Investing in China? Watch your assets
International Trade and Investment Companies (ITIC) in China are the only companies allowed to borrow funds from foreigners and lend them or invest those funds in domestic Chinese companies.
China has 240 ITICs, which are investment arms of various governments or banks. Best-known is the central government’s China International Trust & Investment Corporation, or CITIC. Guangdong’s ITIC is one of 10 allowed to borrow from foreign sources in foreign currencies. They typically take deposits from businesses and government, raise money elsewhere, and invest in state projects. As such, they have contributed little to economic growth but much to local shenanigans. Since market reforms began in 1980, Beijing has run five crackdowns on provincial governments and their misuse of ITICs – in 1982, 1985, 1988, 1993, and 1995. Typically the provincial lords would go back to their old ways as soon as the crackdown ended. But Zhu, Minister of Guangdong, has a more ambitious agenda: He wants to change the fundamental structure of the country.
CITIC, which had investments in more than 700 projects and properties, was shut down on grounds that cash flow was insufficient to service loans of more than $3 billion owed to international banks. Under China’s system, all foreign loans must be approved and registered by the State Administration of Foreign Exchange (SAFE). CITIC apparently failed to register perhaps as much as $2.4 billion with SAFE. These “illegal” loans will not be repaid! That has touched off howls of protest inHong Kong’s banking community. Hong Kong monetary chief Joseph Yam even visited Guangdong to plead for the money to be paid back quickly, with no luck. Just how much individual banks stand to lose is not yet clear. Estimates compiled by Financial Examinations & Evaluations, Inc., indicate that 78 banks in Hong Kong alone are owed $7 billion by all the ITICs that can borrow abroad, and if Zhu’s agents shut them all down, Credit Lyonna reckons that Hong Kong banks alone may be out, at a minimum, over $3 billion.
These maneuvers show that China has appropriated between 3 and 7 billion dollars of investment capital that was determined to have been invested improperly, and hence the investors are entitled to no compensation or ownership of the entities. This may go down in history as the world’s largest theft. China is still a mess, and the People’s Revolutionary Army runs a vast majority of the business in China despite repeated pleas for them to divest.
Any transaction with China must have three things:
1) Dependence upon suppliers/distributors outside of China that cannot be replaced;
2) Dependence upon suppliers/distributors outside of China that cannot be replaced;
3) Contractual enforcement ability, both within China and outside of China, that has real muscle. Until then, each new venture is little more than new fodder for Ministers like Zhu.
