China tells banks to reduce overseas borrowings

China ordered foreign and local banks to rein in overseas borrowings in a bid to curb speculative capital inflows.

Overseas loans with a maturity of less than a year will be limited to $12.7 billion by June for 23 foreign banks and to $8 billion for 19 local banks, the State Administration of Foreign Exchange, or SAFE, document showed. That���s a reduction of 15% for global lenders from the March-end levels, and 5% for domestic lenders, said Xu Hanfei, an analyst at Industrial Bank in Shanghai. The new quotas are valid through March 31, 2009.

China���s foreign-exchange reserves rose to a record $1.68 trillion at the end of March, the central bank said on April 11, fueling concerns that inflows of speculative capital will hamper the government���s efforts to damp inflation close to the fastest in 11 years. ���Growth in foreign-exchange lending exceeded that of yuan loans from last year,��� said Li Huiyong, a foreign-exchange analyst at Shenyin Wanguo Research and Consulting in Shanghai. ���Short-term lending is one of the channels for inflows of so-called hot-money.��� A SAFE official said he was aware of the document, but wouldn���t make further comments.

Premier Wen Jiabao said last month that the government���s top priorities this year are curbing inflation and preventing economic overheating. The central bank has ordered lenders to set aside larger reserves three times this year, following six interest-rate increases in 2007. Inflation surged to 8.3% in March, little changed from 8.7% in March. ���Investors borrow dollars from banks and convert them into the Chinese yuan,��� said Wang Qian, economist at JPMorgan Chase in Hong Kong. ���Even a simple deposit of the currency would give them a nice return on investment.���

The yuan has appreciated 4.5% against the dollar this year. The benchmark one-year deposit rate is 4.14%. China���s record trade surplus has flooded the country���s financial system with cash and the government is also concerned that inflows of so-called ���hot money��� will contribute to excess liquidity in the world���s fourth-biggest economy.

The State Council held a meeting with seven regulatory agencies on April 19 to discuss ���hot money��� flowing into the country, China Business News reported this week.

SAFE said in March last year that it would cut local banks��� short-term foreign debt quotas to 30% of their 2006 levels by March 2008 to stem foreign-currency inflows. Overseas financial institutions��� short-term foreign debt quotas were cut ���by a relatively small margin��� because of their limited funding sources, it said then, without giving details.

Outstanding foreign-currency loans surged 56.9% from a year earlier to $268.8 billion at the end of March, according to central bank data. Outstanding short-term debt increased 19.85% to $220 billion at the end of 2007 from a year earlier, accounting for 58.9% of the total foreign debt, according to government data.

The National Development and Reform Commission, the nation���s top economic planning agency, cut quotas for foreign banks��� medium and long-term foreign debt this year, according to a statement on its website this month. The reductions in the limit of foreign debt of more than one-year maturity are part of the government���s ���tight��� monetary policy, the statement said.