CNY Premium Analysis

Using Bitfinex XBTUSD and BTCC XBTCNY daily volume weighted data from Bitcoin Charts I have analysed the XBTCNY premium over XBTUSD over the past month. What is abundantly clear is that the premium peaked earlier in the month when Bitcoin was on its rally up to the local high of approximately $790 in mid June, and has since come off trading flattish recently.

What is of interest is the current uptick over the past few days with the premium on the rise again to 1%. Last Thursday Reuters published an article with an anonymous government economist source stating that the PBOC was willing to tolerate a further weakening in the Yuan to 6.8 to support the economy. This immediately sent the CNY trading to a 5 year low of 6.66 (about -2.5% YTD) but retraced after the PBOC stated this information was inaccurate (and reports of supposed State banks selling USD to help stabilise the Yuan).

Whether the news is false or not, there has been gradual improvement in US data and China cannot hide the increased noise about the systemic threats posed by its massive pile of corporate debt. According to the International Monetary Fund (IMF), China’s corporate debt stands at around 145% of GDP, considered extremely high. Torsten Slock, chief international economist at Deutsche Bank, has warned investors that China’s credit bubble is worse than the US subprime buildup that led the last financial crisis.

As local Chinese investor’s concerns about the economy increase, they will continue to look for ways to escape capital controls which could reduce the value of their local assets. Bitcoin is one of the easiest conduits to do this, and this current uptick may be the sign that we are on the road again to a 10% premium once more.

How can you bet on the premium? There are three strategies:

  1. You can take a directional view on the China stock market and sell the BitMEX China A50 futures contracts.
  2. A positive premium is positively correlated with the Bitcoin price, as such if you think the premium is set to rise then you can buy and hold Bitcoin with BitMEX’s XBTUSD swap contract.
  3. Finally, If you only want to trade the premium and have no exposure to Bitcoin price, one suggestion would be to long an XBTCNY denominated future/swap product and short the XBTUSD futures / swap product. As this is a long term play, avoiding rollover would be ideal and thus a suggestion would be to long the BTCC Pro XBTCNY swap and short the BitMEX XBTUSD swap product.