It’s hard to say how much of this is “news”, but it’s certainly notable in the context of the Sino-US trade pact announced on Friday, even if it’s been reported in one form or another previously.
As you’re likely aware, the “Phase One” deal leaves key structural issues to future negotiations, and no issue is more contentious (and potentially intractable) than state subsidies.
Well, as Nikkei reports, industrial subsidies in China have doubled over five years, “creating a massive sticking point for the next phase of trade negotiations with the US”.
Specifically, Nikkei says Beijing deployed some $22.5 billion in subsidies last year to Shanghai-and Shenzhen-listed companies, “amount[ing] to about 5% of total net profit earned by mainland China’s publicly traded enterprises”.
The article cites a series of additional statistics, including the following:
- Through the first nine months of 2019, subsidies rose another 15% YoY
- More than 90% of nearly 3,800 companies included in the sample got some money during that period
- Sinopec received nearly $500 million
- Four of the top 10 recipients were automakers
- ZTE got $18 million in the first six months of 2019
Clearly, this isn’t something that the Trump administration is enamored with, and it’s been one of the most vexing issues in the trade discussions. Nobody expects any progress on this for one very simple reason. As Shinichi Seki of the Japan Research Institute explains, “the Communist Party leadership draws its authority from the distribution of wealth, and fundamental change will be difficult”.
Yes, “difficult”. More like “impossible”, because assuming Trump doesn’t actually try to make good on his “joke” about serving more than two terms, China is, at most, five years away from being rid of him. The idea that the Party would rapidly roll back subsidies and allow for market forces to run amok, purging misallocated capital and driving uneconomic production out of business virtually overnight at the cost of God-only-knows-how-many jobs, is unthinkable. It isn’t going to happen.
Nikkei goes on to say that Beijing “appears to be expanding subsidies to companies related to [“Made in China 2025″] to help them compete on the global stage”. Trump has taken direct aim at that initiative. Indeed, undercutting Xi’s global tech ambitions has become something of an obsession for the White House.
It’s worth noting that the total amount of subsidies is likely far higher than the RMB156 billion reported in the Nikkei piece. Presumably, that only covers listed companies. At least one analyst estimate from Haitong Securities put the total value of subsidies to the corporate sector in 2017 at RMB430 billion.