Tuesday, March 15, 2016

Having Killed Their Equity Market, China Unleashes "Tobin Tax" For FX Market

In September last year, Chinese regulators stepped on the throat of a 'fair' market in equity futures trading and for all intent and purpose killed the Chinese equity market. Tonight - after 2 days of Yuan weakness - having warned everyon from Soros to Kyle Bass that "betting against the Yuan can't possibly work," The PBOC just unleashed plans for so-called "Tobin Tax" on FX transactions (which implicitly taxes each transaction, reducing liquidity, raising margins and reducing leverage).
Deputy central bank governor Yi Gang raised the possibility of implementing a Tobin tax late last year in an article written for China Finance magazine, and now, as Bloomberg reports, it is on!
China’s central bank has drafted rules for a Tobin tax on currency trading, according to people with knowledge of the matter.

Rules are aimed at curbing speculative trading, say the people, who asked not to be identified as the discussions are private

An initial tax rate may be set at zero so as to allow authorities time to set up rules without immediately implementing the levy, people say

Tax is not designed to disrupt hedging and other FX transactions undertaken by companies, people say

Rules still need final approval by central government and it’s not clear how quickly they may be implemented, people say

People’s Bank of China doesn’t immediately respond to faxed request seeking comment
What happens next? Well that's easy... This!~
NOTE: Yes that is real... and Yes there is 'some' volume there
Good luck unwinding those levered shorts... and even if the hedgies are profitable, we suspect the tax will be tiered to enable the maximum pain to be extracted from so-called speculators.
“The Tobin tax can be considered as a form of capital control,” says Andy Ji, a foreign-exchange strategist and economist at CBA in Singapore.

“The levy will hurt market sentiment and cause investors more panic, as this shows that the existing capital controls are not enough to curb outflows,” Ji says; “Now is not a good time to roll out Tobin tax as the market is already concerned about whether China will be able to increase capital account convertibility in the coming years, and this is another step backward to achieve that goal
Simply put this imposition of a Tobin Tax suggests PBOC is expecting a lot of volatility and is trying to minimize any possibility of momentum ignition and speculation as much as possible.
Charts: Bloomberg