As observed yesterday, one of the main reasons for the post New Year's Day surge in Bitcoin to above $1,000 both in China and the US, is that over the past week, in order to further curb capital outflows, Beijing implemented a new set of capital controls according to which Chinese banks would be required to report all yuan-denominated cash transactions exceeding 50,000 yuan (around 7,100 US dollars) to the People's Bank of China (PBOC), down from the current level of 200,000 yuan, according to a PBOC document released on Friday. Cross-border transfers more than 200,000 yuan by individuals will also be subject to the report process. In terms of foreign currencies, the report threshold remains at the equivalent of 10,000 US dollars for both cash transactions and overseas transfers.

Amusingly, as Xinhua reported over the weekend, "the policy stoked worries that the government is trying to impose capital control in a disguised form" to which PBOC economist Ma Jun had the following retort "It is not capital control at all." Translation - it is.

And that's not all, because overnight, China's currency regulators, the State Administration of Foreign Exchange (SAFE) added its own round of capital controls when it said that it wanted to close loopholes exploited for purposes such as money laundering and illegally channeling money into overseas property. While the regulator left unchanged quotas of $50,000 of foreign currency per person a year, citizens faced draconian new disclosure requirements from Jan. 1, first and foremost requiring foreign currency buyers to indicate how they plan to use the money and when they plan to spend it.

Additionally, mainlanders will now have to fill in a more detailed form when applying to use their renewed US$50,000 foreign exchange quota, which restricts foreign exchange from being used to buy overseas property, securities, life insurance or other investment-style insurance products, according to the Standard.

Bloomberg summarizes the key elements of the latest set of FX conversion requirements:

• Customers must pledge money won’t be used for overseas purchases of property, securities, life insurance or investment-type insurance. While such rules aren’t new, citizens previously didn’t have to sign such a pledge
• Customers must give a more detailed account of the planned use of funds, such as business travel, overseas study, family visits, medical treatment, merchandise trade or purchases of non-investment insurance policies, including the timing, by year and month
• Violators of foreign-exchange rules will be added to the currency regulator’s watch list, denied foreign-exchange quota for three years and subjected to anti-money-laundering investigations
• Customers must confirm compliance with restrictions on money laundering, tax evasion and underground bank dealings
• Customers must now confirm they aren’t lending or borrowing quotas to or from other citizens

Approved uses of funds are restricted to non-investment including tourism, schooling, business travel and medical care. Those who violate rules will be fined 30 percent of the illegal purchase amount and an additional penalty of less than 50,000 yuan (HK$55,795). Violators will also be deprived of their foreign exchange quota for the year when they break the rule and for the following two years, according to the form.

The measures followed said on Saturday that from this month it will step up scrutiny of individual foreign currency purchases and strengthen punishments for illegal money outflows, although the US$50,000 (HK$387,750) annual individual quota will remain unchanged.

Capital outflows have been a growing concern for the government in the past year as it attempts to put the economy back on track and keep the currency stable without exhausting its foreign exchange reserves, which tumbled to US$3.052 trillion in November, the lowest in almost six years.

Meanwhile, whether due to these brand new measures or for some other reason, Reuters reports that despite concerns of a flood of FX conversions from Yuan to Dollars on the first day following the Yuan reset, there was little evidence at Beijing and Shanghai banks on Tuesday that Chinese individuals were rushing to lock in 2017 quotas to buy foreign exchange.

As we reported in late December, under China's capital controls, individuals are permitted to buy up to $50,000 in foreign exchange a year, and data shows January is typically a standout month for onshore foreign currency deposits.

Only a trickle of people at banks were seen selling yuan for dollars on the first business day of the new year when buyers in theory, could have made use of their quotas. At major bank branches in two of China's biggest cities, there were no queues on Tuesday, and the few individuals who changed money reported doing so with relative ease.

People enter a branch of the ICBC bank in Beijing, China, January 3, 2017.

"The whole process of changing money was pretty smooth and quick," said an office worker surnamed Xu, who withdrew $500 from an ICBC branch in Beijing on Tuesday for a coming vacation in the United States. Several other customers at banks in the two cities reported similar ease when changing amounts of money well below the quota.

Yang Zhao, chief China economist at Nomura in Hong Kong, said there wasn't any widespread panic about the falling yuan, so he had not expected a surge in demand.

However, as Reuters adds, it is unclear how much foreign currency exchange was being conducted online on Tuesday. Central bank data shows onshore foreign exchange deposits rose by almost 32 percent in the first 11 months of 2016, propelled in part by the yuan's fall to eight-year lows.

Aside from the rising forex deposits, there has been little indication of growing unease among ordinary Chinese - although the authorities were taking no chances, repeating a mantra that the economy is improving and there is no basis for depreciation of the yuan in the long term. In recent months, analysts have noted that the yuan was not alone in falling against the dollar, with most other emerging market currencies also suffering, which has helped keep sentiment around the yuan from souring too much.

Ultimately, however, it just may be that the unprecedented rollout of capital controls is finally forcing the Chinese to keep their funds at home. As Nomura's Zhao said, restrictions on use of foreign exchange limited anyone's options and so acted as a disincentive anyhow.

"You can't buy real estate. You can't purchase anything. Basically, you can only park that FX in your deposit account onshore with interest rates that are very low," he said.

Which means even more focus on the unregulated bitcoin, which has emerged as the last uncontrolled means of escaping China's draconian FX capital controls - as confirmed by its soaring price - but a more relevant question is how long until China finally does as it threatened in early November, when as BBG reported, China’s regulators were studying measures to limit transactions that use bitcoins to take funds out of the country, citing people familiar with the matter.

According to Bloomberg sources, Chinese officials were considering policies including restricting domestic bitcoin exchanges from moving the cryptocurrency to platforms outside the nation and imposing quotas on the amount of bitcoins that can be sent abroad. Further indicating that Chinese regulators were "just a little behind the curve", they allegedly noticed only recently that some investors bought bitcoins on local exchanges and sold them offshore, evading rules on foreign exchange and cross-border fund flows, the report further reveals.

Curiously, for now, both SAFE and the PBOC has left Bitcoin mostly alone, perhaps because the total market cap of Bitcoin is still tiny in the grand scheme of things (Chinese outflows amount to roughly $1.1 trillion since they began in earnest in 2015), and maybe because members of China's politburo are themselves using bitcoin as a means of circumventing capital controls; however the higher the price of bitcoin rises, the sooner that particular status quo is likely to change, with adverse consequences for the price of bitcoin.