While financial markets have expressed concerns about China’s rapid corporate foreign debt build-up, which was estimated at USD 1 trillion, or 9.3% of GDP, in 2015, many Chinese companies have started repaying their foreign borrowing since the second half of last year. This is positive for China’s systemic stability as it reduces its foreign debt burden, which is not heavy despite the market’s concern.
However, foreign-debt repayment can have a negative implication for the renminbi exchange rate, as Chinese companies have to sell renminbi and buy foreign currencies to repay their foreign debt. The renminbi exchange rate is likely to remain under downward pressure, ceteris paribus, for as long as Chinese companies continue to repay their foreign borrowing.
If we know how much foreign debt the Chinese companies have repaid, we would be able to gauge how much more downward pressure the renminbi exchange rate would come under as the rest of this foreign debt is repaid. Unfortunately, nobody knows for sure due to the lack of proper borrowing records of Chinese companies. However, there are a couple of clues (up to the third quarter (3Q) of 2015 at the time of writing) that can help us make some estimates.
Firstly, Bank for International Settlements (BIS) reporting banks’ claims on China fell by USD 143 billion in the first three quarters of 2015, with 75% of that in 3Q alone. This reflects repayment of China’s foreign bank loans by many Chinese companies switching to borrowing onshore to take advantage of lower borrowing cost and to reduce their foreign debt burden due to renminbi depreciation.
Secondly, the financial account, excluding reserve assets, in China’s balance of payments (BoP) showed a deficit of USD 304.7 billion for the first three quarters of 2015. The main source of this deficit was “other investments”, totalling USD330.4 billion. There was also a deficit of USD 43.4 billion from portfolio investment and financial derivatives, while net FDI recoded a surplus of USD 69.1 billion (Chart 1).
 Including foreign bank loans and bond issuance.
 The financial account includes non-reserve items (including foreign direct investment, portfolio investment, financial derivatives and other investments) and reserve assets (including SDR, gold, reserves at the IMF, foreign exchange etc.)Download to read more