Wall Street Journal: US Tax Cuts a 'Gray Rhino' Risk for Chinese Policymakers

The Wall Street Journal reports that Chinese officials are focusing on defending the economy from America's tax cuts, which are likely to become law before the end of the year. One official called the US tax overhaul 'a gray rhino,' meaning that is is a highly probable, high-impact yet neglected risk.

"In the Beijing leadership compound of Zhongnanhai, officials are putting in place a contingency plan to combat consequences for China of U.S. tax changes as well as expected interest-rate increases by the Federal Reserve," reports the Journal, quoting officials familiar with the matter.  "What they fear is a double whammy sapping money out of China by making the US a more attractive place to invest."

The main worry is capital outflow, which intensified earlier this year over concerns about the weakening renminbi before a combination of currency support and tough monitoring stanched the exodus. US tax cuts in combination with rising interest rates could make investments in the US more attractive to international investors, which could weaken the renminbi in relation to the US dollar.

The contingency plan, according to the Journal, involves higher interest rates, tightger capital controls and more frequent currency intervention, measures that are meant to suppor the renminbi and keep capital at home.

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