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exchange expenditure (on imported equipment, imported raw
materials, and wages of expatriates) with earnings from
exports. Instead of being outward looking, many investors start their business in China with a view to penetrating
the Chinese market. The Chinese authorities, on the other
hand, are worried about the possible foreign exchange
drain once the domestic market is opened.
30.
In
At the beginning, China insisted that joint
ventures must export 70% to 80% of their products. In
1983, in order to encourage more foreign investment, the
restrictions on domestic sales were partially lifted.
principle, a higher percentage of domestic sales will be
allowed if the firm provides advanced equipment and
technology, if the products are urgently needed in China,
or if the products are otherwise imported. This partial
lifting of domestic sales restrictions, coupled with a
more liberal policy in approving applications for joint
ventures in 1983 and 1984, resulted in a marked increase
in the number of joint venture projects approved in 1984,
and the lagged effect was carried through to 1985.
A
31.
However, during the fourth quarter of 1984 and
early 1985, China's foreign exchange reserves fell
sharply. In order to halt this development, stringent
controls on foreign exchange spending were introduced.
freeze on foreign currency credits to joint ventures was
imposed, resulting in cash flow problems (in foreign exchange terms) for many joint ventures. Moreover, it has
become even more difficult for joint ventures to convert
their Renminbi earnings into foreign currencies. More seriously, some buyers in China are not honouring their agreements to pay in foreign currencies. As these controls and changes are applicable to both existing joint
ventures and new-comers, the consequential adjustments
that need to be undertaken by the existing joint ventures
are particularly disruptive.
CONFIDENTIAL # 3