Pacific Money | Economy | East Asia

In Kenya and Ethiopia, China is using debt distress as a strategic opening to expand the RMB’s international use.

Credit: Depositphotos

Kenya has converted part of its Chinese loans from U.S. dollars into renminbi (RMB), while Ethiopia is negotiating a similar arrangement. These conversions provide fiscal relief while embedding China’s currency more deeply in African sovereign debt relations – turning debt distress into a strategic opening for Beijing to expand the RMB’s international use.

Kenya has completed the conversion of $3.5 billion of its railway loans (originally valued at $5 billion) from Chinese lenders, such as the Export-Import Bank of China, into RMB, halving its interest rate and saving around $215 million annually. Ethiopia is currently negotiating a similar arrangement to exchange about $5.4 billion of loans into RMB, which could reduce servicing costs from around 7.25 to 3 percent.

Recent reporting describes these conversions as serving several purposes. They hedge against dollar scarcity and volatile U.S. interest rates for African borrowers, while advancing Beijing’s long-standing goal of RMB internationalization and extending a “RMB ecosystem” already taking shape through participation in the Cross-Border Interbank Payment System (CIPS), currency-swap agreements, and RMB-denominated transactions. In Kenya’s case, the shift complements the presence of Chinese clearing banks and deepens financial integration within China’s own payment architecture.

These developments are unfolding amid a broader reassessment of the dollar’s global role. Across Asia, the Gulf, and now Africa, policymakers are seeking to reduce reliance on the U.S. dollar for a variety of reasons – economically, to strengthen regional financial linkages, mitigate exposure to U.S. interest-rate cycles and liquidity shortages, stabilize exchange-rate management, and diversify reserves; politically and strategically, to limit exposure to sanctions and policy shifts in Washington; and ideologically, to advance a vision of a more multipolar financial order.

For example, ASEAN’s 2026-2030 economic strategy pledges to expand local-currency settlements and strengthen regional payment connectivity. Similar initiatives are emerging in the Gulf and Africa, where governments are experimenting with alternative payment systems and local-currency trade mechanisms to reduce dollar dependence.

In Asia and the Gulf, diversification efforts are driven largely by strategic and ideological considerations, notably, a desire to hedge against U.S. dominance and promote a more multipolar financial order. For African economies, however, the drivers are more immediate and material. The dollar’s surge and higher U.S. interest rates have strained balance sheets, inflated debt-servicing costs, and triggered foreign-exchange shortages. The appeal of RMB conversions lies in easing that pressure by lowering interest payments, aligning repayments with trade flows to China, and insulating budgets from dollar-liquidity shocks.

China’s debt conversions in Africa thus form the monetary dimension of this wider de-dollarization trend, though grounded less in geopolitical maneuvering than in economic pragmatism. They alleviate fiscal strain while simultaneously advancing Beijing’s long-term objective of embedding the RMB more deeply within the global financial system.

This also marks another step forward in Beijing’s approach to currency internationalization. Since the global financial crisis, China has pursued what might be called selective internationalization, whereby the RMB’s reach is extended through tightly managed, state-directed mechanisms rather than full liberalization of its financial markets. The process has unfolded in successive phases: first, its use in cross-border trade settlement; then the development of offshore and reserve markets alongside a growing role in energy and commodity pricing; and now its use in bilateral debt conversions. A new, still emerging phase centers on digitalization, as China’s digital currency and payment infrastructure begin to offer alternative channels for cross-border settlement.

In the latest development of its selective approach to internationalization, debt relief serves as a vehicle for currency diffusion for Beijing. Rather than forgiving loans or extending swap lines, Beijing has opted to refinance distressed sovereign debts by redenominating them in Chinese currency, thereby maintaining its claims while expanding the RMB’s international footprint. This illustrates how financial management can serve a dual purpose in addressing borrower distress while advancing the RMB’s international reach. It also strengthens China’s position as a system-defining creditor able to set terms outside the orbit of dollar-based institutions.

The broader context is one of a gradually fragmenting financial order. Dollar-based finance remains underpinned by multilateral institutions and forums such as the IMF and the G-20, which have traditionally upheld norms of market liberalization, policy discipline, and dollar-denominated governance. By contrast, RMB internationalization is advancing through state-led and bilateral mechanisms such as Chinese policy banks, CIPS settlements, and swap agreements, which operate largely outside these frameworks. This institutional bifurcation allows Beijing to expand the RMB’s global use while retaining capital-account control, generating what might be called “functional de-dollarization”: not a replacement of the dollar, but the creation of parallel circuits of liquidity less exposed to Western sanctions and U.S. monetary policy swings.

Debtor states gain immediate and measurable benefits. The conversions lower servicing costs and reduce vulnerability to dollar funding shocks, easing repayment pressures amid tightening global credit conditions. They also open the door to concessional RMB financing and potential follow-on investment from Chinese banks and firms. The flipside is a new form of dependency marked by greater concentration of power. Unlike the diffuse governance of dollar finance, RMB arrangements are managed through Chinese party-state institutions, giving Beijing greater leverage over liquidity, repayment terms, and financial access. In effect, fiscal pragmatism becomes a pathway to a more centralized and politically mediated form of monetary dependence.

Multilateral institutions are being forced to adapt to a more fragmented debt landscape. The G-20’s Common Framework for sovereign debt restructuring, grounded in dollar-based benchmarks and comparability of treatment, provides little precedent for RMB-denominated lending. The growing share of RMB liabilities complicates coordination by raising questions over how claims are valued, losses apportioned, and assumptions aligned across currencies and governance regimes.

Even when the creditors remain Chinese, the shift from dollar to RMB lending changes the currency composition of sovereign portfolios and introduces new challenges for valuation, oversight, and policy alignment. For countries with obligations to both Western and Chinese lenders, the politics of debt relief are becoming increasingly entangled with the geopolitics of currency competition.

Beijing’s incentives are straightforward. Its policy banks face mounting exposure to distressed loans across Africa and Asia, but rather than absorbing outright losses, China has opted for balance-sheet preservation through currency conversion. The mechanism allows Beijing to maintain its financial claims while advancing the RMB’s international role, transforming credit risk into leverage and turning potential write-offs into mechanisms that extend its financial reach. At the same time, the approach reflects the disciplined, incremental logic of China’s financial strategy – one that emphasizes maintaining control over overseas credit relationships and limiting exposure to the volatility of market-led liberalization.

In this sense, the RMB’s emergence in Africa’s debt corridors is emblematic of the broader era of de-dollarization. The global system is not witnessing a dramatic demise of the greenback but its gradual and partial erosion – the emergence of parallel circuits of settlement and liquidity that coexist with, and at times bypass, the dollar’s reach. From Nairobi to Addis Ababa, Beijing is managing balance-sheet exposure in ways that extend the RMB’s international reach, one loan conversion at a time.