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China curbs capital inflows by limiting offshore borrowing

China has moved to curb capital inflows by restricting the amount of money local and foreign banks can borrow overseas, the country's foreign exchange regulator said yesterday.

The State Administration of Foreign Exchange (SAFE) said it has set a ceiling of US$34.8 billion in short-term debt that can be taken on by foreign banks, the latest move by Beijing to ease pressure on the yuan.

Offshore borrowings by Chinese banks will be set at US$24.5 billion, according to a statement on the SAFE Web site.

The quota is "aimed at containing short-term debt ... and adjusting the short-term debt structure," it said.

The action had been taken in consideration of "China's economic situation, foreign banks' forex credit growth, the usage of overseas borrowing quotas and the increase in the nation's foreign debt," it said.

China imposed curbs on offshore borrowing early last year after a sharp increase in foreign funds flowing into the country.

Outstanding short-term debt jumped to US$104.31 billion at the end of last year, up US$27.27 billion from the end of 2003.

Since it is significantly cheaper to borrow money overseas, foreign concerns have been using the dollar to finance their China investment and operations.

China's export-driven economy has for more than a decade kept its currency fixed to the US dollar at around 8.28 yuan, a level that many of the country's foreign trade partners argue is artificially low and unfairly boosts exports.

Booming exports and the fixed-rate system forces China to absorb ever greater amounts of foreign currency, as seen by the astronomical jump in foreign reserves last year to a record US$609.9 billion from US$403.3 billion in 2003.

As the foreign funds flow in, the central bank takes them up under the fixed-rate system but in doing so is forced to issue yuan in return, thereby pumping money into the economy and adding to the danger of overheating.
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