Foreign debt rises due to policy changes
By Zhang Dingmin (China Daily)
Updated: 2004-09-30 00:55

China's foreign debt rose abruptly in the first half of this year due to macroeconomic factors like the unabated expectations for a renminbi revaluation and policy adjustments, the nation's foreign exchange authorities said Wednesday.

But the sudden increase in outstanding foreign liabilities did not signal heightened foreign debt risk for China, and external borrowing by foreign banks operating here will likely decline for the remainder of the year, said the State Administration of Foreign Exchange (SAFE).

China's outstanding foreign debt totalled US$220.1 billion at the end of June, up 14.12 per cent from the end of last year. Short-term debts stood at US$98.9 billion, a 28 per cent jump from six months earlier.

New borrowing, excluding trade credits, surged by 97.8 per cent on a year-on-year basis to US$83.4 billion during the first six months of the year, SAFE said.

And the net inflow of foreign liabilities -- new borrowing minus repayments and interest -- registered US$22.7 billion for the period, six times of what was recorded one year earlier.

"Generally speaking, the continued increase in China's foreign debt was influenced by such factors as the rapid growth in the domestic economy and foreign trade," SAFE said in a statement.

The rapid growth of the Chinese economy, registering a strong 9.7 per cent for the first half of this year, required greater funding, while the State's ongoing macro management, aimed at bringing down monetary and investment growth, caused a funding shortage and forced businesses to borrow from overseas, it said.

The interest rate differentials between China and international markets, as well as the persistent expectations for an appreciation of the renminbi exchange rate, were an "unnegligible" factor behind the rapid rise in foreign debts, the administration said.

But the recent interest rate increases in the United States narrowed interest rate differentials, and may hopefully put a damper on China's foreign debt growth, it said.

What can be a more important reason, the administration said, was policy adjustments on foreign banks' foreign debt regulations and forex sales rules, which had a "significant" impact on the foreign debt picture in the second quarter.

The Chinese authorities issued new rules governing foreign banks' foreign borrowings in May, requiring them to bring their outstanding loans from outside China to below authorized ceilings by the end of this year, and keep their short-term liabilities below the amount outstanding at the end of June before the end of the year.

That, coupled with a tightening in rules on forex sales to Chinese banks, caused foreign banks to increase borrowing in June to push up the outstanding amount at the end of the month and gain more elbow room for the remainder of the year.

"Therefore, the abrupt increase in the outstanding foreign debt at the end of June was largely associated with adjustments in foreign debt policies, and did not suggest a sudden rise in China's overall foreign debt risk," SAFE said.

Foreign financial institutions operating in China accounted for 21 per cent of the nation's total foreign debts outstanding at the end of June.

The administration also said it was closely watching the effect of the new foreign debt regulations, pledging it would try to avoid disrupting normal operations of foreign banks when containing the nation's foreign borrowings.

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