China has ordered the most liquid and popular global bitcoin exchanges based in the country to refrain from any “offline promotions,” to not engage in any “fake trading,” to enact “mandatory strong KYC,” and, in a clear sign of nervousness about the country’s currency, to not mention devaluation, according to a translation.
China shocked world markets on August 2015 when it devalued its currency, the yuan, by 2%, creating turmoil around the globe and sending its stock market down crashing. It further began money printing in early 2016, sending the currency lower and lower, which in turn incentivized its businesses and citizens to store their wealth elsewhere, forcing the authorities to intervene to slow down or halt the decline.
The most spectacular intervention came three days ago when Yuan’s overnight borrowing rate increased by 100%, sending bears for cover, crashing bitcoin down by $300 in minutes and giving yuan one of its biggest one day gain in years, strengthening the currency by 1%.
However, it appears the market has doubled down. Any gains were almost erased yesterday, with figures released today showing that China’s foreign reserves are now just above the significant psychological threshold of $3 trillion.
“We’re starting to see more and more of a negative cycle being created potentially by China itself with aggressive capital controls,” Benjamin Fuchs, a former Lehman Brothers Holdings Inc. trader, told Bloomberg. China’s attempts to curb outflows are “just making people want to take money out quicker, and make companies change their behavior.”
Yu Yongding, an economist at government think tank Chinese Academy of Social Sciences and former adviser to the central bank, thinks China may have created another negative cycle, according to WSJ: as it keeps dwindling its reserves to stop yuan from declining, concerns increase over its ability to do so, causing more capital flight, thus lowering reserves further.
Some, like Fuchs, are now changing their calculations. Although previously they believed Yuan may decline gradually, now he thinks odds are increasing of a steep decline.
Bitcoin’s Correlation with Yuan, Courtesy of Bloomberg.
As China goes head to head with global markets in a potential showdown we have not seen in years, the surprise win of Donald Trump has opened the most complicated chess game in years. In one of the biggest rally, the Dow Jones jumped in November, continuing a bullish run to the psychologically significant line of 20,000, which it missed by just one point last night.
Dow Jones Almost Reaches 20,000. Chart from Tradingview.
The rally began because of Trump’s promise to provide America with one of the biggest people’s stimulus of all times, cutting income taxes and business taxes to the tune of $4 trillion. Moreover, he will institute a policy of repelling any “unnecessary” regulations, repel restrictions on energy and spend considerably on infrastructure re-building.
Despite the left’s continued objection, he will probably align with Russia to end the middle east mess, potentially returning peace after 15 years of endless wars, which, if it can be achieved, would give America and the entire world an economic peace dividend, increasing productivity and happiness across the globe.
All that, however, might be child’s play when it comes to what will probably go down as Trump’s legacy, the economic relationship between America and China, two of the world’s biggest economies, both deeply intertwined with each other.
In this context, although bitcoin is tiny, it finds strong support amongst some in Trump’s administration as well as in Silicon Valley. The recent restrictive measures towards bitcoin by Chinese authorities could be used by the Trump administration, directly or indirectly, as the latest example of China engaging in protectionist measures with its market less open than not only developed, but developing countries. The East Asia Forum states:
“The lack of reciprocity creates an un-level playing field. A concrete example is the acquisition of the US firm Smithfield by the Chinese firm Shuanghui. In a truly open market, Smithfield, with its superior technology and food-safety procedures, may well have taken over Shuanghui and expanded into the rapidly growing Chinese pork market. But investment restrictions prevented such an option, so the best way for Smithfield to expand into China was to be acquired by the Chinese firm.”
Tech companies are particularly affected. Google was forced out, Facebook is banned, Twitter too, with Quartz stating “China is blacklisting Apple, Cisco, and other US tech companies.”
Combined with China’s continued intervention in the value of its currency, Trump states this has created a zero-sum game where one country wins at the expense of the other. He wants to re-arrange the relationship to that of a win-win situation where both countries gain through the efficient allocation of capital where it has genuine, rather than artificial, advantage, thus growing both economies to the benefit of both.
That requires market reforms in China by lifting any restrictions towards foreign investments, opening its markets to at least the level of other developing economies, but, considering it is the second biggest economy in the world, preferably to that of developed economies, and allowing the yuan to free float and be exchanged freely with other currencies with its value determined not by policy makers, which always mismanage it, but by the free market.
In a potential indication of how these negotiations will go down, China’s latest restrictions towards bitcoin have a greater significance than for just our space. Firstly, they are not as restrictive as they could be if what is publicized is indeed all of the required measures. Although the reasons may be specific to the bitcoin space, it might also indicate that china is perhaps open to a less protectionist market. Secondly, China did intervene, which, although not as far as they could, does suggest that Beijing has not greatly changed its attitude towards their protected market even as they await Trump’s inauguration. However, overall, comparing it to the actions China undertook in 2013, the country does seem far more willing to be less restrictive, suggesting perhaps that the negotiations between the two countries could be more amicable than confrontational.
Bitcoin, however, is a tiny consideration in the great chess game. The world’s eyes are on Yuan and Dow Jones. The latter may be about to pass the psychological threshold of 20,000, while the former awaits the response of the global markets.
Monday, therefore, is likely to be a spectacle with bitcoin responding depending on how global markets act. If indications are correct, that may be up.
Disclaimer: All of the above is pure speculations and mere opinions. It does not constitute financial advice or any sort of advice. You rely on any of it solely at your risk and discretion. Remember, price is unpredictable. It may go up just as down with bitcoin’s highly volatile nature making it one of the riskiest asset which may lead to your full or partial loss of funds.
Image from Shutterstock.
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