On the afternoon of April 26, local time, U.S. Treasury Secretary Steven Mnuchin and White House National Economic Council Director Gary Cohn jointly announced the country’s “largest tax cut plan in history.”

So what does this A4-sized tax cut plan look like?

Cat Brother has summarized the key points of Trump’s tax cut plan:

Will money flow to the U.S.? Will the Chinese stock market fall?

Trump's intention is clear: to ease the burden on American taxpayers, encourage them to invest, and—even more importantly—encourage capital to flow back to the United States!

Major U.S. corporations operate globally. In the past, when overseas profits were repatriated to the United States, the U.S. government imposed a 35% tax on them, which led many large companies to park their profits in “tax havens” to avoid paying taxes.

According to reports, the 50 largest U.S. companies alone have as much as $1.6 trillion in profits parked in “tax havens.”

Among them, Apple tops the list with more than $200 billion in offshore funds. It is followed closely by Pfizer with $193.6 billion and Microsoft with $124 billion.

To give a small example, Apple’s iPhones are selling like hotcakes worldwide; in the fourth quarter of 2016 alone, revenue in Greater China reached $8.785 billion. American companies are more successful than China’s monopolistic enterprises—they make money from people all over the world. In the past, when they earned too much, the taxes on remittances back to the U.S. were too high, so they kept the money overseas.

Now that the tax on repatriated profits has been significantly reduced, it is highly likely that most of this $1.6 trillion will flow back to the United States.

In particular, the U.S. stock market has been performing strongly, with both the New York Stock Exchange and the Nasdaq hitting new record highs; as capital flows into the U.S., emerging economies will face enormous pressure.

For China, the stock market, bond market, and real estate market could all be affected—especially the stock market, which continues to plummet. With U.S. stocks hitting new highs, it’s a cause for concern! Furthermore, gold prices may also head lower again.

Is China's Manufacturing Sector Facing a Catastrophe?

An even bigger trump card is that Trump has also slashed taxes for U.S. businesses.

In the past, the U.S. corporate income tax rate was approximately 35%, while Ireland’s corporate tax rate was less than half that of the U.S., at about 12.5%. Multinational corporations reduced their tax liabilities by relocating overseas or engaging in cross-border mergers and acquisitions, thereby avoiding high U.S. taxes.

Now that Trump wants to lower the rate to 15%, the message is clear—U.S. companies should hurry up and invest more domestically, and companies from other countries are also encouraged to invest in the U.S.

This is really not good news for China. According to a 2013 research report by the Boston Consulting Group, the average cost of manufacturing goods in the United States at that time was only 5% higher than in China. By 2015, manufacturing in low-cost regions of the United States had become just as cost-effective as manufacturing in China. Even more shocking is that by 2018, the cost of manufacturing in the United States will be 2–3% cheaper than in China.

If the United States were to actually implement such a significant tax cut, it would mean that the cost of manufacturing in the United States would be much lower than in China.

For our country, known as the “world’s factory,” the impact is enormous.

According to media reports, a logistics company in Guangzhou transported a shipment to Hainan, generating total revenue of 19,000 yuan, but its profit was only 216 yuan, of which 1,260 yuan went toward taxes.

This gives a clear picture of just how heavy the tax burden is on Chinese companies.

Last year, Cao Dewang, known as the “Glass King,” invested $600 million in Ohio to build the world’s largest single-site automotive glass factory. Using his own company’s production of a single piece of glass as an example, he ran the economic numbers for manufacturing in China and the U.S. He noted that the U.S. has lower taxes, cheaper electricity and natural gas prices, and many other favorable conditions. After comparing the costs of doing business in both countries item by item, he concluded that, on balance, manufacturing glass in the U.S. would result in a 40% lower total profit than in China.

He also pointed out that the overall tax burden on China’s manufacturing sector is 35% higher than that of the United States, and that it is “the highest in the world.”

When the U.S. cuts taxes again, the calculations show that China’s overall tax burden on manufacturing is nearly 50% higher than that of the U.S.

Given this, is China’s manufacturing sector still cost-competitive?

Will the wealthy flee to the United States?

Under Trump’s tax cut plan, the number of personal income tax brackets will be reduced from seven to three: 10%, 25%, and 35%. The personal income tax threshold has nearly doubled. The income tax threshold for married couples filing jointly will rise to $25,400.

The new tax reform plan will also eliminate the estate tax, the “Obamacare” tax, the alternative minimum tax, and other taxes.

As for the scale of these tax cuts compared to China’s individual income tax, Cat Brother doesn’t even want to comment—just take a look at the chart:

Then there’s the estate tax. Because of the estate tax, wealthy Americans typically set up family trusts to manage their estates. Now, if Trump really does abolish the estate tax, not only will wealthy Americans benefit, but how many wealthy people from around the world will flock to the United States?

The yuan will face a new round of depreciation pressure

The RMB exchange rate has been falling steadily over the past two years! It has dropped from 6.3 all the way to 6.9, and foreign exchange reserves have fallen from nearly $4 trillion to $3 trillion.

After various efforts by the relevant authorities to contain and curb it, it has finally stabilized at just over 7 and $3 trillion.

But it’s still very risky, because the stability of foreign exchange reserves since 2017 has largely been due to domestic companies issuing bonds overseas to replenish those reserves—a trend that is not sustainable. The pressures of RMB depreciation and foreign exchange reserve outflows have not yet been eliminated.

With the U.S. gradually raising interest rates and expectations of a yuan depreciation resurfacing in international markets, if Trump’s tax cut policy is implemented and European countries follow suit with their own tax cuts, large amounts of capital will flow back to the U.S. and Europe, further reinforcing expectations of a yuan depreciation and likely triggering a new round of declines.

The yuan’s exchange rate is likely to break through the 7 mark, and foreign exchange reserves are likely to fall below the $3 trillion psychological threshold.

Could U.S. Tax Cuts Threaten China's Financial Security?

So, even though Trump has only presented a one-page plan, it still has to be put to a vote in Congress.

But it was precisely this single sheet of A4 paper that proved so devastating that it immediately unsettled the relevant authorities in our country. Early in the morning on April 28, the *People’s Daily* was the first to publish an article titled “U.S. Tax Reform: Who Are the Winners?”, in which it argued that, from the perspective of other countries, U.S. tax cuts are effectively provoking a tax war!

The article claims that U.S. tax cuts could trigger systemic risks!

“For companies, the question of what to do with the money saved from tax cuts is both an issue and a risk. If the investment rate in the U.S. real economy remains weak and profit margins stay low, while financial transactions such as stock trading continue to be highly profitable, companies will buy back shares to prop up their stock prices, and other investors will follow suit. The money saved from tax cuts would then inflate financial bubbles, just as it did during the era of quantitative easing. In this scenario, tax reform would not only fail to achieve its intended goals but could also become a trigger for systemic financial risks.”

The *People’s Daily* is worried that U.S. companies won’t know what to do with the money they save from tax cuts and will end up using it to speculate in the stock market, just like some of China’s financial tycoons. They really are worrying themselves sick—they can’t even keep China’s own tycoons in check, yet they’re concerned about others.

Finally, the commentary also warned, “We must coordinate international tax policies with other countries to prevent mutual harm and avoid jeopardizing the global economy.”

They’re cutting taxes on their own without even giving us a heads-up—what are we supposed to do?!

Criticize it!

In response, Liao Tizhong, Director-General of the International Taxation Department of the State Taxation Administration, stated in a media interview that while U.S. tax reform is undoubtedly a sovereign act of the United States, in an era of economic globalization, sovereign policies have spillover effects and must also take into account the concerns of other countries. He said, “We unequivocally oppose tax competition. We advocate for international cooperation and coordination. This is not only China’s position, but also that of all the leaders at the G20 Hangzhou Summit.”

He said, “Trump can cut taxes, but major powers should shoulder their responsibilities. China is the world’s second-largest economy; we don’t do anything irresponsible, let alone the leader of the world’s largest country.”

Is the logic here that—tax cuts are irresponsible?

As a humble taxpayer, hearing this man’s words sent a shiver down my spine.

However, China has actually implemented “tax cuts” recently—even earlier than the United States!

On April 19, an executive meeting of the State Council chaired by Premier Li Keqiang announced six tax-reduction measures, including the consolidation of value-added tax rates. This represents a tax-reduction package worth more than 380 billion yuan, building on the 200 billion yuan in fee reductions already implemented in the first quarter.

At the time, the Premier stated, “Let’s finalize this matter today. The plan must be rolled out promptly, and tax cuts must be implemented without delay—we must ensure that businesses feel the tangible benefits!” “ It is worth noting that Li Keqiang cautioned the relevant departments at the meeting, ‘Many countries are preparing to introduce tax cuts. In this new round of global competition, we must adopt a ”get a head start’ mindset and take concrete measures to enhance the competitiveness of enterprises!”

During a press conference at this year’s National People’s Congress and Chinese People’s Political Consultative Conference, Li Keqiang stated that the government will strive to reduce taxes and fees by 1 trillion yuan this year.

The Prime Minister’s remarks are still fresh in our ears—how could the relevant authorities have forgotten them?

Is it because our tax cuts aren’t deep enough? Or is it because we’re implementing “structural tax cuts”? (What a great term!)

This round of tax cuts in the U.S. is putting a lot of pressure on China. Cat Brother often says that the economies of China and the U.S. are highly interconnected, and many of China’s economic policies are forced to react in response to U.S. moves. For example, when the Federal Reserve raises interest rates, we have no choice but to follow suit to maintain our exchange rate; now that the U.S. is cutting taxes, should we follow suit?

Of course, the U.S. government is currently burdened with massive debt, and tax cuts on such a large scale would likely cause the deficit to soar. The return of capital to the United States and a strong dollar would also impact U.S. exports; therefore, it remains to be seen whether this tax cut plan will pass the U.S. Congress.

However, based on the analysis above, the United States’ large-scale tax cuts have already had an impact on China’s financial security.

If the six tax-reduction measures announced at the State Council executive meeting—including the consolidation of VAT rates—can be seen as a precautionary step, then the highest leadership is fully aware of the financial risks to China posed by U.S. tax cuts.

On the afternoon of April 25, the Political Bureau of the CPC Central Committee held its 40th collective study session on safeguarding national financial security. Xi Jinping, General Secretary of the CPC Central Committee, pointed out: “ The spillover effects of monetary and fiscal policy adjustments in some countries could pose external shocks to China’s financial security. We must have a clear understanding of existing financial risk points, strengthen our awareness of risk prevention, prepare for contingencies, monitor the situation closely, make accurate assessments, and take effective preventive measures—without overlooking a single risk or letting a single hidden danger slip through the cracks.”

A financial security competition centered on “tax cuts” may have already begun.