Since China’s accession into the World Trade Organization, there has been constant pressure on the Chinese currency, the renminbi, otherwise known as the yuan, to appreciate.
And that would make sense.
As a country’s economy grows and becomes more powerful, and the rest of the world demands its goods and services, it would make sense that its currency should rise in value relative to others.
But Beijing has done a remarkable job of keeping the lid on the rise of the yuan, and not without reason.
By keeping the yuan cheap, Chinese wares have filled shelves from Sydney to Santiago, Boston to Berlin and everywhere in between, fueling China’s industrialisation and ascent to become the world’s second-largest economy.
But peel back the veneer of a currency that appears to have every reason to rise relentlessly and the picture is no longer so sanguine.
A Yuan for More Dollars
A once booming housing market that has lifted an entire generation out of poverty is faltering, and measures to shore it up appear half-hearted and poorly thought out.
The Chinese economy continues to struggle with periodic zero-Covid lockdowns.
And the People’s Bank of China, the central bank, has been cutting interest rates even as other central banks increase borrowing costs, providing an added incentive for Chinese to spirit their wealth offshore.
Combined, these forces have “conspired” to push the Chinese yuan down by over 8 per cent against the greenback this year alone, on course for its biggest annual drop since 1994.
For years, bearish investors have been warning that China’s banks have lent far too much money, to fund far too many wasteful projects, especially unnecessary real estate and infrastructure.
Although some have predicted that years of profligate lending will lead to an explosion of so many bad loans that Beijing will have no choice but to print money to bail out banks, leading to a devaluation of the currency, it hasn’t happened yet.
Until maybe now.
Because China’s housing market can no longer be used as an ATM, banks, shadow or otherwise, will soon be inundated by an avalanche of non-performing loans.
The faltering housing market could have been bolstered by China’s substantial manufacturing complex if not for the fact that Beijing’s Orwellian zero-Covid lockdowns are putting the kibosh on a lynchpin of the economy, with China on track for one of its slowest growth periods in modern history.
In the second quarter of this year, China’s economy shrank by 2.6 per cent, against the previous quarter, its first contraction since early 2020, when the pandemic first hit.
One of These Banks is Doing its Own Thing
At a time when central banks are tightening, the People’s Bank of China (PBoC) is doing its own thing, the PBoC is not quite the same, easing monetary policy and removing the shine off the yuan.
Beijing’s reluctance to condemn Russia’s invasion of Ukraine and Chinese President Xi Jinping’s cozy relationship with Russian President Vladimir Putin hasn’t helped either, with investors having an increasingly wide and justifiable list of reasons to pull money from China.
China’s embattled bond markets have already seen record amounts of foreign investment outflow this year, as have its stock markets.
And it’s not just foreign investors who have been leaving, well-heeled and entrepreneurial Chinese have as well, taking their wealth with them and just like in 2015, cryptocurrencies are one conduit to spirit their riches out of the Middle Kingdom.
To be sure, cryptocurrencies are merely a means to an end for most Chinese looking to evade strict capital controls. Ultimately, once the wealth has arrived at its intended destination, they will be looking to swap those digital assets for dollarised ones.
But such a view also overlooks the fact that the more Chinese who put their trust in cryptocurrencies to move money globally, the more will be open to doing so with each other as well.
As more financial institutions globally accept cryptocurrencies, whether for loans, or as an investment product, the legions of well-heeled Chinese who have spirited their wealth out of China may reconsider converting their crypto to cash right out the gate, given the growing options available with which to deploy such assets.
And as geopolitical tensions between the US and China rise, and the freezing of Russian assets in the dollarised global financial system still fresh in the minds of Chinese contending with a rapidly devaluing yuan, cryptocurrencies may yet receive an unexpected boost from the macroeconomic challenges facing the global economy.
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Cryptocurrencies Coming of Age?
But it’s not just capital flight that may motivate the Chinese to take up cryptocurrencies against a rapidly sliding yuan, it’s the potential collapse of confidence in an asset class that most Chinese have only known to go up — real estate.
Since China Evergrande Group first encountered challenges with paying its massive debt, China’s real estate market has continued to come under increasing pressure.
For the Chinese, real estate is not just one out of a plethora of assets, it is the asset that forms the bulk of familial and generational wealth.
Chinese families often combine money between individual family units, children with parents, siblings with each other, scrimping and saving to make the down payment on their prized new homes in the hope of providing wealth for future generations and for a brighter future.
And since the reforms of the Deng era, when the Communist Party recognised property rights, such bets on real estate have paid off in spades.
Fortunes have been minted and those who could afford real estate quickly became rich beyond the dreams of avarice.
Billionaires built their fortunes atop concrete, steel and glass and Chinese families eager for a better life saw real estate as a one-way road to riches.
But hundreds of millions of Chinese homeowners may be in for a rude shock when they find out that the asset class they had bet the farm on, doesn’t always go up.
Typically, real estate ought to be a useful hedge against a rapidly devaluing currency, except that right now, China has far too much of it.
Decades of overbuilding have given rise to China’s infamous “ghost cities” and excess spending on infrastructure means that China is plagued with cities, airports and ports that are heavily under utilised, not to mention apartments buildings that remain empty.
China’s younger generation, who haven’t been able to get a leg-up on the property ladder, because of sky-high prices, won’t necessarily be eager to spend their rapidly devaluing yuan on mortgages even if Beijing can continue to maintain a loose monetary policy and low interest rates.
Bearing in mind that the Chinese have yet to experience the bursting of a real estate bubble, if and when it happens (because trees do not grow to the sky), the possible flight to other assets could involve cryptocurrencies in some way as well.
By Patrick Tan, CEO & General Counsel of Novum Alpha
Novum Alpha is the quantitative digital asset trading arm of the Novum Group, a vertically integrated group of blockchain development and digital asset companies. For more information about Novum Alpha and its products, please go to https://novumalpha.com/ or email: ask@novum.global
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