Chinese Monetary Manipulation Endangered by Bitcoin

April 29, 2014
Chinese Manipulation Endangered?

The PBOC must hate cryptocurrencies. Their constant negative statements lead a reasonable hack to reach this assumption in any event. Why are they so anti Bitcoin? What potential danger does a cryptocurrency pose to China, the World’s second largest economy and most populous country?

When you look at the facts, Bitcoin could well have the potential to pose quite a significant level of threat to China’s monetary policy. Let me explain.

Let us begin by looking at the Peoples Bank of China, hereinafter, the PBOC. Now the PBOC is huge, it holds and controls reserves of $3.2 Trillion Dollars; it controls and regulates monetary policy, as well as all financial institutions in mainland China.

It holds, not to put too fine a point on it, more assets than any financial institution in history. China’s PBOC is a big deal. When it takes a dislike to a particular organization, idea, or product, then it brings huge power to bear. Now, the law on the PBOC says: “that the objective of monetary policy is to keep the value of RMB stable to contribute to economic growth.”


China’s take on the Financial Crisis

[dropcap size=small]T[/dropcap]here is a significant level of over consumption in the US and this fact, allied to a high level of savings in the emerging economies of Asia, has acted to place China in a position of financial strength.

Now, when the sub-prime property crisis in the US went global, through the use of conglomerate financial instruments such as complex derivatives, China got a fright.

The PBOC had been quietly building up the State’s reserve levels for a decade, and when the sub-prime crisis happened the PBOC looked at China and found that there was evidence of overheating in the Chinese property market. With this knowledge, the PBOC moved to implement conservatives policies to ensure that inflation and growth levels remained stable. This happened because China sees itself as a developing, or transitional economy, and inflation is seen as the greatest macroeconomic threat to China’s development.

Inflation would mean higher prices; that would mean lower levels of savings; and this would lead to wage demands, wage demands would render exports less competitive, and the PBOC knows that China’s future is dependent upon exports.

China is moving towards finally being a market economy, the revolution we are seeing is the same one we saw with the collapse of the USSR following the economic reforms. China’s revolution is economics led, and, just, happening at a slower, more planned rate.

The PBOC needs the monetary policy to be planned and conservative and sees this as being important. The PBOC acts to maintain price stability by a policy of hands-on management of the financial system, and this has led to a policy of the pre-emptive management of, what it sees as, financial and systematic risks. It chooses to do this to prevent the development of a crisis rather than when the crisis has arisen.

How China is staying competitive

In order to ensure that China’s exports remain competitive, the PBOC has followed an active policy of devaluing the yuan relative to the dollar. This has proved to be a successful policy, and China is projected to pass America as the World’s largest economy during the 2020’s. China will have the world’s largest GDP, but she won’t have the world’s largest per capita GDP for quite some time.

To recap, China hates, and fears, inflation; the PBOC has seen what happened to the Japanese economy, and this has led to ultra conservative financial management policies from the PBOC.

Chinese workers earn relatively low wages, within a developing country, with relatively low prices, and that is the secret of China’s success. Chinese monetary manipulation manifests as such, the Yuan, or RMB, is a pegged currency, it has been allowed to inflate slightly over the past decade but it is currently undervalued by at least 30%.

Is Bitcoin a threat to China?

Imagine that there was a second currency; a decentralized currency that couldn’t be pegged. Imagine that workers could work for, trade, and sell stock in order to receive this currency. Imagine a trading nation, no, imagine an export nation that found it had a second currency that the State could not control. This currency would act as a conduit to export sales, and it would facilitate Chinese workers selling their stock, and their labor, at a higher price than they could earn in China; they would be selling to people who would buy and invest at a lower price than they could get in the US.

Individual wealth would increase and this could potentially lead to increased demand, to increased prices, to a potential property bubble. Why would someone work for $20 a day when they could choose to earn $30?

Bitcoin as an alternative currency threatens the PBOC by undermining their ability to manage their currency. Bitcoin could simply never be successful in China; it is only in the last few years that we have developed an economic framework that can accept Bitcoin, and it is simplistic to expect an export led, conservatively managed economy, with a pegged currency, to be in a position to do the same. The PBOC is many things; but it is not a stupid organization, it will not permit Bitcoin to threaten China’s competitiveness. Bitcoin value is now suffering and we can not reasonable expect China to change this policy. China is not in the same place as the US yet, but it’s getting there, and Wall Street is watching.

Last modified (UTC): April 29, 2014 13:23

PJ Delaney @P.J. Delaney@delboyir

Masters in Public Administration, Bachelors in Mgt., I live in Ireland, I have a bit of a background in Economics and lots of opinions on everything else.