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Bitcoin recently ended its price rally rather abruptly after the Chinese yuan improved its performance for a short period. While many resorted to panic selling with the hopes of yuan’s continued improvements, it hasn’t turned quite the way they had expected. Thanks to the meddling of People’s Bank of China, the currency’s gains were short-lived.
According to various financial media outlets, the actions of PBOC to set the yuan midpoint at 6.9262 as against the previous week’s 6.8668 is an indicator of worse things to follow. By deliberately setting the midpoint lower than the existing rates, PBOC seems to be making way for the next devaluation amid the already worsened situation in the country.
There is an ongoing argument about China’s actions. Some believe that the country is manipulating its currency to gain an unfair trade advantage against other countries. At the same time, there are few who believe that the Chinese central bank’s actions are driven by economic fundamentals. Whatever may be the case, it still shows that the economy is still at a risk.
A leading news outlet quoted Daniel Morris, a senior investment strategist at BNP Paribas Investment Partners saying,
“We’ve had this brief rally now but we do expect further weakness.”
It also quoted the head of commodity and Asia-Pacific foreign exchange at UBS Wealth Management saying,
“The problem is the continuous outflow of capital will persist. It’s structural in nature and that’s going to burn the currency.”
Both the experts are right in this case and their views are directly related to the actions of PBOC. If the government continues to hand-hold the currency gains, then it will risk yuan’s recovery. This will, in turn, lower the confidence among investors, further driving capital outflows.
It is not just the big-ticket investors the country needs to be concerned about, but also small ticket ones and individuals. Individuals will look for alternative stable assets and in their pursuit, a significant number will distribute their investments between conventional assets and Bitcoin. While it may not result in capital flight from the country’s geographic boundaries, it will definitely have a significant impact on China’s macro economy.
The right move for the government, irrespective of whether it is ethical or not is to allow the market to perform freely and wait a bit longer before taking corrective measures. By doing so, they will at least give the currency the much-required time to recover without jeopardizing Bitcoin’s position within the country as well as abroad.
Ref: CNBC | Image: NewsBTC