China raises foreign debt quota for foreign banks

BEIJING Thu Mar 29, 2012 2:17am EDT

HSBC logos are displayed inside an office tower in Hong Kong February 27, 2012. REUTERS/Bobby Yip

HSBC logos are displayed inside an office tower in Hong Kong February 27, 2012.

Credit: Reuters/Bobby Yip

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BEIJING (Reuters) - China has bumped up the annual long-term foreign debt quota allocated to foreign banks to $24 billion, allowing them to bring more money into the country as growth slows in the world's No.2 economy.

The National Development and Reform Commission, the powerful Chinese planning agency that announced the quota increase, also said it would launch a pilot project for increasing the debt quota.

Participants in that project include HSBC Holdings Plc (HSBA.L) (0005.HK), Deutsche Bank AG (DBKGn.DE), JP Morgan (JPM.N), Citigroup (C.N), Sumitomo Mitsui Banking Corp and Bank of East Asia (0023.HK), the regulator said in a statement published on its website.

Because of China's capital account restrictions, overseas banks operating have often struggled to supply their local Chinese operations with enough capital to meet demand for loans and investment.

The move could also help China cope with the slower flow of capital into its economy. Inbound foreign direct investment, a key indicator for long-term capital inflows, shrank in February from a year earlier, marking the fourth straight fall.

"The number $24 billion is not big, but it shows China is taking measures to manage capital inflow slowdown," said Liu Junyu, an economist with China Merchants Bank in Shenzhen.

"However, it should be noted that there's no evidence to show that China will see persistent capital outflows," Liu said.

BORROWING IN YUAN

NDRC said that foreign banks can also borrow yuan from overseas markets, but that they need to report the size, maturity and the lenders of such yuan loans.

The new quotas may have more than doubled from previous quotas, according to data from the State Administration of Foreign Exchange (SAFE). The NDRC did not provide a breakdown or comparison.

The quota allocation is aimed at "promoting opening-up of the financial sector, giving a bigger role to foreign banks in capital flows, and pushing forward national economic development", the regulator said.

Outstanding foreign debt held by foreign banks in China stood at $54 billion at the end of 2011, including both long-term and short-term debt. That accounted for 12.13 percent of China's total foreign debt, according to government data.

In 2011, China in total borrowed only $44 billion in long-term foreign debt. All foreign banks would have borrowed $5.3 billion in long-term foreign debt last year, according to Reuters calculations, assuming the 12.13 percent applies.

A banker with one of the six lenders and an NDRC official, both of whom declined to be named, confirmed that the new quota marked an increase from previous years.

China's foreign exchange purchases in the banking system, a key gauge to measure short-term capital inflows, showed that China witnessed capital inflows in the past two months after an exodus of money in the last quarter of 2011.

NDRC decides the amount of long-term debt, meaning debt with maturity of one year and above, for every foreign bank in China. The long-term foreign debt quota serves as an important tool in capital account control.

According to Chinese regulations, foreign banks have to apply for their long-term debt quota from the NDRC on a yearly basis by telling the economic planning agency their general plans for these debts -- for instance, banks can't borrow overseas money to lend to foreigners in China to buy houses.

NDRC will then approve the quotas that it believes is appropriate.

(Additional reporting by Lu Jianxin in Shanghai; Editing by Don Durfee and Muralikumar Anantharaman)

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