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China’s crypto crackdown shouldn’t have come as a surprise

May 20, 2021, 12:36 PM UTC

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On Tuesday, Chinese regulators announced a raft of new rules barring financial institutions and payment companies from providing services related to cryptocurrencies.

The restrictions—unveiled in the form of a joint statement from the National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China—reiterate and expand prohibitions on cryptocurrencies Beijing issued in 2017.

News of the added rules sent global crypto markets swooning. Bitcoin plunged to near $30,000 in early trading Wednesday, down from around $40,000 at the beginning of the day. Ether, Ethereum, and meme-stock-turned-cryptocurrency Dogecoin all sank more than 20%. The selloff was so frantic it briefly crashed the systems of the world’s two largest crypto trading platforms, Binance and Coinbase. (The cryptocurrencies recovered some of their losses on Thursday.)

The crypto craze showed signs of peaking before Tuesday—battered in part by crypto fanboy Elon Musk’s declaration last week that Tesla Inc. won’t accept payment in Bitcoin after all because of environmental concerns.

Beijing’s crackdown accelerated the rout. And yet it shouldn’t have come as a surprise.

China doesn’t completely ban cryptocurrencies; it allows its citizens to hold and trade them. But financial regulators in the world’s second-largest economy have clearly and consistently signaled their hostility towards private digital currencies since 2013, when they forbade banks and payment companies from providing Bitcoin-related services to clients and customers.

China tightened those restrictions in 2017 by outlawing Initial Coin Offerings, prohibiting cryptocurrency trading platforms from exchanging legal tender for cryptocurrencies, and barring financial firms and payment companies from providing services to cryptocurrencies including opening accounts, trading or clearing.

Little wonder that, as Reuters reports, by July 2018, 88 virtual currency trading platforms and 85 ICO platforms had withdrawn from the Chinese market.

Tuesday’s directives tighten existing restrictions. The three state-backed financial associations warned member institutions that they must not accept virtual currencies for payment or settlement, provide exchange services between cryptocurrencies and the yuan other foreign currencies, or issue crypto-related financial products.

The associations warned that cryptocurrencies are “not supported by intrinsic value” and must not be classified as money. Per the association’s statement: “They should not and shall not be circulated on the market as a currency.”

One reason Chinese regulators take a dim view of cryptocurrencies is that they’re volatile and high risk. The financial associations’ warning states that concern plainly: “The prices of cryptocurrencies have fluctuated wildly recently,” it said. “Speculation has returned, which seriously damages people’s asset safety and disrupts normal economic and financial order.”

That’s a view that’s increasingly shared by financial regulators in the U.S., where it’s easy for retail investors to purchase cryptocurrencies, and crypto exchanges are listed on public markets.

But China, unlike the U.S., has a closed capital account. Beijing fears cryptocurrencies enable its citizens to evade rules prohibiting individuals from transferring more than the equivalent of $50,000 out of the country in any given year.

Moreover, Chinese officials see cryptocurrencies as a direct threat to their plan to introduce a digital version of the yuan controlled by the nation’s central bank. As the Wall Street Journal‘s James Areddy explains here, Beijing hopes the digital yuan will provide a powerful new tool for collecting information about currency transactions at home—and someday challenge the supremacy of the U.S. dollar as the preferred currency for global exchange.

The crypto rally may still have plenty of room to run, but Beijing is definitely not onboard.

More Eastworld news below.

Clay Chandler
– clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Nicholas Gordon. Reach him at nicholas.gordon@fortune.com

EASTWORLD NEWS

"I lack some of the skills that make an ideal manager"

In an unexpected move, ByteDance CEO Zhang Yiming announced that he would be stepping down at the end of the year. This decision comes as ByteDance, one of China’s most valuable start-ups, is preparing for a long-anticipated IPO, reportedly delayed due to U.S.-China tensions. Zhang stated that he wished to focus on longer-term initiatives rather than day-to-day management of the company, but greater pressure on China’s tech sector from regulators have led to other interpretations of Zhang's decision. Fortune

Deal or no deal?

The EU-China Investment Deal has been on life-support for several months, and it may finally keel over when the European Parliament votes today on a motion to freeze progress on ratifying the agreement. The motion is backed by major European political groups, and is widely expected to pass. The motion is presented as a response to sanctions on European individuals and organizations imposed by Beijing in March. South China Morning Post

Blocked imports

The United States Customs and Border Protection Agency revealed that it had blocked a shipment of Uniqlo shirts from entering the United States in January on concerns that they were made using forced labor in Xinjiang. Fast Retailing, Uniqlo's parent organization, denies any connection to the Xinjiang Production and Construction Corps, increasingly the target of human rights concerns outside of China. Use of cotton from Xinjiang has become a flashpoint in fashion retail, with companies like H&M and Burberry increasingly torn between Western and Chinese public opinion. Bloomberg

A crackdown on coal-powered crypto

Inner Mongolia announced it would suspend crypto mining before the end of April, but now the province says it will further investigate miners as it comes under pressure to meet its environmental targets. The province, China’s second-largest coal producer, has been a popular location for crypto miners seeking cheap power. Miners disguising themselves as data centers and those illegally tapping power supplies are specific targets of the new campaign. South China Morning Post

Asian resistance to net-zero 

Officials throughout Asia have dismissed a call from the International Energy Agency to halt all investments in coal, gas and other fossil fuels in order to achieve net-zero emissions by 2050. An official at Japan’s Ministry of Economy, Trade and Industry noted that the country “needs to protect its energy security,” balancing it against future emissions targets. Reuters

A new "hermit kingdom"?

Australia’s government has come under criticism after officials admitted they may keep borders closed until mid-2022. Many observers have used “Hermit Kingdom”—a term coined in Foreign Policy this month—to describe Australia’s border policy. This comes as other attempts to re-open borders have struggled, including the second suspension of the Hong Kong-Singapore travel bubble and Taiwan’s ban on non-resident foreign arrivals, earlier this week. The New York Times

MARKETS AND MOVERS

China MobileThe Chinese telecoms company has announced plans for an estimated $6 billion IPO in Shanghai. The announcement comes days after the firm (along with two other Chinese telecoms companies) were delisted from the New York Stock Exchange as part of a Trump-era investment ban. 

HuitongdaThe Alibaba-backed e-commerce platform is considering an IPO in Hong Kong that might raise as much as $1 billion. Alibaba invested in the rural-focused e-commerce platform in 2018 as part of an effort to reach into lower-tier areas.

Qantas Australia's Qantas expects to make a profit in the coming year, bolstered by stronger-than-expected domestic travel. Domestic travel has been a rare bright spot for some airlines as the wider industry suffers from international travel restrictions. Qantas’s announcement is in stark contrast to the struggles of other carriers, like Singapore Airlines, which recently announced a $3.2 billion annual loss for the past year.

The Development Bank of Japan The government-owned bank plans to commit 40% of its future investment to funding based on ESG factors over the next five years. The DBJ states that it would support companies in hydrogen-based energy, EVs, and companies transforming their business models in response to the COVID pandemic. 

Daiwa Securities Japan’s second-largest brokerage will soon launch a joint-venture in China to tap into the country’s growing wealth management market. Daiwa joins several other financial firms looking to expand their Asia and China presence, with Goldman Sachs, Citi and Credit Suisse going on hiring sprees over the past few months.

FINAL FIGURE

349%

Futu, also known as the “Robinhood of China,” had a bumper quarter with revenue growth of 349% due to a pandemic-driven boom in retail trading. The company’s user base grew by 70% over the same period. The company hopes to attract more users in the United States and Singapore as it balances its domestic customers with international expansion.

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