Why China will hit back at Donald Trump in trade row, but not too hard

Government sources say the country’s leaders want to contain the fallout from the tariffs tit-for-tat to ensure the process of reform and opening up continues

President Xi Jinping has told Chinese officials that the country must pick its battles carefully amid the increasing trade tensions to ensure that nothing derails the country’s process of reform and opening up, government sources have said.

Xi has repeatedly reminded aides that while Donald Trump’s provocations mean Beijing must retaliate, they must try to contain the damage to prevent the stand-off from compromising its chosen path, a government source told the South China Morning Post.

“The message from the top is that ‘nothing can stop China from opening up’,” the official, who was briefed on the president’s instructions, said.“It is particularly important for 2018 when China is celebrating the 40th anniversary of its ‘reform and opening up’ policy.” Although Beijing was frustrated by Washington’s rejection of its offer to buy more US goods as a way of easing tensions last month, its response has been measured so far. In the three weeks since Trump indicated he would push ahead with his plan to impose tariffs, Xi has met multinational executives to tell them that China’s doors will only open wider in future and the government said it would increase the number of sectors that foreign businesses can invest in.

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Beijing has also tried to manage the news to avoid provoking American ire. State media has been told to keep quiet about Made in China 2025 – a state-backed plan to promote the hi-tech sector which Trump’s administration has frequently criticised – and the customs agency released figures that showed Chinese exports to America weakening ahead of schedule. Despite speculation that China would pre-empt the US 25 per cent tariffs – due to come into force on US$34 billion worth of products Friday – by announcing a similar set of countermeasures first, the Ministry of Finance insisted on Wednesday that China wouldn’t “fire the first shot”. These olive branches are part of a broad strategy decided by the top leadership that the trade row with the US, which could alter the trajectory of China’s economic development, must not be allowed to distract it from the policy of reform and opening up. In 1978 the former paramount leader Deng Xiaoping decided to embrace market reforms and integrate China into the global capitalist economy, unleashing a nearly uninterrupted four-decade boom that transformed China from an economic backwater to the world’s second biggest economy. It is a legacy that Xi is trying to continue and he has highlighted the significance of the anniversary on a number of occasions this year.

Although Beijing has introduced tit-for-tat tariffs on some US products, ranging from cars to soybeans, it has refrained from releasing specific and qualitative countermeasures. Instead, it has tried to emphasis its free trade stance. At a press conference on Thursday, Ministry of Commerce spokesman Gao Feng, when asked about whether Beijing would target US firms in China, replied that the government would protect the “legitimate interests of all foreign businesses in China” and help firms relieve the possible impact from any trade war.

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Trump has threatened punitive tariffs of up to US$450 billion worth of Chinese products, which could prove a major drag on the country’s exports and growth. This threat has fanned speculation as to whether Beijing would shelve its drive to curb risky lending – one of Xi’s flagship policies – and embrace fiscal stimulus and monetary easing instead. The decision by the People’s Bank of China to unleash US$100 billion funds into the banking system, effective from Thursday, has only served to amplify such speculation. But Vice-Premier Liu He, Xi’s right-hand man, this week made it clear that any easing would be tactical and the policy of curbing debt would continue. He told the first meeting of the Financial Stability and Development Committee, that China had “favourable conditions to win big risk control battles and cope with external risks” and its debt reduction efforts would continue “as planned”. It would not be in Xi’s interests to rush into a full-blown trade war with the US as it could cause unwanted disruption to its economy and the president’s “Chinese dream” of transforming society and increasing prosperity, according to Henry Chan Hing Lee, an adjunct researcher with the East Asian Institute at the National University of Singapore. “There is no doubt that China must chart its own path of development when it is moving towards the goal of the Chinese dream and challenging the US on global leadership,” said Chan. The “collision between America First and the Chinese dream will take years if not decades to resolve”, he warned.

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Although it is relatively easy for China to open its domestic markets further or promise to import more, analysts say it will be harder to move away from its state-led growth model and claw back the government’s omnipresence in the economy. The US increasingly views Chinese state-owned enterprises with suspicion. Earlier this week a US government agency recommended that the state-owned operator China Mobile should be barred from the US market as national security threat. But Xi views these companies as the backbone of the economy and the foundation of China’s future economic might, Ding Shuang, chief Greater China economist of Standard Chartered Bank, said. The Communist Party’s fondness for state-owned enterprises is “unlikely to change under Xi although it’s possible Beijing will introduce more market competition,” Ding said.

Additional reporting by Zhou Xin

This article appeared in the South China Morning Post print edition as: China will hit back at Trump tariffs … but not too hardChina will hit back at Trump, but not enough to disrupt reform process