Morgan Stanley suggests China could use Hong Kong as a sandbox to pilot yuan-pegged stablecoins and expand the international use of its digital currency, leveraging Hong Kong’s new regulatory regime for stablecoins effective August 1 and its large offshore yuan liquidity pool. The appeal of stablecoins lies in enabling faster, cheaper cross-border payments, which could support multinational operations and raise the yuan’s global profile. However, despite Beijing’s rollout of cross-border infrastructure, the yuan’s share of global reserves fell from 2.8% in 2022 to 2.2% in 2024 amid economic concerns like debt, deflation, and demographic challenges. Morgan Stanley stresses that for the yuan to gain traction internationally, China must pursue structural reforms including debt restructuring, tax reform, and pro-growth regulation. While China once banned crypto transactions, it is now exploring technologies like blockchain and stablecoins to modernise its payment systems. Backed by Beijing, Hong Kong is pushing to become a stablecoin hub, with its sandbox—launched in March 2024—allowing firms like JD.com’s fintech arm to test yuan-pegged stablecoins and related technologies under regulatory oversight.