Recently, the Chinese economy has encountered difficulties that pose significant risks to global growth. Economic activities and credit flows in the region are weakening, raising doubts about whether the Chinese government’s intervention alone can solve these issues.
Beyond the impact on global economic growth, investors are concerned that the turmoil in the Chinese real estate market could trigger a ripple effect on the US dollar and commodities. Conversely, this scenario could prove unfavorable for Bitcoin.
Bitcoin traders have valid concerns about the potential consequences of the fluctuations in the Chinese stock market. This unease stems from historical price trends and greater shifts in investor sentiment towards risk aversion during times of macroeconomic instability.
As depicted in the chart, Bitcoin’s price performance tends to align with the overall movement of the Chinese stock market, albeit with some time lag. In fact, the 30-day correlation between the CSI 300 Index and Bitcoin/USD reached an unusually high 70% on August 28th.
Interestingly, the recent growth in the stock market seems to have been primarily driven by measures announced by China on August 27th. According to Bloomberg, these measures are believed to include:
1. Special capital replenishment terms for the real estate sector to support companies in managing challenges and maintaining economic stability.
2. Reduced fees to encourage companies to buy back stocks, potentially boosting stock prices and investor confidence.
3. Selected commercial companies are allowed to lower leverage ratios, making it easier for investors to trade with borrowed capital.
4. Upcoming initial public offerings are expected to face stringent regulatory oversight, reducing competition for existing companies.
5. Limiting sales below the initial public offering price within a specific period to curb excessive volatility and protect investors from immediate losses.
However, according to Ting Lu, a China economist at Nomura Holdings, it was quickly realized that the initial economic stimulus measures did not have the desired effect. He noted that these measures “cannot stop the downtrend, and their impact will only exist for a short period unless they come with support for the real economy.”
Besides the significant 23.8% drop in the CSI 300 Index since July, there are clear signs of foreign capital fleeing the Chinese stock market. According to Bloomberg, global funds sold around $1.1 billion worth of shares on August 28th alone, contributing to a total outflow of over $11 billion in August, possibly reaching a record high.
The critical question revolves around why China’s effective economic stimulus packages have not been deployed. The answer might lie in the nation’s currency value. The value of the Chinese yuan against the US dollar has continuously declined, as shown in the yuan price chart. This trend is concerning as it indicates historically low levels for the currency.
Despite encouraging measures like tax cuts, government bond repurchases, and currency distribution to citizens, which could lead to increased money circulation and rising debt, they continue to negatively impact the purchasing power of the yuan. The situation is complex and lacking a specific solution, potentially resulting in considerably slower economic growth for China.
The strong US dollar is bad news for Bitcoin. Interestingly, the main beneficiary of the capital outflow from the Chinese stock market appears to be the US stock market, ultimately strengthening the US dollar. As capital flows out of Chinese stocks, it tends to weaken the domestic currency, as investors seek lower-risk options like the S&P 500 index or US currency market funds.
Unfortunately, this scenario could pose a challenge for Bitcoin, as it is priced in dollars and competes as an alternative store of value. This could be a concern for those predicting a cryptocurrency price surge due to global economic downturn.
However, market dynamics can swiftly change, once investors realize the potential overvaluation of the US stock market or when there are signs of an impending recession in the US, regardless of the relative strength of the US dollar against other currencies. Hence, the value of Bitcoin as an independent and alternative hedge retains its significance, regardless of the current inability to reclaim the $29,000 support level.