Renminbi debt in a dollar-denominated world

When governments borrow on international markets, they do so overwhelmingly in US dollars.

- Paola Subacchi

Roughly two-thirds of international debt issuance is denominated in foreign currencies, of which nearly half is in dollars and about 40% is in euros. The rest is spread across other currencies, including the Chinese renminbi.

While borrowing in hard currency is especially important for developing countries, many advanced economies also benefit from tapping deeper, more liquid markets and a broader pool of investors.

Thus, in the aftermath of the 2008 global financial crisis, when US interest rates hovered near zero, dollar-denominated borrowing was particularly attractive, despite the risk that cheap money could encourage overborrowing and excessive leverage. By contrast, US firms and the federal government have long had the privilege of borrowing abroad almost exclusively in their own currency, insulating them from exchange-rate risk.

But now that US policy interest rates are in the 4.254.5% range, borrowing in dollars is relatively less appealing than it once was. Add to this the growing perception of the dollar serving as a geopolitical lever in an increasingly fractured world economy, and it is no surprise that some developing countries are experimenting with alternatives.

With China's benchmark policy rate set at around 1.4%, renminbi-denominated debt offers better terms, leading highly indebted countries like Kenya and Sri Lanka to turn to renminbi-denominated loans to ease their debt-service burdens.