The International Monetary Fund has cautioned that countries swapping dollar-denominated loans from China into yuan may face significant currency risks, even as they aim to lower borrowing costs. In a statement responding to queries, the Washington DC-based lender emphasized that while currency conversion can be a proactive tool for debt management, nations must ensure such strategies do not introduce new financial vulnerabilities.
“While these transactions may lower costs, they can also introduce currency risks depending on their structure,” an IMF spokesperson said. “We encourage countries to consider these operations within comprehensive medium-term debt and reserve management strategies to balance cost and risk appropriately.”
Yuan-denominated sovereign and corporate bonds have attracted interest this year, with yields around 2.4%, roughly half the cost of dollar-denominated debt. For Kenya, converting Chinese railway loans into yuan has already reduced annual borrowing costs by $215 million. Ethiopia, which defaulted on $1 billion of Eurobonds, is in discussions to convert part of the $5.38 billion it owes Beijing into yuan while negotiating a debt restructuring under the Group of 20 Common Framework.
Other nations are also exploring yuan financing. Sri Lanka seeks the yuan equivalent of $500 million for a highway project initially planned in dollars, while Hungary has issued five billion yuan in panda bonds. Analysts warn that these shifts will require countries to hold more yuan in national reserves, potentially complicating financial management for smaller economies that conduct most international trade in dollars.
Deepak Dave, director at Johannesburg-based Autonomi Capital, noted that small economies may struggle to diversify reserves into yuan while still operating in a global trade system dominated by the dollar. Despite the lower interest costs, the IMF’s warning highlights the need for careful planning to avoid exposing economies to new risks even as they tap China’s growing currency influence.
