◎ The CCP factional struggle will escalate as Xi tries to force through reforms to meet U.S. trade demands.
On Feb. 24, United States President Donald Trump announced an extension of trade negotiations between the U.S. and China, as well as a delaying of tariffs.
Trump tweeted: “I am pleased to report that the U.S. has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues. As a result of these very productive talks, I will be delaying the U.S. increase in tariffs now scheduled for March 1. Assuming both sides make additional progress, we will be planning a Summit for President Xi and myself, at Mar-a-Lago, to conclude an agreement. A very good weekend for U.S. & China!”
On Feb. 25, Trump tweeted: “China Trade Deal (and more) in advanced stages. Relationship between our two Countries is very strong. I have therefore agreed to delay U.S. tariff hikes. Let’s see what happens?”
The backdrop:
Chinese vice premier Liu He led a trade delegation to Washington for high-level talks on Feb. 21 and Feb. 22.
During a meeting at the Oval Office on Feb. 22, U.S. Treasury Secretary Steven Mnuchin announced that Liu and his team would extend their trip for two days to continue working on a trade agreement.
The big picture:
Trump’s tariff delay announcement comes before the March 1 deadline for trade talks and before the Two Sessions political conclave is scheduled to be held in China.
Our take:
1. We analyzed earlier that “China will likely wait until the midnight hour before agreeing to a trade deal that meets U.S. demands” because Xi Jinping and the Chinese Communist Party cannot afford for the trade war to drag on. A prolonged and more intense trade war would be disastrous for China’s worsening economy, and imperil the Xi leadership.
From Trump’s tweets, it appears that Beijing is operating as we analyzed to avoid having America raise tariff rates on March 1, and not likely because Trump is showing weakness out of an eagerness to get a deal, superficial or otherwise.
2. There is a good chance that the Chinese trade delegation offered a framework to proceed with the trade talks which Washington finds agreeable. Both sides could be working out the details of an agreement under this framework.
3. The extension of trade talks both grants Xi Jinping enough time and puts external pressure on him to use the Two Sessions in March to pave the way towards reaching an agreement with President Trump when they meet at Mar-a-Lago.
The annual State Council government work report read by premier Li Keqiang at the Two Sessions should offer clues about the sort of concessions that Xi is planning to make in Florida.
4. We do not believe that Xi will be able to hold a Fourth Plenum to set the tone in the Party on the issue of a trade agreement with the U.S. because there is a political crisis in the regime. Based on our analysis, it seems Xi is unable to subjugate rival voices in the CCP and bring the Party elite to a consensus on the trade issue.
We believe that Xi could try to force through required structural reforms at the Two Sessions instead of holding a plenary session. Again, the government work report should reveal what Beijing wishes to do to meet U.S. demands.
Technically, Xi can skip a Fourth Plenum before meeting Trump because it is the state apparatus, and not the Party apparatus, that will execute the details of a Sino-U.S. trade agreement. However, because the Xi leadership will likely be forging ahead without first reaching a consensus in the Party’s elite, it can expect to face immense resistance from opposing factions and interest groups.
5. Party and state institutional reforms that were announced at the 2018 Two Sessions are due to be fully implemented at the provincial level and below by March 2019. Two noteworthy reforms include the shifting of jurisdiction over provincial, county, and city national security agencies from local governments to National Security Commission members in local Party committees, as well as the scrapping of the Central Leading Group on Preventing and Dealing with Heretical Religions and its administrative office (the “610 Office”).
In the coming weeks, the state of the implementation of Party and state institutional reforms will likely be announced in official media. The progress of institutional reforms will hint at the severity of resistance towards the Xi leadership and its policies.
6. We believe that the Jiang Zemin faction will tap on its networks and influence over key organs in the regime to attack the Xi camp on the issue of signing a trade deal that meets America’s demands. For instance, Xi and Liu He could be accused of selling out the country and “national interests.” The Xi leadership could respond to attacks by stepping up anti-corruption efforts.
7. In our 2019 China outlook, we wrote that China “could see political Black Swans.” We recently observed indicators of Black Swan events, such as resistance by the Jiang faction-swayed political and legal affairs apparatus, as well as familiar anti-Xi tactics by elements with links to the Zeng Qinghong-controlled intelligence apparatus.
8. Both China and the U.S. may opt not to disclose parts of the final trade deal so that both sides can appear to walk away with a victory. Appearing victorious allows Xi Jinping to “save face,” possibly avoid being attacked by political rivals back home, and stand a higher chance of enacting the reforms required to meet American demands.
