Week of August 13, 2019 Market Analysis

By Jing Zhu | Crescent City Capital Market Analyst Intern

Chinese Yuan Falls[1]

Last Monday, China let the value of the yuan drop sending the currency above 7 CNH per USD. This decade-low marked a significant point in the US-China Trade War, resulting in a tumultuous stock market and a spike in US government bonds. Investors fear immense market volatility, especially because China may use the yuan as a trade-war weapon by manipulating its price.

Chinese-Issued Cryptocurrency[2]

According to Bloomberg, China is planning on releasing its own nationally-issued cryptocurrency. This digital currency would replace cash in circulation and support the internationalization of the yuan. China intends for this currency to give it more control over its financial system. Another point of interest is that the timing of this event occurs subsequently after the Libra release. Sun Tianqi, an official from China’s State Administration of Foreign Exchange, states that “Libra must be seen as a foreign currency and be put under China’s framework of forex management”.

Effect of Yuan on Bitcoin

Bitcoin has earned a reputation of “digital gold” because it has store of value. Many consider it to be an asset to invest in when the markets are unstable because it acts as a hedge. Given the market volatility caused by the fluctuating price of the yuan, as well as increased animosity between US and China, investors turn to Bitcoin to protect their wealth. Although Bitcoin itself can be unpredictable, people may flock to it when financial institutions and governments prove to be even more unpredictable. As a result, Bitcoin price may increase during this trade war, which Goldman Sachs predicts will continue through the 2020 Presidential Election.

Effect of Digital Coin on Bitcoin

As for the impending launch of China’s new digital coin, it is clear that China wants as much control as possible. Physical fiat money like cash, by nature, can be difficult to track down and manage, especially involving peer-to-peer transactions. By replacing cash in circulation with digital currency, the Chinese government can oversee all transactions. One can argue that this new currency should not be considered cryptocurrency because there is no decentralized network. The money eventually passes through one entity, and that is the Chinese government, which has had strict capital controls in place for many years. With Bitcoin, although there is regulation, there are no such government capital controls. This may make it even more attractive to investors.  

[1] “As Yuan Takes a Hit, Bitcoin Rises Up to Shine” by Jet Encila for Business Times published 8/12/19

[2] “China’s PBOC Says Its Own Cryptocurrency Is ‘Close’ to Release” by Yinan Zhao and Eric Lam for Bloomberg published 8/12/19