When it comes to countries and cryptocurrencies, China and Bitcoin share a relationship similar to estranged lovers. China has a credit fueled economy; Bitcoin had a period of stagnated growth. Chinese used Bitcoins to escape the debt trap and this in turn boosted the growth of the cryptocurrency. The price of Bitcoin almost tripled (from $220 to $730) in a year thanks to the Yuan devaluation. While this is convenient to the proponents supporting the currency, the Chinese government sees this as a threat to the economy.
China has dominated Bitcoin mining and trading domains for some time now. The widespread use of the digital currency has led the Government to initiate regulations to monitor Bitcoin. In 2013, the government classified Bitcoin as a commodity threatening its status as currency. This placed Bitcoin outside the purview of the foreign exchange regulator. People’s Bank of China and financial regulators made it a point to specify that bitcoin functioned as digital commodity only. Owing to the success of the cryptocurrency, the government itself was looking into possibility of its own national digital currency. In 2013, finally China moved to ban Bitcoin barring all financial institutions from handling Bitcoin transactions.
Capital control represents any measure taken by a government, central bank or other regulatory body to limit the flow of foreign capital in and out of the domestic economy. These controls include taxes, tariffs, outright legislation and volume restrictions, as well as market-based forces. Capital controls can affect many asset classes such as equities, bonds and foreign exchange trades. As mentioned earlier, China has a credit fueled growth, which implies that it is important that they ensure the value of money is intact. This can only be assured by implementing Capital Control over certain assets.
Government to make the move soon:
According to Bloomberg, Chinese regulators are looking into measures for limiting Bitcoin transactions taking the funds out of the country. The policies include restricting domestic bitcoin exchanges from moving the cryptocurrency to platforms outside the nation. Also would be in place quotas for the amount of bitcoins that can be sent abroad.
The measures were triggered when investors bought bitcoin on local exchanges and sold them offshore evading taxes. Whenever the Yuan depreciated, there was heavy inflow of funds into Bitcoin as means of hedging. With U.S. interest rate hike around the corner, policy makers are trying to restrict the outflow of funds with Yuan weakening. When the measures will be implemented, growth of Bitcoin will surely face little discomfort.