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Xi Strikes Optimistic Tone After Riding Out Trade War With Trump

Bloomberg News
Xi Strikes Optimistic Tone After Riding Out Trade War With Trump

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With China on the verge of signing a deal with Donald Trump to at least temporarily defuse a nearly two-year trade war, Xi Jinping is projecting confidence.

After he warned last year about threats to the Communist Party’s rule and “changes unseen in 100 years,” Xi began 2020 touting “extraordinary Chinese splendor and Chinese strength.” “In the face of severe and complex domestic and foreign situations and various risks and challenges, we have been able to move forward firmly,” the Chinese president told party leaders last week.

Problems and challenges remain for Xi, but the phase-one deal the world’s biggest economies plan to sign on Wednesday in Washington gives him reason to accentuate the positive. While party leaders still face a slowing economy, surging debt and new challenges in Hong Kong and Taiwan, the trade agreement has at least given them some certainty that Xi can manage Trump’s penchant for diplomatic brinkmanship.

“China’s leaders are just happy to have a deal instead of wasting so much energy on arguments and publicity,” said Charles Liu, a former economic negotiator with China’s United Nations delegation and founder of Hao Capital, a private-equity fund. “They are more confident than ever in how to handle President Trump because his behavior is almost becoming a known quantity.”

“Now you can pretty much see that whatever bluster there may be, it doesn’t necessarily come with a bite,” Liu said.

The deal will reportedly commit China to buying some $200 billion of U.S. goods, as well as respecting intellectual property rights and not manipulating its currency. The agreement puts off more sensitive discussions such as the state subsidies and market protections that China has relied on to nurture a growing club of global corporate champions.

Strategic Struggle

The U.S. will consider additional cuts on tariffs affecting $360 billion of imports based on China’s compliance with the phase-one deal after the election later this year, people familiar with the matter told Bloomberg. Treasury Secretary Steven Mnuchin, speaking to reporters Tuesday evening, denied any connection between tariff relief and the election, and said any reduction in duties would depend on a deal in phase two of trade talks.

The recent pause in tensions is all the more welcome given the growing consensus in both Beijing and Washington that the two powers are headed for a long-term period of strategic struggle. While celebrating a small victory, Chinese policy makers are girding for a protracted conflict.

“China is now faced with lots of challenges and many of these challenges have their origins in Washington,“ said Gao Zhikai, a former Chinese diplomat and interpreter for ex-Chinese leader Deng Xiaoping. “Whether it’s Xinjiang, Hong Kong, Tibet or the South China Sea -- you name it, you always see the increasing finger print of the United States.”

Tech Tensions

Tensions over tech are likely to remain as the Trump administration considers steps to further limit the ability of American companies to supply Chinese telecom equipment giant Huawei Technologies Co. Industry associations representing U.S. chipmakers, software companies and manufacturers have written to Secretary of Commerce Wilbur Ross arguing against the changes.In December, Bloomberg News reported that Washington was weighing new limits on the sale of chips and other key components to Huawei. De minimis provisions exempt certain products if companies can prove the majority of work done to create the items happens outside the U.S. The current threshold effectively kicks in when 75% of the work occurs overseas. Washington is considering raising that to 90%, and broadening the list of products, people familiar with the discussions said at the time.

But although repeated setbacks in talks between the two sides have fueled skepticism about the longevity of the truce, investors are optimistic: The yuan has strengthened to a five-month high against the dollar. The country’s flagship English-language newspaper, the China Daily, even hailed a new “spirit of modus vivendi,” or peaceful coexistence with the U.S.

Good Signs

Communist Party leaders have other reasons to smile as 2020 begins. The economic slowdown has showed signs of stabilizing -- economists upgraded their 2020 growth forecasts to 5.9% -- while the historic pro-democracy protests in Hong Kong that erupted last year have decreased in both frequency and violence.

The trade deal gives China confidence that it can weather Trump’s pressure campaigns by carefully calibrating retaliation and avoiding direct criticism of the U.S. leader. Meanwhile, much of Trump’s attention in the new year has gone toward a looming impeachment trial in the Senate and a deadly tit-for-tat with Iran.

“The Iranian situation is a very good indication of how Trump does his business,” said Charles Liu, of Hao Capital. “You can pretty much read into President Trump’s principal objectives. They’re pretty much all tactical. He’s not an ideologue.”

‘People’s Leader’

While Trump faces a tough re-election battle after becoming the third U.S. president to get impeached, Xi’s domestic position appears as strong as ever. The Communist Party’s elite Politburo last month dubbed Xi the “people’s leader” -- a term once used to describe Mao Zedong -- after previously agreeing to remove presidential term limits and enshrine his name in the constitution.

The trade detente can only help as Xi prepares for the party’s next twice-a-decade congress in 2022, which will determine whether he’ll continue the lead the country for the foreseeable future. This year, Xi is likely to “step up his campaign to hold on to the leadership of the ruling party,” according to a report by Tom Rafferty, principal China economist for the Economist Intelligence Unit.

“The list of challenges Xi faces in 2020 is undoubtedly long,” said Jude Blanchette, Freeman chair of China Studies at the Center for Strategic and International Studies. “But from his perspective, so too are the opportunities stemming from declining global leadership and influence of the U.S., whether real or perceived.”

(Updates with planned Huawei restrictions)

--With assistance from Jeffrey Black.

To contact Bloomberg News staff for this story: Peter Martin in Beijing at pmartin138@bloomberg.net

To contact the editors responsible for this story: Brendan Scott at bscott66@bloomberg.net, Daniel Ten Kate

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