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Source: U.S. Department of the Interior

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Source: AA

China plans to allocate 500 billion yuan ($70 billion) of capital that could be leveraged up to fast track new infrastructure projects as authorities seek to cushion the economy from US tariffs, according to people familiar with the matter.

Under the so-called “new financing policy tool,” the nation’s three policy banks will raise funds and buy stakes in projects, one of the people said, asking not to be identified discussing a private matter. The policy lenders may issue bonds or use other methods to tap financing, according to the person.

The initial capital injection of 500 billion yuan could amplify total investments by multiple times that amount, since it allows the projects to raise additional bank loans or other forms of financing, the person said.

While China’s top planning agency last month publicly telegraphed the new approach, its amount and other details were unknown. The funds will go to key projects in areas like artificial intelligence, the digital economy and consumption-related infrastructure, the person said, adding that the People’s Bank of China could provide liquidity support as needed during the process.

The program was first proposed by the decision-making Politburo at a late April meeting, along with other stimulus measures to boost growth. Now that authorities have delivered on some of their promises, such as cutting interest rates, the market’s attention is turning to the new tool and its purposes.

By raising more funds for investment, the mechanism would help China offset the drag from an uncertain export outlook by increasing domestic demand. Tensions have risen again in recent days with Washington, just weeks after the US and China agreed to a 90-day truce in their trade war.

The PBOC and the National Development and Reform Commission didn’t immediately reply to requests for comment.

While it’s unclear when the injection will start, the NDRC vowed last month to decide on this year’s key construction projects by the end of June and to set up a financing tool to help address the problem of insufficient equity capital.

The Securities Times, a newspaper supervised by the official People’s Daily, ran a report Friday saying the PBOC’s pledged supplementary lending could be another possible source of funding for the injections.

The mechanism is expected to be operational by the end of June and could help stabilize foreign shipments and expand investment, the Securities Times reported reported.

China in 2022 deployed a similar tool to counter the blow to the economy from Covid lockdowns, raising a total of 740 billion yuan through policy banks’ bonds. The proceeds were invested mainly in infrastructure projects, and the Ministry of Finance provided interest-payment subsidies funded by the central budget.

Separately, the Shanghai government said Friday that national financial authorities will announce “several major financial policies” during the Lujiazui forum in mid-June.

Source: Bloomberg Europe

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Source: China Daily

House Republicans’ “big, beautiful bill” could bring hundreds of billions of dollars in tax cuts to wealthy business owners.

But a key subset of rich Americans were pointedly excluded from that potential bonanza. In fact, thousands of business owners are facing the prospect of billions of dollars of higher taxes. Their sin: Earning their money in the wrong industry.

The disparities are the result of two complex provisions — worth more than $1 trillion combined — in the 1,000-plus page tax and spending bill, which was approved by the House last week and now heads to the Senate.

One would make the lucrative qualified business income (QBI) deduction even more generous. The other would tweak the cap on deducting state and local taxes (SALT), with a higher limit but more restrictive rules that could cost wealthy business owners up to $50 billion over a decade.

Both parts of the bill end up penalizing certain “specified service” businesses, a category that can cover entertainment companies in Hollywood, pharmacists and physicians on Main Street, legal and financial firms on Wall Street and many other industries.

“The House bill is devastating” for affected clients, such as those in “financial, medical, legal and other service-industry businesses,” said Timothy Noonan, a partner at law firm Hodgson Russ LLP. “This specific group of taxpayers is being singled out.”

The bill would boost the maximum SALT deduction to $40,000, from the $10,000 limit in President Donald Trump’s 2017 tax overhaul. That’s good news for most affluent taxpayers in high-tax states. Still, the higher SALT cap phases out above $500,000 in annual income, and for many wealthy taxpayers there’s a surprise in the fine print.

Until now, business owners in most states haven’t actually needed to abide by the SALT cap that applies to everyone else, thanks to legal workarounds approved by legislatures in New York, New Jersey, Connecticut, California and dozens of other states. The House bill quashes those loopholes, but only for specified service businesses. Other businesses would be allowed to continue deducting unlimited SALT.

While the bill could yet face significant revisions, professionals in affected industries are already expressing their concern, especially in states like New York and California, where losing the SALT deduction can amount to a backdoor rate hike of 3 percentage points or so. Ending the workaround could raise as much as $50 billion over the next decade, according to Penn Wharton Budget Model estimates.

“People are going to be very upset,” said Tricia Levin, head of family office solutions at Brown Brothers Harriman. If you’re losing the ability to take advantage of the SALT cap workarounds, she said, “your taxes are definitely going to go up.”

The QBI and the SALT cap workarounds are both intended for the millions of so-called pass-through entities in the US, whose profits, unlike those of corporations, flow to their owners’ individual tax returns. Business lobbyists and others advocates of QBI and SALT cap workarounds argue they’re necessary to even the playing field between pass-through businesses and corporations, which benefited from permanently lower rates in the 2017 law and have always been able to deduct their SALT.

The SALT disparity could spur more clients to move to lower-tax locales like Florida, Hodgson Russ’ Noonan predicted. “There’s no doubt that this could further hasten the exodus of the ultra-high-net worth set from high-tax states to low- or no-tax states,” he said.

BBH’s Levin said she didn’t necessarily expect more clients than usual to relocate. But without the provision, she said, the $40,000 SALT cap might have slowed the trend that started after the 2017 law. Instead, “you’re going to continue to see that migration.”

Pouring another kind of salt in the wound is the QBI deduction. Specified service businesses — the same ones excluded from the SALT workarounds — were left out of the break above certain income limits in Trump’s original 2017 tax law.

The House bill continues those rules excluding service businesses, but now their owners are missing out on an even more lucrative version of QBI. The deduction would rise to 23% from 20%, and gets other enhancements that Penn Wharton estimates will cost a combined $213 billion over a decade. The Joint Committee on Taxation estimated the total cost of expanding and extending QBI beyond its scheduled expiration next year is nearly $820 billion over a decade.

Also known as the Section 199A deduction, QBI is controversial among tax experts. In the House bill, “it’s noteworthy that one of the most expensive new changes to the code benefits this very small slice of the population, namely high-net-worth pass-through owners,” University of Chicago economics and finance professor Eric Zwick said. “This group also happens to be disproportionately represented among members of Congress.”

The enhancements to the QBI break are the second-most expensive new tax provision in the bill, after the higher SALT cap, which Penn Wharton estimates would cost $350 billion over a decade. Closing the SALT cap workaround for some businesses helps limit the cost for the new $40,000 cap, which was included at the insistence of Republican lawmakers in New York and other high-tax states.

The “legally dubious workarounds” should be eliminated for everyone, said Mike Kaercher, deputy director of the Tax Law Center at New York University. “These workarounds are a trifecta of bad policy, benefiting the highest income businesses, leading to big, senseless differences in how different businesses and their owners are taxed, and complicating the tax system.”

Businesses, not surprisingly, disagree. The American Institute of CPAs on May 20 sent a letter to the heads of key committees in the House and Senate objecting to the “indirect tax increase” on service businesses, including accounting firms, in the current version of the bill.

“Our laws should not discourage the formation of critical service-based businesses and, therefore, disincentivize professionals from entering such trades and businesses,” the AICPA wrote. “Ultimately, Congress should allow all business entities [to] deduct state and local taxes paid or accrued.”

What qualifies as a specified service business isn’t always obvious. The Internal Revenue Service definition includes the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial and brokerage services, as well as any business “where the principal asset is the reputation or skill of one or more of its employees or owners.” That covers most professionals, but certain ones, like architects and engineers, are allowed to deduct QBI like other businesses.

Real estate brokers can generally deduct QBI, while wealthy stock brokers can’t. “They both buy and sell stuff and they’re going to get very, very different treatment under the rules,” NYU’s Kaercher said. He predicted the changes would boost incentives to look for loopholes stretching the definition of a non-service business.

“It creates additional complexity and puts a lot more pressure on this question” of whether you quality, he said.

The House bill now heads to the Senate. Ryan Ellis, a tax lobbyist who heads the conservative nonprofit Center for a Free Economy, is pushing GOP lawmakers to allow all businesses to continue deducting unlimited SALT.

“There’s no reason that the tax code should deny a community pharmacy a tax deduction it makes available to CVS,” Ellis said.

Source: Bloomberg Europe

Earnings season is finally over, and for investors one thing is certain: Corporate executives and Wall Street analysts are deeply concerned about the “uncertainty” sparked by President Donald Trump’s combative trade plans.

“As we look to the rest of the year, there is still uncertainty related to tariff levels, timing and countries involved in addition to the potential actions of others in the industry, as well as the potential reaction of American consumers,” Corie Barry, chief executive officer of Best Buy Co., said during the company’s earnings call Thursday.

She’s hardly alone. Deckers Outdoor Corp.’s chief financial officer said last week that the company can’t give full-year guidance due to “macroeconomic uncertainty related to global trade policy.” And AT&T Inc. is leaving flexibility in its balance sheet so it can respond to “a competitive environment or any uncertain things that occur in the macro environment,” CEO John Stankey said.

Since the beginning of April, the words “uncertain,” “uncertainty” and “uncertainties” have been used about 3,100 times during companies’ earnings calls and other events, according to an analysis of transcripts compiled by Bloomberg. That’s the most in any quarter based on records going back more than two decades, topping even the height of the global financial crisis in 2008 and the beginning of the Covid-19 pandemic in 2020.

The level of uncertainty is rising as the courts challenge Trump’s sweeping global tariffs. On Wednesday, a three-judge panel for the US Court of International Trade declared that the Trump administration had wrongly invoked a 1977 law in imposing levies on dozens of countries and that the move was therefore illegal. Then on Thursday, a federal judge in Washington ruled that a number of Trump’s tariffs on China and other countries were unlawful.

Finally, on Thursday afternoon a federal appeals court temporarily paused the Court of International Trade’s ruling on Trump’s tariffs so it can weigh a longer lasting stay sought by the government. For its part, the Trump administration has vowed to appeal the decision to the Supreme Court if necessary.

All of this lack of clarity on trade and the impact on the economy is weighing on stock-market investors, even as the S&P 500 Index has rebounded from its April lows and is now less than 4% from the all-time peak it hit in February.

“It’s really hard to feel confident that we’re going to surge higher to record highs with this overhang,” said Mark Hackett, chief market strategist at Nationwide.

Meanwhile, a measure of chief executives’ confidence has plunged to the lowest level since 2022. More than 80% of executives said they expected a recession within the next year-and-a-half, according to a May survey by the Conference Board in collaboration with the Business Council.

On Goldman Sachs Group Inc.’s April 14 earnings call, CEO David Solomon said a lack of clarity had constrained clients’ ability to make “important” decisions.

“This uncertainty around the path forward and fears over the potentially escalating effects of the trade war have created material risks to the US and global economy,” he said. “We are hopeful that feedback from companies large and small, institutional investors and ultimately consumers will support an approach that will lead to greater economic certainty and long-term growth.”

Six weeks later, US trade policy is still in flux. Countries are racing to strike deals before Trump’s tariff pauses end, while the president keeps rattling markets with threats on social media.

Meanwhile, the US economy shrank in the first quarter, but other economic data has largely held firm. Companies have by and large kept capital spending plans intact despite fears of a pullback, which is encouraging to investors. However, for corporate executives, the risk of the unknown remains the biggest fear.

“In the longer term, the secondary effects of tariffs, like impacts to global GDP growth and energy demand, are much more complex and remain a source of uncertainty,” Exxon Mobil Corp. CEO Darren Woods said Wednesday. “We’re staying focused on the things we can control.”

Source: Bloomberg Europe