The HKEX confirms that crypto ETFs aren’t available to mainland China investors, despite persistent rumors otherwise
Hong Kong’s crypto ETFs, because of their unique in-kind redemption model, would offer a means to bypass mainland China’s capital controls
As the listing date for Hong Kong’s crypto exchange-traded funds (ETFs) got closer, the rumors went into overdrive that they would be available to mainland Chinese traders via the Stock Connect, which allows mainland trading of Hong Kong equities.
And then the ETFs launched, and they still aren’t available. But the rumor won’t cease. The reality is that, while crypto is still available to mainland Chinese traders in limited amounts, having an ETF available with in-kind redemptions would open the floodgates of liquidity, posing a threat to Chinese capital controls.
Adding some fuel to the fire was a piece in the SCMP that said these ETFs would be available to mainland traders who have Hong Kong residency and brokerage accounts. That’s certainly true, but there’s a massive caveat: it’s like saying that mainlanders with U.S. residency can open an American brokerage account and trade New York-listed stocks (which they can’t). This doesn’t mean that they are available in mainland China, as the trading, by mainlanders with Hong Kong residency, is done in Hong Kong.
For this part, the Stock Exchange of Hong Kong (HKEX) confirmed that they are unavailable in mainland China when CoinDesk asked for a comment.
Controlling the Yuan
So why is this all a big deal?
Allowing mainland Chinese to trade these crypto ETFs would fly in the face of Beijing’s monetary policy of controlling the ascent and descent of the Yuan (RMB), particularly as Hong Kong authorities allow for in-kind creation and redemptions thanks to the partnerships between ETF issuers and licensed crypto exchanges in the city, which the U.S. SEC prohibits.
China’s capital controls are designed to regulate the inflow and outflow of money, preventing excessive currency fluctuations and capital flight, and maintaining the stability and value of the Yuan.
This controlled ascent and descent of the Yuan, which these capital controls allow for, gets China labeled a currency manipulator. Still, it remains a central part of its economic policy as its exports can remain competitively priced in global markets.
Allowing a trader to purchase shares of a crypto ETF in Yuan via a local brokerage account, and then sell it for crypto, would create a very effective means of bypassing capital controls. Stablecoins already provide a very effective gray market for this, especially for small and medium-sized enterprises in China that need dollar liquidity to pay their international supply chain.
Remember, that there’s no outright ban on crypto in China, only one on exchanges and using local payment rails for crypto transactions. Binance and OKX openly advertise USDT-Yuan markets on their peer-to-peer platforms facilitated by WeChat Pay.
However, the liquidity offered in these markets is small, and most max out at 10-12,000 RMB ($1400-$1600), which is why it’s tolerated.
The ability to do this via brokerage accounts would institutionalize the capital flight, adding a significant number of zeros behind the amounts being converted to crypto to leave the country.