HONG KONG: Sometimes China’s leaders throw markets a curveball, and the latest could prove curvier than most: the country’s state council, or cabinet, may approve a roadmap for boosting global use of the yuan later this month, including a bid to catch up with US progress on stablecoins, per a Reuters report citing unnamed sources.
This would follow passage of the Guiding and Establishing National Innovation for US Stablecoins (Genius) Act in Washington. America’s embrace of such tokens had already prompted soul-searching in the People’s Republic, where the state-run Securities Times suggested in June that stablecoins backed by offshore yuan assets could provide “a new path forward for renminbi internationalization in these turbulent times”.
Jumping on the bandwagon now may smack of fear of missing out, but it nonetheless marks an inflection point for China’s currency, which is subject to extensive management and strict capital controls. The mere existence of a plan for stablecoins – digital assets that, unlike bitcoin and its ilk, are pegged to fiat currency – would be a massive U-turn for Beijing, which has outlawed cryptocurrency trading and mining in the country since 2021.
Hong Kong, which sits outside Chinese capital controls and is already a hub for offshore yuan, would be an ideal place to experiment. The city just launched its own regulatory regime this month for the tokens, which requires every stablecoin to be fully backed by highly liquid assets held in reserve. That means every yuan-backed token that is minted will take offshore yuan out of circulation from the city’s pool in equal measure, helping minimize risk to China’s stated goal of a strong and stable currency.
Obvious candidates to become licensed issuers include the Hong Kong branches of state-run lenders like Bank of China and Bank of Communications. They could buy offshore yuan-denominated paper, known as dim sum bonds, to hold in reserve and facilitate issuance. If and when demand for stablecoins grows, China’s central government and policy banks can simply sell more dim sum bonds to these banks to expand the pool of offshore yuan-denominated assets. And since the new debt in this scenario simply sits with the banks, authorities do not have to worry about extra liquidity unduly impacting the exchange rate.
Use cases will probably be limited at first. Trade finance may be one bright spot: stablecoins can help lower transaction costs, speed up settlements and increase transparency. Stringent anti-money laundering rules included in Hong Kong’s new regulations ought to help assuage concerns over unapproved or illicit use, as should the trail of settlements left on a blockchain by every stablecoin transaction.
In an ideal world this would kick off a virtuous cycle that helps bolster global demand for the yuan, starting with offshore renminbi-denominated debt. Issuance of dim sum bonds in Hong Kong this year already topped 475 billion yuan (RM279 billion), per the Financial Times and is on a course to surpass last year’s record high. But that’s largely due to higher yields offered on offshore bonds relative to the domestic market.
Of course, it will take significantly more to allow the renminbi to challenge the dollar as a global currency, and any roll-out of yuan stablecoins will be gradual and carefully managed. The country’s leaders are still haunted by the last major push for internationalisation which blew up in 2015, when the People’s Bank of China shifted to a more “market-oriented” system for setting the exchange rate. That coincided with a one-off devaluation which triggered a sell-off so dire that the central bank was forced to burn through US$1 trillion (RM4.2 trillion) of foreign reserves just to stop the fall. It subsequently tightened capital controls, which remain the chief stumbling block to internationalisation.
If China is really getting serious about widening foreign use of its currency again, embracing stablecoins can be a positive, if tiny, step in the right direction. – Reuters