Analysis – Due to the stock market being damaged, the Chinese are rushing to the banned Bitcoin

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Written by Vidya Ranganathan and Summer Chen

SHANGHAI/HONG KONG (Reuters) – Dylan Ran, a Shanghai-based financial executive, started shifting part of his money into cryptocurrencies in early 2023, when he realized that China’s economy and stock markets were heading downward.

Cryptocurrency trading and mining have been banned in China since 2021. Used bank cards issued by small rural commercial banks to buy cryptocurrencies through gray market traders, capping each transaction at 50,000 yuan ($6,978) to escape scrutiny.

“Bitcoin is a safe haven, like gold,” Ran says.

He now owns nearly 1 million yuan in cryptocurrencies, which represents half of his investment portfolio, compared to only about 40% of Chinese stocks.

His investments in cryptocurrencies increased by 45%. Meanwhile, the Chinese stock market has been sinking for three years.

Like Ran, more and more Chinese investors are using innovative ways to own bitcoin and other crypto assets that they believe are safer than investing in flagging stock and real estate markets at home.

They operate in a gray area. While cryptocurrencies are banned in mainland China and there are strict controls on the movement of capital across borders, people are still able to trade cryptocurrencies like Bitcoin on cryptocurrency exchanges like OKX and Binance, or through other over-the-counter channels.

Mainland investors can also open bank accounts abroad to purchase crypto assets.

Following Hong Kong’s open endorsement of digital assets last year, Chinese citizens are also using their annual foreign exchange quota of $50,000 to move funds to cryptocurrency accounts in the territory. Under Chinese rules, the money can only be used for purposes such as traveling abroad or education.

China’s economic downturn “has made investing in the mainland risky, uncertain and disappointing, so people are looking to allocate assets overseas,” said a senior executive at a Hong Kong-based cryptocurrency exchange, who declined to be identified due to the sensitivity of the issue. .

Bitcoin and cryptocurrency assets have attracted these investors, he said: “Almost every day, we see mainland investors coming to this market.”

As retail investors rush into cryptocurrencies, Chinese brokers and other financial institutions are not far behind. Deprived of growth opportunities in their home country, many of them are exploring cryptocurrency-related businesses in Hong Kong.

“If you are a Chinese brokerage, facing a stock market slowdown, weak demand for IPOs, and a downturn in other companies, you need a growth story to tell shareholders and the board,” the exchange executive said.

Subsidiaries of the Bank of China, China Asset Management Corporation (ChinaAMC) and Hong Kong’s Harvest Fund Management Co are scouting companies in the region that deal in digital assets.

I got bad luck

Access to bitcoin is not difficult on the mainland, according to Reuters’ checks of online cryptocurrency exchanges and interviews with retail investors.

Exchanges such as OKX and Binance still offer trading services to Chinese investors, directing them to use fintech platforms such as Ant Group’s Alipay and Tencent’s WeChat Pay to convert yuan into stablecoins with merchants, to trade cryptocurrencies.

OKX and Binance did not respond to Reuters’ requests for comment.

Cryptocurrency data platform Chainalysis says cryptocurrency-related activities in China have rebounded, and its global ranking in terms of peer-to-peer trade volume jumped to 13th place in 2023, from 144th in 2022.

Despite its ban, the Chinese cryptocurrency market recorded an estimated $86.4 billion in raw transaction volume between July 2022 and June 2023, dwarfing Hong Kong, which saw $64 billion in cryptocurrency trading, Chainalysis reported. The proportion of large retail transactions between $10,000 and $1 million is nearly double the global average of 3.6%.

Much of China’s cryptocurrency activity “takes place through over-the-counter transactions or through peer-to-peer businesses in the informal gray market,” Chainalysis said in the report.

Brick-and-mortar cryptocurrency exchange shops have popped up on Hong Kong’s busy business and shopping streets. These offline stores are only slightly regulated.

At Crypto HK, a popular cryptocurrency store in the Admiralty District, customers can purchase cryptocurrencies with a minimum of HK$500 (US$64) and are not required to provide any identity documents.

The underground cryptocurrency market is booming in China.

Daily volumes reach several million yuan or even tens of millions, says Michael Wang, a trader who helps individuals buy digital assets.

Charlie Wong, a 35-year-old buy-side stock analyst, bought Bitcoin via the Hashkey Exchange, an officially recognized market in Hong Kong.

He added, “It is difficult to find opportunities in traditional areas. The performance of Chinese stocks and other assets is weak… The economy is going through a decisive transition.”

China’s crackdown on the real estate sector over the past three years has caused a decline in housing prices, which have traditionally been the mainstay of household savings portfolios. The stock market has fared even worse, with the benchmark CSI 300 index falling by half its value since early 2021.

By contrast, Bitcoin, which is known for its wild volatility, has jumped 50% since mid-October.

Wong believes that Chinese officials realize how disruptive Bitcoin can be, yet recognize its huge potential, hence their endorsement of cryptocurrency trading in Hong Kong, to maintain a foothold in the booming cryptocurrency business in financial centers such as Singapore and New York.

Hong Kong, although autonomous, is a special administrative region of China.

Chainalysis believes that the developments “have created speculation that the Chinese government may be ready for cryptocurrencies and that Hong Kong may be a proving ground for these efforts.”

($1 = 7.1659 Chinese yuan)

($1 = 7.8197 Hong Kong dollars)

(Reporting by Shanghai Newsroom; Editing by Vidya Ranganathan and Kim Coghill)

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