Date
20 October 2017
Bitcoin prices have soared amid a speculative frenzy among Chinese investors. Photo: Reuters
Bitcoin prices have soared amid a speculative frenzy among Chinese investors. Photo: Reuters

Risks rise as Chinese inflate the bitcoin bubble

China’s yuan has been one of the most speculative currency investments in the world. But now another unit is beginning to take that position — the bitcoin digital currency.

China drew the attention of all the bitcoin users and followers in early November when BTC China — the bitcoin exchange in the country — became the world’s biggest digital foreign exchange, handling more than 100,000 bitcoins in a week and processing 36,000 bitcoins in 24 hours.

BTC China kept notching new records, as it handled more than 100,000 bitcoins exchanges per day just a week later.

With the high transaction volume in China, price of this digital note has been climbing. According to the webpage of BTC China, bitcoin price hit 2,444 yuan (US$401.3) on November 12, which was the all-time high at that moment. The price has since soared to 6,989 yuan (US$1,147).

What makes the Chinese turn to bitcoins rather than yuan?

Before answering this question, we should take a look at how the bitcoin system works. The bitcoin is a system which allows people to do anonymous currency transactions; no one will come to know about the payment or about all other information related to the payment, including who sent it, who received it.

This anonymous system is attractive to Chinese especially the ones who want their wealth hidden. After President Xi Jinping vowed to step up the anti-graft fight in the Communist Party and the government, people who had engaged in questionable dealings were worried that their wealth would get exposed.

Chinese love investing in properties. Some corrupt officials who were sent to jail were found owning many properties in different cities all over China.

Liu Zhijun, China’s ex-railway minister, who was sentenced to death with a two-year reprieve, was found to have 374 properties across the country.

Property was one of the best instruments for corrupt people to hide their money. But when China started introducing various housing curbs, some people found that they could not treat property as a good investment any more.

More than 8,100 houses and 25,000 vehicles were returned to the government by Armed Police Force in order to follow the policy of Xi, state news agency Xinhua reported earlier this month.

These are the numbers from one single department in China. The whole picture of covered wealth of corrupt Chinese would be astonishing, to say the least.

Now, if an investment can be done anonymously, and provides good return, Chinese would naturally be interested in it. That’s why the bitcoin has drawn the attention of Chinese speculators.

Bitcoin is getting popular in China, with people now apparently even able to buy a house with the digital currency. IT giant Shanda, the developer of Zhangjiang Hi-Tech Park in Shanghai, has promoted its properties through the acceptance of bitcoin.

Rumors had it that the exchange rate was ‘fixed’ by Shanda at 1,000 yuan to one bitcoin while at that time one bitcoin was traded at 1,200 yuan in BTC China. Three hundred apartments in soon-to-be-built buildings ranging from 42 to 81 square meters were sold at 800 to 1,000 bitcoins; that is around 800,000 yuan to 1 million yuan per unit.

Report said the flats were sold out within minutes. There is no evidence that the transactions were done with bitcoin but if that was indeed how the deals took place, the developer would be really glad since the value of the bitcoin has soared to almost 7,000 yuan. The profit from the bitcoin appreciation would be great.

In a US hearing held by the Senate Committee on Homeland Security and Governmental Affairs, federal regulators and law enforcement agencies have said that digital currencies and internet anonymity presented serious challenges, but no one is interested in regulating them.

As of now, the Chinese government has said nothing about the legitimacy of the virtual currency.
That is the reason why the bubble is getting bigger and bigger. But bubbles will burst some day.

Last year private lending in Wenzhou was a classic case of a bubble bursting. Many merchants in Wenzhou were all into private lending. They lent out money with interest rates much higher than that offered by bank fixed deposits. Interest rate reached 60 percent at that time and many Wenzhou people were crazy about lending out money. However, when the credit market collapsed, people were in deep trouble and some even chose to commit suicide.

The bitcoin situation in China is in some ways a mirror of the Wenzhou disaster. If the government stays silent about the situation, Chinese speculators will make the bitcoin bubble grow larger until it eventually bursts.

RC

Vivian Chung is a financial journalist with more than 10 years’ experience. She writes mostly on financial issues relating to Hong Kong and China

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