Currency tax under consideration: SAFE

Updated: 2014-01-04 01:53

By GAO CHANGXIN in Shanghai (China Daily)

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Foreign exchange regulator studying measures to curb hot money inflow

China's top foreign exchange regulator vowed on Friday to consider new measures, including a transaction tax, to curb currency speculation, after hot money inflows intensified in 2013.

Yi Gang, head of the State Administration of Foreign Exchange, made the comments in an article in the Communist Party journal Qiushi.

Yi wrote that a Tobin tax, a tax on all spot foreign currency transactions that's named after Nobel economist James Tobin, should be "studied in depth".

It's the first time that a Chinese regulator has commented publicly on the tax, which was first suggested by Tobin in 1972.

In 2011, the European Commission proposed to introduce a financial transaction tax within the European Union by 2014. The tax would affect transactions among financial institutions, with a charge of 0.1 percent on the exchange of shares and bonds and 0.01 percent on derivative contracts.

Low rates in the United States have sent increasing amounts of hot money, or speculative funds, into emerging markets including China in search of higher returns.

Last month, China reported its widest trade surplus in almost five years. The surplus rose to $33.8 billion in November from $31.1 billion the month before.

Exports jumped 12.7 percent, well ahead of October's 5.6 percent growth. Imports rose a more modest 5.3 percent.

Zhou Hao, an economist with Australia and New Zealand Bank Group Ltd, said that part of the growth in the export figure in November resulted from speculative funds, or hot money, in the guise of normal trade.

The surplus with the United States alone was $22.4 billion in November. December data is not yet available, but the market consensus is for a surplus of at least another $31 billion.

Chen Bo, a professor at the Shanghai University of Finance and Economics, feels that a Tobin tax will serve as a market-oriented method to reduce speculation in the foreign exchange market, in place of the current system where the central bank gives approval on a case-to-case basis.

"The tax will make certain otherwise profitable transactions unprofitable and thus reduce speculation," he said.

The tax, he added, will likely be rolled out together with a quota system to regulate the foreign exchange market. The scope of the tax will probably be nationwide, rather than trials in selected areas.

The measures, said Chen, will be temporary, before China makes its capital account fully convertible.

In its 60-point blueprint in November guiding China's reforms over the next decade, Beijing promised the liberalization will be completed by 2020.