As 2017 comes to an end, the big economic and business story is probably the passage of a major tax-cutting bill in the US House of Representatives. The tax cuts were one of US President Donald Trump’s big campaign promises. Among many other measures, the plan reduces corporate tax from 35 percent to 21 percent.
Commentators in Hong Kong are wondering how China will respond to this particular part of the reform. They point out that business costs are rising on the mainland, and lower corporate taxes in the United States could attract capital away from China.
Obviously, businesses prefer taxes to be lower. But headline corporate tax rates are just one part of the equation. Many businesses – especially smaller ones – will probably prefer taxes not just to be low but also simple, just as they would benefit from less regulation and red tape. Low taxes alone do not automatically mean a good business environment.
The most important thing for any business is the prospects for profit. Any business operator would prefer paying a 35 percent tax on high earnings rather than paying 20 percent of a small profit.
While the US tax bill was going through the House of Representatives, China’s top policymakers gathered for the central economic work conference. This annual meeting sets Beijing’s short-term economic priorities, but this year it also produced broad three-year plans.
The conference addressed China’s three most pressing economic challenges: reducing financial risks, alleviating poverty and tackling pollution. All three threaten the economy in various ways.
It will take several years to see how well Beijing overcomes these challenges. But at least the leadership realizes that these problems are real.
The US also faces problems in these broad areas, but critics say it is not doing much to fix them.
Some opponents have attacked the US tax reform for increasing liquidity while boosting the federal deficit. If they are right, it increases financial and economic risks. It has also been criticized for benefitting the rich rather than the middle class. If the tax cuts lead to reductions in social security and healthcare, this points to a widening of the country’s wealth gap.
Where pollution is concerned, the US has pulled out of the Paris Accord on climate change and favors more fossil fuel use. China has far worse pollution problems than the US, but Beijing has specifically declared its intention to lead the world in a renewable energy revolution.
If we step back and look at the bigger picture, China – unlike the US – has a very clear, forward-looking vision for national development.
The heart of this ambitious vision is the achievement of a moderately prosperous society by 2020, a fully modern one by 2035, and a strong one by 2050.
Behind the slogans are some fairly specific targets. These include things like better healthcare and education in poorer regions, a more balanced housing market and a more sustainable energy policy. The recent economic work conference called for a continued shift away from basic manufacturing to a more innovative economy driven by artificial intelligence, biotechnology and other futuristic models.
Of course, the Chinese system has a tradition of long-term planning and targets. The results are not always positive – some industries have serious overcapacity because of policy direction. But if we look back at China’s recent achievements like the building of high-speed rail links, urban metros or the 2008 Olympics, we can see that ambitious ideas can become reality.
The US has a very different system, with far less central or state planning. The country’s outlook is mixed. Pessimists would point to the country’s crumbling infrastructure, its racial problems or its apparently broken political system. Optimists would look at American technology, universities and its vibrant, open society.
Time will tell whether the Chinese or American model – or a different one entirely – is superior.
As for us in Hong Kong, a proposed vision for the future will be out in 2018, namely the results of our 2030+ strategy study on territorial development. As a small, open services center, our future is dependent on the continued progress in the mainland and in China’s economic relationship with the US and the rest of the world. But it will also depend on whether we can deliver a more livable, competitive and sustainable environment.
For us, as with everywhere else, investment will go where the prospects look bright – and that does not necessarily mean just low taxes.
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