26 March 2019
There has been talk that the People's Bank of China may introduce a 'Tobin tax' on currency transactions in a bid to deter yuan speculation. Photo: CNSA
There has been talk that the People's Bank of China may introduce a 'Tobin tax' on currency transactions in a bid to deter yuan speculation. Photo: CNSA

China may go slow on financial reform

China’s financial reforms have encountered various challenges over the last year.

In the first half of 2015, the nation’s stock market hit new highs on hopes for A-share inclusion in MSCI indexes, as well as leverage-fueled speculative bets.

Smart money exited at the peak and some even reaped good profits through short-selling. But individual investors suffered a lot when the market tanked later.

Beijing resorted to intervention fearing that the market crash could further weigh on the nation’s economic growth.

Liu Shiyu, the new chairman of the China Securities Regulatory Commission (CSRC), admitted that government support is necessary for stabilizing the market.

In fact, various major central banks have tried their hand at market intervention. For example, the European Central Bank has decided to expand the scope of its debt-purchasing program.

Central banks have already used up all their ammunition as monetary easing measures have failed to do the trick in stimulating economic growth.

In the past, Hong Kong government also bought stocks to bail out the market in 1998. At that time, the move was criticized by the US, saying the intervention goes against the city’s free economy.

But in the wake of the 2008 financial crisis, the US was itself forced to step in to bail out large financial institutions.

Coming back to China, banks could struggle with increasing bad loans if economic growth keeps slowing in the country.

It’s sensible for Beijing to stem the market slide, but it lacks the experience and talent to do that.

In recent months, China’s foreign exchange reserves saw some rapid depletion. Economic growth outlook remains challenging, and there is still risk for further yuan depreciation.

There has been speculation that the Chinese central bank may introduce a so-called Tobin tax on currency transactions to deter yuan speculation.

Against this backdrop, authorities might hold back on the push for the unit’s globalization.

The yuan was kept steady in the past thanks to current account surplus, which largely offset the impact of capital outflow.

However, things are different now.

Beijing might adopt a more cautious approach in liberalizing the foreign exchange market. As a result, the nation’s equity and bond prices could be affected, which will harm Hong Kong.

This article appeared in the Hong Kong Economic Journal on March 17.

Translation by Julie Zhu

[Chinese version 中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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