Chinese Assets Continue Decline Amid Ongoing Bitcoin Bull Run
The new year has brought no respite for Chinese assets, which continue to plummet in a downward spiral that may further fuel the ongoing bitcoin (BTC) bull run. The Chinese yuan (CNY) hit an all-time low of 7.32 per U.S. dollar early on Tuesday, marking its lowest level since September 2023, according to data source TradingView. This decline represents a 0.4% drop in the currency’s value over the past month, extending the three-month losing trend despite attempts by the People’s Bank of China (PBOC) to calm investor nerves about impending U.S. tariffs under President-elect Donald Trump’s administration.
The CSI 300, a blue-chip index for mainland China’s stock exchanges, also plummeted to its lowest level since September on Monday, underscoring the severity of the market downturn. The ChiNEXT Index, a so-called risk barometer tracking the performance of innovative and high-growth small and medium-sized enterprises (SMEs) in China, has dropped by 8% since December 31, according to charting platform TradingView. This significant decline reflects growing concerns over worsening deflationary pressures in the country.
The yield on the 10-year Chinese government bond has also seen a remarkable drop of 100 basis points from a year ago, falling to an all-time low of 1.6%. This sharp decline contrasts starkly with the rising yields in advanced economies, including the U.S., and underscores the country’s deepening economic woes.
Potential Capital Flight and Bitcoin Demand
The ongoing decline in Chinese assets is likely to trigger capital flight from the country, potentially boosting demand for alternative investments such as bitcoin, according to LondonCryptoClub. "China appears to be letting the currency slide and no longer defending it, allowing the peg to crawl if not an outright devaluation," said the Founders of the LondonCryptoClub in a statement. "This will accelerate capital outflows from China, which we’re seeing with Chinese stocks under pressure. Bitcoin will be an obvious destination for some of those flows, especially with capital controls in place making it difficult to get capital out of China via traditional channels."
The founders also pointed out that the PBOC’s reliance on its daily fix and other liquidity measures to arrest the slide in the yuan rather than outright intervention could become a headwind for crypto. When China devalued in 2015, bitcoin promptly traded over three times higher, highlighting the potential for capital flight into cryptocurrency.
PBOC Efforts to Support Yuan
In an effort to temper bearish expectations about the CNY, the PBOC set its daily reference rate stronger than the widely-watched 7.20 per USD on Monday. The daily fix has been the central bank’s preferred tool in managing market expectations and has consistently held stronger than 7.20 per USD since Trump’s victory in the U.S. election in early November.
Meanwhile, the PBOC has also taken steps to tighten liquidity in the offshore (Hong Kong) market to support the yuan. As evidenced by the spike in the overnight interbank interest rate in Hong Kong rose to 8.1%, the highest since June 2021, the central bank is working to stem capital outflows.
Potential Outright Intervention and Dollar Index
However, BTC bulls need to keep a watchful eye on potential outright intervention involving the sale of dollars to prop up the yuan, as this could boost the dollar index and cap the upside in greenback-denominated assets like BTC. Whenever the PBOC sells the dollar to shore up the yuan, it concurrently buys the greenback against other currencies to keep the proportion of the USD in reserves stable.
This process causes financial tightening through the FX channel, which has already led to a surge in the dollar index from roughly 100 to 108 in just over three months. Further strength could zap investor appetite for riskier assets, potentially capping the upside in BTC and other cryptocurrencies.
Conclusion
The ongoing decline in Chinese assets is likely to continue fueling the bitcoin bull run, as investors seek alternative investments amidst growing concerns over deflationary pressures and capital flight from China. While the PBOC’s efforts to support the yuan are commendable, outright intervention could boost the dollar index and cap the upside in greenback-denominated assets like BTC. As such, it is essential for BTC bulls to remain vigilant and monitor market developments closely to capitalize on potential opportunities arising from the ongoing market dynamics.
