China mulls 'Tobin tax' to deter speculative capital inflows

PUBLISHED : Friday, 24 January, 2014, 2:50pm
UPDATED : Saturday, 25 January, 2014, 3:45am

China's firmer yuan and higher interest rates could attract more money inflows this year, despite the possible impact of the US Federal Reserve's tapering of its easy money policy, the foreign exchange regulator said.

The Chinese authorities are considering a "Tobin tax" on financial transactions to deter speculative capital flows, said Guan Tao, head of the department of international payments at the State Administration of Foreign Exchange (SAFE).

A Tobin tax imposes a small charge on individual currency transactions to discourage excessive speculation.

"If the yuan continues to be stable or rise slightly while yuan interest rates are higher than those of major currencies, financial operations of many companies could lead to more money inflows," he said.

"This will increase our foreign exchange reserves, given that we already have large reserves and investment returns from the reserves."

Chinese banks posted a surplus of 1.68 trillion yuan (HK$2.14 trillion) in their foreign exchange settlements last year, up 210 per cent from the previous year, Guan said.

The central bank has said China's foreign exchange reserves, the world's largest, rose US$157 billion in the fourth quarter to US$3.82 trillion.

Guan said the impact of the Fed's tapering on China's capital flows has so far been limited, but he cautioned that some money could leave emerging markets as the Fed pares its stimulus.

China's stable economic growth and large foreign exchange reserves will provide a cushion against possible capital flight caused by the tapering.

The government has laid out plans to make the yuan convertible on the capital account.

"We will use more market-based means to manage [capital flows], and there are many tools that are under consideration, including a Tobin tax," he said.