Title Revision: “Chinese Investors Flock to Prohibited Bitcoin Amid Stock Market Setbacks”

Authored by Vidya Ranganathan and Summer Zhen

SHANGHAI/HONG KONG (Reuters) – Marketplace executive in the finance industry, Dylan Run, who’s stationed in Shanghai, started transferring some funds into the realm of digital currencies in early 2023 amidst the economic and stock market downswing in China.

Since the 2021 ban on crypto activities in China, Run has artfully navigated the landscape, turning to small commercial banks in rural areas to acquire digital currencies via informal channels, cleverly keeping his purchases below the 50,000 yuan limit ($6,978) to avoid regulatory attention.

“Bitcoin represents a bastion of stability, akin to gold,” Run declared.

His holdings in digital currencies have now ballooned to an estimated 1 million yuan, representing a significant 50% slice of his entire investment portfolio, a figure surpassing his engagement in Chinese stocks which sits at 40%.

Gazing at the performance of his investments, Run’s digital asset portfolio has soared by 45%, whereas the Chinese stock market has been on a continued descent for three years.

Echoing Run’s strategy, a growing number of investors from China are tapping into creative avenues to secure Bitcoin and other cryptocurrencies which they consider more reliable amidst the declining domestic stocks and property sectors.

Although digital currency operations are officially forbidden on the mainland and stern restrictions are imposed on cross-border capital flows, individuals continue to exchange digital tokens like bitcoin via platforms like OKX and Binance, or other off-exchange mechanisms.

Inhabitants can also set up offshore bank accounts for purchasing these digital assets.

Following Hong Kong’s public endorsement of digital assets the previous year, citizens of China are utilizing their $50,000 annual foreign exchange quotas to transfer funds into Hong Kong-based cryptocurrency accounts, albeit with the stipulation that these funds be used for designated purposes such as overseas education or travel.

“Mainland investment is fraught with risk, unpredictability, and disillusionment due to the economic slump, prompting investors to reallocate assets abroad,” commented a high-ranking official from a Hong Kong cryptocurrency exchange, who requested anonymity given the subject’s sensitivity.

According to this executive, “Nearly every day, we witness new investors from the mainland entering this market,” as they pursue Bitcoin and other cryptocurrencies.

Not to be outpaced, China’s financial entities, including brokerage firms, are actively exploring the crypto sphere in Hong Kong, seeking growth avenues amid domestic stagnation.

“Chinese brokerages are encountering a sluggish stock market and a decline in business. Crypto-related pursuits could serve as a compelling narrative for stakeholder communications,” explained the aforementioned crypto exchange executive.

Mainland-based financial giants, such as the Bank of China’s Hong Kong segment, China Asset Management (ChinaAMC), and Harvest Fund Management Co, are probing opportunities that cater to digital assets within the region.

Despite the prohibition, acquiring Bitcoin on the mainland is still manageable, as confirmed by Reuters’ evaluations of online crypto exchanges and discussions with retail investors.

Even though exchanges like OKX and Binance continue to extend their trading services to Chinese clientele, guiding them through the process of converting yuan to stablecoins with traders, in order to proceed with cryptocurrency trades.

When approached, neither OKX nor Binance provided a response to inquiries from Reuters.

Chainalysis indicates a notable resurgence in Chinese crypto operations, with the country climbing the ranks to 13th globally in peer-to-peer trade volume for the year 2023, a leap from the 144th position the year prior.

Despite regulations, the Chinese market for cryptocurrencies has processed approximately $86.4 billion in raw transactions between July 2022 and June 2023, overshadowing Hong Kong’s $64 billion in the same span. Moreover, the prevalence of sizeable retail transactions here is nearly double the global mean of 3.6%.

China’s dealings in digital currencies largely occur through less formal conduits like over-the-counter operations or peer-to-peer markets that operate in the shadows, as reported by Chainalysis.

In the bustling commercial districts of Hong Kong, storefront cryptocurrency exchanges have become increasingly visible. Crypto HK of the Admiralty district is one such establishment where customers can trade a minimum of HK$500 ($64) worth of cryptocurrencies without the need to reveal their identities.

The clandestine cryptocurrency arena within China is experiencing robust growth.

Michael Wang, an intermediary for crypto transactions, notes that the daily trading volume can reach several to tens of millions of yuan.

Equity analyst Charlie Wong, aged 35, secured bitcoin through the officially sanctioned Hashkey Exchange, stationed in Hong Kong.

“The reality that conventional investment realms are grim leaves hardly any room for lucrative opportunities. Chinese equities and assets are underwhelming … the nation’s economy is amidst a fundamental shift,” Wong voiced.

The recent regulatory measures on the property market, traditionally considered a staple in local investment portfolios, have taken a toll on real estate valuations. In stark contrast, the equity market has witnessed even more pronounced losses, with the benchmark CSI 300 Index suffering a decline of up to 50% of its early 2021 value.

Bitcoin’s journey, on the contrary, has recorded a 50% price surge since mid-October, with its notorious volatility remaining a characteristic feature.

Wong is of the belief that Chinese regulators are both mindful of the potentially disruptive nature of bitcoin yet recognize the immense potential it holds, leading to their support for cryptocurrency trading in Hong Kong as a way of maintaining presence in the burgeoning crypto markets of global financial hubs like Singapore and New York.

Despite Hong Kong’s separate governance system as a Chinese special administrative region, Chainalysis speculates that this could signal a softening stance by the Chinese government toward cryptos and views Hong Kong as a potential pilot region for such initiatives.

($1 = 7.1659 Chinese yuan renminbi)

($1 = 7.8197 Hong Kong dollars)

Additional insight provided by the Shanghai Newsroom; Edited by Vidya Ranganathan and Kim Coghill

Copyright 2024 Thomson Reuters.