China mulls Tobin tax on forex deals

China's monetary authorities may tax individual foreign exchange transactions when necessary to curb speculation as China is still facing high capital inflows.

The Tobin tax may be introduced to control cross-border money flow as a relatively high interest rate and a strong yuan will continue to draw foreign capital, Guan Tao, head of the department of international payments at the State Administration of Foreign Exchange, said at a briefing in Beijing yesterday.

"Capital inflow may possibly increase. For example more foreign investors will be willing to hold Chinese assets if the Chinese economy outperforms other emerging markets," Guan said.

"If the yuan continues to be stable or rise sightly while yuan interest rates are higher than those of major currencies, the financial operations of many companies could lead to more money inflows," he said.

A variety of market-based tools, including the Tobin tax, can be employed to enhance risk control and manage flows of foreign exchange by controlling transaction costs.

China recorded a surge of net inflow of capital as Chinese banks posted a surplus of 1.68 trillion yuan (278 billion U.S. dollars) in their foreign exchange settlements last year, more than triple from the previous year, Guan said, citing official data.

In response to a question about how the US Federal Reserve's recent reduction in bond purchases would affect China's trans-border capital flows, Guan said there had been no obvious impact yet and China could resist future possible shocks.

This is due to the country's stable economic fundamentals, fiscal and financial conditions and current account, he said.

China's foreign exchange reserves rose to a record US$3.82 trillion at the end of December, the largest in the world, according to the central bank.