Across The Border
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Yuan weakness prompts Chinese investors to place risky bets on digital currency bitcoin

PUBLISHED : Thursday, 27 October, 2016, 4:23pm
UPDATED : Thursday, 27 October, 2016, 10:38pm

Chinese investor demand for asset diversification amid the depreciating yuan has helped drive bitcoin to its highest value in three months, with the mainland Chinese market now accounting for 90 per cent of all trading in the digital currency.

Bitcoin’s price hit US$683 on Thursday, the highest since early July, while trading volume reached a six month daily high of 6.65 million bitcoin, according to data from Bitcoinity.org.

“Limited investment channels for Chinese investors drive them to seek all possible investment tools to preserve their asset value,” said Victor Au, chief operating officer at Delta Asia Securities. “The search for more diversified channels has become more pressing after recent property cooling measures started to calm China’s housing frenzy and after last year’s Chinese stock market crash sapped speculators’ confidence.”

The new bout of yuan weakness and expectations that the currency will drop further have substantially added to the demand for asset diversification, Au added. The Chinese yuan has fallen more than 1.5 per cent against the US dollar in September alone and the currency hit a six-year low at 6.7922 on Thursday.

Limited investment channels for Chinese investors drive them to seek all possible investment tools to preserve their asset value
Victor Au, chief operating officer, Delta Asia Securities

Xu Mingxing, chief executive officer of Okcoin, one of the largest bitcoin trading platforms in mainland China, echoed these views, saying that Chinese investors have become more active in seeking investment alternatives to relieve the pressure of the weakening yuan – and bitcoin is just one of these alternatives.

“Bitcoin trading, like other tools, just provides an investment channel for asset diversification among Chinese investors, especially these who have a strong risk appetite,” said Xu. But Bitcoin itself doesn’t provide a hedge to the risks of a weakening yuan as it is a highly volatile product, he added.

Bitcoin’s value skyrocketed 80 per cent to a 30-month high of US$777 on June 17 compared with its value at the end of 2015, amid the rapid depreciation of yuan and expectations of a fall in bitcoin supply. However, bitcoin’s value plunged in early August, triggered by the hacking of Hong Kong-based exchange Bitfinex, but has since seen a strong rebound.

Driven by more knowledge of the digital currency and the concurrent demand for diversified assets, Xu said more Chinese investors have become confident in the value of bitcoin, which in turn has helped boost its market price and trading volume. Xu added he was not greatly concerned about tighter regulation of the bitcoin market as it is a still only a tiny market in China now.

Arthur Hayes, Hong Kong-based founder of bitcoin exchange BitMEX told Bloomberg that he expects bitcoin to strengthen to US$1,000 by January as the yuan heads towards 7.0 against the greenback.

However, Au said while a weaker yuan is triggering a flock of Chinese investors into the bitcoin market, it cannot be considered a safe haven asset due to its high volatility – just like betting in a casino.

Another limitation is that bitcoin investing doesn’t offer a way around China’s strict capital controls because it cannot be used to change yuan into US dollars.

“A bitcoin trader cannot transfer his Chinese yuan into foreign currency through buying and selling bitcoins,” said Xiao Yue, a customer service representative from Huobi, a major Chinese bitcoin exchange based in Beijing.

Au said bitcoin trading shouldn’t be seen as “mainstream” due to its extremely high risks. “I don’t expect bitcoin investment will be highly popular because its trading seems opaque and mysterious,” said Au. “The trading is also open to risks of hacking. Bitcoin, independent of a central bank, has no authority to make up coin owners’ losses if they are hacked or stolen”, he added.

In the current investment environment it is not only bitcoin sales that are growing. Other assets, including foreign property and commodities, are also being pursued by Chinese investors amid the yuan’s depreciation.

However, in Au’s view there is one exception in commodities: gold. He said it isn’t a good time to buy the precious metal. “The high possibility of a US rate hike in December will lower the price of gold,” he said. “I suggest investors wait and see the pace of US rate hikes. Maybe next year is a better opportunity to purchase gold when clear clues for the pace of US rate hikes can be seen.”

However, Goldman Sachs analysts including Jeffrey Currie and Max Layton wrote in a new report that the continuing weakness in yuan and investor concerns over the nation’s property market may spur gold demand in China.

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