China will allow foreign banks this year to bring in a total of $24 billion in borrowed foreign funds – a sharp increase from last year’s limit, bankers say – in an apparent effort to attract more investment as a slowing economy prompts capital outflows.
Inbound foreign direct investment declined for the fourth consecutive month in February, and a recent bout of yuan selling indicates accelerating capital flight in response to concern about China’s slowing economic growth.
The National Development and Reform Commission announced the annual long-term foreign-debt quota in a statement after people familiar with the situation told The Wall Street Journal on Tuesday that individual quotas for a number of foreign banks had been raised sharply. China’s capital controls allow banks to bring into the country a set sum in borrowed foreign funds – often originating from the banks’ own headquarters – for longer-term uses such as funding for fixed assets like factories and equipment.
Although the NDRC, China’s economic-planning agency, didn’t offer a figure for comparison, foreign-bank executives say last year’s quotas likely totalled only a few billion dollars. According to the State Administration of Foreign Exchange, China’s foreign-exchange regulator, foreign financial institutions’ outstanding foreign debt, including short-term borrowings, rose by $5.9 billion last year, to a combined $54.1 billion.
The increases in individual banks’ quotas, the people familiar with the situation said, range from high double-digit percentages to a more-than-doubling. According to the NDRC, the banks include Bank of East Asia Ltd, 0023.HK -1.35 percent Citigroup Inc., C -1.48 percent Deutsche Bank AG, DBK.XE -3.56 percent HSBC Holdings HBC -1.39 percent PLC, J.P. Morgan Chase JPM -1.30 percent & Co. and Sumitomo Mitsui Financial Group Inc.
Observers said this year’s increased quota shows the authorities are keenly aware of the recent signs of capital outflows and are trying everything they can to prop up the economy. Calculations based on data from the People’s Bank of China suggest more hot money, or speculative capital, left China than entered in three of the last five months.
Expectations are growing that China may suffer another month of net capital outflows in March, exacerbated by a heavy yuan sell-off in the past two weeks, and especially after the latest manufacturing data intensified concern about a sharp economic slowdown.
The state economic planner, which sets quotas for bank borrowings with durations longer than a year, said in its Thursday statement that yuan-denominated borrowings could be included under the quota.
Another priority of Chinese authorities has been to expand cross-border use of the yuan to give the currency a bigger role in global markets.