Rumours coming out of China hinting at further draconian moves against crypto in the country are back with a vengeance, and as usual there is no hard evidence to back them up.
Nevertheless, that shouldn’t blind investors to the changes at the top in China, which may yet have a profound impact on the future direction for crypto in the world’s second-largest economy.
The head of China’s central bank, Zhou Xiaochuan, bowed out last Friday after 15 years of service. His replacement will be confirmed on 19 March but no one outside of the ruling party elite knows who it is. One thing is certain though – whoever it is will have less wiggle room than before as President Xi Jinping seeks to centralise power even more than it already is.
On the face of it, the People’s Bank of China’s (PBOC) power is expanding. The China Banking Regulatory Commission and the China Insurance Regulatory Commission are being merged and their powers handed over to the PBOC.
Yet this should be seen as part of a wider policy to centralise authority, especially in the wake of Xi’s power grab achieved through the abolition of term limits for the presidency.
Chi Lo, senior economist at BNP Paribas Asset Management in Hong Kong, in comments on Bloomberg TV today, said: “It’s very clear Beijing’s policy direction is that it wants to centralise all departments, ministries, officials and governors to Beijing’s central direction.”
Former bank chief Zhou had been known to favour liberal market policies but was unable to push through on that agenda. Now centralisation is the order of the day, with the new governor having less independence on policy matters than his predecessor.
OK, so what does any of that have to do with crypto. Quite a lot as it happens.
Before Zhou departed he attended to some housekeeping matters. On 9 March, you will recall, he declared that a central bank digital currency (CBDC) was “inevitable” but that China wouldn’t be rushing into it, with Zhou warning the country should be careful that a cash replacement does “not conflict with the current financial order” and that a digital currency must “serve the real economy”.
The bank has not decided whether to use blockchain for its CBDC but there seems to be a consensus that digital cash is the way forward.
In contrast, on cryptocurrencies – in their current form at any rate – he was fairly damning. “Lots of cryptocurrencies have seen explosive growth which can bring significant negative impact on consumers and retail investors. We don’t like [cryptocurrency] products that make huge opportunity for speculation that gives people the illusion of getting rich overnight,” he explained.
Crypto is still alive in China
The banning of initial coin offerings and exchanges in China has not killed off the industry. Far from it. Part of the explanation for the rise of Binance, which exited mainland China in response to the ban, is the spill over of investors from mainland China, despite the exchange banning access from Chinese IP addresses in September 2017 – to which crypto investors have responded with the cry: “VPN is our friend”.
Chinese exchanges OKEx and Huobi shipped out to Hong Kong when the ban came in and have seen business boom, with new clients coming in from around the globe but also from China.
It should also be remembered that over-the-counter trading of cryptocurrencies was never banned.
So the authorities haven’t killed off crypto yet, which begs the question: what’s the next move for crypto in China?
Clearly the financial authorities have chosen the prohibition route for regulation and making life tougher for the miners is part of that. But it could be that once the central authorities feel they have firm control of the wider economy, which is what the centralisation impulses are determined by, then we could see an opening up of the sector, albeit directed and guided from above.
China’s policymakers will be acutely aware of developments in Japan, and so will its citizens because Japan is a top destination for Chinese tourists. The crypto sector has been credited with adding some juice to the Japanese economy still struggling to break out of years of stagnation.
For now though, crypto is bad in Beijing’s eyes because it adds to the speculative froth already present in other sectors; it is the last thing the financial authorities need as they try to figure out how to deflate the real estate bubble and rationalise the state sector without triggering labour unrest.
New governor may use crypto to make his mark
That means there is probably more anti-crypto legislation to come in the near-term and the new governor may wish to run with the crypto clampdown baton as a signifier of vigour.
Which brings us back to the subject of the latest from the China rumour mill that has it that a big announcement is expected “around March 15” that could be “catastrophic for bitcoin” by forcing the closure of all miners in the country.
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Well, there has been no announcement as the sun comes down on the 15th in the East, which suggests this latest rumour it a re-run of the January ones that also came to nothing, but they did have a grain of truth. January didn’t see the banishing of miners but it did concentrate minds and began the migration to other climes.
The Huobi-sourced rumour this time round talks of a “People’s bank document”, suggesting this wouldn’t be local authorities restricting electricity usage by crypto miners and instead points to something altogether more serious and national in scope. We’ll have to wait and see. It’s another element of uncertainty the crypto markets could do without right now.
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