How many stablecoins does Hong Kong need?

The Hong Kong "Stablecoin Regulation" will take effect on August 1, 2025, and will begin accepting license applications from fiat-backed stablecoin issuers, with the first batch of licenses expected to be distributed in early 2026. According to data from the Monetary Authority, as of the end of August, up to 77 applications of intent have been received, with the first round of applications closing on September 30, indicating that the process for the Hong Kong stablecoin license is progressing in an orderly manner.

Recently, there have been differing opinions regarding Hong Kong stablecoins. From the perspective of the China-U.S. rivalry, it seems unlikely to abandon the new opportunities for the on-chain development of the Hong Kong dollar and offshore RMB stablecoins. Offshore RMB stablecoins may also help promote the internationalization of the RMB, while driving the increase in the scale of offshore RMB bonds. Based on compliance, effective regulation, and controllable risks, the implementation of Hong Kong dollar and offshore RMB stablecoins may still be the regulatory authorities' wish.

We expect that after the first issuance of stablecoin licenses in Hong Kong early next year, the focus will primarily be on testing the Hong Kong dollar stablecoin, while the issuance of the offshore renminbi stablecoin may require some time for preparation, including expanding the scale of the offshore renminbi bond market.

· The Hong Kong Monetary Authority's requirements for stablecoin application scenarios focus on whether they can fulfill a "real and beneficial function in the financial system." We assume that the HKD stablecoin will mainly be used for cross-border trade settlement in Hong Kong, with a total trade volume of 1.2 trillion USD in 2024. Assuming 5% will be settled using the HKD stablecoin, the amount would exceed 60 billion USD. If we assume the circulation speed of the HKD stablecoin is 6, then the demand for the HKD stablecoin brought about solely by trade settlement would be 10 billion USD.

· Using the same logic, China's total trade volume in 2024 will be 6.2 trillion USD, a 5% penetration rate, and a circulation speed of around 6, which means the demand for trade settlement in RMB stablecoins will exceed 50 billion USD.

The above may represent a lower limit of the market's reasonable demand for Hong Kong Dollar and Renminbi stablecoins, which does not include the demand for Hong Kong Dollar and Renminbi stablecoins from cryptocurrency asset trading or even the tokenization of real-world assets. However, in terms of supply capability, the supply of Hong Kong Dollar stablecoins can basically meet the demand; but the supply capability of Renminbi stablecoins is severely lacking.

· According to the data from the Monetary Authority, as of 2024, the outstanding balance of Hong Kong dollar bonds is 153.7 billion USD. After deducting 114.2 billion USD of corporate bonds, the balance of Hong Kong government bonds is about 40 billion USD, corresponding to a demand for 10 billion USD of Hong Kong dollar stablecoins, resulting in a coverage ratio of less than 4 (considering that not all of the 40 billion government bonds will be short-term bonds, and the reserve assets behind the stablecoins are mainly short-term government bonds);

· In contrast, the supply situation of offshore Renminbi stablecoins will be mainly constrained by the low scale of offshore Renminbi government bonds in Hong Kong. According to the data from the Monetary Authority, as of 2024, offshore Renminbi government bonds are less than 50 billion USD, while the calculated demand for Renminbi stablecoins driven solely by trade settlement needs would amount to 50 billion USD. The underdeveloped offshore Renminbi bond market will become the biggest bottleneck restricting the development of offshore Renminbi stablecoins.

Looking ahead, the development path of stablecoins in Hong Kong may be that licenses will be issued early next year. Under the premise of compliance and effective regulation, the Hong Kong dollar stablecoin will take the lead in expanding its scale. The issuance of offshore RMB government bonds (including central bank bills) may increase, and the scale of RMB swaps may also increase to enhance the offshore RMB stock. After making these relevant preparations, the offshore RMB stablecoin may truly scale up.

Chart 1: Hong Kong Dollar Bond Size and Offshore Renminbi Bond Size