Kenya’s China loan revamp sparks wider interest in yuan switch, AidData says

At least five African and Asian nations are considering Kenya's debt-relief strategy with China, which involves converting dollar loans to yuan to reduce borrowing costs.

Kenya's move to convert Chinese loans from dollars into yuan to cut borrowing costs is drawing interest from at least five other African ‌and Asian nations, an AidData study found, in a sign debt-laden borrowers are exploring alternatives to expensive dollar-linked financing.

Ethiopia, Mozambique, Zambia, Pakistan and Indonesia were among countries that could seek Kenya-style changes to the terms of Chinese loans, according to the report, as Beijing also pushes broader use of the renminbi in cross-border lending. AidData is a U.S.-based research group at the ‌College of William & Mary that analyses global development finance, including Chinese lending.

The East African nation converted three Chinese railway loans from dollars into yuan, alongside longer maturities ‌and extra grace periods, cutting its debt-service costs by about $215 million a year. "Kenya’s widely publicized payment relief from China Eximbank has sparked interest among other countries in converting their existing debts from USD to RMB," said AidData, which also analysed media reports for its study.

The U.S. dollar remains the dominant currency for bilateral lending to developing economies. However, Kenya’s move is also being seen as part of a strategic shift ⁠in China Eximbank’s ​broader portfolio of cross-border loans as it ⁠works to accelerate the internationalization of RMB, the report said.

China Eximbank is now encouraging -- and in some cases requiring -- sovereigns to borrow in yuan rather than dollars, the report said, citing recent examples from Sri ⁠Lanka and Bangladesh. China Eximbank and ministry officials were not immediately available to respond to a request for comment.

Ethiopia, which also borrowed money from Beijing to build a railway and is at the ​tail end of restructuring its external debt, was a top candidate for benefiting from a similar move, the report found. "Ethiopia’s interest in RMB debt conversion ⁠is best understood as part of a broader debt distress episode," the report's authors said.

Converting U.S. dollar debt to renminbi tied to China’s Loan Prime Rate could reduce borrowing costs if the new benchmark is meaningfully lower ⁠than ​the existing arrangement linked to U.S. dollar short-term funding rate SOFR, the report said. Addis Ababa could save about $169 million by switching the benchmark rate alone, rising to as much as $778 million if it secures Kenya-style terms from China, the AidData study found.

"Whether China Eximbank would be willing to offer a Kenya-style restructuring of the ⁠Addis Ababa–Djibouti railway loans is an open question, particularly given that some of these loans were already restructured in 2018," it said. Nations seeking to convert debts to China ⁠should consider that such a switch is ⁠not risk-free, with borrowers still having to secure renminbi when payments are due.

"If a country’s local currency weakens against the RMB, or if RMB liquidity is costly to access, the benefit of a lower interest rate might not be so large," the ‌report said. "This risk is especially ‌relevant because the RMB remains far less widely held than the dollar."