China Trade Review ｜ a rational view of the continuous growth of China's foreign debt

A group of data on China's foreign debt released by the State Administration of foreign exchange has attracted a lot of attention. By the end of 2021, the balance of China's full caliber (including local and foreign currencies) foreign debt was US $2746.6 billion, an increase of US $50.1 billion over the end of September 2021 and US $345.8 billion over the end of 2020. Wang Chunying, deputy director of the State Administration of foreign exchange and spokesman, said that the growth of foreign debt was mainly due to the continuous enhancement of China's economic strength and the continuous expansion of opening to the outside world, and foreign investors continued to increase their holdings of domestic RMB bonds.
In theory, foreign debt is defined as the total debt that a country should repay to a foreign country. According to debt instruments, it can be divided into five categories: loans, debt securities (bonds issued by domestic institutions abroad and domestic RMB bonds invested by foreign investors), monetary deposits (such as deposits of non residents in domestic banks), trade credit and prepayment (liabilities incurred by enterprises due to different times of trade capital receipt and payment and goods ownership transfer, including deferred payment and prepayment) and inter company loans in direct investment.

Under the new situation, by summarizing the management experience of cross-border capital flows in domestic free trade zones and based on China's own development stage, in 2017, the people's Bank of China issued the notice of the people's Bank of China on matters related to the macro Prudential Management of full caliber cross-border financing, introducing the "macro Prudential Management of full caliber cross-border financing", hereinafter referred to as the "full caliber model". According to the data published on the website of the State Administration of foreign exchange, since 2016, the scale of China's full caliber foreign debt has continued to grow, reaching a balance of US $2746.6 billion by the end of last year.

The author notes that for a long time, for domestic enterprises in China, foreign debt capital is the most direct, convenient and lowest cost channel for overseas financing, which is more flexible and convenient than any other way. The external debt of such enterprises has also increased in recent years. In response to the new situation, the State Administration of foreign exchange further expanded the pilot of foreign debt facilitation quota for high-tech enterprises last year. At present, the pilot of foreign debt facilitation quota has been carried out in 9 regions, including Beijing Zhongguancun national independent innovation demonstration zone and Shanghai free trade zone. In addition, focusing on the issue of foreign debt registration, which is widely concerned by enterprises, the safe has also continued to deepen the pilot reform of foreign debt registration and management in recent years, making it clear that qualified non-financial enterprises (except real estate enterprises and local government financing platforms) can apply to the local safe for one-time foreign debt registration according to the amount of twice the net assets of the enterprise, without going through foreign debt registration one by one according to the loan contract. This greatly reduces the exchange rate risk and financing cost of relevant enterprises.
It should be noted that China's management of foreign debt insists on serving the real economy, and tries to make China's foreign trade more convenient and attract investment effectively through the optimization of foreign debt management. Official institutions support the application of medium and long-term commercial loans to the introduction of high-tech and intellectual property management, and some short-term foreign debt is used to support cross-border capital flows. For example, not long ago, with the approval of the State Council, the State Administration of Foreign Exchange carried out high-level pilot opening-up of cross-border trade and investment in four regions: Lingang New Area of Shanghai Free Trade Zone, Nansha New Area of Guangdong Free Trade Zone, Yangpu Economic Development Zone of Hainan free trade port and Beilun District of Ningbo, Zhejiang Province. In particular, it is mentioned that qualified high-tech enterprises can independently borrow foreign debt within the amount of US $5 million, which has greatly increased the amount of foreign debt that such enterprises can borrow. According to the new regulations of the above four regions, the registration of foreign exchange businesses such as overseas loans, foreign debts, cross-border guarantees, overseas listing, participation of foreign employees of domestic listed companies in equity incentive plans, hedging of central enterprises and state-owned enterprises shall be handled directly by banks.
Industry insiders pointed out that with China's economic development, continuous expansion of opening-up and international investors' recognition of the Chinese market, the total scale of foreign debt has increased, which is in line with the law and objective needs of economic development. In terms of total amount, compared with countries with the same economic scale, the overall scale of China's foreign debt is moderate. According to the latest global foreign debt data released by the world bank, by the end of September 2021, China's full-scale foreign debt ranked 10th in the world. The foreign debt balance of the United States, the eurozone, the United Kingdom and Japan was 8.5 times, 6.8 times, 3.6 times and 1.8 times that of China respectively.
According to the data released by the safe, at the end of 2021, China's external debt liability ratio was 15.5%, the debt ratio was 77.3%, the debt service ratio was 5.9%, and the ratio of short-term external debt to foreign exchange reserves was 44.5%. The above indicators are within the internationally recognized safety line (20%, 100%, 20% and 100% respectively), which is far lower than the overall level of developed and emerging countries.
With the global epidemic superimposed on inflation and rising geopolitical risks, the global economic environment is becoming more and more complex and changeable. Developed economies have started a tightening cycle, which will undoubtedly lead to an increase in financial risks. Therefore, China should continue to strengthen the accurate monitoring of the scale of foreign debt, especially the management and monitoring of contingent liabilities, so as to make the decision-making basis of foreign debt management more accurate and comprehensive. In addition, we should also pay attention to strengthening the risk management of the use of foreign debt. While making full use of foreign debt to develop the economy, we should also guard against the possible impact of some foreign capital on China's economy. Foreign debt management naturally requires comprehensive monetary, fiscal and foreign exchange policies. In the future, we should carefully accelerate the internationalization of RMB, develop the offshore RMB market and prevent the rapid cross-border flow of hot money. In terms of serving enterprises, in the future, the development of foreign debt should further facilitate its use procedures on a sound basis, and give full play to the ability of various economic entities to use foreign capital.