Chinese yuan Photo:VCG
The global debt market is undergoing a subtle, but profound adjustment. The Financial Times reported on Tuesday that developing countries are moving out of dollar-denominated debt and turning to currencies with lower interest rates such as the Chinese yuan and Swiss franc. This shift is not merely a matter of convenience; it reflects a strategic response to an environment characterized by persistently high US interest rates, which inflate borrowing costs.
The pressures on developing nations are evident. A report released by UN Trade and Development (UNCTAD) indicated that global public debt reached a record high of $102 trillion in 2024. For some developing countries, the cost of servicing this debt is formidable. A record 61 developing nations allocated 10 percent or more of government revenues to interest payments in 2024, twice as many as in 2010. When such a substantial portion of government revenue is consumed by interest payments, the fiscal room for development investment – whether in infrastructure, education, or healthcare – diminishes significantly.
In this context, the shift toward currencies with lower interest rates is hardly surprising. Furthermore, reliance on a single funding currency introduces vulnerabilities. The US Federal Reserve’s interest rate trajectory has become increasingly unpredictable, and the resulting volatility exposes emerging markets to fluctuations in interest-payment costs. By diversifying their funding sources, sovereign borrowers are not only seeking cheaper capital; they are also hedging against policy risks beyond their control.
This situation has led to an increased demand for borrowing in yuan among some developing countries. Borrowing in yuan broadens the range of viable funding options, which can help reduce costs and risks more effectively for relevant countries.
In recent years, the internationalization of the yuan has made steady progress on an established foundation. Despite challenges in the global economic environment, the scale of cross-border yuan payments has continued to expand. The yuan’s share in global trade settlements has increased, and its financing capabilities have also seen notable advancements. Benefiting from relatively low financing costs, the panda bond market has remained active.
According to the 2025 White Paper on RMB Internationalization released by the Bank of China in June, measured by market share, the yuan is the fourth most used payment currency worldwide, the third in trade finance, the fifth in foreign exchange trading, and the seventh in global reserves.
Promoting the internationalization of the yuan is beneficial for advancing the diversification of the global monetary system. This is not aimed at challenging any specific currency, but a step toward broadening the range of financing options available in global markets. At a time when US dollar funding costs remain high and volatile, it is only normal for some economies to choose the yuan, which offers an additional channel that can help them mitigate risks more effectively.
The US currency is expected to remain the dominant vehicle for international borrowing in the foreseeable future. Yet introducing alternatives adds a degree of balance to the system. Even incremental diversification can deepen market liquidity, spread exposures more evenly, and reduce the vulnerability of sovereign borrowers to policy swings in a single country. Over time, this quiet evolution in financing practices could support a more resilient international monetary system.
While expectations for yuan internationalization remain high, it is essential to acknowledge that this process needs to be stable. It requires prudent management, carried out in line with China’s own pace. In the China Financial Stability Report 2024, the People’s Bank of China, the central bank, emphasized the importance of advancing yuan internationalization in a prudent and steady manner, while at the same time deepening financial reform and opening-up.
China’s commitment to high-level financial opening-up provides robust support for advancing yuan internationalization. As China continues to implement policy measures involving financing, the quality and scale of yuan usage in cross-border transactions are steadily improving. This trend not only enhances the yuan’s influence within the global financial system but also contributes to a more stable and sustainable international monetary environment.