As delegation arrives, China’s leader’s economic vision and domestic demands stand in the way of compromise

Chinese President Xi Jinping has been making publicized tours to promote his agenda, including this April 24 visit to the Three Gorges Dam, a monument to state planning.
Chinese President Xi Jinping has been making publicized tours to promote his agenda, including this April 24 visit to the Three Gorges Dam, a monument to state planning. PHOTO: JU PENG/XINHUA/ASSOCIATED PRESS

BEIJING—President Xi Jinping may be China’s most powerful leader in decades, but he has some heavy lifting ahead as he tries to achieve his economic goals and head off a trade war with the U.S.

Freshly empowered this spring to stay in office indefinitely, Mr. Xi has issued exacting objectives to advance China’s economic progress by developing world-beating industrial champions. He responded to Washington’s trade threats with plans for retaliatory tariffs, shoring up his image as a firm defender of Chinese interests.

He also has pledged to open up certain Chinese markets—partly addressing some U.S. demands—and cast himself as a champion of free trade.

A U.S. delegation led by Treasury Secretary Steven Mnuchin arrives in Beijing on Thursday with a list of asks for Mr. Xi and his team: reduce China’s trade surplus with the U.S., better protect intellectual property and end policies that Washington says favor Chinese national champions and discriminate against American companies.

Though Mr. Xi has indicated he would like to avert a damaging trade fight, ending state subsidies and protection for strategic industries would undermine his plan to make China a high-tech manufacturing power, and could set him against influential ministries, local governments and business circles.

Paring state control over the economy also runs counter to Mr. Xi’s objective to strengthen Communist Party control over all of Chinese society. And anything less than stout resistance against perceived American bullying is likely to displease many Chinese.

Though China’s economy is humming steadily and expanded 6.8% in the first quarter, growth remains heavily dependent on investment—much of it fueled by worrying amounts of debt, equivalent to around 260% of GDP.

Officials are trying to steer a transition toward tech-fueled manufacturing, services and consumption as the main drivers. A bruising battle with the U.S., which is still a key market and a nexus in the global financial system, would make that transition more difficult.

Mr. Xi has taken steps intended to avert a trade battle with the U.S., and hosted President Donald Trump in November on this visit to Beijing.
Mr. Xi has taken steps intended to avert a trade battle with the U.S., and hosted President Donald Trump in November on this visit to Beijing. PHOTO: NICOLAS ASFOURI/AGENCE FRANCE-PRESSE/GETTY IMAGES

In public remarks in recent weeks, Mr. Xi and his top lieutenants have sought to cool temperatures with the U.S., offering greater foreign access to the financial and auto sectors and lower tariffs on car imports.

Mr. Xi “has sold himself as a very powerful leader,” said Christopher Balding, an associate professor at the HSBC Business School in Shenzhen. But “even in China, you can’t just snap your fingers and change the tariff rate on cars.”

Some foreign business executives and economists dismissed the concessions, saying the sectors they included aren’t regarded as critical to Chinese aspirations to become a high-tech industrial power, or are already heavily dominated by Chinese players. Officials cast the moves as a signal of Beijing’s commitment to open up Chinese markets and adhere to global trade norms.

Mr. Xi has been ginning up support for his positions in publicized tours of the provinces. Traveling in central China last week along the Yangtze River, he visited the mammoth Three Gorges Dam, an icon of state planning, and Xinxin Semiconductor Manufacturing Corp. , a leader in a government-backed effort to create competitive makers of semiconductors.

His message, according to state media: China needs to “rely on our own hard work” in mastering key technologies.

By his record, Mr. Xi is a staunch backer of China’s brand of state capitalism, with an inclination to improve its performance, not overturn it. He has treated market forces more as potential agents of instability than tools for shaking up sluggish state-run industries, especially since a stock market implosion in 2015.

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“Xi Jinping is a committed planner and an interventionist,” said Scott Kennedy, a deputy director at the Washington-based Center for Strategic and International Studies. “He doesn’t believe in markets.”

Public expectations and resistance from ministries, local governments and state enterprises make compromise politically risky. Since the U.S. began unrolling tariffs and threats of further trade penalties earlier this year, Chinese state media has filled airwaves and newspapers with reports and commentaries accusing President Donald Trump of being an aggressor bent on tearing up global rules and on using trade as a tool to suppress China’s rise.

The hard-line rhetoric in media ramped up further after the U.S. banned sales of American products to Chinese telecom gear-maker ZTE Corp. for violating a previous agreement, making compromise with the U.S. more difficult.

“The louder Trump’s demands, the greater the domestic pressure on the Chinese leadership to appear steadfast,” said Jessica Chen Weiss, an associate professor at Cornell University who has studied the role of nationalism in China’s foreign relations.

State-owned enterprises remain the backbone of China’s economy and an instrument of foreign policy. They fill government coffers, dominate strategic industries from energy to telecommunications, anchor employment markets and help disburse state largess through investments at home and abroad. At home, most ply protected markets they have fought to preserve.

“There are basically two forms of quiet opposition to foreign entry: Beijing and its large state firms, and provincial governments and their local firms,” said Andrew Collier, managing director at Orient Capital Research, an independent research firm in Hong Kong. “Even if access is granted, there is likely to be subtle delays by local or central government regulators, and hurdles that will impede market access.”

State industries are central to the “Made in China 2025” initiative, Beijing’s blueprint to create a world-beating manufacturing sector—and a focus of the Trump administration, which says the plan discriminates against foreign companies. Mr. Xi has frequently shown his support for the plan by visiting businesses that benefit from it.

State industries have also been formidable centers of resistance to Mr. Xi’s own plans. His earlier efforts at reforming state enterprises—trying to get them to improve their returns through restructuring and mergers—became mired in discord between government agencies, among them the state commission that oversees state businesses.

A report issued last year by a think tank run by China’s top economic-planning commission accused vested interests in local government and businesses and excessively powerful agencies of impeding reforms, watering them down and delaying them with “constant compromise.” The report ran 217 pages.

Write to Chun Han Wong at chunhan.wong@wsj.com

Courtesy: WSJ

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