Precautions needed over potential debt risks
By Xin Zhiming (China Daily)
Updated: 2004-03-10 15:07

With its economy pounding ahead with world-beating speed, China has become a star performer against the still-recovering global economy.

But it is not growing without potential problems. With newly released statistics concerning China's short-term foreign debt surge in 2003, people are justified to demand more caution against potential debt risks that may hurt the country's economic sustainability.

According to the State Administration of Foreign Exchange (SAFE ), China's foreign debt surplus increased by US$22 billion by the end of 2003 year-on-year. Of that total, US$21 billion was short-term debt, sparking concerns that rapid increases in payment-demanding short-term debts may incur risks threatening China's financial stability.

SAFE chief Guo Shuqing said China's payment ability is strong enough to deal with the challenge, precluding any substantial debt crisis.

Guo is not being over-optimistic.

China boasts a foreign exchange reserve of more than US$400 billion. Deducting the recent US$45 billion transfusion into commercial banks to facilitate their reform, the remaining amount still makes the country capable of warding off debt risks.

By the end of 2003, China's foreign debt surplus was US$182.6 billion, increasing by 8.33 per cent year-on-year.

Currently, China is free of debt crisis according to the three major international solvency standards: debt service, foreign debt and liability ratios.

The debt service ratio refers to the ratio of the payment of principal and interest on foreign debts to the foreign exchange receipts from exports and non-trade services of the current year. China's figure stood at 7.89 per cent in 2002, far below the international warning limit of 20 per cent.

China's foreign debt ratio, which means the ratio of its balance of foreign debts to foreign exchange receipts from exports and non-trade services in the current year, was 46.12 per cent in 2002, while the internationally recognized security line is 100 per cent.

The country's liability ratio, referring to the ratio of its balance of foreign debts to the gross national product in the current year, registered at 13.62 per cent in 2002, nowhere near the security line of 25 per cent.

Such assuring figures can justify optimism on the part of policy-makers in terms of the short-term debts in the country's debt surplus structure.

China's short-term debts account for more than 30 per cent of its debt surplus, which has exceeded the international security line of 25 per cent.

Interest and exchange rate fluctuations are behind the short-term debt pick-up. The interest on US dollar loans in the international market is 2-3 percentage points lower than that of the renminbi loans.

Analysts said what is worrying is that investors may be engaging in foreign exchange speculation. It may create the possibility of drastic short-term capital flow, which was one factor standing behind the Asian financial crisis in the late 1990s.

The rapid increase in short-term foreign debts has reversed the trend since 1999 of contracting a foreign debt surplus. If the upward trend continues, risks may accumulate to a dangerous level.

Authorities should therefore closely supervise short-term capital flows. More importantly, they need to improve its foreign debt structure to make it more rational and less risky.

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