China’s Bitcoin Ban Backfires: $86B Crypto Volume Soars Amid Stock Slump

China’s cryptocurrency trading and mining ban hasn’t deterred local investors from flocking to the crypto market. In defiance of the ban, these investors turn to digital assets to escape the economic downturn plaguing traditional investments, such as stocks and real estate. 

According to a Reuters report, Chinese individuals are finding “creative” ways to participate in the crypto market, leveraging grey-market dealers, overseas bank accounts, and Hong Kong’s endorsement of digital assets.

Chinese Investors Defy Regulations

A perfect example of the new ways Chinese investors invest in crypto is Dylan Run, an executive in the financial sector based in Shanghai, who began to diversify his investments into cryptocurrencies at the beginning of 2023. 

Recognizing the declining Chinese economy and stock market, Run perceived the largest cryptocurrency by trading volume, Bitcoin (BTC), as a safe haven, similar to gold. 

According to Reuters, Run now holds approximately 1 million yuan ($140,000) worth of cryptocurrencies, accounting for half of his investment portfolio, compared to just 40% in Chinese equities. While China’s stock market has been sinking for the past three years, Run’s digital asset investments have surged by 45%.

Although cryptocurrency trading is officially banned in mainland China, investors continue to trade tokens such as Bitcoin on exchanges like OKX and Binance. 

Reuters reports that investors also utilize over-the-counter (OTC) channels and open overseas bank accounts to access the banned digital asset market. Additionally, Chinese citizens leverage their $50,000 annual forex purchase quotas to move money into accounts in Hong Kong, taking advantage of the territory’s open endorsement of digital assets.

As retail investors rush towards cryptocurrencies, China’s brokers and financial institutions are also venturing into the crypto-related business in Hong Kong. With limited growth opportunities at home, these entities are exploring new avenues to satisfy shareholders and boards amidst a sluggish stock market and weak demand for initial public offerings, according to the report.  

Well-known institutions such as the Bank of China, China Asset Management (ChinaAMC), and Harvest Fund Management Co are reportedly exploring digital asset businesses in Hong Kong.

Informal Peer-To-Peer Crypto Trading Thrives

Per the report, the country’s estimated $86.4 billion in raw transaction volume between July 2022 and June 2023 outperformed Hong Kong’s $64 billion in digital trading. Large retail transactions ranging from $10,000 to $1 million accounted for nearly twice the global average.

Data services provider platform Chainalysis emphasizes that much of China’s digital asset activity occurs through informal, “grey market” peer-to-peer businesses or over-the-counter transactions. 

In Hong Kong, brick-and-mortar digital exchange stores have emerged, offering “lightly regulated” services. These offline shops, such as Crypto HK, allow customers to purchase cryptocurrencies with minimal requirements and without providing identity documents.

China’s crackdown on the property sector and a struggling stock market have eroded confidence in traditional investments. Plummeting home prices and the CSI 300 Index’s 50% decline since early 2021 have pushed investors towards alternative assets. 

Notably, the report emphasizes Bitcoin’s recent 50% surge since mid-October, which has attracted investors seeking opportunities amidst the country’s economic transition.

Overall, Chinese investors, driven by the economic downturn and seeking refuge from traditional investments, are utilizing creative methods to participate in the digital asset market. Despite regulatory restrictions, the appeal of cryptocurrencies persists, and financial institutions are also exploring crypto-related businesses. 

Featured image from Shutterstock, chart from TradingView.com