The new year has brought little respite for Chinese assets, as they continue to experience a notable downturn that could inadvertently contribute to the ongoing momentum of the Bitcoin (BTC) bull run.
Recent data from TradingView reveals that the Chinese yuan (CNY) has slid to 3.22 per U.S. dollar, marking its lowest point since September 2023. The currency has depreciated by 0.4% this month alone, extending a troubling three-month losing streak despite the People’s Bank of China (PBOC) efforts to assuage worries over potential U.S. tariffs under President-elect Donald Trump’s administration.
On the stock front, the CSI 300, which tracks the performance of blue-chip stocks in mainland China, has plummeted to levels not seen since September, while the ChiNEXT Index, known for monitoring innovative and high-growth small and medium enterprises (SMEs) within China, has witnessed an 8% decline since the beginning of the year, according to figures from TradingView.
Adding to these economic challenges, the yield on the 10-year Chinese government bond has dropped to 1.6%, a staggering decline of 100 basis points compared to last year. This falling yield stands in stark contrast to rising yields in advanced economies, particularly in the U.S., and highlights escalating fears surrounding an exacerbation of deflation within China.
The emerging situation appears poised to encourage capital flight from the country, thus potentially elevating the demand for alternative investments, such as Bitcoin, according to insights from the LondonCryptoClub.
As articulated by the founders of LondonCryptoClub, “China seems to be allowing the currency to decline without defending it, which may lead to an outright devaluation. Such a development would likely accelerate capital outflows from China, with Bitcoin becoming a prime target for some of those flows, especially given the capital controls that complicate traditional channels for moving money abroad.” They further noted that during China’s devaluation in 2015, Bitcoin’s value surged over threefold.
It’s worth mentioning that the PBOC currently relies on its daily fix and liquidity measures to manage the yuan instead of resorting to direct intervention, which may create barriers for cryptocurrencies.
On Monday, the PBOC implemented a daily reference rate stronger than the well-monitored 7.20 per USD to counteract negative expectations surrounding the CNY. This daily fix has been the central bank’s preferred approach for managing market sentiments and has consistently remained above 7.20 since Trump’s electoral victory in early November.
Furthermore, the PBOC has undertaken steps to tighten liquidity in the offshore (Hong Kong) market to bolster the yuan. This is illustrated by the spike in the overnight interbank interest rate for the offshore yuan in Hong Kong, which surged to 8.1%, the highest level since June 2021.
Despite these measures, Bitcoin advocates should remain vigilant for any potential outright intervention by the PBOC, such as the sale of dollar reserves to stabilize the yuan, which could impact the dollar index and suppress the upside potential for dollar-denominated assets like BTC.
Whenever the PBOC sells dollars to support the yuan, it simultaneously purchases the greenback against other foreign currencies to stabilize the composition of USD in reserves. This practice inherently leads to financial tightening via the foreign exchange channel.
Recently, the dollar index has surged from approximately 100 to 108 within the past three months, primarily reflecting the rise in Treasury yields, indicating that any further strength could dampen investor interest in higher-risk assets.
