Capital Controls Ahead?
As Chinese financial regulators try to clamp down on capital outflows from the country, they are considering measures to regulate cryptocurrencies like “Bitcoin.”
Digital currencies have provided alternate routes for Chinese citizens and expats who want to move money overseas. Many of them are looking to get their funds out of the country before another stock market crash or economic crisis makes their funds disappear. (Source: “China Prepares To Impose Curbs, “Capital Controls” On Bitcoin,” Zero Hedge, November 3, 2016.)
Advertisement
However, Beijing cannot afford to leave capital outflows unchecked. According to sources at Bloomberg, Beijing may impose quotas on how many bitcoins can be sent abroad, or else Beijing could place an absolute ban on local Bitcoin exchanges dealing with foreign currencies.
In either case, Chinese citizens would see their incentives for using Bitcoin diminished; a fact which bodes ill for the value of the cryptocurrency, considering that China accounts for 90% of Bitcoin’s trading volume.
Until recently, regulators had no idea that cryptocurrencies were being used as a loophole to evade capital controls. In fact, they had wrongly classified Bitcoin as a commodity as recently as 2013, which shows they were ignorant of its various uses.
This a regular feature of technological evolution; tech outpaces regulations. It is a common enough story, but that probably doesn’t come as a comfort to Chinese officials.
They see it as disruptive to the aims of public policy. China’s economy is in the midst of an epic pivot from manufacturing to consumption, meaning that it cannot afford to lose more consumer dollars to the advanced nations of the world.
Naturally, China is trying to preserve whatever assets remain in the country, but doing so carries a cost. Namely, the financial freedom of their people.
“With the risk of quicker depreciation rising along with the odds of an impending U.S. interest-rate hike, policy makers are seeking to restrict outflow channels,” says BBG. “Just a week ago, China limited the use of China UnionPay Co.’s cards to purchase insurance products in Hong Kong — another way of taking cash out of the country.”
