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Chinese Tech Giants Lobby for Offshore Yuan Stablecoin to Challenge U.S. Dollar Dominance

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Chinese technology leaders JD.com and Ant Group are pressing the People’s Bank of China (PBOC) to authorize yuan-pegged stablecoins issued in Hong Kong, aiming to boost the international use of the Chinese currency and counter the growing influence of U.S. dollar-linked stablecoins. This push reflects a strategic effort to expand the yuan’s role in global digital finance and cross-border payments amid increasing competition with the U.S.

Stablecoins are cryptocurrencies pegged to stable assets like fiat currencies. Currently, over 99% of stablecoins are linked to the U.S. dollar, and their blockchain-based technology allows fast, low-cost, and borderless transactions, potentially disrupting traditional financial systems. The global stablecoin market is valued at about $247 billion and is expected to grow to $2 trillion by 2028.

Both JD.com and Ant Group plan to launch stablecoins backed by the Hong Kong dollar following the region’s new legislation effective August 1. However, they argue that yuan-based stablecoins issued offshore—particularly in Hong Kong—are urgently needed to promote the yuan’s internationalization. This would mark a significant policy shift in Beijing’s stance on cryptocurrencies, which were banned domestically in 2021.

Industry voices, such as Wang Yongli of Digital China Information Service Group and former Bank of China official, highlight the strategic risks of the yuan falling behind the dollar in cross-border payments. Currently, the yuan’s share of global payments has dropped to 2.89%, far below the dollar’s dominant 48.46%.

The lobbying coincides with Hong Kong and the U.S. racing to establish regulatory frameworks for stablecoins. Chinese exporters increasingly use dollar-pegged stablecoins like Tether (USDT) due to capital controls and currency volatility risks at home, fueling demand for alternative payment tools.

While the PBOC has yet to officially respond, advisors and officials acknowledge the challenges posed by the digital currency surge and have hinted that offshore yuan stablecoins are under consideration. Ant Group is preparing to seek stablecoin licenses in Hong Kong and Singapore, with JD.com planning similar applications globally to facilitate foreign exchange and cross-border payments.

JD.com also points out that pegging stablecoins to the Hong Kong dollar—tied to the U.S. dollar—does little to promote the yuan’s use, thus proposing a yuan stablecoin issuance pilot first in Hong Kong, then expanded to China’s free trade zones, a suggestion reportedly well received by regulators.

China’s Bond Market Hits Historic Low as 10-Year Yield Falls Below 2%

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China’s 10-year government bond yield fell below 2% on Monday, reaching a historic low of 1.975%. This milestone highlights the impact of a sluggish economy, sustained investor demand for bonds, and expectations of further rate cuts by the People’s Bank of China (PBOC). The decline in yield reflects the growing appeal of safer assets amid China’s economic uncertainties.

Key Drivers of the Rally

The decade-long rally in China’s bond market accelerated over the past two years due to several factors:

  1. Economic Slowdown: Weak growth, particularly in the property sector, has dampened risk appetite.
  2. Low Deposit Rates: The recent ban on offering preferential deposit rates underscores the low-rate environment.
  3. Investor Appetite: Funds and institutions remain under-allocated to bonds, prompting increased purchases, especially by insurance companies anticipating allocations ahead of the new year.

Morgan Stanley analysts predict continued bond market strength, citing expectations of a 40 basis point (bps) cut in China’s policy rate by the end of Q1 2024.

Comparative Yield Dynamics

China’s bond yields now significantly trail those of U.S. Treasuries. The 10-year Chinese bond offers 222 bps less than its U.S. counterpart, marking the largest gap since the early 2000s. This inversion reflects China’s weaker economic performance compared to the U.S. post-pandemic.

Additionally, China’s 30-year bond yield fell 4 bps to 2.16%, while 10-year treasury futures, which move inversely to yields, rose 0.4% to a record closing high.

PBOC Measures and Policy Impact

The PBOC has implemented policies aimed at reducing rates, including:

  • Aligning deposit rates for non-bank institutions with the 7-day reverse repo rate of 1.5%.
  • Injecting liquidity into the market, such as 800 billion yuan in 3-month reverse repos in November.

These measures lower short-term rates and contribute to the downward trend in long-term yields. For instance, one-year AAA-rated negotiable certificates of deposit (NCDs) fell 10 bps on Monday to below 1.7%.

Outlook for 2024

Analysts expect China’s 10-year yield to decline further, potentially reaching the 1.7%-1.9% range next year. Loose monetary policy and supportive funding conditions will likely sustain the bond rally.

Implications

While the bond market’s performance signals robust investor confidence in fixed-income securities, it also reflects deeper concerns about China’s economic trajectory. Policies aimed at preventing a hard landing may keep yields low, but the challenges of spurring growth remain.

 

China Unveils Broad Stimulus Measures to Revive Economy

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China’s central bank announced wide-ranging monetary stimulus and property market measures on Tuesday, aiming to revive an economy facing deflationary pressures and at risk of missing its growth target for the year. The People’s Bank of China (PBOC) revealed plans to lower borrowing costs, increase liquidity, and ease the burden of mortgage repayments for households, marking the latest attempt to restore confidence in the world’s second-largest economy after months of disappointing economic data.

Stocks and bonds in China rallied as Governor Pan Gongsheng outlined the measures, which include cutting banks’ reserve requirement ratios (RRR) by 50 basis points (bps). This move will free up around 1 trillion yuan ($141.93 billion) for new lending, though credit demand remains weak. The PBOC will also lower the seven-day repo rate by 0.2 percentage points to 1.5%, and reduce the medium-term lending facility rate by 30 basis points. Loan prime rates will also see a 20-25 bps cut.

The property market, a major driver of China’s economy, received further support with a 50 bps reduction in average interest rates for existing mortgages and a reduction in the minimum down payment to 15% for all types of homes. China’s property market has been in decline since its peak in 2021, and the crisis has heavily impacted consumer confidence, with 70% of household savings tied to real estate.

Despite earlier efforts to lower mortgage rates and downpayment requirements, demand for homes remains weak, and prices continue to fall. August’s economic data missed expectations, adding urgency to the stimulus package. Analysts warn, however, that these measures may not be sufficient to fully restore growth unless complemented by stronger fiscal policies.

Local governments have accelerated bond issuance to fund infrastructure projects, and analysts expect further support measures in the coming weeks as China aims to meet its roughly 5% growth target for the year. The recent U.S. Federal Reserve rate cut has provided room for the PBOC to ease its own monetary policies without putting too much pressure on the yuan.

Analysts, including those from investment banks such as Goldman Sachs and UBS, have already downgraded their growth forecasts for 2024, but they see Tuesday’s measures as a positive step towards economic recovery. ING’s Chief Economist for Greater China, Lynn Song, believes there is potential for further easing in the coming months, especially if global central banks continue cutting rates.