There has been much conjecture on the role China has played in the rise and fall of Bitcoin’s price. Most in this space recognize that China has been leading the Bitcoin marketplace in terms of trading and volume. If this is the case, perhaps looking through some charts would shed some light on where Chinese money is flowing.

Below is a chart comparing the Shanghai Composite with the price of Bitcoin. First, let’s look at the month of July, where the Shanghai composite started its rally, while Bitcoin topped out after making a rally of its own in the wake of the Mt. Gox debacle. In mid July, The People’s Bank of China (PBOC) announced CNY 1 trillion of "Pledged Supplementary Lending" PSL to the China Development Bank. This was later dubbed quantitative easing QE lite.

The second major event happened in November right around the time Bitcoin had a false breakout. (See my previous writings on this). This led to another surge in the Shanghai Composite and another leg down in the price of Bitcoin. This was a surprise rate cut by the PBOC coupled with A shares being available to global investors, as well as a linking between Shanghai and Hong Kong. This was thanks to the Shanghai-Hong Kong Stock Connect, often called the “through train,” which also allowed individual mainland Chinese investors to buy the big-name companies listed in Hong Kong.

Why is China doing this?

These are all moves to stimulate China’s slowing economy by opening China’s financial markets. China has ambitions to make Shanghai a global financial center. It also allows mainland investors to put their money to work in the right companies and allows Hong Kong and the rest of the world to speculate on mainland Chinese companies. Thus far it has been noted more money has been flowing into China, than out of it.

These moves are also put into place to raise the investing standards of the average Chinese retail investor, as well as internationalize the currency (yuan). They are also part of the major reforms the government has decided to initiate in order to clean up the financial and banking sectors, along with state-owned enterprises (SOEs). Thus far these moves have worked as the Shanghai Composite has broken out of a multi-year downtrend and has surged.

The chart below is a monthly chart of the Shanghai Composite going back to 2005. This shows the beginning of what looks like a major move:

As a result of the surge in the Shanghai margin, trading has surged massively in China. Leverage has proved a potent accelerant. Margin trading in Shanghai and Shenzhen has doubled since July to 800 billion yuan (US$130 billion), notes Chen Long at GaveKal Dragonomics. 

This, along with declining interest rates in the market for interbank funds, further reduces returns on savings. The retail investor in China is back in the stock market, with the rate cut in the property and housing markets as well. Below are a few charts showing the surge in margin and futures trading in China:

Here is the surge in futures trading:

Why does this matter for Bitcoin?

Simply put, there are asset classes that are outperforming Bitcoin within China itself, and outside of China, as well and many Chinese investors participating as the charts above show. One of the major arguments for Bitcoin in China was a way for wealthy Chinese to move money offshore, which may still hold true. However, government attempts to stimulate and reform the economy have worked and investors are buying into it.

Money flows to where money can be made, and this year that has not been Bitcoin. There are far more liquid markets experiencing price appreciation. Bitcoin has such a small market cap presently that it would not take much money moving out of it and being reallocated into other asset classes for price to move down. It does appear as Chinese money has stopped accumulating Bitcoin and has become more of a speculative trading vehicle. In other words, there isn’t much “committed” money.

[Author note: Please see @sammantic for timely updates on all things Bitcoin, including price analysis and the latest charts.]

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