China’s foreign debt rose abruptly in the first half of this year owing to macroeconomic factors such as the persistent expectations of a Renminbi revaluation and policy adjustments, the State Administration of Foreign Exchange (SAFE) announced on Wednesday.

However, the sudden increase in outstanding foreign liabilities does 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, according to SAFE.

China’s outstanding foreign debt totaled US$220.1 billion at the end of June, up 14.1 percent from the end of last year. Short-term debt stood at US$98.9 billion, a 28.0 percent jump from the end of 2003.

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

The net inflow of foreign liabilities -- new borrowing minus repayments and interest -- was US$22.7 billion for the period, six times the amount 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,” according to a SAFE statement.

The strong 9.7 percent economic growth in the first half of this year meant high funding needs. Meanwhile, the government’s ongoing macro control policies -- aimed at bringing down monetary and investment growth -- caused a funding shortage and forced businesses to borrow from overseas.

The interest rate differentials between China and international markets, as well as the continued expectations of Renminbi appreciation, are also factors behind the rapid rise in foreign debt.

However, the recent interest rate increases in the United States narrowed interest rate differentials and will hopefully put a damper on China’s foreign debt growth, said SAFE.

Of greater impact were policy adjustments to foreign banks’ foreign debt regulations and forex sales rules, which had a significant impact on the foreign debt picture in the second quarter.

New rules governing foreign banks’ foreign borrowings were issued in May, requiring them to bring their outstanding loans from outside China to below authorized ceilings by the end of this year. They are also required to reduce their short-term liabilities below the amount outstanding at the end of June before the end of the year.

(China Daily September 30, 2004)