By Andrea Shalal and Cate Cadell
WASHINGTON/BEIJING (Reuters) - Beijing sharply rebuked Washington on Tuesday for adding some top Chinese artificial intelligence startups to its trade blacklist, dimming hopes for progress in high-level talks aimed at ending a 15-month trade war between the two economic giants.
U.S. and Chinese deputy trade negotiators were due to meet in Washington for a second day of talks on Tuesday, laying the groundwork for the first minister-level meetings in more than two months later this week.
A report from the South China Morning Post said China had tamped down expectations ahead of the talks scheduled for Thursday with Chinese Vice Premier Liu He, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, saying the Chinese delegation could leave earlier than planned because "there's not too much optimism."
Prospects for a breakthrough in the on-again, off-again negotiations sagged this week after the U.S. Commerce Department added 20 Chinese public security bureaus and eight companies to its trade blacklist.
Hikvision <002415.SZ>, which bills itself as the world's largest maker of video surveillance gear, was among those targeted, as were SenseTime Group Ltd and Megvii Technology Ltd, both leaders in facial recognition technology.
The listing bars the firms from buying components from American companies without U.S. government approval, a potentially crippling move. It follows the same blueprint used by Washington in its attempt to limit the influence of Huawei Technologies Co Ltd [HWT.UL] for what it says are national security reasons.
U.S. officials said the latest action was tied to China's treatment of Muslim minorities and human rights violations, provoking a sharp reaction from Beijing.
China said the United States should stop interfering in its affairs. It will continue to take firm and resolute measures to protect its sovereign security, foreign ministry spokesman Geng Shuang told a regular media briefing without elaborating.
Washington is also moving ahead with discussions around possible restrictions on capital flows into China, with a focus on investments made by U.S. government pension funds, Bloomberg reported.
Some major U.S. stock indexes were down 1% in afternoon trading, with shares of chipmakers trading sharply lower. Oil prices also fell.
Tit-for-tat tariffs imposed by the United States and China have roiled financial markets and slowed capital investment and trade flows.
International Monetary Fund Managing Director Kristalina Georgieva issued a stark warning about the state of the global economy, saying an economic deceleration could worsen without action to resolve trade conflicts and support growth.
"We are decelerating, we are not stopping, and it's not that bad. And yet, unless we act now, we are risking a potential more massive slowdown," Georgieva, who took over as IMF chief this month, said at an event to preview the IMF and World Bank fall meetings next week in Washington.
LOOMING TARIFF HIKES
The trade talks in Washington are taking place days before U.S. tariffs on $250 billion worth of Chinese goods are slated to rise to 30% from 25%. President Donald Trump has said the hike will take effect on Oct. 15 if no progress is made in the negotiations.
Trump, who has embraced protectionist policies as part of an "America First" agenda aimed at rebalancing global trade and boosting U.S. manufacturing, said on Monday a quick trade deal with China was unlikely, and that he would not be satisfied with a partial agreement.
The two sides have been at loggerheads over U.S. demands that China improve protections of American intellectual property, end cyber theft and the forced transfer of technology to Chinese firms, curb industrial subsidies and increase U.S. companies' access to largely closed Chinese markets.
Trump launched a new round of tariffs after the last high-level talks in late July failed to result in Chinese agricultural purchases or yield progress on substantive issues. China quickly responded with tariff increases of its own.
With no signs of any significant momentum in the talks, the world's two largest economies could be braced for an open-ended trade dispute, an idea that is gaining currency in some circles.
"I can feel that Chinese society has low expectation for real breakthrough in the new round of trade talks. Most people think alternate trade war/trade talks will be a normal thing between China&the US," Hu Xijin, the editor of China's state-run Global Times newspaper, wrote on Twitter.
Another flashpoint in U.S.-China relations erupted over the weekend when an official with the NBA's Houston Rockets wrote a tweet in support of Hong Kong democracy protests. The tweet, which was quickly deleted, sparked a backlash in China and a rebuke from the National Basketball Association, which in turn faced U.S. criticism that it was allowing free speech to be censored for commercial reasons.
Police in Hong Kong have used rubber bullets, tear gas and water cannons against pro-democracy demonstrators in the former British colony, which has been plunged into its worst political crisis in decades.
Trump has called for a peaceful resolution to the protests, and warned the situation had the potential to hurt trade talks.
Beijing views U.S. support for pro-democracy protests in Hong Kong as interfering with its sovereignty.
(Reporting by Andrea Shalal, David Lawder and Makini Brice in Washington and Cate Cadell in BeijingWriting by Andrea Shalal and Paul Simao; Editing by Cynthia Osterman)