TNAG-1623-FCO40-2237-Relations-between-Hong-Kong-and-China-1987 — Page 214

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financing needs of enterprises. The development of direct

financing in China appears to run contrary to the

conventional pattern of financial development in many other countries, in which the growth of the securities

markets usually comes after, and is often supported by, a

relatively more sophisticated and more developed banking

sector. Nevertheless, tight controls by the PBOC do provide a measure of protection against abuses.

35.

It is doubtful whether the general public in

China fully understands the nature of the stocks and bonds

being offered. From the point of view of the issuing enterprises, these stocks and bonds represent expensive

loans in lieu of cheaper loans from the banks, particularly since early 1985 when the PBOC began to

tighten the lending limits of banks with a view to cooling down the overheated economy.

36.

Many of these enterprises can afford to pay high

yields on their issued stocks because they enjoy a monopolistic position in certain markets, or because they

are benefiting from the distorted price structure with, for instance, the prices of their material inputs being

kept under control at a low level while they can charge much higher market prices for their output. The spread of private ownership in those privileged enterprises will

tend to make such misallocation of resources more

difficult to eliminate.

China's fund-raising activities overseas

37.

Since 1979, China has accepted a series of loans from foreign banks and governments. It is estimated that,

up to 1986, the amount of foreign capital China had absorbed was around US$20 billion, and that the

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