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China's Economic Unrest: Ripple Effects and Bitcoin's Path

Martin Walker
Aug 30, 2023 at 11:32 am

Recent reports in the media have been extensively covering the rather intricate situation unfolding in China's economic landscape. The prevailing narrative suggests that the economy is currently facing certain challenges that might have broader implications on the global stage. It's worth noting that economic activities in the region have been displaying a somewhat lackluster performance, and this, in turn, has led to a decrease in the flow of credit, which, as experts point out, could potentially have some far-reaching consequences.

For instance, if we look at the data, it becomes evident that the industrial output numbers for July have shown a growth rate of 3.7% compared to the corresponding period in the prior year. However, this rate of growth seems to be trailing behind the slightly more impressive growth rate of 4.4% observed in June. Additionally, there seems to be a trend of reduced enthusiasm among Chinese banks when it comes to issuing new loans, with a rather substantial 89% drop in new loans issued in July when compared to the prior month of June. This dip in loan issuance is reportedly the lowest it has been since the financial crisis back in late 2009.

What's causing even more furrowed brows among investors is the potential ripple effect that the ongoing turmoil in China's real estate market could set off. This ripple effect, if it indeed occurs, might not be limited to China alone, as concerns are mounting that it could reverberate across the U.S. dollar and commodities market. This, as some analysts speculate, could potentially create a less than ideal scenario for the trajectory of Bitcoin (BTC), the popular cryptocurrency.

As of now, the ticker shows that Bitcoin has seen a dip to $27,398, indicating a certain level of turbulence in the market. However, it's interesting to note that just a while back, on August 28 to be precise, the Shanghai Shenzhen CSI 300 Index, which is widely regarded as a key indicator of China's stock market, appeared to be going through a roller coaster ride. Initially, there was an impressive surge of 5.5% in the index, only for it to eventually close the day with a more modest 1.2% gain. Despite this roller coaster, it's worth mentioning that Chinese shares still seem to be among the less impressive performers when compared to their global counterparts in the equity market, as duly noted by those keeping a close eye on market dynamics.

Interestingly, the Bitcoin trading community seems to be buzzing with legitimate concerns regarding the potential aftershocks stemming from the Chinese stock market's oscillations. This concern, it appears, is rooted in historical patterns of price movements and a more overarching shift in investor sentiment. This shift seems to be leaning toward a preference for avoiding markets that carry higher risks, particularly during times when the broader economic outlook is shrouded in uncertainty.

Comparison between Bitcoin/USD index (shown in purple on the left) and China CSI 300 Index (depicted in blue on the right). Data source: TradingView.Comparison between Bitcoin/USD index (shown in purple on the left) and China CSI 300 Index (depicted in blue on the right). Data source: TradingView.  

As some charts seem to illustrate, Bitcoin's price seems to have a certain alignment with the general trajectory of China's stock market. However, it's important to remember that these correlations might not always be easily predictable or instantaneous. In fact, recent data suggests that the 30-day correlation between the CSI 300 Index and Bitcoin/USD reached an unexpectedly high 70% on August 28.

Is China capable of fostering investor confidence?

Now, the million-dollar question is whether China can manage to instill a sense of confidence in the minds of investors. Interestingly, the recent upswing in the stock market appears to have been largely prompted by a set of measures announced by Chinese authorities on August 27. These measures, as reportedly outlined by sources at Bloomberg, include:

1. Introduction of specialized refinancing terms aimed at providing a helping hand to the real estate sector. This is anticipated to assist companies in tackling the various challenges they face, ultimately contributing to economic stability.

2. Implementation of reductions in fees that might serve as an incentive for companies to consider buying back their own shares. This potential increase in share prices, in turn, could potentially boost investor confidence in the market.

3. Notable lowering of leverage margins by select trading firms, with the aim of making trading using borrowed funds a more accessible option for a broader range of investors.

4. Elevated levels of scrutiny for new stock offerings. This move, it is believed, could help curtail excessive competition in the market and potentially safeguard existing companies.

5. Introduction of limits on selling below the initial public offering price for a specific period. This measure, which is touted as a means of preventing undue volatility, could provide some level of protection for investors against sudden and substantial losses.

However, it didn't take long for experts to start questioning the effectiveness of these measures that were initially hailed as a form of economic stimulus. One notable voice in this discourse is Ting Lu, Chief China Economist at Nomura Holdings, who pointed out that these measures seem to fall short of effectively arresting the downward trend in the market. Lu highlighted that for any meaningful impact to be achieved, these measures would need to be complemented by more comprehensive support for the actual economy.

Considering the substantial 23.8% decline in the CSI 300 Index since July, coupled with observable signs of foreign capital fleeing the Chinese stock market, it's not surprising that eyebrows are being raised. To put it in perspective, it's reported that a staggering $1.1 billion worth of shares were sold by global funds on August 28 alone. These actions have contributed to a situation where the outflows in August have surpassed the $11 billion mark, potentially making it a historical record in terms of capital flight, at least according to reports by Bloomberg.

Amid all this uncertainty, one of the most pressing questions remains unanswered: Why does it appear that China is struggling to implement effective economic stimulus packages? The answer, in a nuanced way, could be found in the realm of currency dynamics. It's no secret that the value of the yuan in relation to the U.S. dollar has been on a consistent decline, as duly demonstrated by available data. This trend, as many experts point out, raises concerns as it seems to be pointing towards the yuan reaching historically low levels against the dollar.

 Comparison between the Chinese yuan and the U.S. dollar. Data source: TradingView.
Comparison between the Chinese yuan and the U.S. dollar. Data source: TradingView.

Despite a series of incentives that include things like tax breaks, government-led buybacks of bonds, and even monetary distributions to the population, all of which theoretically have the potential to inject more money into circulation and possibly lead to a surge in debt levels, there's a side effect. This side effect seems to manifest in the form of a negative impact on the purchasing power of the yuan. The situation is intricate, and experts agree that finding a simple, straightforward solution is no mean feat. This complexity is what might eventually lead to China grappling with a significantly slower pace of economic growth.

A robust U.S. dollar spells trouble for the value of Bitcoin

Interestingly, the current dynamics seem to be favoring the United States' stock market, which appears to be reaping the benefits of the capital flowing out of China's stock market. This influx of capital seems to be bolstering the U.S. dollar, which, as a result, is gaining strength. This situation, though beneficial for the U.S. economy, could potentially pose a challenge for Bitcoin. The cryptocurrency, often touted as an alternative store of value, is typically priced in dollars. This means that any strengthening of the dollar could potentially have a dampening effect on Bitcoin's value.

While many are looking at the possibility of a cryptocurrency rally amidst global economic uncertainties, it's important to recognize that the U.S. dollar doesn't necessarily need to be perfect. It only needs to outshine its competing fiat counterparts to have an impact. However, market dynamics can be swift and unpredictable. As soon as investors start perceiving signs of potential overvaluation in the

U.S. stock market or indications of an impending economic slowdown, the landscape could change dramatically. This change might occur regardless of the U.S. dollar's comparative strength against other currencies. In this rather intricate environment, the value of Bitcoin as an independent and alternative hedge seems to remain intact, even if it's currently grappling with a challenge in reclaiming the $29,000 support level.

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