Even as China and the United States are working to finalize a trade agreement, Beijing is grappling with the challenge of building political consensus about implementing and enforcing the deal on the ground.

The challenge for the Xi Jinping-led government is both economic and political at a time when the annual political congress has just begun in Beijing.

Delegates to the meetings include the heads of major Chinese corporations both private and state-owned.

The deal may hit State Owned Enterprises hard, an important Communist Party base, as they stand to lose subsidies and monopoly status. SOEs employ millions of people in key sectors like energy, mining, banking and manufacturing.

“The Chinese government will face resistance from SOEs and coastal provinces with dynamic trade with the US and other countries,” said Zhiqun Zhu, chair of the department of international relations at Bucknell University.

During the political sessions, President Xi will be closely watched in China and the world over as he deals with issues like the trade deal, the Huawei controversy and an increasingly slowing economy. The two-week sessions will be attended by around 5,000 delegates from around the country.

The US is not just asking China to buy more American goods, it is demanding structural changes from Chinese industry, which enjoy preferential treatment compared to foreign investors in many sectors. The deal could mean an end to government subsidies and monopoly status for SOEs in several markets.

“Structural reforms will be more difficult [for China] due to vested interests of SOEs and local governments and businesses with extensive trade,” Zhiqun said.

Paul Gillis, a professor at Peking University’s Guanghua School of Management said, “Trade policy changes always have winners and losers. Expect opposition from the losers”.

Nature of challenge

The resistance will be internal, voiced in closed-door discussions of small groups of legislators and not during televised discussions of the National People’s Congress and the China People’s Political Consultative Conference, the two bodies that are part of the so-called “Twin Sessions.”

In the main sessions, which are televised live, no one speaks out of turn and without his or her speech vetted by senior leaders in advance, sources said.

“We have our system which is centralized. Once the President gives a directive, the delegates will not say no,” said Shen Dingli, a Shanghai based international relations specialist.

“The Twin Sessions will follow the leader’s view. The leader wants reform while making sure there is no pre-mature reform because that would be result in weakening China,” he said.

Under the surface, provincial leaders from more developed provinces and cities like Shanghai, Guangzhou are expressing concern about the negative fallout on the local economy if the deal is implemented.

Heads of several state owned corporations are already asking the government that their performance must be evaluated differently once the deal is implemented, informed sources said. They expect to take a hit on their profitability as the deal will give a bigger role to foreign competitors.

“At the end of the day, it is up to the central government and President Xi. If they are really determined to carry out structural reforms, they can, despite challenges and resistance,” Zhiqun said. China’s former Premier Zhu Rongji faced a lot of resistance when he carried out structural reforms in the 1990s but he still succeeded in his mission, he said.

Taking the hit

On the other hand, some analysts believe that the giant state-owned corporations are quite capable of handling the new challenge that will emanate from the trade deal with the US.

“They will face tougher competition in China from further opening up and reduction of state support, but I think they can handle that,” Gillis said. He was referring to the expected increase in the role of foreign companies once the deal is implemented in China.

The SOEs have been facing competition from foreign players since 2001 when China became a member of the World Trade Organization, he said. This time the competition will be more intense as restrictions on foreign firms will be reduced.

“The competition seems to have made many of these companies stronger,” Gillis said.

Chinese experts said the US should not expect China to restructure its economy as soon as the ink dries on the contract. Beijing was moving towards market based economy for its own reasons before the trade war and is now ready to hasten the process.

“The question is: Can China stop all subsidies to state owned enterprises? In some cases, China is not ready now, it needs a few years. It’s better if the US accepts a time bound commitment from China,” Shen said.

The US and China look at the situation differently, he said. The US believes that the presence of several competing players in the market is good for the customer. The Chinese think national competitiveness can be enhanced quickly if the government steps in to mobilize national resources to create and nurture a few gigantic national SOEs, he said.

 
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