WEEKLY, April 20, 2024

priming the “pump”; can Chinese investors buy Hong Kong ETFs?

Hi everyone! I hope you’re all doing well. And now that the halving is behind us, welcome to the next Bitcoin era.

You’re reading the free weekly version of Crypto is Macro Now, where I reshare/update a couple of the articles from the week.

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In this newsletter:

• Priming the “pump”

• Can Chinese investors buy Hong Kong ETFs?

Some of the topics discussed this week:

• What do interest rates and AI have to do with Bitcoin’s halving?

• Korean crypto interest

• Hong Kong ETFs and Asian investors

• Conservative banking and crypto

• The IMF and cross-border BTC flows

• Sounding the privacy alarm

• Escalation? The market does not seem worried.

• That bigger picture, though…

• Oil supply chains

• … and much more besides.

Priming the “pump”

When traditional theories no longer seem to work, the window of opportunity opens for new ones. This includes radical ideas such as decentralized finance and self-sovereign custody, with fewer and fewer people continuing to insist they are unworkable.

It also extends to the heart of economic orthodoxy, which says that inflation can be fought with interest rate hikes. This is, after all, the water we have been swimming in, sometimes drowning but generally, collectively, staying afloat. Only now we’re told that perhaps this basic principle is wrong.

Maybe high interest rates encourage inflation.

As recently as a year ago, Turkey’s Erdogan vowed to continue fighting his country’s eyewatering price increases by dropping rates. Economists around the world fell off their chairs laughing. Turkish citizens didn’t laugh so much as they coped with inflation that had been dropping but was still around 40%.

After reelection in May of last year, Erdogan caved to economic and international pressure and started hiking rates, only to see inflation start to climb again, reaching almost 70% in March.

Now a handful of western economists are wondering if perhaps Erdogan wasn’t on to something after all. Some – from houses such as JPMorgan, Greenlight Capital and others – are suggesting that high rates are inflationary. After all, higher rates put more money in people’s hands. And, let’s face it, the steepest hiking cycle since the 1980s has done virtually nothing to slow down consumption.

You know, maybe?

But it could be that there is something else going on here, something that resembles an economic “psyops”. It’s possible, just possible, that we are being manipulated.

We know that there is no traditional justification for US rate cuts in the short term. Employment is strong, retail sales are beating expectations, Q1 GDP is expected to be not much lower than Q4 and inflation is proving stubborn. Even Fed Chair Powell, yes, he who less than four months ago told us that cuts were imminent, is now suggesting that they may hold rates high for “longer than previously anticipated”.

Indeed, if the Federal Reserve were to cut rates at the May or even the June FOMC meetings, we could see market panic due to 1) fears inflation will roar back and 2) a loss of respect for the US central bank.

Unless, of course, we were gradually coming around to the idea that rate cuts would bring down inflation. If this new school of thought became more widespread, the Fed could cut rates and not lose credibility.

I know, suggesting the US central bank is trying to manipulate us is a stretch – after all, Powell and many other Fed officials are telling us rate cuts aren’t imminent. Rather, the unorthodox rumblings are coming from Wall Street.

But let’s stick with the psyops theme for a moment. What if these claims are part of a concerted effort to give the Fed cover to cut rates, without upsetting economists?

I am not saying there is a conspiracy theory afoot. I am pointing out that we will probably hear more about the need to cut rates to bring down inflation in coming months. We’ll know things have got particularly crazy when that no longer sounds crazy.

Can Chinese investors buy Hong Kong ETFs?

It looks like it’s official: the Hong Kong Monetary Authority (HKMA) has approved the listing of BTC and ETH spot ETFs. The market did not seem too impressed.

(chart via TradingView)

I’ve written before about how this could be a big deal in terms of flows – but I’m also seeing some outrageous predictions on X and elsewhere as to just how big of a deal this could be. So, it’s worth level-setting and looking more closely at what could be potential disappointment ahead.

In sum, the Hong Kong listing of crypto spot ETFs would indeed be very good news for the crypto market, but we are unlikely to see floods of inflows on day one, let alone the first week, whenever that is (no launch date has been set).

Yes, the Chinese market is potentially huge – but not all Chinese investors will have access to these funds, at least not for a while.

First, let’s review the details of what got approved this week. As far as I know, the HKMA has not yet made an official statement, so the linked reporting is based on statements from the issuers.

They are:

• China Asset Management (Hong Kong), the offshore arm of China Asset Management which is one of the mainland’s largest fund management groups, with roughly $266 billion AUM as of June 2023. The firm was founded in 1998 and is majority-owned by CITIC Securities, one of China’s largest investment banks. China Asset Management will be working with OSL Digital Securities, one of the first digital assets exchanges to get a Hong Kong license.

• Harvest Global Investments, the offshore arm of Harvest Fund Management, a Chinese fund manager founded in 1999. As of January, it managed roughly $210 billion in assets, making it the sixth largest public fund manager in China (excluding money market funds). In January, Harvest laid off more than one third of its Hong Kong staff and announced plans to wind down most of its Hong Kong-domiciled retail funds, so it’s interesting that it is one of the few proposers for Hong Kong-based crypto ETFs. Harvest also has offices in New York and London, and counts Germany’s Deutsche Bank among its key shareholders. Harvest will also be working with OSL.

• Bosera Asset Management (International) Co. is the offshore arm of Bosera Asset Management, which was founded in 1998. According to Wikipedia, it is also one of the largest fund management companies by AUM in mainland China, managing over $200 billion. Bosera will be launching the funds with Hashkey Capital, a crypto-native venture fund manager based in Hong Kong with operations in Singapore and Tokyo. Hashkey Capital is part of the Hashkey Group, which also owns Hashkey Exchange, one of the first crypto platforms to get a license in Hong Kong.

In sum, the crypto spot ETF push in Hong Kong is dominated by large legacy mainland investment firms. None of them are anywhere near as large as BlackRock (which manages over $9 trillion), but in relative terms, their combined size is as significant.

Their marketing impact is unlikely to be anywhere near as significant, however, since mainland access to the Hong Kong crypto ETFs will be limited, at least at first.

There are a few programs that allow mainland investors to put money into Hong Kong funds:

• ETF Connect enables Chinese mainland retail investors to buy some Hong Kong ETFs via their usual brokers, without needing a Hong Kong account. However, the list is restricted (size, trading record, does-it-help-mainland-stocks) and it’s unlikely the Hong Kong spot ETFs will qualify to start with.

• Some mainland investors have accounts at Hong Kong brokerages, but there was a big clampdown on this last year, so it's much less common now.

• Mainland institutional investors can buy Hong Kong ETFs via the Qualified Domestic Institutional Investor Scheme, but the eligible entities are very regulated and it’s not clear if they’ll have permission to buy shares in the crypto funds. Plus, there are regulatory limits to the amounts that can be invested in Hong Kong markets via this channel.

And it’s worth remembering that the Hong Kong market – even accounting for some mainland participation – is tiny compared to that of the US. A handful of BTC and ETH futures ETFs listed in Hong Kong in December 2022, and today, more than a year later, have a combined AUM of just under $170 million. For contrast, BITO – the largest US-listed BTC futures ETF – has an AUM of over $2.8 billion.

Still, even a small trickle of mainland interest combined with the considerable investor base already in Hong Kong could be enough to give crypto asset education and demand a boost, especially as currency diversification becomes an increasingly important aspect of Asian portfolio management.

Reports suggest that the bulk of the surge in gold demand, responsible for pushing the metal’s price up 14% over the past three months, is largely coming from mainland China as investors lose confidence in local stocks and real estate. Bloomberg reported last week that trading was halted in a Chinese gold ETF due to “frenzied” demand that pushed the fund’s premium relative to the underlying asset price to over 30%, the highest on record. And a World Gold Council chart shows that gold in China has been consistently trading at a premium to the international price for the past year.

(chart via the World Gold Council)

So, it’s likely that there will be significant interest from mainland China in BTC and ETH investment, especially when it comes with the support of well-known investment brands. It is unlikely to be a flood, though, at least to start with, due largely to investment restrictions.

What’s more, there is still much that we don’t know. For instance, we don’t know when the products will list. We also haven’t yet seen confirmation from the Hong Kong Monetary Authority. And there could be some conditionals that we are not yet aware of.

Still, this is good news for the crypto ecosystem, in terms of potential flows and also in terms of the strong message of growing institutional acceptance around the world of an entirely new type of asset.

HAVE A GREAT WEEKEND!

Did you see the Guy Ritchie film “The Gentlemen”? Violent but also funny and stylish, with an excellent cast and soundtrack. And now, there’s the series. I watched it recently on Netflix, and liked it just as much if not more. Also very violent, but also funny and stylish with a great cast and soundtrack, it weaves in many threads and stories, reaching an ending that leaves you hoping there’s a Season 2 on the way.