Countries that are switching to currency conversions and swap agreements in Chinese yuan for apparent short-term relief on interest rates are headed for trouble in long-term
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NEW DELHI — Countries that are switching to currency conversions and swap agreements in Chinese yuan for apparent short-term relief on interest rates are headed for trouble in long-term, as they end up with currency mismatches and tie up their national balance sheets closely to a financial system that lacks transparency and full convertibility, according to an article in Capital News.
The article cites examples of Kenya and Indonesia to drive this point home.
Kenya converted three dollar-denominated loans from China’s Export-Import Bank -- tied to the five-billion-dollar Standard Gauge Railway -- into Chinese yuan in October this year. The Cabinet Secretary for Finance said the decision would save the country about $215 million annually in interest payments.
Meanwhile, in January 2025, Bank Indonesia and the People’s Bank of China renewed their bilateral currency swap arrangement for another five years, allowing exchanges of up to 400 billion yuan. Indonesia’s central bank said the agreement would support bilateral trade settlement in local currencies and strengthen financial stability.
The article points out that by mid-2025, analysts noted that about 68 per cent of Kenya’s external debt remained denominated in US dollars. This meant the country stayed heavily exposed to currency and interest-rate volatility, even after converting the railway loans.
These developments were portrayed as pragmatic financial management by China, Kenya and Indonesia alike. Kenya’s government argued that converting its railway loans into yuan would ease pressure on the budget. Indonesia’s central bank said the expanded swap line would deepen monetary cooperation with China and strengthen liquidity buffers.
However, the article states that this logic does not stand the test of scrutiny. Kenya continues to earn the bulk of its foreign exchange in dollars and shillings, while holding only a limited stock of liquid yuan assets. This means the country has shifted the currency of its repayments without shifting the currency of its earnings. Any shock that cuts export revenues or tightens access to yuan liquidity would immediately place the government under strain, forcing it to draw down dollar reserves to meet obligations now denominated in a less liquid currency.
Indonesia faces a different version of the same strategic dilemma. The enlarged swap line offers a larger pool of yuan liquidity, but it also deepens operational reliance on a currency that is not fully convertible and remains subject to China’s domestic policy decisions. While such a facility may help manage short-term volatility, it cannot replace the long-term stability that comes from diversified reserves and broad-based creditor engagement. In effect, the tool offers temporary relief while embedding structural dependence, the article states.
It further observes that both countries are gradually moving towards a financing environment in which a single major creditor increasingly shapes the terms of access to liquidity. China already holds a dominant position as a bilateral lender across much of the developing world.
Once debts are denominated in Chinese currency and supported by Chinese swap lines, the freedom of borrowers to negotiate on purely commercial terms is reduced. Debt restructuring, project renegotiation and even public procurement decisions get entangled in geopolitical considerations.
This concentration of exposure is often underestimated. It is easy to focus on immediate interest-rate savings while overlooking the cumulative strategic weight of these arrangements. Over time, dependence shifts in character. It is no longer only about the size of the debt; it becomes about the currency in which it is held, the channels through which liquidity is accessed, and the political conditions that shape those channels, the article added.