The China Venture

foreign investors in structuring the finance of their venture, in large part because the RMB is
not fully convertible. Compensation trade is one form of countertrade in which the investor
pays for the cost of machinery or other asset being purchased with items produced by the
machinery itself. Other forms of countertrade exist, such as those in which the asset purchased
is paid off using products other than those produced by the machinery acquired. Using one of
these methods is helpful for companies reducing their use of foreign exchange, but they
should be careful, however, to ensure that this method is cost -effective and that the cost of the
goods which will be used to pay for the asset is less than the cost of taking out a loan. Leasing
of equipment and machinery also provides a suitable alternative for FIEs that do not wish to
pay the full price for the equipment immediately on purchase. Financing the venture by
leasing is also attractive because the fixed lease payments are not subject to the vagaries of
floating interest rates, and because leases are at times much more convenient to obtain and
handle than loans. 67
2.3.3.3 Currency management
International enterprises operate in China with a wide range of high volatile currencies. They
are permanently faced with currency risk, which includes transfer and exchange risk. The
current concern for all investors in China is whether or not China will devalue its currency.
There seems to be a distinct polarisation between those with a political point of view (who
believe that China’s leaders cannot afford to lose face by reversing their public commitments
to maintain current rates) versus those with an economic point of view (who believe that
China cannot forever avoid the impact of the regional devaluation in Asia). Most businesses
are not getting into the debate, but are rather reviewing their exposures and trying to hedge
their positions as much as possible. 68
The RMB is not fully convertible on world markets and most companies must endure
restrictions on foreign exchange. In addition to that, the exchange rates of the RMB towards
other currencies do not express the real values. FIEs are heavily exposed to a variety of
currencies used for their working capital and cash assets as well as for their balance sheet
values. The strict currency control (see also part Exchange Control) accelerates the currency
risk for the FIEs although they are in advantage of more freedom in the area of currency
67 Buxbaum/Gonzalez, 1998, p. 12.
68 de Waal, 1998, p. 19.
48