China prepares to counter any U.S. trade penalties: sources

China's government has been seeking advice from its think-tanks and policy advisers on how to counter potential trade penalties from U.S. President Donald Trump, getting ready for the worst, even as they hope for business-like negotiations.

The policy advisers believe the Trump administration is most likely to impose higher tariffs on targeted sectors where China has a big surplus with the United States, such as steel and furniture, or on state-owned firms.

China could respond with actions such as finding alternative suppliers of agriculture products or machinery and manufactured goods, while cutting its exports of consumer staples such as mobile phones or laptops, they said.

Other options include imposing tax or other restrictions on big U.S. firms operating in China, or limiting their access to China's fast-growing services sector, they added.

Beijing was a particular target of Trump's rhetoric during last year's election campaign, and officials see some friction as inevitable due to China's large trade surplus, according to several sources involved in the internal discussions.

China's State Council Information Office, the government public relations arm, and the Ministry of Commerce did not return requests for comment.

"There is still room for both sides to resolve problems through co-operation and consultation, rather than just resorting to retaliation," said a policy adviser who spoke on condition of anonymity.

"But we should have plans in case things go wrong."

Premier Li Keqiang said last week that Beijing did not want to see a trade war with the United States and urged talks between both sides to achieve common ground.

U.S. Treasury Secretary Steven Mnuchin also said last week that the Trump administration did not want trade wars, but that certain trade relationships needed re-examining to make them fairer for U.S. workers.

No major U.S. measures have been announced, and there were no public indications of Washington's intentions on trade at the weekend when Secretary of State Rex Tillerson visited China.

Trump is expected to host President Xi Jinping next month.

A glimpse of the uncertain future, however, came on Saturday in a communique after a meeting of finance ministers at the G20 in Germany, which dropped a pledge to keep global trade free and open, acquiescing to an increasingly protectionist United States after the two-day meeting failed to yield a compromise.

GOODWILL GESTURE

The sources said China could step up some imports from the United States and boost its investment there to help create more jobs as a goodwill gesture, but would not meekly accept any unilateral U.S. action.

"We will have contingency plans to cope with the worst policies from Trump," said a second policy adviser.

Trump has previously threatened a 45 percent tariff on China's exports and frequently said on the campaign trail that he would label China a currency manipulator, even though Beijing has not been actively weakening the yuan in recent years.

In an interview with Reuters on Feb. 23, he declared China the "grand champions" of currency manipulation.

"It's hard to say his views have changed or he has become more pragmatic," said the first adviser.

Mnuchin has pledged a more methodical approach to analyzing Beijing's foreign exchange practices.

Under the three criteria set by the U.S. Treasury to determine whether a country is manipulating its currency for a trade advantage, China only meets one: running a trade surplus of more than $20 billion with the United States. The U.S. Treasury's next report on the issue is due in April.

China's surplus with the United States fell by $20.1 billion to $347 billion in 2016, the U.S. Commerce Department said on Tuesday, while Chinese data put it somewhat lower.

One of the sources said he thought it unlikely that Trump would label China a currency manipulator.

"If he does that, China will let the yuan go, and the yuan will fall sharply," the source said.

Weakening the yuan or dumping some of China's massive holdings of U.S Treasuries could be considered only when trade relations deteriorate sharply, the sources said.

Earlier this month, former commerce minister Gao Hucheng said during the annual meeting of parliament that China was not afraid of a trade war, though it hoped to avoid one.

"We are willing to deal with it properly, but we are not afraid. Once the U.S. side take certain measures, we will evaluate and analyze such measures, and take actions when necessary," Gao said.

(By Kevin Yao; Additional reporting by Elias Glenn; Editing by Will Waterman)