As noted yesterday, for the first time in three years, and only the second time in history, bitcoin rose above $1,000 in Yuan-denominated Chinese trading, however it was limited to the lower side of this “round number” psychological barrier in US trading, as BTC flirted with $999.99 for most of the day on the popular Coinbase exchange, without crossing it.
Overnight, however, Chinese demand proved too great and US markets had no choice but to arb the difference. So with Bitcoin trading in China at an implied price of over $1,050 at this moment, bitcoin finally soared above $1,000 in the US as well, trading just around $1,024 on Coinbase as of this moment.
Various catalysts for the recent surge have been cited, chief among which is the ongoing crackdown against cash in India providing a new source of demand for bitcoin. However, the most immediate driver of the recent burst in Chinese demand originates, not unexpectedly, from China where Beijing over the weekend implemented even more of what we have said since September 2015 will keep pushing bitcoin relentlessly higher: capital controls.
Recall that as we noted over the weekend, in order to further curb capital outflows, Chinese banks will be required to report all yuan-denominated cash transactions exceeding 50,000 yuan (around 7,100 US dollars) to the People’s Bank of China (PBOC), down from the current level of 200,000 yuan, according to a PBOC document released on Friday. Cross-border transfers more than 200,000 yuan by individuals will also be subject to the report process. In terms of foreign currencies, the report threshold remains at the equivalent of 10,000 US dollars for both cash transactions and overseas transfers.
How do we know that this latest PBOC intervention in capital markets was merely the latest form of capital controls? Because the PBOC immediately said it wasn’t.
As Xinhua reported overnight, “the policy stoked worries that the government is trying to impose capital control in a disguised form.”
“It is not capital control at all,” central bank economist Ma Jun said.
Actually, imposing limits on capital movement, i.e. controls, is by definition just that.
Logic, however, did not prevent Ma from continuing on a tangent, and he “explained” that the responsibility of report will be assumed by financial institutions, and there will be neither extra documentation nor official approval procedures for businesses and individuals. “They will not feel any change,” Ma added. He also noted that each person’s current annual foreign exchange purchase quota of 50,000 US dollars is unchanged, and normal activities, ranging from business investment and operation abroad to individuals’ overseas trips and study, will not be affected, Ma said.
The PBOC has said the move aims to improve monitoring of money laundering, financing for terrorists, graft and tax fraud, instead of targeting common business activities. Appealing to the Chinese savers not to withdraw their money out of fears of even more capital controls, Ma said that the world’s major countries also have similar rules, citing that transactions worth 10,000 US dollars or more are subject to reporting in the United States, Canada and Australia. Regulators in those countries can even adopt stricter rules if necessary after obtaining legal authorization, Ma said.
Judging by the move in Bitcoin since the announcement, nobody believes Mr. Jun.
And yet, what is surprising is that if China indeed wishes to limit capital flight by bitcoin it could easily do so with the flip of a switch, sending the price plunging. As we noted recently, according to Bloomberg sources, Chinese officials have been considering policies including restricting domestic bitcoin exchanges from moving the cryptocurrency to platforms outside the nation and imposing quotas on the amount of bitcoins that can be sent abroad. Further indicating that Chinese regulators were “just a little behind the curve”, they allegedly noticed only recently that some investors bought bitcoins on local exchanges and sold them offshore, evading rules on foreign exchange and cross-border fund flows, the report further reveals.
A quick look at the uncanny correlation between the decline in the Yuan and the rise in the bitcoin, confirms that the digital currency has indeed been largely used to evade capital controls.
Based on this chart alone, the recent surge in Bitcoin would imply that a substantial devaluation of the yuan is looming. That, or even more aggressive capital controls.
As for those buying into bitcoin here on the momentum, most of which originates in China, we urge readers to be cautious as by now the PBOC has certainly noticed that the digital currency remains one of the final, and most successful, means of bypassing capital controls in China. Should Beijing mandate that bitcoin no longer be a means to illegally transfer capital offshore, there is risk of a dramatic, and sharp, drop in its price.