Why is Bitcoin booming in China?

Aiga Gosh is a researcher of international law at China University of Political Science and Law. In this article, she briefly analyzes China’s economic development history, currency controls, and the rise of Bitcoin in the country.

China's monetary policy and currency have been in chaos for a long time. China was unified only in 1994 , when the official exchange rate abandoned the dual-track system and the official RMB exchange rate and foreign exchange swap price were officially aligned.

Tight controls on capital flows across its borders allow the Chinese government to direct the economy and control commerce.

China’s monetary policy is gradual, as economists pointed out as early as 2010. In 2009 , China proposed reforms to allow goods exported to China to be priced in yuan rather than dollars, and to allow earnings to be kept in overseas corporate accounts.

China has also signed currency swap agreements with Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea. In addition, it has begun allowing certain countries to pay for Chinese imports in renminbi, and now allows companies headquartered in Shanghai and four cities in Guangdong Province to pay for goods imported into China in renminbi.

What are the steps to capital account convertibility? While authorities have weighed the pros and cons of how much to open up capital flows, Bitcoin seemingly did it overnight.

Why is Bitcoin successful in China?

One reason for Bitcoin's success in China is that the country already has experience with virtual currencies, such as Q coins, which were launched in 2002 .

Q coins are issued by Tencent QQ , an instant messaging software service company that provides a variety of services such as online social games, music, shopping and microblogging to more than 8 million users.

In my experience, when asking Chinese people for their email addresses, about 4 out of 10 will answer with the address of the QQ server.

Q coins can be purchased at one yuan per coin through banks, telephone or Q cards , and can be used to purchase Tencent services such as electronic greeting cards and online games.

Now people have the opportunity to use Bitcoin to transfer funds out of China and trade with international merchants and customers. But it is important to note that the current limit for overseas investment is 350,000 RMB (about 50,000 USD).

Chinese exchanges like OKCoin , BTCC , and Huobi do not charge any fees when trading, making it faster and more affordable to use Bitcoin than traditional currency transfers like Western Union.

This is of great significance to the millions of Chinese studying and working abroad.

Zennon Kapron, owner of Shanghai-based consulting firm Kapronasia and a financial technology expert, said in an interview that China's experiments in the field of Bitcoin are mainly in the manufacturing and operation of trading and mining equipment. He believes that under such circumstances, Bitcoin is unlikely to trigger a financial revolution in China.

According to Kapron , in order to work in China, Bitcoin must be easy to use and effective in everyday transactions for the general public. This is challenging, as China's investment costs are lower than in the West and the platforms that dominate the mobile and non-bank payment market, such as Alipay, WeChat and Tenpay, are more affordable.

Since early 2015 , thousands of stores in Taiwan have launched Bitcoin purchasing services, such as FamilyMart , OK mart , Hi-Life stores and the largest convenience store chain 7-11 .

Customers need to create an order for bitcoin using an app or a web wallet from Maicoin and BitoEX (main competitors of Taiwan Bitcoin Services), then hand over cash to the store owner to complete the transaction, or use a regular bank ATM. At the store, customers need to present a barcode on their phone or tablet for the convenience store cashier to scan.

This presents a great opportunity for mainland Chinese who are waiting to see whether Bitcoin’s user base and daily usage will increase.

Regulatory system

In China, one of the biggest obstacles is regulatory approval. The People's Bank of China issued a statement on Bitcoin on December 5, 2013 , which prohibits financial institutions and third-party payment processors from directly handling Bitcoin. Bitcoin is legal for individuals to own and trade, and trading platforms can continue to operate.

Following the announcement, bitcoin prices worldwide fell by more than 20% , and the announcement had a significant impact on the market share of domestic bitcoin transactions.

It is foreseeable that the Chinese government will make this cautious decision, in other words, it is also to remove direct risks from the financial system, as this may undermine China's economic growth.

In my opinion, the Chinese government will first closely monitor the development of Bitcoin in the world, and then adopt best practices by adjusting Bitcoin to make it more suitable for Chinese characteristics.

As for now, it is clear that the " Bitcoin fever " is not over yet, and it will be interesting to see how it develops in China. The main question now is: will Bitcoin affect China's current financial system and currency usage? If so, what political impact will this have?