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US tax cuts impact on China two-sided: economists

Xinhua | Updated: 2017-12-06 10:43

BEIJING - A tax overhaul in the United States will bring two-sided effects to the Chinese economy, according to analysts.

Tax cuts will likely bolster household consumption and private investment in the United States, lifting demand for imports from countries including China, according to Sun Lijian, an economist at Fudan University.

On the other hand, lower corporate taxes could encourage companies to bring offshore profits back home and boost domestic investments, possibly resulting in capital outflows from China, according to Shenwan Hongyuan Securities.

The US Senate on Saturday morning narrowly passed the Republican bill to overhaul the tax code, moving one step closer to the first major legislative victory of the Trump administration and congressional Republicans.

The Republican-led Senate approved the legislation, called the Tax Cuts and Jobs Act, by a vote of 51-49.

One notable change in the tax bill is a reduction in the corporate tax rate from 35 percent to 20 percent.

The cuts are good news for Chinese exporters, who will help the economy remain on solid footing, boosting profits of listed firms on China's stock market, Sun said.

But higher growth prospects in the United States could also speed up the monetary tightening process by the Federal Reserve, putting pressure on China's own monetary policy, which could negatively impact the A-share market, he said.

"The external impact of tax policy change in the world's largest economy cannot be overlooked," China's Vice-Finance Minister Zhu Guangyao said at a recent forum.

Zhu said China should actively respond to the tax cuts, setting policies on the basis of coordination with other countries to boost overall labor productivity and help people become better off.

According to Liu Shangxi, head of Chinese Academy of Fiscal Sciences, China should continue to carry out its value-added tax (VAT) reform in response to the US tax bill.

As the most significant tax overhaul for two decades, VAT is replacing business tax which has been in place for 60 years, streamlining procedure, and avoiding repetitive taxing. It was piloted in Shanghai in 2012 and expanded nationwide in May 2016.

By the end of September, more than 1 trillion yuan ($150 billion) had been saved.

China should further to streamline VAT brackets to encourage fair market competition, which in a sense reduces taxes for many enterprises, Liu said.

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