The People’s Bank of China (PBOC) is drafting rules for a tax on foreign currency transactions in China, in an effort to help curb currency speculation, a potentially extreme policy move, according to sources quoted by a Bloomberg article earlier today.
The aim of the so-called ‘Tobin Tax’, would be geared towards speculators, and not the needs of hedgers or importers/exporters per se – while it’s still unclear how such businesses could be affected. Nonetheless, at least initially the rate may be held at zero, until an appropriate percentage is determined for any such forex tax.
According to feedback from FX professionals in Asia, Tommy Ong, Managing Director of DBS Hong Kong (as quoted by Bloomberg), said: “These measures can’t guarantee volatility in the market will come down since it’s difficult to identify if currency trading is down to speculation or the genuine need of companies hedging their foreign-exchange exposure.”
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“There haven’t been many successful experiences of this happening anywhere else in the world, ” he concluded.
Such a tax could reduce liquidity, leverage, and margins for the country’s forex markets, and may have a twofold purpose for the Chinese government. Tax revenues would be achieved as the Chinese forex markets expand globally, and a greater degree of control would be realized as is the case with the country’s local stock markets and other government influenced business. However, this policy could also backfire if it ends up hurting the development of the FX market for China, versus helping to allow it to become a major currency reserve ahead of its planned inclusion in the reserve currency basket of the International Monetary Fund (IMF) this October.
In a parallel update, the PBOC and the Monetary Authority of Singapore (MAS) have agreed to renew their existing Bilateral Currency Swap Agreement (BCSC) for another three years. The news also follows recent talks about a cryptocurrency by the PBOC.