Chinese central bank drafts rules for Tobin tax

Levy on foreign-exchange trading to stop speculation criticised as being short-sighted

BEIJING • China's central bank has drafted rules for a tax on foreign-exchange transactions that would help curb currency speculation, a proposal which is getting a cold reception in the foreign-exchange market for being "short-sighted".

The initial rate of the so-called Tobin tax may be kept at zero to allow the authorities time to refine the rules, Bloomberg reported, quoting unidentified sources. The tax is not designed to disrupt hedging and other foreign-exchange transactions undertaken by companies.

Imposing a levy on foreign-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.

The tax would complicate plans by China to create an international reserve currency and could undermine Beijing's pledge to increase the role of market forces in the world's second-largest economy.

"A Tobin tax would be a big blow to China and it may backfire" if investors decide to dump yuan assets to avoid the levy, said Mr Sean Yokota, the head of Asia strategy at Skandinaviska Enskilda Banken in Singapore. The proposal "would be moving in the opposite direction of letting markets set prices rather than the government".

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.

The People's Bank of China (PBOC) has been fighting to drive out speculators who take advantage of the difference in the yuan's rates at home and abroad.

The onshore gap with Hong Kong surged to a record 2.9 per cent in early January before the PBOC cracked down by mopping up the currency's supply offshore and restricting mainland banks from moving yuan overseas.

Government efforts to narrow the spread appear to be succeeding. The yuan traded in Hong Kong fell 0.25 per cent to 6.5103 a dollar yesterday, trading around 0.04 per cent stronger than in Shanghai.

Critics called the proposal short-sighted, saying the tax on yuan trades would reduce liquidity and could heighten investor concern over capital outflows, thus driving away foreign investors.

The proposal comes before the yuan's planned inclusion in the International Monetary Fund's reserve-currency basket in October.

Not everyone thinks the tax is a bad idea. Dr Mark Mobius, an executive chairman at Templeton Emerging Markets Group, said that it would help stem a US$790 billion (S$1.1 trillion) slide in foreign-exchange reserves since June 2014.

The PBOC has tools to address the tax's impact on liquidity, such as adjusting banks' reserve requirement ratios, according to Mr Banny Lam, co-head of research at Agricultural Bank of China International Securities in Hong Kong.

"Targeting speculators is a good idea," Mr Lam said. "It will help stabilise the onshore and offshore markets, which will be good for the economy."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on March 16, 2016, with the headline 'Chinese central bank drafts rules for Tobin tax'. Print Edition | Subscribe