ANALYSIS-Amid crises, frayed U.S. ties give China's Xi political cover at home

By Michael Martina and Kevin Yao

By Michael Martina and Kevin Yao

BEIJING, Aug 16 (Reuters) - To the outside world, China's ruling Communist Party - faced with an expanding trade war crimping an already slowing economy and spiralling protests in Hong Kong - is confronting some of its strongest political and economic headwinds in decades.

But at home, where China's elite leaders prepare for the 70th anniversary of the founding of the People's Republic this October, there are few indications that President Xi Jinping is politically embattled.

Many in Beijing believe U.S. President Donald Trump's approach to the trade war, and the Chinese government's effort to use Washington as a scapegoat for the Hong Kong unrest, provides Xi with convenient and effective short-term political cover.

This time last year, as Xi and other top officials held secretive talks at the seaside resort of Beidaihe, there was an unusual surge of criticism in official circles about economic policy and how the government had handled the trade war with the United States, sources told Reuters at the time.

With that same annual beach gathering likely wrapping up this week in China in the midst of the two deepening crises, there are no obvious dissenting voices.

"In the early months there were some criticisms on the government for not opening up so quickly," said one Chinese government advisor, speaking on condition of anonymity, referring to the rare internal dissent during the opening salvoes of the trade war last year.

"But right now in China, the rising consensus is that the U.S. is trying to contain China no matter what we do."

The source, who closely follows U.S.-China trade talks, said Trump's threat in early August to impose 10% duties on Sept. 1 on another $300 billion of Chinese imports was evidence to many in China that he was not sincere in wanting a deal.

On Tuesday, Trump backed off that deadline for tariffs on cellphones, laptops and other consumer goods, in the hope of blunting their impact on U.S. holiday sales. But this month he also branded China a currency manipulator, despite the International Monetary Fund's view that the value of China's yuan was largely in line with economic fundamentals.

"Many people will feel it is worthless to negotiate with Trump," the advisor said.


'CALLED TRUMP'S BLUFF'

That message fits with the unapologetically nationalist policies that Xi has pushed since coming to power in 2012, and has found an outlet in state media, which has ramped up a daily war of words towards the United States.

" U.S. trade war has greatly squeezed pro-U.S. thoughts inside China, making it easier for the Communist Party to unite Chinese society," editor-in-chief of the state-run Global Times Hu Xijin wrote on Twitter last week.

One American executive in China said he thought the manner in which Trump has handled the 10% tariffs would backfire and give Xi a boost.

"It plays right into Xi's hand as he goes into Beidaihe. He can look around the room and say, 'see, you can't negotiate with these people'. Xi called Trump's bluff," the executive said.

Jude Blanchette, the Freeman Chair in China Studies at the Center for Strategic and International Studies in Washington, said while Xi was facing a challenging external environment, particularly over the protests in Hong Kong, he was not significantly weakened at home.

"Xi Jinping is lucky insofar as he has a mercurial United States president who is making the case for him that the reason U.S.-China relations have turned in such a dire direction is because there is an unpredictable U.S. leader," Blanchette said.

In mainland China, amid tight internet censorship, there is little apparent popular solidarity for the Hong Kong protesters, whom increasingly vociferous state media have condemned as "violent radicals".

China has also painted Washington as a "black hand" fomenting months of increasingly violent demonstrations in the former British colony.

Still, Trump's unpredictability on trade has created a big headache for Chinese leaders, policy insiders said, while higher U.S. tariffs have pinched the word's second-largest economy.

Xi has few good options to deal with the trade war - seen in Beijing as one front in Washington's long-term goal to stifle China's development - or the Hong Kong protests, the more immediate shock to the country's short-term political stability.

Nonetheless, years spent consolidating his power among China's ruling elite - including the removal of terms limits to his presidency and a sweeping corruption crackdown - means analysts do not see such crises imperilling his leadership.

Blanchette said Xi could be fully secure in the office of general secretary, his post as head of the party, yet be finding it difficult to move forward with policy because he has a "scattered or unhappy coalition".

"This is precisely why you secure allies in the military and the security services, and in the central guard bureau and within the politburo, to buttress your leadership in a time of challenges," Blanchette said.


RISK TO REFORMS

Both Chinese and foreign analysts agree that the drag on the government's ability to adapt and implement needed market reforms due to tightened political controls under Xi poses a serious long-term risk that could derail the economy.

"Reforms are not moving forward and not going backward. The problem for the economy will not be big this year. We need to watch next year. It will definitely be troublesome," said a second Chinese government advisor.

A Chinese government official, speaking on condition of anonymity, said Chinese leaders were "nervous" about the situation, adding "controls are very tight".

Evidence of those controls: officials across the bureaucracy, in government agencies, state media, academia and at state-owned enterprises, including senior executives, have told Reuters of increased study sessions in recent months of party ideology.

Numerous foreign ministry officials said diplomats were being called back from holidays to participate in the sessions, and one official from the People's Bank of China, the country's central bank, spoke of working overtime to finish papers on Xi's eponymous political thought.

The same government advisor who said early criticism of Xi's handling of the trade conflict had tapered off, also warned that Chinese officials were nonetheless paralysed or issuing conflicting policy signals in the face of the external challenges, and that China's own lack of implementation of economic reforms was a bigger problem than the trade war.

"The government needs to take some action, but now they don't have the space," he said. "They don't have the appetite to take action. So many restrictions. So many risks. So we just wait." (Reporting by Michael Martina and Kevin Yao in Beijing, and Keith Zhai in Singapore; Editing by Alex Richardson)