From Reuters By Vidya Ranganathan and Summer Zhen

SHANGHAI/HONG KONG, Jan 25 (Reuters) - 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%. China's stock market, meanwhile, has been sinking for 3 years.

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.

After Hong Kong's open endorsement of digital assets last year, Chinese citizens are also using their $50,000 annual forex purchase quotas to move money into cryptocurrency accounts in the territory. Under Chinese rules, the money can only be used for purposes such as overseas travel or education.

China's economic downturn "has made investment on the mainland risky, uncertain and disappointing, so people are looking to allocate assets offshore", said a senior executive of a Hong Kong-based cryptocurrency exchange, who declined to be identified due to sensitivity of the topic.Bitcoin and crypto assets have attracted such investors, he said: "Almost everyday, we see mainland investors coming into this market."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."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 Asset Management (ChinaAMC) and Harvest Fund Management Co are all exploring businesses in the territory that deal in digital assets.

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Access to bitcoin isn't that difficult on the mainland, according to Reuters' checks of online crypto exchanges and interviews with retail investors.Exchanges such as OKX and Binance still offer trading services for Chinese investors, and guide them to use fintech platforms such as Ant Group's Alipay and Tencent's WeChat Pay to convert yuan into stablecoins with dealers, to trade cryptocurrencies.OKX and Binance did not reply Reuters requests for comment.Crypto data platform Chainalysis says crypto-related activities in China have bounced, and its global ranking in terms of peer-to-peer trade volume jumped to the 13th place in 2023, from 144 in 2022.Despite being banned, the Chinese crypto market recorded an estimated $86.4 billion in raw transaction volume between July 2022 and June 2023, dwarfing Hong Kong, which witnessed $64 billion in crypto trading, Chainalysis said. And the proportion of large retail transactions of $10,000-$1 million is nearly twice the global average of 3.6%.Much of China's crypto activity "takes place through over-the-counters or through informal, grey market peer-to-peer businesses," Chainalysis said in the report.Brick-and-mortar crypto exchange stores, have sprouted in Hong Kong's busy business and shopping streets. These offline shops are lightly regulated.At Crypto HK, a popular crypto store in the Admiralty district, customers can buy cryptocurrencies with a minimum HK$500 ($64) and are not required to provide any identity documents.The underground crypto market in China is thriving.Michael Wang, a dealer who helps individuals buy digital assets, says daily volumes run into several million yuan or even dozens of millions.Charlie Wong, a 35-year-old buy-side equity analyst, bought bitcoin via the Hashkey Exchange, an officially recognised marketplace in Hong Kong."It is hard to find opportunties in traditional fields. Chinese stocks and other assets perform poorly ... the economy is undergoing a crucial transition," he said.China's crackdown on the property sector over the past three years has battered prices of homes, which were traditionally the mainstay in household savings portfolios. The stock market has fared even worse, with the benchmark CSI 300 Index(.CSI300), opens new tabdown by half its value since early 2021.Bitcoin, by contrast, has leapt 50% since mid-October, and is known for its wild swings.Wong believes Chinese officials are cognisant 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 centres 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)($1 = 7.8197 Hong Kong dollars)

Additional reporting by Shanghai Newsroom Editing by Vidya Ranganathan and Kim Coghill