The Senate tax plan has China concerned. Beijing's Contingency Plan includes higher interest rates and stronger capital controls.

As the U.S. prepares to take China to task over trade imbalances, economic mandarins in Beijing are focusing on a potentially more immediate threat from Washington— Donald Trump’s tax overhaul.

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, according to people with knowledge of the matter. What they fear is a double whammy sapping money out of China by making the U.S. a more attractive place to invest.

Under the plan, the people say, the People’s Bank of China stands ready to deploy a combination of tools—higher interest rates, tighter capital controls and more-frequent currency intervention—to keep money at home and support the yuan.

An official involved in Beijing’s deliberations called Washington’s tax plan a “gray rhino” an obvious danger in China’s economy that shouldn’t be ignored. “We’ll likely have some tough battles in the first quarter,” the official said.

Central to officials’ fear is the yuan, which has just regained its footing after enormous government efforts to prop it up. Should the yuan lose steam again, the thinking goes, it could further exacerbate capital outflows in a vicious cycle.

Tax Rates US vs. China

China's capital flight concerns stem from World Bank figures for 2016 show that total tax burden on Chinese businesses are among the highest of major economies: 68% of profits, compared with 44% in the U.S. and 40.6% on average worldwide.

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