China to Reduce Short-Term Overseas Borrowing Quota This Year

China will cut domestic financial institutions’ short-term overseas borrowing quotas from April 1, signaling it’s stepping up efforts to curb hot money inflows attracted by yuan appreciation.

The rules will help lower the financial risks of cross- border capital flows, said the State Administration of Foreign Exchange in a statement published on its website today, without giving further details. The currency regulator also reduced the net amount of yuan forward contracts some banks can sell to clients, according to the statement.

“The new rules will help curb capital inflows which seek to benefit from currency appreciation,” said Zhao Qingming, a senior analyst in Beijing at China Construction Bank Corp., the country’s second-largest lender. “The regulator is trying to improve the international balance of payments.”

China’s consumer prices climbed 4.9 percent from a year earlier in February, exceeding the government’s 4 percent annual target for a second month, the statistics bureau said on March 11. A stronger currency is attracting capital into the nation, complicating the central bank’s efforts to contain inflation.

The yuan strengthened 0.08 percent to 6.5559 per dollar as of the 4 p.m. close in Shanghai, according to the China Foreign Exchange Trade System. The currency touched a 17-year high of 6.5549 on March 25 on speculation the government will tolerate appreciation to help reduce the cost of imports.

SAFE last year cut its quota for 2010 short-term overseas borrowings by 1.5 percent to $32.4 billion from 2009, according to a statement on April 29.

People’s Bank of China’s purchases of foreign currency to counter yuan appreciation increased lenders’ cash holdings in January by 502 billion yuan, the most in three months, central bank data showed on March 2.

SAFE also reduced the percentage of prepayments an exporter can receive and the ratio of deferred payments an importer can pay.

--Judy Chen, Alfred Cang. Editors: Sandy Hendry, Simon Harvey

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at +86-21-6104-3043 or xchen45@bloomberg.net;

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

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