Hong Kong dollar stablecoins could become a key link between China’s digital yuan and top global digital assets, potentially transforming cross-border investment and accelerating yuan internationalisation, according to Morgan Stanley. Local currency-backed stablecoins could provide a pathway for mainland China’s e-CNY – the country’s only legal digital currency backed by the government – to gain a foothold globally while advancing Beijing’s drive to internationalise its currency and counter US dollar dominance, Laura Wang, the bank’s chief China equity strategist, said in a written interview last week. Hong Kong’s stablecoin ordinance, which took effect at the beginning of the month, allows for real-time, low-cost transactions and is designed to support cross-border use. The e-CNY is backed by the People’s Bank of China and is undergoing a pilot scheme for cross-border payments in Hong Kong. “In theory, HKD stablecoins could act as a bridge between e-CNY and global digital assets,” said Wang. International investors could convert the world’s largest stablecoins, USDT and USDC, into Hong Kong dollar stablecoins and then into e-CNY, and invest in Hong Kong-listed assets or tokenised securities, she added. “This creates a pathway for [yuan]-linked capital flows without violating mainland capital controls,” she said. “It also supports [the yuan] internationalisation through offshore channels.” Hong Kong-dollar stablecoins have emerged as a top candidate to integrate with e-CNY, as they provide a combination of regulatory compliance, technological infrastructure and alignment with China’s monetary policy, Wang said. This was especially the case when the issuance of stablecoins pegged to offshore yuan, or CNH, remained uncertain due to “liquidity constraints, limited reserve asset options and policy ambiguity”, she added. To be sure, the overall interoperability between the state-backed e-CNY and privately issued stablecoins remains uncertain, and it was too early to assume seamless conversion between stablecoins of different currencies, Wang said. The Morgan Stanley strategist said these assumptions hinged on the absence of additional regulatory restrictions. “Given the historically tight controls over capital flows into and out of onshore markets, and the mainland government’s ongoing ban on cryptocurrencies, the regulatory outlook remains uncertain,” she said. Still, Hong Kong’s sandbox model and dual-track framework – allowing both the Chinese sovereign digital currency and CNH-pegged stablecoins issued by licensed firms – made it “one of the most promising venues” for exploring the convergence, Wang added. The world is rushing to take advantage of the capabilities of stablecoin, such as real-time settlement, lower transaction costs and 24/7 operability, to address pain points in financial market investment activities, particularly cross-border trades, which are often expensive and prolonged. With Hong Kong’s new law paving the way for stablecoins, the city could strengthen its role as a global financial hub and a key intermediary in trade finance between China and international markets, Wang said. Stablecoins, combined with e-CNY and platforms like mBridge, a multi-country central bank digital currency project involving Hong Kong and mainland China, could form a decentralised, blockchain-based alternative for transactions that rely on traditional financial messaging systems like Swift, according to Wang. “This shift has major implications for financial sovereignty.” The diversification away from US dollar assets and financial infrastructure comes amid the broader weakening of the US dollar this year, and the renewed discussion about how the US uses its currency dominance to impose sanctions. Meanwhile, Beijing has deepened regional cooperation that helps raise the yuan’s share in foreign trade transactions while increasing the attractiveness of yuan-based payments. In Hong Kong’s capital markets, stablecoins could help unlock new liquidity channels and facilitate cross-border investment flows. “As stablecoin adoption grows, we expect more international investors to engage with Hong Kong’s capital markets, especially through tokenised securities and digital asset platforms,” said Wang. Stablecoins would enable instant settlement rather than the usual two-day process, cutting counterparty risk and boosting efficiency – key benefits for high-frequency trading, structured products and margin management, she noted. They would also streamline fiat conversions and programmable payments, helping investors overcome foreign exchange and capital controls in emerging markets. Wang said fintech and brokerage platforms integrating stablecoin features were gaining momentum, offering new revenue streams, higher margins and growing investor appeal despite broader market volatility. The city’s financial regulators have issued multiple warnings against speculative bets related to stablecoin activities as some listed companies’ stock prices and trading volumes surged simply because they claimed an intention to develop stablecoin operations. Investors should focus on firms with strong blockchain expertise, regulatory participation and capabilities in stablecoin issuance, custody or tokenised asset trading, while remaining mindful of early-stage risks, Wang added.