[Paola Subacchi] Renminbi debt in dollar world

When governments engage in international borrowing, they predominantly do so in US dollars, representing approximately two-thirds of international debt issuance. This trend manifests itself starkly in developing nations, yet even advanced economies frequently benefit from accessing the depth and liquidity that dollar markets offer. The aftermath of the 2008 global financial crisis saw a surge in dollar-denominated borrowing, driven largely by near-zero US interest rates. This situation incentivized many nations to capitalize on cheaper loans, even as it raised concerns about potential overborrowing.

The privilege that US firms and the government enjoy by borrowing almost exclusively in their own currency helps shield them from exchange-rate risks—a significant advantage. However, with current US interest rates hovering between 4.25-4.5%, borrowing in dollars has become less attractive. In light of increasing geopolitical frictions and a perceived weaponization of the dollar, developing countries are exploring alternative borrowing options, particularly the Chinese renminbi.

China’s current benchmark policy rate is approximately 1.4%, making renminbi-denominated loans appealing for heavily indebted nations like Kenya and Sri Lanka, looking to alleviate their debt-service burdens. Despite this shift towards renminbi, it remains small-scale. As of the first quarter of 2025, only about 1% of international debt issuance was in renminbi, a modest increase from 0.5% a decade prior—indicating that the dollar’s dominance is firmly intact, for now.

The stakes for China in this scenario are enormous. As the world’s largest bilateral creditor, China has loaned around $1.5 trillion to various countries, utilising its vast dollar reserves accumulated through consistent trade surpluses. Notably, a significant portion of China’s global trade is conducted in US dollars, a reflection of both the existing framework and the limitations associated with the renminbi’s liquidity on the world stage.

When engaging in dollar-denominated lending, China faces certain challenges. To ensure that returns are competitive with US Treasury yields while mitigating risks, the state-run banks often impose stringent loan conditions. Borrowers must navigate the complexities of repaying loans in a foreign currency, which can increase default risk should their access to foreign exchange diminish.

To manage these risks, Chinese lenders often require collateral, enforce non-concessional interest rates, and impose management fees, further complicating the borrowing landscape for developing nations. While the costs associated with the renminbi’s limited liquidity are sometimes counterbalanced by favorable interest rates, borrowing decisions ultimately reflect a broader struggle to achieve sustainable debt management.

The majority of China’s loans are directed toward developing countries, many of which are financially fragile and owe approximately 80% of their debt to China. Therefore, choosing between renminbi and dollar debt has direct implications for their overall debt sustainability. For these nations, the motivation to borrow in renminbi stems less from a desire to challenge the dollar’s supremacy and more from a strategic effort to lower immediate borrowing costs while contemplating long-term repayment uncertainties.

This dynamic recalls historical shifts in global finance. As the dollar gradually supplanted the British pound sterling, the incremental rise of the renminbi showcases evolving economic realities and geopolitical aspirations. However, this transition is occurring in a more fragmented global economy, where the vulnerabilities of borrowers are increasingly apparent.

As the renminbi’s relevance in global finance continues to grow, even at a slow pace set by Chinese policymakers, it is likely to play a larger role in development lending. This development aligns with both pragmatic economic strategies and China’s ambition to enhance its influence in international finance.

The crucial question that looms is whether the gradual internationalization of the renminbi can harmonize China’s strategic ambitions with the pressing need for sustainable finance in the developing world. This intersection will likely shape the landscape of the international monetary system in the years to come, even if the dollar remains the dominant currency.

In summary, the interplay of renminbi debt within a dollar-dominated world encapsulates a dynamic and evolving narrative in international finance. As China seeks to bolster its position while addressing the developmental needs of its partners, this evolving relationship could redefine global monetary displays, illustrating the complexities and challenges ahead. Despite current dominance, it remains essential for both China and developing nations to navigate this shifting paradigm with caution, ensuring that their fiscal strategies are sustainable and beneficial in the long run. The ramifications extend far beyond immediate borrowing costs, shaping the future of international currency use and global financial relations in the coming decades.

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