USDT negative premium, holding stablecoins still losing money, how should we interpret and what should we do?

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

First, I would like to discuss why the RMB is currently entering an appreciation phase. To understand this, let’s return to a fundamental economic concept: GDP. Generally speaking, although GDP has some shortcomings, it remains the simplest and most effective indicator for assessing a country’s overall economic condition. The composition of GDP 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: corporate capital formation (new equipment, factories, etc.) and residential construction.

G: Government expenditure: spending on goods and services purchased by the government (excluding transfer payments).

X–M: Net exports: exports (X) minus imports (M).

With this simple formula in mind, the reasons for the RMB’s appreciation become clearer, mainly three points:

1. Attracting foreign investment to boost investment expenditure

The first benefit of RMB appreciation is the rapid attraction of foreign capital inflows. We know that over the recent period, both China and the US face a common issue—debt. The US’s debt is reflected in the explicit federal government debt, i.e., the national debt scale, while China’s is mainly in the form of implicit local government debt. Since US Treasury bonds are tradable and foreign investors hold a significant proportion, debt repayment pressure is higher 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 dollar-denominated debt’s real value to foreign creditors decrease. 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, held mainly by domestic commercial banks or investors, with more debt relief options such as debt extension or transfer payments, which can buy time and space. As a result, the RMB exchange rate does not face as much pressure from debt issues. However, this debt problem has impacted both countries by limiting government borrowing capacity—meaning that expanding government spending to stimulate GDP has become more difficult. At this stage, RMB appreciation can help attract capital back into the country.

2. Boost consumption and increase consumer expenditure

Another benefit of RMB appreciation is that it makes foreign goods cheaper for domestic investors, which is reflected in two aspects: 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 products 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 business expansion and profit distribution.

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

Since the announcement in November that China’s trade surplus exceeded 1 trillion USD, there has been increased international discussion about RMB being undervalued. China’s trade negotiations with major export countries, especially the EU’s key consumer nations, have become more frictional. Why is this?

Theoretically, in accounting principles, the global current account balance sums to zero because a country’s exports are another country’s imports, and income/transfer payments are reciprocally linked. When the trade surplus hits new highs, it implies that some net importing countries’ deficits are also increasing. In the current macroeconomic environment, countries prioritize economic stimulus, so expanding trade deficits can drag down GDP growth, especially for developed countries already experiencing low growth. Small fluctuations in data can have a larger impact on GDP growth. To alleviate 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 RMB orderly appreciation can help quickly reduce political conflicts caused by trade frictions, thereby decreasing government expenditure.

Although RMB appreciation offers these benefits, a core principle is that appreciation must be stable and orderly, not too rapid. Over the past month, RMB appreciation has been notably 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%. Allowing some appreciation now can help prepare for next year’s economic transition, 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.

Next year, I believe the pace of RMB appreciation will slow significantly because, although contributions from net exports are converging, they remain crucial. Rapid appreciation would sharply reduce net exports, 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 options, 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. Onshore RMB exchange quotas are limited, so many small and medium enterprises engaged in international trade or overseas operations choose USDT for settlement, 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 and triggering 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, but the RMB’s short- to medium-term strength will inevitably cause RMB-based investors to face some exchange rate losses.

Should you convert USD stablecoins back to RMB?

Since the RMB is appreciating, 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 reasonable. Three reasons:

1. Short-term USDT negative premium and exchange losses: As previously explained, I believe the negative premium is a short-term phenomenon, not a structural risk. Prematurely converting could incur significant exchange losses. Therefore, if you need to adjust your 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, 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. 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, RMB government bond yields are falling, increasing the opportunity cost of holding assets. Holding stablecoins offers more flexibility for global asset allocation, especially during the US easing cycle with ample liquidity.

3. Uncertainty of RMB appreciation: The US-China tariff game is not permanently resolved; it’s only paused for a year. 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 return goals are achieved, the trade conflict could flare up again, likely affecting the RMB exchange rate.

How to hedge exchange rate losses on-chain, using gold and euro stablecoins

Given this, how can one appropriately hedge RMB appreciation-driven exchange rate losses? The first idea is to use derivatives to hedge, but on-chain derivatives are difficult to implement. Early last year, I considered creating a decentralized exchange rate derivatives platform to preemptively address this need. However, research shows 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—many countries with manufacturing sectors, such as China, Korea, and others, strictly control exchange rates. Compared to crypto investments, exchange rate derivatives face higher regulatory hurdles, and investors seeking hedges are mostly from these countries, making entry difficult.

However, there are still ways to mitigate risks. I believe three asset classes are worth attention:

• Hong Kong, Japanese, and Korean stablecoins: In mid-year, following US legislation on stablecoins, many countries launched their own stablecoins. Due to the unique status of the Hong Kong dollar and the overlapping industrial structures in East Asia, exchange rate trends tend to converge. Investing in these stablecoins can somewhat mitigate RMB appreciation risks, but recent concerns over exchange rate controls have led countries to tighten issuance policies. It’s advisable to stay alert and consider allocation once mature products are available.

• 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, e.g., Tether Gold and Pax Gold. Discussions about gold bubbles persist, and recent volatile metal prices suggest the market is in a delicate balancing act. For risk-averse investors without early positions, it may be safer to wait rather than act now.

• Euro stablecoins: I believe euro stablecoins are the most promising among these three assets. 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, 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 positive impact on net exports, especially as China shifts low-end manufacturing and invests in machinery and industrial inputs. Politically, China’s rising military power also constrains EU relations, but overall, China and ASEAN are converging politically. For the EU, China’s exports are mainly industrial goods with higher profit margins, making Europe an important market for Chinese stablecoins. Euro trade settlement is primarily in EUR, and to enhance Chinese goods’ competitiveness, the RMB/EUR exchange rate is likely to stay lower. However, political frictions remain, as many EU countries are developed with higher manufacturing shares in GDP (Europe’s manufacturing accounts for about 15%, US less than 10%). Rising costs due to loss of Russian energy supplies and Chinese industrial upgrades have hurt European manufacturing, especially the automotive sector, reducing profits, government tax revenue, and wage growth, which in turn dampens consumer wealth effects and spending. Europe’s capital outflows from AI and other high-tech sectors also weaken investment prospects. Consequently, net exports’ importance is magnified, and EU trade deficit attitudes are more aggressive.

In my view, the EU does not currently have the same bargaining leverage as the US in the trade war, and attitudes toward China vary among member states, making large exchange rate adjustments unlikely. Instead, the future trade framework may rely on euro-based profit-sharing and investment agreements. Europe’s well-developed capital markets and stronger investor protections compared to emerging markets like India, Vietnam, or Brazil allow China to reinvest foreign reserves profitably. Maintaining a stable exchange rate also helps Chinese goods remain competitive in Europe.

Regarding on-chain hedging strategies, I suggest converting USD stablecoins into EURC and depositing them on platforms like AAVE to earn interest—current utilization rates offer around 3.87% yield, which is attractive. If you want to maintain 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.