Markets
Backdoor to China? Hong Kong Crypto ETFs Look to Mainland Investors via Stock Connect
(Kitco News) – Even before the launch of multiple spot Bitcoin (Bitcoin) and Ethereum (ETH) exchange-traded funds (ETFs) in Hong Kong, many analysts speculated that the move would be used as a backdoor to allow Chinese investors to re-engage with crypto markets despite a ban on all things crypto in China.
This speculation was confirmed by the CEO and chief investment officer of Harvest Global Investments, Han Tongli, who counted told the South China Morning Post that the company “will not rule out” requesting that its ETFs that invest directly in crypto tokens be included in the connection program linking exchanges in mainland China and Hong Kong, as long as “everything goes smoothly and smoothly” in the next two years.
Harvest is a Chinese fund institution and one of three issuers of Bitcoin and Ether ETFs in Hong Kong, and according to Tongli, the company is already looking to offer Chinese citizens access to products through Hong Kong’s ETF Connect framework.
“We have some plans for Bitcoin and Ethereum ETFs to reach investors in China,” said Tongli. “If we, as Harvest Global, are able to include spot BTC-ETH ETFs in the Stock Connect program, a new investment path will be opened for investors in mainland China.”
“As the regulatory environment on the continent is quite uncertain, the Stock Connect program can be a pioneer in regulating investments in cryptocurrencies, especially Bitcoin and Ethereum,” he added.
ETF Connect launched in May 2022 and offers mainland investors access to a selected range of ETFs listed on the Hong Kong market. The program is part of the larger Stock Connect scheme launched in 2014 that connected the Hong Kong and Shanghai stock exchanges.
Data provided by Farside shows that the six newly launched ETFs in Hong Kong started with US$292.7 million in seed funding at their launch on May 2 and have since generated additional inflows worth US$24.7 million.
The inclusion of these ETFs in the Connect program could provide a confidence boost to the market, providing access to a large new group of investors eager to invest in assets that can maintain their value amid China’s economic difficulties, including a declining property market. .
However, it is not yet known whether the assets will be permitted or not, as the Bitcoin and Ether futures ETFs launched in Hong Kong in 2022 have not yet been included in the Stock Connect program.
“People are still skeptical about Hong Kong’s status as a special country [administrative] region,” Tongli said during a Bitcoin Asia panel discussion. “It’s located in China… and a lot of people don’t want to see Hong Kong become more successful for whatever reason.”
That said, Tongli is still optimistic about the long-term potential for the Hong Kong market, which he said is a “more neutral” region that has broad appeal in Asia. Once adoption increases, he suggested that local crypto ETFs could grow to double the size of US products, but did not offer a timeline for this to occur.
He said it largely depends on when Hong Kong is able to establish a full virtual asset ecosystem, but the city has “sown a seed” by launching ETFs. Eventually, Tongli said he sees other products, such as stablecoins, receiving regulatory approval and being released to the market.
For now, Harvest is focused on making its spot crypto ETFs the top products in Hong Kong in terms of trading volume by the end of the year, ahead of the launch of ETF-based collateralized financial products, Tongli said.
So far, the Bosera HashKey Bitcoin and Ether spot ETFs have been the best performers, recording net inflows of $15.2 million and $8.1 million, respectively, since launch, in addition to initial funding of $61 .1 million and US$12.3 million, respectively, according to data provided by Farside.
ETFs offered by China Asset Management Company (ChinaAMC) had the highest initial funding, with the ChinaAMC Bitcoin ETF starting with $123.6 million in assets under management (AUM), while the ChinaAMC Ether ETF started with $20.2 in AUM.
Speculation about Chinese investors’ access to Hong Kong ETFs had already been circulating before Tongli’s Thursday comments with SYZ Capital managing director Richard Byworth counting his X followers on May 1 that he “just got back from Hong Kong” where “there is [was] say that the ETF could be added to stock connect.”
“The implications for this are absolutely huge (it basically means mainland money can buy it),” Byworth added.
Brian HoonJong Paik, co-founder and chief operating officer of SmashFi, he responded “It’s just a matter of time. 70% of Chinese wealth is in real estate and there are now 100 million empty homes. The CCP needs an alternative resource to mitigate social unrest.”
On April 15, Paik willing the reasons he thinks Chinese investors will inevitably have access to ETFs.
Citing the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs, he noted that they “enable investors in mainland China and Hong Kong to trade stocks in each other’s markets through their securities firms or local brokers ,” adding that “The Stock Connect Connect program covers a wide range of stocks but is subject to a daily quota.”
Another factor is the “Qualified Domestic Institutional Investor (QDII) Scheme”, which “allows qualified Chinese institutional investors (such as banks, funds and insurance companies) to invest in overseas markets, including Hong Kong. This scheme also helps you diversify your investment strategies,” he said.
“Chinese residents can also invest in Hong Kong stocks through brokers that have the right to operate in both markets,” Paik noted. “These companies often offer services to help individuals navigate regulatory requirements for foreign investments.”
There is also a “Mutual Recognition of Funds (MRF)” program between Hong Kong and mainland China that “allows eligible funds from the Mainland and Hong Kong to be distributed in each other’s markets through a streamlined process,” he said.
“These mechanisms make the Hong Kong stock market one of the most accessible foreign markets for Chinese investors, promoting financial integration between the Mainland and Hong Kong”, concluded Paik. “Delisting just the Bitcoin ETF would likely cause significant repercussions among institutional and retail investors in China and Hong Kong.”
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