Regional economies could take a hit if President-elect Donald Trump follows through with his promise to slash US corporate taxes, said Citi investment strategist Ken Peng yesterday at a briefing.
He said a corporate tax cut from 35 per cent to 20 per cent would further erode competitiveness in China and the region, as labour savings from producing in Asia would be less attractive compared to the US. "In terms of competitiveness, it is already hard for China. If US corporate taxes are cut, some of the loss of competitiveness could be made up for by the yuan's weakness," he said.
"Even though people have made a lot of Trump's Cabinet picks, one of his trade representatives, who is known for his anti-China views, commented recently that Trump's view of China is a bit simplistic.
"So I don't think China will be named a currency manipulator because it will be self-defeating. But friction is likely to rise, because Trump thinks there are other things that can be used as leverage, such as Taiwan."
Mr Peng, who works at Citi Private Bank in Hong Kong, added: "But will it devolve into trade war? I think that's mutually guaranteed destruction. Trade friction can be massaged by corporate ambassadors like Jack Ma."
Even if the US imposes a "broad- based value-added tax on imports", the impact in terms of a direct tax on Singapore exports is not expected to be big, Mr Peng said.
"The bigger question is whether that tax will reduce trade volume going through Singapore. That is the killer, as Singapore is very volume dependent," he added. "But this could be offset if we get developments in Asian infrastructure... The Silk Road effort is geared more towards Malaysia and Indonesia, but Singapore can be a very important part of that investment."
Mr Peng noted that Mr Trump will give his first formal news conference since July today. "This will be the first opportunity... to see how much support there is for Trump's foreign policy, and is also important for signalling what he can accomplish in his first 100 days," he said.
Mr Peng also addressed the issue of increasingly large amounts of capital flowing out of the region due to better returns now available in the strengthening US dollar.
He said that while these outflows are likely to continue, they will likely be offset by more diversified sources of funding from China and Japan, which are the biggest investors in South-east Asia.
"A lot of capital outflow has already taken place from Asia since 2014," he noted. "Will there be more? Sure. It will continue, but the key difference between now and 1997 (the Asian financial crisis) is that the US provided a majority of funding for (emerging markets) Asia markets back then. Now, the biggest provider of capital for emerging market Asia is China and Japan."