Bloomberg: PBOC is Drafting Tobin Tax on Forex in China

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 Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term 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."

"There haven’t been many successful experiences of this happening anywhere else in the world, " he concluded.

Such a tax could reduce Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term, 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.