Bitcoin and Europe Look on as US and China Intensify Financial Decoupling

The Hang Seng Index has dropped 14% in 2021, while The Hang Seng Technology Index has fallen even more, down 30%.

S&P 500 and Nasdaq in contrast are up 20% during the same period, indicating a financial decoupling between the United States and China.

Hang Seng (HSI) fell another 1.2% today, with Shanghai’s Composite (Shcomp) dropping by 1.16% as the United States adds more Chinese firms to investment and export blacklists this week.

Rate cuts are expected in China with CNY forming a coup and handle of sorts on 1 hour triangles as the yuan presumably is to continue weakening further against the dollar.

Bitcoin didn’t play at all however during China’s trading hours even as these stock moves were occurring with KE Holdings, an online and offline platform for housing transactions and services in China that has a market cap of $21 billion, seeing one of the biggest fall at -13% following allegations they were inflating their data.

The property collapse is just one background to China’s economy as both Chinese regulators and US policy makers intensify scrutiny and action in a 2021 like no other.

The Breakup

The two are breaking up, and what this looks like exactly is anyone’s guess with China failing to detente as it ententes with Russia.

Russia’s economy is tiny however, and the two are more frienemies but not where their political system is concerned which China has recently copied from Russia dot by dot.

That has turned China under Xi Jinping a bit hostile towards US as it buys Russia’s propaganda against the United States, with the latter moving to reduce reliance on Chinese markets in a show we have seen play out in Hong Kong throughout this year.

Xi is up for re-coronation in a few months with most suggesting it’s just a formality. In which case, little might change in outlook as both China and US maintain their posture. Which may mean more red for Hong Kong.

America, as the world’s biggest market and still by far, can’t really be replaced as a customer by the world’s biggest manufacturer. Thus China’s economy is slowing down and might continue to do so.

That’s especially as foreign capital starts drying up with China having a very immature financial market in capital formations, while the US capital markets dominate more than even in the 90s.

The lack of such liquidity may spell trouble next year for the Chinese economy as the two world powers fail to secure an holistic economic treaty that sets ground rules.

With such clear advantages for the United States, you would have expected China to turn and accommodate. But the Chinese people can’t easily change their leader, so pride or hubris now gets them the crown of the worst stock market this year.

Europe is not playing yet. There isn’t as visible a decoupling, financial or otherwise, with the continent seeing itself as competing against both economically, but they share US’ concerns in regards to a lack of ground rules, especially an independent judiciary on business matters and protection against copyright theft.

This 2021 however has shown that where independent courts are concerned or a rule of law more generally, there is little chance of getting it in China under the current administration where Jack Ma and other tech titans have been subject to dictat.

That makes foreign trade in China a complicated business unlike as late as 2012 when China was keen to show the west they share the rule of law in business matters, at least in aspiration.

Flat Bitcoin in a Changing Wind?

And so Hong Kong goes red, while US stocks boom, but interestingly bitcoin was not playing at all during these stock moves during China’s trading hours.

It fell a bit before Shanghai woke up from $49,000 to $48,000, and then stayed there until Europe woke up with the US stock opening then sending it lower to currently about $46,000.

One potential explanation may well be due to cancelling out. The printer is expected to be turned on in China as their state media claims rate cuts are coming.

The monetary system there has plenty of space to move in that regard, but it will weaken CNY which should make their imports more expensive and they’ll effectively get paid less in real terms for exports.

This may have led some to bitcoin as a hedge, while the wider stock pressures may have led some out of bitcoin, hence no movement as they cancel each other out.

A more radical suggestion in light of just one data point might be that China is out of the bitcoin market entirely.

The officials there ordered foreign Chinese crypto exchanges to deny accounts to Chinese citizens, threatening potential action against family or personnel that they might have in China if they do not comply.

This process of closing Chinese accounts has been ongoing for a couple of months now and should be at or near the end, so the bitcoin market might be less accessible there now, hence flat.

But without continuous further confirmation, this potential theory does not sound credible as compliance is thought to be limited and there are plenty of loopholes.

Moreover there have been indications that Shanghai financial houses have incorporated bitcoin in their overall trading. So perhaps it is more reasonable to suggest that the flat action during Shanghai trading hours was because China was buying, but wider global pressures – from Europe in particular – did not facilitate a clear movement, hence we get what looks like flat in what would have been down but for China’s buying.

If so, then it might be a sign of changing trend as China potentially moves towards being bullish on bitcoin, which considering their macro would make sense.

We’ll have to wait and see in the coming days which theory gets more strength as the unusual flat line just suggests something is probably happening, but it’s very unclear what exactly as the so called macro re-adjustment that we have seen in the past six week across the three continents starts entering the more ‘normal’ phase when more medium term direction should start becoming clearer.