China to Lower Ceiling On Foreign Borrowing

China's ceiling on local banks' short-term, foreign-currency debt will be cut by 70% this year compared with 2006, said the State Administration of Foreign Exchange (SAFE). It added China will lower the short-term debt ceiling for nonbank institutions and foreign banks by 40% this year from last year (WSJ).

China's foreign-exchange regulator said it will lower the ceiling on financial companies' short-term, foreign-currency debt overseas, and encourage them to borrow foreign currency in the domestic market (WSJ).

China's huge trade surplus, which surged 74% 2006 to a record $177.47 billion, as well as large capital inflows (WSJ).

In this case, on one hand, China's huge trade surplus has contributed to flush liquidity in the country, driving loan and investment growth (WSJ). In my opinion that is a Market Disequilibrium. In the supply and demand curve, this can be illustrated by less quantity demanded than quantity supplied. It caused surplus, and the market should press on price to fall.

On the other hand, China moved to reduce financial firms' offshore foreign-currency borrowings (WSJ). I think the huge trade and foreign-currency borrowing brought a big pressure to China. Thus, China wanted to make a lower ceiling to reduce quantity demanded (in the other word, it can decrease the foreign currency amount), and then to mitigate the big pressure. The lower ceiling caused quantity demanded more than quantity supplied. This move caused shortage.