While the U.S. bets on stablecoins to solve its debt problem and ensure global dominance of the American currency, China has not even entered the stablecoin race.
Inside China, a growing number of experts believes that it’s high time to develop a stablecoin that could compete with dollar-backed stablecoins. Should we expect a breakthrough leading to a development of an official (or an officially-approved) yuan-backed stablecoin in the near term?
In fact, private yuan-backed stablecoins already exist. The key thing to keep in mind is that these stablecoins are pegged to the offshore yuan. There are two kinds of yuan: onshore (CNY, used within China) and offshore (CNH, used in Hong Kong and in global markets).
The onshore yuan is strictly controlled by the People’s Bank of China. The regulations for the offshore yuan are more similar to what investors are used to when working with the world’s leading currencies. That said, it should be noted that the People’s Bank of China has a material impact on the dynamics of the yuan. Thus, the price action of any kind of yuan, onshore or offshore, is not fully determined by market forces.
Complex regulations and existence of two types of yuan hurt demand for private yuan-backed stablecoins. In addition, crypto is effectively banned in mainland China. Hong Kong, which serves as the gateway to China for international investors, allows crypto. However, international investors prefer either fiat Hong Kong dollar (HKD) or dollar-backed stablecoins.
In this light, an “officially approved yuan-backed stablecoin” is the only financial instrument that could generate true interest. Not surprisingly, this type of stablecoin is proposed by experts seeking to boost China’s market share in global payments.
However, there’s no consensus regarding potential stablecoin approval within China. For example, the former head of the People’s Bank of China believes that stablecoins will be “excessively used for speculative asset trading.”
Talking about everyday payments in China, there’s little space for stablecoins in case of their full approval. The Chinese hardly use cash or cards, paying with QR codes via super-apps. The digital yuan is also available via apps.
China is not aggressively promoting its fiat yuan or digital yuan in the global marketplace, preferring to keep full control of the currency. Thus, a robust entry into a stablecoin market does not look realistic. Most likely, China will stay focused on the development of its SWIFT-alternative named CIPS, an interbank payment system focused on yuan payments.
At this point, there’s no real threat to the duopoly of USDT and USDC in the stablecoin market. Surely, it’s worth keeping a close eye on any potential moves from China in the stablecoin space. For such a stablecoin to achieve global success, China will have to relax regulations and lift the crypto ban in the country, which does not look like the base-case scenario in the near term.