China is studying plans to curb currency speculation even as it seeks to quicken the process of making the yuan trade freely, a deputy central bank governor said. Beijing will further open up its capital markets and develop its foreign exchange market as it aims to "accelerate the renminbi convertibility on the capital account", Yi Gang wrote in an article published in China Finance magazine, a central bank publication. The yuan is also known as renminbi.
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.
Chinese officials have not given a firm timetable for making the yuan freely tradeable. They have pledged financial reforms to make the yuan more convertible as they push for it be included in the International Monetary Fund's Special Drawing Rights (SDRs) basket. But the authorities are also studying plans to curb currency speculation, including a "Tobin tax", non-interest bearing reserve requirement and foreign exchange trading fees, Yi said.
Chinese offices have floated the idea of the Tobin tax, a scheme to penalise short-term currency speculators that was proposed by Nobel prize-winning American economist James Tobin in 1972. "In the long term, foreign exchange management departments should always give top priority to preventing risks," Yi said. 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. The authorities have taken a series steps to curb currency speculation and money outflows that intensified after China's surprising August 11 devaluation of the yuan.
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. The central bank has intervened heavily to support the yuan, alongside the government's efforts to stem a slide in China's stock market.
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