Banks Threaten “Foreign Exodus” if China Imposes Tobin Tax

The People’s Bank of China has drafted rules for a tax on foreign-exchange transactions, a so-called Tobin tax, which is provoking screams from the western (bankrupt) banks. The plan is not yet approved, but Bloomberg reports from sources that the structure is in place and ready to go. The government may set the initial rate at zero “to allow authorities time to refine the rules and to deter speculators by letting them know that there is a system in place,” says Bloomberg.

Bloomberg also surveyed the bankers: “A levy would set back China’s push to make the yuan a reserve currency and could heighten investor anxiety over capital outflows, according to Commonwealth Bank of Australia. The proposal is short sighted and would drive away foreign investors, Citi Private Bank said…. A Tobin tax would be a big blow to China and it may backfire if investors decide to dump yuan assets to avoid the levy, said Sean Yokota, the head of Asia strategy at Skandinaviska Enskilda Banken in Singapore. The proposal would be moving completely in the opposite direction of letting markets set prices rather than the government.”

The real reason they are so upset, is that the plan will require that hedges and foreign-exchange transactions have to document that the operation was a legitimate hedge, and not speculation. That is driving the bankers wild.

Banny Lam, co-head of research at Agricultural Bank of China International Securities Ltd. in Hong Kong, a unit of one of China’s largest state-run lenders, told Bloomberg: “Targeting speculators is a good idea. It will help stabilize the onshore and offshore markets, which will be good for the economy.”

A strategist at Citi in Hong Kong, Ken Peng, issued an impotent threat: “A main side effect is that foreign investors just won’t participate in the yuan market in the future. Why would they invest in the yuan market when the economy is slowing, capital is leaving, and the system is getting more and more tightly controlled?”

Lyndon LaRouche responded: “Oh, so they are threatening to pull out? Good! Good riddance!”