The global development finance gap remains large, and developing countries need more options. According to UN Trade and Development, developing countries face an annual shortfall of US$4 trillion in achieving the Sustainable Development Goals. Yet for much of the postwar era, development finance has been predominantly denominated in US dollars, leaving them exposed to changes in borrowing costs and debt burdens driven by US monetary policy and investor appetite in advanced economies.
Fortunately, efforts to diversify the currency of borrowing, including toward local currencies, have received renewed attention since early 2025. Recent changes in US economic policies and institutions have underscored the risks of relying on a single funding currency. The surge of 30-year Treasury yields to multi-decade highs reflects growing concerns about the US fiscal trajectory and higher oil prices fuelling persistent inflation. Meanwhile, Chinese interest rates have been low, and the exchange rate stable, thus generating new momentum in renminbi financing. Offshore borrowing in renminbi has already hit a record high of US$149 billion in 2026.
China’s financial system is among the largest in the world, with total assets exceeding 450% of GDP, and an onshore bond market that is 126% of GDP. With a persistently high savings rate rooted in its culture of “long-term orientation”, China holds one of the deepest pools of domestic savings globally, offering access to patient capital that looks past short-term fluctuations and supports longer-term investments in innovation, productivity enhancements, and human capital.
Thus, for those looking to diversify the borrowing currencies, the renminbi has the potential for significant cost-saving. Since China’s monetary policy is addressing deflationary pressures, while the US Federal Reserve is in a prolonged tightening cycle, renminbi-denominated borrowing costs have, in many cases, fallen meaningfully below equivalent US dollar-denominated rates.
This is true even after considering exchange rate risks. Evidence suggests that currency risks for developing countries are systematically exaggerated. Although future renminbi appreciation could erode some of the net gains from borrowing in the currency, Chinese authorities are unlikely to allow too sharp a rise, given the implications for financial stability. Thus, if dollar interest rates remain higher for longer, renminbi borrowing should remain attractive.
With free capital flows, this borrowing-cost advantage would have been arbitraged away, and covered-interest parity would hold. But since China maintains capital controls, the cost advantage persists. Regulatory provisions and case-by-case approvals by the Chinese government enable developing countries borrowing in renminbi to enjoy the cost advantage and take the proceeds out of China.
There is also a broader development dividend here. Using the renminbi in development financing creates incentives to develop domestic capital markets and hedging instruments both in the borrowing country and in China itself. For China, this works in tandem with the gradual opening of China’s capital account and the development of its international financial centres in Shanghai and Hong Kong.
Multilateral development banks and individual sovereign borrowers alike are already moving in this direction. The Asian Development Bank recently extended its inaugural Panda bond issuance by 2 billion yuan ( US$298 million ), and the Asian Infrastructure Investment Bank is also providing more RMB-denominated financing. Going further, the New Development Bank has made local-currency financing a core part of its institutional strategy. Local currency loans account for approximately 25% of its total lending, and the bank is issuing renminbi-denominated ( Panda ) bonds in China’s interbank market and lending the proceeds directly to borrowers.
Among developing countries, Egypt issued Africa’s first sustainable Panda bond in 2023, with a 3.5-billion-yuan, three-year instrument at a coupon rate of 3.51% – substantially below what it would have paid in international dollar markets at the time. And 13 other sovereign states and international institutions have issued Panda bonds as of mid-2026, including the Philippines, Kazakhstan, Pakistan and Indonesia.
At the same time, Kenya has restructured its dollar-denominated Chinese loans into renminbi, achieving meaningful reductions in debt service costs by exchanging higher dollar interest rates for lower renminbi equivalents. Now, Ethiopia, Mozambique, Zambia, Pakistan and Indonesia could seek Kenya-style changes by converting portions of their existing dollar-denominated Chinese loans into renminbi.
Of course, there are still constraints to the further use of renminbi in development financing. The currency is not yet fully convertible, and accessing China’s onshore market requires navigating a complex regulatory framework. Moreover, many developing countries run persistent current account deficits with China, which means that they do not naturally accumulate renminbi reserves. Repayment may, therefore, require converting other currencies into renminbi, introducing a secondary exchange rate exposure.
Given the renminbi’s still-modest international footprint, it is unlikely to displace the dollar as the primary currency of development finance. But for many countries, renminbi-denominated borrowing offers a credible, increasingly accessible, and cost-effective alternative. Diversification is not about abandoning one option for another; it is about lowering the cost of capital, building resilience, and achieving balance. Hence, the case for including the renminbi in diversification strategies deserves serious attention from both borrowers and the multilateral financial institutions that serve them.
Justin Yifu Lin is the honorary dean of the National School of Development, the director of the Institute of New Structural Economics at Peking University and a former chief economist and senior vice-president of the World Bank; and Yan Wang is a senior academic researcher at the Boston University Global Development Policy Center.
Copyright: Project Syndicate
