The China Venture

2.3.3.2 Debt financing
As getting the status of Chinese legal entities through official approval, FIEs are treated
through the authorities and financial institutions as if they are Chinese domestic enterprises.
According to the goal of the government to promote foreign direct investment into China, the
FIEs can generally obtain more financial instruments of debt financing than their Chinese
counterpart. The government also provides grants and financial support for financing
corporate debt, if the potential debtors fulfil certain restrictions similar to Western standards.
Similarly to Western standards, the loans can also vary in China according to currency, time
limits, finance purpose etc. Nevertheless, Chinese authorities use different definitions for
long- and short-term loans. Long-term loans include all loans with a time limit of more than
twelve months. Loans with a maturity of 12 months or less are considered to be working
capital, and are subject to different quota restrictions than longer maturity loans (see also part
0). The definition of maturity orientates mainly on the financing purpose, as if the loan is
meant to be for fixed or current assets. For investment projects, which exceed certain limits
set by the Planning Bureau, approval of authorities is necessary. 61 Large infrastructure
projects are still often funded over the budget state or provincial budget. Another issue to
address is whether debt financing should be in RMB or foreign currency (usually USD).
Many foreign investors have no choice. Often corporate policies require that investments be
funded in local currency. Many consumer product companies with wide -spread activities in
China will only consider expansion if they can secure adequate local currency funding. As
policy they will not take the risk of a devaluation of the RMB. While conditions vary from
place to place in China, in recent months it has generally been easier for joint ventures to
obtain reasonably structured debt financing. Positive impacts by the PBOC on RMB debt
financing have been its announcement to abolish the lending quota system and its lowering of
RMB interest rates, because of the decline in economic growth and the fall in inflation. 62
A joint venture or a WFOE in China may, according to the „PRC Commercial Bank Law“
obtain a RMB loan from a Chinese bank. Having sufficient RMB is necessary to cover the
costs of everyday expenses such as raw materials, labour and public utilities. Security interest
for the loan may be required by the bank issuing the loan, and such security may take the form
of a guarantee or charge over various assets of the enterprise. Concerning the security,
investors have to keep in mind some Chinese specific features, such as the non-conveyance of
61 Fan, 1994, pp. 198.
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