The China Venture

control compared to national enterprises. 69 A significant devaluation has not occurred for
more than four years in China, therefore, many investors have become (too) complacent with
a stable exchange rate and easy access to foreign exchange.
FIEs have to gain their currencies, which they need for procurement from abroad,
compensation of their foreign staff and for paying dividends to their foreign investors on a
self-operating basis. The Chinese government supports them only poorly. The balancing of
these foreign exchange positions is one of the most difficult tasks and therefore a high barrier
for FIEs in China. In a controlled market like China, it is complicated to gain all the necessary
currencies for the daily business. However, in spite of all techniques of hedging currency
exposures, devaluation will fundamentally alter a company’s revenues and costs and thus its
cash flow. If devaluation occurs, a company that imports parts and components to
manufacture products that will be sold in China, must raise local currency prices to avoid
losing money on every sale. Each investor in China should review their cash flow by currency
and determine what impact various levels of devaluation would have on that cash flow. 70
When a company’s assets and liabilities are denominate d in different currencies, changes in
the relative value of the currencies involved will bring about a change in the relative value of
the assets and liabilities. To avoid this, financial managers have the objective to keep the same
ratio between currencie s on both sides of the balance sheet. By borrowing in the same
currency as they will receive from future business, companies hedge against exchange rate
risk. This is problematic when one of the currencies involved is the RMB. Firstly, rigid RMB
maturities complicate matching. The dates for payment and repayment of the loans are often
inflexibly set by the bank. Secondly, the interest rates on these loans can be preclusively high
(see 2.3.3.2). Regulatory peculiarities also create exchange risks. Conversion of RMB into
foreign currency for import payments are allowed not earlier than three months before
payment. The importing company is exposed to a depreciating RMB from the point in time
when the purchase was decided until three months before payment. A FIE selling on the
domestic market is therefore exposed to the risk of a RMB depreciation in the period between
the closing of the deal and payment, although the RMB is officially a fixed exchange rate.
Since the crisis in Asia has seriously touched Japan and other competitor countries in Asia,
the Chinese government could be forced to devalue the RMB in the next year. 71 The main task
69
See for more information Fan, 1994, pp. 208.
70
de Waal, 1998, p. 19.
71
See Madura, 1993, p. 136-140 and Fan, 1994, pp. 207.
49