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How China’s top-down political system holds it back

Clay Chandler here, chiming in from Hong Kong with CEO Daily’s weekly Sino-Saturday edition.

It has been more than a week now since the collapse of trade talks between the world’s two largest economies. Beijing and Washington have since announced billions of dollars in new tariffs on each others’ exports. Official rhetoric between the two sides has deteriorated from muted to downright nasty.

This feels like a decisive rift. Global investors are adjusting to the grim prospect that the U.S.-China trade war could drag on indefinitely.

How did negotiations, which seemed so close to accord, lurch so suddenly off track? We may never know the full story. An analysis published in Thursday’s New York Times lays blame for the breakdown at the feet of Chinese president Xi Jinping.

Only he, the Times argues, could have ordered the series of sweeping last-minute changes that torpedoed the deal: “In China’s top-down political system, where President Xi has amassed formidable power, it’s unlikely that anyone else would have had the authority — or, for that matter, the nerve — to fundamentally alter the emerging pact” at such a late date.

The Times speculates Xi “misjudged Mr. Trump’s eagerness for a deal,” and suggests the fact that he has monopolized so much decision-making authority contributed to the error. Xi and other senior Chinese leaders may not have seen a translated version of the proposed deal until very final stages of negotiation, the Times notes, and Xi’s own frenetic travel schedule didn’t help. The story quotes China expert Scott Kennedy who attributes the agreement’s undoing to “insufficient policy coordination” on the Chinese side.

If the Times story seems to suggest that China’s problem is that Xi is too powerful, it also portrays a leader who is deeply insecure: afraid to be perceived as having “given in” to Donald Trump, wary of party rivals who might condemn him for “humiliating” China, lacking confidence to push legal changes through what is often described in the Western press as China’s “rubber-stamp” legislature.

In an article published Thursday in one of China’s leading theoretical journals, Xi bemoaned China’s “bloated” economy and lamented its “lack of strength in innovation ability.” Many of the changes sought by the U.S. in the trade negotiations would accelerate Chinese innovation by paring back public subsidies for state-owned firms, strengthening intellectual property rights, and giving greater sway to markets. And yet Xi has resisted those demands not only for fear of losing face, but because he has stacked state-controlled firms with political allies.

Is China’s problem that its “core leader” is too powerful—or that he is too weak?

More China news below.

Clay Chandler
@claychandler
clay.chandler@fortune.com

Innovation and Tech

Huawei banned. The White House has intensified its campaign against Huawei. President Trump signed an executive order Wednesday that effectively blocks Huawei from the U.S. market. The Trump administration then added the Chinese telco to its “entity list.” As an “entity,” Huawei is unable to purchase components from U.S. companies without approval from Washington. Huawei says it has already stockpiled supplies and eventually will be able to replace U.S. tech with its own. Analysts are skeptical. Bloomberg

Searching for growth. Baidu reported its first quarterly loss since going public in 2005. The search giant registered a $49 million net loss attributable to shareholders for Q1, compared to net revenues of $970 million for the same period last year. In a letter to staff, CEO Robin Li said the company was in a “grim situation.” TechCrunch

$4 billion pot of coffee. Luckin Coffee, the upstart challenger to Starbucks China, raised $561 million in its IPO this week, less than two years after the company was founded. The IPO values Luckin at $4 billion with its American Depository Shares pricing at the higher end of their $15-$17 range. Luckin sold $10 million worth of ordinary shares to agricultural company Louis Dreyfus. The two firms are set to build a roastery in China. Financial Times

Xpeng expands. Xpeng, one of China’s numerous “Tesla rivals,” is trialing a ride hailing business in Guangzhou, where the electric car maker is headquartered. Xpeng says it will only hire “trained, verified and monitored professional drivers” and will operate its own fleet of Xpeng SUVs. The move seems like a ploy to shift excess stock onto the streets. TechNode

Economy and Trade

Piggy in the middle. Days after the Trade War ceasefire ended, Chinese buyers cancelled orders for 3,247 metric tons of U.S. pork, which is subject to Chinese tariffs. It’s the biggest cancellation in over a year and comes at a time when China’s domestic pork supply has been decimated by an African Swine Fever epidemic. The U.S. will soon start testing domestic hogs for the disease, which is spreading across Asia. South China Morning Post

Money matters. The yuan fell to its lowest in five months on Friday, passing Rmb6.9 to the dollar but stopping short of Rmb7. The yuan has fallen 2.5% since President Trump announced he would increase tariffs on Chinese imports. Sources told Reuters China’s central bank won’t let the renminbi fall beyond seven to the dollar. A weaker Rmb would help China’s exporters offset the impact of tariffs, but it could also prompt capital flight. Reuters

In Case You Missed It

Celebrated Architect I.M. Pei Is Dead at 102 Fortune

Show sincerity or cancel trade talks, Chinese state media tells US SCMP

How China forged self-made female billionaires The Economist

What’s our China endgame? NYT

China Is Running Out of U.S. Goods to Tariff, But It Has Other Trade War Weapons to Unleash Fortune

Politics and Policy

LGBT Taiwan. Taiwan’s parliament has become the first in Asia to legalize same-sex marriage. Two years ago, the island’s high court ruled that disallowing same-sex marriage was unconstitutional and set a deadline for parliament to legalize it. However, a referendum last year showed that a majority of voters considered “marriage” to be between man and woman, which is why parliament has created a new law for “same-sex marriage” rather than simply expanding the legal definition of “marriage.” BBC

Pompeo’s world tour. U.S. Secretary of State met with Hong Kong pro-democracy leader Martin Lee in the Special Administrative Region on Thursday where Pompeo reportedly “expressed concern” over Hong Kong’s plan to pass legislation that facilitates extradition requests. Last month, thousands of demonstrators protested the proposed law, which opponents say will make it easier for Beijing to target political dissent in Hong Kong. Reuters

 

This edition of CEO Daily was edited by Eamon Barrett. Find previous editions here, and sign up for other Fortune newsletters here.