• Thu
  • Dec 18, 2014
  • Updated: 9:11am
BusinessBanking & Finance

China's foreign exchange regulator urges consideration of ‘Tobin Tax’

Yi Gang suggests considering applying tax to foreign exchange deals as a precaution against currency speculation

PUBLISHED : Saturday, 04 January, 2014, 6:01pm
UPDATED : Saturday, 04 January, 2014, 6:01pm

A leading financial regulator in the mainland has suggested the country could introduce a tax on foreign exchange transactions among other steps to guard against speculative capital flows amid further economic liberalisation.

Yi Gang, head of the State Administration of Foreign Exchange (SAFE), wrote in an article for the Communist Party theoretical journal Qiushi that China should “study in depth” the so-called “Tobin Tax” on financial transactions.

The levy gets its name from Nobel laureate James Tobin, who proposed it in 1972 as a means of reducing speculation in global markets.

Yi, in his article carried on the journal’s website, also called for studying measures including fees on foreign exchange trading and curbing short-term speculative fund flows.

The measures were mentioned in the context of “orderly pushing forward capital market opening, improving and perfecting the foreign debt management system and accelerating the advance of renminbi capital account convertibility”, Yi wrote.

“Persistently guarding against cross-border liquidity flow shocks is the key to good foreign exchange management.”
Yi Gang

“Persistently guarding against cross-border liquidity flow shocks is the key to good foreign exchange management,” he wrote.

In addition to heading SAFE, which regulates China’s foreign exchange system, Yi is also a vice-governor of the People’s Bank of China (PBoC), the country’s central bank.

The state-run China Daily newspaper reported on Saturday that it was the first time a Chinese regulator had commented publicly on the “Tobin Tax”.

During the global financial crisis in 2009, then-British Prime Minister Gordon Brown and German Chancellor Angela Merkel expressed support for a transaction tax but it failed to gain sufficient backing within the Group of 20 major economies, includingUnited States.

The idea still has supporters, however, among some members of the European Union, though Britain – home to the City of London financial centre – staunchly opposes it.

Supporters see such a levy as a way of providing buffers against economic downturns and also curbing excessively speculative transactions.

Chen Bo, a professor at the Shanghai University of Finance and Economics, told the China Daily that a “Tobin Tax” would work as a market-oriented way to cut down foreign exchange speculation in lieu of China’s present system in which the PBoC gives approval on a case-to-case basis.

“The tax will make certain otherwise profitable transactions unprofitable and thus reduce speculation,” Chen said, according to the paper.

Chen predicted that the tax was likely to be introduced along with a quota system to manage China’s foreign exchange market as temporary measures ahead of China making its capital account fully convertible, adding that the tax would probably be imposed nationwide as opposed to selectively in certain areas.

China’s Communist Party leaders at their landmark third plenum meeting in November vowed to loosen controls on the economy, with the market playing a “decisive” role in the allocation of resources as opposed to its hitherto “basic” function.



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The over-invoicing carry-trade shenanigans (in addition to the Renminbi QFII schemes) may have overvalued the Onshore CNY/USD exchange rate and hence oversudued China’s domestic exports.
The over-invoicing also causes the greater growth of wealth management products, which in turn are invested in real estate or the riskier local government financing vehicles.
On the other hand, its unwind (say through the Tobin Tax) may lead to the demise of the carry trade and end an important source of cheap credit for China, causing more serious cash squeezes and worse stock performances later.


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