Global finance experts have reacted with shock and dismay to reports that the Chinese government is preparing to implement a so-called ‘Tobin tax’ to control currency speculation.
News of the plan first emerged in a Bloomberg story of 15 March – citing unnamed, but reliable, sources – which triggered alternately angry and dismissive responses from industry insiders.
‘Tobin tax’ has become a largely pejorative term for any central bank levy on FX, or forex, transactions. Its name derives from that of late, Nobel Prize-winning economist James Tobin, who proposed such a step for the US in 1972 following turmoil in the Bretton Woods fixed exchange-rate system.
While the story indicates that the People’s Bank of China (PBOC) intends to launch the levy to counteract volatile market conditions, commentators have argued that it would not be enough by itself to ease China’s woes. Indeed, on the basis of a previous Tobin tax experience in Sweden, it could even backfire.
Speaking in the original report, Tommy Ong, MD of treasury and markets at the Hong Kong wing of Asian bank DBS, 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 FX exposure.
“There haven’t been many successful experiences of this happening anywhere else in the world.”
In a statement from Eversheds, Ben Jones, partner in the law firm’s London-based tax team, said: “Tobin taxes have had a chequered past, with powerful examples of unintended market disruption and genuine concerns about how [they] can be effectively operated in a global economy.
“Sweden’s experiment with a Tobin tax in the 1980s ended disastrously, with significant trading activity moving from Sweden to other markets. More recently, attempts by the EU to introduce an EU-wide Tobin tax have floundered – a key problem being the design of an effective system that discourages migration from the market while avoiding extraterritorial taxation.”
He added: “Currency trading in China represents a different, more focused target than other Tobin taxes and it may be that such a tax will have the desired effect of dampening [renminbi] speculation.
“However, history has shown that the knock-on effects of such a tax can be significant and unexpected, and the legal and administrative framework of such taxes are often complex and burdensome. Ultimately, both outcomes are likely to create a more challenging business environment.”
China’s plan has been revealed less than four months on from a decision by the International Monetary Fund (IMF) to include the renminbi in its basket of reserve currencies. Speaking to CNBC, Chris Weston of financial spread-betting firm IG markets said: “This [tax] will not be taken kindly by the IMF if it eventuates, and if Chinese officials broaden this to other markets, like swaps, then speculators may pile into proxy currencies like the Hong Kong dollar.”