Re-inflation: China's monetization therapy is about to begin

China is facing the most severe economic challenges since the reform and opening up. With the bursting of the real estate bubble, the Chinese economy is sinking into a deflationary crisis. In order to revive the economy, Beijing is preparing to launch a large-scale monetization therapy.

The Burst of the Real Estate Bubble

In 2020, the Chinese government implemented the "three red lines" policy to restrict financing for real estate developers. This marked the government's determination to end decades of real estate bubbles. The real estate sector is crucial to the Chinese economy, accounting for 25-30% of GDP. With the collapse of the real estate market, the entire economy faced severe impacts.

The decline in housing prices has led to a decrease in the wealth of ordinary families, significantly reducing consumer spending. Real estate developers have halted new project constructions, impacting the related industrial chain. Local governments have lost land transfer fees, a major source of fiscal revenue, resulting in increased debt pressure. The bad loan rate of banks has soared, and the entire financial system is facing systemic risks.

Deflationary Pressure Intensifies

With the collapse of the real estate market, the Chinese economy is facing serious deflationary pressure:

• The Consumer Price Index ( CPI ) has experienced negative growth for 3 consecutive months.
• The Producer Price Index ( PPI ) has experienced negative growth for 12 consecutive months.
• Economic growth rate has fallen to the lowest level in 30 years.
• The youth unemployment rate has surged to over 20%.
• The capacity utilization rate of the manufacturing industry is less than 75%

Deflationary pressure has further intensified the debt burden, with both companies and households deleveraging, leading the entire economy into a vicious cycle.

Monetization therapy is about to begin

In the face of a severe economic situation, the Chinese government is preparing to launch a large-scale monetization therapy. Recent signs indicate that China is about to initiate quantitative easing:

1. The People's Bank of China has included the buying and selling of government bonds in its monetary policy toolkit.
2. Increase holdings of local government bonds, from 1.5 trillion to 4.6 trillion since August.
3. Lowering the reserve requirement ratio and the loan market quotation interest rate
4. Instruct banks to expand credit provision, especially to the real estate sector.
5. Restart the "Three Zone Division" policy and relax accountability for officials.

These policies point in one direction: China is preparing to significantly expand the currency supply to combat deflationary pressures through quantitative easing and credit expansion.

The impact on Bitcoin

As China initiates monetary therapy, a large influx of new renminbi will flow into the market. This will lead to a rise in asset prices, especially for scarce assets. Bitcoin, as a globally scarce asset, is likely to become the preferred choice for Chinese investors to hedge against inflation.

Although China has banned Bitcoin exchanges, over-the-counter trading remains active. With the increase in monetary easing, Chinese investors are likely to increase their allocation to Bitcoin. This could drive a significant rise in Bitcoin prices.

However, this process takes time. Currently, Chinese investors may be more inclined to purchase undervalued A-shares and real estate. But as the effects of monetary therapy gradually become apparent, the appeal of Bitcoin will increase. In the coming months, we need to closely monitor China's monetary policy trends and their impact on the Bitcoin market.

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