Dollar-denominated cross-border bank lending to emerging market economies (EMEs) declined almost 10 percent between the start of 2022 and early 2024.
According to our analysis using both public and restricted BIS banking statistics, this is largely because of a shift in the currency composition of lending abroad by Chinese banks. With both economic and geopolitical considerations supportive of the trend, Chinese banks have notably reduced their dollar lending to other emerging market economies (EMEs), increasing lending in renminbi (RMB).
We find that this recent decline in dollar-denominated lending by Chinese banks is outsized compared to that by other banks. Although Chinese bank incentives are opaque, we suggest two potential and complementary reasons for this difference: (1) Increasing U.S. and euro-area interest rates, which substantially raised funding costs in the two currencies most commonly used in cross-border lending (dollar and euro) and left Chinese banks in the unusual position of having one of the lowest-cost home currencies among major international banks and (2) a reported intensification, in the wake of the West's 2022 sanctions on Russia, of China's longstanding desire to de-dollarize international transactions.
