China’s forex regulator to limit risks as slowing growth, US interest rates raise spectre of currency fluctuations
The foreign exchange regulator warned yesterday of the risk of bigger swings in short-term capital flows amid external uncertainties and slowing domestic growth.
The State Administration of Foreign Exchange said question marks over the timing and pace of rate hikes by the US Federal Reserve, and the negative interest rate policies of Japan and the European Central Bank could hit global market sentiment and exacerbate short-term fluctuations in capital movements.
The regulator also said markets might also continue to focus on China’s growth slowdown, which could prompt some domestic entities to adjust their holdings of overseas assets.
The regulator said it would communicate effectively with the market and work to minimise systemic and regional risks from capital movements.
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There has been heated debate over the best way to manage cross-border capital movement since the sharp depreciation of the yuan and massive capital outflows from China last year.
Several senior officials, including deputy central bank governor Yi Gang, have raised the possibility of introducing a Tobin tax to discourage short-term currency speculation.
A Tobin tax is a levy on foreign exchange transactions and has been adopted in various countries, including Chile, Brazil, South Korea and Malaysia.
SAFE official Wang Yungui said last week that the existing policy tools were sufficient to address the outflow pressure but the regulator was looking into a Tobin tax to help manage capital flux.
Zhou Jingtong, a division chief with the Institute of International Finance, a Bank of China think tank, said there was less urgency for China to use a Tobin tax to discourage short-term capital speculation and stabilise its currency.
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“A Tobin tax can be used when capital flows are volatile. It all depends on ... the domestic economic situation,” Zhou said. “It’s not necessary right now.”
The yuan’s exchange rate started to stabilise last month while falls in the official forex reserves narrowed by a big margin in February. Officials also said capital outflows from China were cooling.
Critics of a Tobin tax say it would hamper the country’s efforts to cement the yuan as a global currency and undermine Beijing’s pledge to allow market forces to play a bigger role in determining its value.
Meanwhile, Bank of China’s research institute forecast national GDP growth to rise to 6.6 per cent in the first quarter and 6.7 per cent in April-June period. It said the Fed might raise interest rates in June and December and emerging markets could face the risk of a debt crisis.
According to the China Securities Journal, Yao Yudong, head of the central bank’s finance institute, said growth might slow to 5 per cent in the 14th five-year plan (2021-2025) from the expected 6.5 per cent in 2016-2020 period.
