China's Stablecoin Ambition: A New Front in Global Currency Competition

Chinese policy advisors and economists are increasingly advocating for the exploration of stablecoins for cross-border payments, even as the United States advances its own initiatives to reinforce the dollar's global standing through this evolving technology. Despite China's current prohibition on cryptocurrency activities and its lack of formal endorsement for stablecoins—digital tokens pegged to conventional currencies—recent statements from senior central bank officials have reignited discussions about their potential role in international transactions.

In June, Pan Gongsheng, Governor of the People’s Bank of China, underscored the transformative potential of stablecoins in international finance. He specifically highlighted their relevance in an era of heightened geopolitical tensions, which have exposed the vulnerabilities of traditional payment systems that can be susceptible to politicization and weaponization as sanction tools. During the same Shanghai event, former central bank head Zhou Xiaochuan noted that dollar-linked stablecoins could inadvertently facilitate dollarization. Concurrently, other financial officials from mainland China and Hong Kong deliberated on the capacity of yuan-based stablecoins to bolster China's long-standing objective of promoting its currency on the international stage.

While Beijing has historically approached cryptocurrencies with caution, viewing them as a potential threat to financial stability and capital controls, economists now perceive an opportunity. This shift is partly influenced by the Trump administration's increasing support for digital tokens. Morgan Stanley, for instance, has suggested that China could utilize Hong Kong as a testing ground for offshore yuan-based stablecoins, thereby circumventing Beijing's stringent capital regulations. Robin Xing, chief China economist at Morgan Stanley, emphasized that "Stablecoins are not new currencies, but new distribution channels for existing ones," asserting that "It is crucial for China to embrace the trend of sovereign currency tokenization to maintain competitiveness in the digital infrastructure race."

Just hours prior to the statements from Pan and other Chinese officials at the Lujiazui Forum on June 18, the US Senate passed a bill regulating stablecoins, signifying a significant victory for the crypto industry and a boost for President Donald Trump’s digital asset agenda. On June 19, Treasury Secretary Scott Bessent asserted via an X post that stablecoins have the potential to strengthen, rather than undermine, the dollar’s dominance. Bessent further elaborated in a Bloomberg TV interview that global users are likely to prefer US-backed stablecoins over central bank digital currencies from Europe or China, attributing this preference to greater trust in the privately regulated American sector compared to the perceived risks of government control elsewhere.

Stablecoins, typically collateralized by traditional currencies and issued by private entities, are increasingly favored as a more efficient and cost-effective solution for cross-border payments. The majority of these are pegged to the dollar and backed by US assets, such as short-term Treasuries, with their total supply projected to reach $3.7 trillion by 2030. In response, Chinese economists are advocating for the development of yuan-linked alternatives. Shen Jianguang, chief economist at JD.com, warned that "If China doesn’t develop stablecoins, it will essentially withdraw from the competition for next-generation global currency dominance and hand it to others." Richard Liu, founder of JD.com, has reportedly informed staff of the company's intention to apply for stablecoin licenses in all major markets, with the goal of reducing cross-border payment costs by 90% and cutting settlement times to under 10 seconds.

Hong Kong has recently implemented its own regulatory framework for fiat-referenced stablecoins, offering licenses to issuers operating within the city. JD.com and Ant Group are among the first major technology companies anticipated to apply. Shanghai-listed Zhejiang China Commodities City Group Co., the operator of the world's largest wholesale goods market, has also expressed its intention to seek a license.

Offshore yuan stablecoins could enable China to capitalize on growing global apprehension regarding dollar dominance, particularly following its use as a tool of financial pressure on the Kremlin after Russia's invasion of Ukraine. Interest in the yuan is expanding, with over 30% of China's goods trade settled in the currency in February, marking the highest level in a decade, although its share in global payments remains modest.

This escalating interest in stablecoins coincides with the limited traction gained by China’s own state-backed digital currency, the e-CNY, both domestically and internationally. A separate cross-border payments initiative, mBridge, faces an uncertain future after the Bank for International Settlements, a key participant, withdrew due to concerns that it could be exploited to circumvent sanctions. Nevertheless, Pan recently announced plans for an international e-CNY center in Shanghai, signaling a continued commitment to promoting its use for trade. According to Li Yang, chairman of the state-backed National Institution for Finance and Development and a former PBOC adviser, China should adopt a "dual track" approach to enhance the yuan’s global utilization. This approach would involve sustained traditional efforts, such as expanding currency swaps and the yuan-based CIPS settlement system, while simultaneously leveraging Hong Kong’s financial institutions to promote offshore yuan-linked stablecoins.