Capital Flight and the Investigation into Chinese Bitcoin Exchanges

Bitcoin’s price fell around 33% last week amid concerns on the part of the People’s Bank of China that “possible market manipulation, money laundering, unauthorized financing and other issues” were occurring through bitcoin use. The PBOC has launched investigations into several of the largest bitcoin exchanges: BTCC, OKCoin and Huobi.

Fear of a crackdown on the digital currency caused panic and allowed the price to slide. China has very strict capital controls but is there evidence to support that bitcoin is being used primarily for capital flight?

Is Capital Flight through Bitcoin a Major Issue in China? 

The price of bitcoin is shown to follow the price of the Chinese yuan when measured in terms of the US dollar.

To spur economic growth the PBOC has looked to devalue their currency to boost exports as a devalued yuan creates a cheaper option to buy goods from. The chart above seems to support the argument that wealthy Chinese are using the digital currency to protect the value of their money but because the data set is so small it is difficult to be statistically certain.

For the most part, bitcoin is a non-correlated asset to most other investments but there does appear to be inverse correlation to the Chinese yuan. 

If bitcoin is being used for capital flight in China, then the price gap between exchanges would shrink as buyers sell on foreign exchanges. Also arbitrage is exceedingly difficult for household traders using the legacy banking system. 

The more time that passes and assuming the PBOC continues to devalue the yuan there may be even more evidence that capital flight into bitcoin is occurring. That said, one of the main reasons for capital flight is to preserve wealth by investing in foreign economies. Bitcoin in and of itself can be used as a store of value without the need to siphon money out into foreign investments. 

As it stands now there is no clear evidence and the Chinese government has made no steps forward into questioning the legality of bitcoin. It’s also important to note that these investigations aren’t exclusively targeting crypto exchanges but also includes exchanges from other industries. 

Richard Schultz

Discovered Bitcoin in late 2013 and with it found a new passion in life. Completed a degree in economics at The College of New Jersey. My thesis was on Bitcoin. I'm also a part-time crypto trader.