CONFIDENTIAL # Z
14
30.
In China, the financing of projects undertaken
by enterprises and local governments from sources other
than bank loans or government funds is popularly known as
"social financing". This is because the borrowers and
lenders involved are neither central government units nor
banks. It opens a new way for mobilizing surplus funds in the private sector. Existing practices comprise four
channels of financing: inter-enterprise (raising funds
from other enterprises), intra-enterprise (raising funds
from employees by issuing "stocks" to them), public offer
(raising funds from the general public), and investment trust companies (entities which raise funds from the general public and use them to invest in other
enterprises).
31.
Most of the "stocks" issued in China are a
mixture of bonds and equity shares. They resemble a form
of participating preferred stocks in that holders can
obtain extra payments beyond the fixed rate of interest.
Very often they bear a fixed maturity date, which makes
them look more like a bond. The redemption of the
principal is often guaranteed by the local governments
concerned. Holders generally have no say in the actual management of the enterprises issuing the stocks. The rate of return, covering both interest and dividend
incomes, is usually much higher than that on bank deposits and appears attractive in relation to the level of risk
involved. To some extent, this is due to the high
transaction costs involved in the transfer of such stocks,
thereby making them relatively illiquid, given that, until very recently, secondary markets did not exist in China.
32.
The ownership of enterprises by individuals runs
counter to socialist ideology which emphasises the
G.F. 32%
CONFIDENTIAL #2