According to sources close to the People's Bank of China, the central bank is drafting rules for a tax on FX transactions - a so-called Tobin tax.
The aim of the Tobin tax is to throw sand in the machine and make short-term speculative flows more expensive . The consideration is clearly happening on the back of the significant speculation against the CNY in December-January time. It could be used as a further tool to stem the selling of CNY along with currency intervention and push up offshore (CNH) money market rates.
If fully implemented, it would make it more expensive to trade CNY and make CNY hedging more expensive. The sources are saying it is not designed to disrupt hedging and other FX transactions undertaken by companies. Hence, the central bank may be looking at ways for it to mainly affectshort-term trading flows and not hedging . It could perhaps make hedging flows connected to an underlying physical flow exempt from the tax. But we do not have the details on this yet.
We continue to recommend hedging CNY receivables, and to do it in the offshore market, which should be exempt from a tax. Now is a good time to take advantage of the recent decline in CNH money market rates and the stronger CNY versus the USD to hedge receivables.
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