Analysts said the decision, announced by Kenya last week, paved the way for other debt-stressed African countries and could ultimately draw them closer to China.
Kenyan Treasury Minister John Mbadi said on Tuesday that the country’s US$5 billion Chinese railway loans had been converted to Chinese yuan, in a move expected to cut annual debt-servicing costs by US$215 million.
Kenya took three loans worth US$5 billion from the Export-Import Bank of China (China Exim Bank) in 2014 and 2015 to build the 600km (373-mile) Standard Gauge Railway (SGR) from the port city of Mombasa to Naivasha, a town in the Rift Valley just outside the capital Nairobi.
Treasury data shows about US$3.5 billion of the loan remained unpaid as of June 2024, with Kenya spending US$1 billion annually on servicing its Chinese debt.
Mbadi did not reveal the new yuan loan’s terms, including its interest rate. However, he had said in August that the deal was expected to halve the SGR loan rates from the existing 6.37 per cent under the dollar-denominated agreement.
Aly-Khan Satchu, a geoeconomic analyst specialising in sub-Saharan Africa, said Kenya appeared to have pegged its shilling to the US dollar. This means it cannot benefit from the rally in emerging market currencies, which would have reduced the principal amount of the debt in shilling terms.
He said converting the loan into yuan – with its considerably lower interest rates than dollar rates – made “optimal sense from a balance sheet management perspective”.
Satchu linked Kenya’s move to China’s broader ambitions for the internationalisation of its currency, also known as the renminbi (RMB).
“This conversion fits into that strategy,” he said. “Kenya’s conversion is a lodestar for other African countries to do the same.”
Yufan Huang, a pre-doctoral fellow with the China-Africa Research Initiative at Johns Hopkins University, described the deal as “a win-win-win for Kenya, China Exim and the Chinese government”.
“Beijing is happy to see a bit more progress on [yuan] globalisation after years of effort with limited success,” Huang said.
He suggested that signs of recent US dollar weakness under President Donald Trump might have encouraged the Chinese government to push banks and ministries to do more on this front.
China is promoting the global use of the yuan to challenge the US dollar’s dominance. This is evident in Africa through signed currency swap deals with countries such as Nigeria and South Africa and yuan-denominated transactions such as the 2.1 billion yuan loan to the Development Bank of Southern Africa.
But Huang noted that while Kenya gained from the lowered interest rate, the relief might not be enough, and it might still hope for a reprofiling of the SGR loans.
“Kenya will have to balance that request carefully with [President William] Ruto’s desire to secure new financing from Exim for the next phase of the SGR,” he said, referring to the planned extension to Malaba on the Ugandan border.
The swap has the blessing of Beijing amid its renewed push for yuan globalisation, but Huang cautioned that new lending volumes might remain limited, given recent painful restructuring experiences.
He suggested that demand for yuan-denominated loans, especially at a floating rate, might be modest as borrower countries must weigh the lack of reserves of the Chinese currency, the added cost of hedging and the risk of yuan appreciation.
Kenya’s case may become a test case for similar African swaps, but with caveats, as each case differs, according to Huang.
He said that for countries such as Djibouti and Congo, swaps alone might not be sufficient to address debt sustainability concerns.
Ovigwe Eguegu, a policy analyst at Beijing-based consultancy Development Reimagined, said the currency swap allowed Kenya to avoid US dollar volatility and US interest rate cycles while securing access to Chinese funding as Western lenders remained cautious