China weighs tax on currency trades

Beijing, March 15

China's central bank has drafted plans to impose a tax on currency trades, Bloomberg News reported today, in what would be its latest volley against those betting on a depreciation of the yuan.

Chinese authorities have spent unprecedented sums to support the currency and stem capital flight since a surprise devaluation rattled investors last summer.

The tax would be the most dramatic measure to date, although Bloomberg reported that the rules had yet to be approved and the level might initially be kept at zero as an experiment.

Dubbed a 'Tobin tax' after Nobel economics prizewinner James Tobin, it would impose a small levy on foreign-exchange transactions. Aim would be to deter investors from seeking to profit on fluctuations in the currency.

Analysts said the move would reduce liquidity in the long term and possibly fuel short-term volatility as investors were forced to leave the market.

If implemented, the tax could also raise questions about plans for the yuan to join the International Monetary Fund (IMF)'s elite reserve currency basket, scheduled for October.

"RMB as reserve currency RIP," George Magnus, associate at the University of Oxford China Centre, wrote on Twitter. "Not that it was likely anyway."

'Tobin taxes' have been fiercely debated since they were first proposed, with Sweden adopting a financial transaction tax in the 1980s to boost government revenue, and then abolishing it after bond trading volumes collapsed.

Major banking hubs such as Britain and the US have previously opposed them for the damage they would cause the financial sector.

The idea of a Chinese Tobin tax was floated last year by the deputy chief of the central People's Bank of China (PBoC) in an article for China Finance magazine, in which he said it would help 'contain the inflows and outflows of short-term speculative and arbitrage funds'.

Chris Weston, chief market strategist at IG, said there was speculation that PBoC 'is taking the fight to speculative FX community', but that the Tobin tax would ‘not be taken kindly by the IMF’ if adopted.

'If Chinese officials broaden this to other markets, like swaps, then speculators may pile into proxy currencies' like the Hong Kong dollar, he added.

China's foreign-exchange reserves dropped to $3.20 trillion in February-end, PBoC reported last week, down over $300 billion in just four months.