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China sees more inflows

China’s firmer yuan and higher interest rates could attract more money inflows this year, despite the possible impact of the Federal Reserve’s stimulus tapering, the country’s foreign exchange regulator said on Friday.

The Chinese authorities are considering a “Tobin tax” on financial transactions to deter speculative capital flows, said Guan Tao, head of the department of international payments at the State Administration of Foreign Exchange (SAFE).

A Tobin tax imposes a small charge on individual currency transactions to discourage excessive speculation.

“If the renminbi (yuan) continues to be stable or rise sightly while yuan interest rates are higher than those of major currencies, financial operations of many companies could lead to more money inflows,” Guan told a news conference.

“This will increase our foreign exchange reserves, given that we already have large reserves and investment returns from the reserves,” he added.

Chinese banks posted a surplus of 1.68 trillion yuan ($277.61 billion) in their foreign exchange settlements in 2013, up 210 per cent from the previous year, Guan said.

The central bank has said China’s foreign exchange reserves, the world’s largest, rose $157 billion in the fourth quarter to $3.82 trillion at end-2013.

A Reuters poll showed that the yuan is likely to gain 1.7 per cent versus the dollar in 2014 due to capital inflows, even as the US currency draws some support from the Fed’s move to unwind its economic stimulus.

Guan said the Fed’s tapering on China’s capital flows has so far been limited, but he cautioned that some money could leave emerging markets as the US central bank pares its stimulus.

China’s stable economic growth and large foreign exchange reserves will provide a cushion against possible capital flight caused by the Fed’s tapering, he said.

The government has laid out plans to make the yuan convertible on the capital account, but it will also adopt measures to control potential risks from volatile money flows, Guan said.

“We will use more market-based means to manage (capital flows) and there are many tools that are under consideration, including a Tobin tax,” he said.

Yi Gang, a vice central bank governor who is also head of the SAFE, wrote in an article earlier this month that China should study the so-called “Tobin tax” on financial dealings to curb hot money flows.

Meanwhile, the foreign exchange regulator said in a statement on its website (www.safe.gov.cn) that it will simplify rules on some currency transactions, including making it easier for foreign investors to deal with non-performing loans.

From February 10, foreign investors will no longer need approvals when they exchange profits from disposals of bad loans in China, while approvals on currency dealings by Chinese debt-clearing companies will also be abolished, according to the SAFE.

The regulator also said that it will scrap approvals for financing leasing firms when they generate revenue overseas and it will ease rules to allow domestic firms to extend the maturity on their overseas loans to more than two years.

Chinese Premier Li Keqiang has been pushing government agencies to cut red tape and cancel unnecessary administrative approvals as part of efforts to promote market-oriented reforms.