As China’s economic instability deepens, Bitcoin could be poised to benefit from the capital flight, attracting new investments.
The new year has brought little relief for Chinese markets, which remain in decline, adding to the growing sense of uncertainty that may fuel the ongoing Bitcoin (BTC) rally. Investors are increasingly seeking alternatives as the situation worsens.
On Tuesday, the Chinese yuan (CNY) hit 7.32 per U.S. dollar, its lowest level since September 2023, according to TradingView data. The yuan has dropped by 0.4% this month, continuing its three-month slide, despite the People’s Bank of China (PBOC) trying to calm fears of a possible U.S. tariff escalation under President-elect Donald Trump.
The CSI 300, a key index of China’s blue-chip stocks, fell to its lowest point since September on Monday, while the ChiNEXT Index, which tracks growth stocks in China, has dropped 8% since the end of December, according to TradingView.
Additionally, the yield on China’s 10-year government bonds has fallen to 1.6%, a sharp decline of 100 basis points from last year, highlighting concerns over deflation in the Chinese economy in contrast to rising yields in developed economies like the U.S.
These conditions could encourage capital outflows from China, with Bitcoin being one of the primary beneficiaries as investors look for alternative assets, according to analysts at LondonCryptoClub.
“China appears to be letting the yuan slide without actively defending it, which will likely accelerate capital flight. Bitcoin is an obvious place for some of those outflows, especially with the tight capital controls in place that restrict traditional methods of moving money out of China,” said the founders of LondonCryptoClub to CoinDesk. “When China devalued the yuan in 2015, Bitcoin’s price surged by more than threefold.”
The PBOC has so far relied mainly on its daily reference rate and liquidity measures to try to manage the yuan’s decline, rather than direct market intervention. On Monday, the PBOC set the reference rate stronger than the critical 7.20 per USD level in an attempt to prevent further downward pressure on the yuan. This daily rate has become an important tool in managing market expectations, especially since Trump’s election.
The PBOC has also tightened liquidity in offshore yuan markets to support the currency. The overnight interbank interest rate in Hong Kong surged to 8.1%, the highest level since June 2021, as part of the central bank’s efforts to stabilize the yuan.
However, Bitcoin investors need to stay cautious about the possibility of direct intervention by the PBOC. If the central bank begins selling U.S. dollars to prop up the yuan, this could cause the U.S. dollar to appreciate, which might cap the upside for Bitcoin and other assets priced in dollars.
When the PBOC sells U.S. dollars to support the yuan, it simultaneously buys dollars from other currencies, maintaining the dollar’s proportion in China’s reserves. This process can tighten financial conditions and affect risk assets like Bitcoin.
The U.S. dollar index has already surged from 100 to 108 in the past three months, in line with rising U.S. Treasury yields. If the dollar continues to strengthen, it could dampen demand for riskier assets such as Bitcoin, potentially limiting future price gains.
