Update: Reuters has confirmed the earlier Bloomberg report that Wanzhou's arrest has provoked "intense debate" among senior Communist Party officials about how to respond.
According to a separate report, Huawei has made a $2 billion "commitment" to address "security concerns" raised by the British government earlier this year.
Asked whether he thinks the arrest will spill over into the trade talks, Larry Kudlow said during a post-jobs-report interview on CNBC that he "rather doubts it," adding that China has agreed to talk about the security concerns (ie China's pervasive cyberespionage) raised during last weekend's meeting. He also hinted that Trump might be willing to extend that 90-day period set for negotiations, while he believes car tariffs "will come down rapidly."
- KUDLOW SAYS U.S. HAS BEEN WARNING HUAWEI ON SANCTIONS VIOLATION
- KUDLOW: HUAWEI DOESN'T HAVE TO SPILL INTO TRADE TALKS W/CHINA
- KUDLOW SAYS HUAWEI IS `SEPARATE TRACK' FROM TRADE TALKS
- KUDLOW SAYS CHINESE CAR TARIFFS WILL COME DOWN RAPIDLY
...And stocks shoot higher.
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As Beijing's outrage over the arrest of Huawei CFO Wanzhou Meng simmers ahead of her Friday arraignment in a Canadian court, Bloomberg has shed some light on how news of her arrest has resonated with different factions in the Chinese leadership.
The upshot is that while officials in charge of managing China's trade negotiations believe China shouldn't allow Wanzhou's arrest to impact trade negotiations, hardline national security officials believe the arrest is an embarrassment to Chinese leader Xi Jinping, who reportedly had 'no idea' that the daughter of a Chinese business icon and Communist Party member had been arrested in Canada - and that China should use trade talks as leverage to demand that she be released.
Western media outlets have reported that, while White House officials and National Security Advisor John Bolton knew about Wanzhou's arrest before Saturday's meeting between Trump and Xi, the president somehow had no idea.
Now, BBG is reporting that Xi similarly had no idea that one of his country's most prominent executives had been taken into custody hours before he sat down with Trump. This asymmetry is viewed as deeply embarrassing to China's leader, and many believe that simply letting trade negotiations to move forward as plan would be an unconscionable capitulation - particularly if (as many analysts believe) the Trump Administration intends to use her arrest as leverage.
Still others believe that Wanzhou's arrest is a "gift" for Xi, because it gives cover for the Chinese to dig in their heels and accuse the US of using the trade war as a pretext to stymie China's ascent as a global superpower. In light of Wanzhou's arrest, such a stance would likely garner more sympathy from the rest of the world.
As China contemplates how to respond, at least there is one silver lining: It helps China appear sincere to the world in wanting to resolve the trade war. He can say he is trying to resolve the issue but the US has an entrenched strategy to cut off China’s rise as a global power - a theme that state-run media picked up on Friday.
"The Huawei arrest gives China’s leaders a huge gift,' said Barry Naughton, a professor at the University of California in San Diego who studies China. "It makes super plausible the narrative they’ve been trying to promote all along: 'The U.S. just can’t stand our rise, they can’t stand to lose their dominance, they can’t treat anybody like an equal.'"
But one salient fact has been agreed on by all sides: Wanzhou's arrest doesn't bode well for a trade detente.
Officials concerned about the economy warned a collapse in trade talks would hurt China more than the Huawei arrest. Trump has threatened to raise tariffs to 25 percent on $200 billion worth of Chinese goods if a deal isn’t reached in 90 days. In the worst case of a 25 percent duty on all Chinese goods, 2019 economic growth could slump about 1.5 percentage points to 5 percent, down from 6.6 forecast for this year, according to Bloomberg Economics.
"The detention of Huawei’s CFO is not an accidental incident and will cast a shadow over the trade talks, but both sides will work hard to avert that bad influence," said Wei Jianguo, former vice minister of commerce and now a vice chairman of the China Center for International Economic Exchanges. "The negotiation between Chinese and U.S. working groups is going smoothly, and actually much better than people outside expected."
Because even if President Xi does opt to continue negotiating as per Saturday's deal, he will now need to extract even more concessions in order not to look powerless. And although Chinese officials have said they won't retaliate by arresting US executives - well - we wouldn't blame any US executives in China for grabbing their passports and chartering a flight to anywhere but China as quickly as humanly possible.
"Ms. Meng’s arrest threatens to make China’s leadership look powerless in securing the release of not only a citizen, but a senior executive and daughter of one of China’s business icons," said Michael Hirson, Asia director at Eurasia Group and a former U.S. Treasury Department official. "Nationalist sentiment will thus make it harder for Beijing to offer major concessions to Trump."
Publicly, at least, China is keeping the issues separate. On Thursday, commerce ministry spokesman Gao Feng told reporters that China is implementing agreements reached with the U.S. on agriculture, autos and energy. “In the next 90 days we will work in accordance with the clear timetable and road map” to negotiate in areas of mutual benefit, he said.
Then on Friday, foreign ministry spokesman Geng Shuang dismissed concerns that China would retaliate against U.S. companies.
"China always protects the legal rights and interests of foreigners in China, but they should also abide by all Chinese laws and regulations," Geng said.
In what's perhaps the clearest indication of China's outrage over the arrest, government-run media railed against Meng's arrest in editorials published on Friday.
"Obviously Washington is resorting to a despicable rogue’s approach as it cannot stop Huawei’s 5G advance in the market," the Communist Mouthpiece Global Times said in an editorial.
The upshot: If the US tries to use Whenzhou's arrest as leverage, they could wind up killing a promising deal.