The Chinese negotiating hand is quite firm right now, says China Beige Book CEO Leland Miller

Key Concepts:

• China's economic condition and its impact on trade negotiations.
• Export controls as a negotiation tool.
• Rare earths and critical minerals as leverage.
• Security concerns related to chips and technology.
• Manufacturing sector's performance and export trends.

China's Economic Condition and Trade Negotiations:

• Leland Miller, CEO of China Beige Book, reports that China entered trade talks with a stronger economy compared to recent months.
• While growth isn't exceeding year-ago levels, July data showed improvement over June.
• Miller argues that China's negotiating position is firm because the economy is "doing well enough" for Xi Jinping, not "roaring," but stable.
• The inclusion of export controls in trade negotiations significantly strengthens China's leverage.

Export Controls and National Security:

• Historically, export controls were excluded from trade talks, considered national security restrictions.
• China's inclusion of export controls on rare earths and rare earth magnets changed the dynamics.
• This created a negotiation point around supply chain choke points, increasing China's leverage.
• The situation is described as "mutually assured destruction" due to China's control over critical resources.

Security Concerns and Technology:

• China's potential security concerns regarding Nvidia's chips are seen as a tit-for-tat response to concerns about Huawei.
• There's concern about chips having built-in tracking capabilities, enabling geographic tracking of their destination.
• This raises worries about transshipping and the final destination of chips, especially those intended for China.
• China is concerned about being caught "lying and cheating" regarding chip usage and destinations.

Manufacturing Sector Performance:

• Despite PMI data suggesting a weak manufacturing sector, China Beige Book's data indicates continued strength.
• Manufacturing has been robust through COVID-19 and its aftermath.
• While exports to the U.S. have contracted, there has been an "explosion of exports to Asia."
• Manufacturing continues to produce and export, with some moderation in acceleration.

Synthesis/Conclusion:

China entered trade talks with a relatively stable economy, giving them a firm negotiating position. The inclusion of export controls, particularly on rare earths, has significantly increased their leverage. Security concerns surrounding chip technology and tracking are also playing a role in the negotiations. Despite some indicators suggesting weakness, the manufacturing sector remains strong, driven by exports to Asia. The situation is complex, with elements of economic strength, strategic leverage, and security concerns all intertwined in the trade negotiations.