By Vidya Ranganathan and Summer Zhen
SHANGHAI/HONG KONG (Reuters) – Dylan Run, a Shanghai-based financial sector manager, began investing some of his money in cryptocurrencies in early 2023 when he realized the Chinese economy and its stock markets were going downhill.
Cryptocurrency trading and mining have been banned in China since 2021. To purchase cryptocurrencies through gray market traders, they used bank cards issued by small rural commercial banks and limited each transaction to 50,000 yuan ($6,978) to avoid scrutiny.
“Bitcoin is a safe haven, just like gold,” says Run.
He now owns around 1 million yuan worth of cryptocurrencies, making up half of his investment portfolio, compared to just 40% of Chinese stocks.
His crypto investments have increased by 45%. Meanwhile, the Chinese stock market has been in decline for three years.
Like Run, more Chinese investors are turning to creative ways to own Bitcoin and other crypto assets, which they say are safer than investing in crumbling stock and real estate markets back home.
You operate in a gray area. While cryptocurrencies are banned in mainland China and capital movements across the border are subject to strict controls, people can still trade tokens like Bitcoin on crypto exchanges like OKX and Binance or through other over-the-counter channels.
Mainland investors can also open bank accounts abroad to purchase crypto assets.
After Hong Kong openly embraced digital assets last year, Chinese citizens are also using their $50,000 annual foreign exchange purchase quota to transfer funds to cryptocurrency accounts in the territory. According to Chinese rules, the money can only be used for purposes such as foreign travel or education.
China's economic downturn “has made investing in the mainland risky, uncertain and disappointing, so people are trying to distribute assets abroad,” said a senior executive at a Hong Kong-based cryptocurrency exchange who did not want to be named due to the sensitivity of the issue.
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Bitcoin and crypto assets have attracted such investors, he said: “Almost every day we see investors from the mainland coming into this market.”
While retail investors are buying cryptocurrencies, China's brokers and other financial institutions are not far behind. Many of them have no growth opportunities in their home country and are exploring crypto-related businesses in Hong Kong.
“If you are a Chinese brokerage firm facing a sluggish stock market, weak demand for IPOs and contractions in other companies, you need a growth story to tell your shareholders and the board,” the stock exchange executive said.
Bank of China's Hong Kong subsidiaries China Asset Management (ChinaAMC) and Harvest Fund Management Co. are all exploring companies in the territory that deal in digital assets.
BADLY CONSERVED
According to Reuters reviews of online crypto exchanges and interviews with retail investors, accessing Bitcoin on the mainland is not that difficult.
Exchanges like OKX and Binance still offer trading services to Chinese investors, guiding them to use fintech platforms like Ant Group's Alipay and Tencent's WeChat Pay to convert yuan into stablecoins with traders and trade cryptocurrencies.
OKX and Binance did not respond to Reuters requests for comment.
According to crypto data platform Chainalysis, crypto-related activities in China have recovered, and its global ranking in terms of peer-to-peer trading volume has risen from 144th in 2022 to 13th in 2023.
Despite the ban, China's crypto market recorded an estimated raw transaction volume of $86.4 billion between July 2022 and June 2023, dwarfing Hong Kong, where $64 billion worth of crypto trading took place, according to Chainalysis. And the share of large retail transactions valued at $10,000 to $1 million is nearly double the global average of 3.6%.
Much of China's crypto activity “takes place through over-the-counter transactions or through informal peer-to-peer gray market companies,” Chainalysis' report said.
Brick-and-mortar crypto exchanges have been popping up on Hong Kong's busy commercial and shopping streets. These offline shops are easily regulated.
At Crypto HK, a popular crypto shop in Admiralty District, customers can buy cryptocurrencies for at least HK$500 ($64) and are not required to provide any identification documents.
The underground crypto market in China is thriving.
Michael Wang, a trader who helps individuals purchase digital assets, says daily volumes are in the millions of yuan or even tens of millions.
Charlie Wong, a 35-year-old buy-side equity analyst, purchased Bitcoin through Hashkey Exchange, an officially recognized marketplace in Hong Kong.
“It is difficult to find opportunities in traditional areas. Chinese stocks and other assets are performing poorly… the economy is undergoing a decisive transformation,” he said.
China's crackdown on the real estate sector over the past three years has hit home prices, traditionally the mainstay of household savings portfolios. The stock market fared even worse: the benchmark index CSI 300 has lost its value by half since the beginning of 2021.
In contrast, Bitcoin is up 50% since mid-October and is known for its wild swings.
Wong believes that Chinese officials are aware of how disruptive Bitcoin can be, but are still aware of its enormous potential and are therefore in favor of crypto trading in Hong Kong to capitalize on the booming crypto business in financial centers such as Singapore and to gain a foothold in New York.
Although Hong Kong is autonomously governed, it is a Chinese special administrative region.
Chainalysis understands that the developments “have sparked speculation that the Chinese government may be warming to cryptocurrencies and that Hong Kong could be a testing ground for these efforts.”
($1 = 7.1659 Chinese Yuan Renminbi)
($1 = 7.8197 Hong Kong dollars)
(Additional reporting by Shanghai Newsroom; Editing by Vidya Ranganathan and Kim Coghill)
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