NEWSWIRE - October 31, 1998
Topic: Financing Growth in an Emerging Market
Source: "Red Chips No More," by Mark L.
Clifford, Joyce Barnathan, and Dexter Roberts, Business
Week, Monday, October 26, 1998, pages 48-50.
Synopsis of Article:
Growing corporations in China can no longer depend on the
government for financing. This produces demand for loanable
funds from the private sector. The article discusses two firms,
China International Trust and Investment Corp. (CITIC) and
Guangdong International Trust & Investment Corp. (GITIC).
These firms have raised billions of dollars of loanable funds
from foreign investors. The funds are then invested in various
projects. Government officials are concerned that considerable
portions of the loans made by these two corporations are nonperforming.
There are also allegations of mismanagement by corporate officials.
In addition to these problems, the investment companies also
have significant foreign loans of their own which are now
more difficult to repay due to the sagging local currency.
Questions:
1. Why are Chinese corporations more dependent on foreign capital
to finance growth than their counterparts in the U.S. and other
developed nations?
2. What is exchange rate risk? How are CITIC and GITIC exposed
to this risk and how has it affected them recently?
3. In the past year, the US dollar has appreciated materially.
Does this expose U.S. manufacturers to exchange rate risk
as well?
4. What are other sources of risk a foreign investor must
consider before investing abroad? Use examples from the article.
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