China's Crypto Crackdown: ETFs Unlikely, Warns Bloomberg Analyst

Despite recent approvals of Bitcoin and Ethereum ETFs in Hong Kong, Bloomberg ETF analyst Eric Balchunas believes it is unlikely China will allow investors to trade these ETFs due to their existing ban on crypto-related activities. The unclear law regarding ETFs in mainland China and investor interest in alternative assets have sparked optimism that the ban may not apply to ETFs, potentially opening up billions of dollars in investment. However, Balchunas remains skeptical, citing the small size of Hong Kong's ETF market and the absence of approvals from prominent companies like BlackRock.

China's Crypto Crackdown: No Room for ETFs, Bloomberg Analyst Warns

Despite cautious optimism that China's stringent crypto restrictions may exempt exchange-traded funds (ETFs), Bloomberg senior ETF analyst Eric Balchunas has issued a stern warning that such a scenario is highly improbable.

The recent green light given to spot Bitcoin (BTC) and Ethereum (ETH) ETFs in Hong Kong has ignited speculation that it could potentially circumvent China's blanket ban on digital asset trading within its borders.

According to a Friday report by DL News, citing an interview with Alessio Quaglini, co-founder and chief executive of crypto custodian company Hex Trust, the introduction of these ETFs in Hong Kong could indirectly expose Chinese investors to the crypto market.

Unclear ETF Laws in China

Quaglini points out that China's 2021 ban on all crypto-related activities, including trading, staking, and mining, does not specifically address ETFs. He suggests that the lack of clarity in the law could provide an avenue for Chinese investors to explore these new investment products.

He draws parallels with China's interest in alternative assets such as gold, indicating a potential appetite for crypto as well. Quaglini further posits that if China's restrictive stance on crypto does not extend to ETFs, it could attract billions of dollars in investment.

Bloomberg Analyst Casts Doubt

However, Balchunas has swiftly doused this optimism, unequivocally stating that it is highly unlikely China will allow investors to trade crypto ETFs.

"Agree.. if Chinese investors start buying and the govt doesn't crack down that could change things but as far as we know the govt ban on bitcoin will incl the ETFs and they DEF won't be on the southbound connect program," Balchunas tweeted.

He cautions investors against expecting a surge of capital inflows into the newly approved ETFs, highlighting the relatively small size of Hong Kong's ETF market. Balchunas predicts that inflows are unlikely to exceed $500 million.

"Don’t expect a lot of flows (I saw one estimate of $25b that’s insane). We think they’ll be lucky to get $500m. Here’s why: 1. The HK ETF market is tiny, only $50b, and Chinese locals cannot buy these, at least officially," he tweeted.

Moreover, Balchunas points out that the Hong Kong Securities and Futures Commission (SFC) has yet to approve an ETF from a major player like BlackRock, which could further hamper the anticipated inflow.

Chinese Investors' Crypto Workaround

Despite the ban, China remains a crypto market force, albeit through unconventional means. China once hosted a thriving crypto market and was a magnet for miners due to its low electricity costs. However, the crackdown forced companies to relocate to neighboring countries and even the United States.

Undeterred, Chinese investors have found ways to access the crypto economy. According to a report by blockchain analytics firm Chainalysis, crypto transactions originating from China reached a staggering $86.4 billion between July 2022 and June 2023.

While ETFs in Hong Kong may offer a glimmer of hope, it remains clear that China's crypto restrictions are far from over. The government's stance on ETFs remains uncertain, and investors should proceed with caution.