MNI INTERVIEW2: China To Up Corp USD Borrowing As Yields Drop

     BEIJING (MNI) - China will encourage its companies to raise funds in

overseas markets as global interest rates tumble, a former official at China's

foreign exchange regulator told MNI in an interview.

     The State Administration of Foreign Exchange (SAFE) announced last week it

has relaxed macro-prudential assessments of cross-border funding risks. This

will ease firms' financing difficulties and high financing costs, as they seek

to resume operations hit by the coronavirus epidemic, the regulator said.

     "The move sent a signal that the authorities are making it easier for

domestic firms to borrow overseas, which helps to cushion the economy after the

hit from the virus, and also increases capital inflows, offsetting the trade

deficit," said Guan Tao, former director of the international payments

department at SAFE.

     Dollar debt is only a small part of China's overall borrowing, Guan said,

commenting on the global squeeze in dollar liquidity. 

     --SWAPS

     The provision of swap lines by the Federal Reserve and five other central

banks on Sunday was a "suitable remedy" for this problem, he said, noting the

PBOC could yet join in.

     China's outstanding foreign debt rose to USD2.03 trillion at the end of

September 2019 from USD2.0 trillion at the end of June, of which 60% was

short-term borrowing, according to the latest data from SAFE. At only about 39%

of reserves, short-term debt levels were safe according to international

benchmarks, Guan said.

     SAFE said on Sunday that China's foreign debt risks are under control and

that it would act to prevent any dangerous cross-border capital flows.

     While the yuan is likely to come under pressure amid a global flight to

dollars and as the spreading epidemic saps demand for Chinese exports, the

currency should find support as China's economy recovers and as global central

banks slashes interest rates, Guan said. Chinese officials should prepare for

the possibility that the Fed could cut rates to negative levels, disrupting

international capital flows and asset markets, he said.

     --TENSIONS

     A danger to this outlook comes from potential renewed flare-ups in the

China-U.S. trade dispute, Guan said, noting that the U.S. Commerce Department

last month finalised a rule for imposing anti-subsidy duties on products from

countries which undervalue their currencies against the dollar.

     The difference between currency devaluation and manipulation is not clear,

Guan said, even though the two countries have reached consensus on a flexible

yuan formation mechanism and on avoiding competitive depreciation during their

phase-one trade deal.

     China should move more decisively to liberalise its service sector even as

it stimulates the economy, Guan said.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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