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LAWYERS working on power station projects in China are waiting along with their clients for China to release its new policies governing the sector.

  These include implementing rules covering the new foreign exchange laws announced last December and new power industry regulations.

  Gao Pei Ji, the People's Republic of China legal consultant to law firm Clifford Chance, said the new power project rules would probably include a mechanism for allowing joint-venture access to the foreign exchange market.

  This is a vital element because domestic power sales can only generate yuan income while the project's debt and dividends must be paid in foreign exchange.

  'As we understand it, the approval process will involve all projects over a certain amount of investment. They will need approval from the state government and Ministry of Electric Power. Also, normally [it will involve] consent or approval from the State Administration of Exchange Control [SAEC],' Mr Gao said.

  'It is not very clear how it works because the SAEC is working out regulations concerning the foreign exchange balance of foreign investment companies.

   'But, as we understand it, in the approval process, the approving authority would get consent from the SAEC that the project would have access to the forex market, either the interbank market or the foreign exchange swap centres to swap renminbi.'   Currently, only Chinese domestic enterprises have access to the interbank market, which involves obtaining foreign exchange from a local bank. Foreign enterprises, including joint ventures, have access to swap centres.

  Banks lend to power projects on a limited recourse basis, which means they look to the project itself for their security. It is difficult, if not impossible, to get any guarantees from Chinese financial institutions over the foreign exchange component, which makes the banks examine the credit worthiness of the power buyer, often the local power monopoly.

  China has not given blanket access to its interbank market, as had been expected when the new rules were released in December.

  Clifford Chance partner Li Wang-wai said: 'People thought it was the demise of the swap centre and assumed all would have access to the interbank market. But, in April, it emerged that only financial institutions would have access to the interbank market and foreign institutions would need to stick to the swap centres.

  'The government has not said how it will implement the reform, which presents a degree of uncertainty when people are evaluating their cash flows and financing plans.'    Before December, the price of electricity produced by a China power project could effectively be denominated in foreign exchange. This was to cover the project's foreign exchange loans and dividends.

  With the new rules, there is more emphasis on the seller's (the joint venture's) access to the forex market.

    'It now seems to have moved in a direction that prices of things and settlement have to be denominated in renminbi but, whether denominated in foreign currency or not, settlement will have to be in renminbi so convertability is always an issue,' said Mr Li.

  'Unfortunately, there have been no detailed implementing rules announced by the SAEC or the People's Bank of China so things are in a state of flux,' he said.

  In order to move ahead on infrastructure projects despite the uncertainty, lawyers like Clifford Chance are drawing up documents which assume projects will receive access to foreign exchange from the relevant authorities.

  Mr Li said this indicated business pragmatism. 'People dealing not just with China, but other developing countries, need to be ready to accept the challenge of the changes in order to do business.'    Mr Gao said the delay in releasing the new rules was partly because of the administrative load.

   'China is keen to transform the current system into a socialist market economy and there are a lot of policies and regulations required for orderly development.

   'That is why a lot of projects have been under discussion for a long time, but we understand some major power projects are in the pipeline and it is about time to close them.

  'It is getting clearer and clearer how the uncertainties will be removed, in particular the availability of foreign exchange to power projects,' he said.

  Mr Li said some multinational companies accepted a degree of uncertainty over the new rules in their desire to progress.

  Clifford Chance and other foreign firms involved in power station deals in China are generally involved acting for foreign financiers or sponsors. The increasing involvement of multinationals in China power projects has meant lawyers becoming involved at an early stage.

  'On the financing side, lawyers enter the equation fairly early on, but any more detailed discussion with the banks will come when they think that they really have a project,' Mr Li said.

  Companies seeking to enter infrastructure deals as investors, on the other hand, are keen to have advice at an earlier stage.

  'The focus hasn't changed; timing is the issue. Banks still seek legal advice when their clients have taken a deal to an imminent stage but, before that, people might come in and say, 'I have been talking to X or Y province - we may have done a letter of intent - how do you see that as a project? How do we proceed on the commercial document side'?'   Mr Li said China was of growing importance to the legal sector.



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