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(Bloomberg) — China is leveraging its position as the world\u2019s largest creditor to help broaden usage of the yuan, offering overseas borrowers the chance to benefit from economically-depressed interest rates at home by ditching the dollar.<\/p>\n
Ethiopia became the latest this week in looking to convert at least part of the $5.38 billion owed to Beijing into yuan-denominated loans. A growing number of sovereigns is also seizing on cheaper Chinese financing via bonds.<\/p>\n<\/p>\n
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But the strategy is coming at a price to China, forcing it to stomach some losses along the way as domestic rates hover well below those on the dollar. Kenya said it cut annual debt-servicing costs by $215 million by converting its Chinese railway loans from dollars earlier this month.<\/p>\n
\u201cIf the borrowers pay less, then the lender gets less,\u201d said Michael Pettis, a senior fellow at the Carnegie Endowment for International Peace. \u201cThe benefit for China in exchange for less revenue is that the renminbi becomes a more internationally-used currency.\u201d<\/p>\n
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People with knowledge of official thinking said China supports converting dollar loans originally intended to pay for its goods and services.<\/p>\n
Such an approach makes it easier for borrowers to pay for Chinese merchandise in yuan, elevating the currency\u2019s role in trade settlement and financing, the people said, asking not to be named because they weren\u2019t authorized to speak publicly. The same principle could apply to new loans extended to countries beyond Africa, one of the people said.<\/p>\n
What makes the trade-off worthwhile for China is that it\u2019s embedding the yuan deeper in international commerce and payments, blunting the financial edge of the US at a time when the world\u2019s two biggest economies are at loggerheads. It\u2019s also entrenching influence in Africa, a continent that\u2019s become a much bigger destination for Chinese exports after Donald Trump ratcheted up US tariffs.<\/p>\n
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While China may end up getting less in interest by swapping bilateral loans from dollars to yuan, it\u2019s focusing on wider issues, according to Pettis.<\/p>\n
Financially, Beijing has ways to manage potential losses. The country\u2019s lenders for African countries \u2014 such as its policy banks \u2014 can sell yuan bonds at costs that are much cheaper than issuing dollar debt, according to Kevin P. Gallagher, a professor of global development policy at Boston University. That means even as they lend to other nations at lower rates, China could avoid incurring any significant loss, he added.<\/p>\n
Geopolitical calculus aside, a bigger global footprint for the yuan has become possible because China\u2019s persistent deflation pressures and economic slowdown are warranting a loose monetary policy in response.<\/p>\n
The rate differential between the US and China is enabling borrowers to lock in a favorable cost of capital just as many global investors look to diversify away from the dollar after Trump\u2019s erratic policies at home and abroad.<\/p>\n
Already this year, Hungary and Kazakhstan sold bonds denominated in the Chinese currency, while Sri Lanka announced it would take a yuan loan equivalent to $500 million for a highway project. Indonesia is meanwhile planning its first offshore yuan bond sale.<\/p>\n
Governments, policy banks and international bodies have issued a combined 68 billion yuan ($9.5 billion) of debt and loans as of October this year, according to data compiled by Bloomberg, double the total for the whole of 2024.<\/p>\n
Zambia, which also owes billions of dollars to China, is watching Kenya\u2019s deal \u201cwith keen eyes,\u201d Finance Minister Situmbeko Musokotwane said in an interview last week.<\/p>\n
\u201cAnything that reduces the debt burden of Zambia \u2014 saves money in a true sense \u2014 that is something that is of course always interesting,\u201d he said. \u201cWe\u2019ve not yet made a decision on that particular issue, but we are observing and watching what is happening.\u201d<\/p>\n
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While Beijing has officially said little and never confirmed discussions around the loans, the Ministry of Foreign Affairs pledged a commitment to \u201cpromote practical cooperation with Kenya and other African countries, and make China\u2019s contribution to help Africa achieve independent and sustainable development.\u201d<\/p>\n
Yufan Huang, a predoctoral fellow at the China-Africa Research Initiative of Johns Hopkins University, listed Laos, Djibouti, Congo, Mozambique and Senegal among low-income economies that might seek a Kenya-style deal with Beijing.<\/p>\n
\u201cOther countries in need of relief may ask for a similar deal, but the currency switch alone may not be able to solve their problems of unsustainable debts,\u201d he said. \u201cDeeper reprofiling or restructuring may be needed.\u201d<\/p>\n
Bilateral currency swaps are another part of China\u2019s push for greater international adoption of the yuan, an arrangement that about 30 countries around the world have with the central bank in Beijing.<\/p>\n
\u201cChina is trying to establish an ecosystem for the yuan with more scenarios where it can be used,\u201d said Ding Shuang, chief economist for greater China and north Asia at Standard Chartered Plc. This includes encouraging other countries to use the currency in bilateral trade and invest in yuan-denominated financial products, he said.<\/p>\n
Years of lending abroad by China have created a huge potential pool of economies that could benefit from revamping their liabilities. The world\u2019s 78 poorest countries under a definition used by the World Bank have about $67 billion in outstanding debt to China, according to Gallagher, the professor at Boston University.<\/p>\n
\u201cIf China refinances its debt to countries for longer terms and lower interest rates it will give these countries much needed fiscal space,\u201d said Gallagher. It \u201cwould be highly beneficial to refinance to that level,\u201d he added.<\/p>\n
Financially, it may not be such a bad deal for China. The country\u2019s lenders for African countries \u2014 such as its policy banks \u2014 can sell yuan bonds at costs that are much cheaper than issuing dollar debt, Gallagher said. That means even as they lend to other nations at lower rates, China won\u2019t incur any significant loss, he added.<\/p>\n
China has long tried to promote the yuan\u2019s weight globally, but the results have been meager, in part because of stringent capital controls and the central bank\u2019s tight grip on the exchange rate.<\/p>\n
The People\u2019s Bank of China has been refining its priorities, however, recently vowing to keep opening up domestic financial markets and supporting foreign institutions interested in using the yuan as a funding currency.<\/p>\n
Beijing has also widened access to its onshore repurchase markets and launched a fast payment system with Hong Kong to draw more foreigners to the yuan.<\/p>\n
A relentless surge in local Chinese stocks has meanwhile boosted demand for the yuan, driving more investors into the onshore markets. China\u2019s capital controls and the PBOC\u2019s preference for stability have kept the currency steady despite its lower yield.<\/p>\n
By contrast, the dollar has lost about 7.5% of its value against a basket of global peers so far this year, with its haven status unsettled by Trump\u2019s chaotic tariff policies and ballooning US debt.<\/p>\n
While the global order is in flux, Beijing is having to contend with a structural mismatch that\u2019s left its economy overwhelmingly reliant on the currency of its chief rival. This dependence creates a vulnerability for China, especially after Washington showed it was willing to weaponize the dollar against Russia after its invasion of Ukraine.<\/p>\n
Heavy purchases of gold by China in recent years are among signs it\u2019s making \u201csteady, incremental progress toward de-dollarization,\u201d said Gabriel Wildau, managing director at advisory firm Teneo. \u201cChina and other non-Western countries will find ways to incrementally reduce their reliance on the dollar, with yuan payments becoming an increasingly viable backup option.\u201d<\/p>\n
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Beijing\u2019s immediate goal is to build a multi-polar monetary system in which the yuan provides a credible alternative. A more lofty ambition over the long haul is to fashion it into a true global reserve currency, reflecting China\u2019s status as a technological and economic superpower.<\/p>\n
In comments published by the Communist Party magazine Qiushi in September, PBOC Governor Pan Gongsheng said the international system may \u201cevolve toward a structure where a few sovereign currencies coexist, compete, and counterbalance each other.\u201d<\/p>\n
But many economists say China\u2019s low interest rates alone won\u2019t be enough to raise the yuan\u2019s global profile in the absence of deeper reforms.<\/p>\n
\u201cThis interest rate configuration is unlikely to remain unchanged forever,\u201d said Louis Kuijs, chief Asia-Pacific economist at S&P Global Ratings. \u201cOther factors are needed to drive a comprehensive structural trend towards yuan internationalization, including easier access for foreigners to China\u2019s financial markets.\u201d<\/p>\n
–With assistance from Yuling Yang, Paul Richardson and Matthew Hill.<\/p>\n
(Updates with researcher\u2019s comment in ninth paragraph.)<\/p>\n
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\u00a92025 Bloomberg L.P.<\/p>\n","protected":false},"excerpt":{"rendered":"(Bloomberg) — China is leveraging its position as the world\u2019s largest creditor to help broaden usage of the…\n","protected":false},"author":3,"featured_media":328105,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[7779,9710,64,74,163159,79,267,163158,67,132,68],"class_list":{"0":"post-328104","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-africa","9":"tag-beijing","10":"tag-business","11":"tag-china","12":"tag-dollars-to-yuan","13":"tag-economy","14":"tag-interest-rates","15":"tag-michael-pettis","16":"tag-united-states","17":"tag-unitedstates","18":"tag-us"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@us\/115426984240738578","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/328104","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/comments?post=328104"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/328104\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media\/328105"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media?parent=328104"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/categories?post=328104"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/tags?post=328104"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}