A Reflection on China-US Trade Tensions and Bitcoin’s Impact
Something is unfolding before our eyes, and while many of you have likely noticed, it’s worth sharing some reflections. Although our primary focus is typically on the crypto market, after the BTC halving the market has now potentially entered a “doing nothing phase.” During this period, with most crypto natives already invested, inaction can be a strategic move.
For most investors, adopting a long-term perspective simplifies the investment process by reducing the need for frequent adjustments. Right now the best move seems to be either that or gambling on meme coins.
In any case, this lull in the crypto market also provides us with an opportunity to turn our attention to the macroeconomic side of things, which inevitably impacts the crypto market. After all, Bitcoin and other cryptocurrencies are fundamentally influenced by macroeconomic trends. While the crypto market may seem stagnant at the moment, the macro landscape is far from boring.
Today, we want to focus on two closely related and significant recent headlines:
- China is heavily selling off US Treasury and agency bonds.
- The US has announced substantial increases in tariffs on Chinese imports.
Let’s provide some context.
For decades, China has steadily accumulated US Treasury securities, owning up to 10% of all US national debt through bonds issued by the federal government. The reasons for this include:
- US Treasury bonds are considered one of the safest investments globally, offering a reliable return with minimal risk. This is attractive for preserving China’s large foreign exchange reserves.
- China exports a significant amount of goods to the US, earning substantial US dollars. Instead of holding onto these dollars, China invests them in US Treasury bonds to earn interest.
- By buying US debt, China helps keep the value of its currency, the yuan, relatively stable. This stability maintains the competitiveness of Chinese exports, as a stable yuan makes Chinese goods more affordable for US consumers.
Source: Investopedia
Recently, China has been reducing its US exposure, with Bloomberg reporting a record sale of Treasury and US agency bonds by China in the first quarter. The US is certainly not pleased with this development, and here’s why:
- A massive sell-off increases the supply of US Treasury bonds in the market, leading to a drop in their prices. As bond prices fall, interest rates rise.
- Higher interest rates mean the US government has to pay more to service its debt. Initially, selling US Treasuries might strengthen the US dollar, as investors move into dollars to buy the bonds China is selling. However, over time, the increased supply of dollars could weaken the currency. Additionally, 10% is a significant gap. Who is going to fill it? Japan? We wouldn’t count on that, considering Japan is also dealing with issues related to its depreciating yen.
- A move like this could also affect the value of the US dollar relative to the yuan, making Chinese exports more expensive and potentially harming China’s economy. However, China seems less concerned about this, as de-dollarization is a top priority for them.
What can the US do in response? Well, the US Federal Reserve could step back into the debt market, reviving Quantitative Easing (QE) even with interest rates still above 5%. The US government could also insist that banks and other institutions buy more Treasury bonds.
However, banks would need to be compensated with higher yields, which could incentivize them to increase lending, potentially fueling inflation.
Now, let’s move on into the second headline: The US has announced substantial increases in tariffs on Chinese imports.
In what seems to be a response, President Biden unveiled new and increased tariffs on Chinese imports. These tariffs continue the punitive measures imposed by the previous Trump administration, which were roundly criticised by then-candidate Biden for burdening American consumers.
Tariffs on electric vehicles have more than quadrupled to 100%, and tariffs on lithium batteries and their components, as well as some steel and aluminum products, have more than tripled. Additionally, tariffs on semiconductors and solar panels have doubled.
New tariffs have also been imposed on a long list of critical minerals, magnets, ship-to-shore cranes, and medical products.
This move aims to make Chinese goods more expensive in the US, thereby encouraging consumers to buy more American-made products. This strategy is expected to hurt Chinese manufacturers and exporters, potentially leading to lower revenues and job losses in China.
However, there is a significant challenge. The US currently lacks the capacity that China has to increase domestic production. To boost domestic activity, fiscal stimulus will be necessary to help businesses build the additional capacity needed to replace the more expensive Chinese supply. This essentially means more money printing.
The fiscal stimulus required to compensate for these tariffs and to “onshore” industries that the US currently lacks will likely be funded by more government debt. Given that the US economy is showing signs of slowing, the country cannot rely on GDP growth to cover these costs in the short term.
Now, how does all of this affect Bitcoin and the cryptocurrency markets? Apart from the escalation of the situation contributing to socio-political instability, a global economic slowdown could reduce the disposable income available for investment in cryptocurrencies, but that has already been happening. In fact, the situation described above leads us to believe that more fiscal stimulus and potential money printing to support the conflict could occur, and Bitcoin is often viewed as a hedge against inflation.
Moreover, as governments worldwide face economic challenges, the once-common belief that they would increase regulatory scrutiny on cryptocurrencies is now diminishing, at least for Bitcoin. In fact, the opposite seems to be happening, with more people appreciating its existence. Over the long term, if the US dollar weakens due to increased debt and money supply, Bitcoin could benefit as an alternative currency.
In the meantime, good luck navigating the market volatility.
At Greythorn, we will keep you updated with our monthly reports and cryptocurrency research.
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