MNI INTERVIEW: China May Bring In Tobin Tax-Ex PBOC Advisor

The People's Bank of China could consider measures such as a tax on foreign exchange transactions as it accelerates the opening up of its financial markets, a former senior advisor to the PBOC told MNI.

Foreign money is likely to continue to be attracted to China as the PBOC normalises its monetary policy stance while other major central banks keep rates low, Huang Yiping, a former member of the PBOC's Monetary Policy Committee, said in an interview.

So far, the yuan has appreciated 8% against the dollar in five months amid record capital inflows after a relaxation of controls.

Repeatedly over the past 40 years, big capital inflows following liberalisation of emerging market financial systems have ended in crisis when the flows reversed, said Huang, now deputy dean of the National School of Development at Peking University.

The central bank could design tools to increase the cost of capital flows as the financial system is opened up, he said.

"A Tobin tax is now being widely discussed," he added, using the term for a tax on currency conversions originally proposed by Nobel-Prize-winning economist James Tobin.

China has previously drafted rules for a forex transaction tax, according to the State Administration of Foreign Exchange in 2016, but it was never implemented. At the time, concerns focussed on speculation on a weakening yuan, and the proposal prompted intense debate in policy circles.

YUAN EXCHANGE RATE

Officials must also take care not to open the capital account before the yuan exchange rate is sufficiently flexible, Huang said, pointing to the major outflows in 2015 after the PBOC devalued the currency by 2%. Authorities were forced to tighten capital controls, delaying moves to promote international use of the yuan.

China needs capital market and banking reform to better support the real economy, he said, noting that the ability of additional units of credit to produce growth has gradually reduced over the past 10 years. The PBOC's moves towards the creation of a digital yuan, which is included in the country's new five-year plan proposal, will also impact banks, Huang said, although the current plans aim to avoid producing a drain on deposits at existing financial institutions.

The central bank is set to focus more on macro-prudential management to minimise financial risks, he said, and it will shift towards depending more on using rates rather than liquidity tools to manage monetary conditions.

The Chinese economy's leverage levels are manageable, Huang said, noting that many debts are asset-backed. Fast-growing household debt may present potential risks, but corporate and public debt have grown more slowly since a deleveraging campaign began in 2016.

While an expanding fintech sector is boosting credit expansion to small and micro-businesses, its use of big data could boost loan efficiency and lower costs, Huang said. But regulators should update their rules in order to properly supervise the sector.

China's economy could grow at 5-6% a year in the medium term, as the effect of the pandemic fades, and the country should surpass the U.S. to become the world's largest consumer market this year, Huang said.

But consumption and manufacturing investment remain sluggish, he said, expressing concern that the recovery is unbalanced.