Bitcoin trading volume in China’s exchange platforms including BTCC, Huobi and Okcoin has accounted for more than 90% of the world’s total. It won’t be a far-stretched conclusion to say that China’s market policies, sentiments and behaviors will greatly influence the price trend of Bitcoin in 2017.

We have analyzed in our article “What Drives the Recent Bitcoin Price Surge” that Yuan’s depreciation has make more Chinese see Bitcoin as a safe haven under the backdrop that that China is exerting inflow-constraining policies on gold which should be the first choice when it comes to hedging risk. So the exchange rate of yuan matters not only for the traditional financial system but also for Bitcoin’s price.

Global Bitcoin trading volume structure( BTC China Huobi and Okcoin are all Chinese exchanges)

We now analyze factors that will impact Yuan’s exchange rate in 2017 and see what predictions we may have as for Bitcoin price.

What is Yuan’s Trend in 2017

To be clear about the current economic situation in China and to understand China’s macroeconomic development plan in the coming year, one needs to read through the information conveyed by Central Economic Work Conference (CEWC), the most important annual economic conference jointly held by Communist Party of China and China’s State Council. CEWC 2016 was just held in the middle of December, it has conveyed important messages and set the tone for China’s economic development in 2017. Then what are the signals?

First, CEWC 2016 has focused on the management of housing price in 2017 with an aim to resume the original feature of real estate-for people to live and thus to prevent financial risks. To do this, Chinese real estate market needs to be transformed from speculation-oriented to a consumption oriented one. Though there are already policies regulating the requirements needed for a house buyer like continuous 5-year-long contribution record of social medical insurance as the prerequisite for those without local “Hukou”, the housing price is still extortionate for most people. But if housing price is not lowered, the transformation will never be achieved. Then the lower price will negatively impact, at least in the short-term, on China’s GDP growth rate in 2017.

Luckily, CEWC 2016 have told us that Beijing in 2017 might give up its previous middle-term GDP annual growth rate target and accept a rate lower than 6.5% in 2017. Then more stringent housing price management will be justified in 2017. The expectation of lower housing price and thus GDP growth pressure will strengthen the anticipation that yuan will be depreciated.

Second, to prevent systemic risk of China’s financial market is also the main theme of CEWC 2016. Thus deleveraging will be the direction for China’s monetary policy. If deleveraging leads to bubble burst in 2017, then there will be more likelihood for yuan’s devaluation.

Third, yuan’s exchange rate is still not free floating. Beijing still has the initiative to adjust the exchange rate. Though this will theoretically stabilize yuan, it will boot more outflow of internal capital when the “adjustment” is over the top. When the government shows low confidence to its currency, devaluation of it the currency tends to be inevitable.

Forth is the international factor.The increasingly tightened monetary policy in US will also give pressure to yuan. As yuan is partly linked to dollar, yuan will be further pushed down if the Federal Reserve again raise interest rate of dollar. It just did so on 14^th December for the first time in decade.

The above analyses are the forecast of yuan’s exchange rate in 2017. As we mentioned, when it comes to Bitcoin price in 2017, it should be remembered that it now has a negative correlation with yuan.   If yuan’s value is the only factor, then the forecast of the Bitocoin price becomes self-evident.

                       Yuan’s exchange rate against dollar since 30 Sept.

Bitcoin price in RMB since 30th Sept.

China’s Policy on Bitcoin

As China takes a lion share of the global Bitcoin trading volume, other factors of China will also influence Bitcoin price. First is China’s policy. Rumor says China will take measures to confine internal Bitcoin exchanges, but until now no evidence show the any source of the news. On the contrary, Chinese government is keen on Blockchain technology, from which Bitcoin originates. People’s Bank of China even openly recruits talents with cryptology and Blockchain background in the midst of its efforts to “issue” its own digital currency. Furthermore, as we mentioned in our article, till now Bitcoin is still far from nationally recognized to the extent that Chinese “Dama” or Chinses rich middle-aged women, the major speculative force in the gold price hype in 2013 and stock price hype in 2015, to participate no matter they know bitcoin or not. In 2013 Chinese barred banks from handling Bitcoin transactions but private trading is just free ever since Bitcoin was first heard in China. Thus, fully-supportive policy for Blockchain technology is the undoubted trend for China and Bitcoin will not be regulated by Chinese financial agency as it is only “commodity” in China.

There is one situation for Beijing to meddle in. China’s Bitcoin exchanges offers 1-50 times of leveraging. If Bitcoin price continues to rise and attracts zealous ordinary Chinese people to push up the price froth if any, and short-seller suddenly crashes the Bitcoin price, the society will be unstable, which will cross the bottom line of the Chinse government. This might compel Beijing to regulate the exchanges in China. But we have repeatedly pointed out that the recent Bitcoin price surge only triggered ripple in the Bitcoin circle till now, there are plenty of buffer room before that happens.

To conclude, China’s trading volume of Bitcoin  will keep China still the main factor impacting Bitcoin price trend in 2017. Yuan remains a parameter for bitcoin price and Yuan tend to be devalued. China’s policy will most likely be preferential to Blockchain technology and thus at least neutral to Bitcoin trading unless the speculators  greatly outnumber investors to the extent that financial market stability is hindered. But If Bitcoin’s scaling issue has been solved in 2017 and thus its  economic benefits like fast confirmation and low costs are recovered, China will see more investors or Bitcoiners than speculators. Then who knows the upper limit for Bitcoin price when Chinese “Dama” are cultivated and convinced to be firm Bitcoiners ?

Editors’ note: The article does not constitute any investment advice.