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Taxes

China mulls tax on foreign exchange transactions

A Chinese financial regulator has said the country is considering introducing a tax on foreign exchange transactions. He said the measure would help guard against speculative capital flows amid market liberalization.

A top official from the State Administration of Foreign Exchange (SAFE), Guan Tao, said Friday, Beijing was mulling a Tobin tax on financial transaction, with the levy getting its name from Nobel laureate James Tobin who proposed the tax in 1972 as an instrument to reduce speculative trading.

Guan Tao thus echoed earlier comments by the vice-governor of the People's Bank of China, Yi Gang, who'd argued the tax was required for improving the foreign debt management system and accelerating the advance of yuan capital account convertibility.

Guan Tao maintained Friday such a tax would make foreign currency transactions more expensive and curb them as a result.

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The economist added that defending against cross-border liquidity flow shocks was the key to good financial management.

The main financing rate at China's central bank currently stands at 6 percent, while the Fed's is zero percent and the European Central Bank's just 0.25 percent, marking a record low.

With all the money that has been pumped into markets of late, investors have been looking for better yields, with China a reasonable option also because of the prospects of a steadily rising yuan.

Beijing has fears that a continuously high capital influx could lead to a price bubble and has thus been interested in stemming the tide of financial flows.

hg/hc (Reuters, AFP)

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