China’s central bank could use Hong Kong as a sandbox for testing digital payment alternatives to internationalise the yuan, but Beijing’s digital currency ambitions face hurdles because of the country’s economic challenges, according to Morgan Stanley.
Hong Kong has established the world’s first regulatory regime for stablecoins – digital tokens that are pegged to a reference asset like a fiat currency – with the law taking effect from August 1.
The move positioned Hong Kong as a launch pad for yuan-pegged stablecoins, which could be used as a pilot for real-world cross-border settlement and offered a way to expand the use of the digital yuan internationally, Morgan Stanley analysts led by chief China economist Robin Xing said in a report last week.
The sandbox would be supported by Hong Kong’s robust offshore yuan liquidity pool, which was estimated at around 1 trillion yuan (US$139 billion).
The allure of stablecoins lies in their ability to make cross-border transfers faster and more cost-effective, a feature that multinational companies hope could help streamline their operations, the report said. A yuan-linked stablecoin would be a good option for cross-border settlements, giving the currency a boost on the world stage, the report added.
However, making the yuan truly international faces headwinds, the US bank’s analysts said.
