DEBT financing will provide China with extra means to reform the moribund state sector, an investment banker says. China International Capital Corp chief executive officer Edwin Lim said the prevailing belief that debt financing was more expensive than equity financing was a 'misconception'. The investment bank, officially opened last year, is a joint venture between the Morgan Stanley Group, the People's Construction Bank of China, the Government of Singapore Investment Corp and the Mingly Corp. Because equity investment was riskier than lending, foreign investors usually asked for a higher return on mainland investment and the purchase of B shares, or H shares, Mr Lim said. B shares are the foreigners-only shares listed in Shanghai or Shenzhen, while H shares refer to mainland enterprises floated in Hong Kong. Mr Lim said China was careful about raising its sovereign debt and had to look for other means to import foreign capital. Corporate borrowing was one way to do that. The state has kept tight control on the ability of domestic enterprises to raise foreign debt. They can borrow abroad only through 'windows' or designated institutions. As a result, the enterprises were not subject to the scrutiny of the international capital market. 'It's time now that the best Chinese enterprises are allowed to enter the international capital market,' Mr Lim said. If the enterprises were allowed to issue bonds abroad, they would be exposed to the examination of foreign investors, thereby improving their performances, he said. China has latched on to equity financing to steer its state-owned enterprise reform. It has invited foreign investors to establish joint ventures with domestic enterprises, and has allowed pilot enterprises to list overseas. So far 19 Chinese enterprises have listed in Hong Kong and New York. Mr Lim did not expect enterprises to undergo significant changes after they were listed because China was different from the Japanese and German models. Financial institutions played a significant role in Japanese and German listed-enterprises, so their behaviour was restricted. The US stock market was characterised by a diversified ownership system, so shareholders exercised little power on the companies, but the companies faced the threat of takeover if they performed badly. Mr Lim said none of these conditions existed in China, where enterprises were not threatened by takeover because the state was the largest shareholder. There also was no representation of foreign investors on their boards.