Chinese gov’t fires up the printer — How will it impact Bitcoin price?
Chinese gov’t fires up the printer — How will it impact Bitcoin price?

Recent headlines have covered how China’s troubled economy poses a major risk to global growth. Economic activity and credit flows are weakening in the region, and analysts are not convinced Beijing’s interventions will be enough to address what appear to be structural problems.

For example, the value added of industry in July increased by 3.7% year-on-year, which was lower than the 4.4% growth rate in June. In addition, new lending by Chinese banks fell 89% in July from June, the lowest level since late 2009.

In addition to the impact on global growth, investors are concerned that turmoil in China’s property market could have knock-on effects on the dollar and commodities. In turn, this could create an unfavorable situation for Bitcoin (BTC).

On Aug. 28, the CSI 300 , a key gauge of Chinese stocks, surged initially 5.5 percent before closing 1.2 percent higher. Despite the improvement, Chinese stocks remain among the worst performers globally in a stock index tracked by Bloomberg.

Bitcoin traders have legitimate concerns about the potential impact of Chinese stock market volatility. The unease stems from historical price trends and a broader shift in investor sentiment toward avoiding market risk during times of macroeconomic uncertainty.

Bitcoin/USD Index (purple, left) vs. China’s CSI 300 Index (blue, right). Source: TradingView

As the chart above shows, Bitcoin’s price performance tends to align with overall moves in China’s stock market, although these moves can be predicted or occur with time lags. In fact, the 30-day correlation between the CSI 300 and BTC/USD reached an unusually high 70% level on August 28.

Can the PROC instill confidence in investors?

Interestingly, the recent surge in stocks appears to be largely driven by the PROC’s measures Announce August 72nd. According to Bloomberg, the measures reportedly include:

  • Special refinancing terms for the real estate sector should help companies navigate the challenges and maintain economic stability.
  • Lower fees encourage companies to buy back stock, potentially boosting stock prices and investor confidence.
  • Selected trading firms reduce leverage margins, making it easier for investors to trade with borrowed funds.
  • IPOs are expected to face greater regulatory scrutiny, reducing competition from existing companies.
  • Limiting sales below the IPO price for a specified period to prevent excessive volatility and protect investors from immediate losses.

However, Lu Ting, chief China economist at Nomura Holdings, said it soon became apparent that the measures, initially touted as economic stimulus, had not had the desired effect. These measures, he noted, “are not enough to stem the slide, and unless they also support the real economy, their impact will be short-lived.”

In addition to the sharp 23.8% drop in the CSI 300 Index since July, there are also clear signs of foreign capital fleeing the Chinese stock market. Global funds sold about $1.1 billion worth of equities on Aug. 28 alone, leading to outflows of more than $11 billion in August, possibly a record, according to Bloomberg.

The key question is why China has not implemented an effective economic stimulus plan. The answer may lie in the value of the country’s currency. As the yuan price chart shows, the yuan has been falling against the dollar. This trend is worrisome because it indicates that the currency has reached an all-time low.

RMB/USD. Source: TradingView

While incentives such as tax breaks, government bond buybacks and currency distribution to the populace may lead to increased currency circulation and increased debt, this has a negative impact on the purchasing power of the renminbi. The complexity of the situation and the lack of simple solutions could lead to a sharp slowdown in China’s economic growth.

A Stronger Dollar Is Bad News for Bitcoin Price

Interestingly, the main beneficiary of outflows from Chinese equities appears to be U.S. equities, which ultimately strengthens the dollar. Local currencies tend to weaken as capital flows out of Chinese stocks and investors seek less risky options such as the S&P 500 or U.S. money market funds.

Unfortunately, this situation could present challenges for Bitcoin, considering that it is priced in U.S. dollars and competes as an alternative store of value. For those expecting cryptocurrencies to rise in response to a global economic downturn, it is important to note that the U.S. dollar is not necessarily perfect; nor is the U.S. dollar. It just needs to outperform other competing fiat currencies.

However, once investors recognize that U.S. stocks may be overvalued, or there are signs of an imminent mild U.S. recession, regardless of the relative strength of the U.S. dollar against other currencies, market dynamics can quickly shift. Therefore, despite the inability to reclaim the $29,000 support level at the moment, Bitcoin’s value as an independent alternative hedge remains valid.