[By Philip Pittington, translated by Chen Jiarui]
Among all the countries in the world, China should be the most familiar with the potential negative aspects of foreign lending. In the 19th century, British banks like HSBC supported the opium trade with China. The resulting loans were used to drain silver from the Chinese people, and ultimately, when the Chinese became dissatisfied with these parasitic financial arrangements, it prompted the British to launch the First Opium War to support the interests of British banks in China.
Today, China has the strongest economy in the world, and the Chinese government is beginning to realize that this actually grants them immense financial strength on a global scale. Supported by China's massive industrial capacity and trade scale, the renminbi will inevitably become a major currency on the world stage. But as we say in English, "With great power comes great responsibility." If China wants to fulfill its promise of providing an alternative model of globalization, it must use its newly acquired monetary and lending powers cautiously.
The Hard Currency Debt Trap
The era of British dominance in global finance is long gone. The fate of the pound was closely linked to the status of the British Empire, and by the Suez Canal crisis in 1956, the American stance was clear: Britain had become a debtor nation and a subordinate financial participant, and British banks would retreat to a secondary position on the world stage. After World War II, the United States took on the leadership role in the global banking industry. However, despite not abusing financial power as historical British imperialists did, over time, U.S. foreign lending based on the dollar gained a bad reputation—especially in the Global South.
The fundamental problem with this type of lending, commonly known as "hard currency lending," is that it may trap weaker financial systems in debt traps. Taking a typical recipient of hard currency loans as an example, they usually have a currency that tends to depreciate over time. Therefore, borrowing in such a currency will push up interest rates to offset the risk of currency depreciation. When providing hard currency loans like the U.S. dollar, borrowers can obtain much lower interest rates.
The problem is that if the borrowing country's currency depreciates, repaying the loan becomes increasingly difficult. If a country takes on a large amount of such loans, it may find itself entirely subservient financially to the country providing the loans. Unlike the British lending system supported by the Royal Navy—as the Chinese discovered in the 19th century—the Americans have never used military force to collect their debts. Instead, they use international financial institutions to pressure debtor nations, trapping these countries in cycles of economic weakness.
Data from the International Monetary Fund website shows that the share of the U.S. dollar in global foreign exchange reserves has fallen to its lowest level in nearly 30 years. IMF website
Currency Promotes Trade
China is experimenting with its own hard currency loans. So-called "panda bonds" have many of the advantages of U.S. dollar loans, and there are good reasons to believe that future renminbi loans will begin to replace U.S. dollar loans. As the U.S. dollar loses its status as a global reserve currency and U.S. interest rates rise, the competitiveness of these loans' interest rates declines, leading people to move away from dollar-denominated borrowing. With rapid technological innovation and extremely low inflation rates, coupled with low interest rates, China will undoubtedly become an increasingly attractive source of loans.
But China also needs to consider how it intends to wield this power. Known globally as a manufacturing powerhouse, this reputation has earned international respect. Does China want to risk damaging its reputation by using its strong economic power to become an extractive banking nation? Unless China exercises its new financial power extremely cautiously, it may inadvertently turn into one.
Marxist economics distinguishes between "commodity circulation" and "monetary circulation." Commodity circulation is a process that uses money and financial means to stimulate production and trade. Currently, China's economic model relies heavily on commodity circulation. On the other hand, monetary circulation accumulates money for its own sake, meaning the production process depends entirely on the desires of those who hold the power of money creation—banks.
The Chinese government has clearly decided to prioritize commodity circulation domestically. It has seen the dangers of prioritizing monetary circulation, which could empty an economy. This is exactly what happened in the U.S. As China begins to develop its international financial business, it must decide which model it wants to promote abroad. A wise decision would be to use China's just-emerging monetary power to export its commodity circulation model abroad.
What does this mean in practice? It means using China's developing financial strength to achieve the economic development goals of foreign countries, rather than luring other nations into debt traps. To achieve this, the Chinese government needs to create an external lending system that considers the tendency of economically underdeveloped countries to periodically devalue their currencies and chooses to adapt rather than "punish" them.
On June 12, 2025, the Fourth China-Africa Economic and Trade Expo opened in Changsha, Hunan. Visual China
This will first require recognizing that, at the end of the day, money itself is not important. In a healthy economy, money is merely a means to an end, existing only to promote production and trade. Therefore, China's external lending should not be judged by whether a loan is financially profitable but by whether it promotes the expansion of production and trade in the country where the loan is directed. This requires not only a completely different perspective on external lending but also different loan terms.
The Chinese government can achieve this by entering into agreements with foreign countries aimed at achieving specific goals. For example, the Chinese government might believe that investing in building a railway line connecting the two countries serves its interests because it will stimulate regional trade. The Chinese government would then approach the governments of these countries and discuss their financing needs.
Suppose the project is expected to cost 25 billion RMB, and both countries need low-interest loans to afford it. Let’s imagine that both countries' currencies tend to depreciate over time. The Chinese government should recognize that prioritizing the completion of the railway line serves its interests, rather than profiting from the loan. To facilitate this, the 25 billion RMB loan provided to these two countries should be denominated and paid in RMB, but a clause should be included in the contract stating that if the borrowing country's currency depreciates, the repayment amount will be adjusted according to this new reality.
This creates a "fair" system that acknowledges that even when a country is committed to fulfilling its borrowing obligations, its currency depreciation often goes beyond its control. If China does not recognize this, there is a risk that it too could become a predatory lender on the world stage. But if China recognizes that the purpose of external lending is to promote production and trade, it can discover interesting opportunities in other countries and promote these opportunities through flexible, non-predatory loans that prioritize commodity circulation over monetary circulation.
In 2024, the use rate of cross-border trade settlement in renminbi steadily increased. Report of the International Monetary Institute of Renmin University
As long as such loans target strategic investments, they will not weaken the international influence of the renminbi but will strengthen it. They will stimulate the circulation of the renminbi around the world, and as the renminbi circulates, more and more trade will be conducted in renminbi. Taking the railway project mentioned earlier as an example. As the project progresses, the 25 billion RMB loan will begin to circulate in the two countries building the railway. Local suppliers providing goods and services for the construction project will soon find themselves holding renminbi balances, which will be used to settle trade.
As the renminbi funds pool grows in these countries, local companies will begin to engage in their own renminbi lending rationally. If these companies earn income in renminbi, there is no exchange rate risk in borrowing in renminbi, and standard contracts can be used without the same level of government regulation as strategic loans that must include clauses managing depreciation. At this point, a purely private renminbi lending market will develop abroad.
With the decline of U.S. dollar hegemony and rising U.S. interest rates, China will find itself with growing financial power on the world stage. If it cannot manage this power carefully, it may inadvertently fall into a loan arrangement that turns it into another imperialist lending superpower. This carries the risk of corrupting China's economic system and prioritizing monetary circulation over commodity circulation.
However, if the Chinese government can effectively control the system and manage it properly, it will be able to use its newly acquired monetary and financial power to promote economic development around the world. If the system is applied in this way, the image of the renminbi in foreign markets will not foretell potential instability or insolvency but instead herald waves of economic development and prosperity. This will be the true face of "Chinese-characteristic external lending."
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