Chinese individual investors are so desperate to move their money out of the country, they are buying local funds with U.S. or Japanese exposure at prices higher than their net asset value, The Wall Street Journal reports.

This week, Chinese investors bought such funds at NAV premiums of 14% to 20%. An exchange-traded fund from China Asset Management Co. with exposure to Japanese stocks became so popular that the investment firm halted its trading for an hour on Thursday, warning investors of potential heavy losses.

Four ETFs listed in China that track Japan’s Nikkei 225 index had $3.3 billion in trading volume this week through Thursday, their busiest week on record.

Chinese investors are also flocking to ETFs tracking the U.S. stock market, with a China AMC ETF that tracks the S&P 500 closing Wednesday at an 18% premium to its net asset value.

However, that premium had shrunk to 5% as of Thursday, while AMC’s Japan ETF was trading at just a 5.8% premium.

“The current craze for U.S. and Japanese stocks is no different from the panic buying of real estate, bitcoin, and gold by Chinese aunties years ago,” said Qi Wang, chief investment officer at UOB Kay Him.

Also this week, China’s top government body said it would impose stronger measures to stabilize financial markets and boost investor confidence.

China’s benchmark CSI 300 index fell 11.4% last year, its third consecutive yearly loss, prompting millions of individual investors in China, as well as foreigners, to pull out of local markets there.

China has strict capital controls on how much money people and companies can invest overseas, which is one reason why ETFs traded inside of China that have overseas exposure have become popular.

BITCOIN

Chinese are also investing heavily in bitcoin and other cryptocurrencies. Dylan Run, a Shanghai-based finance sector executive, started moving a bit of his money into cryptocurrencies in early 2023, when he realized that the Chinese economy and its stock markets were going downhill.

Crypto trading and mining has been banned in China since 2021. Run used bank cards issued by small rural commercial banks to buy cryptocurrencies through grey-market dealers, and capped each transaction at 50,000 yuan ($6,978) to escape scrutiny.

“Bitcoin is a safe haven, like gold,” says Run.

He now owns roughly 1 million yuan worth of cryptocurrencies, accounting for half of his investment portfolio, compared with just 40% in Chinese equities.

His crypto investments are up 45%.

Like Run, more and more Chinese investors are using creative ways to own bitcoin and other crypto assets that they believe are safer than investing in crumbling stock and property markets at home.

They operate in a grey area. While cryptocurrency is banned in mainland China and there are strict controls on capital movement across the border, people are still able to trade tokens such as bitcoin on crypto exchanges such as OKX and Binance, or through other over-the-counter channels.

Mainland investors can also open overseas bank accounts to buy crypto assets.

As retail investors make a dash for cryptocurrencies, China’s brokers and other financial institutions aren’t far behind. Starved of growth opportunities at home, many of them are exploring crypto-related businesses in Hong Kong.

IN SEARCH OF ‘A GROWTH STORY’

“If you are a Chinese brokerage, facing a sluggish stock market, weak demand for IPOs, and shrinkage in other businesses, you need a growth story to tell your shareholders and the board,” said the exchange executive.

The Hong Kong subsidiaries of Bank of China, China AMC and Harvest Fund Management Co. are all exploring businesses in the territory that deal in digital assets.

Wong believes Chinese officials are cognizant of how disruptive bitcoin can be and yet aware of its huge potential, and hence their endorsement of crypto trading in Hong Kong, to keep a toehold in the crypto business booming in financial centers such as Singapore and New York.

Hong Kong, though autonomously governed, is a Chinese special administrative region.

Chainalysis reckons the developments “have created speculation that the Chinese government may be warming to cryptocurrency and that Hong Kong may be a testing ground for these efforts.”

($1 = 7.1659 Chinese yuan renminbi)

With reporting by Newsmax Finance Wires


© 2024 Thomson/Reuters. All rights reserved.

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