Bitcoin Analysts Remain Optimistic as China Unexpectedly Sets Yuan Rate Above 7.2 Level

Key Points to Know:

• China permitted the yuan to depreciate past a crucial level, likely as a response to U.S. tariffs.

• Analysts believe the yuan's decline could result in capital flight into bitcoin.

On Tuesday, China loosened its control over the yuan (CNY), allowing it to depreciate past a crucial level, likely in response to President Donald Trump's aggressive tariffs.

Crypto analysts predict that the yuan's depreciation could benefit bitcoin (BTC), drawing comparisons to similar situations from a decade ago.

Early Tuesday, the People's Bank of China (PBOC) set the daily yuan fix at 7.2038 per dollar, marking the weakest level since September. Unlike the USD, euro, and other G-7 currencies, the yuan does not freely float. Instead, it is allowed to trade within a 2% range on either side of the daily fix, which is set at 9:15 a.m. Beijing time.

The 7.2 threshold has been seen as a critical limit for the central bank. Although the USD/CNY pair has briefly surpassed this level several times since 2022, it has never maintained a sustained position above it.

This shift could occur with the PBOC setting the daily mid-point above the 7.2 level. Essentially, this move signals a strategy of managing the yuan's depreciation, which could help keep China's exports more affordable and competitive, potentially mitigating the adverse effects of Trump’s tariffs on Chinese products.

Capital Flight to BTC?
The yuan's managed depreciation might trigger capital flight from China, with analysts suggesting that cryptocurrencies could attract this outflow of capital.

Markus Thielen, founder of 10x Research, wrote in a note to clients on Monday, "The U.S. is intensifying economic pressure on China, which may need to respond with measures like quantitative easing and devaluing its currency. If that occurs—and China allows capital flight—Bitcoin could see a surge, similar to what happened in 2015."

On August 11, 2015, the Chinese central bank devalued the yuan by 1.9%, the largest single-day drop in over 20 years, causing a global market shock. While Bitcoin initially dropped more than 20% along with U.S. stocks, it quickly rebounded and surged nearly 60% in the next four months.

Ben Zhou, CEO and founder of crypto exchange Bybit, shared a similar view on X, stating that depreciation of the yuan typically benefits Bitcoin.

"China will likely lower the RMB to counteract the tariff, and historically, when the RMB falls, a lot of Chinese capital flows into BTC, which is bullish for Bitcoin," Zhou said on X.

Regulatory Challenges
While history suggests that yuan depreciation may trigger a bullish response in Bitcoin, it’s important to note that China has become increasingly anti-crypto over the years, citing financial stability risks and enforcing some of the strictest regulations in the world.

Earlier this year, China introduced new regulations requiring banks to monitor and report suspicious international transactions, including those involving cryptocurrency. Banks are mandated to investigate and report any risky crypto trades, which could lead to financial restrictions and even blacklisting of the trader.

This stringent regulatory approach could make it difficult for local traders to diversify into Bitcoin and other digital assets if the yuan faces prolonged depreciation.

Markus Thielen added, "Since August 2024, the Supreme People’s Court has significantly increased the legal risks for individuals using cryptocurrencies in connection with money laundering, a risk that could easily extend to cases of capital flight." He pointed out that this presents a significant deterrent, despite the growing economic uncertainty.