How a Chinese Stablecoin Is Changing the Way the World Trades

China is now the largest trading partner of most countries in the world, which are buying more products from China than from any other nation. China has also become a major destination for products from those countries.

Historically, the vast majority of cross-border B2B and B2C trades have been settled predominantly in U.S. dollars (USD). However, recent trends indicate more and more trades are settled in Chinese yuan (CNY) – more specifically in offshore Chinese yuan (CNH). These free-floating reserves of Chinese yuan (also known as renminbi) are traded in offshore centers including Hong Kong, Singapore, London and Luxembourg. Last year there was a 76% increase in the value of transactions handled in the Chinese currency to RMB 80 trillion (around US$12.5 trillion) while the number of transactions increased by 51.5% to 3.34 million transactions.

A report by the International Monetary Fund in March 2022 noted the “stealth erosion” of the dollar’s dominance as a currency reserve. In the past decade, various countries have started to gradually shift away from it, and some of them have already implemented local currency settlements for bilateral trades. It is not a coincidence the yuan has appreciated against the dollar by more than 12% since September 2019 and continues to offer higher, real yields as well as a range of attractive investment opportunities, as reported by the Asian Times in April 2022. Exposure to CHN is also a part of a safe asset diversification strategy for investors looking for dynamic new alternatives. For residents of emerging/underdeveloped economies where inflation is rampant, it’s a powerful tool to hedge against the depreciation of the local currency.

In parallel with this move away from the U.S. dollar and toward the offshore Chinese yuan as a settlement currency, there are strong forces at work accelerating a global trend of moving away from SWIFT transfers by traditional banks and toward innovative cryptocurrency transfers.

However, the use of cryptocurrencies to settle trades or to invest has been hampered by price volatility. The inherent risk of price fluctuation with traditional cryptocurrencies can be circumvented by using stablecoins pegged to a fiat currency.

CNHC is one of these stablecoins, and it is increasingly being used by exporters and importers to settle their transactions with China. It is backed 1:1 by offshore CNH deposits held by a custodian bank in Singapore.

CNHC facilitates B2B/B2C cross-border trade settlement with slashed forex costs and 24/7 availability. Transactions are compliant and traceable. Most importantly, users do not need a RMB-denominated bank account to hold and trade CNH.

CNHC is already used by hundreds of companies in Asia, Africa and Latin America to settle international trade. By the end of 2021, the total monthly transaction volume of CNHC had reached CNH 200 million.

Earlier this year, the Hoover Institution in Washington, D.C., a distinguished American think-tank, released a report titled “Digital Currencies – The US, China and the World at a Crossroads.” In this report, the Institute specifically mentioned CNHC and how it is gaining traction both from its end users but also from a policy standpoint within the Chinese government. The report noted, “... China’s government could leave an open door for yuanization with RMB stablecoins such as CNHC. This could potentially set up a proxy competition in some emerging-market economies between US dollars and RMB stablecoins.”

The way that global trade is being settled is evolving at an accelerated pace. Small and mid-sized enterprises (SME) are frustrated with high costs, long delays and politics dragging down their activities. They are looking for a new way to transact without being held hostage by geopolitical interests or sky-high fees by traditional payment services providers. Stablecoins such as CHNC not only offer new ways to diversify portfolios and manage liquidity; they are also the future way to settle cross-border trade. The high rate of adoption of CNHC for trading purposes shows this future is rapidly becoming reality.