Arthur Hayes's new article: Go Bitcoin, massive liquidity is on the way

Original Title: "Let's Go Bitcoin"

Author: Arthur Hayes

Translator: zhouzhou, BlockBeats

Editor’s Note: This article mainly expresses that the Chinese government is stimulating the economy through quantitative easing and promoting credit growth, but its effects will take time to manifest. Currently, domestic investors mostly choose to buy undervalued stocks and real estate, and have not yet widely flocked to Bitcoin. However, as policies gradually advance, the market may turn to Bitcoin to protect assets. If demand surges, Bitcoin prices may experience a sharp increase.

The following is the original content (for ease of reading and understanding, the original content has been reorganized):

The Wharton School has always celebrated capitalism and the so-called "American exceptionalism," with students from around the world filled with aspirations, indoctrinated by professors in free-market capitalism and the "rules-based" American peace concept, a system escorted by Tomahawk cruise missiles.

However, if you, like me, entered the workforce in September 2008, you would quickly realize that much of what you learned was nonsense. The reality is that the so-called system is not a true meritocracy, but rather a system where those companies that are best at relying on government resources ultimately achieve the greatest financial success; capitalism is a game for the poor.

My first lesson in "real capitalism"—which I now refer to as "corporate socialism"—was learned after the 2008 global financial crisis (GFC), observing which top investment banks thrived and which faltered. After the bankruptcy of Lehman Brothers, American banks rushed to obtain government bailouts through direct equity injections.

Although European banks also secretly received financial support from the Federal Reserve, they did not receive government equity injections or forced mergers (backed by central bank loans) until 2011. Therefore, when I received my first full bonus for 2009 in the analyst class at Deutsche Bank in February 2010, our bonuses were significantly lower compared to those of my colleagues at American banks who had pressed "F9."

This is the KBW Bank Index, which covers major commercial banks listed in the United States. Since the low point after the global financial crisis in March 2009, this index has risen by more than 500%.

This is the Euro Stoxx Bank Index, which includes major banks in Europe. Since the low point after the crisis in 2011, this index has only risen by 100%. Corporate socialism in the United States has far surpassed Europe in terms of profitability and prevalence, regardless of how political commentators analyze it. Remember, kids, the formula for generous bonuses is privatized gains and socialized losses.

Considering China's consistent emphasis on the differences and superiority of its economic system, some may think that China would adopt different policies to solve its economic problems. This is not the case; the reality is more complex. To understand the massive changes currently underway in China, one must first review the recent financial crises of three other major economies: the United States, Japan, and the European Union. These economies all faced severe financial crises due to the bursting of real estate market bubbles:

Japan: 1989

United States: 2008

European Union: 2011

China has also entered the list of economies suffering from a real estate bubble burst. In 2020, the central government initiated the "three red lines" policy, which restricted credit to real estate developers, thus starting the process.

ChatGPT Explains the "Three Red Lines" Policy

China's "three red lines" policy is a regulatory framework introduced in August 2020 aimed at limiting excessive borrowing by real estate developers and reducing financial risks in the real estate sector. The policy sets strict thresholds for three key financial indicators: a liability-to-asset ratio (excluding advance receipts) of less than 70%, a net debt ratio (net debt to equity ratio) of less than 100%, and a cash-to-short-term debt ratio of more than 1. Developers are classified based on the number of thresholds they meet, and their borrowing growth rates are correspondingly restricted—companies meeting all standards can increase their debt by a maximum of 15% per year, while those violating any of the three standards cannot increase their debt. By implementing these "three red lines," the Chinese government aims to promote financial stability, encourage developers to deleverage, and improve their financial conditions.

Subsequently, the Chinese economy, like other victims, fell into a liquidity trap or balance sheet recession. During this period, private enterprises and households tightened their spending and reduced economic activity to repair their balance sheets. When the credit demand of households and businesses declines, traditional Keynesian economic methods—namely moderate fiscal deficits and central bank interest rate cuts—become ineffective. To curb the terrifying deflation, strong monetary and fiscal measures must be adopted. The timing of switching to "panic mode" depends on national culture, but regardless of the economic system adopted, all countries will ultimately respond to crises through "monetization therapy."

Although this monetization may cure deflation, it ultimately harms the lower and middle classes, who suffer from rising asset prices while the real economy shows no significant improvement. This ineffective monetization therapy is highly profitable for a few financial giants, whose headquarters are distributed in New York, London/Paris/Frankfurt, and Tokyo, and may now extend to Beijing/Shanghai.

Monetization therapy consists of two parts:

1. Public funds for capital restructuring of the banking system, where bank balance sheets are always filled with poor-quality mortgages. The private market will no longer provide equity funding, which is why bank stock prices plummet, showing insolvency and ultimately bankruptcy. The government must inject new funds and subsequently change accounting rules to legitimize the financial status claimed by banks. For example, Japan allows its banks to hold real estate assets at purchase cost rather than current market value, thus maintaining accounting solvency. After government capital injections, banks can expand their loan books again, increasing the money supply. As bank credit increases, nominal GDP rises accordingly.

2. Central bank money printing, i.e., quantitative easing (QE). By purchasing government debt, the central bank injects funds through money printing. With a reliable debt buyer, the government can implement large-scale stimulus plans. QE also pulls reluctant savers back into risky financial markets. The central bank buys large amounts of safe interest-bearing debt, forcing savers to speculate in financial markets with "safe" government bonds. They understand that the inflation shock brought by monetization therapy is imminent, so they are eager to return to the real estate and stock markets. For those without sufficient assets, they can only be forced to accept this situation.

Bankrupt banks are saved because the financial assets (real estate and stocks) supporting their loan accounts appreciate in value. I call this "re-inflation," in contrast to deflation. The government increases its revenue due to rising nominal GDP, pushing for more aggressive stimulus plans, while GDP growth stems from bank-led money creation and the central bank's infinite debt purchases. For investors in financial markets, the rise in asset prices no longer depends on the actual state of economic development. In other words, even if the economy does not genuinely improve, the prices of assets such as real estate and stocks will continue to rise due to government and central bank injections of funds.

The stock market is no longer a forward reflection of the economy but has become the economy itself. The only thing that matters is monetary policy and the speed of money creation. Of course, government policies will also affect the types of companies that obtain capital, which is crucial for stock pickers, but the prices of Bitcoin and cryptocurrencies are primarily influenced by the total money supply. As long as fiat currency continues to be created, Bitcoin will continue to rise, and the ultimate beneficiaries do not matter.

Current financial analysts generally believe that the stimulus measures announced by China are still insufficient to adjust the scale of the economy. However, the latest measures reveal some signs indicating that under the leadership of Beijing, China is preparing to inject "monetization therapy" to combat deflation. This means that Bitcoin will soar in the long term as China revitalizes its banking system and real estate industry. Considering that China's real estate bubble is the largest in human history, the resulting RMB credit will rival the total amount of dollars printed by the U.S. during the pandemic in 2020-2021.

To substantiate the above points, the following will gradually analyze:

• Why do modern governments promote real estate bubbles?
• Analyze the scale of China's real estate bubble and why Beijing decided to end it.
• Discover signs that Beijing is preparing to revitalize the Chinese economy.
• How the RMB enters the Bitcoin market.

Social Order

The foundation of modern governments is widespread public support. In today's era, which does not rely on organized religion for authority, how does the state gain the support of the populace for its rule? The simplest way to avoid revolution is to link citizens' economic net worth to the success of the ruling regime. The most important financial asset is undoubtedly the primary residence, as the human body can only survive within a very narrow temperature range. When you are homeless, you may be too cold or too hot, which can lead to death in severe cases.

Setting aside housing costs, assuming you have saved enough money to buy a house for your family, your biggest concern is who will protect your property rights? Without a government that can legally counter domestic opponents, you need private armed forces to defend these rights. In the absence of government protection, how can you prevent armed neighbors from claiming your land belongs to them? When the state is strong and the law is respected, there is no need to worry about homeless people stealing property; when the state is weak, you must be prepared to take violent action against infringers. Therefore, property owners naturally trust the government to protect their property rights and are willing to comply with government orders. Ultimately, this means you will not easily rebel, or it will lead to economic self-destruction.

The government seeks to convert as many citizens as possible into homeowners, linking their economic and material welfare to the state. Because building structures requires expensive energy, the government typically encourages private homeownership through various debt-based financing schemes. Even in so-called communist countries—like China—property rights were one of the first areas to be reformed, starting with Deng Xiaoping's reforms in the late 1980s and early 1990s.

I once took a housing policy course taught by a former deputy secretary of housing during President Clinton's administration, during the spread of the subprime mortgage crisis in the first half of 2008. We learned about various government programs aimed at increasing homeownership. My main takeaway was that real estate bubbles always require government support and financing. In the context of the United States, since the Clinton era (1992 to 2000), the government has vigorously promoted the increase in homeownership, expanding the role of government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac through the 1992 Federal Housing Enterprises Financial Safety and Soundness Act.

GSEs are publicly traded private companies but have implicit support from the federal government. They finance in a manner akin to the federal government and take on most housing mortgages. Thus, Fannie Mae and Freddie Mac became some of the most profitable financial services companies. Banks also benefited by initiating loans with risk-free profits, ultimately transferring the risk to the public sector's balance sheet. Of course, it is precisely because of these distorted incentives that the "masters of the universe" go too far—but they would never take these risks without government backing.

Real Estate Bubble with Chinese Characteristics

Let’s first understand China's economic model. To accelerate industrialization, China has implemented financial repression on savers through its state-owned banking system, allowing state-owned enterprises (SOEs) to obtain capital at low costs. If the largest users of bank credit are industrial enterprises, then the fair interest rate for savers should be proportional to the value added by industry. The value added by industry refers to the contribution of the industrial sector to the national GDP, calculated by dividing the value added created by all industrial activities by the total GDP.

As you can see, the benchmark lending rate has always been lower than the value added from industrial production because state-owned banks offer very low deposit rates to ordinary savers—see the chart below.

Savers know that the returns they receive are not worthwhile, but since the RMB is a restricted currency, they cannot invest their funds overseas. To achieve higher capital returns, they can choose to invest in the local stock market or real estate market.

However, there are issues with the stock market: the best-performing companies are often state-owned enterprises. State-owned enterprises receive the cheapest bank credit and monopolize high-profit industries such as telecommunications, oil and gas, and minerals due to exclusive operating licenses. You might think this means that state-owned enterprise stocks perform exceptionally well, but in reality, their return on equity (ROE) is mediocre. This is because all senior executives in state-owned enterprises are party members, and the interests of the party do not always align with those of shareholders, with the party's needs always taking precedence.

This chart shows the difference in return on equity (ROE) between the CSI300 index and the S&P 500 index. It is evident that Chinese stocks significantly underperform U.S. stocks.

Privately-owned enterprises facing real competition have much higher return rates than state-owned enterprises (SOEs), yet state-owned enterprises are more prominently represented in major stock market indices.

With a baseline of 100, China's GDP (green) has grown by 1200%, while the CSI300 index (white) has only grown by 200%.

Since the early 2000s, the stock market has significantly lagged behind China's frenzied economic growth (as shown in the chart above). Ordinary Chinese people are not foolish; thus, stocks are not their preferred means of appreciating savings; they are more inclined to invest in the real estate market.

Chairman Mao initiated the process of urbanization in China, and subsequently, Deng Xiaoping and his more market-oriented policies propelled urbanization to rapid development. The party believes that the only way to reshape China's (literally "Middle Kingdom") dominant position in the world is to rely on the strength of global manufacturing. This means relocating farmers from rural areas to cities to produce export goods. Therefore, every five-year plan has urbanization goals.

In just a few decades, relocating hundreds of millions of people from rural areas to cities necessitated a frenzy of residential and industrial real estate construction. The first step to making money in real estate is selling land to developers. Local governments own the land and sell it to developers by granting land use rights.

Since most of the income tax revenue from the central government is retained by itself, local governments' primary source of funding is land sales. As urbanization accelerates and the economy grows, land becomes increasingly valuable, and sales revenue rapidly expands. Beijing also sets limits on the amount of debt local governments can issue each year, which is usually secured against their land reserves. Therefore, the financial condition of the government is directly related to the rise in real estate prices.

Land prices have increased 80 times over 19 years, with an average annual compound growth rate (CAGR) of 26%.

Ordinary people accumulated wealth by saving and then purchasing one or more apartments. From the early 1990s to 2020, real estate prices have been on the rise. Banks typically do not offer any form of consumer credit but are willing to lend against real estate as collateral, making the net worth of ordinary households almost entirely tied to the rise in real estate prices.

As real estate prices soared, all stakeholders made money. After the initial demand from the rapidly urbanizing population was met, the market continued to build apartment units because it was encouraged and was the only area where banks felt secure in extending credit. Thus, a massive real estate bubble formed.

Maintaining social harmony is a clear goal of the party. When the vast majority of people cannot afford housing, the social structure becomes torn apart. The sharp decline in birth rates is a symptom of the disease of the real estate bubble. Young people may be dating, but due to high housing prices, the only housing they can afford is a condom.

Moreover, excessive bank credit flows into real estate rather than being used for the development of new technologies. Beijing has shifted funds from non-productive, speculative real estate development to high-tech manufacturing.

Beijing began to adopt a tough stance on curbing the real estate market in the mid-2010s, but actually bursting the bubble came with a series of risks. Every major state-owned bank and industrial company has significant ties to the real estate market. Many bank loans are backed by residential mortgages issued to families or developers. One of the largest customer bases for companies producing air conditioners, steel, cement, and other goods is real estate developers.

Additionally, Beijing retains most of the tax revenue to ensure that the central government's balance sheet appears strong, which means that local governments cannot achieve the party's growth targets without continuously rising land prices. Bursting the real estate bubble would severely impact ordinary families, banks, industrial companies, and local governments. If Beijing cannot control the market downturn, social harmony may collapse.

In 2020, Beijing announced: "Houses are for living in, not for speculation." It then introduced the "three red lines" policy. Soon, the most over-leveraged real estate developers stopped new construction and completions, starting to default on offshore bonds, with Evergrande being a high-profile example of a Chinese real estate developer that collapsed after credit restrictions.

Before I continue with the timeline of the story, I want to quickly mention a lesser-known characteristic of the Chinese real estate market and its impact on the successful implementation of policy measures to end the crisis. In China, most apartments are purchased before they are built. Buyers need to pay a cash deposit upfront and then provide the remaining funds over the years before the real estate is completed.

Essentially, real estate developers operate like Ponzi scheme operators, using the full payment for unfinished units to pay for the completion of old units. Developers also use this pre-sale cash as collateral to obtain bank credit, as they still need more funds to complete old projects and purchase new land from local governments.

When banks are instructed to reduce loans to highly indebted developers, it raises doubts among buyers about whether unfinished units will be delivered. If ordinary Chinese families do not believe that real estate developers will complete construction, they will not purchase pre-sale units. Without pre-sale funds, real estate developers cannot complete old projects. The end result is that developers have to stop construction, confidence in the entire real estate market collapses, and everyone loses.

The Chinese government's initial response to the crisis was to instruct banks and local governments to provide loans to real estate developers to complete unit deliveries. However, there is a significant agency problem here. Despite the central government's immense power on paper, they still rely on party members to bear the occupational risks of executing directives.

Imagine you are a local government head; if you can create economic growth, you will be promoted, but if you incur losses, you will be investigated by the central anti-corruption committee. Being punished by the party for corruption can lead to imprisonment or even death, and investigations usually occur suddenly years after the fact. Therefore, taking risks offers no benefits; even if the central government tells you to lend, you might choose to ignore it.

Beijing continues to issue higher quotas, allowing more real estate developers to obtain credit, but this credit has not been effectively allocated. Another option is for the government—whether central or local—to directly participate in construction, completing millions of unfinished units to restore market confidence. However, they have yet to take such action, which I think may be because such a massive project is too complex for a top-down centralized government, especially with millions of square feet of construction needing completion.

Moreover, if the government enters the construction sector and the units they build fail to meet the initially promised quality, angry citizens may blame the government rather than the failing real estate developers. This brings us to the current moment. Using traditional monetary policy to underpin prices and restore confidence may take decades.

Beijing is unlikely to wait that long, as the Chinese economy is rapidly slowing down. It is time to summon financial "sorcerers" and begin "therapy."

Re-inflation

Let’s browse some frustrating charts to see the impact of the real estate bubble burst on the Chinese economy. Listening to economists' pessimistic views on the Chinese economy may make you feel that Beijing has been helpless, but the reality is far from it.

The Chinese government has implemented large-scale fiscal and monetary stimulus measures; however, due to the massive excess in the economy, this funding is merely used to maintain basic operations. The left chart shows the rising debt-to-GDP ratio, which allows "zombie" state-owned enterprises to continue operating (the right chart), avoiding massive layoffs.

However, when you have just burst the largest real estate bubble in human history, strong "therapy" is needed to curb deflation. All measures are relative. Compared to the economic "black hole" created by the collapse of the real estate market, the current stimulus measures are still insufficient to produce positive credit or fiscal spending effects.

Despite the implementation of numerous stimulus measures, loan demand remains at historically low levels. This is because real interest rates are still too high.

China's broad money supply growth has fallen to historical lows, leading to a significant slowdown in nominal GDP growth.

As economic activity contracts due to the deflationary clearing of excess capacity, the real problem Beijing faces is a large number of unemployed young people. Due to the high youth unemployment rate in cities, China has stopped publishing this data since June last year.

A large number of young, educated, unemployed, and homeless men, lacking heterosexual appeal, are prone to dissatisfaction and may become potential factors for public uprisings. The CIA may be closely monitoring this situation, hoping to incite a "color revolution" in China. These newly graduated young people may become disillusioned with the existing system because they have not received the promised opportunities for prosperity.

If China were the United States or the European Union, it might divert these young people through foreign wars. However, China has traditionally not been keen on large-scale foreign military adventures. Therefore, China needs to restore economic activity through quantitative easing (QE) and increase the broad money supply to provide job opportunities for ordinary university graduates.

Beijing is well aware of this. Since this summer, it has instructed the People's Bank of China (PBOC) to update its tools to conduct open market operations in the government bond market, gradually incorporating the buying and selling of Chinese government bonds in its toolkit. In recent years, the market has paid increasing attention to this, and we have been enriching and improving the methods of injecting base currency. In the past, the method of foreign exchange reserves was a passive injection of base currency. Since 2014, the amount of foreign exchange reserves has decreased, and we have actively injected base currency through open market operations and medium-term lending facilities.

It is worth noting that incorporating the buying and selling of Chinese government bonds into monetary policy tools does not mean implementing quantitative easing but serves as a channel for injecting base currency and a tool for liquidity management. The buying and selling of Chinese government bonds will work in conjunction with other tools to create a suitable liquidity environment.

Current Monetary Policy Stance in China and the Evolution of Future Monetary Policy Framework

Today, quantitative easing (QE) has become a sensitive term because people know it can trigger inflation. However, since August of this year, the PBOC has increased its holdings of local government bonds from 1.5 trillion RMB to 4.6 trillion RMB, marking the first time since 2007 that monetary injection has been conducted through the purchase of government debt.

To achieve a level of fiscal policy stimulus sufficient to escape the deflationary predicament, large-scale issuance of local and central government bonds is necessary. Although Chinese bond yields are at historical lows, they are still too tight in substance. The price of money needs to be close to zero, and the supply must significantly increase, which can only be achieved through the PBOC's implementation of quantitative easing.

The Federal Reserve, the European Central Bank, and the Bank of Japan all began their quantitative easing efforts with small-scale purchases of government bonds but ultimately emerged from the deflation trap through massive money printing. China and the PBOC will also take the same path. Although initial interventions may be small, ultimately, the PBOC will print tens of trillions of RMB to adjust the scale of the Chinese economy—this is Beijing's intention!

China is about to embark on quantitative easing, but this only addresses half of the problem. Banks also need to restore lending to drive high nominal GDP growth.

Returning to the incentive mechanisms for senior management in state-owned banks (SOEs), they are reluctant to issue large amounts of new loans. This is because some loans may default, and they may be investigated for corruption years later; they need to be assured that Beijing will support them.

Recent monetary policy measures from the People's Bank of China (PBOC) signal encouragement for bank credit growth, as the Chinese government has announced it will borrow and inject funds directly into the banking system. Although state-owned banks essentially pass funds from "left hand" to "right hand," this is, to some extent, more of a gesture. Through this action, Beijing indicates to bank executives that increasing loan growth will not bring personal risks.

Another sign that Beijing is prepared to relax corruption penalties is the restart of the "three zones" policy. In recent party documents, the Politburo has expressed to party members that it will forgive grassroots officials for making erroneous decisions to improve the economy. By reducing the personal responsibility of senior officials for risks, officials can begin to lend and provide the necessary credit to revitalize the economy.

The financial indicators of China's banking industry, especially regarding non-performing loans (NPL), appear somewhat distorted. According to the Bank for International Settlements (BIS), on average, the banking system's non-performing loan rate reaches about 22% after experiencing a real estate crisis. However, China's banks report an NPL of only 2%. Are Chinese banks really that special?

I don't think so. This is why banks in China are usually only willing to lend to projects directly supported by the government. To use a cryptocurrency analogy, imagine a bank whose loans are primarily targeted at companies like FTX, Three Arrows Capital, BlockFi, Genesis, and Voyager. If this bank reports the lowest non-performing loan rate, would you believe it? Therefore, to revitalize the banking industry, Beijing needs to repair banks' balance sheets through equity injections.

Another policy indicating that Beijing is ready to relax credit issuance is the setting of caps on total compensation for bankers. Recent government regulations state that the maximum total compensation for any financial services professional is limited to $420,000, regardless of whether they work in state-owned or private banks. When the U.S. aided its banking industry, such restrictions were not imposed; JPMorgan CEO Jamie Dimon still earned $17.6 million after the bank was rescued in 2009.

Beijing knows that credit expansion is extremely profitable for the banking system, especially when the government essentially backs all loans. At the same time, they are aware that wealth does not trickle down, which could incite anger among the general populace. The last thing Beijing wants to see is a "eat the rich" movement like "Occupy Wall Street" happening on Nanjing Road in Shanghai, which also aligns with Beijing's common prosperity policy.

Beijing is signaling to the market that it is injecting monetary "therapy"; you just need to listen. One side effect mentioned by many analysts is the depreciation of the RMB against the USD.

RMB

Russell Napier wrote an excellent article arguing that China is ready to accept the monetary "therapy" I described in the previous section and believes that Beijing will tolerate the depreciation of the RMB due to the surge in money supply. I am not sure if Beijing will allow the RMB to depreciate significantly, as this could trigger capital outflows. However, I believe the RMB will not depreciate significantly against the USD, so this prediction will not be tested.

It is well-known that China is the world's manufacturing workshop, and thus, its trade surplus continues to reach historical highs. However, a deeper analysis of the data reveals that the reason for the increase in China's trade surplus (exports minus imports) is not an increase in export volume but a decrease in its economic dependence on imports, while China can pay for more imports in RMB.

To illustrate my hypothesis, assume China's total monthly exports are $100, and total imports are $50, resulting in a trade surplus of $50. Now, the import dependence of its export economy has decreased—for example, China used to need to import components from abroad to manufacture cars, but now most components are produced domestically. This allows the trade surplus to grow even if the quantity of exported goods has not increased.

The above chart shows how China exports more construction machinery and cars while reducing imported goods.

The main goods that China lacks are energy; however, currently, China can purchase goods from countries like Saudi Arabia and Russia using RMB (rather than USD).

After the outbreak of the Ukraine war in February 2022, the West froze Russia's dollar and euro reserves and imposed sanctions. Before this, China could not dominate trade terms. But now, Russia has no choice but to accept payment in RMB at China's request and supply energy to China at discounted prices.

As China increases the domestic supply of RMB to stimulate economic growth, inflation will also rise. However, since the proportion of domestically produced goods is higher and a larger share of energy payments is settled in RMB, the rise in inflation will not significantly weaken the RMB's exchange rate against the USD as it did in the past.

The final reason the RMB is unlikely to depreciate significantly is that, in sync with China's re-inflation measures, the U.S. will implement a "weak dollar" industrial policy regardless of the election outcome. Although Trump and Harris attempt to emphasize their differences, in essence, they will both stimulate the economy by printing money and injecting funds into key U.S. industrial sectors.

Whether Trump or Harris wins, the U.S. will inject trillions of dollars into the market in the coming years, which will undoubtedly lead to structural depreciation of the dollar.

For China, the negative monetary impacts of implementing re-inflation policies may not be immediately apparent. All signs indicate that Beijing is preparing to print large amounts of RMB. However, in the context of credit creation growth, ordinary people may not see a significant enhancement in the real economy. For these individuals, Bitcoin may become a "cure."

Let's Go Bitcoin

The Chinese people are known for their adaptability and innovative spirit; they will not let their RMB depreciate in the face of asset price inflation. Bitcoin is not unfamiliar to middle and high-income residents of coastal cities. Although exchanges are prohibited from offering public Bitcoin/RMB trading pairs, the Bitcoin and cryptocurrency market continues to thrive in China.

Currently, China's cryptocurrency market has returned to a peer-to-peer (P2P) trading model. In the early years, during the heyday of the three major Chinese exchanges (OKCoin, Huobi, and BTC China), users often had to go through complex methods to transfer RMB into exchange accounts. Today, it is rumored that China once again has an active P2P market, with major Asian spot exchanges like Binance, OKX, and Bybit having substantial business in mainland China. Exchanges have P2P information boards to help local traders assist each other in cryptocurrency trading. In short, motivated Chinese individuals can relatively easily exchange RMB for cryptocurrencies.

The reason Beijing closed Bitcoin/RMB trading pairs may be to prevent Bitcoin from becoming a "warning signal" for currency depreciation, prompting investors to choose Bitcoin over stocks or real estate to store value. Although the Chinese government cannot completely ban Bitcoin, holding cryptocurrencies has not been entirely prohibited in China, but Beijing prefers to keep Bitcoin low-key. Therefore, I cannot directly track the flow of RMB into the Bitcoin ecosystem through statistics; the only clues may come from feedback from market trends.

Bitcoin ETFs listed in Hong Kong are also unlikely to see significant inflows, as funds flowing into the Hong Kong market through the Shanghai-Hong Kong Stock Connect will not be used to purchase domestic stocks or real estate, which is why mainland China prohibits the purchase of Bitcoin ETFs in Hong Kong. Thus, even if companies issuing these ETFs place expensive advertisements in Hong Kong subway stations, they cannot easily connect mainland investors with Bitcoin.

While I do not have direct tools to track the flow of RMB into Bitcoin or channels to view Bitcoin/RMB prices, I am confident that in the context of the central bank's balance sheet expansion, the performance of stocks and real estate will generally lag.

The above chart shows the performance of Bitcoin (white), gold (yellow), the S&P 500 index (green), and the Case-Shiller U.S. Home Price Index (magenta) compared to the Federal Reserve's balance sheet, with all assets set to an initial value of 100. Bitcoin's performance relative to other risk assets is so strong that the return curves of other assets cannot be distinguished on the right side of the chart.

As I mentioned earlier, this is my favorite chart. No other major category of risk assets can resist currency depreciation as effectively as Bitcoin. Investors instinctively recognize this, so when considering how to protect the purchasing power of their savings, Bitcoin will stare you in the face like a Kwisatz Haderach, impossible to ignore.

For those who believe the market will quickly recognize the future and rapidly drive up Bitcoin prices, I must disappoint you. The People's Bank of China's quantitative easing (QE) policy and the renewed acceleration of credit growth will take time. Therapy consumes the "patient" and requires a process. In the initial stages, Chinese savers, as I expected, are buying oversold domestic stocks and heavily discounted apartments. This policy may not be apparent at the moment, but give it time, and its effects will eventually become undeniable.

Economists' current pessimistic views on the scale and intensity of stimulus provide excellent buying opportunities for investors. When wealthy investors living on the coast decide to buy Bitcoin at any price, the price fluctuations will remind one of August 2015—when the People's Bank of China suddenly implemented a devaluation of the RMB, and Bitcoin's price rose from $135 to $600 in less than three months, achieving nearly a 5-fold increase.

(The views expressed in this article are those of the author and should not be taken as the basis for investment decisions, nor should they be considered as any investment advice or opinion.)