Hopes of a US/China trade deal have grown even stronger over the weekend. This comes in response to reports that the US has moderated some of its more stringent demands.
The US had been demanding that China cap its industrial subsidies as a requisite for agreeing on a deal. However, following strong opposition from Beijing, the Trump administration has since watered down these demands.
Industrial Subsidies In Focus
The issue of industrial subsidies is a complex one. And it’s highly important to Beijing, as it involves China’s official industrial policy. Beijing awards subsidies and tax breaks to state-owned corporates, as well as sectors, which are seen as integral to long-term development.
Over his term as premier, Xi Jinping has strengthened the government’s role in certain sections of the economy. China gave assurances earlier in the year that it would cease its market-distorting subsidies for domestic industries. However, it gave no details on how it would do so.
US Makes Concessions
As both sides are pushing to secure a deal in the next month or so, US negotiators have apparently backed down over this issue. This marks a major retreat on one of the core issues of the US negotiations perspective.
Moving focus away from capping industrial subsidies, the US is reportedly focusing more on areas where it believes it can deliver results. This includes ending forced technology transfers, building better protection for intellectual property as well as broadening market access in China.
US Tariffs Removal
The other big obstacle which remains in negotiations is that of the removal of the US tariffs currently worth $250 billion. The US has signaled that it wants to keep some of these tariffs in place as a means of ensuring that China fully co-operates with the terms of any deal. The US also wants China to increase its purchase level of “big-ticket” items to over $1 trillion in the next six years.
This demand again funnels back to the industrial of subsidies for state-owned companies. This is because it is likely these companies which will be making the purchases. Therefore, in this case, those state subsidies will directly benefit the US.
The issue of subsidies and tax breaks has long haunted US/China relations, causing friction over the years. The US accuses China of failing to fulfill the obligations placed on it by the World Trade Organisations.
While China has made some effort to assuage some of the US concerns regarding its WTO obligations and has already tried to downplay its “Made in China 2025” push to assert dominance in the high-technology sector.
For now, the market waits to hear when the next round of talks will be held. And the mission to secure a trade deal continues. Trump has publicly said that he feels an “epic deal” can be done in the next four weeks and so now the pressure is on to deliver said deal.
However, negotiations remain tense and the risk of the deal collapsing and negotiations being pushed back is ever present.
The SPX500 continues its march back towards all-time highs at the 2939.87 level, with the September 2018 closing high of 2926.10 coming in just ahead. Any retracement lower will likely find support at the 2860.11 level.
On the lower timeframes, you can see that price is currently trading along the bullish trend line from late March lows. We also have strong local structural support at the 2895.92 level where we have a raft of prior highs offering support on a retest.