Marco roll-over

China/liquidity: Chinese banks and companies taking advantage of cheap dollars to circumvent lending restrictions at home have racked up $333 billion in foreign loans, of which historical data suggests as much as 60 per cent came from European banks. That’s only a sliver of the overall credit in China, but if Europe’s crisis forces those banks to turn tail, it could make life for some borrowers painful.

Though China controls the flow of money in and out of the country, companies and banks can borrow from overseas banks . According to latest data from the Bank for International Settlements, offshore borrowing climbed 24 per cent, or $80 billion, in the second quarter, half of it going to banks.

Borrowers don’t even need to move the proceeds into China to benefit: a manufacturer can use borrowed dollars to pay for imported materials, say, thus freeing up capital at home. And, because loose monetary policies in the West have made dollars so cheap, borrowing offshore is an increasingly attractive way to circumvent efforts by China’s own monetary authorities to rein in rampant credit growth and investment.

China’s dependency is still small in relative terms. Even as foreign borrowing is soaring, it represents less than six per cent of the GDP. Offshore loans account for less than four per cent of total loans, according to data from the People’s Bank of China. And, China’s $3.2 billion in foreign exchange reserves give it ample cushion.

But, this may understate the risk to borrowers availing themselves of cheap foreign funding. Companies can’t easily refinance onshore, since domestic lending restrictions have driven borrowing rates on the mainland as high as 25 per cent. The government has been trying to tighten without strangling growth, and a withdrawal of this small but significant funding source could tip the balance.

The risks of a reversal are very real: China isn’t just borrowing from abroad, but is borrowing up to two-thirds of that in one-year maturities or less, based on past trends. European banks, faced with troubles at home, don’t have to call those loans to make life difficult for Chinese borrowers. All they have to do is stop making new ones.