USDT has a negative premium, and holding stablecoins can still result in losses. How should we view this and what should we do?

Why Is the Renminbi Appreciating, and Why Is USDT Trading at a Discount?

To start, let’s examine why the Renminbi is currently on an appreciation trajectory. For this, we return to a core economic concept: GDP. While GDP has its shortcomings, it remains the most straightforward and effective metric for evaluating a nation’s overall economic health. The GDP formula is:

GDP = C + I + G + (X–M)

Where:

• C: Consumption Expenditure — Total spending by households and individuals on final goods and services.
• I: Investment Expenditure — Business capital formation (e.g., new equipment, factories) and residential construction.
• G: Government Expenditure — Government purchases of goods and services, excluding transfer payments.
• X–M: Net Exports — Exports (X) minus Imports (M).

With this framework, the reasons behind the Renminbi’s appreciation become clear. Three primary drivers stand out:

1. Attracting Foreign Capital and Increasing Investment

The first advantage of a stronger Renminbi is the rapid inflow of foreign capital. Both the US and China have recently faced significant debt issues. In the US, this is reflected in federal government debt, while in China, it’s seen in local government off-balance-sheet liabilities. US Treasury bonds are widely held by foreign investors and are highly liquid, so default risk quickly impacts bond prices and the US’s ability to refinance. As a result, the US often relies on dollar depreciation to reduce the real value of its debt to foreign creditors—essentially, an “inflation tax” through rate cuts and quantitative easing. In China, most local debt is held domestically, giving authorities more options for restructuring, such as extending maturities or using fiscal transfers. Therefore, the Renminbi faces less pressure from debt dynamics. However, in both countries, high debt levels limit the ability to boost GDP through increased government spending. In this context, Renminbi appreciation is a tool to attract capital inflows and support economic growth.

1. Stimulating Consumption and Reducing Import Costs

A stronger Renminbi makes imported goods more affordable for domestic consumers in two key ways. First, it increases consumers’ purchasing power, especially for essential goods like food and energy, which dominate total consumption. In the near term, shoppers will notice more imported products at lower prices. Second, companies benefit from reduced costs when importing raw materials or critical components, which boosts profit margins and frees up resources for expansion or dividend distribution.

1. Reducing Trade Tensions and Government Spending

Since China posted a trade surplus exceeding $1 trillion in November, international debate over the Renminbi’s valuation has intensified, leading to greater friction in trade negotiations with major partners, especially the EU. This occurs because, in aggregate, global current accounts must balance—one country’s exports are another’s imports. When China’s surplus rises, deficits in other countries increase. In today’s environment, every country is focused on economic growth, and a widening trade deficit weighs on GDP, especially in developed economies with low growth. There are two main responses: raising tariffs (trade protectionism) or adjusting exchange rates. The former, as seen in the US-China tariff dispute, is currently paused. Allowing the Renminbi to appreciate in a controlled manner helps alleviate political friction and reduces related government expenditures.

Despite these benefits, appreciation must be gradual and orderly. Recently, the Renminbi’s rise has been pronounced, partly because year-end growth targets have been met—5.2% through Q3, which essentially achieves the annual “around 5%” goal. Allowing some appreciation now helps position the economy for next year’s transformation, enabling policymakers to monitor market dynamics and identify opportunities and risks early. Otherwise, with substantial foreign reserves, the central bank could easily stabilize the exchange rate.

Looking ahead, I expect the pace of appreciation to slow significantly. Net exports remain a crucial driver of China’s GDP, even as their contribution narrows. Rapid appreciation would shrink net exports and complicate next year’s growth targets.

With the short-term appreciation drivers clarified, let’s turn to why USDT is trading at a discount. Three main reasons stand out:

1. Continued weakness in the crypto market, a lack of attractive investment opportunities, and portfolio rebalancing by investors.
2. Year-end settlement demand from international trade businesses. Restrictions on onshore Renminbi conversions mean many small and mid-sized firms use USDT for cross-border settlements, bypassing quota limits and reducing costs.
3. Recent tightening of Chinese government policy on stablecoins has increased investment risk premiums in crypto, prompting capital to seek safer options.

In summary, the USDT discount is likely temporary, driven by short-term supply-demand shifts. However, sustained Renminbi strength will result in exchange rate losses for Renminbi-based investors over the short and medium term.

Should You Convert USD Stablecoins to Renminbi?

Given the Renminbi’s appreciation, should you convert USD stablecoins to Renminbi to avoid FX losses? Unless your portfolio is heavily concentrated in USD stablecoins, a moderate adjustment is sufficient; otherwise, maintaining a diversified allocation is prudent. Here are three reasons:

1. Short-term USDT discount: As discussed, the current USDT discount is a short-term phenomenon, not a structural risk. Converting now could lock in FX losses. It’s better to wait for the discount to normalize before making any adjustments.
2. Opportunity cost: While China’s economic fundamentals remain resilient, challenges persist—notably the loss of wealth effects from declining real estate prices. Policy is focused on stability, deleveraging, industrial restructuring, and redistribution. Recent gains in the Chinese stock market look more like a valuation correction or speculative rally than a clear signal of long-term growth. Meanwhile, falling Renminbi government bond yields increase the opportunity cost of reallocating assets. Stablecoins offer flexibility for global asset allocation, especially as the US enters a rate-cutting cycle with abundant liquidity.
3. Uncertainty in Renminbi appreciation: The US-China tariff truce is only temporary. The US, entering its midterm election cycle and unable to counter China’s rare earth leverage, has paused escalation for now. However, the tariff battle could resume, especially if US goals for reshoring manufacturing are unmet, which would impact the Renminbi exchange rate.

On-Chain Hedging for FX Risk: Gold and Euro Stablecoins

How can you hedge Renminbi appreciation and FX risk on-chain? While FX derivatives would be the standard solution, on-chain access remains limited. Last year, I considered building a decentralized FX derivatives platform, but market research showed competitors, like DYDX’s foreign derivatives section, faced shallow liquidity and little market-maker interest—mainly due to regulatory constraints. FX controls are a key policy tool in manufacturing economies like China and South Korea, so FX derivatives face even stricter oversight than crypto. Most demand for FX hedging comes from these jurisdictions, which heightens regulatory resistance.

Still, there are ways to mitigate FX risk. Three asset classes are worth monitoring:

• HKD, JPY, and KRW Stablecoins: After US stablecoin legislation passed mid-year, other countries accelerated their own stablecoin initiatives. The Hong Kong dollar’s unique status and the industrial similarities among East Asian nations suggest their exchange rates will trend together. Allocating to these stablecoins could partially offset Renminbi appreciation risk. However, recent concerns over FX controls have slowed progress, so it’s best to monitor developments and act when mature products emerge.
• On-Chain Gold RWAs: Gold has posted remarkable gains in recent years, driven by geopolitical uncertainty and expectations of dollar depreciation. On-chain investors can readily access gold RWA tokens like Tether Gold and Pax Gold, which offer solid liquidity. However, concerns about a gold bubble remain, and recent volatility highlights a delicate market balance. For risk-averse investors who haven’t already positioned, waiting may be the safer choice.
• Euro Stablecoins: Of these options, euro stablecoins are the most compelling. Circle’s EURC is fully compliant, has a large circulating supply, and offers strong liquidity. The EUR/RMB exchange rate is also less volatile than USD/RMB for several reasons:

China’s top export destinations are ASEAN, the EU, and the US. Trade war pressures have reduced exports to the US, making the EU and ASEAN the main drivers of incremental growth.

ASEAN, composed largely of fast-growing developing economies, absorbs much of China’s low- and mid-end product exports and investment, and imports significant industrial equipment for upgrading. The overall economic effect is positive, and China’s growing military power has helped reduce political friction, resulting in a more stable relationship.

The EU story is different. China’s exports to the EU are more heavily weighted toward high-margin industrial goods, making Europe a key market for stablecoin trade surpluses. Most trade is settled in euros, and China has an incentive to maintain a competitive exchange rate. However, political friction with the EU must also be managed. Most EU countries are developed economies with a high share of manufacturing in GDP (15% in Europe vs. less than 10% in the US). Wage income is a larger portion of household earnings than capital gains. The loss of Russian energy has raised costs and hit manufacturing, while China’s industrial upgrading has disrupted key sectors like autos. Lower industrial profits have led to lower tax revenues and slower wage growth, reducing the wealth effect and dampening consumption. On the investment side, a lack of quality AI projects has pushed European capital to the US. As a result, net exports are even more important for European growth, and governments are highly sensitive to trade deficits.

Despite this, the EU lacks the leverage the US has shown in trade disputes, and member states are divided in their approach to China, making it difficult to secure major concessions. As a result, I expect the focus to shift toward reinvesting euro profits in Europe rather than large-scale exchange rate adjustments. Compared to emerging markets like India, Vietnam, or Brazil, Europe offers more developed capital markets and stronger investor protections. China’s ample reserves allow for reinvestment to boost returns, and stable exchange rates help Chinese goods remain competitive.

For on-chain FX hedging, a practical strategy is to convert USD stablecoins to EURC and deposit them on leading protocols like AAVE, where current lending rates reach 3.87%. If you want to maintain exposure to risk assets like BTC while hedging FX risk, you can use EURC as collateral to borrow USD stablecoins and allocate into assets like BTC.

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