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Chinese President Xi Jinping (right) shakes hands with Japanese Prime Minister Shinzo Abe during their talks in the Russian port city of Vladivostok on Sept. 12.    © Kyodo
China up close

Why Xi Jinping vowed to 'safeguard free trade' at Abe meeting

Chinese leader seeks an anti-Trump alliance but home market has many barriers

KATSUJI NAKAZAWA, Nikkei senior staff writer | China

TOKYO -- Opting not to make his first visit to North Korea this month, Chinese President Xi Jinping instead flew further east to Vladivostok in Russia's Far East.

The Pacific port city of Vladivostok is located in a region that belonged to the Qing Dynasty until it was ceded to the Russian Empire under the 1860 Convention of Peking.

In Vladivostok, Xi attended the Eastern Economic Forum, which was held on Sept. 11-13, and had talks with Russian President Vladimir Putin.

Xi's visit coincided with Russia's biggest military exercise since the end of the Cold War: the "Vostok-2018" war games.

China sent 3,200 troops to take part in the eight-day military event, a move partly aimed at countering U.S. President Donald Trump's exclusion of the Chinese military from this summer's Rim of the Pacific exercise.

Another purpose of Xi's Vladivostok visit was to hold talks with Japanese Prime Minister Shinzo Abe.

Four years ago, Xi and Abe held their first talks on the sidelines of an Asia-Pacific Economic Cooperation, or APEC, summit in Beijing. Xi's grim-face during their awkward handshake made a splash.

In contrast, Xi, this time, was mild mannered and was seen sporting a smile when meeting with Abe. More important was what he said to the Japanese leader.

China and Japan "need to steadfastly safeguard multilateralism, the free trade system and the rules of the World Trade Organization, and promote the building of an open global economy," Xi said, according to Chinese state media. 

Perhaps surprisingly, it is highly unusual for Xi to vow to "safeguard the free trade system." He did not use the same phrase when he held separate talks with Putin and Mongolian President Khaltmaa Battulga in Vladivostok. Abe was the exception.

Until now, Xi has carefully avoided the phrase "safeguard the free trade system." For example, at the Boao Forum in the Southern Chinese island province of Hainan in April, Xi told the gathering that China would "liberalize and facilitate investment," "safeguard the multilateral trade system" and "construct free trade ports with Chinese characteristics."

The question is: Why has Xi been hesitant to use the phrase "safeguard the free trade system"?

The Communist Party has advocated socialism. Xi, who doubles as the ruling party's general secretary, has gone to lengths to avoid making any promise that would put constraints on his economic policies.

The top Chinese leader's use of the phrase would normally mean that he would have an immediate obligation to take liberalization steps at home that help safeguard the free trade system.

Meanwhile, Chinese Premier Li Keqiang has spoken relatively freely about the need for the "firm maintenance of the free trade system."

Xi presides over the Communist Party and is ranked first in the party hierarchy, while Li is in charge of the national government and ranked second in the hierarchy. Observers point to the division of labor between Xi and Li as a way to avoid problems, with one saying that the words of the No. 1 and No. 2 men "carry different weight." 

China, a major exporter, has taken full advantage of and gained huge benefits from the free trade system, but it has blocked the system at home, leaving its market largely closed amid a lack of liberalization measures.

U.S. President Donald Trump listens to a question from a reporter before departing the White House in Washington on Sept. 19.   © Reuters

China has imposed strict restrictions on foreign companies' entry into its market, including through foreign ownership limits in various sectors.

Furthermore, companies and organizations operating in China are required to have internal Communist Party committees that have the final say on decisions.

In a report at the party's 19th national congress in the autumn of 2017, Xi particularly stressed the need for the party to exercise "overall leadership over all areas of endeavor in every part of the country."

In response to criticism of its barriers to trade and investment, China has so far argued that it is a socialist state and still a developing country and sought trading partners' understanding of its uniqueness.

But many Chinese companies, flush with capital after racking up profits through exports, have gone on acquisition sprees abroad and targeted Western companies with advanced technologies in recent years, taking advantage of the free trade and capitalist systems.

For example, Zhejiang Geely Holding Group, a major Chinese automaker with close ties to Xi, has acquired foreign companies such as Sweden's Volvo Cars, Britain's London Taxi, now London Electric Vehicle, and a Danish financial institution.

Meanwhile, it is effectively impossible for Western companies to acquire major Chinese companies, even as the free trade system requires free cross-border capital flows.

There is growing discontent among many countries outside China, including the U.S. under President Trump, over what they see as a fundamentally unfair situation.

Authorities in the U.S., Australia and Germany are becoming increasingly frustrated and have recently started blocking acquisitions by Chinese companies on national security grounds.

In Vladivostok, Xi's comments on free trade and the agreement for Abe to visit were said in part to form an international coalition against the U.S. over trade.

Japan is also facing growing pressure from the Trump administration over trade. If possible, Xi wants to bring Abe over to China's side in the Sino-U.S. trade war and show off a "Sino-Japanese united front."

Japan needs to understand Xi's intentions and make sure he does not renege on his commitment to free trade.

But there has been a disturbing move within China recently.

An article published by a certain financial figure within China's Communist regime has sparked a considerable controversy in political and business circles.

The author argued that China's private sector has already finished its role in helping the country's public sector develop and should not be expanded blindly anymore. In the future, the mixing of public and private sectors should be promoted, the author added.

Chinese Vice President Wang Qishan is seen at the Great Hall of the People in Beijing in March. Wang has personal connections to the U.S. financial world. (Photo by Kosaku Mimura)

Reformist scholars have denounced the article as running counter to the basic spirit of China's "reform and opening up" economic policy, which was introduced 40 years ago by then-supreme national leader Deng Xiaoping.

Why the article was published abruptly, and the author's real intentions, remains unclear.

But the article has caused a considerable stir, partly because it coincided with a bombshell announcement by Jack Ma Yun, the founder of Chinese e-commerce giant Alibaba Group Holding, that he will retire in a year. Alibaba is China's most influential private company.

If China puts the brakes on the growth of the private sector, it will never truly be able to join the free trade system.

The Trump administration is ratcheting up pressure on China over trade. On Sept.17, it announced a third round of punitive import tariffs on $200 billion of Chinese products. The Xi administration has been put on the defensive.

The Xi administration now counts on Chinese Vice President Wang Qishan, who has personal connections to the U.S. financial world, to defuse Sino-U.S. trade tensions. It also pins its hopes on possible future ministerial-level talks between the two countries.

Under such circumstances, Xi unexpectedly promised to "safeguard the free trade system" for the first time when he met with Abe. There is no doubt that Xi's diplomatic maneuvering involving Japan will continue in the future.

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