China's external debt soars to 27 year high at $695 billion
Beijing: China's external debt totalled a whopping USD 695 billion last year, highest in 27 years, adding to concerns that it might undermine the country's fiscal position at a time when its economy has slowed down due to declining exports.
The external debt rose by USD 146 billion, or nearly 27 percent from 2010, data released by the State Administration of Foreign Exchange (SAFE) said.
The proportion of short-term external debt to the total also climbed to a record high of 72 percent as of December 31, in contrast to 68 percent in 2010 and 60 percent in 2009, SAFE data said.
But the year-on-year increase in short-term debt moderated. As of 2011 end, outstanding short-term debt stood at USD 500.9 billion, up 33 percent. The growth rate was nearly 12 percentage points lower than in 2010.
The jump in foreign debt shows that China, which lends more than it borrows, is borrowing more from overseas to hedge against the devaluation of its foreign exchange reserves, analysts said.
Meanwhile, enterprises on the Chinese mainland have resorted to borrowing from overseas due to financing difficulties at home, they added.
As the yuan has strengthened against other currencies, the value of China's foreign exchange reserves has shrunk, Li Jian, a research fellow from the Chinese Academy of International Trade and Economic Cooperation from the Ministry of Commerce said.
According to SAFE, the Yuan has risen 13.69 percent against the US dollar since the beginning of 2008.
The Yuan appreciation also had adverse impact on China's foreign exchange reserves of USD 3.20 trillion, highest in the world. As a result, the value of the Chinese government's dollar-denominated assets has fallen, Li argued.
Borrowing in dollars allow the government to offset some of those losses because it would effectively have to pay less when the loans come due if the yuan continues to strengthen, Li told state run Global Times.
Also, the Chinese business enterprises have become more reliant on borrowing from abroad due to soaring costs of domestic financing, Zhang Yugui, dean of the College of International Finance and Trade at Shanghai International Studies University said.
Overseas borrowing has also helped central and local governments diversify their sources of financing, which will ease reliance on domestic banks, Li said.
Added to the soaring overseas debt, China's domestic borrowings also rose to USD 2.78 trillion, about 43 percent of the country's gross domestic product (GDP).
The domestic debt last year included USD 1.70 trillion by local government and USD 1.07 trillion incurred by central government, according to Yang Kaisheng, president of the Industrial and Commercial Bank of China (ICBC).
The debt regulators should be alert to China's rapidly rising short-term external debt, as the proportion of 72 percent is well above the international alert level of 25 percent, Li Chao, deputy head of the SAFE, said in December.
The expectations of further yuan appreciation and interest rate differentials between the yuan and other currencies had spurred the rise in short-term debt, because companies and banks tended to take in foreign currencies more quickly but pay out yuan more slowly, state run China Daily quoted him as saying.
Lu Zhengwei, chief economist at the Industrial Bank Co Ltd, warned that while regulators should keep an eye on the short-term external debt, the "most devastating risks" lie in the surging medium- and long-term debt, which China might not have the ability to repay due to future interest rate levels.
Medium and long-term external debt, which accounted for nearly 28 percent of total outstanding external debt, showed a marked increase last year of 12 percent, compared with a two percent gain in the previous year.
Lu said the cheap and "more accessible" dollar, the result of US monetary easing, was the main driver of the rapid debt increase.