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Risk of a sharp CNY rebound
Risk of a sharp CNY rebound
Summary
- Trending CNY weakness is not a surprise alongside a softer economic backdrop, central bank stimulus and portfolio outflows.
- Debt concerns are not a global systemic issue, as foreign debt accounts for only 6% of the overall total and has been on a declining trend as of late.
- CNY weakness and portfolio outflows are likely to reverse if Chinese equities are included in key global emerging market benchmarks.
Three benchmarks
The intention of the People’s Bank of China (PBOC), alongside further liberalisation of the currency, is to keep the valuation of the Renminbi ‘basically stable’ against a basket of global currencies. Risk of a sharp CNY rebound
Although the USD is the main currency that the market values the Chinese Renminbi (CNY) against, Chinese policymakers increasingly want to move the focus to a basket of currencies – the method they indicate they set the currency on a daily basis.
Officials state that the currency is allowed to deviate within a +/-2% band on a daily basis from the fixing rate which is partly determined by the closing value of the Renminbi on the prior trading day. Risk of a sharp CNY rebound
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In December 2015, the PBOC introduced the CFETS RMB Exchange Rate Index, to be more a representative valuation of the Chinese currency against its trading and investment partners. China Foreign Exchange Trade System (CFETS) is the foreign exchange markets subsidiary of the PBOC. There are 13 currencies in the CFETS basket, with the weightings largely trade based.
The other baskets that are referenced by Chinese officials are the IMF’s Special Drawing Rights (SDR) basket and the Bank of International Settlements (BIS) basket. The SDR is valued against the US Dollar, the Japanese Yen, the British Pound, the Euro and the Renminbi, while the BIS basket is valued against 40 different currencies. Regardless, the USD is the primary currency, with 26%, 42% and 18% weightings in the CFETS, SDR and BIS baskets respectively.
The recent onshore CNY weakness (against the USD) over the past two months doesn’t appear to be artificially distorted. Indeed, onshore traded Renminbi (CNY) moves in 2016 are in line with offshore traded Renminbi (CNH) movements. The gap between onshore and offshore markets that appeared during H2 2015 after the surprise CNY devaluation has all but disappeared, as the market becomes more comfortable with the more transparent CNY pricing.
No motivation for devaluation
If policymakers are devaluing the CNY the only motivation can be to boost trade. The benefits of currency weakness on trade is well documented. However, as the Chinese currency becomes more market-based, and most developed market central banks follow beggar-thy-neighbour stimulus to weaken local currencies, the gains to trade are likely be limited. Additionally with China sitting in the middle of many supply chains, the finished output to be exported could be more competitive as the currency depreciates. However, imported inputs to manufacturing would also be more expensive, limiting any strong benefits to devaluation from a trade perspective as well.
With so much focus and concern around China’s debt problems, the authorities are unlikely to want to exacerbate the problem by depreciating the currency, which would make the value of foreign debts larger in local currency terms. The fears are maybe overblown given that only 6% of China’s debts are denominated in foreign currency and are declining. However, given the nebulous benefits to trade from devaluation, increasing credit risks associated with devaluation (even though is small) does not appear worthwhile.
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There seems little motivation for policymakers to artificially weaken the Renminbi in the current environment.
Steady decline in FX reserves
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Currency weakness isn’t surprising for a country whose pace of growth is slowing, with a central bank in the process of cutting both the repo rate and the reserve requirement rate (RRR), and a government injecting other forms of stimulus. Calls for a stronger currency by foreign politicians are misplaced in such an environment.
Although the currency is officially managed against three benchmarks, the PBOC analyses its FX reserves in USD mainly. However, it has recently begun publishing foreign exchange reserves with the IMF’s SDR as the unit of account.
The PBOC is not actively devaluing the renminbi. Foreign exchange reserves are actually declining, a trend that could not occur if the PBOC were intervening in currency markets to devalue the local currency. Moreover, FX reserves have been in steady decline since mid 2014, after peaking at around US$4tn.
The recent weakness in the Renminbi has contributed to the trend decline in the outstanding level of foreign currency loans. If a loan is not hedged, a sustained decrease in the currency will lead to a greater debt burden. FX loans are likely to continue downward as the level of positive carry is expected to decline due to US rates increasing in coming years.
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June 14 deadline.
In addition to foreign debt, portfolio investment is critical to the direction of the CNY. Capital flows are likely to increasingly be a directional driver of the Chinese currency in the years ahead as liberalisation of the Renminbi gathers pace. Further currency weakness seems likely in the near term on this basis. Investment funds flowing out of China in Q1 2016, amounted to US$40.1bn, a 55% jump on a year earlier, according to the PBOC. In April, US$25bn of portfolio was withdrawn from Chinese assets, the 25th consecutive monthly outflows, according to the Institute of International Finance. Portfolio outflows can intensify as the decline in the CNY will have an adverse impact on foreign portfolio returns.
Nonetheless, the negative flows could abate quite quickly and even reverse in coming months. MSCI are expected to decide on June 14 whether to include Chinese A shares in its MSCI China Index (and consequently MSCI Emerging Markets Index). This is likely to prompt a lift of the CNY in the near-term as investment funds are redirected towards the country.
Liberalisation and beyond
Greater currency liberalisation is likely in the future, not only because of the greater scrutiny from the IMF (with the Renminbi now being in the SDR basket) but also as China seeks to gain greater interest in global commodity pricing dynamics. Currency transparency and flexibility are necessary to lure trading away from developed commodity trading platforms and encourage greater foreign participation on Chinese commodity exchanges. Although CNY weakness is warranted from an economic and portfolio flows perspective, the June 14 announcement of a potential inclusion of Chinese equities in key MSCI EM benchmarks could see recent CNY trends reversed. A greater degree of CNY volatility can also be expected alongside further liberalisation and transparency.
Important Information
General
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”). The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities.
This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.
2024 was a landmark year for bitcoin, solidifying its role as a fully institutionalised asset class.
Institutional inflows into physical bitcoin exchange-traded products (ETPs) reached nearly $35 billion globally, signalling a major shift in how traditional investors view crypto. As bitcoin continued to enhance portfolios’ risk-return profiles, more institutional investors followed suit, reshaping the financial landscape.
Looking ahead, 2025 promises to bring exciting developments across the crypto ecosystem. Here are the top five crypto trends to watch.
Fear of being left behind
The era of bitcoin as a niche investment is over. Institutional adoption is creating a ripple effect, forcing hesitant players to reconsider. Portfolios with bitcoin allocations are consistently outperforming those without, highlighting its growing importance.
Figure 1: Bitcoin in a multi-asset portfolio
| 60/40 Global Portfolio | 1% Bitcoin Portfolio | 3% Bitcoin Portfolio | 5% Bitcoin Portfolio | 10% Bitcoin Portfolio | MSCI AC World | Bloomberg Multiverse | Bitcoin | |
| Annualised Return | 5.77% | 6.46% | 7.83% | 9.20% | 12.57% | 9.07% | 0.56% | 56.24% |
| Volatility | 8.79% | 8.86% | 9.14% | 9.62% | 11.42% | 13.94% | 5.05% | 67.28% |
| Sharpe Ratio | 0.48 | 0.55 | 0.68 | 0.79 | 0.96 | 0.54 | -0.20 | 0.81 |
| Information Ratio | 1.01 | 1.01 | 1.01 | 1.00 | ||||
| Beta | 70% | 71% | 73% | 75% | 81% | 100% | 24% | 181% |
Source: Bloomberg, WisdomTree. From 31 December 2013 to 30 November 2024. In USD. Based on daily returns. The 60/40 Global Portfolio is composed of 60% MSCI All Country World and 40% Bloomberg Multiverse. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investment may go down in value.
With bitcoin’s ability to noticeably improve portfolios’ risk-return profiles, asset managers face a clear choice: integrate bitcoin into multi-asset portfolios or risk falling behind in a rapidly evolving financial landscape. In 2025, expect the competition to heat up as clients demand exposure to this powerhouse cryptocurrency.
Expanding crypto investment options
In 2024, regulatory breakthroughs opened the doors for physical bitcoin and ether ETPs in key developed markets. This marked a critical step towards making cryptocurrencies mainstream, providing seamless access to institutional and retail investors alike.
Figure 2: Global physical crypto ETP assets under management (AUM) and 2024 net flows
Source: Bloomberg, WisdomTree. 02 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
In 2025, this momentum is expected to accelerate as the crypto regulatory environment becomes more friendly in the United States and as key developed markets follow Europe’s lead and approve ETPs for altcoins such as Solana and XRP. With their clear utility and growing adoption, these altcoins are strong candidates for institutional investment vehicles.
This next wave of altcoin ETPs will expand the diversity of crypto investment opportunities and further integrate cryptocurrencies into the global financial system.
The maturing of Ethereum’s layer-2 ecosystem
Ethereum’s role as the backbone of decentralised finance (DeFi), non-fungible tokens (NFTs), and Web3 is unmatched, but its scalability challenges remain a hurdle. Layer-2 solutions—technologies such as Arbitrum and Optimism—are transforming Ethereum’s scalability and usability by enabling faster, cheaper transactions.
In 2025, Ethereum’s recent upgrades, such as Proto-Danksharding (introduced in the ‘Dencun’ upgrade), will drive layer-2 adoption even further. Innovations like Visa’s layer-2 payment platform leveraging Ethereum for instant cross-border transactions will underscore the platform’s evolution.
Expect Ethereum’s layer-2 ecosystem to power real-world use cases ranging from tokenized assets to decentralised gaming, positioning it as the infrastructure of a truly scalable digital economy.
Stablecoins: bridging finance and blockchain
Stablecoins are becoming indispensable to the global financial system, offering the stability of traditional assets with the efficiency of blockchain. Platforms such as Ethereum dominate the stablecoin landscape, hosting stablecoin giants Tether (USDT) and USD Coin (USDC), which facilitate billions in daily transactions.
Figure 3: Key stablecoin chains
Source: Artemis Terminal, WisdomTree. 05 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
As we move into 2025, stablecoins will increasingly interact with blockchain ecosystems such as Solana and XRP. Solana’s high-speed, low-cost infrastructure makes it ideal for stablecoin payments and remittances, while XRP Ledger’s focus on cross-border efficiency positions it as a leader in global settlements. With institutional adoption rising and DeFi applications booming, stablecoins will serve as the backbone of a seamless, interconnected financial ecosystem.
Tokenization: redefining ownership and revolutionising finance
Tokenization is set to redefine how we think about ownership and value. By converting tangible assets like real estate, commodities, stocks, and art into digital tokens, tokenization breaks down barriers to entry and creates unprecedented liquidity.
In 2025, tokenization will expand dramatically, empowering investors to own fractions of high-value assets. Platforms such as Paxos Gold and AspenCoin are already showcasing how tokenization can revolutionize markets for gold and luxury real estate. The integration of tokenized assets into DeFi will unlock new financial opportunities, such as using tokenized real estate as collateral for loans. As tokenization matures, it will transform industries ranging from private equity to venture capital, creating a more inclusive and efficient financial system.
For the avoidance of any doubt, tokenization complements crypto by expanding the use cases of blockchain to include real-world applications.
Looking ahead
2025 is set to be a defining year for crypto, as innovation, regulation, and adoption converge. Whether it is bitcoin cementing its position as a portfolio staple, Ethereum scaling for mainstream use, or tokenization unlocking liquidity in untapped markets, the crypto ecosystem is poised for explosive growth. For investors and institutions alike, the opportunities have never been clearer or more compelling.
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
On January 20, 2025, bitcoin (BTC) reached a new all-time high, surpassing $109,000, and this milestone coincided with Donald Trump’s inauguration for his second term as U.S. President.
Historical trends show that BTC has performed exceptionally well in the 12 months following the past three U.S. elections. If history repeats, this could signal another bullish phase. With Trump’s pro-BTC stance and a U.S. Congress aligned on favorable digital regulation, the outlook for the coming months appears highly promising.
Source: Hashdex Research with data from Messari (from November 6, 2012 to January 19, 2025).
MARKET HIGHLIGHTS | Jan 13 2025 – Jan 19 2025
Bitcoin-backed loans enabled on Coinbase’s L2
• Now customers can borrow USDC in the new base’s lending protocol by using bitcoin as collateral.
• This underscores the importance of onchain innovations as the pillar for future adoption of blockchain technology, in this case enhancing personal finance to be more decentralized and intuitive in a permissionless etho..
ETF filings reiterate bullish regulatory tailwinds
• As Donald Trump’s inauguration approaches, several asset managers have filed applications for new crypto ETF products, including those focused on assets like LTC and XRP.
• This reflects optimism for 2025’s crypto regulations and their potential to transform the regulated products landscape.
Trump to make crypto top priority in US agenda
• U.S. President-elect Donald Trump allegedly plans to issue an executive order making crypto a national policy priority and establishing an advisory council.
• The announcement signals that crypto has gained political importance. Even if not all promises are met, crypto has already crossed the chasm.
MARKET METRICS
The Nasdaq Crypto Index™
This week saw a significant rise in digital assets as the market awaits Trump’s inauguration, with the NCI™ (+15.3%) outperforming all traditional asset classes. The NCI™ (+13.2%) also outperformed BTC (+12.1%), highlighting the value of diversification in a volatile market. The performance was positively impacted by SOL’s strong 46.3% gain, while ETH’s underwhelming 3.0% growth had a dampening effect.
Source: Hashdex Research with data from CF Benchmarks and Bloomberg (from December 31, 2024 to January 19, 2025).
It was a strong week for the NCI™ , with SOL leading the pack (among others, like XRP and LINK), surging 46.3%, while BTC (12.1%) and ETH (3.0%) lagged behind. This price action seems driven by excitement around Trump’s inauguration and the crypto-friendly environment his promises suggest.
Source: Hashdex Research with data from Messari (from January 12, 2025 to January 19, 2025).
Indices tracked by Hashdex
Source: Hashdex Research with data from CF Benchmarks and Vinter (from January 19, 2024 to January 19, 2025).
5 crypto trends to watch in 2025
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Nyheter1 vecka sedanHANetfs Tom Bailey om utsikterna för koppar och uran
