China's Currency Issues Impacting Bitcoin: A Crypto Analysis

• China's Economic Situation Influences Bitcoin
• China's Controlled Currency
• Impact of Currency Measures on Bitcoin
• Possible Repercussions for Bitcoin

China's Economic Situation Influences Bitcoin

In light of the recent depreciation in China's national currency, coupled with the ongoing risk of deflation and the decline of the property market, foreign investors have begun to withdraw capital from the country. Beijing's efforts to tackle the downturn could pose a risk to Bitcoin$42,260 -0.64% via the foreign exchange channel, as per the view of an analyst.

China's Controlled Currency

The highly regulated Chinese yuan (CNY) has experienced a 1.39% decrease against the US dollar, while the offshore version of this currency in Hong Kong, known as the CNH, has recorded a 1.25% dip. The country's primary equity index, the Shanghai Composite, has seen more than a 7% decline, hitting a low not seen since March 2020, as indicated by the charting tool, TradingView.

The People's Bank of China (PBOC) loosely ties the value of the CNY to 24 different currencies via a managed-float system. This system allows for a 2% fluctuation on either side of the daily fix or reference point. Recently, China's state banks have been selling US dollars onshore while tightening the liquidity of the offshore foreign exchange market to support the yuan, as reported by Reuters.

Impact of Currency Measures on Bitcoin

The aforementioned measures risk causing a widespread increase in USD strength, a tightening of global financial conditions, and a decrease in investors' exposure to risky assets, such as Bitcoin and tech stocks. This is because the PBOC, when selling USD onshore in support of the yuan, buys the USD against other currencies, in order to maintain the dollar's proportion in the country's foreign exchange reserves. Given everything else being equal, such intervention could potentially boost the dollar index (DXY), which monitors the USD value against major currencies.

Bitcoin tends to have an inverse correlation with the USD. The well-documented surge of Bitcoin in Q4 2023, which saw a 50% increase largely credited to the optimism surrounding the ETF spot, occurred as the dollar index fell by 4.5%.

Possible Repercussions for Bitcoin

As observed by David Brickell, head of international distribution at Toronto-based crypto platform FRNT Financial, state banks in China have been observed selling dollars in order to bolster the yuan, while simultaneously curtailing lending to tighten currency liquidity. This makes shorting the currency more costly and generally results in a broader USD strength, as dollars are bought back against other currencies to maintain FX reserve ratios.

China has a vested interest in maintaining limitations on BTC in order to preserve a semblance of currency stability and to deter capital flight. In the past, periods of pressure on the yuan have coincided with underperformance in BTC, noted Brickell.

The dollar index has already seen a 1.8% increase this month. Meanwhile, Bitcoin's value has seen a 4% decline to $40,500, despite reaching close to $49,000 at the start of the month.

Edited by Jonathan Stoker