1. Financing your Chinese Projects
What 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.
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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
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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 …
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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
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7. IFC financing approach
World Bank Group
The 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 Timing
As Seen by Client Internal to IFC
Initial Review
Initial Discussions & Authorization
to Appraise
Mandate Letter
Appraisal Management Approval
Financing Negotiations
Info. Memo and Syndication
Legal Documentation Board Approval
Disbursement
Supervision/Evaluation
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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
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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
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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 !
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16. Questions/Answers
谢谢你的注意 !
XièXiè Ni De ZhùYì !
Thank you for your attention !
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