US tax cuts excite exporters

But corporate tax slash could cause some concern in certain sectors

Last week's cuts to US personal income tax and corporate tax rates will likely benefit certain Chinese manufacturers listed in the A-share market in the long run, while potentially hurting capital-intensive sectors like high-tech and new technologies, analysts said.

Chinese manufacturers who mainly export to the US will likely benefit as lower rates of personal income tax in the United States are expected to boost savings and disposable income, leading to an increase in household consumption.

Increase in consumption could stoke fresh private investment in the sectors concerned, which could again benefit certain Chinese exporters, analysts said.

Some listed Chinese companies would expect higher profits in the future, said Sun Lijian, a professor of Fudan University.

Already, several companies have told their shareholders they expect US tax cuts to help improve financial performance in the near future.

For instance, Shenzhen-listed Ningbo Chuangyuan Cultural Development Co Ltd, which develops, makes and exports paper-based and card-based products such as handicraft and stationery, said the latest income tax rate cut will help boost sales of its products in the US market.

In addition, interest rate fluctuations are expected to help improve the profitability of the company.

Chuangyuan's board secretary informed shareholders in an interaction on Dec 4 that for the company's US subsidiary, competitors are few and far between. So, the risk of stiffer competition due to lower corporate tax rates, which typically encourage launch of new businesses, is minimal.

A research note from Sinolink Securities said that for Chinese exporters and domestic companies with subsidiaries in the US, the tax cuts spell good news. "When operations in the home market do not change significantly, the tax cuts (in the US) simply widen the profit margin."

Several other Chinese companies, most of which export consumers goods like toys, home appliances and garments, expressed similar sentiments in the investor relations section of their websites. They said exports and profit margins are expected to increase after the US tax cuts.

But it is not glad tidings all the way. Cut to the US corporate tax rate from 35 percent to 20 percent could affect Chinese companies in certain sectors, analysts said.

Lower corporate taxes may persuade certain American companies to relocate their offshore business units back to the US. Any such move would have an impact on their investments in China.

"However, any adverse impact would be transient. Chinese companies can still present their core competitive edge to attract investment," said a research note from Shenwan Hongyuan Securities.

If Chinese companies face stiff competition from US peers, capital may gravitate toward places with lower taxes. If Chinese companies collaborate with their US peers or play a significant role in the supply chain, they may not have to worry about a potential flight of capital, said the Shenwan Hongyuan note.

In a similar note, Essence Securities said stock market investors need to be aware of the fundamentals in the A-share segment, including improving macroeconomic conditions, continuous opening-up and reforms, and the steadily brightening trade situation.

Overall, the US tax cuts may have some impact on the A-share market, but domestic fundamentals have a bigger influence, Essence said in its note.