Capital flight risks test China's plan to disrupt dollar stablecoins' dominance

China wants to roll out its first stablecoins to push the renminbi into more global markets and challenge the dominance of the US dollar. But behind the scenes, officials are worried that this very move could backfire by triggering capital flight.

The country’s financial system isn’t built to handle rapid money movement, especially not through blockchain rails that they can’t fully control.

The plan is being tested in Hong Kong, where crypto isn’t banned like it is in mainland China. A new law now lets licensed firms issue tokens tied to fiat currencies, but don’t expect a flood of new projects overnight. The Hong Kong Monetary Authority (HKMA) has said only a “handful” of licences will be issued in the first wave, starting next year.

Beijing struggles to balance power and decentralization

Beijing sees stablecoins as a way to chip away at dollar dominance, as officials have been watching the rise of dollar-backed tokens like USDT and USDC, and they don’t like what they’re seeing. These coins are now baked into the global financial system, and China’s policymakers don’t want to get left behind.

Pan Gongsheng, China’s central bank governor, said in a speech in June that stablecoins have “fundamentally reshaped the traditional payment landscape.”

In the last two months, Chinese regulators have quietly brought in industry contributors to discuss how the country can get involved. One person in the room allegedly told Financial Times that regulators made it clear: any stablecoin in China must match the country’s “national conditions”.

That same person said a central banker at the meetings kept hammering on capital outflows. If people start using stablecoins to move money out of China, the system could crack. And that’s the big fear: letting blockchain into the economy might mean losing grip on where the money goes.

Hong Kong takes cautious steps while pressure builds

Meanwhile, Hong Kong is moving, but carefully. The HKMA is building what it calls a “stablecoin sandbox”, a test run for licensed projects. But this isn’t a free-for-all. Officials made clear in a press conference that they’re worried about “market speculation and exuberance”. They also flagged money laundering risks.

Behind the scenes, the HKMA is being just as strict. FT claims applicants were grilled on everything; from use cases, reserve systems, and even legal dispute plans. No detail was too small.

According to Paul Tang, who runs the Hong Kong Money Service Operators Association, the first wave of stablecoins will mostly focus on business-to-business uses. No retail rollout for now. “HKMA’s priority is stability and control at launch,” he said.

Still, some big players are circling. State-owned enterprises linked to China have started showing “quite a bit of interest,” said Chen Lin, who leads the Center for Financial Innovation at the University of Hong Kong. Many of them want to apply for licences, especially those with Hong Kong operations.

But out of the four big Chinese state-owned banks, only one is expected to get the green light from the HKMA… at least in the beginning.

HKMA hasn’t ruled out allowing stablecoins backed by offshore renminbi, and that could be a game changer. China has been trying for years to push its currency into more cross-border transactions, but traditional systems like Swift are dominated by the West. Stablecoins could help China bypass that. But again, the concern is what happens when the money flows too easily.

“It’s quite challenging to compete with the US dollar-backed stablecoin system,” said Lin. “Certainly Hong Kong is making its own efforts, but there’s still a long way to go.”

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