China Labels US Tax Plan a "Gray Rhino"

In response to US tax legislation, China plans measures to counter threats of increased capital flight.

The Senate tax plan has China concerned. Beijing's Contingency Plan includes higher interest rates and stronger capital controls.

As the U.S. prepares to take China to task over trade imbalances, economic mandarins in Beijing are focusing on a potentially more immediate threat from Washington— Donald Trump’s tax overhaul.

In the Beijing leadership compound of Zhongnanhai, officials are putting in place a contingency plan to combat consequences for China of U.S. tax changes as well as expected interest-rate increases by the Federal Reserve, according to people with knowledge of the matter. What they fear is a double whammy sapping money out of China by making the U.S. a more attractive place to invest.

Under the plan, the people say, the People’s Bank of China stands ready to deploy a combination of tools—higher interest rates, tighter capital controls and more-frequent currency intervention—to keep money at home and support the yuan.

An official involved in Beijing’s deliberations called Washington’s tax plan a “gray rhino” an obvious danger in China’s economy that shouldn’t be ignored. “We’ll likely have some tough battles in the first quarter,” the official said.

Central to officials’ fear is the yuan, which has just regained its footing after enormous government efforts to prop it up. Should the yuan lose steam again, the thinking goes, it could further exacerbate capital outflows in a vicious cycle.

Tax Rates US vs. China

China's capital flight concerns stem from World Bank figures for 2016 show that total tax burden on Chinese businesses are among the highest of major economies: 68% of profits, compared with 44% in the U.S. and 40.6% on average worldwide.

I don't buy the notion that growth in the US is about to take off. Rather, I am in the "Fake Math " camp.

However, since China thinks tax cuts will spur growth, instead of placing more capital controls, why doesn't China cut taxes?

Mike "Mish" Shedlock

Comments (10)
No. 1-10
WhoStruckJohn
WhoStruckJohn

In order to cut corporate tax rates without running up debt, China would have to slow their military expansion from its current rate. As you can see, the Chinese government prefers any alternative.

TheLege
TheLege

No wonder Chinese companies are struggling: 68% tax on fake profits. The math says this doesn't end well.

JonSellers
JonSellers

No way China could grow as fast as it has with the highest tax rates in world. Right? Those rates are like the US in then1950's and 1960's.

Sechel
Sechel

China continues to suffer from huge misallocations of capital that hurt the consumer and make the people poorer. You can see it when looking at consumption as a measure of gdp. Michael Pettis has written about this extensively. And as far as the u.s. tax plan goes, it looks to be a disaster and probably won't accomplish any of its stated goals. CEO's are already saying they'll simply be using new found money to buy back stock and not to expand and hire. While they took away incentives for green energy such as solar and wind they gave more of them to the oil and gas industry. And despite years of words to the contrary corporate america saw none of this tax breaks taken away which was always supposed to go hand in hand with a cut in the corporate tax rate.

KidHorn
KidHorn

If you read between the lines, what China is really concerned about is the US running bigger deficits. Bigger deficits means a lower dollar. Something China clearly doesn't want. There's no way China gives a rats patootie about investment dollars going to the US rather than China.