China firms have unseen foreign debt maturing fast

Beijing

THE foreign debt built up by Chinese companies is about a third bigger than official data shows, adding to the pressure on the country's currency reserves as a wave of repayment obligations approaches in 2020.

On top of the US$2 trillion in liabilities to foreigners captured in official data, mainland Chinese firms have around another US$650 billion in debts built up by subsidiaries overseas, according to Bloomberg calculations. About 70 per cent of that debt is guaranteed by entities such as onshore parent companies and their subsidiaries, the data shows. The amount of maturing debt will rise in coming quarters, with US$63 billion due in the first half of 2020 alone.

The prospect of Chinese companies rushing to find dollars to service liabilities comes at a time when authorities have already allowed the currency to sink below 7 per dollar amid a trade war with the US. The nation now risks a reprisal of what happened after the yuan's devaluation in 2015, when foreign-debt servicing contributed to a rapid decline in the country's foreign-currency reserves.

"China's debt servicing risks can be underestimated with this part of the debt staying outside the official gauge," said Ji Tianhe, a strategist at BNP Paribas SA in Beijing, adding that the US$3.1 trillion in foreign-currency reserves is "just enough" to cover the risks.

The PBOC set the yuan fixing rate at 7.057 per dollar on Monday morning, stronger than forecast. The offshore Chinese yuan pared losses after falling to an all-time low against the dollar.

Countries such as China which control the flow of cross-border capital are recommended to hold reserves worth 30 per cent of short-term foreign debt, 20 per cent of other external liabilities, 10 per cent of exports and 10 per cent of broad money supply to counter potential outflow risks, according to a guideline by the International Monetary Fund (IMF).

Applying that methodology to the official data on China's foreign liabilities suggests the nation would need at least US$2 trillion of reserves during a currency crisis, and more than that if capital controls aren't enforced well, according to Natwest Markets Plc. If the debt of Chinese companies' overseas units is taken into account, the reserves would need to be higher still. BLOOMBERG