US President Donald Trump has scored his first big legislative victory — US senators have passed a sweeping tax overhaul. Under the new tax code, the corporate tax rate will be permanently lowered from 35 percent to 20 percent. And tech giants like Apple and Google will be allowed to repatriate up to US$1.3 trillion in capital parked outside the US at a preferential tax rate of 10 percent.
Hong Kong is one of the largest markets where US firms park their funds. How would the tax overhaul affect the city’s economy and financial market?
I believe the US tax bill may impact Hong Kong’s economy in a number of ways.
First, sweeping tax cuts may stimulate the US economy and job market, which will give more room for the Fed’s monetary tightening measures.
The financial market is now expecting four hikes in 2018. By 2019, some expect the federal funds rate to rise above 3 percent, implying a potential upside of 2 percentage points from the current level.
Due to ample liquidity in its banking system, Hong Kong has lagged behind in the rate hike cycle under the dollar peg system. The US Fed has raised interest rates four times since December 2015, and the Fed funds rate has risen to 1 to 1.25 percent from 0-0.25 percent. By contrast, Hong Kong’s interbank offered rate, or Hibor, only rose 0.7 percent during the same period.
Thus, the US rate hikes over the past two years have yet to exert a major drag on housing prices in Hong Kong. Instead, the housing prices have gone even higher due to tight supply and strong demand from mainland buyers.
The Centa-City Leading Index, a gauge of the city’s secondary housing prices, has spiked 19 percent to 163 points from 137 points in December 2015.
Nevertheless, if the Fed accelerates the rate hike following the tax bill passage, it may exert pressure on Hong Kong to catch up, posing a serious test to the resilience of property prices.
Second, the new tax bill may lead to a massive capital outflow from Hong Kong. US corporates used to leave enormous profits abroad due to the hefty tax rate in the US. It’s estimated that US corporates have parked up to US$1.3 trillion overseas, representing about 70 percent of their total cash flow, according to Moody’s. The Trump administration has made a major concession and agreed to grant a 10 percent preferential tax rate if these corporates move these profits back to the US.
The initiative is estimated to lure US corporates to move two-thirds of their foreign capital home. For example, Apple has stashed US$230 billion overseas, and chief executive Tim Cook has promised that the company will bring its foreign profits back to the US gradually if the federal government offered a tax cut. Other big corporates like Microsoft, Cisco and Google have US$113 billion, US$62 billion and US$49 billion offshore, respectively. They may follow suit.
Apple is believed to have parked most of its sales proceeds from the Greater China market in Hong Kong. If all these big US companies like Apple bring profits back to the US, that would draw massive capital from the city’s banking system.
There may also be a positive side. Accelerating US rate hikes may strengthen the US dollar and put pressure on the Chinese yuan. That might prompt mainland investors to divert more money into Hong Kong, which would somewhat offset the capital outflow.
Also, the tax overhaul may benefit US economic recovery, and a stronger US dollar may boost exports from China and Southeast Asia, benefiting Hong Kong (in terms of trading, logistics and financial services) as a key re-exporter in the region.
This article appeared in the Hong Kong Economic Journal on Dec 4
Translation by Julie Zhu
[Chinese version 中文版]
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