In another one of its conflicting policy moves, the Chinese government wants to clamp down on currency speculation, while simultaneously letting the yuan trade freely.
Beijing plans to further open up its capital markets and develop its foreign exchange market as it aims to “accelerate the renminbi convertibility on the capital account,” Deputy Central Bank Governor Yi Gang wrote in an article published in China Finance magazine, a central bank publication. Renminbi is another name for the yuan.
While the yuan is already convertible under China’s current account, the broadest measure of trade in goods and services, the capital account, which covers portfolio investment and borrowing, is still subject to restrictions due to worries about abrupt capital flight and hot money inflows, reported Reuters.
Chinese officials have not given a firm timetable for making the yuan freely tradable. However, China has made it a major policy goal to get the yuan included in the International Monetary Fund’s Special Drawing Rights (SDRs) basket. And the reforms are necessary to achieve that.
However, Chinese authorities also want to curb currency speculation, which is what people do with a freely traded currency. They are currently studying plans on how to achieve this.
Some officials have floated the idea of the Tobin tax, a scheme to penalize short-term currency speculators that was proposed by Nobel prize-winning American economist James Tobin in 1972, reported Reuters.
“In the long term, foreign exchange management departments should always give top priority to preventing risks,” Yi said. The government is also studying a non-interest bearing reserve requirement and foreign exchange trading fees, said Yi.
Yi, who also heads the State Administration of Foreign Exchange, said the regulator will improve its monitoring on cross-border capital flows and develop an early warning system.
Since Aug. 11, when China surprised the markets by letting the currency float, money has flowed out of China and speculators have been betting on the currency’s direction.
In an effort to clamp down on this, the People’s Bank of China has told banks to set aside reserves for purchases of currency derivatives, while the foreign exchange regulator has instructed them to bolster checks on currency dealings and identify “abnormal” cross-border fund transfers, reported Reuters.