The new year has offered no relief for Chinese assets, which continue to decline in a meltdown that could further fuel the ongoing bitcoin (BTC) bull run.

The Chinese yuan (CNY) fell to 7.32 per U.S. dollar early Tuesday, reaching the lowest level since September 2023, according to data source TradingView. The Chinese unit has dropped 0.4% this month, extending the three-month losing trend despite attempts by the People's Bank of China to calm investor nerves about impending U.S. tariffs under President-elect Donald Trump's administration.

On Monday, the CSI 300, a blue-chip index for mainland China's stock exchanges, fell to the lowest since September. The ChiNEXT Index, a so-called risk barometer tracking the performance of innovative and high-growth SMEs in China, has also dropped 8% since Dec. 31, according to charting platform TradingView.

Lastly, the yield on the 10-year Chinese government bond has fallen to 1.6%, a remarkable decline of 100 basis points from a year ago. This ongoing drop contrasts sharply with the rising yields in advanced economies, including the U.S., and reflects growing concerns over worsening deflation.

All of this is likely to trigger capital flight from the country, potentially boosting demand for alternative investments such as bitcoin, according to LondonCryptoClub.

"China appears to be letting the currency slide and no longer defending it, allowing the peg to crawl if not an outright devaluation. This will accelerate capital outflows from China, which we’re seeing with Chinese stocks under pressure. Bitcoin will be an obvious destination for some of those flows, especially with capital controls in place making it difficult to get capital out of China via traditional channels," Founders of the LondonCryptoClub told CoinDesk.

"When China devalued in 2015, Bitcoin promptly traded over 3x higher," founders added.

Note that the PBOC has relied solely on its daily fix and other liquidity measures to arrest the slide in the yuan rather than on outright intervention, which can become a headwind for crypto.

On Monday, the PBOC set the daily reference rate stronger than the widely-watched 7.20 per USD in a bid to temper bearish CNY expectations. The daily fix has been the central bank's preferred tool in managing market expectations and has held consistently stronger than 7.20 per USD since Trump's victory in the U.S. election in early November.

Meanwhile, the PBOC has also taken steps to tighten liquidity in the offshore (Hong Kong) market to support the yuan, as evidenced by the spike in the offshore yuan's overnight interbank interest rate in Hong Kong rose to 8.1%, the highest since June 2021.

That said, BTC bulls need to keep an eye out for a potential outright intervention involving the sale of dollars to prop up the yuan, as that could boost the dollar index, capping the upside in the greenback-denominated assets like BTC.

Whenever the PBOC sells the dollar to shore up the yuan, it concurrently buys the greenback against other currencies to keep the proportion of the USD in reserves stable. The process, thus, causes financial tightening through the FX channel.

The dollar index has already surged from roughly 100 to 108 in just over three months, largely tracking the uptick in the Treasury yields. Further strength could zap investor appetite for riskier assets.

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