China targets overseas debt to curb hot money inflows

BEIJING Aug 16 (Reuters) - China has cut the overall size of guarantees that banks can provide to domestic firms when they raise overseas debt, the foreign exchange regulator said on Tuesday, the latest move to curb hot money inflows.

Domestic and foreign banks operating in China were allowed to provide combined guarantees worth $76.38 billion for foreign borrowings by domestic firms in 2011, down from last year's, State Administration of Foreign Exchange (SAFE) said.

"In order to promote balanced international payments, the SAFE has decided to appropriately reduce the guarantee quota for overseas financing in 2011," it said in a statement on its website, www.safe.gov.cn

But the agency did not disclose last year's quota.

Beijing has been worried about sustained capital inflows due to interest rate differentials and expectations of a firmer yuan and the SAFE has pledged to combat hot money inflow in the second half of this year.

Such inflows could put more pressure on the yuan to appreciate and complicate Beijing's fight against inflation.

It also said that it has stopped reviewing applications from domestic property firms that seek to provide guarantees for bond sales by their overseas subsidiaries.

The move was an apparent move to block part of financing channels of domestic real estate developers to rein in the red hot property market, confirming an earlier report by local media.

The SAFE said that it would strictly track the flow of guaranteed capital and would punish those that are found illegally repatriating the money to the mainland.

The SAFE uncovered 1,865 violations of its foreign exchange rules in the first half of 2011, involving $16 billion, up 26.2 percent and 26.9 percent from a year earlier, respectively. (Reporting by Aileen Wang and Kevin Yao; Editing by Ramya Venugopal)