Top think tank wants stablecoins to drive Chinese yuan internationalisation
Hong Kong and Shanghai could emerge as renminbi stablecoin hubs.
A top economist from one of China’s most prestigious think tanks argues that Beijing has no choice but to embrace the latest advances in cryptocurrency and blockchain technologies.
Li Yang (李扬), the deputy-head of the Chinese Academy of Social Sciences (CASS) and the director of National Institution of Finance and Development (NIFD), has called for the development of offshore renminbi stablecoins, to drive internationalisation of China’s official currency.
China's deep cryptocurrency ambivalence
China has long had an ambivalent relationship with blockchain-driven cryptocurrency innovations.
As early as December 2013, the Chinese central bank launched prohibitions on domestic financial institutions handling bitcoin transactions.
In September 2017, the central bank effectively put the kibosh on China’s bitcoin market, with a ban on domestic cryptocurrency exchanges and trading platforms.
By the start of 2018, Pan Gongsheng - the current governor of China’s central bank who was then head of its forex authority, launched a crackdown on bitcoin mining.
Despite these misgivings over cryptocurrencies, the doyens of China’s financial system have been remarkably eager to embrace blockchain innovations for their own prescribed ends - most notably for the purposes of trade and supply chain finance.
The most well-known example of China’s willingness to embrace fintech innovations is undoubtedly its central bank digital currency - the digital yuan.
Research on the project commenced over a decade ago in 2014, with pilot trials launched in April 2020 across the Chinese cities of Shenzhen, Suzhou, Xiong’an and Chengdu.
The digital yuan is a virtual cash-alternative which is categorised as part of China’s base money supply. It’s designed for small-scale, high-frequency retail transactions, effected via the use of digital wallets installed on personal smart devices.
Cryptocurrency trends viewed as irreversible
Li Yang argues that China has no choice but to embrace the latest cryptocurrency and fintech innovations, given the transformative impact they’re poised to have on the world’s financial and monetary systems.
“We must realise that the trend of integrating stablecoins, cryptocurrencies and traditional financial will be irreversible,” he wrote in a recent opinion piece (“李扬：面对稳定币浪潮，中国需双轨并进”).
“Stablecoins and cryptocurrencies will achieve complementary development with central bank digital currencies.
“They will reshape the global payments system and drive defi development…[they will] comprehensively improve payments efficiency and reduce payments costs.”
Li argues that realisation of the need for the integration of stablecoin, cryptocurrency and central banking systems is fast becoming universal across the world’s leading economies.
“Just several years ago, certain countries only supported central bank digital currency testing, while others focused their support on stable coin and cryptocurrency innovations.
“Recently however, most of them have shifted to a model of supporting the joint development of all three…the EU Japan, Dubai, Singapore and Hong Kong are all classic examples of supporting integrated development.”
Stablecoins enhance fiat money's power
In sharp contrast to cryptocurrency advocates who touts the ability to radically decentralise financial systems, Li is most impressed by the potential for stablecoins to enhance the reach and power of state-backed fiat monies.
Stablecoins are a type of digital asset that are nominally pegged to a reference asset which can assume multiple forms - including fiat money, other cryptocurrencies, or real world commodities.
Li views them as a critical means for extending the functionality and power of the incumbent currencies produced by the monetary authorities of national governments.
He points in particular to the example of US stablecoin usage.
“Stablecoins are not a newly emerging, independent currency, but in fact a technological upgrade and power extension for the US dollar system in the digital era," Li writes.
“Their rise highlights the core status of payments and clearing functions and the key role of accounts systems.”
The US is the model for stablecoin adoption
Li considers the US government’s embrace of stablecoins as a strategic means for shoring up the greenback’s status, by enhancing its functionality while also driving up demand for Treasury bonds.
“The US has driven the development of stablecoin legislation, with the clear goal of serving the interests of the US dollar,” Li writes.
“This expedites the modernisation of US dollar payments, shores up the international status of the US dollar, and creates trillions in new demand for US treasuries.”
He highlights the success of the USDT and USDC stablecoins, that are backed by short-term US Treasury bonds.
“This mechanism enables stablecoins to become the bridge linking the world of virtual currencies and traditional fiat monetary systems…they markedly increase cross-border payments efficiency and reduce costs.
“The core value of stablecoins lies in the high efficiency of their payments and settlement functions.
“They are based on peer-to-peer blockchain payments - payment is settlement, and in terms of payment efficiency and cost they possess a marked advantage.”
How China will use stablecoins to drive yuan internationalisation
Li advocates that China follow the lead of the US, and embrace stablecoins to drive internationalisation of the yuan via enhanced functionality.
His plan involves capitalising upon the role of Hong Kong as a bridge between the international financial system and the domestic Chinese economy, as well as a global centre for stablecoin adoption.
“We should develop offshore renminbi stablecoins, to create an international payments channel that is controllable.” Li writes.
“In terms of paths for further development, we should make full use of the advantageous conditions of Hong Kong, capitalising upon its status as financial centre as well as its existing institutional foundations.”
Li notes that Hong Kong is home to Tether’s head office, and that in 2019, the company issued an offshore renminbi stablecoin whose current circulation is in excess of 20 million yuan.
He also sees Shanghai as playing a key role in China’s ambitions to use stablecoins to drive international renminbi adoption.
“We should create the conditions to use the status of Shanghai as an international financial centre, to actively and steadily drive the development of renminbi stablecoins.”
In the final analysis, Li views stablecoins as an indispensable strategic tool in the global competition between sovereign monetary powers.
He also considers the technology to be integral to China's national financial security in future.
“Various nations are competing to establish legislation to regulate stablecoins, and this is in fact an attempt to control the critical node that connects the virtual world with the real world," he writes.
“For China, the path to maintaining monetary and financial security is to strengthen economic fundamentals, shore up the foundations of its sovereign currency, effectively use Hong Kong’s offshore market to develop renminbi stablecoins, and firmly drive renminbi internationalisation.”