Increasing rates of Chinese capital outflows over the past few months are presenting the cryptocurrency space with an unprecedented opportunity as citizens of one of the world’s most strictly regulated jurisdictions find ever more ingenious ways to get around financial movement restrictions.
China’s Capital Restriction Problem
In theory, China has perhaps the most stringent capital restrictions of any major world economy. Regulations state that individuals are not allowed to move more than $50,000 out of the country and companies are only allowed to exchange yuan for other currencies with approval from authorities. This is a rule that dates back to the era when Chinese industrialization was being developed under the principle of national self-reliance and conservation of scarce foreign reserves. These days, critics claim that such capital restrictions serve no purpose other than to coerce wealthy Chinese nationals to toe the communist party line under threat of losing their assets forcibly domiciled in the country.
In practice, even the Chinese government has a limit to how effectively or extensively it can enforce such regulations. Over the past 10 years, a vast number of Chinese elites have found ways to move their money abroad, with their extensive real estate holdings even becoming a subject of political controversy in Vancouver and London due to perceived inflationary pressure on local housing markets. This is not to mention a significant number of well-funded Swiss bank accounts held by Chinese nationals.
Opportunity For Crypto
While the central government with its tremendous surveillance capacity is not unaware of the various creative ways Chinese nationals use to export capital beyond the $50,000 limit, it is only likely to carry out a thorough crackdown in the highly unlikely event that foreign reserves become depleted. With over $1 trillion in American bonds on its books, such a scenario is extremely remote, and this creates a juicy opening for cryptocurrencies.
Chinese trade data from last month shows that capital outflows increased significantly. The last time a surge of this level happened, bitcoin embarked on a prolonged bull run starting from $200 and eventually culminating at its $20,000 all-time high as Chinese traders and exporters used cryptocurrency to move large amounts of money out of the country.
Going by last month’s trade data as well as the current rise of the Yuan, it is likely that over the next few months, Chinese money will make its way into crypto, which may herald the start of another Bitcoin bull run.