President Xi Jinping faces a strategic dilemma amid mounting domestic concerns that his state-centric agenda is setting China on a collision course with the United States.

Concerns are surfacing that this will ultimately hurt the world second-largest economy’s already fledging growth.

In an unusual move, vocal pro-market voices are challenging Xi’s strategy as the Chinese Communist Party, or CCP, celebrates the 40th anniversary of the opening up of the country.

This faction is calling for renewed reform impetus, which was inspired by Paramount Leader Deng Xiaoping.

Xi admission

Yet in a rare admission, Xi acknowledged divisions within his own staff during “small talk” with Trump over dinner at the Group of 20 summit in Buenos Aires on December 1, when the two leaders agreed on a fragile trade truce.

When Trump joked about the fact that his team was made of “different people with different views,” Xi smiled and replied “Yeah, I have the same thing across my table,” according to Steven Mnuchin, the US Treasury Secretary, who attended the meeting.

This anecdote shows that differences have erupted even at the helm of the regime over how to manage ongoing trade talks and the economy.

“The trade war instills anxiety. Since summer, there is a realization that China faces a major risk,” Yuan Ding, the dean of the China Europe International Business School (CEIBS), in Shanghai said.

Washington’s decision to slap tariffs on Chinese exports worth more than US$200 billion in September sent a shockwave through Beijing.

It also reignited an old divide within the CCP, pitting pro-market reformers and supporters against those favoring a more socialist approach in line with Xi’s agenda.

Politburo debate

“There is no easy way out. The answer does not lie in the negotiation with the Americans, but within the Politburo. One key issue needs to be addressed: the role of the state within the economy,” Ding said in an unusually frank comment from the head of one of the major business schools in China.

The postponement of a key CCP meeting where the country’s economic strategy is to be discussed is seen as another indication of internal divisions. The plenum was expected to take place in November in Beijing, but no date has been yet announced.

The discussion comes at a symbolic time.

Forty years ago, a similar meeting was held, known as “Reform and Openness,” on December 18, 1978 under the leadership of the pragmatic Deng in a decisive departure from Mao’s orthodox socialist policies.

Four decades later, China has emerged as an economic powerhouse as it closes the gap with the US. But the old divide within the CCP is back on the table as Xi Jinping reaffirms the leading role of the Party over the economy and society.

“He believes in centralization, not diversity. He is coming back to the Soviet model,” David Shambaugh, a professor at George Washington University, said.

‘Self-reliance’

Escalating trade tensions with Washington bring a new twist to this old debate, adding a sense of urgency amid fears that the trade war will hurt GDP growth, which already at its lowest point in a decade.

In response to Trump’s tariff, Xi has called for manufacturing “self-reliance” during a tour in North China’s Heilongjiang province in September. The use of this Mao era slogan, as well as his repeated praises of the central role state-owned enterprises, or SOEs, has triggered unease among entrepreneurs, and reformers.

“What worries people is the priority given to the state over the private sector. Many entrepreneurs secretly hope that Trump will indirectly help their voice to be heard in Beijing,” Duncan Clark, a Beijing-based consultant and author of ‘Alibaba, the House that Jack Ma Built’, said.

Many observers noted that Xi has so far paid lip service to the celebration of Deng’s legacy. Tellingly, an exhibition in Beijing recalling 40 years of opening up downplays the “Paramount Leader’s” role. It showed only small framed pictures of him in sharp contrast with those dedicated to the current president.

Major speech?

Speculation abounds that Xi will deliver a major speech on this issue in December that will set the tone, for both China’s dealing with the US, as well as its economic domestic strategy. It could potentially signal a significant shift.

The 90-day window to negotiate a trade deal, agreed by Trump at the G20 will put to the test Xi’s proclaimed goal to pursue Deng’s reformist legacy.

As the US threatens a fully-fledged economic war if China does not open up key sectors, pro-market forces see an opportunity to challenge Xi’s state-centric strategy, calling for fresh reforms.

“The next six months will be decisive. The key question will be: Are we going to see a new set of reforms? Ding, asked.

Washington’s new aggressive stance poses a challenge to Xi, a princeling who has promoted a more assertive foreign policy, in sharp contrast with Deng’s cautious approach of “biding our time.”

In Buenos Aires, Xi committed to purchase more American agricultural products and to lower tariffs for US car manufacturers, according to Trump. But China has yet to provide any official figures.

Slim negotiating margin

The arrest of Meng Wanzhou, the chief financial officer and daughter of Huawei founder Ren Zhengfei, by the Canadian authorities earlier this month at the request of the US, signals Washington determination. 

“Xi is a very strong leader, therefore he cannot afford to lose face. If he gives in too much he will face domestic pushback,” Gary Leo, the president of the China Financial Reform Institute, said.

“It would be good for China to make difficult but necessary decisions,” the Shanghai-based economist, added, stressing that there should be a greater role for the market, as outlined during a Plenum in 2013 that has fallen short in tangible implementation.

China’s massive state subsidies are a key US complaint, alongside forced technology transfers. But Xi’s negotiating margin is slim squeezed between a slowing economy and his determination to assert a strong renascent China in the eyes of his own population.

“Xi can make concessions, but only in a way that shows he is still a strong leader,” Leo said.