No, Hong Kong’s Crypto ETFs Aren’t Available in Mainland China

As a long-term crypto investor with a background in international finance and economics, I’ve been closely following the development of Hong Kong’s crypto ETFs with great interest. The persistent rumors that these funds would be accessible to mainland Chinese investors through the Stock Connect have fueled excitement and speculation within the community.

As the date for launching crypto ETFs in Hong Kong drew nearer, there was a surge of speculation that these funds could be accessible to Chinese investors through the Stock Connect system, enabling them to trade Hong Kong securities on the mainland.

After the introduction of ETFs, they remain unreachable for now. However, persistent rumors refuse to subside. The truth is that while cryptocurrency trading remains accessible in restricted quantities for mainland Chinese investors, the availability of an ETF with in-kind redemptions could significantly increase liquidity, potentially challenging China’s capital control measures.

A recent article in the South China Morning Post reported that certain Exchange-Traded Funds (ETFs) would become accessible to individuals with Hong Kong residence and brokerage accounts who are based on the mainland. While this information holds true, it’s essential to clarify a significant limitation: this does not imply that these ETFs can be traded within mainland China. Instead, the trading takes place in Hong Kong by mainlanders holding Hong Kong residency and corresponding brokerage accounts. This is similar to suggesting that individuals with US residency can open an American brokerage account to trade New York-listed stocks, which isn’t possible under current regulations.

When CoinDesk requested a comment from the Stock Exchange of Hong Kong (HKEX), they responded that they are not accessible in mainland China for this particular matter.

Controlling the Yuan

So why is this all a big deal?

Permitting mainland Chinese residents to trade crypto ETFs goes against Beijing’s strategy of managing the rise and fall of the Yuan (RMB) through monetary control. This is more evident with Hong Kong authorities enabling in-kind creations and redemptions due to collaborations between ETF issuers and licensed cryptocurrency exchanges in the city, a practice that the U.S. Securities and Exchange Commission (SEC) does not allow.

As a crypto investor, I understand that China implements strict regulations on the movement of capital in and out of the country to ensure monetary stability. These measures aim to mitigate extreme currency swings and prevent massive capital outflows, thereby safeguarding the worth of the Yuan.

Despite being classified as a currency manipulator due to this deliberate control over the Yuan’s rise and fall by capital restrictions, China continues to prioritize this strategy in its economic plan. This approach keeps Chinese exports affordable in international markets.

As a researcher studying the crypto market, I’ve discovered an intriguing workaround for traders looking to bypass capital controls. By enabling them to buy shares of a cryptocurrency exchange-traded fund (ETF) using Yuan through a local brokerage account, and then selling the crypto derived from those shares, traders can effectively circumvent restrictions on moving funds abroad. This method is already gaining popularity in the gray market, particularly among small and medium-sized enterprises in China that require dollar liquidity to manage their international supply chains. Stablecoins have proven to be an effective solution for this purpose, providing a relatively stable and accessible means of converting Yuan into crypto and vice versa.

In China, while there isn’t an absolute prohibition on cryptocurrencies, the use of local exchanges and payment systems for crypto transactions is restricted. However, platforms like Binance and OKX promote USDT-Yuan trading markets through their peer-to-peer services, which utilize WeChat Pay as a facilitator.

Despite the limited liquidity available in these markets, reaching a maximum of around 10-12,000 RMB ($1400-$1600) is common. This explanation justifies their existence.

As an analyst, I would propose paraphrasing it this way: By utilizing brokerage accounts for this purpose, we can effectively institutionalize capital outflows and significantly increase the value in cryptocurrencies as a means to exit the country.