The Impact of Chinese Capital Outflows on Bitcoin vs. Yuan Relationships: A Multi-Period Analysis
DOI:
https://doi.org/10.58886/jfi.v20i2.3432Keywords:
Bitcoin, btc, cryptocurrency, Chinese Yuan, CNY, Capital outflowsAbstract
We examine the relationships among Bitcoin (BTC), the Chinese Yuan (CNY), and Chinese capital outflows between 2014-2021. We find that BTC returns strongly comove with CNY returns after 2018Q1, while no significant BTC/CNY relationship exists before 2018Q1. Further, the strength of the BTC/CNY relationship increases throughout 2018 to the present date. Yet, this relationship strength cannot be explained by periods of ascending BTC prices, changes in crypto mining location, nor changes in the use of BTC "mining pools". Instead, we find that the strength of the BTC/CNY relationship is strongly and directly related to Chinese capital outflows. We find no similar relationship with a "bogey" currency, the Euro, implying that the capital outflows -to- BTC/CNY relationship is unique to China and its capital outflow environment. In total, our novel results suggest that BTC is used as part of a process to move economically significant amounts of capital from mainland China.
References
Aalborg, H., A., Molnár, P. and de Vries, J. E. (2019) ‘What can explain the price, volatility and trading volume of Bitcoin?’, Finance Research Letters, Vol. 29, pp. 255-265. DOI: https://doi.org/10.1016/j.frl.2018.08.010
Aizenman, J. (2004) ‘Financial opening and development: Evidence and policy controversies’, American Economic Review, Vol. 94, No. 2, pp. 65-70. DOI: https://doi.org/10.1257/0002828041301434
Avdjiev, S., Chui, M. K. and Shin, H. S. (2014) ‘Non-financial corporations from emerging market economies and capital flows’, BIS Quarterly Review, December.
Balcilar, M., Bouri, E., Gupta, R. and Roubaud, D. (2017) ‘Can Volume Predict Bitcoin Returns and Volatility? A Quantiles-based Approach’, Economic Modelling, Vol. 64, No. 8, pp. 74-81. DOI: https://doi.org/10.1016/j.econmod.2017.03.019
Baur, D.G., Hong, K. and Lee, A.D. (2018) ‘Bitcoin: Medium of exchange or speculative assets?’, Journal of International Financial Markets, Institutions and Money, Vol. 54, pp.177-189. DOI: https://doi.org/10.1016/j.intfin.2017.12.004
Bouri, E., Gupta, R., Tiwari, A.K. and Roubaud, D. (2017a) ‘Does Bitcoin hedge global uncertainty? Evidence from wavelet-based quantile-in-quantile regressions’, Finance Research Letters, Vol. 23, pp. 87-95. DOI: https://doi.org/10.1016/j.frl.2017.02.009
Bouri, E., Molnár, P., Azzi, G., Roubaud, D. and Hagfors, L.I. (2017b) ‘On the hedge and safe haven properties of Bitcoin: Is it really more than a diversifier?’, Finance Research Letters, Vol. 20, pp.192-198. DOI: https://doi.org/10.1016/j.frl.2016.09.025
Bruno, V. and Shin, H.S. (2015) ‘Capital flows and the risk-taking channel of monetary policy’, Journal of Monetary Economics, Vol. 71, pp. 119-132. DOI: https://doi.org/10.1016/j.jmoneco.2014.11.011
Cambridge Bitcoin Electricity Consumption Index (CBECI) (n.d.), https://cbeci.org/.
Campbell, C. (2021, June 2) ‘Why China is cracking down on Bitcoin mining’, Time, https://time.com/6051991/why-china-is-cracking,-down-on-bitcoin-mining-and-what-it-could-mean-for-other-countries/ (Accessed 13 August 2021).
Carrick, J. (2016) ‘Bitcoin as a complement to emerging market currencies’, Emerging Markets Finance and Trade, Vol. 52, No. 10, pp. 2321-2334. DOI: https://doi.org/10.1080/1540496X.2016.1193002
Chan, K., Tse, Y. and Williams, M. (2011) ‘The relationship between commodity prices and currency exchange rates: evidence from the futures markets’, in Ito, T. and Rose, A. (Eds.), East Asia Seminar on Economics, Vol. 20, National Bureau of Economic Research, pp. 47-71. DOI: https://doi.org/10.7208/chicago/9780226386904.003.0003
Cheng, J. and Dai, Y. (2020) ‘Is bitcoin a channel of capital inflow? Evidence from carry trade activity’, International Review of Economics & Finance, Vol. 66, pp. 261-278. DOI: https://doi.org/10.1016/j.iref.2019.12.005
Cheung, Y.W. and Qian, X. (2010) ‘Capital flight: China's experience’, Review of Development Economics, Vol. 14, No. 2, pp. 227-247. DOI: https://doi.org/10.1111/j.1467-9361.2010.00549.x
Choi, K.J., Lehar, A. and Stauffer, R. (2020, January 10) ‘Bitcoin microstructure and the kimchi premium’, Available at SSRN: https://ssrn.com/abstract=3189051 or https://doi.org/10.2139/ssrn.3189051 DOI: https://doi.org/10.2139/ssrn.3189051
Chow, G. (1960) ‘Tests of Equality between Sets of Coefficients in Two Linear Regressions’, Econometrica, Vol. 28, No. 3, pp. 591-605. DOI: https://doi.org/10.2307/1910133
Corbet, S., Lucey, B. and Yarovaya, L. (2018) ‘Datestamping the Bitcoin and Ethereum bubbles’, Finance Research Letters, Vol. 26, pp. 81-88. DOI: https://doi.org/10.1016/j.frl.2017.12.006
Corbet, S., Lucey, B., Urquhart, A. and Yarovaya, L. (2019) ‘Cryptocurrencies as a financial asset: A systematic analysis’, International Review of Financial Analysis, Vol. 62, pp. 182-199. DOI: https://doi.org/10.1016/j.irfa.2018.09.003
Corbet, S., Larkin, C., Lucey, B.M., Meegan, A. and Yarovaya, L. (2020) ‘The impact of macroeconomic news on Bitcoin returns’, The European Journal of Finance, Vol. 26, No. 14, pp. 1396-1416. DOI: https://doi.org/10.1080/1351847X.2020.1737168
Ding, D., Tse, Y. and Williams, M. (2014) ‘The Price Discovery Puzzle in Offshore Yuan Trading: Different Contributions for Different Contracts’, Journal of Futures Markets, Vol. 34, No. 2, pp. 103-123. DOI: https://doi.org/10.1002/fut.21575
Duffie, D. (2010) ‘Presidential address: Asset price dynamics with slow-moving capital’, The Journal of Finance, Vol. 65, pp. 1237–1267. DOI: https://doi.org/10.1111/j.1540-6261.2010.01569.x
Feng, W., Wang, Y. and Zhang, Z. (2018) ‘Informed trading in the Bitcoin market’, Finance Research Letters, Vol. 26, pp. 63-70. DOI: https://doi.org/10.1016/j.frl.2017.11.009
Feyen, E., Ghosh, S., Kibuuka, K. and Farazi, S. (2015) ‘Global liquidity and external bond issuance in emerging markets and developing economies’, World Bank Policy Research Working Paper, No. 7363, World Bank, Washington, D.C. DOI: https://doi.org/10.1596/1813-9450-7363
Fry, J. and Cheah, E.T. (2016) ‘Negative bubbles and shocks in cryptocurrency markets’, International Review of Financial Analysis, Vol. 47, pp. 343-352. DOI: https://doi.org/10.1016/j.irfa.2016.02.008
Fry, J. (2018) ‘Booms, busts and heavy-tails: The story of Bitcoin and cryptocurrency markets?’, Economics Letters, Vol. 171, pp. 225-229. DOI: https://doi.org/10.1016/j.econlet.2018.08.008
Griffin, J.M. and Shams, A. (2020) ‘Is Bitcoin really untethered?’, The Journal of Finance, Vol. 75, No. 4, pp. 1913-1964. DOI: https://doi.org/10.1111/jofi.12903
Gunter, F.R. (2004) ‘Capital flight from China: 1984–2001’, China Economic Review, Vol. 15, No. 1, pp. 63-85. DOI: https://doi.org/10.1016/S1043-951X(03)00026-9
Honohan, P. (2020) ‘IMF advice on crisis-driven capital controls in Europe. Background Paper BP/20-02/10, International Monetary Fund Independent Evaluation Office, Washington D.C. https://ieo.imf.org/~/media/IEO/Files/evaluations/completed/09-30-2020-imf-advice-on-capital-flows/cfm-bp10-imf-advice-on-crisis-driven-capital-controls-in-europe.ashx?la=en (Accessed 14 August 2021).
Ju, L., Lu, T. and Tu, Z. (2016) ‘Capital flight and bitcoin regulation’, International Review of Finance, Vol. 16, No. 3, pp. 445-455. DOI: https://doi.org/10.1111/irfi.12072
Katsiampa, P. (2019) ‘An empirical investigation of volatility dynamics in the cryptocurrency market’, Research in International Business and Finance, Vol. 50, pp. 322-335. DOI: https://doi.org/10.1016/j.ribaf.2019.06.004
Kharpal, A. (2021, April 6) ‘Cryptocurrency market value tops $2 trillion for the first time as ethereum hits record high’, CNBC. https://www.cnbc.com/2021/04/06/cryptocurrency-market-cap-tops-2-trillion-for-the-first-time.html (Accessed 14 August 2021).
Kim, T. (2017) ‘On the transaction cost of Bitcoin’, Finance Research Letters, Vol. 23, pp. 300-305. DOI: https://doi.org/10.1016/j.frl.2017.07.014
Library of Congress (2018) ‘China: Government indicates all virtual currency platforms have withdrawn from market’, The Law Library of Congress, Global Legal Research Center. June 2018. (Accessed 14 August 2018).
Lin, S. and Ye, H. (2018) ‘Foreign direct investment, trade credit, and transmission of global liquidity shocks: Evidence from Chinese manufacturing firms’, The Review of Financial Studies, Vol. 31, No. 1, pp. 206-238. DOI: https://doi.org/10.1093/rfs/hhx087
Ljungwall, C. and Wang, Z. (2008) ‘Why is capital flowing out of China?’, China Economic Review, Vol 19, No. 3, pp. 359-372. DOI: https://doi.org/10.1016/j.chieco.2007.09.001
Luther, W.J. and Salter, A.W. (2017) ‘Bitcoin and the bailout’, The Quarterly Review of Economics and Finance, Vol. 66, pp. 50-56. DOI: https://doi.org/10.1016/j.qref.2017.01.009
Makarov, I. and Schoar, A. (2020) ‘Trading and arbitrage in cryptocurrency markets’, Journal of Financial Economics, Vol. 135, No. 2, pp. 293-319. DOI: https://doi.org/10.1016/j.jfineco.2019.07.001
Newey, W. and West, K. (1987) ‘A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix’, Econometrica, Vol. 55, No. 3, pp. 703-708. DOI: https://doi.org/10.2307/1913610
Ocampo, J. (2017) Resetting the International Monetary (Non)System, Oxford University Press, Oxford. DOI: https://doi.org/10.1093/oso/9780198718116.001.0001
Pieters, G.C., (2016, December 1) ‘Does Bitcoin reveal new information about exchange rates and financial integration?’, Globalization and Monetary Policy Institute Working Paper, No. 292, Available at SSRN: https://ssrn.com/abstract=2896642 https://doi.org/10.24149/gwp292 (Accessed 14 August, 2021). DOI: https://doi.org/10.24149/gwp292
Redman, J. (2020, January 13) ‘China saw $11.4 billion in crypto-based capital flight last year’, Bitcoin News. https://news.bitcoin.com/china-saw-11-4-billion-in-crypto-based-capital-flight-last-year/ (Accessed 14 August 2021).
Romiti, M., Judmayer, A., Zamyatin, A. and Haslhofer, B. (2019) ‘A deep dive into Bitcoin mining pools: An empirical analysis of mining shares’, arXiv preprint arXiv:1905.05999 https://arxiv.org/pdf/1905.05999.pdf (Accessed 14 August 2021).
Schneider, B. (2003) ‘Measuring capital flight: estimates and interpretations. Working Paper, Overseas Development Institute, London. https://www.files.ethz.ch/isn/100552/wp194.pdf (Accessed 14 August 2021).
Sensoy, A. (2019) ‘The inefficiency of Bitcoin revisited: A high-frequency analysis with alternative currencies’, Finance Research Letters, Vol. 28, pp. 68-73. DOI: https://doi.org/10.1016/j.frl.2018.04.002
Staiger, R.W. and Sykes, A.O. (2008) ‘ “Currency Manipulation” and World Trade’, Working Paper, No. w14600, National Bureau of Economic Research. DOI: https://doi.org/10.3386/w14600
Stoll, C., Klaaßen, L. and Gallersdörfer, U. (2019) ‘The carbon footprint of Bitcoin’, Joule, Vol. 3, No. 7, pp.1647-1661. DOI: https://doi.org/10.1016/j.joule.2019.05.012
Tiwari, A.K., Jana, R.K., Das, D. and Roubaud, D. (2018) ‘Informational efficiency of Bitcoin—An extension’, Economics Letters, Vol. 163, pp. 106-109. DOI: https://doi.org/10.1016/j.econlet.2017.12.006
Urquhart, A. (2016) ‘The inefficiency of Bitcoin’, Economics Letters, Vol. 148, pp. 80-82. DOI: https://doi.org/10.1016/j.econlet.2016.09.019
Urquhart, A. (2017) ‘Price clustering in Bitcoin’, Economics Letters, Vol. 159, pp. 145-148. DOI: https://doi.org/10.1016/j.econlet.2017.07.035
Urquhart, A. and Zhang, H. (2019) ‘Is Bitcoin a hedge or safe haven for currencies? An intraday analysis’, International Review of Financial Analysis, Vol. 63, pp. 49-57. DOI: https://doi.org/10.1016/j.irfa.2019.02.009
Vidal-Tomás, D. and Ibañez, A. (2018) ‘Semi-strong efficiency of Bitcoin’, Finance Research Letters, Vol. 27, pp. 259-265. DOI: https://doi.org/10.1016/j.frl.2018.03.013
Viglione, R. (2015 September 25) ‘Does governance have a role in pricing? Cross-country evidence from Bitcoin markets’, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2666243 (Accessed 14 August 2021). DOI: https://doi.org/10.2139/ssrn.2666243
Wang, J. and Wang, X. (2015) ‘Benefits of foreign ownership: Evidence from foreign direct investment in China’, Journal of International Economics, Vol. 97, No. 2, pp. 325-338. DOI: https://doi.org/10.1016/j.jinteco.2015.07.006
Wei, W.C. (2018) ‘Liquidity and market efficiency in cryptocurrencies’, Economics Letters, Vol. 168, pp. 21-24. DOI: https://doi.org/10.1016/j.econlet.2018.04.003
Yermack, D. (2015) ‘Is Bitcoin a real currency? An economic appraisal’, Handbook of Digital Currency, Academic Press, pp. 31-43. DOI: https://doi.org/10.1016/B978-0-12-802117-0.00002-3
Yu, Y. and Zhang, J. (2020 October 26) ‘Flight to Bitcoin’, SSRN, https://ssrn.com/abstract=3278469 (Accessed 14 August 2021).
