China's Interest in Bitcoin

Published on December 2nd, 2013 by Asif Punjwani

By ASIF PUNJWANI - Dec. 2, 2013

Looking at fiatleak.com, one cannot ignore the fact that China is one of the main buyers of Bitcoin. Chinese officials also have done their part of informing the public about Bitcoin. But why would China support a decentralized currency over which it lacks any authority?

One of the reasons is foreign reserve diversification. China holds over $3.5 trillion in reserves and since they have a policy of pegging to the dollar, China is expanding its money supply proportionally to that of the US to keep the USDCNY price range in a band. When United States runs a trade deficit with China, US prints treasury bills and hands it to China. China then turns around and spends some in the Global economy, including the United States. These are also called ‘surplus receipts’, maybe to make them sound pretty. The following chart shows how tightly China’s M2 follows the US M2.

China simply cannot not buy US treasuries and make its export-based economy fall apart. China followed an export-based economy in an attempt to copy Japan's successes. Seeing Japan in a deflation for over 2 decades, China wants to do something different. Problem is, China is stuck with an export-based economy because its ‘consumers do not have the buying power’, or so the mantra goes. In other words, constant devaluation by the Peoples Bank of China is slicing profit margins from its local companies and businesses. Purchase power, via devaluation, is taken away from its citizen and handed back to the United States, via T-Bill purchases.

Seeing Japan with its $1.2 trillion reserves and experiments of Abenomics, China is desperate to trying something, anything! China wants to switch to a more balanced economy by stopping the bleeding of purchase power from its consumers. This is where Gold, Silver and Bitcoin comes in. The State, in desperation, is trying to promote metals and bitcoin among its citizens, so it doesn't have to drastically change its monetary setup with the United States. China is now reducing capital control and allowing its citizen to directly bid on Bitcoins using Yuan on the Chinese exchange.

This way China wouldn't have to change its policy of buying US treasury, nor would it have to abandon its policy of pegging to the dollar. The more the US M2 expands, the more the Chinese M2 expands, only difference is, this time around, those extra Yuans will get soaked up by Bitcoin purchases by its citizens instead of causing further inflation in its local markets.

As Bitcoins appreciates, this will lift up the average Chinese bitcoin buyers/businesses, creating a positive network effect locally or even globally. This concept is very similar to Ben Bernanke’s Helicopter speech, but allowing Chinese citizens to buy bitcoins is far more practical than dropping dollars via helicopter to fight deflation. Since the dollar is still the world reserve currency, those Chinese reserves may eventually be used to settle the International net payment difference for its local Bitcoin exchange.

Interestingly, other major buyers of Bitcoin include Germany, Russia and United States. Every one of these countries is a net exporter. Yes! including the United States. We export dollars (cash & TBills). Looking at the list of countries running trade surpluses, all Middle Eastern Petroleum exporting countries are missing in action. They may very well be the last shoe to drop. Lets just hope that our exported dollars aren't imported back to the US shores till Bitcoin finds global price stability.

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