Primer on China’s currency controls
As part of China’s monetary strategy to peg the yuan against the dollar, it is mandatory that the People’s Republic control capital flows into the country. The theory is part of the international economics concept called the “impossible trinity.”
According to the theory, it’s impossible for a government to maintain all three of the following at the same time:
- A fixed foreign exchange rate (a peg)
- Free capital movement
- The ability to set interest rates
The PRC chose to fix the yuan’s exchange rate against the dollar, for trade purposes, while retaining the ability to set interest rates to stimulate the economy.
As a result, Chinese citizens are restricted from moving more than $50,000 RMB out of the country in a given year. Moreover, currency exchanges and transactions into and out of the country are closely monitored by the Chinese central bank.
Black market for moving yuan
As a result of these controls, there is a large black market for moving yuan out of the country. This makes sense given that interest rates inside China are kept artificially low, meaning money can earn a higher return outside of the country.
As a result, banning Bitcoin in China isn’t a choice, it’s a necessity. For China to retain its capital controls it must ensure mediums of exchange, like Bitcoin, are restricted, said NEO founder Da Hongfei at the 2019 NEO Community Summit.
But there’s another threat to China’s monetary regime—Tether.