The Chinese authorities have told banks to reduce short-term foreign debt quotas, but only letters of credit (L/Cs) with terms of more than 90 days will count towards the new quotas.

The order made by the State Administration of Foreign Exchange for banks to reduce their short-term overseas borrowings responds to its concerns over increased foreign debt, especially short-term debt, that has helped push up the yuan.

New quotas

Domestic banks must reduce short-term foreign debt in stages to 30 per cent of their 2006 quota by the end of March 2008.

Foreign banks and all non-bank financial institutions in China must cut their short-term foreign debt to 60 per cent of their 2006 quota by the same time.

Concessions

The exclusion of L/Cs with terms of 90 days or fewer from the new quotas represents a change, since all L/Cs are included under the current quotas.

The new quota system becomes effective 1 April 2007.

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