Financing your Chinese Projects

What structure, what partner, what finance,

IFC’s experience and perspective

Emmanuel Pouliquen

IFC Senior Transportation Industry Specialist

General Manufacturing and Services Department

2

Macro Trends and Forces China

• GDP Growth: 8.2% pa for past 10 years. Expected to be 8% pa for the

next 10 years. Shift from export-led to domestic/consumer growth.

• Urbanization: in past 10 years, urban population has gone from 28%

to 40% of total population.

• Financial Markets: Dominated by bank lending, which can be

controlled, to some extent.

• Government Policies: Go West and Harmonious Society initiatives

make a big difference on areas and types of development.

• Social Tensions: Conflicts between rural populations and local

govts/companies are real and increasing.

• Regulatory Environment: Still quite complex, providing practical

challenges to doing business.

3

Structure

• JV times have changed … • Big Three (SAIC, FAW, DongFeng) have chosen their partners

long ago, not just for cars, but also for equipment

• JV opportunities still exist but motivated by:

• very specific technology needs:

• segments where Magna, Valeo or other Bosch have no proposal

• exchange of territory (Swaps: your technology in China, my cheap products in your territory)

• Be very lucid on what your partner wants

• Technology a mean but also an end (“The party said …”)

• 50 years JV = 50 years of “negotiated friendship”

• A boat with 2 captains tends to go on rocks

4

Partner • Perceived benefits of a JV partner:

• Knows the market

• Knows the culture

• Have connections

• Transfer staff from its existing operations

• … but can’t you do without a partner ? • Market:

• GM or Ford: you already know the market !

• Local OEMs or Tier 1s: connections

• Culture:

• learn it yourself, the sooner, the better.

• Learning the culture through your partner may just complicate things …

• Connections:

• governmental connections less and less relevant, consultants can help you

• Customers connections: may or may not be relevant.

• Build-up your GuanXi !

• Transfer staff:

• Watch out: it goes with transferred H.R. practices !

5

Sleeping partner, or no partner ?

• Impacts: • Master of your destiny

• Keep your corporate culture intact, for better or for worse

• “Start right”

• … but need to build your market up from scratch

• Stand alone penetration strategy: • Piggy back on existing U.S. relocated programs

• Transfer existing production to China

• Stick to western customers in the early stages

• Send your best people, ready to stay for 5 years or more

• HQs are far away: go there often, direct reporting line to CEO

• Be patient …

6

Financing • Specific points:

• Multi-stage funding

• Working Capital for

• Growth

• Exports back to U.S.

• China banking system still immature, very focused on state-owned entities

• Issues: • Your U.S Banker may be uncomfortable with your Chinese project

• Your focus must be on strategy and operations. Little time/resources to discover the Chinese banking world

• Financing through global institutions • Must be close to you both in the U.S. and in China

• Must be familiar with U.S.-Chinese issues

• Beyond financing, must understand your business, your strategy, and be able to advise even on operations

Private Sector

World Bank Group

Int‘l Finance

Corporation (IFC)

Est. 1956

The World Bank

(IBRD)

Est. 1945

Government

IFC financing approach

8

Capital Stock Held by IFC’s

Shareholders

Five largest: 45%

Other countries: 55%

United States

23.68%

Japan 5.88%

Germany

5.37%

France 5.04%

United Kingdom

5.04%

Other countries

54.99%

178 Member

Countries

(As of June 30, 2006)

IFC Services Offered

Promote Sustainable Private Sector Development

• Financial products: loans, equity, quasi-equity and risk management facilities

• Resource mobilization: loan participations, partial guarantees of local financing, and securities offerings

• Advisory services: country, industry, financial, and technical

IFC Financing: Key Elements

Equity Loan

• Normally 5%-15% Ownership

• Not Single Largest

Shareholder

• No Direct Involvement in

Management

• Long-term Investor: 5-10 years

• Public Listing Preferred Exit

Mechanism

• Normally Hard Currencies

• Market Interest Rates

• Long-term: 5-10 years

• Appropriate Grace Period

• Secured by Project Assets

• No Government Guarantees

IFC and China

• IFC is world’s largest

multilateral investor in

the private sector • Global portfolio of over $24.6

billion

• $6.7 billion in new

investments in FY06

• IFC sets global standard for

environmental and social

safeguards

• We bring value to clients by

encouraging long term

sustainability of business

• IFC’s role in China is

increasing

• $2.0 billion in over 100

investments since 1985

• SME facility in Sichuan

• Portfolio over $1.5 billion

• Over $600 million in new

investments in FY06

• Plan to increase annual

investments to over US$700

million per year, and double

portfolio in next 2-3 years

12

Project Cycle and Timing

Internal to IFC

Supervision/Evaluation

As Seen by Client

Management Approval

Board Approval

Initial Discussions

Mandate Letter

Appraisal

Financing Negotiations

Info. Memo and Syndication

Legal Documentation

Disbursement

Initial Review

& Authorization

to Appraise

13

Financing Options 1: Local Currency

• Local Banking Sector is very liquid, but • Mostly short-term loans

• Still based on Relationship Banking rather than Credit Analysis

• Bank preference towards lending to SOEs rather than private companies

• IFC Local Currency Options are Limited • Panda Bond successful, but not a permanent, recurring solution

• Direct lending in RMB will depend on development of the long-term swap

market; happening, but progress is slow

• IFC can provide partial guarantees of long-term local bank loans, but

between fees and interest rates, may not be the lowest cost solution

14

Financing Options 2: Hard Currency

• IFC US$ Loans a Viable Option • Long-term, grace periods appropriate for capital projects

• If RMB appreciates, US$ loans are less expensive to repay (though US$ Libor is currently relatively high)

• But Plan and Structure Carefully Up Front: • Only Sino-Foreign JVs or Wholly Owned Foreign Enterprises

are regulatorily allowed to borrow in US$

• Only Direct Borrowers can provide assets for security

• No Co-Borrowing structures, probably no guarantees from Chinese companies, no “exotic” financial instruments

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Summary/Recommendations

• Secure your entry on no thrills business (de-localization)

• Don’t underestimate start-up costs

• Be master in your house

• You need time, have a long term global banking partner

• Share your strategy and operations vision with them, and

they’ll provide you with much more than funds

• Have courage, patience and resilience … it is worth it !

16

Questions/Answers

谢谢你的注意 ! XièXiè Ni De ZhùYì !

Thank you for your attention !