Don’t expect China’s stablecoin to touch the mainland

The cryptocurrency industry is abuzz with speculation after recent reports suggested China may soften its stance on a yuan-backed stablecoin, but law experts caution against overinterpreting the news.

Reuters reported Wednesday that Beijing is considering approving a stablecoin pegged to the renminbi as part of a roadmap to boost the currency’s internationalization. It was the second report this month, following a similar Financial Times story on Aug. 5. Despite the news, Chinese officials have yet to confirm whether it’s considering a stablecoin push.

Even if Chinese authorities move ahead, analysts stress that such a stablecoin would almost certainly circulate offshore, not in the mainland

“The news about stablecoins linked to China’s currency is likely genuine, but it’s not what most people assume. China is unlikely to issue stablecoins onshore, but we can expect them offshore,” Joshua Chu, co-chair of the Hong Kong Web3 Association, told Cointelegraph.

China’s currency operates in two distinct markets — the onshore yuan (CNY) and the offshore yuan (CNH) — and any stablecoin initiative would likely be tied to the latter.

The CNY and CNH are one currency but can trade at different prices. Source: TradingView## Don’t expect China to peg a stablecoin to the CNY

China’s currency has been deliberately split into CNY and CNH. The CNY is strictly confined to the mainland, and it’s not a currency that moves freely in and out of China. A stablecoin pegged to the CNY would clash with Beijing’s strict capital control rules.

The CNH and CNY are the same currency, but their prices can diverge because they trade in different markets. Simply put, if overseas markets are bearish on China, the CNH can weaken more than the CNY. If there’s strong foreign demand for China’s assets, CNH can trade more strongly than CNY.

Related: Banking lobby fights to change GENIUS Act: Is it too late?

A similar effect known as “kimchi premium” is seen in South Korea’s Bitcoin (BTC) market, where BTC often trades at a premium due to the country’s confined crypto market.

Bitcoin often trades higher on South Korean exchanges than the global price average. Source: CryptoQuantPrevious reports suggest China’s internet giants have lobbied to greenlight the offshore yuan stablecoin. Within the domestic market, Beijing has been committed to the digitization of its CNY through the development of its central bank digital currency (CBDC), the digital yuan, also known as the e-CNY.

Winston Ma, an adjunct professor of law at New York University and former managing director of the sovereign wealth fund China Investment Corporation’s North America office, said that if Beijing were to consider a CNY stablecoin, it would have to work alongside the CBDC.

“Within mainland China, the government push of sovereign CBDC via both state bank channels and mobile payment interfaces shows no sign of slowing down,” Ma told Cointelegraph.

“In the mainland market, any stablecoin trial would most likely be integrated with existing e-CNY, which has already been tested by hundreds of millions of Chinese users in numerous transactional contexts.”

A seat “reserved” in Hong Kong for China’s stablecoin

In June 2010, Beijing expanded its cross-border RMB trade settlement scheme to 20 provinces and all foreign counterparties, a move that triggered the rise of Hong Kong’s offshore CNH market.

Hong Kong quickly grew into the largest liquidity pool for CNH. It pioneered the issuance of “dim sum bonds” denominated in offshore yuan and became the primary venue for CNH-based trading. Other centers, such as London and Singapore, have since developed their own markets.

Hong Kong continued to expand as the offshore RMB hub in recent years. Source: SWIFTThe city also serves as a policy bridge. It allows Chinese authorities to test the internationalization of the yuan while keeping the onshore CNY market under strict controls. At the same time, Hong Kong provides a legal framework for cryptocurrency trading, with exchanges able to apply for licenses that remain unavailable on the mainland. Authorities have even reportedly used the city as a venue to liquidate confiscated crypto holdings.

That bridge now extends into stablecoins. On Aug. 1, Hong Kong’s new stablecoin rules took effect, requiring issuers to obtain a license. The rollout followed Washington’s own push for stablecoin dominance under the GENIUS Act, a federal framework reinforcing the US dollar’s primacy.

Related: Stablecoin laws aren’t aligned — and big fish benefit

“Most likely, China’s stablecoin experiment will be in Hong Kong, which is in a unique position to test both CBDC and stablecoins related to the Chinese RMB,” said Ma.

Dollar-backed tokens already account for around 98% of stablecoins in the market. Source: DefiLlamaChinese academics have repeatedly warned that dollar-backed stablecoins pose a threat to the yuan. In June, two scholars writing in China Economic Times — a daily paper backed by the State Council’s Development Research Center — argued that the growth of Tether’s USDt (USDT) and USDC (USDC) risks eroding China’s financial autonomy.

The same concern was echoed this week by Zhang Monan, deputy head of the Institute of American and European Studies at the China Center for International Economic Exchanges, who said the GENIUS Act will reinforce dollar dominance. But she added that Hong Kong’s stablecoin rules open the possibility for a yuan-pegged token to challenge that dominance if ever permitted.

CNH volume is relatively small for global stablecoin dominance

For now, the onshore CNY remains under capital control, leaving little room for any stablecoin that competes with the e-CNY. Offshore CNH, with Hong Kong as its testing ground, is the far more likely candidate.

However, a stablecoin pegged to the CNH may not match global volumes, argues Chu, as the offshore yuan market is “relatively small” compared to the onshore market

China’s broad money supply stood at 329.94 trillion yuan (around $45 trillion) at the end of July. By comparison, Hong Kong’s offshore yuan (CNH) deposit pool was just 0.88 trillion yuan at the end of June — barely 0.27% of the mainland supply.

“With Hong Kong’s Stablecoins Ordinance now active, a CNH-backed stablecoin is very likely. However, its scale, to the disappointment of some crypto bros, may not match larger global stablecoins,” Chu said.

The CNH market is still just a fraction of the domestic yuan. Source: Hong Kong Monetary AuthorityWith dollar-backed coins controlling nearly all of the sector, Chu interprets China’s stablecoin push as less about chasing retail crypto demand and more about carving out strategic space for its currency in an increasingly digital financial system.

In that sense, Beijing’s stablecoin experiment looks less like a controlled pilot in Hong Kong and more like a way to extend the yuan’s reach without loosening its grip at home.

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