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China Moves to Cool Bitcoin Trade but Heat Lingers

China has not declared bitcoins illegal, however. The December warnings are still floating around as one of the country's fabled trial balloons to gauge public reactions.

The government wants to cool the bitcoin trade to forestall an unmanageable middle-class black market. China struggles already with too many other such rackets, from brand knockoffs sold in premier tourist districts to widespread graft. At the same time, authorities want to cool bitcoin without impacting upon prices, spending or domestic investment, any of which could sag if bitcoin transactions suddenly stopped cold.

Foreign merchants that have entered China but play by more conservative international rules should welcome the limits on bitcoin -- especially if China manages to restrict bitcoin without economic fallout. Plus, local peers such as Internet content provider Baidu (BIDU) and national carrier China Telecom (CHA) may disappoint consumers by cutting off their trade in the virtual currency.

However, the reduced trade in bitcoins could be simply Chinese investors waiting to see what's next. They're still ravenous for news about bitcoin and in some cases are holding onto their stashes as an investment until the government makes its ambitions more clear.

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But the exchange issue is still a sensitive one. "Although the guidance didn't specifically state that bitcoin could not be exchanged for goods and services, Chinese companies accepting bitcoin were clearly shaken and decided to play it safe," Denver-based consultancy Digital Currency Research said on its blog Dec. 19.

Digital Currency Research continued, "It does not appear that the announcement will affect bitcoin's use as a store of value and a means to skirt strict capital controls for the Chinese people, and the exchange rate has begun a volatile climb higher since the news."

At the time of publication the author had no position in any of the stocks mentioned.

Ralph Jennings is on LinkedIn.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Ralph Jennings lived in Beijing for seven years as a writer, editor, student, teacher and consumer. Originally from Portland, Oregon, Jennings has covered financial markets in Asia since 2008. His news reports often examine markets from a macro-policy angle on behalf of individual traders as well as institutional investors. In his view, China is a volatile country that can be understood only by watching it closely week in, week out, followed by analysis mixed with hands-on perspectives. He currently lives in Taipei, where he covers general and financial news in East Asia and studies for a master's degree. He also watches China from the unique perspective of Taiwan's traditional Chinese society with its unique economic and political experience.
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