The appreciation channel of the Renminbi has led to a negative premium in USDT, but investors do not need to panic excessively. It is recommended to maintain an appropriate proportion of stablecoin assets, which can be hedged through on-chain exchange rate strategies, such as allocating to euro stablecoins or gold RWA, to moderately avoid exchange losses. This article is based on an original piece by @Web3Mario, organized, compiled, and written by Foresight News.
(Previous summary: USDT exits, EURC fills the gap, euro stablecoins surge over 170% against the trend)
(Additional background: China’s crypto market panic selling USDT at a 1.5% negative premium against the RMB, bear market, regulatory flight?)

Table of Contents

• Why is the Renminbi entering an appreciation channel, and why does USDT show a negative premium?
• Should we convert USD stablecoins back to RMB?
• How to hedge exchange rate losses through on-chain strategies, gold, and euro stablecoins

Summary:

Hello everyone, long time no see. Sorry for the delay; I have been working on designing and developing an AI product for the past three months. Honestly, changing direction is not easy; any innovation must be built on clear industry boundaries before making incremental improvements beyond them. This requires acquiring a lot of preliminary knowledge in AI. Now that the product is preliminarily complete, I have more time to discuss macroeconomic environments and Web3 observations with you. Today, I want to talk about an interesting topic: with USDT at a negative premium and the RMB continuously strengthening, how should we view and respond? Overall, I believe there is no need to panic excessively. When building your investment portfolio, it is still wise to keep a certain proportion of stablecoin assets. However, you can also use on-chain exchange rate hedging strategies to appropriately avoid some exchange losses.

Why is the Renminbi entering an appreciation channel, and why does USDT show a negative premium?

First, I want to discuss why the RMB is currently entering an appreciation phase. To understand this, let’s revisit a fundamental economic concept: GDP. Although GDP has some shortcomings, it remains the simplest and most effective indicator for assessing a country’s overall economic condition. 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 (new equipment, factories, etc.) 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 simple formula in mind, the reasons for RMB appreciation become clearer, mainly in three points:

1. Attracting foreign investment and boosting investment expenditure

The first benefit of RMB appreciation is its rapid attraction of foreign capital inflows. We know that in recent times, both China and the US face similar issues—debt problems. The US’s issue is explicit federal debt, i.e., national bonds, while China’s is implicit local government debt. Since US Treasury bonds are tradable and foreign investors hold a significant share, debt pressure is higher because default risks are quickly reflected in bond prices via the secondary market, affecting the US’s refinancing ability. Therefore, only through dollar depreciation can the dollar-denominated debt’s real value to foreign creditors decrease—this is a form of “inflation tax,” reducing the nominal debt’s real value. The usual methods are lowering interest rates and quantitative easing. China’s local debt is mostly domestic, held by commercial banks or domestic investors, and can be alleviated through methods like debt rollover or transfer payments, so RMB exchange rate pressure from debt issues is less. However, this debt issue impacts both countries by limiting government borrowing capacity—meaning that expanding government spending to boost GDP becomes more difficult. During this phase, RMB appreciation can help attract capital back, stimulating the economy.

2. Boost consumption and increase consumer spending

Another benefit of RMB appreciation is that it makes imported foreign goods cheaper for domestic investors, which has two effects: first, it increases the purchasing power of ordinary consumers for consumption and investment, especially in essential goods like food and energy. In the near future, most people will see more imported products on supermarket shelves at lower prices. Second, it reduces costs for enterprises importing raw materials or key components, increasing profit margins and enabling more capital for expansion and profit sharing.

3. Easing political friction from international trade and reducing government expenditure

Since China’s trade surplus exceeded $1 trillion in November, there has been increased discussion about RMB undervaluation. China’s trade negotiations with major export countries, especially the EU, have become more frictional. Why is this?

Theoretically, in international trade accounts, the sum of global current accounts should be zero, as a country’s exports are another’s imports, and income/transfer payments are reciprocally linked. When trade surpluses hit new highs, it implies that some net importing countries’ deficits are also rising. In the current macro environment, countries prioritize economic stimulation, so expanding trade deficits can drag down GDP growth—especially for developed countries already experiencing low growth. Small fluctuations in data can significantly impact GDP growth. To address trade deficits, two main strategies are used: first, protectionism via tariffs; second, adjusting exchange rates. The trade war between China and the US has temporarily paused tariffs, and RMB appreciation can help quickly ease trade frictions and reduce political conflicts, thus lowering government spending.

Although RMB appreciation offers these benefits, it must be stable and orderly, not too rapid. Recently, RMB has appreciated notably fast, partly because, by year-end, the economic growth target for the first three quarters (5.2%) has been largely achieved against the full-year target (~5%). Allowing moderate appreciation can help prepare for next year’s economic transformation, monitor market developments, and identify opportunities and risks early. Otherwise, with large foreign exchange reserves, the central bank can more easily stabilize the exchange rate.

I believe that next year, the pace of RMB appreciation will slow significantly. The reason is straightforward: although China’s net export contribution to GDP is converging, it remains crucial. If RMB appreciates too quickly, net exports will shrink rapidly, putting pressure on next year’s economic growth targets.

Having clarified the short-term reasons for RMB appreciation, let’s discuss why USDT shows a negative premium. I believe there are three main reasons:

1. The crypto market remains sluggish, lacking attractive investment targets, prompting investors to reconfigure their portfolios.

2. At year-end, many international trade companies experience concentrated currency conversions, increasing demand to exchange USD for RMB. We know that onshore RMB exchange quotas are limited. Therefore, many small and medium enterprises engaged in international trade or overseas operations choose to use USDT for currency conversion, which can bypass quota restrictions and is more convenient and cost-effective.

3. The Chinese government has recently tightened policies on stablecoins, increasing the risk premium for crypto investments, which triggers risk aversion among capital.

In summary, I believe the negative premium of USDT will not last long. This situation is mainly driven by short-term supply and demand changes. However, the RMB’s short- to medium-term strength will inevitably cause RMB-based investors to bear some exchange rate losses.

Should we convert USD stablecoins back to RMB?

Since the RMB is entering an appreciation phase, should we convert USD stablecoins back to RMB to avoid exchange losses? I think, unless your portfolio has an excessively high proportion of USD stablecoins, you can adjust accordingly. Otherwise, maintaining a certain proportion of assets is still advisable. Reasons include:

1. Short-term USDT negative premium and exchange losses: As previously explained, I believe this negative premium is a short-term phenomenon rather than a structural risk. Prematurely converting now could incur significant exchange losses. Therefore, even if adjusting the portfolio, it’s better to wait until the negative premium mean reverts before acting.

2. Opportunity cost: While China’s overall economic fundamentals show resilience, challenges remain—particularly the wealth effect loss from declining real estate prices. Under this context, economic policies focus on stability, debt resolution, industrial restructuring, and redistribution. Although the Chinese stock market has recently rallied, I see it as valuation recovery or speculation rather than a clear positive environment for long-term growth. Additionally, RMB government bond yields continue to decline, increasing the opportunity cost of such operations. Holding stablecoins offers more flexibility for global asset allocation, especially in a US interest rate cut cycle with ample liquidity.

3. Uncertainty of RMB appreciation: US-China tariff tensions are not permanently resolved; they are only paused for a year. The US cannot respond to rare earths immediately and is entering a midterm election cycle, which may lead to a temporary pause and internal consolidation. However, this does not mean tariffs won’t reignite. Past analyses of Trump’s policies suggest that before key manufacturing industries return, tariffs could resurface, significantly impacting the RMB exchange rate.

How to hedge exchange rate losses through on-chain strategies, gold, and euro stablecoins?

Given these strategies, how can we appropriately hedge RMB appreciation-driven exchange rate losses? Naturally, one might think of using derivatives to hedge RMB appreciation. However, implementing this on-chain is very challenging. Early last year, I considered building a decentralized exchange rate derivatives platform to preemptively address this need. But research showed that related competitors, like DYDX’s Foreign derivatives, have shallow order books and low liquidity, indicating limited market interest from market makers. The main reason is regulatory pressure—exchange rate controls are a key tool for manufacturing countries like China and Korea. Compared to crypto investments, currency derivatives face higher regulatory hurdles, and investors with hedging needs are mostly from these countries, making resistance high.

However, this does not mean hedging is impossible. I believe the following three asset classes are worth attention:

Hong Kong, Japanese, and Korean stablecoins: In mid-year, amid US legislation on stablecoins, many countries launched their own stablecoin issuance. Due to Hong Kong’s special status and the overlapping industrial structures in East Asia, exchange rate trends tend to converge. Investing in these stablecoins can somewhat mitigate RMB appreciation effects, but recent concerns over regulatory tightening mean we should stay alert and wait for mature products before allocating.

On-chain gold RWA: Gold prices have surged in recent years, driven by geopolitical uncertainties and dollar depreciation expectations. For on-chain investors, buying gold RWA tokens is relatively easy and liquid, such as Tether Gold and Pax Gold. However, debates about gold bubbles persist. Recent volatile movements in precious metals suggest the market is in a delicate game. For low-risk investors without early deployment, it’s safer to stay on the sidelines for now.

Euro stablecoins: I believe euro stablecoins are the most promising among these three asset classes. First, Circle’s compliant euro stablecoin EURC has a large issuance volume and good liquidity. Second, I think EUR/USD exchange rate fluctuations are generally milder than USD/RMB.
Looking at China’s export data, the top three destinations are ASEAN, the EU, and the US. Due to trade tensions, exports to the US have declined significantly, but the EU and ASEAN remain key contributors.

ASEAN mainly consists of developing countries with high growth, so net export impacts are somewhat offset by other indicators. ASEAN has absorbed many of China’s low- and mid-end product transfers and investments, with a large portion of imports related to industrial upgrades, machinery, and industrial goods, generally having a positive impact on the economy. Politically, China’s military rise also constrains relations. As a result, China and ASEAN show signs of convergence in political friction.

However, the story with the EU is different. China’s exports to the EU are more industrial manufactured goods, which tend to have higher profit margins than other markets like ASEAN. Therefore, Europe is an important market for China’s stablecoin trade surpluses. Trade settlement between China and Europe is mainly in euros, and to enhance the influence of Chinese goods in this market, the RMB/EUR exchange rate is likely to be kept at a lower level.

Of course, exchange rate risks also involve resolving political frictions with the EU. Since most EU countries are developed economies with manufacturing accounting for a higher share of GDP (Europe’s manufacturing accounts for about 15%, US less than 10%), the main income for ordinary Europeans comes from wages, which are more significant relative to capital gains from investments. Recently, due to the loss of cheap Russian energy, costs have risen, impacting manufacturing, especially with China’s industrial upgrades affecting key sectors like automotive. This leads to declining overall industry profits, which in turn reduces government tax revenue and slows wage growth. The former can tighten fiscal policy, affecting Europe’s high welfare model. Both factors lower household wealth effects and consumption. In terms of investment, Europe has lost its capital competitiveness in AI, with most capital flowing to the US AI market for higher returns. Consequently, investment outlook is also cautious. Based on this, the impact of net exports on the economy is amplified, and European governments are more aggressive about trade deficits.

However, I believe the EU currently does not have the strategic leverage in trade negotiations with China that the US demonstrated in the tariff war. Attitudes among EU countries vary—Hungary, Spain, and others have different stances—making it difficult to negotiate more favorable terms. Therefore, I think the ultimate approach will not be large-scale exchange rate adjustments for trade rebalancing but rather cooperation based on euro-based profit-sharing and investment agreements. On one hand, compared to other emerging markets like India, Vietnam, and Brazil, Europe’s capital market system is more mature and better at protecting investments. China’s ample foreign exchange reserves can be reinvested to boost profits. On the other hand, maintaining a stable exchange rate helps Chinese goods remain competitive in Europe.

Returning to the exchange rate hedging strategy, I think a practical approach is to convert USD stablecoins into EURC, then deposit them into leading platforms like AAVE to earn interest—current utilization rates offer around 3.87%, which is quite attractive. If you want to maintain positions in risk assets like BTC while hedging exchange rate risk, you can use EURC as collateral to borrow USD stablecoins and then allocate assets, such as purchasing BTC.