The China Venture

of the currency management is to predict, prevent or hedge these currency risks as good as
possible, which is of essential importance especially for operating in emerging markets. 72 The
most obvious way to hedge a long RMB exposure is to borrow in RMB. Some companies are
borrowing even though they do not currently need RMB. Non-deliverable forwards are
another way to hedge RMB exposures. This market is completely outside China. The market
for these instruments are still underdeveloped. On top of that, there are significant internal
accounting issues that will need to be resolved for most companies that use de rivative
instruments to hedge their actual exposure in China. However, currency management is an
issue with highest priority for foreign investors, because devaluation would fundamentally
alter a joint venture’s future profitability.
2.3.4 Conclusions
China will continue to be an exciting market. Changes in China and the region will be
challenging and perhaps frustrating. China’s economy faces a host of problems as it changes
from being a centrally planned colossus into a decentralised market driven net of indepe ndent
entities. The political unwillingness to seriously reform the loss making SOE sector is perhaps
the single most serious obstacle to a balanced economic growth in China. The inefficiency of
the SOE sector has arrested the development of the financial sector primarily via the former
specialised banks. They have been used as vehicles for subsidising SOEs and thereby social
stability. The fact that policy lending has burdened the state banks with bad debt to the extent
that they would be rendered ripe for bankruptcy by any Western standards, prevents them
from fully pursuing independence and privatisation. Another obstacle for the state banks is
their history as a part of a central planning administrative organisation as well as the
provincial governments’ power apparatus. They have only recently been subjected to the first
experiments with market conditions and therefore lack basic banking skills, most notably the
ability to carry out credit risk evaluation.
This paper has shed some light on the structure and system of the Chinese financial system in
general and of business finance in particular. The recent changes in banking and capital
markets policies provide both opportunities and obstacles for PRC investors. Credit and China
risk limits have tightened, but recent political developments and increasing M&A
opportunities give grounds for investor optimism. However due to the early stage of financial
reforms in China, the study has had to leave questions open. Future research on the banking
72 See Pausenberger/Glaum, 1993, p. 764-767.
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