Due to the persistent threat of a deflationary economic downturn and the woes of the real estate market, foreign investors are withdrawing their cash from China, which has resulted in continued currency devaluation.

One observer claims that the most recent steps Beijing has made to address the problem pose a negative risk to bitcoin (BTC) via the foreign currency channel.

The closely controlled Chinese yuan (CNY) has lost 1.39% of its value in relation to the US dollar, while the offshore Hong Kong counterpart, CNH, has lost 1.25% of its value. According to statistics from the charting platform TradingView, the Shanghai Composite, China's main equity index, has fallen more than 7% to its lowest level since March 2020.

Through a managed-float system, the People's Bank of China (PBOC) loosely pegs the value of CNY to a basket of 24 currencies, enabling the domestic currency to vary by 2% either side of the daily fix or the reference point.

According to Reuters, China's state-owned banks supported the yuan on Monday by selling US dollars onshore and reducing liquidity in the offshore foreign exchange market. A measure of the liquidity conditions for offshore yuan in Hong Kong, the offshore yuan one-week CNH Hong Kong Interbank Offered Rate, increased to 4.95045%, the highest level since September 26.

Such actions may result in a general strengthening of the USD, more stringent global financial regulations, and a reduction in investor exposure to riskier assets such as technology companies and bitcoin.

This is due to the fact that the PBOC buys the USD against other currencies to maintain the consistent share of the greenback in its foreign exchange reserves while it sells US dollars onshore to strengthen the yuan. Under normal circumstances, the dollar index (DXY), which measures the value of the US dollar relative to major currencies, could rise as a result of the intervention.

The USD and bitcoin are known to have an inverse relationship. The spot ETF excitement was largely responsible for the 50% spike in cryptocurrency Q4 2023, which coincided with a 4.5% decline in the dollar index.

See also: As the USD tightens its hold on international transactions, the narrative surrounding Bitcoin's "De-Dollarization" is losing ground.

"To support the Yuan, major state banks were observed selling dollars today. They also reduced lending to restrict Yuan liquidity and increase the cost of shorting the currency. David Brickell, head of international distribution at Toronto-based cryptocurrency platform FRNT Financial, told CoinDesk in an interview that "this typically feeds back into broader dollar strength as dollars are bought back against other currencies to maintain FX reserve ratios."

"China has an incentive to limit Bitcoin in order to prevent capital flight and preserve a semblance of monetary stability. BTC's poor performance has historically corresponded with periods when the Yuan has been under pressure, said Brickell.

This month, the dollar index has already increased by 1.8%. In contrast, Bitcoin has decreased 4% to $40,500 after reaching highs close to $49,000 earlier this month.