Opinion: USDT Negative Premium, Holding Stablecoins Still Losing Money — How Should We View and Address This?

Author: @Web3Mario

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Why the Renminbi is entering an appreciation phase, and why USDT is showing a negative premium

First, I would like to discuss why the Renminbi is currently entering an appreciation phase. To understand this, let’s revisit a fundamental economic concept: GDP. Generally speaking, although the GDP indicator has some shortcomings, it remains the simplest and most effective measure for assessing a country’s overall economic condition. The components of GDP are:

GDP = C + I + G + (X–M)

Where:

C: Consumption expenditure: total household and individual spending 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 clarified, the reasons for the Renminbi’s appreciation become clearer, mainly three points:

1. Attracting foreign investment to boost investment expenditure

The first benefit of Renminbi appreciation is the rapid attraction of foreign capital inflows. We know that in recent times, both China and the US face similar issues—debt problems. The US is reflected in the explicit federal government debt, i.e., the national debt scale, while China’s issue is mainly the implicit debt of local governments. Since US Treasury bonds are tradable and held by a high proportion of foreign investors, the debt pressure is greater because default risks are quickly reflected in bond prices through the secondary market, affecting the US’s refinancing ability. Therefore, only through dollar depreciation can the value of dollar-denominated debt to foreign creditors decrease in real terms. This “inflation tax” reduces the nominal debt’s real value, naturally achieved through rate cuts and quantitative easing. China’s local debt is mostly domestic bonds held by commercial banks or domestic investors, with more debt relief options such as debt extension and transfer payments, which means the RMB exchange rate is less pressured by debt issues. However, this debt problem has impacted both countries by limiting government borrowing capacity—meaning that expanding government spending to boost GDP has become more difficult. At this stage, to stimulate the economy, RMB appreciation can help attract capital backflows.

2. Boost consumption and increase consumer spending

Another benefit of RMB appreciation is that it makes domestic consumers’ foreign goods cheaper, which manifests in two ways: first, it allows ordinary consumers to have more money for consumption and investment. This is especially evident in essential goods categories, such as food and energy, which constitute the largest share of total consumption expenditure. In the near future, most people will see more imported goods on supermarket shelves, and prices will become more affordable. Second, it reduces costs for enterprises importing foreign raw materials or key components, increasing profit margins, and enabling more capital for expansion and profit distribution.

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

Since the news of China’s trade surplus surpassing $1 trillion in November, there has been increased international discussion about RMB undervaluation. China’s trade negotiations with major export countries, especially the EU and other key consumer nations, have become more frictional. Why is this?

Theoretically, in accounting principles, the global current account sum should be zero because a country’s exports are another country’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 macroeconomic environment, countries prioritize economic stimulation, so expanding trade deficits can drag down their GDP growth—especially for developed countries already experiencing low growth. Small fluctuations in data can have a larger impact on GDP growth. To address trade deficits, two main methods are used: first, protectionist measures like tariffs, and second, exchange rate adjustments. The former was temporarily halted with the US-China tariff truce, while orderly RMB appreciation can help quickly ease trade frictions and reduce associated government expenditures.

Although RMB appreciation offers these benefits, a core principle is that appreciation must be stable and orderly, not too rapid. Recently, RMB appreciation has been quite fast, partly because, at year-end, the economic growth target for the first three quarters has reached 5.2%, close to the annual target of around 5%. Therefore, moderate appreciation is beneficial for early planning of economic transformation for the next year, observing market developments, and identifying opportunities and risks. Otherwise, with large foreign exchange reserves, the central bank can more easily stabilize the exchange rate.

Next year, I believe the pace of RMB appreciation will slow significantly. The reason is simple: although the contribution of net exports to China’s 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.

After understanding the short-term reasons for RMB appreciation, let’s discuss why USDT is showing a negative premium. I believe there are three main reasons:

1. The crypto market remains sluggish, lacking attractive investment targets, prompting investors to reallocate assets.

2. At year-end, many international trade companies experience a surge in foreign exchange settlement, increasing demand to convert USD to RMB. We know that onshore RMB exchange quotas are limited. Therefore, many small and medium-sized enterprises engaged in international trade or overseas operations choose to settle via USDT, 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 due to short-term supply and demand changes. However, the RMB’s short- to medium-term strength will inevitably cause RMB-based investors to face some exchange rate losses.

Should you convert your USD stablecoins back to RMB?

Since the RMB is entering an appreciation phase, should we convert USD stablecoins back to RMB to avoid exchange rate losses? I believe only if your portfolio has a high proportion of USD stablecoins should you consider adjusting. Otherwise, maintaining a certain asset allocation is still advisable. Three reasons:

1. Exchange rate losses from USDT’s negative premium: As previously explained, I believe this negative premium is a short-term factor, not a structural risk. Prematurely converting currency now could incur significant exchange losses. Therefore, if you want to adjust your portfolio immediately, it might be better to wait until the negative premium mean reverts before acting.

2. Opportunity cost: While China’s overall economic fundamentals show resilience, there are still challenges, such as the decline in real estate prices leading to a loss of wealth effects across society. Under this context, economic policies focus on stability, debt reduction, industrial restructuring, and redistribution optimization. Although the Chinese stock market has recently rallied, I see it as valuation repair or speculation rather than a sign of a fundamentally improved environment. Additionally, the continuous decline in RMB government bond yields increases the opportunity cost of such adjustments. Holding stablecoins offers more flexibility for global asset allocation, especially in a liquidity-rich environment like the US interest rate cut cycle.

3. Uncertainty of RMB appreciation: The US-China tariff game is not a permanent solution but a temporary pause. The US cannot respond to rare earths in the short term and is entering a mid-term election cycle, which may lead to a pause and internal consolidation. However, this does not mean the trade war won’t reignite. Past analyses of Trump’s policies suggest that before key manufacturing industries are brought back, the trade war could resurface, likely affecting RMB exchange rates.

How to hedge exchange rate losses on-chain, and the role of gold and euro stablecoins

Given these strategies, how can one appropriately hedge RMB appreciation-driven exchange rate losses? First, naturally, through derivatives like FX swaps or options. However, implementing such on-chain is very challenging. Early last year, I considered creating a decentralized FX 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, mainly due to regulatory pressures. FX controls have historically been a key tool for manufacturing countries like China and South Korea. Compared to crypto investments, FX derivatives face higher regulatory hurdles, and investors with FX hedging needs are mostly from these countries, making resistance high.

However, this does not mean there are no ways to mitigate risks. I believe the following three asset classes are worth attention:

· Hong Kong, Japanese, and Korean stablecoins: In mid-year, with the US passing stablecoin-related legislation, many countries launched their own stablecoins. The unique status of the Hong Kong dollar and the overlapping industrial structures in East Asia tend to lead to similar exchange rate trends. Investing in these stablecoins can somewhat mitigate RMB appreciation risks, but recent concerns over regulatory tightening have slowed development. Monitoring and waiting for mature products is advisable.

· On-chain gold RWA: Gold prices have surged in recent years, driven by geopolitical uncertainties and US dollar depreciation expectations. For on-chain investors, buying gold RWA tokens is relatively easy and liquid, e.g., Tether Gold and Pax Gold. Discussions about gold bubbles persist, and recent volatile metal prices suggest the market is in a delicate game. For low-risk investors without early positions, it may be safer to stay on the sidelines now.

· Euro stablecoins: I believe euro stablecoins are the most promising among these three. First, Circle’s compliant EURC has a large issuance and good liquidity. Second, I think EUR/USD exchange rate fluctuations are likely to be milder than USD/CNY. 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, but the EU and ASEAN remain significant contributors. ASEAN, mainly developing countries with high growth, has a smaller impact on net exports, and China has transferred many mid- and low-end products there. The impact on the economy is generally positive. Politically, China’s rising military strength also constrains relations. The convergence of political friction with ASEAN is evident. Conversely, the EU is different: China exports more industrial finished goods there, with higher profit margins. The EU is a key market for China’s stablecoin trade surplus, and trade settlement is mainly in euros. To enhance China’s influence, RMB/EUR exchange rates are likely kept lower. However, political friction remains, as many EU countries are developed with higher manufacturing shares in GDP (Europe’s manufacturing accounts for about 15%, US less than 10%). European workers rely more on wages than capital gains, and recent energy costs due to reduced Russian supplies have hurt manufacturing, especially impacting the automotive sector. This leads to lower profits, reduced tax revenue, and slower wage growth, which can reduce household wealth effects and consumption. Europe’s capital outflows from AI and other high-tech sectors also weaken investment prospects. Consequently, net exports’ influence on the economy is amplified, and European trade deficit attitudes are more aggressive.

Despite this, I believe the EU does not have the same bargaining leverage as the US in the trade war, and attitudes toward China vary among countries like Hungary and Spain. Therefore, I think China and the EU will not significantly adjust exchange rates for trade rebalancing but will focus on EU investment agreements and mutual profits. Europe’s capital markets are more mature and better at protecting investments than other emerging markets like India, Vietnam, or Brazil. China’s ample foreign reserves can be reinvested to improve profits, and maintaining a stable exchange rate helps keep Chinese goods competitive in Europe.

Returning to the on-chain hedging strategy, I believe a practical approach is converting USD stablecoins into EURC and depositing them on platforms like AAVE to earn interest. Currently, lending rates are around 3.87%, which is 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.