The US dollar is losing share to the Chinese yuan in lending to developing nations in Asia, marking a rare success for Beijing in its yearslong efforts to challenge the dominance of the greenback.
Between the first quarter of 2022 and the second quarter of 2024, dollar-denominated loans to emerging Asian economies declined 16%, due to Chinese banks increasingly shifting to yuan-denominated lending, according to a study published in May by the Federal Reserve.
The shrinking share of dollar loans to developing economies was in part driven by higher funding costs as central banks in the US and Europe kept interest rates elevated to battle inflation through much of the pandemic years.
While this yield differential might not persist given that the Fed is widely expected to lower interest rates later this year, the yuan’s quiet rise in cross-border lending reflects Beijing’s longstanding ambition to promote its own currency. This effort has been bolstered by declining global confidence in the dollar, partly due to the volatile trade policies of US President Donald Trump’s administration, analysts say.
“China is primarily pushing for a broader use of its currency by encouraging the use of the renminbi as a trade settlement currency,” said Lynn Song, chief economist for Greater China at ING, using the official name of the yuan.
To be sure, Beijing’s ambition to rival the dollar’s dominant position faces significant hurdles. Companies and individuals still can’t move assets in and out of China freely due to capital account controls. Additionally, China’s elevated debt and slow process in liberalizing its financial market have deterred many global investors from holding its currency.
Most global trade remains settled in dollars, followed by the euro and the pound, according to SWIFT, a global money transfer network. As of May, China’s currency was the sixth most active for global payments by value, with a share of less than 3%.
Since the global financial crisis in 2008, Beijing has attempted to raise demand globally for its currency, such as using the People’s Bank of China’s digital currency abroad and allowing foreign investors to trade Chinese stocks and bonds via Hong Kong.
At an annual forum in Shanghai in June, China’s central bank governor Pan Gongsheng said he envisions a “multipolar international monetary system” and warned of excessive reliance on any single currency.
“Going forward, the international monetary system is likely to continue its evolution towards a system where a few sovereign currencies coexist and compete with checks and balances,” Pan said.
Some scholars, however, have warned that overreliance on lending from China poses risks, including Chinese banks’ diminished appetite to offer fresh financing or provide meaningful relief as they face pressure at home and abroad.
For borrowing countries, one downside of accepting yuan instead of dollars is taking on extra exchange risk, said Fraser Howie, a trader and commentator on China’s financial system.
“You often are going to have this mismatch since they borrow in a currency that they don’t generate in commercial terms,” he said.
China’s efforts to bolster the global status of its currency in cross-border lending has gained traction since early 2022, primarily to developing countries in Asia.
Overseas loans by Chinese banks in 2017 had been 65% dollar-denominated, before dropping sharply since early 2022 and reaching 50% by the second quarter of 2024, according to the Fed study. Meanwhile, for non-Chinese banks, the share of cross-border lending in dollars remained steady at around 46% between 2017 and 2024.
“We find that this recent decline in dollar-denominated lending by Chinese banks is outsized compared to that by other banks,” study authors Laurie DeMarco and Joshua Walker write in the Fed publication “Chinese Banks’ Dollar Lending Decline.”
Cross-border yuan-denominated loans rose sharply to around RMB 20.4 trillion (USD 2.9 trillion) last year, more than double the level of RMB 10.3 trillion (USD 1.4 trillion) in 2022, Chinese official data shows.
Meanwhile, nearly 30% of China’s services imports and 23% of goods imports were settled in yuan in 2023, compared to 12% for both in 2017, according to data from China’s State Administration of Foreign Reserves.
The decline of dollar lending coincided with the Fed’s latest cycle of rate hikes to combat inflation that began in March 2022. The benchmark federal funds are set in a range of 4.25% and 4.5%. In contrast, China’s central bank cut its one-year loan prime rate from 3.8% in January 2022 to 3% in May this year.
“It was mainly an economic decision to finance using yuan as it’s simply much cheaper than the US dollar,” said Gary Ng, senior economist at French bank Natixis.
Overseas investors held around a record RMB 4.2 trillion (USD 588 billion) in Chinese bonds by the end of 2024 as bond issuers took advantage of the low funding cost of the currency.
The country’s growing trade and investment ties with the rest of the region helped elevate the adoption of its currency.
Last year, more than a third of China’s trade with other countries was settled in yuan, reaching nearly 40% by the last quarter of 2024, compared with less than 20% in the last quarter of 2022, according to data compiled by BBVA.
As of September 2024, about 23% of total overseas lending by Chinese banks went to emerging markets and developing economies, according to a 2024 study by the Bank for International Settlements. It also found that since the pandemic, China’s foreign direct investment became a bigger driver of its cross-border lending compared to trade pre-pandemic.
In addition, Russia’s invasion of Ukraine in February 2022 also prompted broad-based sanctions by the US-led West, including banning several Russian banks from SWIFT in 2022. China’s Cross-Border Interbank Payment System, or CIPS, settled RMB 175 billion (USD 24.5 billion) in cross-border transactions in 2024, up 43% from a year earlier.
“The shift away from the USD seemed to be more noticeable after Trump’s first trade war with China and after financial sanctions were imposed on Russia,” said Fiona Lim, senior FX strategist at Maybank in Singapore.
Wider adoption of yuan in loans could pose a dilemma for many countries as the US government heaps fresh pressure on countries to reduce ties with China through its trade policy, according to Howie.
Trump earlier this month threatened an extra 10% tariff on countries that support the “anti-American” policy of BRICS, the acronym for major emerging market economies Brazil, Russia, India, China, and South Africa. This injected renewed fears that countries with close economic ties to Beijing will be penalized.
“Is taking a RMB loan seen as supporting the BRICs agenda? Does that come under the radar screen of the American administration?” Howie said.
John Marrett, director of financial risk at the Economist Intelligence Unit in Hong Kong, said he doesn’t expect China’s overseas lending will return to the peak of 2021 following a string of debt problems among developing markets borrowers.
“Any shift [in reduced demand for the dollar] will be limited in the foreseeable future,” he said. “There are no alternatives that match the low risk level and sufficient supply of US treasuries.”
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.