If you’re not familiar with the China ban on crypto, it’s an attempt by the country’s regulators to gain more control over economic activity. The country is trying to combat capital flight and illicit transactions while creating a sovereign digital currency. It’s easy to see why they’d want to restrict crypto, but they’re also doing it for the wrong reasons. This article will discuss how China’s government is going about deterring Bitcoin mining in Inner Mongolia.
Chinese regulators are trying to exert more control over economic activity
It is no secret that China’s economic growth is waning, thanks to the slowdown in manufacturing and the overreaching of regulators. While the Chinese government is trying to foster a vibrant business sector, the country’s policies and priorities are a far cry from that. The government-controlled media screams at multinationals about the Xinjiang region and the Taiwan Strait, and officials press successful private companies to integrate CCP committees into their management and submit to Beijing’s diktats. The Chinese regime views foreign companies as a threat and the country is entering a new era of state capitalism.
Recent indicators point to a wide decline in economic activity, which is likely to encourage further negative trends. The third quarter of 2018 saw China’s economy grow at its slowest rate since the global financial crisis, while infrastructure investment shrank and the Politburo meeting confirmed that downward economic pressure is accumulating. Meanwhile, many SOEs remain slow-moving, masking potential risks for the economy. And while Chinese leaders have made headline-grabbing commitments to boost infrastructure development, it is unlikely these have been translated into real dollars spent on the ground.
They want to curb capital flight
The rise of the dollar and the subsequent weakening of the yuan are likely to cause more Chinese investors to leave the country. This could lead to real risks to the financial system if leveraged companies continue to be created. Nonetheless, China’s efforts to curb capital flight have proven to be a success, and Beijing is not likely to give up their oversight anytime soon. But how can the government combat capital flight?
One way to discourage capital flight is to sign tax treaties. Capital flight is often tempting because it doesn’t incur tax penalties. Similarly, governments can make large cash transfers more expensive by raising interest rates. However, this will increase currency valuation and therefore the cost of doing business, and will likely lead to higher inflation. China is a great example of a country that wants to control capital flight. The government wants to protect its currency, and its citizens’ finances.
They want to curb illicit transactions
The People’s Bank of China has banned cryptocurrency transactions in China, citing national security concerns and the safety of the people’s assets. As a result, foreign exchanges have been banned in China and 10 other government agencies have pledged to maintain high pressure crackdowns on crypto trading. Financial and internet companies have also been ordered to stop cryptocurrency trading, while the Bureau of Public Security has prohibited the trading of cryptocurrencies entirely.
The Chinese government is concerned that crypto-currency trading could lead to capital flight. Considering that wealthy Chinese use cryptocurrencies to funnel $50 billion overseas every year, the government is trying to prevent it from happening. In addition, promoting cryptocurrency mining and transactions will fuel the crypto craze in India. Furthermore, it could encourage the adoption of NFT and ICOs in China. But what will this mean for the rest of the world?
They want to create a sovereign digital currency
The introduction of a new sovereign digital currency in China has significant political and economic implications. The digital yuan could help China internationalise its currency and allow users of other currencies to use it as a means of payment. In addition, the US Treasury Secretary, Janet Yellen, has signaled that the Biden administration has an open mind toward a digital dollar. Although US Treasury Secretary Steven Mnuchin has shown less enthusiasm for the concept, Yellen has made it clear that she sees merits in the concept of central banks issuing a digital currency.
The central bank did not explain exactly why it is developing a digital currency, but in recent years, it has acknowledged Threat of Digital Technology as a reason to develop such a currency. In the last decade, the number of online payment services has increased, and China feels threatened by this trend. With this in mind, it makes sense for the government to consider a digital currency as a viable option to replace the fiat yuan.