- Bitcoin investments in China could rise as global funds increase their exposure to a major reshuffling of capital in Chinese equities.
- The cryptocurrency eyes further competition in the Chinese economy as a V-shaped recovery seems unlikely by top analysts.
- History shows that unsettling economic conditions are sending Chinese investors to the stablecoin Tether and Bitcoin’s safety.
Investments in the world’s first decentralized asset, Bitcoin, could develop in China as the country becomes the center of a global reshuffle of financing.
The cryptocurrency is looking to take a piece of about $50bn that has recently entered the Chinese stock market. As of March 2020, about 800 global hedge funds have committed a quarter of their $2 trillion assets under management to Chinese equities, according to fund flow data from EPFR.
As Bitcoin and U.S. stocks plunged dramatically in the month, over a year-to-year timeframe, global funds’ exposure in China’s risk-on assets increased by 20%. In the times of a global financial crisis led by the Coronavirus pandemic, China emerged as a safe-haven market, with its relatively limited loss.
The Shanghai Composite, for instance, was down 5.2% YTD, but its U.S. counterpart, the S&P 500, was down 11.1%. Meanwhile, after rallying more than 150% from its lows in March, Bitcoin beat negative expectations.
No V-Shaped Recoveries
The good and poor recoveries were generating diverse perspectives for global investors.
First, fund managers expect a stronger V-shaped recovery in Chinese equities, which will justify their expanded market exposure. Second, they want to rebalance their risks away from the U.S. economy affected by the Coronavirus. And third, they didn’t consider investing in Bitcoin – at least until mid-Q2.
Yet, in a market that remains hit by Coronavirus cases’ resurgences, there isn’t a thing called V-shaped recovery. Released earlier this week, the Chinese economic data looks like a nightmare. It shows that factory-gate prices in the country have dropped to their four-year lows. The hardest hit were the manufacturers whose profits dropped by 36.7% in the first quarter.
Liu Xuezhi, an analyst at Bank of Communications, commented that Chinese investors could expect a V-shaped recovery, noting the rebound will be hindered by the coronavirus factor, which clearly ticks off the forefront of the first two investments. Low demand, sluggish construction development, unemployment – all result in an economic downturn. A stimulus is the best thing that can happen: when central banks raise cash liquidity to hold the markets afloat. But that amounts to an artificial rebound while underlying corporate earnings stay meager.
That leaves a third unconsidered option for investors: Bitcoin
A Hedge Against Hedge: Bitcoin
Chinese investors are not taking their attention off Bitcoin, even though they trade away from government officials’ prying eyes through over-the-counter trading platforms.
Last year, researchers at Chainalysis Inc. found that demand for stablecoin Tether had risen significantly against the backdrop of the US-China trade war. Washington and Beijing put tit-for-tat tariffs on each other. Then People’s Bank of China crashed the Chinese Yuan rate below $7 a unit; investors purchased Tether as their gateway to joining the Bitcoin market. Tether was used in 99% of Bitcoin spot trades in China this year, almost completely displacing the yuan.
The next downside in Chinese stocks could send investors searching for safe havens – both regional and offshore. They might increase demand for Bitcoin-Tether, provided the historical background. With veterans like Paul Tudor Jones acquiring limited exposures in crypto futures, Wall Street is leading the way.