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Ifc presentation gai china 21 sep 2006


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  • 1. Financing your Chinese ProjectsWhat structure, what partner, what finance, IFC’s experience and perspective Emmanuel Pouliquen IFC Senior Transportation Industry Specialist General Manufacturing and Services Department
  • 2. Macro Trends and Forces China• GDP Growth: 8.2% pa for past 10 years. Expected to be 8% pa for the next 10 years. Shift from export-led to domestic/consumer growth.• Urbanization: in past 10 years, urban population has gone from 28% to 40% of total population.• Financial Markets: Dominated by bank lending, which can be controlled, to some extent.• Government Policies: Go West and Harmonious Society initiatives make a big difference on areas and types of development.• Social Tensions: Conflicts between rural populations and local govts/companies are real and increasing.• Regulatory Environment: Still quite complex, providing practical challenges to doing business. 2
  • 3. Structure• JV times have changed … • Big Three (SAIC, FAW, DongFeng) have chosen their partners long ago, not just for cars, but also for equipment • JV opportunities still exist but motivated by: • very specific technology needs: • segments where Magna, Valeo or other Bosch have no proposal • exchange of territory (Swaps: your technology in China, my cheap products in your territory) • Be very lucid on what your partner wants • Technology a mean but also an end (“The party said …”) • 50 years JV = 50 years of “negotiated friendship” • A boat with 2 captains tends to go on rocks 3
  • 4. Partner• Perceived benefits of a JV partner: • Knows the market • Knows the culture • Have connections • Transfer staff from its existing operations• … but can’t you do without a partner ? • Market: • GM or Ford: you already know the market ! • Local OEMs or Tier 1s: connections • Culture: • learn it yourself, the sooner, the better. • Learning the culture through your partner may just complicate things … • Connections: • governmental connections less and less relevant, consultants can help you • Customers connections: may or may not be relevant. • Build-up your GuanXi ! • Transfer staff: • Watch out: it goes with transferred H.R. practices ! 4
  • 5. Sleeping partner, or no partner ?• Impacts: • Master of your destiny • Keep your corporate culture intact, for better or for worse • “Start right” • … but need to build your market up from scratch• Stand alone penetration strategy: • Piggy back on existing U.S. relocated programs • Transfer existing production to China • Stick to western customers in the early stages • Send your best people, ready to stay for 5 years or more • HQs are far away: go there often, direct reporting line to CEO • Be patient … 5
  • 6. Financing• Specific points: • Multi-stage funding • Working Capital for • Growth • Exports back to U.S. • China banking system still immature, very focused on state-owned entities• Issues: • Your U.S Banker may be uncomfortable with your Chinese project • Your focus must be on strategy and operations. Little time/resources to discover the Chinese banking world• Financing through global institutions • Must be close to you both in the U.S. and in China • Must be familiar with U.S.-Chinese issues • Beyond financing, must understand your business, your strategy, and be able to advise even on operations 6
  • 7. IFC financing approach World Bank GroupThe World Bank Int‘l Finance (IBRD) Corporation (IFC) Est. 1945 Est. 1956 Government Private Sector
  • 8. Capital Stock Held by IFC’s Shareholders (As of June 30, 2006) Five largest: 45%Other countries: 55% United States 23.68% Other countries Japan 5.88% 54.99% Germany 5.37% France 5.04% 178 Member United Kingdom 5.04% Countries 8
  • 9. IFC Services Offered Promote Sustainable Private Sector Development• Financial products: loans, equity, quasi- equity and risk management facilities• Resource mobilization: loan participations, partial guarantees of local financing, and securities offerings• Advisory services: country, industry, financial, and technical
  • 10. IFC Financing: Key Elements Equity Loan• Normally 5%-15% Ownership • Normally Hard Currencies• Not Single Largest • Market Interest Rates Shareholder • Long-term: 5-10 years• No Direct Involvement in Management • Appropriate Grace Period• Long-term Investor: 5-10 years • Secured by Project Assets• Public Listing Preferred Exit • No Government Guarantees Mechanism
  • 11. IFC and China• IFC is world’s largest • IFC’s role in China is multilateral investor in increasing the private sector • Global portfolio of over $24.6 • $2.0 billion in over 100 billion investments since 1985 • $6.7 billion in new • SME facility in Sichuan investments in FY06 • Portfolio over $1.5 billion • IFC sets global standard for • Over $600 million in new environmental and social investments in FY06 safeguards • Plan to increase annual • We bring value to clients by investments to over US$700 encouraging long term million per year, and double sustainability of business portfolio in next 2-3 years
  • 12. Project Cycle and TimingAs Seen by Client Internal to IFC Initial Review Initial Discussions & Authorization to Appraise Mandate Letter Appraisal Management Approval Financing NegotiationsInfo. Memo and Syndication Legal Documentation Board Approval Disbursement Supervision/Evaluation 12
  • 13. Financing Options 1: Local Currency• Local Banking Sector is very liquid, but • Mostly short-term loans • Still based on Relationship Banking rather than Credit Analysis • Bank preference towards lending to SOEs rather than private companies• IFC Local Currency Options are Limited • Panda Bond successful, but not a permanent, recurring solution • Direct lending in RMB will depend on development of the long-term swap market; happening, but progress is slow • IFC can provide partial guarantees of long-term local bank loans, but between fees and interest rates, may not be the lowest cost solution 13
  • 14. Financing Options 2: Hard Currency• IFC US$ Loans a Viable Option • Long-term, grace periods appropriate for capital projects • If RMB appreciates, US$ loans are less expensive to repay (though US$ Libor is currently relatively high)• But Plan and Structure Carefully Up Front: • Only Sino-Foreign JVs or Wholly Owned Foreign Enterprises are regulatorily allowed to borrow in US$ • Only Direct Borrowers can provide assets for security • No Co-Borrowing structures, probably no guarantees from Chinese companies, no “exotic” financial instruments 14
  • 15. Summary/Recommendations• Secure your entry on no thrills business (de-localization)• Don’t underestimate start-up costs• Be master in your house• You need time, have a long term global banking partner• Share your strategy and operations vision with them, and they’ll provide you with much more than funds• Have courage, patience and resilience … it is worth it ! 15
  • 16. Questions/Answers 谢谢你的注意 ! XièXiè Ni De ZhùYì !Thank you for your attention ! 16