People’s Bank of China (PBOC) let the yuan drop against the USD to its lowest exchange rate in four years. This recent development refueled speculation about the poor health of the global economy, which will unavoidably be affected by the economic turmoil in China. While the implications of such a development are grim, Bitcoin may see a rise in its demand as Chinese investors are flocking to cryptocurrencies and alternative assets in an attempt to protect their wealth. So, it should come as no surprise to bitcoin investors if they see their holdings rise while Chinese assets fall.
Ominous Chinese FX Dynamics
November marked the fifth consecutive month of decline in Chinese exports (measured on a year-over-year basis, YoY), and the thirteenth consecutive month of decline in Chinese imports (measured on a YoY basis). This situation is starting to look more like a trend and less like a random fluctuation, attracting the attention of both mainstream and bitcoin investors.
This has much to do with the fact that even though China managed to record a trade surplus of $55bn in November – a seemingly healthy figure in absolute terms – it was not enough to cover the excessive demand for USD, even if the entire amount was repatriated. This is why PBOC was forced to spend a sizable amount of its foreign exchange reserves in order to cover the gap.
According to Capital Economics calculations, PBOC had to spend approximately $57bn in order to defend its currency peg against the USD last month; meaning that China not only spent the $55bn earned by its exports, but had to spend an additional $57bn to counteract the respective outflows. This rounds up to a frightening $113bn of total capital outflows, just for the month of November vs. the $37bn recorded in October, marking an approximate 200% leap and reaching an all-time high. So, investors should be weary of the trade surpluses recorded as they might not be able to do what they are supposed to.
New Devaluations Around the Corner
All these events point to a new round of yuan devaluations, leaving China exposed to the global flow of capital, and quite volatile against its peers. Such expectations have proved to be self-fulfilling in the past, as market players react to them in an attempt to protect their assets, making them a reality. For bitcoin, the situation in China might be a positive development since it may benefit from such a realization. If Chinese bitcoin exchanges amount to 94% of the global bitcoin exchange volume, just imagine how much the demand for bitcoin will grow once it attracts new Chinese investors looking to diversify their holdings – at the very least, it’s worth to keep in mind.
Disclaimer: The views expressed in this article are solely those of the author and do not constitute investment advice. Trading digital assets such as Bitcoin carries a high level of risk, and may not be suitable for all investors. The high degree of volatility can work against you as well as for you. Before deciding to trade digital assets you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with digital assets trading, and seek advice from an independent financial advisor if you have any doubts.