This Is What Wall Street Thinks Of China’s FX Trading Tax

Last night we reported that the PBoC is now considering a Tobin tax on FX transactions.

The follows reports that a series of big name money managers – or, as China calls them, “speculators,” “predators,” and “crocodiles” – have placed outsized bets against the yuan.

In January, at Davos, George Soros predicted a Chinese hard landing and said he was betting against Asian currencies. That prompted a series of “Op-Eds” from the Politburo’s various media mouthpieces including a hilarious post that ran the People’s Daily entitled, “Declaring war on China’s currency? Ha, ha”

Subsequently, Kyle Bass laid out his thesis for betting on further RMB depreciation. China’s banks, Bass says, are going to need to be recapitalized and in a very big way. That recap will eat up what remains of China’s FX reserves and force the PBoC to effectively print money to shore things up.

These attempts, China said in the Op-Ed mentioned above, “cannot possibly succeed.” “About this,” the piece continues, “there can be no doubt.”

But in case there was any “doubt,” the PBoC is now looking to erase it by effectively hiking margins on FX trading (that’s what this amounts to). It’s similar to what Beijing did last autumn when, in another effort to combat “speculation,” the PBoC raised the reserve requirement on forwards trading. That move was greeted with skepticism. “They were moving towards market-oriented reforms. This is 10 steps back,” a currency trader in Hong Kong said, at the time. Last night, we got nearly identical comments from an FX strategist at CBA in Singapore. “Now is not a good time to roll out Tobin tax as the market is already concerned about whether China will be able to increase capital account convertibility in the coming years, and this is another step backward to achieve that goal,” he said, adding that “The Tobin tax can be considered as a form of capital control.”

Right. That’s because China is panicking and just about the last thing anyone in the PBoC wants is to have the likes of Kyle Bass make Xi look like an imbecile.

And so, a tax it will be because no matter how (realtively) stable the RMB is now, it won’t stay that way going forward. Especially not with expected USD strength from Fed policy divergence and the focus on keeping the yuan at least stable against the trade-weighted basket adopted in December. And of course there’s the whole collapsing exports problem.

Here are some analyst reactions that should give you some insight into what the Street thinks about China’s latest move to crush “speculators”:

ANZ (Khoon Goh, FX strategist)
- Imposition of a Tobin tax may curb trading liquidity in the yuan market
- Unnecessary at this point to introduce tax considering that the yuan has stabilized after being volatile at the start of the year

SEB (Sean Yokota, head of Asia strategy)
- A Tobin tax in China may backfire and weaken CNY
- Moving completely in the opposite direction of letting markets set prices rather than the govt
- Country still wants to increase volatility over time; Tobin tax goes against this

China Merchants Bank ( Liu Dongliang, senior analyst)
- Short-term capital outflows from China may accelerate if Tobin tax is imposed on FX transactions
- May trim trading volumes over the medium term

Mizuho Bank (Ken Cheung, currency strategist)
- Any introduction of Tobin Tax will raise the costs of trading yuan in the short term
- Measure will impose adverse impact on market liquidity and development
- Even though long-term investment may be excepted from Tobin tax, this rule will make investors more cautious to enter the yuan market

CBA (Andy Ji, FX strategist)
- Tobin tax can be considered as a form of capital control
- Levy will hurt market sentiment and cause investors more panic, as this shows existing capital controls are not enough to curb outflows
- Not a good time to roll this out now, as market is already concerned about whether China will be able to increase capital account convertibility in the coming years

Bocom International (Hao Hong, chief China strategist)
- If the tax is widened to CDS, swaps, traders cannot express their views on the currency
- Impossible trinity is the macro constraints that decision makers have to work with, between an independent monetary policy, stable currency and free capital flows

DBS (Tommy Ong, managing director for treasury and markets)
- Possibility of this being implemented is not very high
- Can’t guarantee volatility will come down since it’s difficult to identify if currency trading is down to speculation or genuine need

Templeton Emerging Markets Group (Mark Mobius, executive chairman)
- It’s part of plan to make sure FX reserves are not exiting at a rapid rate
- It’s positive they don’t want to see a big decrease in foreign reserves

Will a Tobin tax stop the outflows? Probably not and in fact, it could backfire and cause the market to panic further.

But it may still make life a bit more painful for those who think they can play the PBoC like Soros played the BOE.

So go on speculators, “make Xi’s day”…