The US Senate and House of Representatives have already presented their own version of the long-awaited tax reform bill and key differences were reconciled in the conference committee. The final tax bill is now one House vote away before it becomes official.
Previously, US President Trump has quipped that he hopes to pass the bill before the Christmas holiday. As at the time of writing, on 19 December 2017, the US Congress has yet to legislate the bill but the US stock market has already begun to see animal spirits reignited. Just a day before, the bellwether Dow Jones Industrial Average index rose to a new record high of 24,876 points!
Despite the US rally, local and Hong Kong stock market followed the lead from the China to drift lower. It is clear that China A-shares are becoming more influential.
Back in 2015, China’s stock market saw a tremendous run up as investors leveraged up to speculate. Asset valuations became extremely frothy, ultimately forcing the hand of Chinese Central government to rein in the market bubble. The softness in the Chinese stock market this year is the result of the authorities’ continuing effort to tame its debt pile.
Trump’s tax reform bill, in essence, is a massive tax cut for US businesses and individuals. It is also the biggest tax overhaul of the federal tax code in US for generations. In the past, politicians had avoided mentioning “tax cut” as it carried extreme political risk since most benefits would only be enjoyed by the rich but not the masses.
For the stock market though, corporate tax cuts are extremely good news since it directly impacts profitability. For US companies, Trump’s tax bill will see corporate tax rate lowered from the existing 35 percent to just 21 percent, while profits from overseas operations will be taxed at just 10 percent instead of 35.
However, the tax cuts in US have come off as a big blow to many other high-tax countries. For these countries with high taxation rate, funds outflow will negatively impact economic development and will also lead to its currency depreciate. The only beneficiary is, perhaps, Japan as their exports become more competitive and hence benefiting its stock market.
China and the European Union would likely be the biggest losers from the US tax overhaul. In fact, the Chinese media criticised the US for setting off a global trend of tax-slashing immediately after Senate Republicans approved the tax reform bill.
When US roll out its tax reform, China would become a high-tax country compared to the US. Institutions could already be funneling funds out of China which led to the poor performance of Chinese stocks in recent months. Over the last three months, the Shanghai Composite Index had already tumbled to levels not seen since August 2017.
While Singapore is not considered a high-tax country, the government is looking to do the opposite by hiking taxes. A worrying concern from this is whether factories would choose to relocate from Singapore to the US.
Trump’s tax bill could very likely have derailed our government’s tax plans. In the face of US tax cuts, our government may also revise our tax code, lowering various direct tax rates such as the corporate tax rate or individual income tax rate, but at the same time hiking the goods and services tax to make up for the shortfall in government revenue.
Assuming China follows suit in cutting taxes, I believe our stock market would also benefit since a good proportion of our local-listed companies have operations in China.
The Fed closed the year with one last round of interest rate hike, increasing by another 25 basis points to bring the effective rate to 1.25 to 1.5 percent. In total, the Fed has hiked interest rates five times and has guided to three more next year.
Despite that, US investors seemed oblivious to the interest rate outlook, as the US stock market surged during the day when the announcement was made. Investors perceived that the interest rate guidance for next year is essentially meaningless since the current Fed Chairwoman Janet Yellen is about to step down.
The upcoming Fed Chair Jerome Powell is believed to be more dovish than Yellen. Yellen, who was appointed by Obama, had hiked interest rate once during Obama’s presidency but did it four times under Trump. Consequently, Trump chose not to reappoint Yellen but pick Powell to succeed her.
This is the reason why US investors placed their focus on the tax reform bill instead. With a change in leadership in the Fed, US stock market is poised to do better, especially since Powell is also looking to reduce regulatory burdens on the financial sector.
On 18 to 20 December 2017, the Communist Party of China (CCP) is going to hold its annual economic work conference (EWC) to detail out key objectives and directions for the Chinese economy next year. The highly-watched meeting is the most important economic meeting in China.
Investors are keenly following news of the event while some have already begun speculating. China’s tax policy would be one of the most important elements to pay attention to. Would the CCP follow suit and slash taxes?
Energy stocks are also in play: For the past two years, the CCP has worked effortlessly to reduce overcapacity in the industry. As a result, energy stocks have surged tremendously but have recently seen a correction. In face of the EWC, speculators may take the opportunity to drive energy stocks once more.
Chinese insurance stocks are also worth monitoring as “nursing the old” has become a theme following the CCP’s nineteenth annual congress. Currently, China’s supplementary pension Social Security Fund is inadequate to be support the growing number of ageing Chinese. As such, the CCP is expected to come up with more definitive policies while encouraging Chinese citizens to purchase life insurances to save up for the retirement.
Property stocks would also be affected: For a while, the CCP has tried to rein in the overheating property market by suppressing demand through limiting purchase or other limitations in order to restrain speculation of properties. Going forward, the CCP will likely reform its policy and tackle the problem through supply management. To fulfil demand at reasonable prices, the Chinese authorities may start to increase land supply.
With China rising to become the largest superpower, the CCP may unveil the blueprint detailing when and how China would open up its financial sector after years of protectionism. Once enacted, we would definitely see a wave of acquisitions and mergers as well as buying interest in Chinese bank and insurance stocks. Our local-listed Overseas China Banking Corporation, would also have great potential to expand into China.
Last but not least, tech stocks are worth mentioning since Chinese President Xi Jinping is investing heavily on China’s human capital to drive big data capabilities and financial technologies. To lead the world in these fields, I believe the CCP will also lay down the ground rules and rewards schemes for these industries.