The Systemic Risks of Stablecoins and Their Implications for China's Financial Policy

China’s financial policymakers are locked in a high-stakes battle against stablecoins, which threaten to erode decades of capital controls and challenge the yuan’s role in global trade. Dollar-backed stablecoins, particularly those regulated under the U.S. GENIUS Act, have emerged as a potent tool for circumventing Beijing’s tightly controlled financial system. These instruments enable unregulated cross-border transactions, bypassing state-owned banks and undermining the central bank’s ability to manage monetary policy [1]. For a regime that relies on strict capital controls to channel funds into state priorities and maintain elite loyalty, this represents a systemic risk of unprecedented scale [2].

The Chinese government’s response has been twofold: a mainland crackdown on stablecoin innovation and a parallel push to develop yuan-backed alternatives. On the mainland, regulators have banned stablecoin research and seminars to curb speculative trading and capital flight [3]. The Beijing Internet Finance Association has issued warnings about “illegal fundraising schemes” tied to stablecoins, urging investors to avoid unregulated projects [4]. Meanwhile, Hong Kong has adopted a more nuanced approach, implementing a 2025 Stablecoins Ordinance that mandates 100% reserve backing and anti-money laundering (AML) compliance for fiat-pegged tokens [5]. This framework positions Hong Kong as a bridge between China’s digital yuan (e-CNY) and global stablecoin ecosystems, allowing controlled experimentation while aligning with international standards [6].

The strategic calculus is clear. By promoting yuan-backed stablecoins, China aims to internationalize the renminbi and reduce reliance on U.S.-centric systems like SWIFT. The State Council is reviewing a roadmap for such instruments, which could facilitate cross-border trade settlements in Belt and Road Initiative (BRI) corridors [7]. However, structural challenges persist. The yuan’s limited convertibility and strict capital controls remain barriers to adoption, while international trust in Chinese financial infrastructure lags behind that of U.S. dollar-backed alternatives [8].

Former PBOC Governor Zhou Xiaochuan has sounded alarms about the “multiplier effect” of stablecoin issuance, where even fully backed reserves could trigger cascading failures akin to a bank run when leveraged through loans or revaluations [9]. This mirrors global concerns about stablecoin fragility, as seen in the 2022 collapse of TerraUSD. For China, the stakes are higher: a stablecoin-driven crisis could destabilize its financial repression model, which channels capital into state-owned enterprises and suppresses private sector competition [10].

Geopolitical implications are equally profound. By developing yuan-backed stablecoins, China seeks to weaken the dollar’s dominance in digital finance and diversify global currency reserves. Yet, the same tools that enable this ambition—programmable, decentralized money—also empower individuals and entities to evade capital controls, a risk the PBOC cannot ignore [11]. This tension between innovation and control defines China’s stablecoin strategy, reflecting a broader struggle to balance economic modernization with political stability.

For investors, the implications are twofold. First, China’s regulatory bifurcation—strict mainland controls versus Hong Kong’s experimentation—creates a fragmented landscape for stablecoin-related ventures. Second, the success of yuan-backed stablecoins hinges on resolving structural issues like convertibility and building international trust. Until these hurdles are addressed, dollar-backed stablecoins will likely retain their edge in cross-border transactions, even as China’s state-backed alternatives gain traction in BRI corridors.

In the end, China’s approach to stablecoins is a microcosm of its broader economic strategy: a careful, calculated balancing act between openness and control. Whether this strategy can neutralize the systemic risks of stablecoins while advancing the yuan’s global ambitions will depend on the PBOC’s ability to innovate without sacrificing the very capital controls that underpin its financial model.

Source:
[1] Why China Is Spooked by Dollar Stablecoins and How It Will Respond [https://www.cfr.org/article/why-china-spooked-dollar-stablecoins-and-how-it-will-respond]
[2] Stablecoin Risks and Regulatory Responses in China [https://www.ainvest.com/news/stablecoin-risks-regulatory-responses-china-implications-global-digital-asset-markets-2508/]
[3] Navigating China's Stablecoin Regulatory Tightrope [https://www.ainvest.com/news/navigating-china-stablecoin-regulatory-tightrope-systemic-risks-investor-preparedness-2508/]
[4] China Industry Body Warns Against Illegal Fundraising Risks Involving Stablecoins [https://finance.yahoo.com/news/china-industry-body-warns-against-023124688.html]
[5] Hong Kong's Stablecoins Bill and Its Implications [https://www.china-briefing.com/news/hong-kongs-stablecoin-bill-what-it-means-and-why-it-matters/]
[6] Hong Kong Stablecoin Ordinance Takes Effect August 2025 [https://www.morganlewis.com/pubs/2025/06/hong-kongs-stablecoins-ordinance-to-take-effect-august-1-an-overview-of-the-regulatory-framework]
[7] China considering yuan-backed stablecoins to boost global currency usage [https://www.reuters.com/business/finance/china-considering-yuan-backed-stablecoins-boost-global-currency-usage-sources-2025-08-21/]
[8] China considers Yuan stablecoin to challenge Dollar dominance [https://blockchaintechnology-news.com/news/china-yuan-stablecoin-dollar-challenge/]
[9] Ex-PBOC Chief Warns of Stablecoin Crisis – Run Risk Echoes [https://finance.yahoo.com/news/ex-pboc-chief-warns-stablecoin-193322231.html]
[10] China's Crypto Paradox: Banned Yet Influential in Global [https://www.ainvest.com/news/china-crypto-paradox-banned-influential-global-digital-asset-markets-2508/]
[11] China's Stablecoin Gambit: Challenging Dollar Dominance [https://www.ainvest.com/news/china-stablecoin-gambit-challenging-dollar-dominance-yuan-time-2508/]