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China’s SAFE Mulls Tobin Tax to Curb Speculative Flows

China is considering measures, including a levy on spot foreign-currency transactions, to curb speculative capital flows, an official from the foreign-exchange regulator said today.

“There are a lot of policies that can be considered, including the Tobin tax,” Guan Tao, head of the international payments department under the State Administration of Foreign Exchange, said at a briefing in Beijing today.

China’s foreign-exchange reserves surged by a record $508 billion in 2013, indicating money poured into the nation even as other developing economies saw an exit of capital on concern the U.S. Federal Reserve would start to taper its stimulus. The yuan has been the best performing of 11 major Asian currencies tracked by Bloomberg over the past 12 months, rising almost 3 percent against the U.S. dollar.

“We can’t overlook the challenges brought by the U.S. tapering,” Guan said. China hasn’t seen any “substantial impact” on cross-border capital flows so far, he said. “China has the ability to withstand any possible shock in the future given its ample foreign-exchange reserves.”

The nation’s reserves rose to a record $3.82 trillion at the end of December, according to People’s Bank of China data.

Yi Gang, the head of SAFE and a deputy governor of the PBOC, referred earlier this month to the Tobin tax as one of several measures being studied to curb short-term speculative capital flows. The comments were made in an article he wrote for the Communist Party journal Qiushi.

Create Volatility

Liu Mingkang, former chairman of the China Banking Regulatory Commission, said yesterday in Davos, Switzerland, that the reduction in the Fed’s bond-buying program announced in December will create “huge volatility.” The U.S. central bank cut its $85 billion-a-month stimulus by $10 billion, potentially reducing capital flows into other economies.

The Tobin levy offers a concept for regulators based on prices rather than administrative measures and wouldn’t need to be implemented in its original form, Guan said today.

The tax is named after the late Nobel laureate economist James Tobin, who proposed the measure in the 1970s to curb foreign-exchange speculation.

The yuan, which can diverge a maximum 1 percent against the dollar from a daily fixing given by the central bank, gained 2.9 percent in 2013, the fourth annual advance. The continuous appreciation has drawn speculative capital to yuan assets.

China’s leadership pledged in November to accelerate the yuan’s convertibility under the capital account. The PBOC also said it planned to “basically” end normal intervention in currency markets and broaden the yuan’s daily trading limit.

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