Photo: Reuters/Thomas White

Pot. Kettle. Black. Bitcoin enthusiasts could be excused for thinking as much after China shook their world with a regulatory rebuke this week to render so-called initial coin offerings illegal.

Cryptocurrencies are used in initial coin offerings, a form of crowd-sourced fundraising, which after China’s move raises questions about whether they are ready for primetime.

But investors might be tempted to turn the tables on Beijing as the yuan enjoys a truly weird “flight to quality” bid.

China’s minimally convertible currency is especially in vogue since North Korea tested its sixth nuclear weapon on September 3. And why not, some might argue.

The yuan is now a member of the International Monetary Fund’s top-five club. Nor is the mainland directly in harm’s way from Kim Jong-un’s intercontinental ballistic missiles. The offshore yuan has risen for 15 consecutive days.

Let’s not get carried away, though. Liquidity concerns are an obvious concern – ability to get money in and out of a nation is a vital determinant of safe-haven status.

Here, the IMF’s 2015 decision to welcome the yuan into its special-drawing rights program was more aspirational than laudatory.

The hope was that, once inside the IMF matrix, Beijing would be forced to be more transparent, strengthen the financial system, loosen the capital account and curb excess debt and credit.

Just like blockchain currency mediums, though, the yuan isn’t ready for primetime. Don’t take my word for it, take the IMF’s.

Just like blockchain currency mediums, though, the yuan isn’t ready for primetime. Don’t take my word for it, take the IMF’s.

In its annual checkup in the second-biggest economy, the lender said China is on a “dangerous trajectory.” The IMF warned Beijing’s “credit-fueled growth” is “increasing risks of a disruptive adjustment and/or a marked growth slowdown.”

In January 2016, IMF head Christine Lagarde said categorizing the yuan as a top currency was a “clear indication of the reforms that have been implemented and will continue to be implemented and is a clear, stronger representation of the global economy.”

IMF Managing Director Christine Lagarde attends the 60th anniversary of the Paris Club at the Ministry of Finance in Paris, France, July 1, 2016. Reuters/Jacky Naegelen

Twenty months later, growing imbalances are trumping the reforms about which Lagarde talked.

China, for example, now has one of the world’s largest banking sectors – in fact, four of the five biggest institutions by assets are Chinese.

Trouble is, at 310% of GDP, the role banks play in China’s economy is already above the average of the most developed economies and almost three times that of emerging nations.

“The sharp growth in recent years reflects both a rise in credit to the real economy and intra-financial sector claims,” the IMF says.

“The increase in size, complexity and interconnectedness of these exposures have resulted in sharply rising risks.” The IMF is referring to an opaque shadow-banking system President Xi Jinping’s team has been loath to curtail for fear of slamming GDP.

Just one month away from the Communist Party’s twice-a-decade congress, Xi is firmly in circle-the-wagons mode.

Just one month away from the Communist Party’s twice-a-decade congress, Xi is firmly in circle-the-wagons mode.

Nothing is more important to the party’s legitimacy with 1.4 billion Chinese than keeping growth at, or above, the 6.5% growth target.

That means local governments are doing their worst via borrowing and fresh credit creation to make their growth quota for the motherland.

Yet for a strongman, Xi has been surprisingly timid about retooling.

Investors and pundits highlight China’s startup boom and investments in renewable energy, robotics, biochemicals and other industries of the future. But the foundations underpinning it all are shaky.

The glacial pace of reforms, five years into Xi’s reign, comes as China grapples with the transformational pressures all nations do when they move upmarket.

Surging competition from India, Vietnam and the Philippines and rising wages are costing China factory jobs. And then there’s the ever-present risk of President Donald Trump launching a trade war.

Beijing’s crackdown on globally-acquisitive companies like Anbang Insurance Group, Dalian Wanda Group, Fosun Group and HNA Group suggests an air of policy chaos one wouldn’t expect from a leader touted as the strongest reformer since Deng Xiaoping.

Long-term investment in the other direction – into China – is slowing, too.

Few doubt the yuan will be a top currency someday. It might even supplant the dollar. But not before Xi gets a hold of the bubbles, risks and uncertainties clouding China’s outlook.

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