Crypto reacts weakly to new Chinese stimulus measures

Bitcoin (BTC) started the week strong, peaking at nearly $64,500, but crypto prices quickly saw a minor correction after China announced new stimulus measures to support its flagging economy.

The People’s Bank of China (PBOC) cut the reserve requirement for banks by 50 basis points and the seven-day reverse repo rate by 20 basis points to 1.5%. In addition, the minimum down payment for mortgages was lowered to 15%. What are the effects of this on the crypto market?

Limited effect of Chinese measures on crypto

The Chinese stock market responded positively to the stimulus measures, resulting in a strong rally. However, Rick Maeda, an analyst at Presto Research, noted that Bitcoin’s reaction to the Chinese news was relatively weak compared to the stock markets.

“Bitcoin’s lack of reaction to this news, in contrast to the rising Chinese indices, highlights that Bitcoin’s current correlation appears to be more closely tied to the Federal Reserve’s policy and US markets,” Maeda said. “This is confirmed by the high correlation with US equities, especially after last week’s FOMC meeting.”

In other words, China’s monetary policy currently has much less influence on crypto than United States monetary policy.

Chinese stocks rise, but crypto lags

The region’s equity markets also saw strong gains, with Hong Kong’s Hang Seng index up 3.2% and the Shanghai Composite up 2.3%. This could signal a greater focus on equities than crypto by Chinese investors. Maeda expects the PBOC to continue cutting interest rates and stimulating the Chinese economy in the coming period.

Why is the impact on crypto limited?

A possible reason for the limited effect of the Chinese measures on the crypto market is the fact that crypto trading is officially prohibited in China. Although it has been possible to trade crypto in Hong Kong since this year, this is mainly limited to a select group of Chinese and regional institutional investors. For private investors from China, investing in crypto still remains a challenge.

In general, such financial stimulus is beneficial for risk-on assets such as stocks and crypto. In 2021, for example, the crypto market soared to astronomical heights during the US financial stimulus during the coronavirus crisis. According to analysts, we may now be on the cusp of a new phase of US financial stimulus, also known as ‘quantitative easing’.