Banking News
- Govt. curbs lenders' overseas borrowing
Date: 5-Mar-2007 Sources: (Shenzhen Daily)
THE government Friday ordered banks to slash their short-term overseas borrowings in a move designed to reduce capital inflows that have helped push up the yuan and to promote the country's financial markets.
In a statement on its Web site, the State Administration of Foreign Exchange (SAFE) expressed concern that foreign debt, especially short-term debt, was growing fairly rapidly.
SAFE, the currency regulator, ordered domestic banks to reduce short-term foreign debt in stages to 30 percent of their 2006 quota by the end of March 2008.
Foreign-owned banks and all non-bank financial institutions in China must cut their short-term foreign debt to 60 percent of their 2006 quota by the same deadline, the regulator said.
Officials said they were also considering reductions in companies' offshore borrowing.
SAFE said the cuts were not as drastic as they seemed because it was also relaxing the definition of short-term debt.
The regulator, which said the restrictions would help reduce China's bulging balance of payments surplus, has not disclosed how much banks were permitted to borrow last year.
But domestic reports have said quotas were similar to those for 2005, US$34.8 billion for foreign banks and US$24.4 billion for domestic banks and some non-banking firms.
To compensate for the restrictions on foreign borrowing, SAFE said it would expand China's underdeveloped currency swap market.
The regulator also promised to make it easier for foreign banks to operate in the interbank market and said more institutions would be allowed to issue yuan bonds.
'The policy changes may hit two birds with one stone: reduce capital inflows and help develop the domestic money market,'said Sun Mingchun, an economist at Lehman Brothers in Hong Kong.
Sun said the policy package had two possible implications.
Upward pressure on the yuan might ease at least slightly in the short-term, while reduced short-term capital inflows should help reduce excess liquidity in the banking system.
This, together with increased demand for funds in the money market, could push market interest rates higher and pave the way for an increase in official interest rates, Sun told clients.
Oliver Stoenner, a portfolio strategist at Cominvest in Frankfurt, also saw the new policies as a form of backdoor tightening aimed at slowing the tempo of growth.
'With this kind of regulation the authorities aim to reduce inflationary pressure on the mainland because, if the banks borrow abroad to finance activity on the mainland, that tends to give a positive impact on monetary growth and the real economy,'he said.
With less borrowed foreign money coming into China, another effect will be to slow growth of the country's foreign exchange reserves, which reached US$1.07 trillion at the end of 2006.
A foreign banker said SAFE's initiative could also put the brakes on the expansion of foreign banks in China.
Such banks rely on offshore borrowing to fund their lending, as they have few retail branch networks in China and face limits on how much they can borrow from the interbank market, the banker said.
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