Will Brexit and China Continue to Impact Bitcoin’s Price?

Macroeconomic uncertainty has fueled interest in bitcoin over the past few weeks, but is this likely to continue? Last week’s market analysis noted that bitcoin’s price is up 30% from Jan. 1, with two main drivers being uncertainty in China (the devaluation of the yuan) and Europe (Brexit). It’s unclear whether these events will continue to affect the digital currency’s price action in the second half of the year. But economists now believe that China’s shaky economic position after Brexit will increase risk aversion, making investors look to assets that balance risk (like bitcoin). Three economists spoke to CoinDesk about the current situation, revealing the complexity of the Chinese economy and how the superpower could be adversely affected by Brexit. Risks of the deal Since China does a lot of business with both the UK and the EU, economic difficulties in either party could disrupt Chinese business conditions. Sam Rines, senior economist and portfolio strategist at CoinDesk, told CoinDesk that slowing EU demand for Chinese goods would “pose a huge risk to the Chinese economy.” Usha Haley, a professor at West Virginia University’s School of International Business, said that if Brexit triggers a “domino effect” that leads to other countries also leaving the European Union, China’s single market for goods will also be affected. Haley, who has studied Chinese investment and trade for more than a decade, told CoinDesk that in addition to the potential disruption to trade, China’s direct outbound investment may also be affected. “In terms of macroeconomics, with Brexit, China has lost a strong supporter of its EU market position,” she said, adding: “Chinese investment in the UK has become less attractive in the European market, and some foreign investment plans will be shelved.” Debt concerns Market observers have repeatedly warned that China’s growing debt is a huge risk. “Eight years of expansionary fiscal policy has brought China’s debt to a staggering 225% of GDP,” Haley said. China is at risk of defaulting on about $2.4 trillion in debt, which also leads to great concerns about the future of global finance. Rines said that if Brexit slows EU growth significantly, the EU's trade with China will also grow slowly, making more debt unpayable. "This will be a negative shock, not only to China, but also to the world," she said, adding that coordinated action by central banks could help prevent any direct damage. Chen Zhao, deputy director of Brandywine Global Macro Research, also said that corresponding policies need to be "quick and decisive." Although some analysts have warned about China's growing debt burden, Chen Zhao believes that “concerns about China’s debt and the risks associated with it are very exaggerated.” He stressed that in developing countries, “debt is created primarily because savings need to be converted into investment.” Since China has such a high savings rate, its “high leverage is naturally inevitable.” Rines also stressed that “China does have too much debt, but China also has a huge ability to cover up recent problems.” Regardless of how the country addresses its high leverage situation in the short term, Chen highlighted the problem of China’s state-owned sector. This industry “consumes too much credit—it uses 80% of bank credit but only creates 20% of GDP.” He added that “this problem must be solved before China’s economic efficiency can be restored.” Possible shifts Efforts to address this situation could bring about huge policy changes. Zhao stressed that Brexit could represent a huge shift in the globalization that has dominated the world economy for the past 30 years. If this change does happen, it could have a particularly big impact on China, which has benefited greatly from economic globalization. The shift in the globalization situation could cause some setbacks for China’s major economy, while bringing more uncertainty. The deviation from globalization also benefits the price of Bitcoin.