- The latest measures taken by Beijing, according to an observer, pose a downward risk through the foreign exchange channel using Bitcoin (BTC).
- China’s measurement index, the Shanghai Composite Index, has fallen to its lowest level since March 2020, with a decrease of over 7%, according to data.
- When the People’s Bank of China (PBOC) sells US dollars onshore to support the yuan, it has the potential to raise the value of the greenback against majors, as tracked by the dollar index (DXY).
China faces risks due to the continuation of the deflation threat and the stagnation of the real estate market: What will happen now?
Effects of China’s Measures Against Risks
China is experiencing a devaluation of its currency again due to the withdrawal of foreign investors from the country amid the ongoing deflation threat and the stagnation of the real estate market. The latest measures taken by Beijing, according to an observer, pose a downward risk through the foreign exchange channel using Bitcoin (BTC).
The tightly controlled Chinese yuan (CNY) experienced a 1.39% decline against the US dollar, and the offshore CNH version in Hong Kong recorded a 1.25% drop. China’s measurement index, the Shanghai Composite Index, fell to its lowest level since March 2020, with a decrease of over 7%, according to data.
The People’s Bank of China (PBOC) uses a managed floating system that loosely ties the value of CNY to a basket of 24 currencies, allowing the local currency to fluctuate daily by 2% above or below its fixed or reference point.
According to recent reports, on Monday, China’s state-owned banks tightened liquidity in the offshore foreign exchange market in Hong Kong by selling US dollars onshore to support the yuan. The offshore yuan one-week CNH Hong Kong Interbank Offered Rate – an indicator of offshore yuan liquidity conditions – rose to 4.95045%, the highest level since September 26.
Such measures can generally lead to the strengthening of the USD, tighter financial conditions worldwide, and a reduction in investors’ exposure to risky assets like bitcoin and technology stocks. This is because when the PBOC sells US dollars onshore to support the yuan, it has the potential to boost the value of the greenback against majors, as tracked by the dollar index (DXY).
Tightening Yuan Liquidity
It is well-known that Bitcoin has an inverse relationship with the USD. The cryptocurrency’s 50% surge in the fourth quarter of 2023 was largely attributed to optimism around spot ETFs, while it coincided with a 4.5% decline in the dollar index. David Brickell, head of international distribution at FRNT Financial, stated, “Today, it was observed that major state banks were selling dollars and tightening yuan liquidity by curtailing lending to support the yuan. This typically provides feedback where dollars are bought back against other currencies to maintain FX reserve ratios and generally results in the strengthening of the dollar.”
Brickell continued, “China is encouraged to keep BTC limited as a sort of cover for relative currency stability and to prevent capital outflows. Past events when the yuan came under pressure have coincided with periods of underperformance in BTC,” added Brickell. The dollar index has already gained 1.8% this month.
