Experts say regulators must watch fast-growing short-term liabilities

China's outstanding external debt in 2011 totaled nearly $695 billion, the highest since 1985, according to data released by the State Administration of Foreign Exchange on Thursday.

Debt rose by $146 billion, or nearly 27 percent from 2010, adding to concerns over whether rising external debt might undermine China's fiscal position and cause economic damage.

The proportion of short-term external debt to the total also climbed to a record high of 72 percent as of Dec 31, in contrast to 68 percent in 2010 and 60 percent in 2009.

But the year-on-year increase in short-term debt moderated. As of the end of 2011, outstanding short-term debt stood at $500.9 billion, up 33 percent. The growth rate was nearly 12 percentage points lower than in 2010.

"The ratio of short-term debt to foreign exchange reserves stood at 15.75 percent, far below the globally recognized warning line of 100 percent," said SAFE in a statement on its official website.

"Among the short-term debt, trade credit between enterprises and trade finance from banks together accounted for 74 percent, indicating that the surge in short-term debt is closely related to the rapid development of China's foreign trade in recent years."

SAFE said that as of 2011, China's other external debt indicators, such as the 9.52 percent liability ratio, the 33.31 percent foreign debt ratio and 1.72 percent debt-service ratio, all fell into the "safety" range, according to international standards.

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, said Li Chao, deputy head of the SAFE, in December.

He said that 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.

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 2 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.

"But it's difficult to say whether interest rates (on dollar-denominated debt) would still be as low as time goes by."

Dollar-denominated debt took up 76 percent of China's registered external debt, followed by yen debt, which accounted for 8 percent, and euro debt, which made up 7.5 percent, according to the SAFE data.

"Although weakening expectatiuons of yuan appreciation in the years ahead would probably moderate the rise of external debt, the inflexible currency rate of the yuan has made market players insufficiently sensitive to risk," Lu said.

He added that there is no overall, fixed and generalized safety line for external debt, and the experience of some economies proved that problems could still happen even if the major indicators all appear sound.

wangxiaotian@chinadaily.com.cn