Offshore Yuan Declines as China Seen Planning Currency Trade Tax

Updated on
  • Move will make investors more cautious on yuan market: Mizuho
  • PBOC weakens daily fixing most since January as dollar rises

The offshore yuan was set for the biggest two-day decline in six weeks after China’s central bank reduced the currency’s reference rate and policy makers were seen preparing a levy on foreign-exchange transactions.

The monetary authority has drafted rules for a so-called Tobin tax in an effort to curb currency speculation, according to people with knowledge of the matter. The tax isn’t designed to disrupt hedging or other genuine foreign-exchange transactions undertaken by companies, they said. The People’s Bank of China cut the yuan’s daily fixing by 0.26 percent, the most since Jan. 7 after a gauge of dollar strength rose 0.4 percent overnight.

"This will have an adverse impact on market liquidity and development,” said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. “Even though long-term investment may not be affected by the Tobin tax, it will make investors more cautious about entering the yuan market.”

The yuan traded in Hong Kong fell 0.21 percent to 6.5077 a dollar as of 5:47 p.m. local time. That takes its two-day retreat to 0.4 percent, the most since Feb. 2. The onshore currency declined 0.21 percent, the biggest drop in a month, to 6.5126, according to China Foreign Exchange Trade System prices. That narrowed the gap between the two rates to 0.07 percent, compared with a record 2.9 percent in early January.

Curbing Speculation

The PBOC has been fighting to drive out speculators who take advantage of the difference in the yuan’s rates at home and abroad. The central bank drove the currency’s offshore borrowing costs to records in January, increasing short-selling costs, and instructed banks on the mainland to restrict sending yuan overseas.

"Today’s weaker fixing may signal the PBOC’s unwillingness to keep the currency too strong while various economic data disappoint to the downside," said Zhou Hao, an economist at Commerzbank AG in Singapore. "Looking ahead, the yuan is likely to stay weaker than 6.50 in the first half before the economy stabilizes."

China’s industrial output climbed 5.4 percent from a year earlier in January and February, the National Bureau of Statistics said Saturday, compared with the 5.6 percent median estimate of economists surveyed by Bloomberg. Retail sales climbed 10.2 percent from a year earlier, missing the 11 percent projected gain, while fixed-asset investment exceeded estimates with a 10.2 percent increase.

Repo Rate

In the money markets, the seven-day repurchase rate, a gauge of interbank funding availability, rose two basis points to 2.29 percent, a weighted average from the National Interbank Funding Center shows. The yield on government notes due January 2026 fell one basis point to 2.85 percent.

The central bank auctioned 20 billion yuan of seven-day reverse-repurchase agreements on Tuesday, adding to the 10 billion yuan offered on Monday. That compares with 115 billion yuan of such contracts due this week that will drain funds from the financial system. The PBOC kept the interest rate it paid in the operation unchanged at 2.25 percent.

— With assistance by Tian Chen

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