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Attention Byron Wien: Here’s a real 2017 surprise for you – a digital currency will exceed the value of an ounce of gold, the precious metal that has served as a store of value and medium of exchange for 5,000 years.

Welcome to 2017, where the surprises are likely to come thick and fast if the first week of trading is a signpost for remainder of the year. It looms as a year where the annual list of 10 surprises penned by Wien, Blackstone’s resident soothsayer, may look a little tame by the time the champagne is popped to welcome in 2018. Who would have imagined that Laos – yes, Laos – would be the top performing stock market so far in 2017 in both local currency and U.S. dollar terms. Admittedly, stock picking in the landlocked Southeast Asian nation isn’t a taxing endeavor – there are only two stocks to choose from in the Laos Composite.

But it was Bitcoin that yielded the biggest surprise of the year so far. The price of the digital currency went asymptotic this week and momentarily surpassed the value of an ounce of gold, the traditional fallback hedge against fiat money misadventures. And then it all went horribly wrong. The price of a Bitcoin soared to $1,160 on Thursday before a violent selloff pushed prices to a low of $890 – a slide of 23%. The digital currency went from bull market to bear market in the space of about six hours – now that’s a surprise. But who cares about a digital currency that has crashed and burned before, right? The surge in Bitcoin is interesting because it reflects anxieties about the one question likely to keep global investors awake at night during 2017 – just how low can China’s currency go?

Bitcoin’s rally is yet another speculative boom made in China. It was stocks in 2014, then the baton passed to property, and now it looks like Bitcoin may be the new plaything for China’s speculator class. Mohamed El-Erian, Allianz’s chief economic advisor this week lamented how he was “yet to find a convincing explanation for the impressive bitcoin run”. Really?! Could it have something to do with 1.3 billion Chinese freaking out that it’s only a matter of time before the yuan has a 7-handle against the U.S. dollar, if not worse? The Chinese have been hoovering up Bitcoin, with some data trackers indicating yuan-based buyers have accounted for more than 98% of Bitcoin volumes over the past seven days, as well as the past month and the last six months. Who could blame them for buying: the yuan notched up its third consecutive year of declines in 2016 with a 7% fall, the biggest since 1994. Fueling the paranoia of China’s jittery speculators was Wien’s inclusion of a slump in the value of the yuan to a puke-inducing 8 against the U.S. dollar in his yearly crystal ball gazing exercise. If Beijing allows that to happen, it may need a few more cash sniffing dogs at the departure lounges of China’s international airports.

While Beijing is doing its best Baghdad Bob impression to convince everyone that there’s nothing to see here and the yuan will remain stable, savvy Chinese are scrambling for the exits as Beijing plays whack-a-mole with increasingly rapid fire diktats aimed at supporting the currency and choking the outflow of capital beyond China’s border. Last week it was changing the composition of the currency basket to dilute the impact of the strong U.S. dollar. This week, there were suggestions the government may order state-owned enterprises to temporarily repatriate U.S. dollars. But it was a muscular display from the People’s Bank of China that was Bitcoin’s undoing, with the central bank this week pushing the yuan to its highest level against the U.S. dollar since November. While the PBOC may have won the battle, it’s yet to be seen whether it can win the war against those fighting to push the yuan lower. Goldman Sachs isn’t convinced, forecasting the yuan will fall to 7.3 against the U.S. dollar by the end of the year.

The stock market rout of 2015 showcased the collateral damage that can be done when Beijing’s mandarins start making policy on the run. I’m not advocating everyone go maximum bullish on Bitcoin. History shows Bitcoin prices are highly volatile and investors can get burnt: the digital currency slumped 85% from its December 2013 peak around $1,130 to a low of $185 in January 2015. But the rally says a lot about the faith in Chinese policy makers when the locals take comfort in an untested digital currency that exists beyond the reach of Beijing’s cack-handed apparatchiks, rather than stay the course with a currency that could be torpedoed by a policy misfire from Zhongnanhai.

The problem is China is stuck in a vicious circle. As U.S. yields go up, it whets the appetite of Chinese yield hunters. In order to buy U.S. bonds – or anything that returns more than what’s available in the land of financial repression – they have to sell yuan. As the yuan goes down, Beijing needs to sell some of its U.S. bonds to keep the yuan in check. That selling then lifts the yields on U.S. bonds. Rinse and repeat. Supporting the yuan comes with an expensive price tag: Beijing’s holding of U.S. treasuries has shrunk to $1.1 trillion, $200 billion less than its peak of $1.3 trillion in November 2013. Beijing faces a wicked problem: either raise rates to bolster the currency but watch the economy go splat, or let the currency go and cop both barrels from President Trump. Good luck figuring that out.

Leading China economists have declared 2017 to be a year that Beijing will focus on stability ahead of a shake-up of the Communist Party’s senior ranks. But it’s worth remembering that the prognostications for China’s economy at this time last year saw a lot of hand wringing about a day of reckoning for its exuberant use of debt to juice growth. It didn’t happen. If 2016 taught us anything it’s that shorting “experts” and going long Main Street can pay off handsomely. In China’s case, it may be best to watch what the locals are doing rather than listen to what they’re saying, especially when it comes to the currency.

Email: robert.guy@barrons.com

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