◎ Xi may be planning to make concessions on trade, but the CCP system may not let him give up too much.
- Xi Jinping and Wang Qishan gave speeches recently in Shanghai and Singapore respectively.
- From their speeches, we believe that the CCP may still be having wishful thinking about its domestic situation, its influence capabilities, and geopolitical trends.
- The result of the 2018 U.S. midterm election will not change America’s policy shift on China.
- The CCP could play the racial discrimination card as it seeks to exploit the growing divide in American society to advance its agenda.
- Xi may be planning to make concessions on trade, but the CCP system may not let him give up too much.
- Trump and Xi will meet at the G-20, but they may not be able to agree to negotiate a deal.
On Nov. 4, Chinese leader Xi Jinping pledged to lower tariffs, broaden market access, and raise imports at the China International Import Expo in Shanghai. The following day, Chinese vice president Wang Qishan echoed Xi on trade and opening up at the Bloomberg New Economy Forum in Singapore.
In parsing Xi and Wang’s speech , we believe that the Chinese Communist Party may still be harboring wishful thinking about its domestic situation, its Red Matrix, and the direction of geopolitical winds.
The CCP’s wishful thinking may end up escalating Sino-U.S. tensions and heighten the level of political risk faced by Xi Jinping and the regime.
The big picture:
China’s economy has been steadily worsening since U.S. President Donald Trump signed the presidential memorandum on Section 301 investigations on the People’s Republic of China’s intellectual property theft and forced technology transfers in March. Since March, China’s stock markets have lost over 20 percent in total value. Sino-U.S. trade tensions have also caused the renminbi to depreciate sharply against the U.S. dollar, breaking the 6.9 level at the end of September.
Meanwhile, the U.S. recently signed newly re-negotiated trade deals with South Korea, Mexico, and Canada. In October, the Trump administration announced that it intends to negotiate separate trade deals with Japan, the European Union, and the United Kingdom.
The U.S. and its allies have also been increasingly calling out the PRC on issues like espionage, cybersecurity, dangerous military activity, a lack of concrete economic reform, and human rights abuses.
1. We previously wrote that China cannot withstand a trade war with the United States (see here, here, and here). While the People’s Bank of China acknowledged in its annual financial stability report that “some ‘grey rhino’-type financial risks may still be unleashed” in 2019, the recent speeches by Xi Jinping and Wang Qishan suggest that the CCP believes that it can weather the crisis brought about by the trade war. In other words, the CCP has no intention yet to completely “surrender” to the U.S. by making the sort of market and economic reforms which the Trump administration has requested.
There are three likely reasons why the CCP is confident that it can go the distance with the U.S. in a prolonged trade conflict.
First, Beijing may be getting skewed economic data or advice from its think-tanks. The South China Morning Post reported on Oct. 22 that Chinese think-tanks had “filtered” trade war advice to avoid offending superiors, while some experts had done “insufficient research on the matter.” Meanwhile, we have noted several times that the PRC’s statistics bureau has been dishonest in calculating and reporting economic figures this year as compared to previous years (for examples, see here, here, and here).
If Beijing does not have accurate information and data about the economy, elite officials will naturally draw inaccurate conclusions about the trade war and what the regime can tolerate. Further, Beijing may be reading foreign analyses and commentary on the trade war that reach positive conclusions on China because fabricated data was used in an uncritical manner. If this is indeed the case, then the CCP is being deceived by its own Red Matrix (control over the global informational environment).
Second, the CCP might believe that it can rely on influence operations and its Red Matrix to stall the trade war until it can come up with a workable solution. The CCP, however, might be engaging in wishful thinking given the current mood on China in Washington and the changing geopolitical landscape. While the Red Matrix will undoubtedly put pressure on the Trump administration, both the White House and Congress seem resolute in their determination to counter the CCP threat. The U.S. policy on China may even take an ideological turn, especially with the Trump administration’s opposition to socialism.
America’s allies also mostly appear to be in lockstep with the Trump administration on the issue of pushing back against the CCP’s pernicious behavior. Countries appear to be realizing that CCP subversion and influence operations, if allowed to go unchecked, could have severe repercussions for national security. And if the U.S. and its allies have already fixed their minds on countering the CCP, then the CCP’s influence operations and its Red Matrix will become much less effective (but not less threatening, see “What’s next”) in America and around the world.
Third, the CCP might believe that it can always “close up” China as a last resort measure. The constant talk of “self-reliance” by Xi Jinping and other top officials suggest that “closing up” or some form of it is at least being considered. Beijing, however, is engaging in wishful thinking if it believes that “self-reliance” and shutting out the world is a way to escape the effects of the trade war and the increasingly unfriendly geopolitical winds. Unlike Mao Zedong and Deng Xiaoping, Xi cannot ignore the internet revolution and China’s economic and diplomatic connections to the world. And “closing up” China will guarantee that the PRC can never catch up with the United States economically, militarily, and technologically—an awkward “achievement” for the “Xi Jinping New Era.” It is also unclear whether the CCP can control and survive domestic pressures when it moves toward autarky.
2. Back in August, we analyzed that the CCP’s approach to the trade war suggests that it has either misread America’s China policy revolution. Since our analysis, English-language news outlets have reported that Chinese officials are suspecting that the trade war is only one part of a broader U.S. strategic shift.
The CCP appeared to try a different strategic approach in the lead up to the U.S. midterm election. First, it began courting America’s allies (Japan, Israel, the Philippines, the U.K., Germany, etc.) and countries friendly to the U.S. (Singapore). Next, Xi Jinping and Trump had a “long and very good conversation … with a heavy emphasis on Trade” on the phone on Nov. 1. Trump also indicated in his tweet that his “will it happen, will it not” meeting with Xi at the G-2o summit in Argentina will most likely take place.
We are not optimistic that the CCP’s strategic shift will move the dial in favor of the regime.
Going by Trump’s tweet and state media Xinhua’s readout of the Trump-Xi call, it is unclear who initiated the conversation. Regardless, it was in both sides’ interest (Trump for the midterm election, Xi for the economy) to spin the telephone call in a positive light. A positive call, however, does not guarantee a positive outcome when the two leaders finally meet. As stated in the previous point, the speeches of Xi Jinping and Wang Qishan indicate that the CCP has no plans for surrender on the trade front. Meanwhile, Trump and his advisors have stated that his administration is under no pressure to cut a deal with the PRC that does not favor the United States. “If we can make the right deal, a deal that’s fair, we’ll do that. Otherwise we won’t do it,” Trump said in a conference call to supporters on Nov. 5, according to Reuters. In an interview with Fox News on Nov. 4, White House economic advisor Larry Kudlow said that Trump will only make a deal with China that is “strong and in America’s interest.”
The CCP’s efforts to sway America’s allies and other countries is a logical course of action to “divide and conquer.” The diplomatic moves, however, come with opportunity cost. For instance, being friendlier with Japan undermines the CCP’s longtime anti-Japan propaganda and nationalistic rhetoric. Getting along with Israel risks the CCP’s relationship with Iran, Palestine, and other Middle Eastern countries. And there is no guarantee that closer trading relations with the U.K. and European countries mean that they would cease confronting the CCP on espionage, cybersecurity, militarism, human rights abuses, and other issues.
That geopolitical winds are changing is perhaps best summed up by Singapore prime minister Lee Hsien Loong’s observation at the Bloomberg New Economy Forum. He said that it is not a “foregone conclusion” that China will overtake the United States, and “you really ought to work on the basis that America is confident, has been able to reinvent itself, has many ups and downs before, and as [President Trump] used to say, nobody has won by betting against the U.S.”
Thus, the CCP may have shifted its strategy in dealing with America, but it remains to be seen if old tactics will be effective in the new geopolitical environment.
3. We also wrote in August that the CCP was gambling that the U.S. midterm election would “play out in a manner that allows it to avoid a consequential clash.” The results are not yet finalized at the time of writing, but the Democrats have controlled the House of Representatives while the Republicans strengthened Senate majority.
The midterm results may result in greater gridlock in American politics and increase pressure on President Trump and administration officials with the Democrats winning the House and gaining subpoena power. However, the Democrat-controlled House will likely go along with Trump on China issues, especially if Minority Leader Nancy Pelosi becomes the new House Speaker (Pelosi issued strong statements supporting Trump’s investigation of China’s trade abuses and the imposing of tariffs). And with Republicans in control of the Senate, Trump and his allies are in no real danger of a successful impeachment effort. In other words, the midterm results do little to change the current trend towards greater competition in Sino-U.S. relations.
The CCP’s most important takeaway from the midterms is that there is a growing divide in American society. The Party thrives on exploiting societal divisions, and will likely see an opportunity to advance its agenda.
4. The results of the U.S. midterm election will likely convince Xi Jinping to make some concessions in exchange for breathing space. For instance, the PRC could offer to eliminate some tariffs, including those on aircraft, soybeans, and other food products; the CCP strategy of targeting Trump’s support base in middle America with tariffs on agricultural products did not have a decisive impact on voters. Xi could also open up some regions of China to a high degree to signal his intent to push through additional concrete reforms. The opening up could very likely start with Hainan Province where plans for the creation of a free-trade port were introduced earlier in the year.
Xi will almost certainly seek to rally the Party behind his new strategic approach to America at the Fourth Plenum. However, the CCP factional struggle may prove too intense for him to implement his policies effectively. The CCP system itself is also resistant to the sort of reform that the Trump administration is asking Beijing to make. And Xi’s failure to properly enact reform will in turn affect China-U.S. relations. This negative spiral will likely continue until America changes its China policy or Xi decides to make a bold and radical move to resolve gridlock in the regime. In the meantime, Beijing’s promises to reform are akin to “blank checks.” (see “Note”)
1. Trump and Xi may meet at the G-20, but Xi will unlikely have a proposal for Trump that leads to a final deal. The best that Xi can hope for is getting Trump to slow down the pace at which tariffs are implemented.
2. Encouraged by the U.S. midterm election results and America’s information environment, the CCP will likely use its Red Matrix to step up accusations of racial discrimination by the Trump administration. The administration will need to find effective counter propaganda solutions to assuage American Chinese and Chinese immigrants at home, and assure mainland Chinese that the U.S. holding the CCP responsible for misbehavior is not “anti-China.”
3. The U.S. and its allies may have disagreements, but they will likely be united on the issue of countering the CCP threat. The Trump administration will also continue reshaping the CCP-hijacked, post-WWII global order.
1. America’s trade “unilateralism” and “protectionism” are a dead end, and the PRC is the protector of free trade and openness.
“Countries need to improve their business environment by addressing their problems. They should not just point fingers at others to gloss over their own problems. They should not hold a ‘flashlight’ in hand doing nothing but to check out on the weakness of others and not on their own.”
“Efforts to reduce tariff barriers and open wider will lead to inter-connectivity in economic cooperation and global trade, while the practices of beggaring thy neighbor, isolation and seclusion will only result in trade stagnation and an unhealthy world economy.”
“Progress of the human society requires continued efforts of all countries to advance opening-up, cooperation and win-win development, instead of seclusion, confrontation and monopoly. In a world of deepening economic globalization, practices of the law of the jungle and winner-takes-all only represent a dead end.”
“China will remain a strong advocate of openness at the global level, and will continue to act as a stable engine of global growth, a big market with enormous opportunities and an active supporter of global governance reform.”
“China believes that rules of the WTO should be upheld firmly, its necessary reforms should be supported and the multilateral trading system should be defended.”
“Economic globalization has impacted the traditional political economy, society, and culture. Rapid changes have caused created divisions in the society of some countries. Populist ideologies on the “left” and “right” are intensifying, a phenomenon which has manifested in political demands. This has led to the rise of anti-globalist protectionism and seriously affected the international political ecology.”
- Wang is throwing a jibe at the United States.
“Negativity and resentment are not conducive for solving the problems of economic globalization. Throwing up barriers and provoking disputes will not resolve the problem but will only exacerbate global market turmoil.”
- Wang is suggesting that the U.S. is throwing a tantrum and is being “irrational” by resorting to “protectionism.”
“Economic globalization is not a zero-sum game. China advocates the abandoning of Cold War mentality and power politics, mutual respect, mutual aid, and the promotion of economic globalization to create a more open, inclusive, balanced, and win-win community of common destiny.”
- Wang is suggesting that economic issues should not be politicized.
“China firmly supports the multilateral trading system, the implementation of high-quality trade and investment liberalization and facilitation policy, necessary reforms to the WTO, and advocates that countries should properly resolve international issues in accordance with rules-bases consensus. China resolutely opposes unilateralism and trade protectionism.”
2. Chinese history suggests that the CCP regime will not be beaten and will ultimately triumph. (Note that Xi and Wang are deliberately conflating China’s five millennia-old civilization with the CCP regime. The CCP rejected Chinese culture and tradition at its founding and viewed itself as a Soviet satellite until the Sino-Soviet split in 1956. Later, the CCP “embraced” Chinese history and culture as a means to advance its propaganda and extend its influence abroad.)
“After going through 5,000 years of trials and tribulations, China is still here! Looking ahead, China will always be here to stay!”
“I am convinced that as long as we have strategic confidence, deepen reform and opening-up across the board, intensify supply-side structural reforms and make greater efforts to solve outstanding problems, then the Chinese economy will surely make a quicker transition to high-quality development, the Chinese people will surely overcome all challenges coming our way, and China will surely embrace a brighter future of development.”
“Understanding China’s history and culture is key to understanding China’s chosen path, theory, system, and cultural support. To understand the history of [the People’s Republic of China] in the past 70 years, one has to go back to the year 1840 [the First Opium War] when China was bullied and oppressed by imperialist powers. Since then, the unyielding Chinese people have been fighting to once again stand on their feet and achieve prosperity and strength.”
3. The PRC is facing economic difficulty, but the regime will overcome its troubles and things will remain stable on the whole.
“The Chinese economy is now on the whole stable and making good progress. For the first three quarters of this year, China’s GDP grew by 6.7%, including a 6.5% growth registered for the third quarter, meeting our targeted goal for growth … And, compared with other major economies, China still ranks among the world’s top in terms of GDP growth.”
“So, when you talk about the future of the Chinese economy, you have every reason to be confident. The fundamentals for sound and stable growth of the Chinese economy remain unchanged. The necessary production factors for high-quality development remain unchanged. And the overall momentum of long-term stability and progress remains unchanged.”
“To use a metaphor, the Chinese economy is not a pond, but an ocean. The ocean may have its calm days, but big winds and storms are only to be expected … Having experienced numerous winds and storms, the ocean will still be there.”
4. Blank checks.
“I have made it clear once and again that China’s door will never be closed. It will only open still wider.”
“We are steadily increasing the openness of the financial sector, continuing to open up the service sector, and working toward greater openness in the agricultural, mining and manufacturing sectors. We are accelerating opening in such areas as telecommunications, education, medical service and culture. In particular, the foreign equity caps are going to be raised in the education and medical service sectors, where there is both huge interest among foreign investors and shortage in domestic supply. In the coming 15 years, China’s import of goods and services are expected to exceed $30 trillion and $10 trillion respectively.”
“China will introduce the law on foreign investment at a faster pace, and institute an open and transparent system of foreign-related laws. We will implement, across the board, the management system based on pre-establishment national treatment and negative list. We respect international business rules and practice, and provide equal treatment to all types of businesses registered in China. We protect the lawful rights and interests of foreign companies, and are resolute in meting out, in a law-binding manner, punishment for violations of the lawful rights and interests of foreign investors, particularly IPR infringements. We will enhance the credibility and efficiency of IP examination, and put in place a punitive compensation system to significantly raise the cost for offenders.”
5. More “win-win” propaganda rhetoric while avoiding mention of America’s victories and advantage in the trade war.
“The main problems facing the world today require close cooperation between China and the United States. China resolutely believes that Sino-U.S. cooperation is beneficial while Sino-U.S. fighting affects global development and stability … Both China and the U.S. have good wishes for expanded economic and trade cooperation. China is willing to start consultations with the U.S. on issues of mutual concern and push for a deal that both sides can accept.”
6. At the China International Import Expo in Shanghai, Alibaba founder Jack Ma channeled Xi Jinping’s speech in declaring that the “trade war is the most stupid thing in this world. Trade should promote peace and communication … nobody can stop free trade.”