The China Venture

is often to acquire foreign capital and technology. Foreign investors should be aware of how
their partner will finance their share of the investment. The foreign partner often contributes
know-how, immaterial goods, machinery and technology from overseas. Foreign investors
should keep in mind the requirement that only 25% of the foreign investor’s registered capital
contribution to an FIE may comprise technology. 56
The foreign investor could also get his share of registered capital financed through loans from
banking institutions or through investment grants from national and international finance
companies such as KfW in Germany. The foreign investor as well as the Chinese counterpart,
or the venture itself, could also use Chinese banks for financing their registered capital via
loans. They may procure capital other than the registered capital through preferential-interest
loans if it imports goods or machinery from the US or Europe via special government „soft-
loans“, „mixed-loans“ or export credit programs, the purpose of which is to encourage the
purchase of such goods. Applying for such loans requires certain guarantees, housing or real
security and the approval of the venture through the authorities. The US Export-Import Bank
offers bank guarantees to foreign purchasers of machinery and equipment from the US. The
life of these loan contract is generally one to three years. 57 A foreign investor wishing to
participate in a joint venture with a Chinese company may also raise money overseas by
entering into a joint venture contract with a Chinese party. To raise public funds outside the
PRC for use as registered capital, the investor first needs to set up a company overseas, if one
does not already exist. Currency lending from outside China will require the approval of the
State Administration of Foreign Exchange. This method of financing can also be used to raise
capital for a joint venture that already exists.
While a foreign investor must be prepared to initially contribute a good deal of equity to a
venture to satisfy the Chinese regulations regarding registered capital, a wise financier would
also attempt to invest equipment purchased abroad with the help of low-interest loan as a part
of registered capital attributed to the FIE. Alternatively, a foreign party wishing to fund his
enterprise with a Chinese party may prefer to issue shares in a separate overseas company,
and then use the proceeds from the offering specifically for the purpose of funding the joint
ve nture. Leasing of equipment and machinery in China provides another suitable alternative
to loans for some investors in that such agreements are convenient to enter into and may have
tax advantages. Another possibility of funding capital is inside financing through cash flows,
56 Buxbaum/Gonzalez, 1998, p. 10; de Waal, 1998, pp. 16.
57 Fan, 1994, pp. 189.
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