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- Zhou Xiaochuan warns stablecoins could trigger chaos in China’s markets.
- Risks of speculation and weak oversight threaten financial system stability.
- China explores yuan-pegged stablecoin despite strict crypto trading ban.
China’s former central bank governor Zhou Xiaochuan has warned that stablecoins could destabilize the financial system if misused. According to the think tank CF40, he said excessive speculation and poor regulation may create risks that undermine financial stability. His warning comes as China’s State Council prepares to review a potential roadmap for a yuan-pegged stablecoin.
Zhou, the former governor of the People’s Bank of China (2002-2018), was sceptical about the necessity of stablecoins. He stated that China already has well-developed mobile payment systems based on QR code and NFC technology linked with banks. He further noted that CBCs have consolidated payment networks, such that new players have little opportunity to reduce costs.
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Fears of a multiplier effect
Zhou expressed objections to stablecoins, even regarding reserves. He argued that tokens may grow by lending, mortgages, and transactions, and become dangerous to other reserves. According to him, this so-called multiplier effect could increase a bank’s run many times more than the initial support.
He also noted risks associated with poor supervision. Issuers might issue tokens without proper reserve, and custodians might not conduct proper due diligence. Zhou emphasized that the prevailing rules in the United States and Hong Kong are not sufficient to contain such risks.
China’s consideration of stablecoins contrasts with its strict ban on cryptocurrency trading and mining. It has been reported that the move could be driven by the United States’ efforts to promote dollar stablecoins, enhancing the currency’s hold worldwide. The same is also developing in Japan and South Korea, forcing China to rethink its status.
Recently, Bloomberg has reported that Chinese regulators have directed brokers to halt marketing stablecoins at research and seminars. The demand message is that governmental officials are not yet ready to take any risks, even though they are examining the concept of a yuan-backed one.
Zhou’s caution highlights the risks of stablecoins in China. As debates continue, concerns about economic instability are in the limelight.
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