The Yin and the Yang of the Yuan

Thursday 05 November 2015

China has always driven bitcoin sentiment, but this time, something different may be happening.

Ever since Chinese speculators drove bitcoin up to $1,000 and beyond, two years ago, China has been recognised as a major player in the bitcoin space. Although few Chinese use it as a medium of exchange, the Chinese exchanges lead on volume and frequently price (though the lack of fees means it’s always hard to be certain how much of that volume is real and how much is just bots buying and selling to each other). China also leads on mining, with Chinese pools controlling some 60% of hashing power. From the regulatory standpoint, China has also set the pace: the Chinese government’s move to prevent banks from dealing with bitcoin transactions hamstrung the exchanges and burst the bubble at the end of 2013. Still they thrive, due to various workarounds, though nowhere near their former glory - at least, not quite yet. A recent relaxing of rules has meant it's now easier to move money into Chinese exchanges, and the result has been dramatic. China has led on price, which has doubled in the last month.

But now, something big and bad is happening in China, and it might have more impact on real bitcoin use than anything the regulators have said in the past.

China’s economy is in trouble. It may not look like it on first glance; most western economies would do almost anything to be growing at 6.9% annually. But it’s a far cry from the 10% that has, until recently, been the official target - especially when the real number is significantly lower than the official figures suggest.

Yuan

The renminbi or yuan is, like all fiat currencies, prone to government interference and devaluation.

The Chinese stock market has recently corrected sharply after overheating. Think 150% gains in a year, followed by a 30% crash in three months. Millions of small investors lost a lot of money, despite the government’s efforts to shore up prices with a variety of measures - which amount to price-fixing, by any other token. Preventing large holders from selling and having the state throw money at the problem is not the hallmark of a free market, and no one should be under any illusions that that’s what China is.

After 30 years of double-digit growth, something is finally in the wind. The maxim goes that if something is too good to be true, it is. That’s as true of China’s economy as it is of a bitcoin bubble. China’s growth has been fuelled by exports and massive state investment. Now, that model has run out of road and they need to ‘rebalance’ to a consumer-led approach.

It’s not an easy task. The unexpected devaluation of its currency in August - 1.9% against the dollar - sent shockwaves through the world’s markets. China needs its exports to become more competitive. Given the weakening state of the economy, we can expect further devaluation to come.

That’s significant because China also enforces capital controls to prevent investors taking money out of the country: if the Yuan is weakening, smart money will go into the dollar. Of course, wealthy Chinese have always found ways around this, but right now it’s becoming a bigger and bigger issue.

And that’s where bitcoin comes back into the Chinese picture. There is huge uncertainty about the state of the Chinese economy. Bitcoin isn’t a good way of getting large amounts of money out of the country - there isn’t the market depth for that. But for smaller investors, scared about what will happen to their savings, it represents a lifeline, albeit a risky one. Plus, it's a very attractive class for speculation now that the stock market has proved wanting.

As the Chinese government struggle to contain the mounting gloom over their economy and capital controls tighten, we can expect a flight to safety. For some, that will mean gold. For others, it will mean the USD, and for some of those the route will be bitcoin. With a population of 1.3 billion, the implications of that are significant.


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