Measures to contain increase in foreign debt
By Feng Jie (China Daily)
Updated: 2005-10-22 06:14

China's foreign exchange regulator announced new measures on Friday to contain a rapid increase in foreign debt and ensure stable economic growth.

The State Administration of Foreign Exchange (SAFE) tightened rules governing foreign borrowing by local companies and foreign-invested firms, noting that a continued uptrend in foreign liabilities may threaten the nation's stable economic growth.

China borrowed US$148.3 billion in the first half of this year, up 77.7 per cent from a year earlier, it said earlier this month.

"An excessive inflow of foreign debt, particularly short-term debt, may pose a potential risk and have a negative impact on the stable and healthy growth of the economy," a SAFE spokesman said on Friday.

Starting in December, import payments of no less than US$200,000 that are delayed 180 days or longer after delivery will be treated as foreign debt. Such payments shall total no more than 10 per cent of the importer's total imports in the previous year, SAFE said.

The move plugs a regulatory loophole in the management of trade credit and will help provide more complete trade data for decision-makers, it said.

Trade credit accounted for 53 per cent of China's outstanding short-term liabilities at the end of June.

The spokesman did not elaborate on the causes of the rapid increases in trade credit. Earlier this year, the administration named it as one of the channels through which speculative funds that are betting on the revaluation of China's renminbi were entering the country.

China announced a long-anticipated reform of the renminbi's exchange rate, allowing the currency to strengthen by 2 per cent against the US dollar, but trading partners, who complain that the currency is undervalued to give Chinese exports an unfair competitive edge, are pressing for further action.

The administration said the new regulation is unlikely to disrupt importers' normal operations, stressing that the 10 per cent can basically meet their needs of trade credit.

SAFE also announced tighter rules on the conversion of capital and foreign debt by foreign-invested companies into the local currency, providing more strict procedures for conversions of US$200,000 or more.

The move followed measures in the past two years to tighten the supervision of forex sales to banks, as the authorities tried to harness the rapid increases in forex reserves, which were believed to be partly a result of speculative capital inflows.

Under China's current forex management regime, companies are required to sell a big portion of their forex to designated banks, most of which end up in the nation's forex reserve stockpile.

The administration also tightened rules on fund management of China-incorporated multinationals and the policy on overseas guarantees, which it also said will not harm businesses.

Analysts say the current level of foreign debt, or short-term debt, poses no serious threat to China's financial security, as its hefty foreign exchange reserves provide adequate resources to repay debts.

(China Daily 10/22/2005 page1)