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Capital Restrictions and Floundering Economy Cost China $50B Over the Past Year

Cryptocurrency has a history of lifting people from stringent economic situations caused by government policies. In China, citizens have discovered this characteristic, and appear to have been using it over the past year.

Tether and the Hedge Against a Stagnant Economy

This week, CNBC reported that China had lost about $50 billion in capital over the past year, with citizens moving their money into cryptocurrencies as a means of hedging against the struggling economy.

Citing a report from blockchain analytics company Chainalysis, the news medium explained that Chinese citizens had converted their cash into cryptocurrencies. Explaining further, it revealed that many have grown suspicious of the economy’s strength and the Yuan’s stability.

Amid the current trade war, China’s economy has taken some significant hits. Two months after President Trump announced higher tariffs on $250 billion worth of Chinese goods, the country’s exports to the United States understandably fell by 6.5 percent. At the same time, imports from the United States dropped by 19.1 percent.

Even more alarming was the drop in China’s producer price index. The metric turned negative from the first time in three years, dropping 0.3 percent from flat levels. The coronavirus pandemic has only made things worse. Citing data from the National Bureau of Statistics, The Financial Times reported that China’s industrial output fell by 13.5 percent in 2020’s first two months. That fall marked the most significant tumble on record, with the urban unemployment rate also surged to 6.2 percent in February.

Given that China was the origin and epicenter of the virus for a while, this was expected. The Yuan has also been somewhat unstable against the dollar this year, with Trading Economics data showing the currency dropping as low as $6.8 in February.

This has created antsy investors. While many would have moved their assets to dollars, the government has an annual capital restriction. Imposed in 2017, the restriction prevents private individuals from exchanging over $50,000 in foreign currencies.

So, they’ve turned to cryptocurrencies instead. Chainalysis noted that these conversions have been possible using Tether — the top dollar-backed stablecoin, saying: 

“In total, over $18 billion worth of Tether has moved from East Asia addresses to those based in other regions over the last 12 months. Again, it’s highly unlikely that all of this is capital flight.”

Crypto’s Proven Track Record Against Capital Restrictions

This isn’t the first time that cryptocurrencies would come to aid people in vulnerable economies. Last December, peer-to-peer cryptocurrency exchange LocalBitcoins saw the volume of Bitcoin traded on its platform hit an all-time high of 22 million Argentinian pesos ($366,990 at the time) for the week ended December 8.

The rise was amid economic strains that Argentina had suffered. The economy was expected to contract by 53 percent for the year. Thus, many had developed a reliance on the dollar. 

The result was the Peso falling by 85 percent against the greenback in five years, as people continue to convert their savings and disposable income to the currency. Newly-elected President Alberto Fernandez introduced a policy to restrict the dollars available to savers from $10,000 to $200 to remedy this Still, the citizens managed to evade it using Bitcoin.

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      Jimmy has been following the development of blockchain for several years, and he is optimistic about its potential to democratize the financial system.