China’s Yuan Depreciation: Implications for Bitcoin
On Tuesday, China took a significant step by loosening its control over the yuan (CNY), allowing it to dip below a crucial threshold, likely as a reaction to President Donald Trump’s escalating tariffs. Analysts in the cryptocurrency space are observing that this depreciation of the yuan could create a favorable environment for bitcoin (BTC), drawing comparisons to similar historical occurrences.
In the early hours of Tuesday, the People’s Bank of China (PBOC) set the daily yuan fix at 7.2038 per dollar, marking the weakest value since September. Unlike the freely floating currencies such as the USD or euro, the yuan operates under a managed float system, permitted to trade within a 2% range on either side of the daily fix announced at 9:15 a.m. Beijing time. The 7.2 mark has long been viewed as a critical threshold for the central bank.
Historically, while the USD/CNY pair has briefly exceeded the 7.2 level since 2022, it has never managed to maintain a consistent position above it. However, the explicit decision by the PBOC to set the daily midpoint beyond this threshold signals a shift towards a managed depreciation of the yuan. This policy adjustment aims to keep Chinese exports more affordable and competitive, potentially mitigating the adverse effects of Trump’s tariffs on Chinese products.
Could Capital Flight Drive Bitcoin Investments?
The potential for managed depreciation might also instigate capital flight from China, with analysts suggesting that this capital could flow into cryptocurrencies. Markus Thielen, the founder of 10x Research, expressed in a note to clients on Monday, “With the U.S. exerting comprehensive economic pressure on China, it may feel compelled to respond through quantitative easing and currency devaluation. Should China allow capital flight to occur, Bitcoin could experience a significant surge, reminiscent of its performance in 2015.”
In August 2015, the Chinese central bank devalued the yuan by 1.9%, the most significant single-day drop in over two decades, which sent shockwaves throughout global financial markets. Initially, Bitcoin saw a decline of over 20% alongside U.S. stocks, but it quickly rebounded, surging nearly 60% over the next four months.
Ben Zhou, the CEO and founder of the crypto exchange Bybit, echoed similar sentiments on social media platform X, stating, “China’s strategy to lower the RMB in response to tariffs has historically led to an influx of Chinese capital into BTC, which is bullish for the cryptocurrency.”
Navigating Regulatory Challenges
While historical trends suggest a positive reaction for BTC following yuan depreciation, it is essential to note that China has adopted a stringent anti-crypto stance in recent years, citing concerns over financial stability. The country has implemented some of the harshest regulations on cryptocurrencies globally.
A new regulation introduced earlier this year mandates banks to monitor and report any suspicious international transactions, including those related to cryptocurrencies. Banks are now obligated to investigate and report any potentially risky crypto trades, which could result in financial restrictions or even blacklisting of the trader.
This rigorous regulatory environment presents significant challenges for local traders wishing to diversify their investments into bitcoin and other digital assets amid a sustained depreciation of the yuan. Thielen pointed out, “Since August 2024, the Supreme People’s Court has substantially increased the legal risks for individuals using cryptocurrencies related to money laundering, which could easily extend to cases of capital flight. This represents a considerable deterrent, especially in light of growing economic uncertainty.”
