China, the world’s most populous country and the second largest global economy has strict regulations against Bitcoin. China National Bank - The People’s Bank of China, banned third-party payment companies from processing Bitcoin transactions on Dec 16, 2013. This move was harshly revolted by many in the Bitcoin community. But, as a consequence to the ban, the very next day, Bitcoin price drops almost 29%. This created a panic in the Bitcoin community that added to the price drop.
More recently, on April 28, 2014, the Bitcoin price dropped almost 15% on the news of a Chinese Bank deposits being suspended. BTC China - in the top five of the most commonly used Bitcoin exchanges, according to Bitcoinity.org - said over the weekend that it had suspended Yuan deposits from the China Merchant Bank, following guidance the bank had posted on its website.
Why is China so anti Bitcoin?
Well, there are many reasons for this for example Bitcoin can pose a threat to the Chinese economy through a loss of control on the flight of capital out of the country. China’s economy is second to only the United States’ economy by Purchasing Power Parity (PPP) and Gross Domestic Product (GDP). Furthermore, the economy of China is the fastest growing economy in the world with an average growth rate of 10% in the past 25 years. Now you wonder why Walmart is full of Chinese products. With China on a mission to be the world’s largest economy by the next 20 years, the Chinese government is taking all measures to ensure a steady growth rate. This is allowing China to slowly become a stabilized market economy and the Chinese wouldn’t want to endanger it. Furthermore, the objective of the Chinese monetary policy is to keep the value of the Renminbi, RMB (The official currency of China) stable to contribute to a steady economic growth.
Bitcoin, on the other side is an unregulated financial instrument. It has been recently known for its various price fluctuations. Although the Bitcoin is widely accepted in some countries, it poses a great threat to the Chinese economy as it challenges the capital controls in place that guard the value of RMB. With the ease of purchasing and transferring money internationally, Bitcoin might be a big hit in the technologically savvy Chinese population. However, it poses a risk to the Chinese currency, as the Bitcoin could be more readily accepted as means to circumvent controls over Chinese sending their cash overseas. If this were to happen, then it would hinder the steady growth of the Chinese economy and also reduce the control of China on the global economic environment.
Another main reason that China has banned Bitcoin transactions is that Bitcoin could act as a second currency. What would happen if Bitcoin would act as a second currency that couldn’t be pegged in China? China is known to be an export nation, as it exports its products, mainly electronic parts, all over the world. Even the iPhone is made in China and assembled in California. This is due to the cheap labor found in China. Imagine if there is second currency in China that can be traded globally online, wouldn’t the workers want to work for the Bitcoin? If they do so, wouldn’t the average rate for an hour’s work fluctuate according to the global Bitcoin price? This would mean that sometimes, the workers would get more value in Bitcoin than they would get in the RMB. This would hurt the export sales adversely and would hinder the steady economic growth of China, which is linked directly to the RMB. This way, the individual wealth of an average Chinese person would increase, which could potentially lead to an increased demand and an increase in prices, all over China. An increase in prices would increase the property prices astronomically, and this could potentially lead to a property bubble which could throw China into recession, just as it did to the United States in 2008.
Realizing all this, the People’s Bank of China (PBOC) imposed a ban on all Bitcoin transaction in China. After all, the PBOC could not let the usage of Bitcoin affect China’s competitiveness in the global economic framework.
Why does a Chinese ban adversely affect the Bitcoin price?
China is technologically sound. Realizing this many American tech companies like Google have tried to enter the Chinese market, but could not succeed due to the strict economic and government regulations. China is also the world’s fastest growing economy. Therefore, the Chinese economic environment is best suited for Bitcoin to flourish. However, the strict Chinese regulations have made it difficult for Bitcoin companies to flourish in China. The Bitcoin community eagerly waits for Chinese government to ease the regulations. So, any news in an opposite direction would severely affect the Bitcoin price. What’s adding to the price volatility of Bitcoin is the inability of the PBOC to take a definitive stand on the Bitcoin existence in China. Although there are regulations that stop Bitcoin from prospering, there are some Bitcoin companies functioning in China.
But, if the PBOC could take a definitive stand on the Bitcoin existence in China, the Bitcoin community could adopt accordingly and the Bitcoin price volatility could end. Only time would tell if China would modify its monetary policy and accommodate Bitcoin to collectively let the Bitcoin and RMB stabilize the Chinese economy or if it would completely ban everything that has something to do with Bitcoins.
However, recent reports show that the PBOC would soon issue a statement banning all banks from doing business with Bitcoin exchanges in Mainland China. But, not prominent can be said now about the future of Bitcoin in China as the Bitcoin community is organizing a Global Bitcoin Summit in Beijing, China later this month. This is being seen as a move to educate China about Bitcoin and to increase the Bitcoin users in China.
However, we would have to wait a little longer to know who wins this virtual battle between the Bitcoin community and the People’s Bank of China. Stay tuned to Team Bitcoin to know more about this!