China Urges Yuan Backed Stablecoins Amid Dollar Dominance

China is facing a sense of urgency as dollar-pegged stablecoins continue to expand rapidly, with voices in Beijing warning that the country risks being left behind if it does not adapt quickly. A recent article published by a state media outlet urged policymakers to focus on developing yuan-backed stablecoins and establishing regulations, following the U.S. Congress's passage of a stablecoin bill that allows regulated issuers to mint dollar-pegged digital tokens.

The article highlighted the potential advantages of stablecoins as an emerging payment tool, despite the risks involved. It emphasized the need for China to develop yuan-backed stablecoins sooner rather than later, citing a broad consensus among industry insiders. The concern in China is that the U.S. head start in stablecoin regulation could deepen the greenback’s dominance in digital trade, leaving the yuan playing catch-up.

Chinese analysts and officials are worried that the growing popularity of dollar-pegged stablecoins could reinforce the dollar’s status, making greenback transactions easier and encouraging more international use of U.S. currency. This could potentially increase global demand for U.S. Treasuries. However, analysts also noted that rising geopolitical tensions and concerns over U.S. debt levels may eventually undercut confidence in the dollar, creating an opportunity for other digital currencies, including a yuan-backed stablecoin.

Zhou Xiaochuan, former head of China’s central bank, warned that the rise of stablecoins could accelerate “dollarization” in parts of the global economy. He suggested that offshore yuan-based stablecoins should be issued in China’s free trade zones as soon as possible. Meanwhile, China is also ramping up efforts on the digital yuan, or e-CNY, with the central bank’s current governor pledging to establish an international operation center for the currency in Shanghai. The goal is to create a “multi-polar” global currency system that is not overly reliant on the dollar.

However, the development of yuan-backed stablecoins faces significant obstacles. Analysts noted that any meaningful rise of yuan-backed stablecoins will require easing capital controls and broader acceptance of the Chinese currency. The development has been constrained by Beijing’s ban on domestic use, lingering capital controls, and insufficient global recognition given the dominance of USD-pegged stablecoins. Despite these challenges, the urgency to adapt to the trend of stablecoins is clear, as China seeks to maintain its position in the global financial landscape.