(Kitco News) – Even before the launch of multiple spot Bitcoin (BTC) 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 reengage with crypto markets despite the ban on all things crypto in China.
That speculation has since been confirmed by Harvest Global Investments CEO and chief investment officer Han Tongli, who told the South China Morning Post that the firm “doesn’t rule out” applying for its ETFs that invest directly in crypto tokens to be included in the connect program that links exchanges in mainland China and Hong Kong, as long as “everything goes smooth and well” in the next two years.
Harvest is a Chinese fund house and one of the three issuers of the Bitcoin and Ether ETFs in Hong Kong, and according to Tongli, the firm is already looking to offer Chinese citizens access to the products through Hong Kong’s ETF Connect framework.
“We have some plans for Bitcoin and Ethereum ETFs to reach investors in China,” Tongli said. “If we, as Harvest Global, manage to get spot BTC-ETH ETFs into the Stock Connect program, a new investment path will be opened for investors in mainland China.”
“Since the regulatory environment on the mainland is quite uncertain, the Stock Connect program could be a pioneer in regulating cryptocurrency investments, especially Bitcoin and Ethereum,” he added.
ETF Connect was launched in May 2022 and offers mainland investors access to a select 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 $292.7 million in seed funding at their launch on May 2, and have since brought in an additional $24.7 million worth of inflows.
The inclusion of these ETFs in the Connect program could provide a confidence boost for the market by providing access to a large new pool of investors eager to invest in assets that can maintain their value amid China’s economic struggles, including a sagging real estate market.
Whether or not the assets will be allowed is still up in the air, however, as the Bitcoin and Ether futures ETFs launched in Hong Kong in 2022 have yet to be included in the Stock Connect program.
“People are still skeptical about Hong Kong’s status as a special [administrative] region,” Tongli said during a Bitcoin Asia panel discussion. “It’s located in China … and many people don’t want to see Hong Kong become more successful for whatever reason.”
That said, Tongli is still bullish on the long-term potential for the Hong Kong market, which he said is a “more neutral” region that has great appeal in Asia. Once adoption picks up, he suggested that the local crypto ETFs could grow to double the size of U.S. products, but didn’t offer a timeline for this to occur.
He said it largely depends on when Hong Kong manages to establish a full virtual asset ecosystem, but the city has “sowed a seed” by launching the ETFs. Eventually, Tongli said he sees other products like stablecoins receiving regulatory approval and launching on the market.
For now, Harvest is focused on making their spot crypto ETFs the top products in Hong Kong by trading volume by the end of the year ahead of the launch of collateralized financial products based on the ETFs, Tongli said.
Thus far, the Bosera HashKey Bitcoin and Ether spot ETFs have been the top performers, seeing net inflows of $15.2 million and $8.1 million, respectively, since launching, on top of seed funding of $61.1 million and $12.3 million, respectively, according to data provided by Farside.
The ETFs offered by China Asset Management Company (ChinaAMC) had the largest seed funding, with the ChinaAMC Bitcoin ETF starting at $123.6 million in assets under management (AUM), while the ChinaAMC Ether ETF started with $20.2 in AUM.
Speculation about Chinese investors getting access to the Hong Kong ETFs was already circulating before the Thursday comments from Tongli, with SYZ Capital Managing Director Richard Byworth telling his X followers on May 1 that he “just got back from Hong Kong,” where “there [was] talk that the ETF could be added to stock connect.”
“The implications for this are absolutely enormous (basically means mainland money can buy it),” Byworth added.
Brian HoonJong Paik, co-founder and Chief Operating Officer at SmashFi, replied “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 asset to mitigate social unrest.”
On April 15, Paik laid out the reasons why he thinks Chinese investors will inevitably have access to the ETFs.
Citing the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs, he noted they “allow investors in mainland China and Hong Kong to trade stocks in each other's markets through their local securities firms or brokers,” adding that “The Stock Connect program covers a wide range of stocks, but it's 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 in diversifying their investment strategies,” he said.
“Chinese residents can also invest in Hong Kong stocks through brokerage firms that have the right to operate in both markets,” Paik noted. “These firms often offer services to help individuals navigate the regulatory requirements for foreign investments.”
There is also a “Mutual Recognition of Funds (MRF)” program between Hong Kong and mainland China that “allows eligible Mainland and Hong Kong funds 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,” Paik concluded. “Excluding only the Bitcoin ETF would likely cause significant repercussions among both institutional and retail investors in both China and Hong Kong.”
