Don't put too much stock by tax cuts

Editorial | Mary Ma 6 Dec 2017

The US Senate's passage of massive tax cuts in America has given President Donald Trump his first major victory ahead of the first anniversary of his unpopular administration.

In the face of what the political fallout from former White House national security adviser Michael Flynn's guilty plea to having lied to the FBI during the Russian-link probe could mean for the Trump presidency, the tax cut bill was passed by the Senate at an opportune time.

However, enactment of the tax reform legislation is by no means certain, since US lawmakers must now craft and pass a compromise bill before Trump would get a change to sign it into law.

But what could the tax cuts - albeit passage being nearly a foregone conclusion - mean for us all?

The Americans may have little to lose immediately. A lot has been mentioned about the US$1 trillion (HK$7.8 trillion) pothole that will be sunk in US public finances over the next 10 years. While supporters are bullish that the cuts could be compensated by growth, the optimism would be too ideal to be true.

As said before, it will be likely for the United States to raise and even remove the debt ceiling to let it borrow from other governments through new bonds to make up the shortfall.

Even if optimism is well placed and the America can rely on itself to stimulate sufficient growth to bridge the gap - which I somehow doubt - capital responsible for much of the liquidity from Hong Kong and elsewhere will change their direction to head for the United States for growth. Will this mean an accelerated capital drain from other markets, including China? The impact of reduced liquidity will be felt over time.

Bear in mind that the US Federal Reserve is monitoring domestic economic growth closely, to determine how quickly rates will be raised. A better-than-expected growth will result in a pace of interest rate hikes more quickly than expected.

It shouldn't be that difficult to imagine how a steeper hike in rates will have on the SAR, at a time when it is one of the world's most expensive places to buy property. Capital drain and rate movement will be a couple of axes hanging above our heads.

The excitement now is similar to the situation before the 1997 Asian financial crisis, during which the stampede was triggered by a capital exodus from the region.

While that is the downside for us, what policymakers in Washington haven't publicly told Americans is the prospect for US trade deficits to widen. With more cash in their pockets, will Americans spend more to lead to greater demand for imports?

For Americans, tax cuts are also a doubled edged sword. The Dow Jones Index has risen, which, however, isn't mirrored in Nasdaq that has instead come under pressure. The question is: after all the good news is digested, will there be a correction?

Smart investors will lock in profits before Christmas.

Recent successive surges in the Hang Seng Index were partially attributable to the strong performance of mainland tech giant Tencent, which has given up more than 10 percent of the gains since hitting an all-time high last month.

The HSI is probably past its peak after hitting the 30,000 mark.

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