No big effect from U.S. tax cut

(Graphics/GT)

Investment in China to continue: insider

The U.S. government's recent tax cut is unlikely to discourage U.S. companies from investing in China, and nor will Chinese companies pour investment into the U.S. just because of tax changes, the president of the American Chamber of Commerce in Shanghai (AmCham Shanghai) told the Global Times on Monday, while Chinese experts noted that the yuan might face downward pressure as a result.

"We expect continued U.S. investment in China even with tax reform in the U.S.," Kenneth Jarrett, president of AmCham Shanghai, said on Monday.

"U.S. companies make investments based on a range of factors, including tax policies. Most U.S. companies in China are selling into the Chinese market. Thus, in addition to tax considerations, they look at production costs, shipping costs, proximity to market and other factors. Moreover, China is already well integrated into the global supply chain," he said.

Jarrett also said that the level of U.S. investment in China has more to do with "what steps China takes to maintain its attractiveness as an investment destination."

The U.S. Senate on Saturday approved a massive tax overhaul, which is set to be the largest change to U.S. tax laws since the 1980s, according to a Reuters report. The report cited U.S. President Donald Trump as saying that after the tax cut bill takes effect, the U.S. corporate tax rate will be cut to about 20 percent compared with the current 35 percent.

Liu Xuezhi, a senior analyst at Bank of Communications, said that the move is part of Trump's strategy to reinvigorate the U.S. manufacturing industry by encouraging companies in the sector to operate in the U.S. rather than overseas.

China's Vice Finance Minister Zhu Guangyao said on Sunday that the "overflow impact" of tax policy changes in the world's largest economy is "not negligible."

"We should cope with the situation with positive measures, such as increasing labor productivity as well as the competence [of domestic companies]," Zhu said, according to domestic news site ifeng.com.

Companies won't leave

Experts expressed differing opinions about whether the U.S. tax cut will affect the two countries' investment.

Xi Junyang, a finance professor at the Shanghai University of Finance and Economics, echoed Jarrett's view, saying that U.S. companies that are doing well in China are unlikely to leave just because of the new tax policy.

"If they leave, it's more likely because their business is not that smooth here," he noted, adding that the cost of changing a company's investment layout is very high.

Jarrett also said that Chinese investors are unlikely to move plants to the U.S. just because of tax policy, but he noted that if lower corporate taxes in the U.S. lead to even more Chinese investment moving in that direction, "we can only see that as a positive development."

The Global Times contacted Fuyao Glass which has set up a glass manufacturing plant in the U.S., but the company said it refused to comment.

Liu nevertheless noted that a certain level of capital outflow from China to the U.S. will be expected after the tax cut.

"The Chinese government should take measures, such as reforms to improve the domestic investment environment, to counter the possible negative impact of U.S. tax reductions," Liu said.

Yuan to slump?

Xi noted that the tax cut would boost the U.S. economy but would also add to inflationary pressure in the country.

"Therefore, the U.S. government will face more pressure to raise interest rates, which would put the yuan under depreciation pressure," he told the Global Times Monday.

But he stressed that other factors, especially measures taken by the Chinese government, would sway the yuan's exchange rate trend in the future, and a "slump" in the yuan is unlikely.

As for the stock market, Xi said that A shares are not directly pegged to the U.S. market, so there won't be fluctuations as a result of the tax cut.