U.S. markets are on a high right now owing to impending tax overhaul, but China feels threatened by this and are said to be developing plans to counter the immediate threat from Donald Trump’s tax overhaul.
According to reports, officials in China are putting in place a plan to combat the ill-effects of the tax overhaul as well as the expected interest-rate increases by the Federal Reserve. Reports suggest that the two measures could lead to money leaching out of China at a rapid rate with the investments being dumped in the US.
The People’s Bank of China is mulling a number of steps including higher interest rates, tighter capital controls and more-frequent currency intervention so as to not only keep the money in China, but to strengthen the Yuan as well. Officials in China are reportedly calling the tax reforms by the Trump administration as a “gray rhino” that could pose immense danger to China’s economy.
While the tax overhaul isn’t directly aimed at Beijing, it is another way China will be squeezed, Chinese officials believe. The tax overhaul will strengthen the US economy and will be a huge positive for the rest of the world including China, but there are negative aspects that China is fearing.
Under the tax plan now going through the U.S. legislative process, America’s corporate levy could drop to about 20 per cent from 35 per cent. Over the next few years, economists say, that could spur manufacturers—whether American or Chinese—to opt to set up plants in the US rather than China, where total tax burdens on companies are among the highest of major economies.
In practice, tax experts say, Chinese companies typically pay taxes on about 40 per cent to 50 per cent of their profits after various deductions. Tax experts say the average US rate after deductions is lower than that.
In the near term, expectations for such moves could cause money managers and others to move money out of emerging markets like China and instead park the funds in the US Potentially adding to the migration of funds is rising expectations that the Fed will raise rates this week and continue such actions into next year.
Under the contingency plan now being prepared, one course of action China’s central bank could take involves gradually guiding up costs for bank-to-bank borrowing, which has significantly added to financial risks in recent years, while leaving unchanged benchmark interest rates so as not to make it too difficult for companies to borrow or pay back debt, both of which could hurt growth.
The sweeping overhaul of the US tax code, estimated to result in $1.4 trillion in US cuts over a decade, is also serving as a wake-up call for Beijing, which for years has dragged its feet on revamping China’s own rigid tax system. Chinese businesses have long complained about high taxes, and the government has pledged to reduce the levies on them. The contingency plan currently in the works doesn’t include any significant tax reductions, the people involved in the discussions say.