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Hong Kong Crypto ETF – Can it Help Chinese Economic Woes? 

Published April 15, 2024 4:55 PM
Shraddha Sharma
Published April 15, 2024 4:55 PM
By Shraddha Sharma
Verified by Peter Henn

Key Takeaways

  • Hong Kong has approved Bitcoin and Ethereum ETFs, sparking potential new investment avenues.
  • Previous predictions estimated that ETFs could inject up to $25 billion into the market, but analysts see it as overvaluation.
  • Can ETFs help stabilize Chinese economic challenges by attracting capital inflows?

Hong Kong approved the first Bitcoin and Ethereum Exchange-Traded Funds (ETFs) and could play a small role in alleviating some of the economic pressures faced by mainland China. ETF billboards have reportedly made their way and can lead to three things: building product legitimacy, investor interest, and China’s backdoor entry into crypto.

Hong Kong Reportedly Unveils Billboard Ads

April 12 marked  the close of public consultation on Hong Kong’s Over-the-Counter (OTC) licensing system. The news of approved ETFs hit the market on April 15. Soon after, billboard ads were reportedly unveiled across Hong Kong. This appears to be an exercise to build legitimacy before the launch of these products.  

According to Bloomberg analyst  Eric Balchunas, the launch could happen next week, after the conclusion of Dubai’s TOKEN2049 web3 conference.

Financial Expectations From ETFs

Balchunas is skeptical about the high financial expectations surrounding these ETFs. He believes they might only gather around $500 million, due to the small market size. He explained the entire ETF market in Hong Kong is only worth $50 billion. Also, he said, regulations prevent most Chinese locals from buying these ETFs. This, therefore, limits the potential investor base.

Another important factor is that one of the fund issuers is Chinese, notable given the 2021 crypto ban in mainland China.

CCN spoke to a Chinese citizen on the condition of anonymity. They told us: “There‘s definitely a black market for it, and many people are buying and selling. The young people I know don‘t have much investment in this, lots of middle-aged people pay more attention to it.”

The cryptocurrency community is optimistic about the ETFs. Despite crypto being illegal in mainland China, the community hints  at the use of VPNs to access the market indicating a strong underlying demand. The formal introduction of ETFs in Hong Kong could further encourage this demand.

Despite the speculations of an illegal market, Balchunas notes that the issuers are relatively small—Bosera, China AMC, and Harvest—against players like BlackRock.

Moreover, as per the analyst, Hong Kong is not as liquid or efficient as other major markets. This, in turn, could lead to larger price discrepancies between the buying price and the selling price. Additionally, the fees for these ETFs are expected to be higher between 1-2%.

Economic Implications for China

The introduction of crypto ETFs in Hong Kong comes at a time when China’s economy faces headwinds. Reuters reports  that the first quarter of 2024 could see China’s GDP growth slowing to 4.6%. The troubles come on the back of low investor confidence, property market woes, and subdued consumption.

A previous report from Matrixport suggested that could draw $25 billion in capital from Chinese investors. While Balchunas quashed the estimates as overvalued, the inflows could serve as a tool in China’s broader strategy to stabilize its economy and achieve a 5% GDP growth target for 2024. The new investment opportunities provided by these ETFs might stimulate some private sector activity by integrating more international investment flows into Chinese markets.

Parth Chaturvedi, Investments Lead at CoinSwitch Ventures, told CCN: “Chinese real estate and equity markets have been under pressure since the Pandemic and haven’t recovered. The local wealth is searching for other assets to deploy as can be seen from the record gold demand from investors.”

Chaturvedi explained: “The spot ETF approvals will provide a new avenue for Chinese capital to explore some exposure to crypto as an asset class and bodes well for the industry in the medium term. The spot ETFs make it easy and efficient for novice investors to gain access to crypto without worrying about wallet and custody setups.”

The investment lead suggests that if the United States’ experience with spot ETF approvals is anything to go by, Hong Kong can anticipate receiving billions of dollars in investment. He also highlights that it is Hong Kong’s strategic goal to establish itself as a major cryptocurrency center in the region, aiming to compete with Dubai and Singapore.

Crypto ETFs and China

The launch of Bitcoin and Ethereum ETFs in Hong Kong represents more than just a new financial product—it helps alleviate some of China’s economic challenges by opening up new investor avenues.

However, the immediate impact may be modest compared to the larger US market. The upcoming launch also helps in the Asian and global positioning of Hong Kong as a crypto hub.

But how much of a financial bridge can Hong Kong become to China will only be seen after the ETF launch. But it has provided a backdoor entry to China after the crypto ban. 

 

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