Will a China Tobin Tax Work? The Brazil Example

Capital Controls in Brazil: Effective?
In the aftermath of the 2008 crisis, capital poured in emerging markets, enticing many different responses. No emerging market experimented as actively with capital controls as Brazil did during that period. We analyze the impact of the capital controls that Brazil adopted since late 2009. These policies had some success in segmenting the Brazilian from global financial markets, as measured by the spread between onshore and offshore dollar interest rates, as well as ADR premia relative to the underlying local stocks. The measures adopted from late 2009 to mid-2011 did not translate into significant changes in the exchange rate, suggesting limited
success in mitigating exchange rate appreciation.
However, the exchange rate strongly depreciates after a tax on the notional amount of derivatives is adopted in mid-2011. The last of the three restrictions studied may have depreciated the Brazilian real by as much 10 percent. That strong response may have been driven by complementarities with the previous measures.
The relevant period is the tightening phase, when Brazil was fighting the market. After 2011, the commodities complex peaked.

Here is a list of the measures passed by Brazil.

Brazil's efforts at fighting the market were futile even though it owns a printing press and could weaken the real at will. China is in a more difficult position, the one Brazil finds itself in since the real began depreciating. Here's how the Brazilian central bank's battle to preserve the value of the real is going:

The authors of the above paper wrote a separate article on their findings:Guest Contribution: “Capital Controls in Brazil: Effective”

The conclusion:
The recent Brazilian experience suggests that controls can succeed in depreciating the exchange rate in the face of capital inflows. But that success may require several rounds of fine-tuning to close loopholes (which can also increase the scope for unintended consequences and “collateral damage” to the supply of FX hedging for the real sector). It also suggests that controls are more likely to succeed when they are supported by an easing of monetary policy. However, there is also the possibility that capital controls may have had the effect of lowering capital inflows even when they are needed. Brazil savings rate is only 16%, and capital inflows are needed to finance investment.
As Christoper Balding has argued, capital is flowing out through China's current account. Can China close all the loopholes necessary to make capital controls effective while also avoiding unintended consequences?

Also, as for whether China is succeeding at fighting yuan depreciation: the U.S. Dollar Index has depreciated since November and the broader Bloomberg USD Index has depreciated since February. China doesn't need to fight the market as long as this trend continues.

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