China’s central bank has drafted rules for a tax on foreign-exchange transactions that would help curb currency speculation, to people with knowledge of the matter said.
The initial rate of the so-called Tobin tax may be kept at zero to allow authorities time to refine the rules, said the people, who asked not to be identified as the discussions are private. The tax is not designed to disrupt hedging and other foreign-exchange transactions undertaken by companies, they said.
Imposing a levy on foreign-
Photo: Reuters
exchange trading would be the most extreme step yet by policymakers to prevent speculative bets against the Chinese currency, after state-run banks repeatedly intervened to support the yuan and the government intensified a crackdown on capital outflows. A Tobin tax would complicate plans by China to create an international reserve currency and could undermine the leadership’s pledge to increase the role of market forces in the world’s second-largest economy.
“These measures can’t guarantee volatility in the market will come down since it’s difficult to identify if currency trading is down due to speculation or the genuine need of companies hedging their foreign-exchange exposure,” said Tommy Ong (王良亨), managing director for treasury and markets at DBS Hong Kong Ltd. “There haven’t been many successful experiences of this happening anywhere else in the world.”
The rules still need central government approval and it is not clear how quickly they can be implemented, the people said.
The People’s Bank of China (PBOC) did not immediately respond to a faxed request for comment. PBOC Deputy Governor Yi Gang (易綱) raised the possibility of implementing the punitive measure late last year in an article written for China Finance magazine.
The move comes before the yuan’s planned inclusion in the IMF’s reserve-currency basket this October. Daisy Wong, a spokeswoman for the IMF in Hong Kong, was not able to immediately provide comment.
The yuan has declined 4.5 percent since a surprise devaluation in August last year spooked global investors and spurred capital outflows. Bloomberg Intelligence estimates that US$1 trillion left the nation last year. The nation’s defense of the currency depleted its foreign-exchange reserves by US$513 billion last year, the first-ever annual drop.
“The levy will hurt market sentiment and make investors more panicked, as this shows that existing capital controls are not enough to curb outflows,” said Andy Ji, a Singapore-based foreign-exchange strategist and economist at Commonwealth Bank of Australia. “Now is not a good time to roll out a Tobin tax as the market is already concerned about whether China will be able to increase capital account convertibility in the coming years, and this is another step backward to achieve that goal.”
The Tobin tax takes its name from US economist James Tobin, who in 1972 suggested taking a cut of foreign-exchange trades to limit currency speculation. History is littered with government attempts to extract revenue from financial transactions, not all of which were successful and most of which had unintended consequences.
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