In Trade War, China’s Hard-Line Stance Risks Economy


BEIJING — The trade war between the United States and China has turned into what is likely to be a long-lasting high stakes duel between two strongmen, each refusing to cave to the other.

By allowing the Chinese currency to weaken past a key level this week, China’s leader, Xi Jinping, has adopted a hard-line stance, adding to the trade tensions that threaten the global economy and financial markets.

The Chinese leader had little choice, in the face of what he sees as a quixotic, emotion-driven Mr. Trump, Chinese analysts say. He needs to appear strong, to preserve his firm grip on the political apparatus and public propaganda machine. He must also deal with the weight of history that contends the Communist Party must not bend to foreign nations.

And he is willing to take action, even if it means enduring the economic fallout. As the economy slows, he risks inflicting serious damage by running up a huge debt load without the growth to justify it.

“Xi just changed his strategic thinking,” said Shi Yinhong, a professor of international relations at Renmin University. “He is determined to resist and have the Americans step back first.”

The tensions reached a new high after Mr. Trump announced plans last week to impose a 10 percent tariff on an additional $300 billion worth of Chinese imports in September. His decision came just one day after American and Chinese negotiators held inconclusive trade talks in Shanghai.

Then, for the first time in more than a decade, Mr. Xi allowed China’s currency to weaken past the psychologically important level of 7 renminbi to the American dollar. China also said it would no longer purchase soy beans and other crops from the United States. Late Monday, Mr. Trump, in response, labeled China a currency manipulator.

China signaled on Tuesday it wouldn’t weaponize the currency just yet, helping to stabilize financial markets. But China’s official news media continued to strike a strident tone, taking a broad swipe at the United States.

The People’s Daily berated Washington — though stopped short of naming Mr. Trump — for “its obsession with American privileges.” “The U.S. is extremely irresponsible,” the paper said. The Global Times, known for its bluntness, said “Trump’s capricious administration could push things too far, which would lead to severe consequences the U.S. never anticipated.”

The tit-for-tat moves reflect two leaders with similar sensibilities and situations, despite their very different political systems, and their different personal backgrounds.

Both hold power as a result of the crumbling of the liberal globalization agenda. Both men rely on a political base that responds to nationalism.

“For now, Xi is signaling that he is a tough nationalist who will not back down in the face of very aggressive behavior on the part of the Trump administration,” said Victor Shih, an associate professor at the University of California, San Diego, and an expert on the Chinese economy.

Like Mr. Trump, Mr. Xi appears to have a team of hard-liners around him, including the Minister of Commerce, Zhong Shan, who was recently added to the Chinese negotiating team.

Mr. Xi probably believes he can outlast Mr. Trump. Mr. Xi has amassed more power than any Chinese leader since Mao, having abolished term limits.

“In terms of regime legitimacy, this helps Xi’s hold on power,” said Arthur Kroeber, managing director of Gavekal Dragonomics, an independent economic research firm.

But his strategy is not without risks. If China’s economy sours, it could erode his authority and empower his political rivals.

Should China fully weaponize its currency, its economy could take a hit. But he has hinted that the country could ride those out. The ideology of the Communist Party that has long featured the idea of suffering for long-term benefits.

In May, when trade negotiations suddenly fell apart, Mr. Xi traveled to hallowed revolutionary ground in Jiangxi province, the starting point of the historic Long March, a period of hardship in the 1930s that resulted in victory more than a decade later. He exhorted the Chinese people to start a new Long March.

Now Mr. Xi is not merely exhorting, he is demanding such an approach in the current economy, said Mr. Shi.

Growth is at its lowest pace in three decades. There are indications that the situation will get worse before it gets better. Beijing has opened up the money spigots to allow for big infrastructure projects that have temporarily created economic growth and employment.

But to make this happen, China’s debt has ballooned. Local governments that are funding these infrastructure projects are running the highest official deficits in recent history. Big tax cuts that were meant to spur economic growth have left the central government short of the revenue it needs to help paper over the shortages at the local level.

Consumers, while patriotic, are also beginning to feel the hardship. For months ordinary shoppers have faced big price hikes for basic food staples like fruit and pork.

Mr. Xi could continue to fight the trade war despite these economic fault lines as long as he can keep a handle on the country’s foreign exchange reserves. The last time China let its currency weaken substantially in 2015, the central bank ended up having to spend $1 trillion of its reserves to stabilize the renminbi.

But Mr. Xi faces a more complicated situation now, driven largely by his push to take a bigger place on the global stage.

Mr. Xi wants China to be a dominant technology player. And he has pushed Chinese built infrastructure in many parts of the world.

These Chinese projects require American dollars because the country’s own renminbi currency is not widely circulated outside of China. China’s currency devaluation will temporarily help it to offset the impact of tariffs on the economy by making Chinese goods competitive. But it will put heavy constraints on Chinese companies who do business overseas and have borrowed money in American dollars.

“The draining of China’s foreign exchange could break China’s current economic model of using state directed money to finance certain policies,” said Mr. Shih. “China can print renminbi endlessly but it can’t print American dollars.”

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