It's likely that the growing popularity of bitcoin reflects the anxiety of Chinese investors who want to protect their wealth against possible sharp declines in the Chinese currency, and the vagaries of Chinese politics. And one way to do this is by converting their yuan into bitcoin.

And this appears to vindicate the prediction of bitcoin's creator, who goes by the pseudonym Satoshi Nakamoto. Back in 2009, Nakamoto wrote that the traditional currencies are flawed, because they rely on trust. "The central bank must be trusted not to debase the currency, but the history of fiat currencies is fully of breaches of that trust", he argued.

Fears that China's central bank is determined to push its currency lower have been fanned after its decision on Monday to set the daily yuan-fixing at its weakest level against the US dollar in more than five years.

The People's Bank of China set its daily reference rate for the yuan against the US dollar at 6.5784, the weakest level since February 2011. In onshore trading, the yuan is allowed to move 2 per cent above and below the reference rate.

The Chinese central bank appears to be taking advantage of the strengthening US dollar to edge its currency lower. So far this month, the yuan has weakened 1.65 per cent against the US dollar, the biggest monthly decline since August last year when the PBoC sent tremors through financial markets with a shock 1.9 per cent devaluation.

At the same time, the US dollar has climbed amid growing expectations that the US central bank will soon hike interest rates. This view was reinforced by comments from Janet Yellen, the head of the US Federal Reserve, who said on Friday that it would be "appropriate" for the Fed to "gradually and cautiously" raise interest rates in coming months.

But the Chinese central bank is in a dilemma. On the one hand, it wants to gradually move its currency lower. At the same time, however, it wants to avoid a repeat of the situation earlier this year when fears about a sharp devaluation of the yuan triggered heavy capital outflows from China.

China's foreign exchange reserves have declined since June 2014 when they peaked at just under $US4 trillion. Since then, worries about slowing Chinese growth have encouraged Chinese households and businesses to shift money out of the country. According to estimates from the Institute for International Finance, China saw $US676 billion in net capital outflows in 2015.


To stem these heavy capital outflows, Beijing introduced tougher capital controls, including limiting the supply of US dollars that can be converted at banks, and subjecting overseas funds transfers to increased scrutiny.

And these efforts appear to be successful. China's foreign exchange reserves rose for a second straight month to $US3.22 trillion in April.

All the same, it's likely that wealthy Chinese will continue to look for ways to protect their wealth, particularly in offshore investments, as Chinese President Xi Jinping presses ahead with his crackdown on corruption.

Xi's campaign, which has already led to thousands of convictions, is deeply alarming of China's business and political elite. They worry that their wealth and political connections may not be enough to protect them, particularly after the disappearance last December of high-profile Chinese billionaire Guo Guangchang, the head of Fosun Group, the country's largest private conglomerate.

Although Guo subsequently reappeared, China's business elite has become even more aware of their vulnerability to Beijing's shifting political winds. And they appear to be open to trying new ways to protect their wealth.