Reports of plan for new tax on foreign exchange transactions sends offshore yuan lower
Central bank sets mid-price weaker
The yuan fell the most in a month on Tuesday after the US dollar bounced back and reports the People’s Bank of China was planning a new tax on foreign-exchange transactions to curb speculation.
Offshore yuan traded in Hong Kong and overseas markets weakened to a low of 6.5099 to the US dollar on Tuesday afternoon before bouncing back to 6.5092 at 6pm, down 0.26 per cent from Monday when it weakened by 0.16 per cent. Tuesday’s drop was the biggest single-day fall since February 16. The fall in the past two days came after the currency hit a three-month high on Friday at 6.4728.
DBS economist Nathan Chow said that if Beijing implemented a “Tobin tax” to curb speculators, it would affect the yuan’s progress towards internationalisation.
“The tax takes its name from Nobel laureate economist James Tobin, who in 1972 suggested taking a cut of forex trades to limit currency speculation,” Chow said. “While the idea is good if policymakers consider financial stability alone, it becomes less attractive when taking into account financial competitiveness.
If the US Fed meeting on Wednesday hints at an interest rate rise in June or so, it would help the US dollar to strengthen against the other currencies
“As a result of the financial tax, investors might invest in other countries that have lower transaction costs, according to international experiences. Imposing a tax on forex trading would also complicate Beijing’s yuan internationalisation and market reforms.”
The PBOC set the mid-price at 6.5079 on Tuesday morning, weaker by 166 basis points from Monday, when it was set 8 basis points lower. The currency is allowed to be traded 2 per cent either side of the mid-price.