Board of Governors of the Federal Reserve System

May 16, 2025

Chinese Banks' Dollar Lending Decline¹

Laurie DeMarco and Joshua Walker

1. Introduction

The dominant international role of the U.S. dollar has received renewed attention in recent years, but across many measures, the dollar's dominance in international finance has changed little.² However, there has been a notable change in one statistic. Dollar-denominated cross-border bank lending to emerging market economies (EMEs) declined almost 10 percent between the start of 2022 and early 2024.³ 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.

2. Sustained dollar lending declines, concentrated in Asia, can be attributed to Chinese banks

The sustained decline in dollar lending to EMEs since the start of 2022 can be distinguished from brief declines in broader measures such as total lending to EMEs in all currencies and total global cross-border lending denominated in dollars (Figure 1).⁴ Both of those broader declines were brief, widespread, and likely attributable to global macro and financial factors. In contrast, the decline in dollar lending to EMEs continued into 2024, is concentrated in emerging Asia, and can be attributed substantially to a change in the currency composition of Chinese bank lending abroad, as we will show below. Although the lending of Chinese banks to EMEs cannot be directly identified in public data, a shift in Chinese bank lending from dollars to RMB lines up with a similar shift in the currency of lending to EMEs in emerging Asia, where Chinese banks are important lenders.

Figure 1. Percent change in cross−border bank lending, by currency and geography

Global factors drove brief widespread lending declines
Many factors likely contributed to an initial drop in total cross-border bank lending to EMEs (in all currencies) in 2022 and early 2023 (black line in Figure 1), which was widespread across regions except Latin America (not shown). As the IMF noted in 2022, Russia's war in Ukraine, a slowdown in China, and tighter financial conditions all weighed on the global growth outlook that year.⁵ Higher interest rates increased borrowing costs and led to concerns over potential EME vulnerabilities related to such factors as currency depreciation and higher foreign currency-denominated debt burdens. However, growth in overall lending to EMEs turned positive again by late 2023 as EMEs weathered the rate hikes without a major crisis.

Similarly, global cross-border lending denominated in dollars (the red line) fell only very briefly in late 2022 to early 2023 as dollar funding costs rose with U.S. interest rates. The steep rise in U.S. interest rates and the accompanying appreciation of the dollar likely decreased the profitability of lending in dollars by raising dollar funding costs.⁶ During this period, U.S. rates initially rose faster than rates in most other major currencies, thus discouraging lending denominated in dollars. However, as interest rates also rose for other major currencies and the value of the dollar retreated in 2023, global dollar-denominated bank lending stabilized or rebounded in most regions except emerging Asia.

In emerging Asia, declines in dollar-denominated lending were sustained
Even as global dollar lending and total lending to EMEs started to recover, dollar-denominated lending to EMEs continued to decline at an even faster annual rate over the subsequent 5 quarters (the blue line). This sustained decline was concentrated in emerging Asia, which accounted for almost all of the cumulative decline in cross-border dollar lending to EMEs since 2023Q1 (Figure 2).⁷

Figure 2. Change in dollar−denominated cross−border bank lending to EMEs

Cross-border lending in dollars to emerging Asia fell a total of 16 percent from the start of 2022 through 2024Q2, more than during the "China scare" of 2015-2016, a period that similarly featured concerns about slow Chinese growth and strong dollar appreciation.⁸ However, the currency composition of the two declines is quite different. As can be seen in Figure 3, during the "China scare", lending declines to emerging Asia occurred across major and non-major currencies, roughly proportional to their share of lending at the time. In contrast, over the period starting in 2022, the decline in dollar-denominated lending in emerging Asia was largely offset by a rise in lending denominated in "non-major" currencies, where "non-major" currencies are any other than dollar, euro, Japanese yen, British pound and the Swiss franc.⁹ In other words, dollar lending accounts for nearly all of the recent decline in foreign bank lending to emerging Asia. As a result, the dollar share of cross-border bank lending to emerging Asia has fallen faster than in other EM regions in recent years (Figure 4).

Figure 3. Change in cross−border bank lending to emerging Asia, by currency

Figure 4. Share of cross−border lending in dollars, by borrowing region (lending to China excluded)

Chinese banks, important lenders in emerging Asia, shifted rapidly out of dollar lending
The faster drop in the dollar share of lending to emerging Asia relative to other EM regions is likely due to the role of Chinese banks. Without directly observing Chinese banks' dollar-denominated lending to EMEs or emerging Asia, we reach this conclusion based on two steps. First, we establish the importance of Chinese banks' lending in overall bank lending to emerging Asia. We then show that the shift in the currency denomination of Chinese banks' global cross-border lending tracks very closely the shift in the currency of total cross-border lending to emerging Asia described above.

Chinese banks are important lenders to emerging Asia and emerging Asia also appears to account for a large share of Chinese bank lending abroad. The role of Chinese banks in lending to EMEs, and particularly to other countries in emerging Asia, has increased in recent years.¹⁰ Data on the exact size of Chinese banks' lending to specific countries are not publicly available. However, a recent article that draws on confidential BIS data shows the rapid growth in Chinese bank market share in lending to EMEs, reaching about 26 percent of cross-border lending to all EMEs and about 35 percent of cross-border lending to emerging Asia (outside China) as of 2021.¹¹ Calculations using these shares and publicly-available total lending quantities by region also suggest that lending to emerging Asia accounts for the bulk of Chinese bank lending to EMEs (very roughly 80-90 percent).¹² Although this measure includes potentially sizeable Chinese bank lending to related jurisdictions (such as Hong Kong), Chinese banks presumably also lend substantial amounts to other countries in Asia.¹³ Our analysis in the final section below uses restricted data to remove lending to Hong Kong and Macao and thus focus primarily on lending to unrelated EMEs.

The currency denomination of cross-border lending by Chinese banks globally shifted suddenly away from dollars to RMB starting in 2022, parallel to the developments in emerging Asia discussed above. Prior to 2022, Chinese banks generally increased their dollar-denominated cross-border lending at only a slightly slower pace than their lending in all currencies (Figure 5). After 2022 Q1, however, although Chinese banks' lending in all currencies was little changed, their dollar denominated lending fell notably, largely offset by a rise in lending denominated in "non-major" currencies. As a result, the dollar share of Chinese banks' cross-border lending fell rapidly and steadily (Figure 6).¹⁴ Most of this currency shift by Chinese banks appears to be into RMB lending (Figure 7), reflected in the share of RMB in Chinese overseas lending more than doubling, to nearly 40 percent, since 2021.¹⁵

Figure 5. Chinese bank global cross−border lending (to all borrowing countries), by currency

Figure 6. Dollar share of global cross−border lending (to all borrowing countries), by lender

Figure 7. Chinese financial institutions’ RMB loans overseas

The simultaneous shift of Chinese banks' global cross-border lending away from dollars into RMB and the similar sustained shift from dollars to "other" currency lending in emerging Asia, where Chinese banks are important lenders, strongly suggests Chinese banks are primarily responsible for the latter.¹⁶ Although the dollar share of the stock of Chinese bank cross-border lending remains substantial, the rapid decline in that share suggests that much of their new lending is in RMB, not dollars. This constitutes a rapid de-facto de-dollarization of new Chinese bank cross-border lending in the region.

3. Chinese banks' dollar lending decline is unique, as economic and geopolitical considerations coincide

The decline in the dollar share of cross-border lending by Chinese banks is notably steeper and more persistent than for other banks and thus cannot be easily explained by many typical lending supply and demand factors that would apply equally to other banks. We suggest instead that two coinciding factors may have led to a de-facto de-dollarization of new EME lending by Chinese banks: (1) increasing U.S. and euro area interest rates left Chinese banks uniquely positioned with 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.

Chinese banks' dollar lending decline is outsized compared to other banks and history
First, given that interest rate hikes, and thus higher funding costs, incentivized all banks to move away from dollar lending briefly, we use a simple regression to formally test the observation that the decline in Chinese banks' dollar share of lending appears steeper than that of other banks. We use granular restricted BIS data on bank lending by currency, by nationality of lending bank, and by borrower country within emerging Asia from 2015Q4 to 2024Q2. Our regression specification uses fixed effects to control widely for any unobserved lending supply or lending demand factor that applies in common across pairs of bank nationality, borrower country, or currency in each period.¹⁷ To isolate the lending in question, we estimate the coefficient for the three-way interaction of a Chinese bank dummy, a dollar denomination dummy, and a dummy for the period starting in 2022Q1 (see the Appendix for more details and robustness checks).

As shown in Table 1, the significant negative interaction term suggests that the recent changes in dollar lending of Chinese banks are significantly different than each of the following: recent Chinese bank lending in all currencies, other banks' recent lending denominated in dollars, and Chinese bank lending in dollars earlier in the sample. This rules out explanations such as effects of interest rates on banks' dollar funding costs that are common across all banks, or demand effects such as a preference shift away from dollars by borrowers in countries that Chinese banks lend more to (across all banks that lend to those borrowing countries).¹⁸

Table 1. Bank lending to EMEs by currency

Changes in interest rates of major currencies leaves Chinese banks with lower-cost home currency
The exercise above does not account for some unique circumstances of the recent period, which may help explain Chinese banks' shift from dollar to RMB, specifically, the combination of: the rise of Chinese banks as international lenders to EMEs; the significantly higher funding costs for both major international lending currencies, dollar and euro, that left the RMB relatively cheap; and the relatively limited accessibility of RMB funding to non-Chinese banks.

Cross-border lending to EMEs is primarily done by large international banks from a handful of jurisdictions, mainly euro area, U.K., U.S., Switzerland, and Japan. As noted above, Chinese banks have entered these ranks over the past decade. In addition, lending to EMEs is mostly denominated in a small number of major currencies, predominantly dollars, but also euro, both of which are accessible to international banks through established funding and FX markets that cross borders and bank nationalities. Chinese bank lending to EMEs initially followed this pattern, with Belt and Road initiative lending denominated primarily in dollars. We assume that Chinese banks face a similar cost of funding dollars as other non-U.S. international banks, at least on the margin.¹⁹

With this backdrop, when U.S. interest rates first rose in early 2022, the higher funding costs incentivized banks to substitute away from dollars, but for lending to EMEs, there are few alternate currencies that have proven desirable to both banks and borrowers. Once interest rates also rose for the euro, pound, and Swiss franc, both the dollar and the home currencies of most international lending banks were similarly expensive. The largest exception was Chinese banks, as the RMB interest rate became cheaper than rates for the dollar and other major currencies (Figure 8), an unusual occurrence.²⁰

Figure 8. U.S., Euro−area, and China 3−month interbank rates

Loans in cheaper funding currencies support profitability margins for banks while allowing banks to potentially offer lower rates to borrowers. Although we do not have data on loan terms, with substantial lending relationships with EME borrowers already in place, Chinese banks were uniquely positioned to offer more favorable rates through RMB lending when dollar rates rose. Furthermore, some borrowing EMEs have experienced financial strain in recent years. At least one study has highlighted China's rescue lending to countries in debt distress, primarily Belt and Road Initiative borrowers; under such circumstances, a switch to RMB could be part of the terms of renegotiated debt.²¹

Why would other international banks not also shift into lower-cost RMB lending, as they might shift between dollars and euro? Funding in RMB may not be as accessible and substitutable for other banks as it is for Chinese banks for a variety of reasons. Currency controls or simply a lack of established funding markets, funding relationships, or hedging options in RMB could restrain funding for non-Chinese banks. Inexperience with risk management around lending in RMB could also make non-Chinese banks hesitant or slow to shift.

Economic considerations coincide with geopolitical goals
In addition to the other developments in 2022, the timing of the change in trend for Chinese banks' dollar lending coincided with the West's financial sanctions on Russia and growing US-China tensions (over Taiwan and China's tacit support for Russia). China's interest in establishing alternatives to dollar-based financial institutions and networks over the last decade is well known, but, by most measures, changes in the dollar's international role have been quite gradual.²² However, the 2022 financial sanctions on Russia may have intensified China's efforts to insulate itself from exposure to the dollar-dominated financial system.²³ The coincident rise of the cost of funding and lending in most major currencies may have helped this goal, providing a catalyst to lending in RMB as an alternative.

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Appendix: Fixed effects regression specification

To test the relative size of Chinese banks' dollar lending decline, we use restricted BIS data on bank lending by currency, by nationality of lending bank, and by borrower country within EMEs from 2015Q4 to 2024Q2. Inspired by a Khwaja-Mian specification that uses fixed effects to control for unobserved factors, we include currency-time fixed effects, nationality of lender-time fixed effects, and borrower country-time fixed effects. The dependent variable is lending by currency as a share of total lending to that country by that bank nationality, although the results are robust to the dependent variable being the change in level of lending by bank nationality-borrower-currency.

The currency-time fixed effects control for any changes in dollar-specific (or any currency-specific) lending conditions that are common across all lending nationality-borrowing country pairs in each quarter (such as cost of funding). The nationality of lender-time fixed effects similarly controls for any changes in lending that are specific to a lending bank nationality but common across that nationality's borrowing relationships and across all currencies (such a bank lending supply), for each quarter. The borrower country-time fixed effects controls for any changes in lending to a specific borrowing country but in common across that country's lending banks and across all currencies (such as loan demand), for each quarter.

To isolate the lending in question, we estimate the coefficient for the three-way interaction of a Chinese bank dummy, a dollar denomination dummy, and a dummy for the period starting in 2022Q1. Each of these dummies separately are absorbed by the fixed effects, but the combination is not. The coefficient on this interaction indicates whether the dollar denominated share of lending during this period for Chinese banks is significantly different than all of: Chinese bank lending in other currencies for those quarters, other banks' lending shares denominated in dollars for those quarters, and Chinese bank lending share in dollars earlier in the sample. Our results show that the interaction has a significant negative coefficient. The appendix table shows robustness tests compared our main specification from the text. The main specification includes large EME borrower countries or jurisdictions except mainland China, Hong Kong, and Macao – to exclude any effects of changes in RMB lending to mainland China and its largest related jurisdictions – although the interaction coefficient has similar size and significance if we were to include these borrowers (-0.016, not shown). Column 2 shows that the Chinese bank interaction coefficient is stronger with only emerging Asian borrowing countries.

Appendix Table 1. Bank lending to EMEs by currency

Although the currency-time fixed effects should fully absorb factors such as the higher U.S. rates and value of the dollar, we also try including currency values in the regression (Column 3). For this specification, we limit the sample to lending denominated in dollars, euro, and yen, and use the nominal broad index for each currency as a regressor. We also can have only currency fixed effects, not currency-time fixed effects, but we keep the bank nationality-time and borrower country- time fixed effects. For these results, the coefficient on currency value is negative, as expected, but the triple interaction for Chinese banks is largely unchanged.

Finally, given that Japanese banks also have a home currency with low funding costs and had a larger decline in the dollar share of lending to emerging Asia in the recent period relative to other advanced country banks, we test the same specification, substituting a Japanese bank dummy for the Chinese bank dummy. The three-way interaction with Japanese banks is smaller than the one with Chinese banks and is insignificant (Column 4).