Quotas will be slashed for short-term overseas borrowing by both domestic and foreign financial institutions to "maintain the basic balance of payments."

 

The State Administration of Foreign Exchange (SAFE) said on Friday on its website that domestic banks' quotas for foreign borrowing, or debt, will be reduced gradually to 30 percent of the 2006 level by the end of next March.

 

It said overseas borrowing by foreign banks and non-banking financial institutions could constitute up to 60 percent of the 2006 level within the same time limit. SAFE did not reveal the 2006 level.

 

The currency regulator also said that from April 1 it will include more types of borrowing in its short-term debt quota management regime, such as overseas institutional deposits.

 

SAFE said the move aimed to regulate short-term borrowing by financial institutions, safeguard national financial security and promote the balance of payments.

 

China has the world's highest foreign exchange reserves. By the end of 2006 its reserves had exceeded US$1 trillion.

 

SAFE also said it was concerned that foreign debt, especially short-term debt, had grown "too fast" in recent years.

 

By the end of 2006, SAFE said, China's foreign debt had increased by 14 percent on the previous year. Short-term debt increased by 16 percent.

 

About 57 percent of China's foreign debt was short-term by the end of 2006, according to SAFE.

 

That compared with 55.8 percent by the end of June and 55.28 percent by the end of September.

 

The country's short-term foreign debt hit US$168.6 billion at the end of last September, according to SAFE.

 

Zhao Xijun, a senior economist from Renmin University of China, said the move was not unexpected. "China's short-term foreign debt has increased rapidly in recent years, which brings structural risks," he said. "It is time to take some measures."

 

Zhao said the new rule would also curb so-called hot money, or speculative capital, which has been bringing risk to the domestic financial market.

 

"By reining in hot money, the new rule may also alleviate pressure on yuan revaluation."

 

SAFE said it would cooperate with other agencies to encourage financial institutions to borrow from domestic markets and use financial derivatives to broaden their channels for foreign exchange.

 

(China Daily March 3, 2007)