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Forex

China risks capital slipping out bitcoin back door

HONG KONG -- With stocks plunging and the yuan weaker against the dollar, the Chinese economy may face yet another avenue for capital flight: the borderless digital currency bitcoin.

     The yuan hovered in the 1,400 range against the bitcoin around the start of 2015 on China's BTCC exchange for the cryptocurrency. But the redback began losing ground noticeably in the fall, weakening beyond 3,000 in December. A bitcoin now fetches just over 2,600 yuan.

     The yuan is used in an estimated 70% of global bitcoin trades, though bitcoins in China are seen more as an investment instrument than as a currency. In the fall of 2013, the bitcoin rocketed from less than 800 yuan to as much as 7,000 in a span of two months.

     Though the bitcoin bubble soon burst afterward, a Shanghai company employee who converted yuan on hand into the digital currency still fondly recalls those heady days.

     "The bitcoin was a very interesting investment product," the man said. A similar spectacle played out last summer when the Shanghai stock bubble burst.

     China and others moved to restrict trading back then, deflating the first bitcoin bubble. The People's Bank of China barred financial institutions from processing bitcoin payments, citing the threat to the "lawful position" of the yuan. Bitcoins are a huge thorn in the side of a nation that tightly controls the flow of money, since they can be used to launder funds and slip money across the border.

     The central bank announced Wednesday that it is looking into issuing its own digital currency. It said in a statement that the move will cut currency circulation costs, improve the transparency and convenience of payments, and inhibit such crimes as money laundering and tax evasion. The bank apparently plans to fight fire with fire.

     China has yet to regulate bitcoin trading among individuals, who appear to be buying the bitcoin to shield themselves against the yuan and stock slides. The bitcoin won global recognition after the Cyprus financial crisis in the spring of 2013, with Cypriots putting more faith in the virtual currency than their own. Bitcoins later figured in the sharp depreciation of the Argentine peso.

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