External debt refers to local-currency and foreign-currency borrowings of domestic institutions from non-residents. According to the World Bank definition and the International Monetary Fund, external debt is, at any given time, the outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to non-residents by residents of an economy. Since its opening up, China has actively used external debt to give play to the advantages of international market funds and expand the sources of domestic construction funds, which play an important role in promoting economic and social development. According to the State Administration of Foreign Exchange (SAFE), China’s external debt balance stood at US$15.8 billion in 1985 and grew to US$1,843.5 billion as of the end of March 2018.
Over the years, China has strictly managed its external debt, controlled its scale and maintained a reasonable external debt structure. As a result, the national external debt risk is generally controllable. However, the non-unified external debt management, imperfect external debt legislation, policies and regulations of various sources, and China’s current scattered management authorities are not seen as conducive to the effective use of external debt and the control of related risks. Many countries have historically experienced debt crises, which even evolved into international financial crises. Mostly, such crises stemmed from the excessive related risks and imperfect management of external debt. The international financial market has recently been in turmoil and emerging-market countries like Turkey are caught in a currency crisis, which is also related to the excessive ratio of external debt. In view of this situation, the Bank for International Settlements has been conducting research on external-debt management.
To use external debt actively and control related risks, we believe China should unify external-debt management, which may include the following measures:
Establish a unified external debt regime. Since embarking on opening up, China has successively promulgated a series of policies and regulations on external-debt management. These provide a basis and support for the use of external-debt funds and the control of related risks. However, different authorities presently issue sporadic rules, based on their respective regulatory objectives. The relevant regulations are not uniform and systematic. They are even unclear and uncoordinated at the implementation level. We believe all aspects of external-debt management need to be considered in a unified manner to establish a unified external-debt regime applicable to different borrowing entities, different currencies and different maturities, and covers the entire process of borrowing, fund use and repayment. In recent years, the People’s Bank of China promulgated regulations regarding Macro Prudential Management of Cross Border Financing within Expanded Parameters on the basis of the pilot projects. These regulations unify the management of both local and foreign currency debt, external debt management of domestic and foreign-funded enterprises and financial institutions, as well as management of both short-term and medium and long-term external debt, which is a useful attempt to establish a unified external-debt regime.
Determine a unified external debt-management institution. China has several authorities responsible for external debt management. These include China’s central bank, the National Development and Reform Commission, the Ministry of Finance, and SAFE. The fragmented management of different authorities presents a decentralized system of poor management and the absence of cooperation between different administrations. There is no authority to perform the unified management and coordination. According to international experience, there are three modes of external-debt management: (1) a highly centralized and unified management mode, i.e., unified planning, decision-making and management of a country’s external debt. Such functions are assigned to one national institution; (2) a mode of unified management for decision-making and division of labour, i.e., establishment of a specialized institution to formulate macro-policies and regime for external debts, and to coordinate the functional departments of external debt management; (3) a joint management mode, i.e., management of external debts by different departments. For example, the Ministry of Finance approves and manages the external debt of the public sector, and the PBoC manages private debt.
Based on China’s national conditions and international experience, we recommend the mode of unified management for decision-making and division of labour. Specifically, China’s central bank, the NDRC, the MoF and SAFE manage the external-debt affairs within their respective extent of competence, based on the division of labour. Also, there is a need to set up an institution for overall coordination of external debts, directly under the State Council, based on these departments and be responsible for formulating macroeconomic policies and regulations for external debt management, and leading the functional departments of external debt.
Formulate and promulgate a unified external debts law in a timely manner. According to China’s Legislative Law, the legal force of laws, administrative regulations and departmental rules decreases as a result. At present, most of China’s external-debt rules are departmental regulations or departmental normative documents with lower legal force, showing a weaker legislative level overall. After three to four decades, China has had lots of experience in using and managing external debt. Therefore, external debt legislation should be improved, and a unified external debt law should be formulated and promulgated in a timely manner, based on experience to raise the legislative level of external debt laws and regulations. This will be conducive to the establishment of a unified external debt regime and to the authority of external-debt management institutions in terms of legislation. In view of the policy-based nature and timeliness of external-debt management, the external debt law needs to focus on the macroeconomic policies and basic systems of external debt, and reserve certain policy space, so that external debt-management institutions can fine tune the related policies within the scope of its authority, as necessary.
Based on the aforementioned, we believe external debt management is a systematic project. External debt law should be completed and improved, and a unified regime and management institution established according to the principle of overall coordination, to achieve mutual coordination between the scale and structure of external debt and economic growth plan, fiscal budgets, and monetary policies of the PBoC.
Zhang Lei is a partner at Jingtian & Gongcheng