China’s monetary policy and currency has largely been in mess for a long time. Only in 1994 did China manage to set a unified, official exchange rate abandoning a dual system, with both a fixed and a market rate existing side-by-side.
It has tightly controlled the flow of capital across its border, which has enabled Chinese authorities to steer the economy and control business.
As The Economist stated back in 2010, China’s approach towards monetary policy has been incremental. In 2009, China put forward reforms allowing those exporting to China to price their goods in yuan, instead of dollars, and deposit the proceeds in offshore corporate accounts, although with low interest rates and mostly in Hong Kong.
Since then, both deposits and the number of firms seeking to tap them, have increased, while offshore and onshore markets remain separated by tight control: companies cannot borrow yuan from the mainland, they must earn it through trade.
Crudely put, yuan flows out of China only if goods or services flow the other way. Offshore yuan does not easily travel back into China either. The currency represents a claim on a country’s underlying assets.
China has also signed currency-swap deals with Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea. Further more, it began allowing certain countries to use the yuan to pay for Chinese imports, and it now lets enterprises based in Shanghai and in four cities in the southern province of Guangdong use it to pay for imports into China.
Have those steps made capital accounts freely convertible? While authorities have been weighing the pros and cons of to what extent to open up capital flows, bitcoin has done it seemingly overnight.
Why has bitcoin had success in China?
One of the reasons bitcoin has been relatively successful in China is that the Chinese already have experience of using virtual currency, such as Q coins, which were introduced in 2002.
Q coins are issued by Tencent QQ – an instant messaging software service company with more than 800 million active users that offers a variety of services, such as online social games, music, shopping and microblogging.
From my experience, when asking Chinese people for their email address, around four out of 10 have an address on the QQ server.
Q coins can be purchased via a bank, telephone or Q card at an official price of 1 yuan per coin, and can be used for purchasing Tencent services, such as electronic greeting cards and online games.
On top of this existing exposure to virtual currency is the fact that bitcoin gives an opportunity for people to move money out of China and transact with international merchants/customers. This is important as there is currently a 350,000 yuan (around $50,000) limit on overseas investment.
Chinese exchange platforms, such as OKCoin, BTCC and Huobi, allow trading without charging a fee, thus, using bitcoin is faster and cheaper compared to traditional money transfer methods, such as Western Union.
This is important for the millions of Chinese who study and work abroad.
Zennon Kapron, financial technology expert and owner of the Shanghai-based consultancy Kapronasia, told CoinDesk that China’s main experimentation in the bitcoin space is in trading and the manufacture and operation of mining equipment. He argues that, with this being the focus, bitcoin is unlikely to cause a financial revolution in China.
According to Kapron, to work in China, bitcoin has to become accessible and useful for the masses in daily transactions. This might be challenging. Merchant fees in China are lower than in the West and platforms such as Alipay and WeChat/Tenpay dominate the mobile and non-bank payment market.
While this might be true for the mainland, in greater China, and Taiwan, in particular, bitcoin seems to have a really kicked off.
Bitcoin purchasing has been launched at thousands of Taiwan’s stores, including FamilyMart, OK mart, Hi-Life stores and the largest chain 7-11, since the beginning of 2015.
Customers have to create an order for bitcoins using an app or web-based wallet from Maicoin or BitoEX (the main competitors in Taiwanese bitcoin services), and then hand cash to the shopkeeper to complete the transaction, or use the regular bank ATMs. To shop, customers need to display a barcode on their phone or tablet for the convenience store cashier to scan.
This presents a good opportunity for those on the mainland to observe whether bitcoin will increase its user base and daily usage.
In China, as in Taiwan, one of the biggest hurdles is that of regulatory approval. People’s Bank of China issued a statement relating to bitcoin on 5th of December, 2013. It prohibited financial institutions and third party payment processors from dealing with bitcoin directly. Bitcoin remained legal for private individuals to own and trade and exchange platforms were allowed to continue business.
After the statement, the price of bitcoin worldwide dropped from its record high of over $1,100 by more than 20%. The statement had a dramatic effect on the market share of large bitcoin exchanges in the country.
Such a cautious decision by Chinese authorities was to be expected, namely to remove the direct risk to the financial system which might undermine China’s economic growth.
Just like the China (Shanghai) Pilot Free-Trade Zone, established in September 2013, to test a number of reforms regarding foreign investment, arbitration and legal services, and e-commerce before their nationwide implementation, bitcoin has been moved aside to be watched from afar.
In my opinion, Chinese authorities will, first, closely monitor developments of bitcoin around the world, then adopt the best practices regarding regulating bitcoin (the UK and United States might be examples to look upon) tailoring them to suit Chinese characteristics.
As for now, it is clear that ‘bitcoin fever’ is not over and it is interesting to see how it develops in China. The main questions now are: Will bitcoin affect the current financial system and the use of money in China? If so, what political implications might this have?
This article is an edited extract from Aiga Gosh’s paper titled ‘Bitcoin Rush: the Past, the Present and the Future’.