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The Challenges of Expanding the Use of the CNH Currency Are Formidable
The best thing for U.S. dollar dominance has been the emergence of crypto, specifically stablecoins. The $156 billion stablecoin sector is almost entirely dollar-denominated. As stablecoins become an instrument of international trade, all this has done is reinforce dollar hegemony over a new part of the global economy.
Beijing is perpetually annoyed by the dollar dominance of the global economy as this means U.S rules reign supreme. A recent episode with Huawei, exports to Iran and a dollar-denominated loan come to mind.
But can a solution be found in a stablecoin based on the CNH, a version of China’s currency designed exclusively for offshore use? While theoretically intriguing, widening the use of CNH would be difficult.
Capital controls and stablecoins
Given China’s country’s capital controls, where only $50,000 in foreign currency can be bought per entity, there’s demand for tether (USDT) and USDC from anyone that needs to send a significant amount of capital outside the country.
Despite the difficulty capital controls create for international business in China, it’s still a pillar of the People’s Bank of China’s (PBoC) fiscal policy because of the stability it creates for the yuan. A currency that’s not freely convertible is more stable because it’s not exposed to the same market forces as freely convertible currencies like the U.S. dollar, euro, Canadian dollar or Japanese yen.
But this means that despite China’s status as the world’s second-largest economy, and arguably the most important, the yuan’s global share isn’t proportional to this status. Given that it can’t be used offshore, the yuan only accounts for around 2% of global payments.
At the same time, Beijing wanted a way to access foreign capital while maintaining the capital controls on the yuan. So in 2010, it launched the CNH, an “offshore” version of the Chinese yuan initially offered in Hong Kong but later in Singapore and Luxembourg, to spearhead the “Dim Sum” bond market – yuan-denominated bonds issued by domestic Chinese firms that are designed to exist outside China’s capital controls to attract international capital.
Remember that the CNH isn’t a real currency; there’s not really a use for it outside buying and trading “dim sum” bonds.
Making a stablecoin from this currency, as CNH coin proposes, is going to be difficult. The entire market cap of the dim sum bond market, the primary use case for CNH, has a market cap of just over 80 billion which is around the same size as USDT at its peak.
In the end, there might not be enough CNH in issuance to create a stablecoin that’s a serious challenger. This isn’t a problem unique to the CNH, as attempts to create a stablecoin from the Singapore dollar have also run into the wall of supply.
