Yesterday a political proposal was made in China for a “Cross-Border Digital Stable Currency in Hong Kong”. The concept has some similarities to the Libra digital currency in that it proposes a basket currency made up of the Chinese renminbi, Japanese yen, Korean won and Hong Kong dollar, according to a report from ChainNews. The purpose would be for cross border trade, initially in a Hong Kong regulatory sandbox. An indirect effect would be the reduction in the use of the U.S. dollar.
Like the Libra digital currency, it would involve a reserve system to safeguard the funds. It’s intended that the stablecoin be private, but supervised by the People’s Bank of China and the HKMA.
Yesterday saw the start of the Chinese People’s Political Consultative Conference (CPPCC), which is a political advisory body that convenes once a year and is made up of Communist Party members and other influential people. Some portray it as an advisory upper house.
The proposal was sponsored by Shen Nanpeng (also known as Neil Shen), who is the founding and managing partner of Sequoia Capital in China. He’s also on the National Committee of the CPPCC. The original stablecoin idea came from Chen Delin, the former president of the Hong Kong Monetary Authority (HKMA).
The stablecoin benefits are seen as reducing exchange rate risk, improving the efficiency of cross border settlements, and providing a test scenario for cross border payments for China’s central bank digital currency, the DC/EP.
A key point not mentioned directly is that the Asian stablecoin would reduce the usage of the U.S. dollar. A recent study showed that almost 50% of Japanese exports to Asia were denominated in the U.S. dollar as of 2018. Most of the balance was in Japanese yen. In 2017, just 8.6% of Japanese exports to Korea were in won and 12.6% of exports to China were in renminbi.
Based on World Bank figures, together the three countries accounted for 23.5% of 2018 global GDP (20.6% adjusted for PPP).
A quick analysis raises three questions. Firstly, there’s ongoing investment in the Guangdong Hong Kong Macao Greater Bay Area initiative for cross-border trade. Could this be seen as fragmentation?
Furthermore, would the endorsement of a private stablecoin project be viewed as supporting stablecoins in general? However, this might be positioned more as a ‘wholesale’ or institutional stablecoin.
Finally, there has been a stop-start initiative to create a China-Japan-Korea Free Trade Zone, and the stablecoin is seen as part of it. But the project commenced in 2012, and eight years on the Free Trade Zone hasn’t yet happened. Plus the recent Japan South Korea trade dispute doesn’t help matters.
The Hong Kong Monetary Authority does have some experience in this area. For example, in January, it conducted a joint CBDC experiment with the Bank of Thailand. And in terms of trade, it initiated the eTradeConnect trade finance platform, which has a link to we.trade. Late last year eTradeConnect announced an integration with the Bay Area Trade Finance Platform, which was founded by China’s central bank. As of six months ago, the Bay Area platform had processed $10 billion in trades.