The Dark Reason Behind China Bitcoin Crackdown that Nobody is Talking About
China’s crackdown on digital currencies continues. Following the People’s Bank of China’s recent ban on initial coin offerings(ICOs)(read my previous post about that topic), the Chinese government has proceeded to shutdown the major Bitocoin exchanges in the country. The move was not exactly surprising but it still managed to cause an immediate sharp decline on the price of Bitcoin
China’s love-hate relationship with digital currencies is somewhat counter intuitive taking into consideration that the country has become the most influential economy in the raise of Bitcoin. Many articles have been written about the different reasons behind China’s crackdown on Bitcoin. However, there is a little hidden reason that has been ignored by most experts and that is at the root of the behavior of the Chinese government. Like everything in China, it boils down to politics. I am talking about the upcoming congress of the Communist Party.
The meetup of the Party elite in China is never an event to take lightly by financial markets but this one is particularly important. This year, China’s president Xi Jinping is presenting his case to the Party for a second five year term after a not very impactful first term. From that perspective, nothing can hurt his case more than a sentiment of financial instability and vulnerability to “capitalist corruption”. So yes friends, this is all about politics.
The reasons behind China’s crackdown on Bitcoin is the same reason why the Asian giant has remained hesitant to take a tough stand on North Korea or why it has been conducting a very aggressive anti-corruption campaign across the country. Its all about perception in the months preceding the “People’s congress”.
The ban on digital currencies is just one piece of a much broader anti-corruption operation by the Chinese government. If you follow China’s financial the you have probably seen the headlines about this operation because they are literally everywhere. Restriction on money-lending startups, a highly publicized trial about a massive Ponzi scheme, commitments from the major investment funds to focus on deploying capital in their homeland, some hard-to-read news about authories questioning some of the country’s most respected business tycoons and the crackdown on crypcoins are all part of President Xi’s reelection message. And you know what? It seems to be working!
After years of financial ups and down, China’s financial markets seems to be suspiciously stable. The Yuan is trading at it highest level in years compared to the US Dollar(that is bringing its own set of challenges but that’s a story for another day :) ). Chinese equities (specially tech) keep flying high with stocks like Alibaba and Tencent outperforming the hottest US tech stocks. The recent stability has attracted the attention of US financial powerhouses such as hedge fund Bridgewater Associates which recently announced plans to deploy parts of a new fund in China. Factoring all those perspectives, things seems to be looking up for President Xi leading up to the Communist Party Congress.
Back to Bitcoin now. There have been some analysis indicating that the ban on digital currencies is only temporarily and that China will gradually start opening the doors to cryptocurrency investments under a more regulated environment. There are also rumors that China is evaluating the launch of its own digital currency which can be super interesting. That will be the subject of my next post.