Introduction
While governments typically borrow in U.S. dollars, accounting for about two-thirds of international debt issuance, with nearly half in dollars and around 40% in euros, other currencies like the Chinese renminbi also play a role. This article explores the growing trend of countries, particularly developing ones, borrowing in renminbi and its potential implications for the global financial system.
The Current Landscape of International Debt
Following the 2008 global financial crisis, low U.S. interest rates made dollar-denominated loans attractive despite the risk of excessive borrowing and leverage. Meanwhile, advanced economies benefited from access to deeper, more liquid markets and a broader range of investors. In contrast, the U.S. government and corporations have historically borrowed domestically, shielding themselves from currency risk.
Shifting Interest Rates and Geopolitical Factors
With U.S. interest rates now between 4.25% and 4.5%, dollar-denominated loans are less appealing. Additionally, the perception of the dollar as a geopolitical tool in an increasingly fragmented global economy has led some developing nations to explore alternatives. China’s official reference interest rate is around 1.4%, making renminbi-denominated debt more attractive. Countries like Kenya and Sri Lanka have turned to renminbi loans to alleviate debt burdens.
Marginal Shift Towards Renminbi Debt
Despite this trend, renminbi debt remains marginal. In the first quarter of 2025, only about 1% of international debt issuance was denominated in renminbi, up from 0.5% a decade prior. The dollar remains unthreatened for now.
China’s Strategic Interests
For China, the goal is to challenge dollar dominance. As the world’s largest bilateral lender and a significant source of official development financing, China has extended approximately $1.5 trillion in overseas loans. While other lenders like Singapore also provide dollar-denominated loans, China’s scale is unprecedented.
The Costs of Dollar Lending
Much of China’s dollar lending reflects its vast foreign exchange reserves, accumulated through years of current account surpluses. The limited international use and liquidity of the renminbi also play a role, as China conducts at least half of its trade in dollars rather than its own currency—an anomaly for the world’s second-largest economy and leading exporter.
Lending in dollars imposes costs on China, including ensuring returns are at least equal to comparable dollar assets like U.S. Treasury bonds while mitigating currency, credit, market, and compliance risks. Borrowers face their own challenges, as repaying in a foreign currency requires securing dollars, regardless of export earnings. Reduced access to currencies increases the risk of default.
Risk Management by Chinese Lenders
To manage these risks, Chinese lenders—especially state-owned banks—typically impose collateral requirements, non-concessional interest rates, shorter loan terms, management fees, collateral, and credit insurance. Borrowers bear additional costs related to the renminbi’s limited international liquidity, though these are often offset by China’s more favorable interest rates.
Developing Countries and Debt Sustainability
Most Chinese loans—from official sources and other organizations—go to developing countries, including financially fragile nations collectively owing about 80% of China’s outstanding debt. For these countries, contractual loan terms and monetary options directly impact debt sustainability. Their decision to borrow in renminbi rather than dollars is more about balancing short-term borrowing costs with long-term repayment risks than challenging the dollar’s global dominance.
Historical Parallels and Future Implications
As the renminbi’s role in global finance expands—albeit slowly, as dictated by Chinese authorities—its use in development loans will likely rise. This shift reflects both economic pragmatism and China’s ambition to solidify its central role in development financing.
Balancing Strategic Goals and Sustainable Financing
The gradual internationalization of the renminbi must reconcile China’s strategic objectives with the developing world’s urgent need for sustainable financing. The intersection of development financing and the emergence of a new global currency could reshape the international monetary system, even if the dollar remains unchallenged.
About the Author
Paola Subacchi is Professor and Chair of Sovereign Debt and Finance at Sciences Po.
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Project Syndicate, 1995 – 2025
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