There is bad news coming out of China. It isn't another report of human right violations, nor is it smog choking industrial cities. Rather, it is a financial storm forming in the world’s second-largest economy.
For decades, a high annual economic growth has been one of the few positive things many in the West, including the media, could associate with China. An average rate of about 12% made the country an envy of many.
That is far from the reality in the country right now. In the last few months, trouble has been brewing. While trying to avoid extensive damage, the government has been throwing everything it has in its toolbox at it.
But nothing seems to be working; not a ceiling on stock traded or a cap on capital that can be moved out of the country. Not even several devaluations of the Yuan, the country’s currency, and liquidating some of the reserves held by the state.
Lowest point in 25 years of Chinese Market history
As a matter of fact, the Yuan has been growing weaker and weaker against the dollar and other major currencies for some months.
The impact on the stock and derivative markets has become very real over the time. On the 7th, January 2015 prices in the mainland stock markets dipped by 7% and the shock from it forced a halt in the trading of the day. And the day became the shortest trading day in the last 25-years of China's stock market’s history.
It’s now apparent that the world should brace itself for significant turbulence in an economy Financial Times has described as “an engine of global growth.”
But what does that mean for the price of Bitcoin as well as to those of other cryptocurrencies?
Will investors in China and elsewhere see a safe place to put their money in the cryptocurrencies during the storm, hence pushing prices up?
Don’t throw caution out of the window
It is only appropriate to be cautious. There isn’t likely to be much buying of Bitcoin that can happen from Mainland China over and above the current volumes even if the economic crisis persisted for long.
This is for two reasons. First, the Chinese authorities have a history of blocking exits from the stock markets as a way of avoiding capital flight. That means that in this situation, investors who might want to sell their stock and buy Bitcoin cannot because of the caps or bans placed on them.
Even if some investors are successful in selling, financial institutions in the country have their hands tied by the law. They cannot facilitate fiat-to-bitcoin transactions.
Does that mean there cannot be an influence on the Bitcoin price from the current economic storm in China? Not really.
Movement of about 5% observed on Bitcoin price
As a matter of fact, there was an upward movement of Bitcoin prices by between 5% and 6% on Wednesday 7th January 2016 across major bitcoin exchanges, which could be attributed to the turmoil in China.
However, the likely major source of Bitcoin buying interest is going to come from other markets like the US and Europe where it is relatively easy to buy Bitcoins. But that is tied to whether investors in these regions will feel that their wealth is under any real threat.
Given that fact, it should interest us to know how far the damage from the Chinese market storm can go. If not far enough, these investors from outside China will have little motivation to convert their wealth into cryptocurrencies.
Nevertheless, we should have it in the back of our minds that all markets around the globe, whether financial, stock or derivative, are connected in one way or another.
And indeed, the Chinese markets being some of the largest in the world, we should expect major spillovers. One of the people who are agreeing with this viewpoint is Nicholas Melhuish, head of global equities at Amundi Asset Management. “A very large connected economy is a hard bullet to dodge for all equity markets,” he told the Wall Street Journal.
Other markets around the globe catching the cold
Indeed, the shockwaves from the Chinese markets are already moving to others at an incredible speed. When on Thursday 7th January 2016 the Chinese markets experienced a slump of 7%, the European share indexes went down by more than 2%.
It is also important to note that this has something to do with not only perceptions but also real interconnectivity. China is a major importer of raw materials such as oil, copper, ore and others, which go into feeding its mega industrial complexes and development projects.
With a population of close to 1.5 billion people, China is also the world’s largest consumer market for everything from electronics to foodstuffs.
Taking the above points into consideration, a sluggish economy in China, therefore, means a glut in the production of both industrial and consumer goods for other economies. This will have a general downward pressure on market prices.
As a matter of fact, the World Street Journal has reported that the first week of January 2016 saw the lowest price for crude oil in 11 years.
Bitcoin price could take wild leaps
“Concerns about Chinese oil demand also weighed on prices,” The Wall Street Journal explained, “China’s service activity grew at a slower pace in December, a private gauge showed Wednesday, fueling worries about a slowdown in the No. 2 oil-consuming nation.”
The Wall Street Journal has made the same observation on copper and ore.
Investors around the globe are likely to shy away from stocks of companies in oil or mineral, especially if their major market is China. They could see buying bitcoins as a better alternative.
The cut a long story short, if things don’t look up soon for the Chinese market, then we could as well accept that the globe is facing a major economic downturn, and Bitcoin and other cryptocurrencies will have visitors knocking at their doors. Then the bitcoin price could take wild leaps.
PBOC image from flickr