China plus bitcoin is a marriage of convenience

Tech mogul Peter Thiel suggested this week that China might use bitcoin as a "financial weapon" to unseat government-backed currencies in general and the U.S. dollar in particular. The People's Republic is indeed keen on digital currencies. But bitcoin isn't its best way to challenge the greenback.

In theory, a love child of the yuan and bitcoin could give the dollar a run for its money. China's currency is a reasonably good store of value, and the giant economy that sits behind it – incidentally where the majority of new bitcoin is mined – makes it potentially useful, too. Bitcoin's charms include immunity from government intervention, including the devaluation risk presented by U.S. President Joe Biden's multi-trillion-dollar infrastructure plans.

But both have big flaws. For China, a government so hands-on with the economy and capital flows argues against the yuan becoming the global monetary lingua franca. The country accounted for 13% of world exports in 2019 but represents only around 2% of central banks' foreign exchange reserves. While bitcoin comes free of government meddling, its volatility makes it a terrible store of value. And mining and settling transactions is slow and energy-intensive.

Thiel is right, though, to see threats. China has been railing against the dollar's dominance since at least 2008. Policymakers in Beijing are already trialing a digital currency; counterparts in Washington are years behind. Yet if Beijing really wanted a weapon to rival the dollar, the easiest answer would be to open up, deregulate and turn the yuan into a currency foreigners actually want to hold, digitally or otherwise.

It's hard to see President Xi Jinping relinquishing sufficient control. The adherence to a state-directed financial system remains a big obstacle to global yuan adoption. So does China's huge trade surplus, which hit a monthly record in December. Then there's the dismal human-rights record, one reason Thiel and plenty of other people would rather not see China dominate the global currency system.

There's a Chinese saying: Use a barbarian to subdue a barbarian. Maybe bitcoin can fulfill that role for Beijing, but it's not a ticket to global acceptance.