Trump Giving Xi Someone to Blame for China's Slowing Economy

(Bloomberg) -- U.S. President Donald Trump sought to pressure Beijing to open its markets by undermining its economy. Instead, he may be providing Chinese counterpart Xi Jinping with the perfect cover story if things get worse.

China’s economy has shown signs of slowing in recent months, expanding in the third quarter at the weakest pace since the depths of the financial crisis in 2009. The slowdown -- predicted by the ruling Communist Party and market observers long before Trump’s rise -- has nonetheless fanned anxiety among a population that has grown accustomed to decades of breakneck growth.

So far, Xi has deviated little from his playbook since taking power six years ago: gradually allowing more foreign competition in some sectors while centralizing control over others. Recent moves to reaffirm support for state-owned enterprises, detain the Chinese head of Interpol and legalize the detention of tens of thousands of Muslims show he’s not afraid to defy calls to calls to speed up market reforms and protect human rights.

“Against the backdrop of the trade war, Xi is likely to reinforce political and ideological stability -- he will show zero tolerance to any political challenges and strengthen his absolute authority,” said Suisheng Zhao, director of the Center for China-U.S. Cooperation at the University of Denver’s Josef Korbel School of International Studies. “Trump’s maximum pressure will not corner Xi. Instead, it works as a scapegoat for China’s economic slowdown.”

Investor Doubts

The trade fight has emerged as Xi’s most serious foreign policy test, and it came shortly after he secured sweeping new authority over the party and got term limits repealed. The confrontation with the world’s largest economy has prompted doubts within ministries, universities and think tanks about whether China could prevail.

The months ahead may be pivotal, as Trump’s tariffs begin to bite and chip away at investor confidence. Chinese authorities last week acted to shore up the country’s tumbling stock markets and prevent a $3 trillion equity rout from infecting the overall economy.

Broader policy moves could come during an annual party gathering expected before the end of the year. A scheduled meeting with Trump on the sidelines of the Group of 20 meetings in Argentina next month, as well as the 40th anniversary of China’s economic “reform and opening-up” era in December, also provide Xi opportunities to shift course.

Looming Uncertainty

“There’s a looming sense of uncertainty,” said Zhang Jian, associate professor of government at Peking University. “Everyone is looking at Xi and his small coterie of followers. Towards the end of this winter, when we see the annual results for the economy and we feel the results of the trade war across the board, we will be able to judge if Xi has used up too much of his political capital.”

Meanwhile, security disputes have fed fears that the China-U.S. trade fight could develop into a new Cold War. On Monday, Trump pledged to outspend Beijing on a nuclear buildup while the U.S. Navy sailed two warships through the Taiwan Strait, in a show of military support for the democratically run island.

Trump’s moves provide Xi with a ready strategy to face any rising discontent from an economic slowdown he would’ve needed to address regardless of who the U.S. elected president. Now, he also has the option of appealing to nationalism among a Chinese public conditioned to decades of efforts to blame “external forces” for internal problems.

‘Trade Bullyism’

For now, Chinese authorities continue to play down the trade threat, with an editorial published by the party’s People’s Daily newspaper last week calling the damage “controllable.” Still, the government accused the U.S. of “trade bullyism” in a white paper last month and Xi’s top economic adviser, Liu He, has acknowledged the conflict was having a “psychological effect.”

That could change as the stalemate grinds on. The Washington-based Axios news site reported Sunday that Trump believed it would take more time for his tariffs have an impact on China’s economy and that he would gain leverage in trade negotiations the longer they remain.

The U.S. has called on China to scale back support for its sprawling state-owned enterprises, which control about 40 percent of industrial production. But Xi has moved in the opposite direction, even if he’s offered soothing words to private entrepreneurs. During a trip to the northeastern rust belt last month, Xi promoted “self-reliance” and said that “any thoughts or deeds that doubt or speak ill of SOEs are wrong.”

“Economically, China really doesn’t have much space to make a concession -- with a slowing economy, it’s impossible to drop industrial polices and restructure SOEs,” said Zhao, of the University of Denver. “Politically, Xi can not back down from a standoff with Trump which would challenge his legitimacy.”

To contact Bloomberg News staff for this story: Peter Martin in Beijing at pmartin138@bloomberg.net;Dandan Li in Beijing at dli395@bloomberg.net

To contact the editors responsible for this story: Brendan Scott at bscott66@bloomberg.net, Daniel Ten Kate

©2018 Bloomberg L.P.

With assistance from Editorial Board