China prepares for the worst on trade war after Trump’s flip-flops

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Perhaps nobody was more surprised to hear that China had called President Donald Trump’s administration to restart trade talks than the government in Beijing itself.

After a weekend of confusing signals, Trump’s credibility has become a key obstacle for China to reach a lasting deal with the US, according to Chinese officials familiar with the talks who asked not to be identified. Only a few negotiators in Beijing see a deal as actually possible ahead of the 2020 US election, they said, in part because it’s dangerous for any official to advise President Xi Jinping to sign a deal that Trump may eventually break.

In off-the-cuff remarks to reporters at the Group of Seven summit in France on Monday, Trump claimed that Chinese officials called “our top trade people” and said “let’s get back to the table.” In subsequent appearances he portrayed the outreach as evidence China was desperate to make a deal: “They’ve been hurt very badly, but they understand this is the right thing to do.”

It all made for splashy headlines and momentarily boosted stocks, but nobody in Beijing officialdom appeared to know what he was talking about. Even worse, his efforts to depict China as caving in negotiations actually confirmed some of their worst fears about Trump: that he can’t be trusted to cut a deal.

“Trump’s flip flop has further enlarged the distrust,” said Tao Dong, vice chairman for Greater China at Credit Suisse Private Banking in Hong Kong. “This makes a quick resolution nearly impossible.”

Two Chinese officials likened the country’s approach to the US during the Korean War, saying it consisted of fighting while talking, and using fights to speed up talks. China has prepared contingency plans in case of a no-deal scenario, three officials said, including putting US companies on its unreliable entity list and stimulating the economy.

China’s foreign ministry on Tuesday again said it was unaware of the phone calls mentioned by Trump, reiterating a statement immediately after his remarks. One of the first to call out Trump was Hu Xijin, chief editor at the Communist Party-backed Global Times newspaper, who said Monday that the US president was exaggerating the significance of low-level talks and China’s position hadn’t changed.

While officials in Beijing are still willing to engage in trade talks, they are concurrently girding for a decoupling from the world’s biggest economy — an effort made all the more acute when Trump “ordered” US companies via Twitter to look for alternatives to China. After trade talks broke down in May, Xi renewed calls for China to pursue “self-reliance” in key technologies and even called on citizens to join a “new Long March.”

“A gradual decoupling is happening de facto because companies have to make alternative plans when there’s so much uncertainty,“ said Tim Stratford, chairman of the American Chamber of Commerce in China and a former assistant US trade representative.

The conflict has inflicted pain on China, exacerbating the slowest economic expansion in almost three decades as authorities also seek to keep a lid on debt and financial stability risks. Still, officials have room to loosen policy further: The central bank last week unveiled a major reform designed to help lower borrowing costs, and the government is considering allowing provinces to issue more bonds for infrastructure investment.

Politically, Xi doesn’t have much wiggle room to indulge Trump. Hardliners have become more emboldened each time Trump has shattered a temporary truce and hit China harder, from raising tariffs to blacklisting leading tech company Huawei Technologies Co.

While China has been open to a deal that includes greater purchases of US agriculture goods, it’s politically unfeasible for Xi to sign off on an agreement that leaves the punitive tariffs in place. He also can’t agree to privatize parts of the economy that are crucial to the Communist Party’s grip on power, such as certain state-owned enterprises.

Party Legitimacy

“For China, it is about legitimacy of the Party’s rule — economic performance and nationalism, especially about the rise of the Chinese people on the world stage,” said Suisheng Zhao, executive director of the Center for China-US Cooperation at the University of Denver’s Graduate School of International Studies. “Both are at stake, and China can’t afford to lose. China is not likely to make any substantial concessions currently.”

For now, the two sides are technically supposed to meet next month to resume trade talks. From China’s perspective, progress primarily depends on Trump’s political calculations heading into the 2020 election — and even then they will want iron-clad reassurances he makes good on his word.

Trump may be realizing that his China-bashing will be “disastrous” for the US economy and American companies, according to Charles Liu, a former economic negotiator with the Chinese delegation at the United Nations and founder of Hao Capital.

“The only thing that conceivably has changed is that Trump is under a lot of pressure to make a deal — not the Chinese, Trump,” Liu said. “The Chinese position will be that if you want to talk, the door is always open, but this bullying is not going to be helpful for the discussion.”