Bangkok--11 Apr--Standard & Poor's
China's implementation of tax changes to unify the corporate tax rates for foreign and local firms, in concert with other structural reforms, is expected to lift the economic contribution of domestic consumption, which, in turn, should narrow the country's external trade surplus, according to a report by Standard & Poor's Ratings Services titled "China's Tax Reforms Will Help Address Global Trade Imbalances." The report adds that the latest Chinese tax changes also make it easier to implement similar tax reforms elsewhere in Asia.
"Tax incentives for exporters are a key component of East Asia's economic development model," said Standard & Poor's credit analyst Kim Eng Tan. "In a number of these economies, the incentives have proven to be effective in kick-starting rapid economic growth."
The incentives granted to manufacturers, however, come at a cost to other businesses. The heavier tax burden on the services sector means that it is subsidizing the manufacturing sector's consumption of public services. Consequently, the continued existence of tax and other policy preferences for manufacturers constrain the economic contribution of the services sector. From the demand perspective, East Asia is seen as relying heavily on external demand for growth.
This dependence on external demand poses a threat to creditworthiness in the region. Asia's widening trade gap with the U.S. is mirrored by the growing importance of Asian central banks in financing the latter's current account deficit. Higher real U.S. interest rates may be required to persuade foreign investors to continue to add to their holdings of U.S. dollar assets, which in turn would depress U.S. asset prices. The strengthening correlations of global financial markets mean that lower U.S. asset prices would weigh on other major markets.
The persistently large U.S. trade deficits have also led to pressure for the U.S. to implement protectionist measures. The erection of trade barriers, which harm both the U.S. and its trade partners, poses an important risk to Asia's export-led growth model.
"China's recent move to unify the corporate tax rates would help to lift the economic contribution of private consumption over time and narrow the country's external trade surplus," said Mr. Tan. "It will also make it easier for other economies in the region to follow suit. Should this happen, a more sustainable economic structure could emerge in East Asia."
The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com . If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to [email protected] . Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com ; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Members of the media may request a copy of this report by contacting the media representative provided.
Media Contact:
David Wargin, New York (212) 438-1579
[email protected]
Analyst Contacts:
KimEng Tan, Singapore (65) 6239-6350
Ping Chew, Singapore (65) 6239-6345
John Chambers, CFA, New York (1) 212-438-7344
Angela Wang, Beijing 8610-6535-2961