When we first detailed the link between a devaluing currency, increasing restrictions on outflows of China capital, and Bitcoin
, the virtual currency soared (driven by Chinese flows, just as predicted). The last few days, as China has once again started devaluing its currency, authorities once again moved to tighten capital outflows – this time through caps on credit-card withdrawals (as warned here) – and sure enough, Bitcoin has been soaring recently. Specifically, a nationwide crackdown on illegal UnionPay point-of-sale devices, has sparked capital flight (on heavy volume) through the vurtual currrency.

Having previouslywe first detailed the link between a devaluing currency, increasing restrictions on outflows of China capital, and Bitcoin
 Beijing’s mad dash to tighten up capital controls in China in order to stem outflows in the wake of the PBoC’s move to transition towards a new FX regime; increasing expectations that a (much) deeper devaluation is on the horizon (blessed by The IMF) coupled with China’s efforts to manage the fallout from those expectations by liquidating hundreds of billions in FX reserves to support the onshore and offshore spots have understandably put authorities on edge, leading directly to efforts to stop the bleeding.

As we put it a few weeks ago, “while China may succeed in maintaining an orderly pace of FX depreciation, if the local population is concerned it will lose substantial purchasing power in the coming months and years, it will accelerate the capital flight from the country, forcing even greater reserve liquidation as the government finds itself defending not only the capital but also the current account, not to mention the sheer capital flight panic resulting from the crashing stock market.”

this time through caps on credit-card withdrawals (as warned here)one of the more straightforward ways of circumventing China’s official capital controls has been by “abusing” UnionPay cards. Roughly speaking, the process works like this (via Reuters):

Growing numbers of Chinese are using the country’s state-backed bankcards to illegally spirit billions of dollars abroad, a Reuters examination has found.

This underground money is flowing across the border into the gambling hub of Macau, a former Portuguese colony that like Hong Kong is an autonomous region of China. And the conduit for the cash is the Chinese government-supported payment card network, China UnionPay.

In a warren of gritty streets around Macau’s ritzy casino resorts, hundreds of neon-lit jewellery, watch and pawn shops are doing a brisk business giving mainland Chinese customers cash by allowing them to use UnionPay cards to make fake purchases – a way of evading China’s strict currency-export controls.

On a recent day at the Choi Seng Jewellery and Watches company, a middle-aged woman strode to the counter past dusty shelves of watches. She handed the clerk her UnionPay card and received HK$300,000 ($50,000) in cash. She signed a credit card receipt describing the transaction as a “general sale”, stuffed the cash into her handbag and strolled over to the Ponte 16 casino next door.

The withdrawal far exceeded the daily limit of 20,000 yuan, or $3,200, in cash that individual Chinese can legally move out of the mainland. “Don’t worry,” said a store clerk when asked about the legality of the transaction. “Everyone does this.”