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Rating agencies hail US-China interim deal, but say risks persist

Rating agencies described the U.S.-China "phase one" trade deal as a step in the right direction, but also warned that risks and uncertainties are expected to persist as the world's two largest economies undertake more complex trade talks.

S&P Global Ratings considers the deal "mildly positive" for global trade, GDP growth and credit, as trade tensions between the two countries eased following the pact. However, duties on each other's products remain largely unchanged.

As part of an interim deal, China agreed to purchase an additional $200 billion in U.S. manufactured, agricultural and energy products, as well as services. The two countries also agreed to improve intellectual property protection and financial market access while ensuring greater foreign exchange rate transparency.

The next round of negotiations, which will focus on the remaining elements of fundamental issues, may drag on for years, given the complexities involved, said S&P Global Ratings, which sees an interim deal "as just the end of the beginning rather than the beginning of the end of the dispute."

"The deal will likely do little to alter the way that China manages its economy," according to the rating agency.

In a separate report, Fitch said that while the phase one deal will boost business confidence and support global growth, it only pauses the U.S.-China trade war, and does not end it.

"Moving to negotiations on a 'Phase Two' agreement is conditional on implementing Phase One, and these talks would cover contentious areas such as structural economic reforms in China," Fitch said. "The global economy will therefore still have to navigate significant risks and uncertainties in 2020 and beyond."

The effective U.S. tariff rate on Chinese products is higher than two years ago, Fitch said.

Fitch projects the Chinese economy to expand by 5.9% this year, up 0.2 percentage points from a previous forecast in December 2019. This, in turn, should boost global economic growth to 2.6% this year, up 0.1 percentage points from the previous forecast, all else being equal.

However, China's GDP could take a hit due to an increase in imports from the U.S., depending on how much is offset by higher demand or lower imports from elsewhere.

Meanwhile, a report from Moody's echoed similar sentiment. The phase-one deal is positive for global emerging market credit conditions but the relatively small concessions made under the deal suggest that the risk of an escalation in bilateral tensions remains. Increased U.S. purchases could deteriorate China's current account deficit, Moody's said.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.