President Xi sees trade restrictions on China ‘as a major confrontation,’ former ambassador says

Former United States Ambassador to China Max Baucus joins Yahoo Finance Live to discuss Chinese President Xi Jinping, the expectations for China's pivotal national congress, trade restrictions, Chinese inflation, and where the relationship with the U.S. stands.

Video Transcript

- Chinese President Xi Jinping on the cusp of what some are calling his imperial moment, and a break from their prior two-term limit, Xi, about to be given a third five-year term as Communist Party leader at the end of the major party congress that opens Sunday. What does that mean for China, Taiwan, and of course for US-China relations?

Max Baucus is the former US Ambassador to China and was a Montana Senator for more than 35 years. Mr. Ambassador, great to see you. Appreciate you coming on. Let's start with the latter. Headline of the "Wall Street Journal" reads, "A China prepared for conflict with the United States." What does Xi's extended rule mean for the US?

MAX BAUCUS: I think he's going to consolidate power. We'll see that after the 20th Party Congress. He is very proud. He tends to be more of a Maoist than following Deng Xiaoping, who opened up China. He's very proud of China's tradition and of, quote, "China's rightful place in history." After all, China began thousands of years ago. And he wants China to be a co-equal global power with the United States. I don't think he wants to control the United States. But he wants to be a co-equal power. He wants to be respected. I think that's his main goal.

- So Ambassador, as we look at what's on the agenda for this conference, obviously you have the zero-COVID policy, a lot of people wondering if that's going to get lifted, and also what this is going to mean for economic growth and the strategy in China. What are your expectations for what we're going to hear?

MAX BAUCUS: I don't think we'll see much change in zero-COVID. It's hard for Xi Jinping to change. He's going to want to save face, thinks his policy is the right thing to do. Frankly, they're much bigger country than we are, population four times ours, vaccines not nearly as good as ours. He doesn't have a lot of choice. Zero-COVID is-- he'll pursue it. But it's a big problem for the economy, clearly.

It's disrupted supply chains. It's caused the economy to suffer significantly. But he's not going to change it, not for a while anyway. He's going to try to probably spend a little bit more money, shoring up the basic industries in the country, instruct the banks to loan a little bit more. He sees this as a major confrontation with the United States.

That is when he looks at the actions we've taken, the United States, the Chip Reduction Act, and more recently the restrictions on export controls. They're serious. They're very serious. And frankly, if you at the rhetoric, both sides, they're pretty much similar. Each wants to be to outcompete the other, whatever competition means. We're really devolving into a Cold War, despite words to the contrary by the United States and China.

- Confrontation between the two seems likely. What about internally? If you're a Chinese tech giant, what does this mean to you? And we don't have a whole lot of visibility of the Chinese economy. What is your sense of the health of the Chinese economy, in particular what's happening with the property sector?

MAX BAUCUS: Well. tech giants have already been dramatically curtailed. Their wings have been very significantly clipped. They just bow to the leader, Xi Jinping. The property sector is in very difficult straits, highly overleveraged. It's about 20% of the economy.

But the Chinese are smart. They're hard working. They often learn from their mistakes. They'll try to do the best they can to deleverage. They'll try to do it in a pretty easy-- not in an easy way, but in a-- not in a dramatic way, but a way to essentially allow the economy to prosper.

- And Ambassador, we know that President Xi was pushing for this dual circulation strategy, trying to get more reliance on the internal markets. But when you do see China's economy slowing down on top of a global market slowdown, how much wiggle room, how much leverage does China actually have at this point?

MAX BAUCUS: Well, it doesn't have a lot. But it's going to still pursue dual circulation. And it should. I mean, after all, it's relied too much on exports in the past at the expense of the local economy. But exports, they're doing pretty well. But they know that if they're going to prosper longer, then they have to focus much more on the domestic economy. They'll do what they can.

In addition, they're going to really double down on chip production. I can't overemphasize the importance of the recent Biden announcement on export controls. That's a big shot across China's bow. Huawei is bad enough. This is much worse in their view. So the economy suffered. But they're sure are going to look-- and don't forget, China thinks in the longer term. And I was surveyed in China over and over again. I was impressed with how much they think in the long term and also how proud they are and hard working they are.

I don't want to overstate it, but they are very proud working people, and we Americans frankly don't know enough about China. We don't spend much time over there. We don't know China. And part of that is due to quarantine restrictions so we can't go over. But if more Americans were able to spend more time in China, I think we'd have a little more realistic view of what's happening.

- Interesting. What do you think Xi's extended rule of third term means for the likelihood of a confrontation with Taiwan? And how do you believe the United States would respond?

MAX BAUCUS: Well, those are two different questions. Taiwan is the reddist of red lines for China. It's existential. It's non-negotiable. It was once part of China. The Japanese took it over. And then Chiang Kai-Shek took the nationalists over to Taiwan. It's part of China in their view. There's no question about it. And they point out to our One China policy, say, hey, you Americans, you agree this One China policy.

I think Xi Jinping is to try to play the long game. It will be a salami slicing. That's very Chinese. And I was sure learning that, a little here, a here step at a time, maybe a little bit across the Taiwan Straits, a little bit here and there, and slowly, slowly, slowly, they'll wake up one day. It's like the frog in the pot of boiling water. It's just holy mackerel, they're really in charge, just like they did in the South China Sea, dumping sand on submerged reefs, and pretty soon, we got islands. It's slowly, slowly, slowly. That's their that's their MO.

Now, they may up be able to afford to do that. But that's their MO. They really feel-- they don't believe the United States' words when the United States says we support a One China policy. They say, that's just words. You don't mean that. They look at Biden's statements. President Biden four times has said something that's much stronger than that.

And US politicians in the passage of the Taiwan Policy Act really pushed more and more against that tripwire, which means that China is going to say enough's enough. We're playing a very dangerous game in Taiwan, in my view. We should continue our policy of strategic ambiguity. But don't support Taiwan too much because we're going to get to the point where it's going to cause a huge problem with China.

- Well, China is certainly playing the long game. It's got a 100-year plan. It's certainly a very different game they're playing indeed. A big thank you to former United States Ambassador to China Max Baucus. Thank you so much for joining us.

MAX BAUCUS: You're welcome.