An interesting turn of events in the U.S./China Trade War

"The Outlook Has Become Grim": Trump Trade War Causing "Rare Cracks" Within China's Communist Party


by Tyler Durden

Over the weekend, Trump claimed on Twitter that the US is winning the trade war with China for one simple reason: whereas US stocks are back to all time highs, the Chinese market has tumbled and remains mired in a bear market. Now, another - less naive - indication has emerged suggesting that the US is indeed getting the upper hand in the ongoing trade feud: according to Reuters, the trade war with the United States is "causing rifts" within China’s Communist Party, with some critics saying that China's overly nationalistic stance "may have hardened the U.S. position."

While China's President Xi still retains his undisputed grip on power, some have noted an unusual surge of criticism about economic policy and how the government has handled the trade war, revealing "rare cracks in the ruling Communist Party." Specifically, Reuters notes that the backlash is being felt at the highest levels of the government, hitting a close aide to Xi, his ideology chief and strategist Wang Huning.

Wang, a prominent and influential academic, has recently also come under attack for his strident views on Chinese power: the architect of the “China Dream”, Xi’s vision for China to become a strong and prosperous nation, Wang has been taken to task by the Chinese leader for crafting an excessively nationalistic image for the country, which has only provoked the United States, the sources said.

“He’s in trouble for mishandling the propaganda and hyping up China too much,” said one of the sources, who has ties to China’s leadership and propaganda system.

Naturally, China did not respond to a Reuters request for comment on Wang and his relationship with Xi, or on whether China had erred in its messaging in the trade war. But, in a stark confirmation that the ongoing trade war with the US is taking its toll, there is a growing feeling within the Chinese government that the outlook for China has “become grim”, according to a government policy advisor, following the deterioration in relations between China and the United States over trade.

Other influential policy makers have echoed the sentiment:

“Many economists and intellectuals are upset about China’s trade war policies,” an academic at a Chinese policy think tank told Reuters, speaking on condition of anonymity due to the sensitivity of the issue. “The overarching view is that China’s current stance has been too hard-line and the leadership has clearly misjudged the situation.”

The reason for the disappointment is that this view - which has quickly gained dominance - contrasts with the popular thinking at the beginning of the year of many Chinese academics "who had touted China’s ability to withstand the trade row in the face of Trump’s perceived political weakness at home."

China thought it had reached a deal with Washington in May to avoid a trade war, but was shocked when the Trump administration, in Beijing’s eyes, went back on that agreement.

“The evolution from a trade conflict to trade war has made people rethink things,” the policy advisor said. “This is seen as being related to the exaggeration of China’s strength by some Chinese institutions and scholars that have influenced the U.S. perceptions and even domestic views.”

And in what will come as welcome news to Trump this morning, one official who is familiar with China’s propaganda efforts said the messaging had gone astray: "In the trade war, the line of thinking in the propaganda has been that Trump is crazy,” said the official. “In fact, what he is scared of is us getting strong."

That view is correct, and it is surprising that it has dawned on China only now: after all Trump and Navarro have long declared that their true motive is to slow down China's ascent by any means necessary, not merely reshaping the US trade deficit with China.

It also explains the growing backlash to China's repeated nationalistic message.

Under Xi, officials have become increasingly confident in proclaiming what they see as China’s rightful place as a world leader, casting off a long-held maxim of Deng Xiaoping, the former paramount leader who said the country needed to “bide its time and hide its strength”.

Hu Angang, an economics professor at Tsinghua University and an expert in the field of “Chinese exceptionalism”, is one prominent advocate for the view that China has achieved “comprehensive national power”. However, as the Chinese stock market has tumbled in recent weeks, Hu has faced a public backlash, with critics blaming him for making the United States wary of China by trumpeting and exaggerating its relative economic, technical and military might.

It is unclear if Wang, the propaganda boss, will face any consequences Reuters writes, and there may be other reasons for the tensions within the party related to him.

Meanwhile, as official media has in recent days been filled with defiant commentary regarding the United States and the trade war, there have been signs of a shift in China’s messaging, demonstrated mainly by Beijing's downplaying of Made in China 2025, the state-backed industrial policy that is core to Washington’s complaints about the country’s technological ambitions.

Still, "the thinking in Chinese government circles is that the damage has already been done", and that China has learned the hard way that its domestic propaganda is now being scrutinized abroad in a way it never was before.

“It’s impossible for China to ‘bide its time and hide its strength’, but at least we can control the volume of our own propaganda and tell China’s story the proper way,” the policy insider said.

“When the size of China’s economy was small, it got little outside attention but China is now closely watched.”

That said, there is little tangible change observed in what has now become a daily media invective: on Thursday, Chinese state media accused the United States of a “mobster mentality” in its move to implement additional tariffs on Chinese goods, and warned Beijing had all the necessary means to fight back.

“The two countries’ trade conflict, which is merely push and shove at the moment, is likely to escalate into more than just a scuffle if the U.S. administration cannot marshal its mobster mentality,” state newspaper China Daily said in an editorial.

“China continues to do its utmost to avoid a trade war, but in the face of the U.S.’s ever greater demand for protection money, China has no choice but to fight back,” it said.

On its early morning news show, state broadcaster CCTV said that "China has confidence in protecting its own interests, has many means."

Another commentary, written by China Institute of International Studies research fellow Jia Xiudong and published in the overseas edition of the People’s Daily newspaper, said the United States was trying to “suppress China’s development”.

Of course, that's completely accurate, and goes to the real tension between the two nations, of which trade war is just one manifestation.

more by Tyler Durden

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