Reports Indicating That The Chinese Government Approves Of Hong Kong’s Cryptocurrency Plans. Are Investors Overlooking The East?

Reportedly, Hong Kong has recently shifted its focus towards becoming a centre for cryptocurrency with the subtle approval of Beijing. 

The Chinese government appears to be interested in relaxing its strict anti-cryptocurrency stance, at least in the context of Hong Kong.

According to a report from Bloomberg, Chinese officials have indicated a tacit endorsement of Hong Kong’s recent efforts to re-establish itself as a cryptocurrency hub. While cryptocurrency remains illegal in mainland China, Beijing seems willing to let Hong Kong develop its crypto industry. 

Several positive signals have emerged, including the involvement of China’s Liaison Office in Hong Kong’s recent cryptocurrency events, where officials have been exchanging business cards and contact information with industry leaders in a friendly manner and making follow-up calls on projects.

Additionally, the Chinese government has provided explicit endorsements of the city, such as People’s Bank of China governor Yi Gang’s speeches on China’s central bank digital currency and the government’s close cooperation with Hong Kong at major events in the city.

“As long as one doesn’t violate the bottom-line, to not threaten financial stability in China, Hong Kong is free to explore its own pursuit under ‘One Country, Two Systems,’” National People’s Congress member Nick Chan told Bloomberg.

In a consultation paper released yesterday, the Securities and Futures Commission of Hong Kong put forward a proposal to permit retail investors to trade large-cap cryptocurrencies on licensed exchanges, subject to meeting specific requirements. To be granted such licences, exchanges would need to conduct knowledge tests, evaluate risk profiles, and establish reasonable limits on allowable exposure.

What’s even more interesting is the recent surge in China-based blockchain companies, with some up 500% in the last week, after the decision by the nation’s central bank to halt interest rate hikes.

On Monday, the nation’s central bank decided to leave its interest level unchanged, resulting in a liquidity boost spilling over into the cryptocurrency ecosystem. 

Additionally, Bitcoin is looking like it is becoming increasingly correlated with Chinese stocks. Over the last 12 months, Bitcoin has been heavily correlated with US stocks. Are we seeing a change? You can see the chart comparison below.

Thanks to tedtalksmacro for a lot of the following information:

Just last week, the Chinese central bank performed its single-largest liquidity injection to help support their economy out of historically depressed levels.

Whilst most investors and analysts are focused on how the Fed is tightening, and its direct impacts on risk-on assets this cycle, are they overlooking the scale of easing in the east?

What needs to be remembered is that whilst yes, the US boasts the world largest economy, thus, it directly impacts all wider financial markets across the globe, China boasts the world’s second largest economy and is expanding at a pace 2.2% faster than the US. 

Additionally, the People’s Bank of China (PBoC) is the world’s third largest central bank with over $6 trillion in assets, clearly playing a large role in global liquidity.

As a result of abandoning the ‘zero covid’ poly in late 2022, the economy of China has definitely begun to recover. Will we see it back at its heavily expansive growth that it was known for for much of the 21st century?

Clearly the abandonment of this policy has helped surge demand and resume consumption, with new Chinese bank loans hitting a record $4.9 trillion Yuan in January, a 23% increase year-on-year. 

The PBoC are definitely coming to play and keen to play their part in stimulating the great Chinese economy once again.

There are even some expectations from some economists and analysts that the PBoC will cut rates in the coming months to further support and promote a prolonged economic recovery. 

Moreover, Japan (the world’s 4th largest central bank), is also injecting liquidity alongside China into the global markets, combining to easily outpace the US Federal tightening efforts.

Sometimes analysts and investors alike get caught up in narrowing their macro view to just the US, as opposed to the entirety of global liquidity and other crucial central banks. 

For instance, yes, the federal reserve of the US is tightening, however, per the above, some of the other world’s largest central banks are beginning to ease, causing an uptick in global liquidity, as opposed to the notion that global liquidity is simply falling due to the US’ stance.

So, what can we take from this?

The cryptocurrency landscape (and namely Bitcoin) is not tied to any one person, entity, central bank or economy. It is only hungry for liquidity, and thus, could those in the East (Japan, China, Hong Kong etc) with extra liquidity prove to be the risk-hungry investor that pushes the market?

Will it mitigate the continuous tightening in the US? Currently the DXY has pumped again, with stock markets retreating to support levels, yet Bitcoin’s price is holding up firmly. 

We definitely have a very interesting dynamic playing out at the moment.