Lending to Foreign Direct Investments (FDIs) in China

As of February 2002, the total contracted investment in China was around USD 737.5 billion. The foreign sector now employs more than 23 million people, roughly 10 % of the urban population. However, China's banking system has not been keeping pace with the developments in the economy. Bank assets have grown enormously over the last 20 years, but their quality has not improved. Local financial institutions are still heavily protected from global competition.

The government's policy segregation and control has always placed more emphasis on propping up the state sector rather than modernization of the financial services industry as a whole. For this reason, the large domestic banks have been heavily influenced by government policies and do not have the same degree of freedom in developing services and skills when compared to their global counterparts.

Why do foreign companies borrow so little?

1. Perception of foreign investors’ funding arrangements
   Investors setting up a presence in China are generally assumed to bring in their own funds and maintain a rudimentary account relationship with whatever bank is available nearby their registered office. Less than 3% of the domestic lending in 2000 has been extended to FDI in China with the bulk of nearly 89% going to the state sector.
    
2. Restrictions on foreign banks
   Although more than 200 foreign banks have set up a presence in China, they are subject to service and geographical restrictions. The foreign investor may find their preferred bank to be inaccessible for certain types of services, because these banks have limited business scope.
    
3. Legal requirement – debt /equity ratios
   China's mandatory debt /equity ratios put a limit to the amount a foreign enterprise can borrow. For example, an investment of USD 3million or less must have at least 70% in the form of equity.
    
4. Capital Conversion rules affect bank loans
   China has practiced current account conversion since 1996. Bank loans and equity investments are considered capital items, which require approval for conversion. Equity conversion has always been a matter of procedure, whereas loan conversion has been dependent on prevailing government policies. This has created the general impression that bank loans should perhaps not be used.

Notwithstanding the problems mentioned, the National Bureau of Statistics reported that FDIs normally have a higher success rate in applying for bank loans. In a survey published in March 2002, foreign enterprises, particularly wholly-owned subsidiaries of foreign companies have a level of satisfaction in loan applications of 81.6%, even higher than the average rate of 68.5% for state enterprises. This seems to be an indication that despite the rules and restrictions in China today, foreign investors are actually the preferred category of bank customers.

They enjoy privileges not available to either the state or private borrowers, for example, earlier this year BP awarded the mandate for a $ 1.8 billion foreign currency loan to a consortium of mainly domestic banks. The loans were used for the construction of a 900,000 tonne petrochemical complex. So the local banks are finally gearing up to compete for quality business in foreign currency, which used to be the domain of foreign banks unable to provide services in RMB.

» Latest News Index
» Subscribe Fiducia Newsletter