China Is Quitting the US Dollar

It’s been a surreal week. Bitcoin continued its upward ascendancy fueled by a unanimously positive and wild acceptance by the Chinese, at one point with the value touching $900, leaving most of us wondering why we didn’t get in when it was still worth the less than the price of two Xbox Ones.

Now, seemingly out of the blue, China has announced that it would rein in its purchase of US dollars. "It's no longer in China's favour to accumulate foreign-exchange reserves," Yi Gang, a deputy governor at the central bank, said on Wednesday.

A reactionary reading of the situation might interpret the events as a dual-pronged attack on America’s currency hegemony. Just as China’s citizens push bitcoin to stratospheric heights, virtual money that conspiracy theorists believe forebode a currency revolution, the Communist Party it no longer needs to buy dollars to forward its economic policy.

Meanwhile in Russia, perhaps sensing opportunity to weaken its international rival, there’s a growing movement to ban the US dollar outright, citing America’s growing debt problems, a move the bill’s author admits would be a “provocation” of sorts.

Could this move really be a devious ploy by the Chinese to undermine dollar dominance on the world stage?

Probably not. Whether or not the timing of the announcement is coincidental, China’s ditching of its foreign reserves accumulation speaks more about the country’s own problems as it transitions from an export based economy, where feverish growth was fueled by an artificially weak Yuan so they could sell cheaply manufactured goods like Nike sneakers and Apple iPhones, into a developed nation based on domestic demand.

As China’s own middle class has blossomed, moving from the countryside into bustling cities like Shanghai and Tianjin, Chinese leaders, as they look toward the populous nation’s next developmental phase, will look to leverage their growing taste for consumerism. That means allowing the Yuan to appreciate in value. The only reason China accumulated its stash of foreign currencies was to prevent that from happening so other countries would keep buying their stuff at a time where their own people didn’t have the financial capacity to.

In fact, it’s what US politicians, who have long criticized their most powerful economic rival of manipulating their currency, have pined for—nevermind that policies like the Federal Reserves experiment with quantitative easing is its own form of currency manipulation, one that keeps the dollar relatively weak. If China allows the Yuan to strengthen, it would help correct a decades long trade imbalance between the two countries, which is incidentally one of the primary reasons the US is so indebted. We’ve been borrowing trillions from the Chinese so we can buy endless trinkets.

So on the whole, the move should be beneficial for all parties involved and it should have little actual impact on the apparent strength of the dollar.

There is, of course, still the issue of bitcoin. On Friday, Sir Richard Branson revealed that Virgin Galactic would start accepting bitcoin, calling it an “exciting new currency.” That’s right, your bitcoin stash can now fund a trip to space. Science fiction IRL.

Want to spend your #bitcoins? How about a ticket to space! Will discuss today live on @SquawkCNBC @virgingalactic

— Richard Branson (@richardbranson) November 22, 2013

It’s little wonder that Branson joined the party, it was the same day someone made an insane $147 million bitcoin transaction. We have no idea who or why, but anyone can see it right there on the blockchain. Did someone just buy an island? Was this the most ridiculous drug deal ever? Or is someone just transferring balances between accounts to fuck with us?

Whatever the reason, the total value of bitcoin transactions in the last 24 hours was over $400 million, eclipsing Paypal in total payments. Western Union isn’t even a conversation anymore. Is it only a matter of time before the little cryptocurrency that could becomes legitimate competition against the credit card companies?

Even gold, which the properties of bitcoin greatly resemble, is feeling the heat, suffering its worst price drop in ten weeks. The “negativity in gold trading is deafening right now,” Adrian Ash, head of research at BullionVault, told MarketWatch, citing the Fed’s stimulus program and gains in the stock market. Analysts believed that growing Chinese demand for the precious metal was keeping its price. But as this week has proved, the Chinese have a new digital love affair, supporting the idea that they could be trading the past for the future. Beyond the yellow element’s historical relevancy, bitcoin offers everything that gold does, except more.

As I mentioned earlier in the week, US officials don’t appear the least bit worried. Indeed, the government itself could be the flourishing crytocurrency’s ultimate creator.

@sfnuop