The year just ended was a hard one for Chinese president Xi Jinping and 2019 looks no easier. He has had to acknowledge sudden and unusual domestic criticism of his two signature policies, the Belt and Road Initiative and Made in China 2025 and seemingly pulled back from both. The air is rich with speculation about change. Whether this is about optics or substance, it will determine the outcome of the trade war truce with the US and shape China’s economic prospects.

Stung by some bad publicity about Belt and Road financing, cancelled projects, and a new awareness of debt sustainability problems in a rising number of countries, China has started thinking about alternative features. These include foreign direct investment, equity partnerships and co-financing with western official institutions. Some countries have also complained about neo-colonialism, lack of governance transparency and a reliance on Chinese contractors and labour.

A major flaw in Belt and Road as an alternative development strategy is its reliance on US dollar financing at a time when China’s financing capacity is being impaired by the emergence of a balance of payments deficit, and external US dollar liabilities that are not far short of two-thirds of China’s foreign currency reserves. Renminbi financing might be an option, but the currency is facing structural depreciation pressure, and its international role is strictly limited by capital controls.

While a broad-based economic downturn is unfolding at home, Mr Xi’s bigger and more immediate challenge is to try to stabilise trade and commercial relations with the US. These issues have generated disquiet among some in the Communist party elite and intellectual critics. Some have warned that China’s approach to the US, and industrial policy at home, is not compatible with fair trade and world peace, and is leading the country along a path towards confrontation.

China has already stepped up purchases of US agricultural and energy products, cut tariffs on 700 items, offered to shelve the punitive 25 per cent tariff rate on US auto imports, proposed to scrap foreign ownership caps in some sectors and fast track a new foreign investment law and begun a campaign to crack down on the infringement of intellectual property rights.

The main bone of contention, though, is the Made in China 2025 strategy. This seeks to upgrade 10 key high tech manufacturing sectors in which state-owned enterprises and leading “private” companies have been urged to become more self-reliant and set minimum market share targets of between 60 and 90 percent.

Western businesses and politicians have long argued that the strategy promotes unfair competition, and financing, funding and regulations that discriminate in favour of state and state-linked companies, in which the party now has an increased operational management role.

For now, Made in China rhetoric has been dialled down, and was not even mentioned in recent policy instructions to local governments for 2019. Some senior policymakers acknowledge the strategy encourages waste and over-capacity, as evidenced in electric vehicle batteries. There are suggestions of changes to previous policy targets and dates, and to rules governing opening up and technology transfer in designated sectors. Foreign companies have heard these things before and will look for stronger assurances than they have had in the past.

The 40th anniversary of Deng Xiaoping’s opening up of the Chinese economy, and the end-of-year Central Economic Work Conference last month, suggest that Mr. Xi is prepared to accede to change but not to anything that threatens China’s core interests. He cannot risk caving into US pressure. Foreign companies and SOEs will still be required to buy and prioritise locally. Local governments and tech companies are bound to support the security, innovation, and industrial transformation of the state. Industrial policy designed to boost China’s technological and military capacity is not up for negotiation. Changes to intellectual property laws are aimed more at small businesses rather than SOEs and big technology companies. Changes in foreign ownership caps and technology transfer will have to go some way for foreign companies to back away from reconsidering supply chain strategies.

So, while we can anticipate some flexibility in the optics of Mr. Xi’s negotiating stance, no one really doubts that he is firmly in control, and remains committed to both the Made in China and Belt and Road strategies, which are enshrined in the party’s constitution.

The US and the west are going to have to deal with the consequences, whatever the trade talks yield. Far more substantive issues are likely to remain unresolved, keeping tariff tensions high.

Editor’s note: The article reflects the author’s opinion only, and not necessarily the views of editorial opinion of Belt & Road News.