When we first detailed the link between a devaluing currency, increasing restrictions on outflows of China capital, and Bitcoin, the virtual currency soared (driven by Chinese flows, just as predicted). The last few days, as China has once again started devaluing its currency, authorities once again moved to tighten capital outflows - this time through caps on credit-card withdrawals (as warned here) - and sure enough, Bitcoin has been soaring recently. Specifically, a nationwide crackdown on illegal UnionPay point-of-sale devices, has sparked capital flight (on heavy volume) through the vurtual currrency.
Having previously documented Beijing’s mad dash to tighten up capital controls in China in order to stem outflows in the wake of the PBoC’s move to transition towards a new FX regime; increasing expectations that a (much) deeper devaluation is on the horizon (blessed by The IMF) coupled with China’s efforts to manage the fallout from those expectations by liquidating hundreds of billions in FX reserves to support the onshore and offshore spots have understandably put authorities on edge, leading directly to efforts to stop the bleeding.
As we put it a few weeks ago, “while China may succeed in maintaining an orderly pace of FX depreciation, if the local population is concerned it will lose substantial purchasing power in the coming months and years, it will accelerate the capital flight from the country, forcing even greater reserve liquidation as the government finds itself defending not only the capital but also the current account, not to mention the sheer capital flight panic resulting from the crashing stock market.”
However, as we detailed here, one of the more straightforward ways of circumventing China’s official capital controls has been by “abusing” UnionPay cards. Roughly speaking, the process works like this (via Reuters):
Growing numbers of Chinese are using the country's state-backed bankcards to illegally spirit billions of dollars abroad, a Reuters examination has found.
This underground money is flowing across the border into the gambling hub of Macau, a former Portuguese colony that like Hong Kong is an autonomous region of China. And the conduit for the cash is the Chinese government-supported payment card network, China UnionPay.
In a warren of gritty streets around Macau's ritzy casino resorts, hundreds of neon-lit jewellery, watch and pawn shops are doing a brisk business giving mainland Chinese customers cash by allowing them to use UnionPay cards to make fake purchases - a way of evading China's strict currency-export controls.
On a recent day at the Choi Seng Jewellery and Watches company, a middle-aged woman strode to the counter past dusty shelves of watches. She handed the clerk her UnionPay card and received HK$300,000 ($50,000) in cash. She signed a credit card receipt describing the transaction as a "general sale", stuffed the cash into her handbag and strolled over to the Ponte 16 casino next door.
The withdrawal far exceeded the daily limit of 20,000 yuan, or $3,200, in cash that individual Chinese can legally move out of the mainland. "Don't worry," said a store clerk when asked about the legality of the transaction. "Everyone does this."
Yes, “everyone does this,” but not for long because now that the yuan deval debacle has served to accelerate the capital outflows, Beijing is set to double down on efforts to curb the degree to which capital controls are openly subverted and as WSJ reported, China “put a new annual cap on overseas cash withdrawals using UnionPay.”
Which leads us to the past week, where, as Bloomberg reports, China is now cracking down on illegal use and manipulation of UnionPay point-of-sale devices to cirumvent the limits...
A nationwide crackdown targets use of illegal UnionPay “point of service” devices used by retailers which have been altered to mask cash transactions to circumvent China’s strict currency control, South China Morning Post reports, citing a UnionPay internal memo.
Illegal use involves customers purchase goods, only to return them to retailer and receive cash, minus retailer’s commission: report
New measures require mobile POS transaction devices across China to be properly registered.
We note this is a mainland version of the previous 'tricks' that the ultra-wealthy used in Macau and these newly reported UnionPay measures may prompt greater scrutiny on Macau pawnshop business model in which cash transactions are recorded as goods purchases, analysts led by Vitaly Umansky write in Dec. 10 note. Use of illegal POS devices in Macau pawnshops, and on some casino floors, have occurred in the past, but represent only "a minuscule fraction" of dealings in Macau’s pawnshops.
Will this help to reverse the momentum? No, probably not.
The problem here - and this is something that quite a few people are still struggling to understand - is that Beijing has telegraphed a much larger devaluation, which means the pressure on the yuan will likely continue.
So yes, as difficult as this is to come to terms with, this is a scenario where China played the deval card and is looking to ever-so-gradually move from a 3% deval to an export-boosting double-digit deval, but in the meantime, Beijing must manage the pace, which means supporting the yuan via direct interventions. But the last week it appears that The IMF's decision to include the Yuan in the SDR basket has green lit another round of devaluation...
* * *
And the result is obvious, virtual currencies are surging once again as the Chinese find another route to get their savings out of the country...
It appears the moves are becoming increasingly aggressive among those wishing to get their capital out, as we detailed here, it is starting to directly correlate with Yuan movements...
And most clearly on increasingly heavy volume... Notice the surge in October and again now as capital controls increase once again...
So, evidently, the last week or two suggest, perhaps more importantly, that China easing (and outflows implict from further devaluation) now appears to go straight to Bitcoin.
As Overstock's Chairman noted previously: gold is great, but tough to transport; thus, forcing Chinese into Bitcoin as we previously explained:
As we concluded previously, while China is doing everything in its power to not give the impression that it is panicking, the truth is that it is one viral capital outflow report away from an outright scramble to enforce the most draconian capital controls in its history, which - as every Cypriot and Greek knows by now - is a self-defeating exercise and assures an ever accelerating decline in the currency, which authorities are trying to both keep stable while also devaluing at a pace of their choosing. Said pace never quite works out.
So what happens then: well, China's propensity for gold is well-known. We would not be surprised to see a surge of gold imports into China, only instead of going to the traditional Commodity Financing Deals we have written extensively about before, where gold is merely a commodity used to fund domestic carry trades, it ends up in domestic households.
However, while gold has historically been the best store of value in history and has outlasted every currency known to man, it is problematic when it comes to transferring funds in and out of a nation - it tends to show up quite distinctly on X-rays.
Which is why we would not be surprised to see another push higher in the value of bitcoin: it was earlier this summer when the digital currency, which can bypass capital controls and national borders with the click of a button, surged on Grexit concerns and fears a Drachma return would crush the savings of an entire nation. Since then, BTC has dropped (in no small part as a result of the previously documented "forking" with Bitcoin XT), however if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.