Bank of China

Risk and rewards

PUBLISHED : Saturday, 17 September, 1994, 12:00am
UPDATED : Saturday, 17 September, 1994, 12:00am


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BUSINESS is about risk and rewards. One cannot have the second without at least a modicum of the other, and it is the good manager's task to reduce the ratio. If this can be done at somebody else's expense, so much the better.

This is an option that has long been available in China, thanks to the foreign exchange guarantees provided by the domestic banks.

It must have been rather comforting for overseas partners to have been able to obtain the backing of a domestic bank which offered a foreign exchange guarantee on the total amount of a loan raised for, say, construction finance.

Now the game has changed and it seems the risk factor of trading into China has just been cranked up, with the ending of this privilege by the State Council and the People's Bank of China.

This information is seeping out into the public domain rather than being announced as a major policy change with accompanying fanfares and speeches. It is therefore much too early to gauge what effect it will have on investment in China.

However, there are already early indications that the move is being taken seriously by the banks - despite the fairly widespread disregard for central edicts which has previously been apparent in large parts of China's financial sector.

The question for foreign investors seeking to cash in on the China boom is whether the balance has swung too far towards the risk side of the equation with the removal of this insurance policy.

Even today the economy has not been transformed to the extent that the risks of doing business in China equate with those in mature markets. There is still a great element of venturing into the unknown on the part of foreign investors entering joint ventures and other projects.

It will certainly be argued that China's embryonic property laws, company legislation and laws of contract still make it a very special case, which continues to require protection not available - or acceptable - elsewhere.