Why China won’t reverse its crypto stance anytime soon

Written by Kapronasia || July 11 2023

One should always take what crypto diehards say with a few shakers of salt, but especially when it comes to liberalization of China’s digital asset policies. A popular narrative right now is that because Hong Kong is reimagining itself as a crypto hub, that this experimentation will pave the way for mainland China to do the same. While a relaxation of Beijing’s crypto controls cannot be ruled out, it remains unlikely because of the associated systemic financial risk, concerns about money laundering and the central government’s preference for strong capital controls. The selection of Pan Gongsheng as the top Communist Party official at the People’s Bank of China (PBOC) adds weight to the argument that crypto liberalization remains elusive in the mainland.

This move potentially puts Pan in the running for the top job of PBOC governor and appears to signal that the Chinese central bank remains crypto skeptical. Pan is currently the head of the State Administration of Foreign Exchange, the agency that oversees foreign-exchange rules, as well as a PBOC deputy governor. The PBOC banned all crypto transactions in 2021 and in general has taken a dim view of decentralized virtual currencies since Beijing began a crackdown on them in late 2017.

As it so happens, Bloomberg dug out a speech Pan made in 2017 in which he quoted an analysis Kedge Business School professor Eric Pichet. “If you sit by the river and watch, one day the corpse of Bitcoin will float in front of you,” Pan said, adding that he felt “a little scared” contemplating what might have happened if China had not cracked down on crypto.

In June 2022, the Chinese state media Economic Daily warned that Bitcoin’s value could fall to zero in a commentary, describing it as “nothing more than a string of digital codes,” with returns that “mainly come from buying low and selling high,” adding that a collapse in investor confidence or the banning of Bitcoin by “sovereign countries” would cause the most valuable cryptocurrency to return to its original value, “which is utterly worthless.”

Thus far, Bitcoin has defied that and other dire predictions. In the past year, it was lowest price was about US$15,000, but it is now trading at around US$30,000 – though this is well below the all-time high of US$69,000 in November 2021.

We reckon the jury is still out on Bitcoin and crypto in general, but for China’s financial regulators and its political leadership, there aren’t any compelling reasons to relax restrictions. China is hardly alone in this regard. India takes a dim view of crypto as well, while the U.S. remains on the fence in many regards.

As for Hong Kong, it is important to remember that under one country, two systems, the city can have a very different financial services sector than on the mainland. This serves both the mainland’s and Hong Kong’s purposes. Crypto may indeed flourish in Hong Kong, but that does not mean, the same will occur on the mainland.

Consider capital markets. While the Shanghai and Shenzhen stock exchanges have made some changes in recent years, the regulations remain more restrictive than in Hong Kong – and there is no expectation that they will ultimately be regulated in the same way as the Hong Kong Stock Exchange.

We expect that crypto’s development in Hong Kong could be similar.