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US, Hong Kong, Taiwan: how many headaches for Xi Jinping

Beidaihe's secret summit discloses the political and economic direction which China intends to continue pursuing.

by Alessandra Spalletta
30 August 2019
9 min read
byAlessandra Spalletta
30 August 2019
9 min read

When in August, at an unspecified time, the images of Chinese leaders disappear from the national media it can only mean one thing: the powerful of Beijing are gathered in Beidaihe for the informal (and secret) summit that is held every year, in summer, in this seaside town in Hebei province. The center of political life moves a few hours away from the capital. This year it happened quietly. On August 3, the state-run Xinhua news agency reported that two members of the powerful Politburo, the head of the Chinese Communist Party's organization department, Chen Xi, and deputy premier Sun Chunlan, met with "experts at Beidaihe along with other experts in various fields from all over the country.” Just a few lines of text and nothing else. Yet this year's edition must have been of even greater importance than in previous years. Intensifying the political pressure on Chinese President Xi Jinping is not only the trade war with Washington, but also alleged American support for the protests in Hong Kong, now in their twelfth week, and a new front in tensions between China and the United States: military supplies by Washington to Taiwan. According to an article published in the Financial Times, signed by Yu Jie, a researcher at Chatam House, the summit would be focused on internal politics and on maintaining consensus and stability, the cornerstones of the Chinese model, rather than on the trade war under way with the United States and on the “decoupling” risk. While we may know little or nothing about the summit, listing the latest events helps to understand the political and economic direction which Xi Jinping's China intends to continue pursuing.

Tension at sea

The latest front has opened up at the eastern port of Qingdao, where the Chinese government denied permission for a visiting US Navy ship to dock.  This is the second case in less than a month. On August 13, the U.S. Pacific Fleet reported that Beijing had denied permission for two naval units, the USS Green Bay amphibious troop transport ship and the Lake Erie guided missile cruiser, to dock in Hong Kong. This was against the background of tensions with Washington over trade.

Tariff war, a truce?

On August 27, Wall Street closed down, losing all gains made when the markets opened, as investors worried about the trade war. The Dow Jones closed down 0.47% at 25,777.90 points, after having risen 1 percent, on hopes of a solution to the tariff war based on the optimistic statements made by Donald Trump. What happened?

Just before leaving for the G7 in Biarritz, the US president had threated to raise tariffs by 5 percent on 550 billion dollars of products made in China, from 25% to 30%, as retaliation for Beijing’s decision to impose 5 percent and 10 percent tariffs on 75 billion dollars of US goods directed to China - in turn a Chinese reprisal for the latest moves made by the US. A press release issued by the Xinhua agency accused the US of “continuous escalation” on trade and of having “seriously damaged the multilateral trade system and the principle of free trade.”

The retaliation by Beijing, which devalued the yuan on August 5, bringing it down to 7 yuan to the dollar, had infuriated the occupier of the White House, who said he was prepared to order US companies to find alternatives to the Chinese market. Although Beijing has long been opposed to the devaluation of the yuan, the United States officially considers China to be a “currency manipulator”.  But Trump's fury was also directed at the head of the Federal Reserve, Jerome Powell, accused of being too weak on cutting rates. My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”, Trump tweeted on August 27. 

Hopes of an agreement appeared to have evaporated again, until a new, apparent, truce opened up. Beijing and Washington exchanged signs of peace. On the margins of the G7, Trump announced that China “wants a deal” and wants it “badly because it has been hit heavily by all the tariffs and has lost 3 million jobs in a short time.” He lauded Chinese president Xi, defining him “a great leader”, and referred to two night-time phone calls made by Beijing to US negotiators - “very, very good, very productive” - during which a desire to “return to the negotiating table” was expressed.

Beijing responded through the Foreign Ministry spokesman Geng Shuang. He did not confirm the telephone contacts but hoped that the US would bring its wrong actions to an end and create the conditions to talk. Furthermore, it promised further measures against Washington if the new tariffs announced by Trump should come into force. China and the United States are “still discussing” whether a Chinese trade delegation will travel to Washington in September to conduct the next round of face-to-face negotiations as part of the escalating trade war, China’s commerce ministry spokesman Gao Feng said on Thursday.

The escalation was also opposed by Vice Premier Liu He. From Chongqing, the megalopolis in southwest China, the Vice Premier, who is also a member of the Politburo of the Communist Party of China, gave an assurance that Beijing is willing to resolve the dispute through “calm” negotiations. He also pointed out that the Chinese economy is moving from “high speed growth to high quality development”, a route that offers "new opportunities for technological development and the healthy development of the smart industry”.

Chinese economy in recovery

In fact, despite the climate of uncertainty caused by the tariff war, China is showing the first signs of recovery, explains the Raiffeisen Capital Management emerging markets team. The real estate sector emerged from the crisis about a year ago and is now growing vigorously again. The demand for steel and cement is growing. Falling stocks in the automotive sector could lead to new production increases. An increase in infrastructure investments by local and regional governments is also expected. The picture is not only being complicated by the uncertainties of the trade war.

Hong Kong, G7 communiqué unwelcome to Beijing

The Chinese government maintains that there are hidden western forces behind the protests. “We express our strong dissatisfaction and determined opposition to the communiqué issued at G7 summit on the affairs of Hong Kong,” stated the foreign ministry spokesman. The joint communiqué issued by the G7 supported the autonomy of the former British colony and urged a return to calm. China has accused countries like the USA and the UK of interference and even suggested that the unrest in Hong Kong is being directed by foreign agents. Since it was returned to Beijing in 1997, the territory has enjoyed administrative autonomy based on the “one country, two systems” policy.

Police have refused permission for a pro-democracy march on Saturday 31 August and an appeal by organizers to allow the demonstration to proceed was turned down. The Civil Human Rights Front, the organizer of previous mass protests, said it would comply with the order and cancel the march but would plan more demonstrations. The decision came after Hong Kong arrested prominent opposition figures including Joshua Wong. On August 16 Rupert Hogg, the CEO of Hong Kong’s flagship carrier Cathay Pacific, had resigned amid recent controversies surrounding the city’s anti-extradition law crisis

Protests in Hong Kong continue to spread. The demonstrators are not only demanding the definitive repeal of the draft law on extradition between Hong Kong and the People's Republic, but also for universal suffrage to be granted (difficult because the Basic Law will be in force until 2047). The financial markets are unsettled: “In July, the value of Chinese shares fell in line with the trend in emerging countries. Share prices fell by 1.5 to 2%t, both on the mainland and in Hong Kong,” explains Raiffeisen Capital Management. Meanwhile Carrie Lam has ruled out resigning as governor of Hong Kong and has promised “zero tolerance of the violence” continuing with the “dialog platform”. The government “is still confident that it can handle the unrest that has been going on for two months” without the assistance of Chinese forces.

Taiwan: China warns the US, consequences of rearmament

“The US will have to bear the consequences triggered by the sale,” said Geng Shuang.  For China, another interference that is difficult to digest is that of the USA in Taiwan, the rebel island that Beijing claims as part of its national territory. Trump has announced the sale of 66 F-16 fighter-bombers to Taipei, against an increase in defense spending. This is a provocation that ignores Chinese claims over Taiwan. The Chinese Communist Party aims to achieve reunification without resorting to the use of force, hopefully by 2049 - the 100th anniversary of the founding of the People's Republic. A few weeks ago, an article entitled "The Motherland needs to be reunified” appeared in the pages of the People’s Daily.   Xi Jinping is also worried about the influence that the protests in Hong Kong might have on the self-proclaimed “Republic of China”, where the nationalists defeated by Mao took refuge in 1949.