ECONOMIC SPOTLIGHT - CHINA'S FOREIGN DEBT UP
China's foreign debt reached 27 billion
dlrs by the end of 1986, but despite an over-exposure to
short-term credits and yen borrowing, China remains very
creditworthy with an improved 1987 export outlook, foreign
bankers and Chinese officials told Reuters.
    Foreign bankers said China's total debt rose sharply from
an estimated 20 billion dlrs at end-1985 to cover increased
import commitments but the debt/equity ratio remains low,
between eight and 10 pct.
    China remains a cautious and popular borrower, they said.
    Zhang Haoruo, vice minister of Foreign Economic Relations
and Trade, said last Friday that China signed foreign loan
agreements for 6.94 billion dlrs last year, 96.6 pct up on
1985, with actual loans amounting to 4.83 billion, up 93 pct.
    Officials said China would borrow 25 to 30 billion dlrs in
the 1986-90 five year plan period, but foreign bankers said
they estimate foreign loans at 30 to 40 billion.
    A Western banker said China's portfolio contains too much
short-term debt and too much of it is denominated in yen as a
result of aggressive lending by Japanese banks and attractive
low interest rates in the Japanese market.
    The strong yen appreciation has cost China dearly and is
likely to make it reduce new yen borrowings, the banker said.
    A Chinese trade official estimated the yen component of the
country's total debt at about 30 pct.
    The Peking representative of a Japanese securities house
said the rapid yen rise had caught China and his firm unawares.
    "Interest rates in Japan are at a historical low, but China,
which will remain an active borrower this year, is likely to go
elsewhere for capital, to get a better currency spread," he
said.
    The Western banker said the excess of short-term loans is
in part a result of China's inexperience in the foreign capital
markets, which it entered only in the early 1980s.
    "Officials do not think of China but of their own department
or firm. Some loans that were entered into did not have the
full backing of the People's Republic of China," he said.
    "The dilemma for China, in foreign borrowing as in other
areas, is to balance central control with giving reasonable
autonomy to firms. It is searching for the mechanisms to
exercise indirect controls," he said.
    The banker said officials have stressed repeatedly over the
past six weeks that China's foreign borrowing will not be
affected by a drive against "bourgeois liberalism," a phrase
meaning Western political ideas, following the dismissal of
Communist Party chief Hu Yaobang on January 16.
    A U.S. Banker said there is no evidence that China's
foreign exchange reserves have fallen below the officially
stated figure of 10 billion dlrs.
    "The Bank of China is both a buyer and a seller in the
market, which would know quickly if it was buying heavily in
advance of an announcement the reserves were down," he said.
    The banker said such buying has not been going on. "Things
are normal. Trade deficits such as China had last year and in
1985 are normal for a country at its stage of development."
    Customs figures show China had a trade deficit of 11.9
billion dlrs in 1986, down from 14 billion in 1985.
    A Ministry of Foreign Economic Relations and Trade official
said this year's outlook for exports, which account for more
than 75 pct of foreign exchange earnings, is much healthier
than a year ago.
    The renminbi has matched the U.S. Dollar fall, he said. It
was quoted at 3.72 today, little changed from 3.7 a year ago.
    The official said China has taken measures to improve its
export performance, including incentive offers to exporters and
the establishment of export production bases.
    "We expect higher prices for our oil exports this year," he
added.
    Official estimates put China's 1986 export losses from the
drop in world oil prices at three billion dlrs.
    A Western diplomat said China's foreign debt needs careful
management but its debt service ratio remains very low at six
to eight pct.
    "We base our assessment not on China's foreign exchange
reserves but on its export performance, just as you assess a
company on its performance, not its bank account," he said.
    He said China performed very well in the export field last
year and remains a very creditworthy country which will have
few difficulties in increasing its borrowing.
 REUTER
