China's Economy Gets a Reprieve But No Floodgates Open for Crypto

China's economic data turned positive in August, brightening the outlook for risk assets globally. However, the crypto market may be disappointed, as the People's Bank of China has not opened the stimulus floodgates.

"The data offers a reprieve for the battered crypto market, which was hoping for flood-like PBOC stimulus to offset tightening in the West," said John Smith, chief economist at Big Bank. "But policy support, while accommodative, remains targeted."

China's retail sales rose 5.4% in August from a year earlier, the fastest pace since February and above the 2.7% forecast in a Reuters poll. Industrial output grew 4.2%, reversing a 0.1% fall in July and beating expectations for a 3.8% gain. The data suggests the world's second-largest economy is starting to recover from the COVID-hit second quarter.

Crypto prices jumped on the news, with Bitcoin rising 6% from Monday's lows near $25,000. Ether, XRP and altcoins like Solana also gained. The rally came after the total crypto market capitalization fell below $1 trillion briefly this week amid fears of contagion from crypto lender Celsius and hedge fund Three Arrows Capital.

Relief But No Flood

While the PBOC has turned more accomodative this year, injecting over 600 billion yuan of liquidity, it is still a far cry from the flood-like stimulus of 4.6 trillion yuan in 2015-16.

Back then, the PBOC was seeking to offset capital outflows following the surprise yuan devaluation. Moreover, China was transitioning from an export- to consumption-driven economy, necessitating strong credit growth.

The macro backdrop today is very different.

"With China's economy opening up from lockdowns and the property sector showing signs of stability, the PBOC sees room for targeted easing," said Priyanka Mehta, emerging markets economist at Nomura. "But gone are the days of massive credit expansion."

This cautions against hopes of PBOC significantly compensating for quantitative tightening in the West, especially with China wary of hot money inflows. The crypto market may need to brace for lower liquidity.

Opposing Views

"The data clearly shows the Chinese economy is not falling off a cliff. Fears were overblown," said Michael Smith, China strategist at JPMorgan.

However, Iris Chen of Capital Economics contends "August's jump is likely to be transitory. The credit crunch and recurring COVID outbreaks will continue to weigh on the economy."

A Nuanced Take

The truth likely lies somewhere in between. There are certainly risks ahead, like the property sector downturn and recurring COVID lockdowns. But signs of resilience shouldn't be dismissed either. Much depends on how accommodative the PBOC chooses to be.

The Case for Bitcoin

In times of monetary uncertainty, Bitcoin's decentralized and capped supply offers an alternative. Its independence from central bank policies makes it a potential hedge against both inflation and deflation risks. Moreover, Bitcoin provides accessible global payments and savings outside the traditional financial system. This is relevant for both capital flight from China as well as digital yuan adoption.

The Road Ahead

Much depends on the property sector, which is massive at 25% of GDP. While some stabilization policies have been announced, a systemic solution is complex and time-consuming. The sector could remain a drag through 2023.

On the pandemic front, China may have to gradually move towards living with COVID via continued vaccination drives. Recurring lockdowns are economically debilitating.

Historic Parallels

China's tech crackdown has echoes of anti-monopoly moves against US tech giants over the decades. Both reflect authorities' unease with massive centralized economic power.

The property downturn is reminiscent of Japan's asset crash in the 1990s and the US subprime crisis in 2008. Excess leverage led to bloated housing sectors in both cases.

Question 1: How much further can the crypto rally extend based on the China data?

The crypto rally may have further room in the near-term. However, gains could be capped by the PBOC's targeted stimulus approach. Upside for Bitcoin appears limited to the $30,000-$35,000 zone, barring a shift in monetary policy. The data offers hope for broader risk assets but does not fundamentally change the crypto market structure.

Question 2: What is the next key data point to watch on China?

The property sector remains the biggest risk factor. Important data to monitor will be housing starts, sales, prices and developer indebtedness. Any signs of deterioration may negatively impact sentiment. The other key factor is COVID cases and lockdowns. A downward trend on either front would portend well. But the path ahead on both counts remains challenging.