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Economy

Bitcoin and China's endless chain of bubbles

A stack of yuan notes at a commercial bank in Beijing (Reuters)

SHANGHAI -- From the stock and property markets to other segments of the economy, bubbles are continually cropping up in China. Lately, the country's investors have been turning to bitcoin in droves.

Chinese investors are constantly shifting from one promising asset to another, seeking to maximize their returns amid excess liquidity. The slowdown in growth means the authorities have little choice but to maintain a fairly accommodative monetary policy, contributing to the abundance of cash.

Chinese President Xi Jinping stressed during a roundtable discussion last Friday that his administration will "continue its aggressive fiscal policy and moderate monetary policy to expand demand adequately."

It is under these circumstances that China has emerged as a global center of bitcoin trading, with the country purportedly accounting for 40% of investors and 80% of transactions in the market for the digital currency.

"Some customers use bitcoins to transfer money abroad, while others do so for speculative investment," said an official at BTC Trade, a major Chinese bitcoin exchange. BTC Trade's head office is in Zhongguancun, a district of northwestern Beijing known as the Chinese capital's answer to Silicon Valley. Prestigious schools, such as Peking University and the Beijing Institute of Technology, are located nearby.

Bitcoin's value in yuan has surged 50% since the end of 2015, to about 4,300 yuan ($642) from roughly 2,800 yuan. Given lingering concerns about devaluation of the Chinese currency, investors have been snapping up the cryptocurrency instead.

Invest, regulate, repeat

China's succession of bubbles dates back to the 2000s, including the stock bubble of 2007.

In November 2008, the government unveiled a 4 trillion yuan stimulus package in response to the global financial crisis. Taking a cue from the government's move, individual investors rushed to buy condominiums in coastal cities such as Beijing, Shanghai and Shenzhen. Later, following the introduction of restrictions on multiple condo purchases, the property market began to cool and investors flocked to so-called wealth management products.

Regulations on wealth management products were also strengthened in 2014, amid concerns about the high-interest instruments driving the explosive growth of the "shadow banking" industry.

This, in turn, prompted investors to shift their money back to the stock market. But after peaking in June 2015, Chinese share prices tumbled again.

This drove investors into online finance as well as the commodity futures and property markets.

Back to stocks?

These torrents of money can trigger all sorts of market distortions. Private steelmakers, for example, have been scurrying to resume operations at blast furnaces in response to rising steel futures prices. The rush comes despite the Chinese government's goal of cutting the country's excess steel production capacity.

Meanwhile, the property bubble has spread to cities such as Nanjing, Hefei and Xiamen.

It is anyone's guess how long the bitcoin bubble will continue to inflate. Once it subsides, possibly due to fresh government regulations on trading, another stock boom might be in store.

But if history is any guide, investors will not keep their money in the stock market for long -- not if it remains strictly regulated and subject to strong government intervention. 

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