US-China trade talks will trigger more visible reforms, particularly the scope and level of subsidies. This year, however, the picture becomes complicated when macro and corporate challenges meet trade tensions. We believe the scale of subsidy cuts will be limited given counter-cyclical measures of subsidies in past cycles. In terms of scope, traditional sectors may face more visible subsidy cuts, while sectors related to consumption, 5G, and infrastructure will continue to be supported.
Subsidy cuts will be a near-term change under US-China trade talks
Though positive progress has been seen, we think US-China negotiations may persist in the long term, with the key variable being China’s determination to push forward reforms. Beyond tariff issues, wide-ranging changes are continuously being requested by the USA to reach a trade deal, eg, IP protection, subsidy cuts, and openness to US investment.
Subsidy cuts have started, but scale will be limited this time
Total volumes peaked at 2008, 2012 and 2015, indicating the strong counter-cyclical nature of subsidies to weather economic down-cycles. Energy (31.7%), Industrial (31.3%), and Materials (16.9%) may face headwinds if total volume shrinks. Financials (12.4%), Healthcare (3.7%), and Consumer (11.1%) are now picking up, showing top-down policy trends to guide future distribution.