China's short-term foreign debt hits new high

Updated: 2007-08-01 10:02

BEIJING -- China's short-term foreign borrowing as a proportion of its total outstanding foreign debt has hit a record 57.5 percent by the end of March.

At the same time, the country's total outstanding foreign debt increased by 8.57 billion US dollars to 331.56 billion US dollars, according to the State Administration of Foreign Exchange (SAFE).

Meanwhile, China's short-term foreign borrowing jumped by seven billion US dollars to 190.63 billion US dollars, rising as a proportion of total debt by 0.65 of a percentage point in three months.

Experts warned the short-term debt growth and the proportion growth indicated an active trans-border capital flow and may bring more pressure to bear China's fast-growing economy.

The country's gross domestic product (GDP) rose 11.5 percent in the first half, after it grew 11.9 percent in the second quarter.

Despite a series of measures to curb excess liquidity, such as interest rate hikes and reserve requirement ratio rises, China's benchmark Shanghai Composite Index on the Shanghai Stock Exchange continues to surge.

Due to the yuan's continuous appreciation and the booming stock and property markets, speculators were pouring cash in, said Ding Zhijie, vice director of the School of Banking and Finance of the University of International Business and Economics.

By the end of March, trade credit, a channel speculators prefer to use to maneuver trans-border capital flow, amounted to 108.6 billion US dollars, a rise of 4.6 billion US dollars from the end of last year.

"It is difficult to identify how much idle capital has come in, but there's no doubt that speculative funds remain unabated in entering China," said Ding.

His concern was shared by Deng Xianhong, vice director of the SAFE who warned that some speculative funds had entered the market under the guise of trade or investment and flowed into stock and the property markets.

Ding said market expectations of a rising yuan had aggravated the risk as local exporters tended to settle payments for goods in advance to avoid foreign exchange losses.

"Normally, the payment will be advanced by only six months. In extreme cases, it can be two years ahead of schedule which raises the possibility of the inflow of speculative funds through trade credits," Ding said.

The SAFE has drawn a list of companies "deserving special attention" and issued regulations to lower the ceiling on outstanding short-term foreign debt held by financial institutions.

SAFE figures showed a total of 5,303 local enterprises have been put under surveillance last November after being suspected of using their capital for speculation. Another 472 companies have been added to the list by the end of April.

However, Yi Xianrong, researcher of the Institute of Finance and Banking of the Chinese Academy of Social Sciences, said the government could ward off speculative funds by prohibiting suspect enterprises from converting short-term foreign loans into yuan.

The country's short-term foreign bond issue was equivalent to just 14.3 percent of China's foreign exchange reserve, much lower than the world warning line of 1:1, insiders said.

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