January 09, 2025
By Our Correspondent
The exchange rate between the Offshore Chinese Yuan (CNH) and the U.S. Dollar has garnered significant attention from global macro traders as it nears a pivotal level of 7.368.
On January 7, 2025, André Dragosch, the European Head of Research at Bitwise Asset Management, elaborated on the social media platform X regarding the importance of this situation and its potential ramifications, which may extend beyond conventional markets to encompass Bitcoin and the wider cryptocurrency sector.
The Yuan, China’s currency, exists in two variants. The Onshore Yuan (CNY) is utilized within mainland China and is closely regulated by the People’s Bank of China (PBoC), the nation’s central bank. Conversely, the Offshore Yuan (CNH), which is traded outside of mainland China, particularly in locations such as Hong Kong, is more susceptible to market dynamics. This characteristic renders it a crucial barometer for international investors’ perceptions of China’s economic stability.
The exchange rate between the Yuan and the U.S. Dollar serves as an indicator of the Yuan’s strength. A depreciating Yuan (indicated by a higher exchange rate) suggests diminished confidence in China’s economic prospects or increasing financial challenges. Dragosch’s commentary emphasizes that the PBoC is actively working to defend the Offshore Yuan at the 7.368 mark. This indicates the central bank’s efforts to prevent the Yuan from depreciating beyond this threshold in order to maintain economic stability and mitigate additional financial strain.
The PBoC possesses various mechanisms to influence the value of the Yuan. Dragosch identified two primary strategies. Firstly, the PBoC establishes a daily midpoint (or “fixing”) for the Yuan’s exchange rate. By adjusting the fixing downward, the PBoC conveys its intention to bolster the Yuan. Secondly, the central bank can withdraw excess Yuan from the banking system. This is achieved through measures such as selling foreign currency reserves or issuing central bank bills. By reducing the availability of the Yuan, its value is enhanced, thereby contributing to the stabilization of the exchange rate.
These actions, although aimed at stabilizing the Yuan, introduce further complications for the economy. Stricter liquidity conditions may hinder banks and businesses in obtaining cash. This situation arises as the economy grapples with ongoing challenges, particularly in the real estate sector, manufacturing, and consumer expenditure. Dragosch has observed that high-frequency economic indicators already suggest an increase in recession risks within China.
Should the Yuan surpass the 7.368 threshold, the People’s Bank of China (PBoC) may be compelled to enhance its stabilization efforts for the currency. This could exacerbate liquidity issues, leading to what Dragosch describes as a “Yuan shock.” Such an occurrence might result in a rapid and significant devaluation of the Yuan, with consequential impacts on global markets.
For cryptocurrency traders, these developments are of paramount importance. Historically, periods of Yuan depreciation have been associated with a heightened interest in Bitcoin as a safe haven. Despite China’s capital controls restricting direct access to cryptocurrencies, a notable devaluation could drive Chinese investors to explore alternative assets, including Bitcoin.
A “Yuan shock” could also instigate wider volatility in traditional financial markets, presenting both risks and opportunities for cryptocurrency traders. While Bitcoin typically correlates with risk assets such as stocks during initial market downturns, it may later gain from its status as “digital gold” and a safeguard against fiat currency instability. Furthermore, the weakening of the Yuan could exert pressure on other emerging market currencies, potentially boosting demand for Bitcoin in regions facing devaluation threats.
