Will China’s Credit Incentives Help Bitcoin Take Off? Analysts Reveal the Truth

China's biggest stimulus measures since 2008 initially sparked a rally in Chinese stocks and global risk assets, including Bitcoin (BTC).

Analysts Say Chinese Incentives May Not Have the Expected Impact on Bitcoin This Time

Crypto analysts had high hopes that the combination of China’s economic stimulus and possible interest rate cuts from the Federal Reserve would propel Bitcoin to $100,000 in the coming months.

But new information from BCA Research suggests that optimism may be misplaced. According to its analysis, China’s latest round of stimulus lacks the power to generate the same bullish “credit impulses” that have fueled previous market rallies, including Bitcoin’s rise.

Credit expansion refers to the flow of new credit through loans and debt instruments, expressed as a percentage of a country’s gross domestic product (GDP). Analysts have tracked China’s credit volume for more than a decade as a key indicator of economic growth and rising risk around the world. Historically, increases in this metric have coincided with Bitcoin bear market bottoms and subsequent bull runs.

In 2015, China’s credit drive reached 15% of GDP, equivalent to 15.5 trillion yuan. During this period, Chinese stocks, represented by the CSI 300 index, doubled in value in six months. Simultaneously, Bitcoin bottomed around $100, sparking a two-year bull run that culminated in a peak of $20,000 in December 2017.

China’s economy has doubled in nominal GDP terms since then, meaning current credit growth needs to reach 27 trillion yuan to match the 2015 boom. However, the most recent peak in credit growth was just under 5 trillion yuan, well below the level needed to repeat previous market booms.

That shortfall would require the latest stimulus measures to be five times broader than the current peak, BCA Research said in a note to clients on Oct. 2. Without such a boost, the expected boost to the economy and thus risk assets like Bitcoin may not materialize.

One of the biggest obstacles to China’s ability to increase its credit volume is its lack of a strong housing market. From the early 2000s to 2020, China’s credit expansion was largely fueled by a booming housing market that absorbed large amounts of new credit. But as the housing market cools, there are fewer productive channels for that credit to flow through, making it harder for China to see the same level of economic growth.

“During the period 2000-2020 when China’s housing boom was in full swing, it was possible to steer the exponential credit curve towards a housing and construction boom,” BCA analysts wrote. “But now, it will be difficult to generate the same monster credit spurts because there is no alternative target for productive use of credit of the same magnitude.”

While the promise of a Bitcoin rally fueled by Chinese stimulus is enticing, the reality could be more complex. The lack of significant credit taps and the challenges facing the Chinese economy could limit the impact of the latest stimulus on global risk assets, including Bitcoin. For now, Bitcoin bulls may need to temper their expectations.

*This is not investment advice.