Raising Funds in China

As the dollar slumps against the renminbi, Merial looks to build a new factory.

Shanghai -- Tan Hock-Kee, controller of China operations for multinational animal health company Merial Corp., shakes his head as he recounts the challenges of trying to raise funds in China. He began his career working in his native Malaysia, where any ethnic-Chinese-owned companies by law must hire a Malay executive, who may not have a real role to play, just in order to do business. But he says things have become stranger in China for foreign-owned companies like his own.

London-based Merial owns a factory in Nanchang, China, that makes animal vaccines, including a widely used vaccine for the domestic chicken industry. The product line is so successful that even running full-out, the factory cannot meet demand. Building a new plant will cost some U.S. $70 million, an amount about equal to the company’s annual sales in China. 

In years past, the parent company, a $2.7 billion business, would just wire over the money, and local contractors would set to work building the new plant. No more. 

With the dollar slumping steadily against China’s renminbi, payment in U.S. currency is less acceptable, and the central government, already awash in dollars, puts strict limits on how many dollars can be converted into local currency.

Merial Group Treasurer Joachim Hinzen says that while the dollar’s weakness against the renminbi explains why local vendors may not want to accept U.S. currency, the problem with converting money is common in many countries that control their currencies. “Until recently, it used to be difficult to convert dollars in Brazil,” he says.

“We could go to a local bank in Nanchang and try to exchange the dollars,” says Tan, “but that requires the approval of the provincial State Administration of Foreign Exchange (SAFE).” Obtaining such approval, he says, isn’t easy. And going to a foreign bank operating in China would require approval from the central government financial authorities that could take a “very long time.” 

Both types of loans, moreover, have quotas, which Tan says is the central government’s way of “controlling hot money” and keeping a lid on inflation. “In the old days, China needed forex, but they don’t need forex anymore,” says Tan.

Merial, since 2009 a unit of Sanofi, a $42-billion revenue French global health company, has used a local bank for the past 10 years “because they don’t require as much documentation,” he says. The downside is that the interest rate for fixed-asset loans is set by the central bank, the People’s Bank of China, currently at a rate of 6.5%. There’s another problem with relying on bank loans too. “The visible hand of the government can change the rules suddenly on you,” says Tan.

Merial’s acquisition by Sanofi has opened a new financing option for Tan, a system called entrust loans, where one company is allowed under Chinese law to lend to another, with a local bank acting as middleman for a fee. “We plan to use entrust loans from Sanofi operations in China, which are cash-rich, to help fund our new factory,” Tan says.

A complication, he says, is that Chinese tax authorities look at such deals closely to make sure such loans are “arm's-length” transactions, meaning that they cannot simply be gimmicks designed, for example, to shift profits to lower tax jurisdictions. “There is no fixed rule, but most of the time if you use a 6.5% rate, there’s no problem,” Tan says.

Tan says he looks forward to a day in the future when the renminbi becomes fully convertible. “Things will be a lot easier then,” he says.