Why China has a substantial 'underground' crypto market

Written by Kapronasia || January 30 2024

Although China cracked down hard on cryptocurrency beginning in late 2017, it did not succeed in eradicating demand for digital assets. And unsurprisingly, given the size of the country, it remains unofficially a big crypto market. Data compiled by research firm Chainalysis show that the Chinese crypto market recorded an estimated US$86.4 billion in raw transaction volume between July 2022 and June 2023. Further, the proportion of large retail transactions of US$10,000-US$1 million is nearly twice the global average of 3.6%. While crypto bros would have us believe that a full-throated revival of crypto in the world’s second largest economy is just around the corner, the reality is more nuanced.

The Reuters report that broke this story emphasizes that mainland China’s crypto transaction volume “dwarfed Hong Kong,” which recorded US$64 billion in crypto trading during the same period. But Hong Kong has a population of just 7.4 million people, while the Chinese mainland has 1.4 billion people. It stands to reason that given that disparity, the mainland will have a larger crypto market despite the ban.

That said, it seems that demand for cryptocurrency in China has risen because other investment opportunities are lacking. For instance, despite brisk IPO activity, the Chinese stock market has not delivered for investors. In 2023, China had the world’s worst-performing equity market. Its blue-chip CSI Index has fallen 35% over the past 36 months. According to Morgan Stanley, earnings at listed companies are likely to miss forecasts for a tenth straight quarter and that will push down valuations. Though Beijing is preparing to inject about 2 trillion yuan into the market in an effort to stabilize the situation, that may not be enough to lift investor sentiment.

Meanwhile, the property market has also been in a slump. Once seen as a rock-solid investment, especially in China’s tier-1 cities, that is no longer the case.

With uncertainty about the country’s economic prospects growing, Chinese investors are eager to invest offshore and some see Bitcoin as a safe haven like gold. And it just so happens that there are increasing investment opportunities available to them in Hong Kong as the former British Crown Colony steps up its efforts to become a digital assets hub.

While it seems hard to believe that Chinese policymakers would want retail investors to bet big on an asset class that remains mercurial and more prone to malfeasance than other, better regulated assets, it also stands to reason that they might see some upside in using Hong Kong as a limited crypto testing bed.

That said, we remain cautious about reading too much into any China-related crypto developments. While Beijing has made clear its interest in blockchain technology, the decentralized and anonymous nature of cryptocurrency does not align well with how the Chinese leadership thinks about its financial system and the role new technologies can play in that system.