China Weighs CNH Stablecoin as U.S. Advances Dollar-Pegged Legislation

Stablecoins have emerged as a new arena for international monetary competition, with nations accelerating their legislative efforts to secure a favorable position in the global payment system. The discussion around whether China should issue a stablecoin anchored to the offshore Chinese yuan (CNH) to accelerate the internationalization of the yuan has gained significant traction in the current market. Some analysts believe that from the perspective of major power games, China has reached a critical juncture where it must respond. Hong Kong could serve as a "pilot" city to issue a CNH stablecoin, exploring practical application scenarios. However, regulatory challenges such as anti-money laundering must be addressed first.

China has traditionally maintained a conservative stance towards cryptocurrency. However, its recent focus on stablecoins is driven by the comprehensive shift in stablecoin regulation following the tenure of the former U.S. President. The U.S. Congress has rapidly advanced the "Stablecoin Act" (GENIUS Act), with the former U.S. President publicly expressing his hope to complete the legislation by August. This development means that the 99% market share of dollar-pegged stablecoins, such as USDT issued by Tether and USDC by Circle, will legally access the global payment rails in the future. This could further consolidate the dominance of the U.S. dollar and potentially stimulate demand for short-term U.S. Treasury bonds.

State-owned media has highlighted the potential risks and opportunities associated with stablecoins. If stablecoins are allowed to develop in an unregulated manner, it may have a negative impact on China's financial system. Conversely, if China gives up this efficient settlement tool, it may miss out on a vital opportunity for currency internationalization. The U.S. is expanding the dollar's hegemony to the global digital finance sector through stablecoins, which may erode other countries' currency sovereignty systems.

Xing Ziqiang, Chief Economist of Morgan Stanley China, predicts that Hong Kong will first promote a stablecoin pegged to the U.S. dollar and Hong Kong dollar to establish technological and market trust. This initial step will pave the way for the expansion to a CNH stablecoin. With the support of a CNH offshore yuan fund pool reaching one trillion yuan in Hong Kong, the CNH stablecoin can validate practical use cases for cross-border settlements. This approach will avoid violations of mainland capital controls or impacting domestic financial stability.