Assessing Stablecoin Risks in China's Evolving Financial Landscape

China’s financial regulators are navigating a precarious tightrope between fostering innovation and safeguarding systemic stability. The country’s dual-track approach to stablecoins—crackdowns on the mainland and regulated experimentation in Hong Kong—reveals a strategic calculus aimed at mitigating risks while testing the waters of digital finance. Yet, as the data shows, centralized payment systems, particularly the e-CNY and state-backed frameworks, remain superior tools for risk-managed growth in a landscape where capital controls and geopolitical competition are paramount.

The Stablecoin Dilemma: Innovation vs. Instability

China’s 2025 stablecoin strategy underscores its ambivalence toward decentralized finance. On the mainland, authorities have banned seminars and research on stablecoins to curb speculative bubbles and prevent capital flight [5]. This reflects a broader concern: unregulated stablecoins, especially those pegged to the U.S. dollar, could undermine the yuan’s role in cross-border trade and erode monetary sovereignty [1]. The People’s Bank of China (PBoC) has explicitly warned that stablecoins’ programmability and cross-border transfer capabilities pose systemic risks, a stance echoed by former Governor Zhou Xiaochuan [3].

Meanwhile, Hong Kong’s Stablecoins Ordinance, effective August 1, 2025, mandates licensing and anti-money laundering (AML) compliance for fiat-pegged stablecoins [6]. While this framework aims to foster innovation, it also imposes strict reserve requirements and geofenced redemption mechanisms, effectively replicating the controls of centralized systems. The result is a hybrid model where stablecoins are permitted only under state-sanctioned conditions, limiting their disruptive potential.

Centralized Systems: The Gold Standard of Risk Management

Centralized payment systems, such as the e-CNY and traditional banking networks, offer advantages that stablecoins cannot replicate in China’s risk-averse environment. First, they enable real-time monitoring of transactions, a critical tool for preventing money laundering and capital outflows. For instance, the PBoC’s oversight of the e-CNY allows it to enforce compliance with capital controls, a challenge for decentralized stablecoins that operate outside its purview [3].

Second, centralized systems align with China’s geopolitical objectives. By promoting yuan-backed stablecoins in controlled environments like Hong Kong, Beijing aims to internationalize the yuan without ceding control to foreign-dominated networks [2]. However, the success of these efforts hinges on integration with existing systems. For example, the offshore yuan (CNH) remains the more viable candidate for stablecoin issuance due to its smaller, more manageable market size compared to the onshore yuan (CNY) [4]. This underscores the limitations of stablecoins as standalone tools for global influence.

The Strategic Calculus: Why Centralized Systems Prevail

China’s cautious approach to stablecoins is rooted in its broader financial strategy. The State Council’s roadmap for yuan internationalization, expected in Q3 2025, prioritizes risk mitigation and regulatory clarity [1]. This includes designating Hong Kong and Shanghai as pilot zones for stablecoin experimentation while maintaining strict controls on the mainland [4]. The duality of this strategy—crackdowns domestically and regulated innovation offshore—reflects a recognition that stablecoins, even when compliant, cannot fully replace the predictability of centralized systems.

Moreover, Chinese tech giants like JD.com and Alibaba are exploring stablecoins in Hong Kong not to challenge the state’s financial architecture but to reduce cross-border transaction costs within existing frameworks [4]. This pragmatic adoption highlights the complementary, rather than adversarial, role of stablecoins in China’s ecosystem.

Conclusion: A Controlled Future for Digital Finance

For investors, the lesson is clear: in China’s evolving financial landscape, centralized systems will continue to outperform stablecoins in risk-managed growth. While stablecoins offer efficiency in cross-border trade, their potential for misuse and systemic risk necessitates stringent oversight. The PBoC’s dominance in shaping the e-CNY and its regulatory grip over Hong Kong’s stablecoin framework ensure that innovation remains tethered to state objectives. As the world watches China’s experiments with yuan-backed stablecoins, the underlying reality is that centralized control—not decentralized finance—will define the next phase of global digital currency competition.

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] China Weighs Yuan Stablecoins Amid Fear of Dollar's Shadow [https://www.ainvest.com/news/china-weighs-yuan-stablecoins-fear-dollar-shadow-2508/]
[3] Former PBoC Governor Warns Against Stablecoin Risks [https://www.mexc.com/news/former-pboc-governor-warns-against-stablecoin-risks/76627]
[4] China eyes stablecoins to boost 'yuan internationalization' [https://coingeek.com/china-eyes-stablecoins-to-boost-yuan-internationalization/]