Chinese stocks soar to 2024 highs. What’s happening?

China, the country with the largest gross domestic product (GDP) in the world and therefore a global economic power, faces a seemingly contradictory situation in its finances.

On the one hand, the Asian giant is facing—as CriptoNoticias reported last week—a economic crisis resulting from an economy with risks of paralysis due to deflation.

On the other hand, despite this critical scenario, Chinese stocks have soared highermarking a new high so far in 2024. That can be clearly seen in the following graph of TradingView of the SSE Composite index. This index includes all stocks listed on the Shanghai Stock Exchange and is one of the main indicators of stock market performance in China.

To understand why what happens happens, it is necessary to read recent publications from this same information portal. On September 24, CriptoNoticias published that “China cuts rates to combat deflation and fear of a global crisis grows.”

The mentioned interest rate cut It was part of a Chinese government plan to revitalize the economy. Analysts from the newsletter ‘The Kobeissi Letter’ explain that “just by reducing the bank reserve requirement by 50 basis points, more than $140 billion of liquidity was added.” Additionally, China noted that there will be much more stimulus in the future.

In addition, this September 30, the Chinese State announced that it purchased bonds worth $28.5 billion in the last 30 days and that “6 special ultra-long sovereign bonds” were reopened.

The analysts of ‘The Kobeissi Letter’ they explain that These stimuli are “pandemic-like in an effort to recover the economy” and they describe them as “crazy.”

What if the cure is worse than the disease?

The recent stock boom could be a double-edged sword for China’s government and economy. Although liquidity injections (this means there is more money in the market) and government stimuli, such as rate cuts and bond purchases, are designed to revive the economy and avoid a deflationary spiral, These measures carry significant risksespecially with regard to the devaluation of the yuan (the Chinese currency).

One of the main dangers of injecting so much money into the economy is that it can destabilize the value of the local currency. As the Chinese government increases the money supply, the yuan risks depreciating. A significant devaluation of the yuan could generate internal inflationary pressures, since the purchasing power of the population would be reduced, making products and services that depend on imported inputs more expensive.

Rising inflation in a country like China, which relies heavily on its manufacturing and export sector, would have a devastating impact on its international competitiveness. A weaker currency would mean an increase in production costs for Chinese companies that import raw materials or technology from abroad, which would reduce their profit margins or make Chinese products less attractive in global markets.

Furthermore, if inflation exceeds a certain threshold, the Chinese consumer’s ability to purchase essential goods, such as food and fuel, would be severely affected. This would generate a drop in domestic consumption (such as the one that wants to be avoided), which would end up further slowing down the economy instead of stimulating it.

The Chinese government must maintain a delicate balance. Although its current policies are aimed at reactivating the economy, it could trigger an inflationary crisis that would end up nullifying any short-term benefits. An example of this type of situation occurred in Argentina, where the excessive issuance of currency to finance public policies led to rampant inflation that, in turn, destroyed the purchasing power of the population and destabilized the economy.

What happens in China impacts the world (and bitcoin is no exception)

Excess liquidity in China is not only affecting its internal economy, but is having a global impact. In this interconnected world, the policies of an economic giant like China tend to expand rapidly to international markets. The effects are already being seen in other key global indicators.

An example is the S&P 500the stock index that measures the performance of the 500 largest companies in the United States, which is trading near all-time highs. Note that the United States is also cutting dollar interest rates. Thus, the effect is enhanced.

The massive injection of liquidity in China and other regions boosts international financial markets, with investors looking for opportunities in assets considered “risky” given the abundance of capital.

Another asset that has been capturing investors’ attention is gold. With excess liquidity floating in global markets and widespread economic uncertainty, many see gold as a safe haven of value. This has led the precious metal to trade near all-time highs in 2024.

However, not only traditional assets are benefiting from this context. Bitcoin (BTC), often referred to as “digital gold,” is also emerging as a major beneficiary of this global dynamic. Like gold, bitcoin is seen by many as a store of value in times of economic uncertainty, but with the addition of its decentralized nature and limited supply, which makes it especially attractive in monetary expansion scenarios such as the current one.

The cycle of economic stimulus and the search for great returns by global investors has already shown in the past how this shoots the price of bitcoin and cryptocurrencies to new heights (for example, what happened during the COVID-19 pandemic) .

A recent publication on the social network X by the professional trader and market analyst, Willy Woo, refers to this situation. He explains that global liquidity “has exploded again” and that there is a lot of room for monetary issuance (or, as bitcoiners usually call it, ‘brrrr‘) in the coming years:

For all this, the scenario that is being configured, with central banks and governments injecting massive stimuli to avoid recessions, creates the ideal conditions for bitcoin to continue consolidating itself as a haven of digital value.

Recent history shows that in times of excess liquidity, the price of bitcoin has tended to rise significantly. And, if this trend continues, the digital currency created by Satoshi Nakamoto could see new bullish momentum in the fourth quarter of 2024.