China's foreign exchange regulator has tightened controls on local importers' trade financing that lead to foreign liabilities.

In the latest move to balance its international payments, the State Administration of Foreign Exchange (SAFE) issued a circular on Tuesday, requiring importers to report deals exceeding US$500,000 that are dated before March 1, but with the payment scheduled 90 days later.

The importers must report to the local bureau of the SAFE before the end of April, and submit the required documents including customs clearance certificates and contracts.

For such import deals with a delivery date after March 1, the importers need to report to SAFE 60 days after the delivery date.

Postponed import payments constitute virtual foreign debts, which need tighter supervision as they fall into the category of capital account, the administration says.

The Chinese currency, the Renmin, is convertible under the current account, which typically covers trade, but only partially convertible under the capital account.

"The implementation of the circular will help prevent import payment funds under the current account from becoming short-term foreign debt under the capital account, and is an important step to promote balanced international payments," SAFE said in a statement.

Growing numbers of postponed import payments and export advances in recent years have already caused a rapid rise in China's short-term debts, a trend SAFE has vowed to closely monitor.

Chinese importers increasingly opted for late payments while exporters found advance payments more desirable, largely as a result of expectations that the Renmin will appreciate, and interest rate differentials between local and foreign currency deposits.

Market speculation about an appreciation in the Renmin remains unabated this year, as China's trading partners continue to push for revaluation.

China's outstanding foreign debts reversed a downward trend since 1999 in the first half of 2003, and the proportion of short-term liabilities rose rapidly. Regulators attributed the trend to statistical adjustments that included trade-related credit and foreign liabilities of foreign financial institutions operating in China as part of foreign debt.

A policy-triggered borrowing craze by foreign banks operating in China further pushed up growth in the nation's short-term foreign debts last year.

China's new foreign debts in the first three quarters of last year surged 71.27 percent to US$124.1 billion, slowing from a frenzied 97.80 percent increase recorded for the first half of the year, SAFE statistics indicated.

The nation's total outstanding foreign debts were US$223.4 billion at the end of September last year, up 15.31 percent year-on-year, it said.

Chinese regulators insist the increases in foreign debts pose no threat to the nation's financial security, thanks to its massive foreign exchange reserves, which stood at US$609.9 billion at the end of last year.

But the rapid increases in forex reserves, partly due to speculation-driven capital inflows, have also complicated the Chinese monetary authorities' efforts to contain the growth of bank credit.

(China Daily February 24, 2005)