MNI INTERVIEW: HK Eyes CNH Stablecoin For Asset Expansion

Hong Kong will accelerate efforts to build offshore yuan-based capital markets and develop digital financial infrastructure, including a yuan-pegged stablecoin, to hedge against potential instability in the U.S. dollar and boost the yuan’s global role, a prominent economist and policy adviser told MNI. 

However, authorities will maintain the U.S. dollar peg for the foreseeable future to preserve asset values and market expectations, said Xiao Geng, associate dean of the School of Public Policy at the Chinese University of Hong Kong, Shenzhen. The city will likely adopt a dual-track currency system that incorporates a digital currency – such as a stablecoin – pegged to offshore yuan, alongside the existing currency, he added, noting the stablecoin would support yuan internationalisation and strengthen Hong Kong’s role as a global financial hub. (See MNI: China To Test Offshore Stablecoin As U.S. Coins Spread)

The launch of a CNH stablecoin would also help the mainland tackle key challenges in offshore payments and financing for Belt and Road projects, trade and investment with Association of South East Asian Nations (ASEAN) and other partners, and offshore bond issuance by mainland entities in Hong Kong, added Xiao, who is also chairman of the Hong Kong Institution for International Finance.

The Hong Kong Monetary Authority’s Stablecoin Bill took effect on Aug 1, with officials indicating that a small, initial number of licenses are likely to be issued early next year. Xiao said the limited number of licenses contrasts with the large number of stablecoin issuers in the U.S, which could help control risks. 

The first fiat-backed stablecoin will be pegged to the Hong Kong dollar. Once this matures, regulators should move to introduce an offshore yuan-pegged stablecoin, said Xiao, also a member of the HK Chief Executive's Policy Unit expert team. Investors should watch the licensed issuers – comparable to the note-issuing banks in Hong Kong’s linked exchange rate system – as they roll out products and meet regulatory obligations, he suggested. Offshore assets could be allocated to these platforms, while authorities may in time allow certain onshore assets to be converted into offshore holdings through stablecoin channels, he argued.

REGULATIONS 

Hong Kong’s stablecoin regulations are far stricter than the U.S.’s, which have come under growing scrutiny, Xiao said, noting their similarity with rules governing the city’s note-issuing banks, which include know-your-customer and know-your-transaction obligations. Regulation of Hong Kong’s licensed stablecoin issuers – including anti-money laundering and counter-terrorism financing measures – are also on par with those imposed on note-issuing banks, he added.

The Hong Kong dollar’s peg acts like a stablecoin off blockchain, Xiao argued, noting the city’s long-standing experience managing the system. As a result, he said, the risks tied to Hong Kong’s stablecoin development will be much lower than those for U.S. stablecoins. U.S. dollar-based stablecoins also carry higher long-term valuation uncertainty and risks given the size of U.S. debt and fiscal deficit, he added. 

PRACTICAL APPLICATIONS
Xiao sees strong application potential for offshore yuan-pegged stablecoin, noting that leading mainland e-commerce and payment platforms, including JD.com and Ant Group, are applying for legal licenses. Their cross-border payment advantages – large transaction volumes and high frequency – could unlock stablecoin efficiency and cost benefits, he said.

Hong Kong regulators and institutions have already begun putting some assets, such as stocks and bonds, on blockchains. Cross-border CNH stablecoin use could also broaden Hong Kong’s role beyond a West-China connector toward becoming a bridge between China and ASEAN, the Middle East, Africa, and Latin America, where stablecoin can reduce exchange rate risks between the U.S. dollar and yuan, he continued. (See MNI INTERVIEW: Swift Adapts To Digital, Currency-Diverse World)

HKD STABILITY

Stablecoin could also act as both a “firewall” and a “backup” to guard against systemic risks from the Hong Kong dollar’s peg in the event of a U.S. dollar collapse, Xiao said. U.S. instability, from high inflation and worsening fiscal conditions to volatile China-U.S. ties, has increased uncertainty and pressure on Hong Kong’s financial system, given its monetary policy and interest rates shadow those of the U.S., he added.

Still, the U.S. remains the world’s largest economy and the dollar the dominant reserve currency, providing an ongoing rationale for maintaining the peg, he argued. The key advantage of the linked exchange rate system is its ability to keep Hong Kong asset valuations consistent with historical expectations, Xiao said.