China faced a challenge of speculative capital flows. Even though the overall outflow of foreign capital slowed down, there is still the danger to the economic wellbeing of the country. That is why China is planning to introduce a tax on foreign currency transactions. Wang Yungui, China’s State Administration of Foreign Exchange head of the regulation department, mentioned that the office is studying the Tobin tax. This measure aims at penalizing short-term currency speculations because they do not have direct impact on the capital flows. Another tool for coping with the problem is collecting taxes from sales of forward positions. Because capital outflows slowed, no timetable was given. Nevertheless, the challenge remains as the forex reserves of China are contracting. So, the government is forced to fall back on tighter enforcement of capital controls to guarantee that the confidence in yuan is restored.
I believe that with China’s positions in the global economy it is ruinous to admit to losing capital and the strength of its currency. With its tremendous economic potential and the desire to become a global leader, the yuan should be strong. Introducing this tax will be beneficial in the case of choosing the tax rate that will motivate the foreign actors to conduct economic and business operations in yuan, not any other currency. It will add to the economic power and influence of China and help make yuan a currency of international agreements like dollar or euro. Moreover, China has an opportunity to do so because it is attractive for foreign investments and many of the most influential transnational corporations are interested in cooperation with the country because of its, for the most part, stable financial market and smart fiscal policy. Why not change the rules of the game then and insure that the currency is safe instead of waiting till the capital outflows stop?