On a macro level, the clampdown of cryptocurrency from China makes a lot of sense. China has a significant reason to watch the development of the cryptocurrency industry carefully, and it falls to more centralized control. But the question is control over what? Of course, it can be control over their people, control over their economy, and general control over all public affairs. Specifically, China is making sure to have further curtailing capital outflows. The Chinese government started the initiative before the boom of cryptocurrency by taking actions such as minimizing the supply of the required foreign exchange for outside purchases without first receiving permission from the capital city. The need for control in this regard may seem to in line with the regular actions of the Chinese government, or it could be that there or other events at play. It could indicate other issues are present for the Chinese government and they need to make sure that they can hedge against this internal risks and growing problems by minimizing their currency outflows.
China Foreign Reserves
China’s foreign reserves have continued to grow since the year of 2000 and have plateaued from 2013 to 2014 and then started to decrease in the following years. As there was a recession taking place in the U.S. and other developing and developed countries combined with China depreciating its currency, they had no issues with capital outflows and individuals seeking investment elsewhere. But as the global economy started getting back on track, foreign investors looked to other countries to place their capital.
According to the St. Louis Federal Reserve :
“Foreign investors slowly started to seek opportunities elsewhere. Especially after the Federal Reserve announced its plan to increase interest rates, the capital flight combined with a low current account surplus in China led to a plunge in the value of yuan, forcing China’s central bank to sell off foreign reserves to prevent its currency from depreciating too quickly.”
Where cryptocurrency fits into the picture
The movements of capital and a largely depreciated yuan could have significant ramifications on different aspects of China and its economic strength. Therefore, the Chinese government put in place several restrictions in areas where money could flee the country and have been watching this steadily for some time now. Cryptocurrency exchanges allowed Chinese investors to take their yuan and invest in other assets (Bitcoin, Ethereum, etc.). These assets could then be transferred out of the country to another exchange and could serve as a means to convert their currency into other assets. The government is stepping up their efforts in capital restrictions by now taking it one step further and blocking access to websites (Chinese and foreign) that are in the business of the exchange of digital asset trading, initial coin offering and more. While they are carrying this action out, they are reportedly in the process of writing out further legislation to conduct another phase of clamps on the cryptocurrency industry in China.
The government initially declared that they want to prevent and mitigate financial risks and so would be shutting down Initial Coin Offerings and Virtual currency exchanges and swiftly did so across September 2017. Their actions directly affected the volume of trade into cryptocurrencies through renminbi (RMB) and had a sharp decline from being higher than “85% of global trade to less than 2%, minimizing risk levels”.
The Chinese government is taking further action on exchanges because they have seen that citizens and exchanges have been able to get around current impositions and have continued to trade, although, with great hassles.
With this new move, the government will further restrict trading on foreign cryptocurrency exchanges.