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Announcement:

Moody's: New US tax cuts have limited credit implications for China and Chinese corporates

 The document has been translated in other languages

31 Jan 2018

Singapore, January 31, 2018 -- Moody's Investors Service says that the new US tax law passed in December will not have material credit implications for China (A1 stable), one of the largest trading partners of the US, nor for Chinese companies, in terms of bilateral trade, the foreign exchange market, cross-border investment flows, and tax competition.

"Overall, the law's impact on China's fiscal position or capital flows will be limited" says Lillian Li a Moody's Vice President, "and the broader investment climate, rather than tax rates, will continue to guide inward investment to China."

"Furthermore, the US tax cuts will not materially affect the credit profiles of Chinese corporates, either in their domestic or overseas operations", adds Li.

Moody's conclusions are contained in its just-released report, "Cross-Sector — China: New US tax law has few credit implications for Chinese sovereign and companies". The report assesses the credit implications of the changes in US tax policy through four transmission channels: trade, currency effects, cross-border investment flows and tax competition.

On the issue of bilateral trade between the US and China, the tax cuts will produce only modest additional growth for the US economy and therefore will not materially increase US demand for Chinese exports.

Moreover, any positive impact may be offset by increasing trade tensions between the two countries.

The currency effects of the tax cuts will also be muted, with no additional downward pressure on the renminbi beyond the impact of above-trend US growth and Moody's expectations for rate hikes by the US Federal Reserve in 2018.

In addition, the impact on cross-border investment flows will be limited. Lower US tax rates are unlikely to result in significant changes to the future US investment plans of Chinese companies, given that Chinese government policy largely guides their outbound investment strategies.

Furthermore, Moody's does not expect significant cash outflows from US companies repatriating profits, and foreign companies are unlikely to change their investment plans, in light of the economic incentives, beyond tax considerations, to invest and operate in China.

China, however, is not highly exposed to such potential outflows, as most US investment in China has been in manufacturing. US multinationals are now free to repatriate their offshore profits without further tax under the new US tax policy.

Conversely, the US corporate tax cuts, even if they are mirrored in other advanced economies, are unlikely to change foreign companies' investment plans in China, given that these tend to be most influenced by longer-term structural factors, including expectations of continued fast growth in China's domestic market.

Finally, tax competition between China and the US is unlikely. The effective corporate tax rate for many companies operating in China is unlikely to be higher than the new US rate given various preferential tax policies from Chinese governments.

China's central government has reiterated its commitment to further reduce the corporate tax burden. Chinese companies also enjoy a competitive advantage through access to a lower cost of credit in China.

And although the US tax cuts will not have a material credit impact on Chinese companies that have operations in the US, these companies may have some incentive to adjust their US business operations or investment strategies.

Subscribers can read the full report at:

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1110394

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Michael Taylor
MD-CCO APAC
Credit Strategy and Standard
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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