The US Republicans’ tax cuts, which recently made it through Congress and will be implemented this year, will have deep and far-ranging consequences. They will be felt even in China.
The cuts will be the largest in 30 years, bringing the corporate tax rate down from 35 per cent to 21 per cent, 4 percentage points below the rate in China. The combination of lower corporate tax and expected interest rate rises by the Federal Reserve will cause investors from all over the world to chase higher returns in the US.
While many countries now fear an exodus of capital, this will be especially problematic for China. Capital flight will cause the exchange rate to depreciate against the dollar, weakening China’s external purchasing power and threatening to throw its overleveraged financial system into crisis.