Mainland China Wants Crypto: Will It Access Hong Kong’s Bitcoin ETFs?

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Key Takeaways

  • Three Chinese asset managers receive spot BTC and spot ETH ETF approval.
  • Chinese citizens are looking to gain exposure to crypto as a hedge against the Chinese real estate crisis and poor equity performance.
  • HKSE rules state that only Mainland institutional investors and high-value individual investors get access to the Hong Kong securities market.

Hong Kong regulators approved listing spot Bitcoin and Ethereum ETFs for public offering. Mainland investors may not have access, though.

The approval of spot Bitcoin and spot Ether exchange-traded funds (ETF) in Hong Kong is a peculiar time for China, the world’s second-largest economy.

Over the past three years, the Chinese economy has suffered a period of economic downturn due to a prolonged crisis in its real estate sector. With an estimated 70% of Chinese households’ savings being invested in properties, Chinese households have borne the brunt of the crisis.

To add salt to the wounds, those looking to hedge their property risk with equity exposure have found the stock market unreliable. Over the past five years, the Chinese benchmark equity index CSI 300 has fallen about 15%.

During these difficult times, gold has come to the rescue as a safe-haven asset for Chinese households. Now, they may finally have access to other assets uncorrelated to real estate stress and equity market downturns, Bitcoin and Ether.

When Hong Kong Approved Bitcoin ETF?

April 15 marks a historic day for the crypto industry. The Hong Kong Securities and Futures Commission (SFC) approved listing spot BTC and ETH ETFs for public offering in the Chinese city-state.

Several Chinese asset managers, including China Asset Management, Harvest Global, and Bosera Capital, were reported to announce the approval of their spot Bitcoin and Ethereum ETF approvals.

The listing dates for crypto ETFs have not been announced yet. According to  prominent state-run Chinese media outlet Global Times, listings could be as “early as in the second quarter.”

A key feature of the spot crypto ETFs approved in Hong Kong is the in-kind subscriptions and redemption offers. In contrast, the spot BTC ETFs listed in the US function on a cash-only basis.

Now, investors in Hong Kong will be allowed to buy spot Bitcoin and Ethereum ETFs in exchange for their BTC and ETH tokens. Redemptions will see investors paid in the underlying crypto asset.

Markus Thielen, co-founder of 10x Research, shared a note with Techopedia. He wrote, “In-kind has lower transaction costs, superior resistance to market manipulation, and reduced risks of operating events.”

“Based on an analysis of over 1,000 ETFs with at least $1bn in assets, the tracking error, a measurement of how close the ETF tracks the underlying, is seven times higher for cash-only ETFs than in-kind. For Bitcoin, the tracking error for cash-only ETFs, as they have in the US, could be larger.”

Will Retail Investors in Mainland China Get Access to Hong Kong’s Crypto ETFs?

At the time of writing, there was no official statement from market regulators and asset managers about on whether retail investors in Mainland China will get access to spot BTC and ETH ETFs.

The chances are slim.

Let’s look at the Chinese equity market to understand the retail investing environment in China.

Mainland investors can invest in stocks listed on the major Mainland exchanges in Beijing, Shenzhen, and Shanghai.

However, Mainland investors have limited access to Hong Kong-listed stocks through a cross-boundary market access program called the Stock Connect program.

The Stock Connect program has a two-way pipeline. The Southbound trade allows eligible domestic investors to invest in Hong Kong-listed stocks, and the Northbound trade allows Hong Kong and overseas investors to access select Shanghai and Shenzhen-listed companies.

What we can confirm from studying the rules of the Stock Connect program is that not everyone in Mainland China will get access to spot crypto ETFs listed in Hong Kong.

According to the Hong Kong Stock Exchange (HKSE), only Mainland institutional investors and individual investors with an aggregate balance of at least CNY500,000 ($69,000) in their securities and cash accounts are allowed to trade securities in Southbound trading.

“Most market participants expect Chinese mainland investors to be unable to buy these products and that they would NOT be added to the southbound connect program. Even if mainland investors could not access these HK-listed Bitcoin and Ether ETFs, for example, through the southbound connection, there are enough family offices in Hong Kong with links to China to take advantage of these products,” noted Thielen.

How Will Hong Kong-listed Crypto ETFs Impact Crypto Market?

The Chinese economy’s ability to influence market prices of commodities or securities should not be underestimated. This influence plays out in the rally in gold prices from $1950 per ounce (oz) in October 2023 to over $2400 per oz by April 2024.

While geopolitical tensions have played their part in propping up gold prices, booming Chinese demand for the precious metal is considered the key factor behind the rally.

So could China give crypto a leg-up? Let’s hear what the experts have to say:

“We have also frequently written about the enormous demand for gold at China’s Central Bank (PBC). They are currently buying 20% of all the Gold that central banks are acquiring. With local China property worries and a decade-long weakness in Chinese stocks, the view that the Chinese could use Bitcoin to diversify their assets is plausible,” said Thielen.

“The big wild card is whether those ETFs are included in the Southbound Connect program. This program allows mainland investors to buy up to 500bn RMB of Hong Kong-listed stocks annually ($70bn USD)—or equivalent to HK$540bn annually. During the last three years, the annual spare quota was HK$100bn to HK$200bn, equivalent to $15bn to $25bn per year. If Chinese investors could buy, this is how much mainland investors could allocate as an upper limit,” he added.

Meanwhile, Eric Balchunas, senior ETF analyst at Bloomberg, said not to expect “a lot of flows” into the Hong Kong-listed spot crypto ETFs due to its limited access, the lack of a “big fish” issuer, less liquidity, and high fees.


Why New Crypto ETFs Are Important?

While the Hong Kong-listed spot ETF’s impact may not be as profound as its US-listed counterparts, the ETF approvals in Hong Kong mark an important milestone for the Chinese crypto industry.

China is a crypto-hungry nation where crypto trading and mining continue to thrive despite a blanket ban on the industry in May 2021. Chinese crypto investors have had to use creative ways to gain exposure to crypto as they look to diversify beyond their poorly performing stocks and property portfolio.

The introduction of safe, legal, and compliant instruments that give investors exposure to BTC and ETH will be a game changer for crypto enthusiasts in China.