Morgan Stanley analysts predict that yuan stablecoin initiatives in Hong Kong could serve as Beijing’s digital currency sandbox, although significant economic challenges threaten to limit the yuan’s international potential, despite the city’s pioneering regulatory framework.
Hong Kong’s move positions the territory as a launch pad for yuan-pegged stablecoins, which could serve as a pilot for real-world cross-border settlements and offer a way to expand the use of the digital yuan internationally, according to Morgan Stanley analysts led by Chief China Economist Robin Xing in a report last week.
The analysis comes as Hong Kong’s Stablecoins Ordinance takes effect on August 1, 2025, establishing the world’s first comprehensive regulatory regime for fiat-referenced stablecoins.
Hong Kong’s regulatory pioneer status
The Stablecoins Ordinance mandates that any person who issues fiat-referenced stablecoins in Hong Kong or issues stablecoins backed by Hong Kong dollars must obtain a licence from the Hong Kong Monetary Authority (HKMA).
The regulatory framework represents a significant milestone in global digital asset governance, with the legislation positioning Hong Kong ahead of other major financial centres in stablecoin regulation.
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 substantial liquidity foundation provides the necessary infrastructure for yuan stablecoin Hong Kong operations to scale effectively.
The regulatory clarity has already attracted notable participants to the HKMA’s stablecoin issuer sandbox program. As of May 2025, the first batch of institutions participating in the sandbox include JINGDONG Coinlink Technology Hong Kong Limited, RD InnoTech Limited, and a coalition of Standard Chartered Bank (Hong Kong) Limited, Animoca Brands Limited, and Hong Kong Telecommunications Limited.
Strategic implications for Yuan internationalisation
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 Morgan Stanley report added.
A yuan-linked stablecoin would be a good option for cross-border settlements, giving the currency a boost on the world stage. However, the investment bank’s analysis reveals a more complex picture regarding the yuan’s global prospects.
The research indicates that while Hong Kong’s yuan stablecoin framework provides technological infrastructure, fundamental economic challenges could limit broader adoption.
Financial experts suggest the legislation opens new possibilities for cross-border use of China’s central bank digital currency (CBDC), the e-CNY.
Song Ke from Renmin University noted that “by enabling conversion into stablecoins pegged to the Hong Kong dollar, the e-CNY could be integrated into the broader stablecoin ecosystem, expanding its role in cross-border settlements” and allow China to “explore innovations for cross-border payments, improve efficiency and reduce reliance on SWIFT.”
Economic headwinds challenge Yuan ambitions
Despite the technological progress, Morgan Stanley analysts identified significant obstacles to yuan internationalisation. Making the yuan truly international faces headwinds, according to the US bank’s analysts. The research points to concerning trends in global yuan adoption.
According to the South China Morning Post’s reporting, the yuan’s share of global reserves fell from 2.8% in 2022 to 2.2% in 2024, despite Beijing’s rapid deployment of cross-border payment infrastructure. The decline occurred amid concerns over China’s mounting debt, deflation, and demographic pressures that have dampened capital flows.
The Morgan Stanley report emphasises that technological innovation alone cannot solve fundamental challenges. “The rise of stablecoins does not signify the creation of a new ‘supra-sovereign’ international monetary system,” the analysts stated. “Instead, they are just extensions of fiat money under existing regulations to facilitate cross-border transactions.”
Market response and global context
The yuan stablecoin Hong Kong development occurs against a backdrop of increasing global competition in stablecoin regulation. On May 19, the United States Senate advanced its bill to regulate stablecoins, called the GENIUS Act.
The parallel regulatory development highlights the strategic importance both the US and China place on controlling stablecoin frameworks.
During the recent Lujiazui Forum, People’s Bank of China governor, Pan Gongsheng, confirmed that emerging technologies like blockchain and distributed ledgers were driving the development of central bank digital currencies and stablecoins, reshaping traditional payment systems and significantly shortening cross-border payment chains.
ZA Bank, Hong Kong’s digital banking institution, expressed optimism about the regulatory clarity. It believes the new legislation brings greater clarity and confidence to the stablecoin market, contributing positively to the long-term development of the industry.
Reform requirements for success
Morgan Stanley’s analysis suggests that successful yuan internationalisation requires more than technological innovation.
The analysts recommended that to expand the yuan’s global footprint, China must restore confidence in its long-term growth prospects through structural reforms – like overhauling social welfare, restructuring debt, revamping the tax system, and fostering a more pro-growth regulatory environment.
The research underscores the fact that while Hong Kong’s yuan stablecoin regulatory framework provides important infrastructure for digital currency experimentation, broader economic reforms remain essential for achieving Beijing’s internationalisation objectives.
As Hong Kong’s Stablecoins Ordinance takes effect in August 2025, market participants will monitor closely how yuan stablecoin Hong Kong initiatives develop in this new regulatory environment.
The territory’s role as a testing ground for China’s digital currency ambitions could provide valuable insights for both technological development and policy refinement.
(Photo by Andrew Jephson)
See also: JD.com targets Stablecoin licences to cut cross-border payment costs
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