China may be about to tax currency trading

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The People’s Bank of China (PBOC) could be about to implement rules designed to curb speculative trading in currency markets.

According to a report from Bloomberg, the PBOC has drafted rules for a Tobin tax on currency trading, according to sources close to the issue.

“The rules are aimed at curbing speculative trading,” the unnamed sources told Bloomberg.

“The initial rate of the so-called Tobin tax may be kept at zero to allow authorities time to refine the rules,” they said. “The tax is not designed to disrupt hedging and other foreign-exchange transactions undertaken by companies.”

The sources told Bloomberg that the rules still need central government approval, and that it wasn’t clear how quickly they could be implemented.

No further details, including what currencies would be impacted, were provided.

The tax, named after Nobel Laureate economist James Tobin, who first floated the idea, would tax all spot FX conversions from one currency into another.

The increased transactional cost would, according to the idea, discourage some speculative forms of trading.

Bloomberg suggests that the “tax would complicate plans by China to create an international reserve currency and could undermine the leadership’s pledge to increase the role of market forces in the world’s second-largest economy”.

The draft ruling may have been prompted by a surge in capital outflows from China over the past year.

China’s FX reserves fell by US$601.5 billion in the 12 months to February, the largest annual decrease on record. While partially due to revaluation effects of the stronger US dollar, a proportion of the decline was likely due to the central bank intervening in the currency market to curb excessive speculation towards further weakness in the renminbi.

You can read more from Bloomberg here.

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