China's Bid for 'Global Yuan' Finds Double-Edged Sword in Stablecoins — Analysis

When China's central bank governor laid out his vision for a more multipolar monetary system last month, he signalled Beijing's openness to exploring stablecoins.

The apparent shift in attitude--at odds with China's ban on cryptocurrencies--was likely driven by concerns that U.S. support for stablecoins could further entrench the dollar's dominance in the global currency system, analysts say.

As the People's Bank of China seeks a bigger role for the yuan on the global stage, ignoring stablecoins--a type of crypto backed by cash reserves or assets such as U.S. Treasurys--could put the Chinese currency at a disadvantage.

U.S. lawmakers have proposed a stablecoin regulation bill that, if passed, could accelerate the use of dollar-backed digital currencies in everyday transactions. President Trump has said he wants to sign the legislation before August.

Known as the Genius Act, the bill would effectively transform USD-pegged stablecoins into synthetic dollars, hardwiring them into global payment rails, economists at Morgan Stanley said in a recent note.

"This is not a challenge to dollar dominance--it's a reinforcement of it," they said. "For China, ignoring this trend risks being left behind in the digital infrastructure race--especially as stablecoins increasingly function as bypass mechanisms to traditional banking networks."

Stablecoins have drawn renewed attention as global companies and central banks explore their use. Their one-to-one peg to traditional currencies such as the dollar makes them more stable than other cryptocurrencies like Bitcoin, and they can be used for fast, low-cost cross-border payments.

Since PBOC chief Pan Gongsheng highlighted the potential for emerging technologies like stablecoins to transform global payment systems in June, government advisors and economists have stepped up calls for Chinese regulators to approve yuan-backed stablecoins.

In an interview with state media last week, PBOC advisor Huang Yiping suggested exploring Hong Kong as a testing ground for yuan-backed stablecoins, noting that tight capital controls make such experimentation on the mainland unlikely.

"Hong Kong has an offshore market for the renminbi, and if the offshore market develops, it is possible to create a stablecoin pegged to the offshore RMB in Hong Kong in the future," Huang said.

Despite growing interest, some analysts remain skeptical about stablecoins' potential to boost the yuan's global usage.

For one, adoption of stablecoins remains largely confined to crypto trading, partly due to concerns over financial fraud. While usage is growing, progress has been slowed by a lack of regulation, despite recent steps toward setting up guardrails, economists at Capital Economics said in a note.

"Stablecoins lack the backstop of government guarantees that comes with most fiat currencies," and have not always lived up to their promise of par convertibility, CE said.

It would be challenging for a yuan-backed stablecoin to take off globally, said Maybank's Erica Tay, noting that the Chinese currency itself isn't widely used despite being convertible.

The yuan's share of global payments remains around 4%, far behind the dollar. Currently, over 99% of stablecoins are USD-denominated, according to the Bank for International Settlements.

Tokenization alone won't internationalize the yuan, economists at Morgan Stanley said.

The real work lies in reforms at home, they said in a note, calling for decisive structural changes to shift the economy toward consumption and strengthen global confidence in China's growth potential.

"These are difficult reforms and will only be implemented at a calibrated pace, suggesting that the road to RMB internationalization could be long and bumpy," they said.

Write to Singapore editors at singaporeeditors@dowjones.com