BASEL, Switzerland, Dec 7 (Reuters) - Heavy repatriations of overseas deposits by Chinese banks and money flows into the country from foreign banks may make it harder for other governments to finance their deficits, the Bank for International Settlements said on Sunday.
The BIS's quarterly report showed strong repatriation of capital into Asia, which has helped to fund the U.S. budget deficit in recent years, as well as into eastern Europe, but continuing outflows from Latin America.
While China attracted strong investment from abroad, overall net inflows from international banks to emerging markets fell again in the second quarter this year.
The most striking withdrawal of deposits from overseas was by Chinese banks, which sent home $9.1 billion in the second quarter alone, making it eight out of the past 10 quarters that they have repatriated funds.
Cross-border deposits by Chinese banks have fallen to $70.4 billion from $92.5 billion in the second quarter of 2001. At the same time foreign banks have lent more to China's booming economy, totalling $54.7 billion by the end of the quarter.
"Both trends have pushed the net stock of claims on Chinese banks towards positive territory, implying that the surplus of funds placed in the international banking system by the Chinese banking sector that has been available for the financing of foreign government deficits is shrinking," BIS said.
Asia as a whole is a picture of banks sending money home, $14.8 billion in all and $12 billion alone from money in the U.S financial system, largely due to a reduction in repo activity.
Claims on Asia as a whole declined $2.8 billion in the quarter to $292.9 billion, although the net inflow to the region was $12.9 billion in the quarter.
Overall since the second quarter of 2001, net outflows have been staunched as foreign lenders became confident the 1997 financial crisis in Asia was over and domestic banks repatriated funds, although the picture of rising flows is far from uniform.
"This recent rise seems to have coincided with the fall in interest rates since 2000 in the United States and elsewhere. In addition, speculative views on exchange rates have probably joined interest rate differentials as a reason for renewed flows to the region," the BIS said.
Banks in Russia and eastern Europe are also bringing money home and $10 billion of repatriations made for the second largest quarterly net inflow since the first quarter of 1998, the days before Russia shocked the world with its debt default.
The quarter saw the first drop in liabilities vis-a-vis Russia since the third quarter of 2001, halting a trend which had made Russia the region's largest net creditor to the international banking community since the default.
There has also been greater lending to the region, primarily to banks in Russia, the Czech Republic and Croatia.
LATIN AMERICANS LODGE MONEY OVERSEAS
In contrast Latin America saw continued outflows. Liabilities -- deposits in foreign countries among international banks -- rose $11 billion in the quarter.
This was especially marked in Brazil as banks there deposited $3.9 billion with banks in the U.S. in the quarter, while Mexican banks and non-banks shifted $3.0 billion overseas.
Total claims, or lending by international banks to Latin America, fell for eighth consecutive quarter. The stock of claims on the region fell to $275.5 billion, or 29.6 percent of total claims on emerging markets.
Banks also became more wary of lending to risky credits and the average rating of the Latin America portfolio rose to near "B" on Standard & Poor's ratings scale from CCC-plus in the second quarter of 2000.
SOME INCREASES BUT INTERNATIONAL BANKS CUT LENDING
While some countries saw stronger lending by international banks, overall loans to emerging markets declined, with exposure dropping to six percent of total claims from seven percent in 2002 and eight percent in 2001.
A figure of $11 billion in net inflows to emerging markets as a whole largely reflects $14 billion in repatriations by Chinese, Russian and South Korean banks.
Overall claims on emerging market economies -- money deposited overseas -- fell $3.7 billion in the quarter to $931.6 billion. Overall liabilities, lending to emerging markets by international banks, fell $14.3 billion to $1.115 trillion.
A rise in overall credit ratings for emerging economies boosted bond issuance by 62 percent in the second quarter versus the first to $19.4 billion, the largest amount of new funds raised since the second quarter of 2001.
Russian and Taiwanese entities alone accounted for a $5.9 billion rise in net issuance.
Copyright 2003, Reuters News Service
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