China: Digging In

China’s President Xi Jinping is set to announce a series of measures at the opening of the Boao Forum for Asia scheduled for tonight (tomorrow morning, local time). These measures, many of them focused on the financial market sector, are intended to demonstrate Xi’s desire to liberalize China’s economy and integrate further within the global economy (see SGH 4/2/18, “China: Beijing Responds to Washington”).

*** Importantly, the newly formed Central Committee for Financial and Economic Affairs, (transformed in March from the Central Financial Leading Group) agreed last week that China would refuse to take the first step in initiating any trade talks with the Trump Administration. “If Washington does not express a willingness to talk, Beijing won’t talk;” but at the same time the Committee kept a door to negotiations open, adding that “if Washington wants to talk, Beijing can talk.” ***

*** But even as Beijing keeps the door open to future talks, the Central Committee is digging in for the long haul in negotiations – when they are to begin – exhorting leaders to focus on domestic economic affairs, and crucially to build some potential negotiating leverage, encouraging Chinese foreign trade companies to sign relevant trade memos or trade agreements with third countries to potentially replace agreements with the US. ***

Only Two Outcomes

The committee stressed that the outcome of the trade dispute must be a compromise between the two sides based on a willingness from the US to seek consensus with China. Otherwise, “bilateral trade disputes can only have two outcomes: the status quo, or trade war.” The committee asserted China will “ignore Trump’s trade bluster” but reiterated its view that Trump, “though unpredictable, is essentially a businessman.”

It should come as no surprise that the Committee was and continues to be especially sensitive to the direct and deliberate targeting of Beijing’s “Made in China 2025” strategy by the US Section 301 investigations: the ten key sectors highlighted in that strategy all belong to the high tech and advanced manufacturing sectors.

Washington, in the Chinese view, is worried that once China has developed mature technologies and advanced manufacturing capacities in these sectors, it will directly compete with the high-tech industries of the US. The Section 301 investigation is thus seen as a tool for Washington to contain China’s high-tech industries and advanced manufacturing industries.

And so Beijing is now bracing to draw up tit-for-tat measures in the tech industry if the White House is to go forward with its measures based on the section 301 investigation.

The Chinese leadership nevertheless continues to bank on the assumption that Trump, essentially a business man, will before long seek a compromise on trade with China. But these negotiations are still not even begun.

Announcements Tonight

President Xi will nevertheless look to showcase the point to the global community tonight at the Boao Forum that China is “ready for business.”

In his keynote speech, Xi is likely to announce the harmonization, this year, of domestic and international standards for entry of banks into China’s markets, and also the easing of restrictions this year on the share of foreign owned equity in companies in sectors including banking, securities, fund management, futures and financial asset management.

From what we understand, Xi has also considered an announcement that China will open up its general manufacturing sector, including granting easier access to sectors such as new-energy vehicles, telecommunications, medical services, and education.

There has also been some discussion of setting up a first free trade port in mainland China, in Hainan. As opposed to the previous plans to expand the Shanghai free-trade zone into a free port, China’s leadership believes it may be relatively easy to manage the potential risks of unrestricted trade and capital flows in Hainan.