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

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

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

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

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Merial Group Treasurer Joachim Hinzen says that while thedollar's weakness against the renminbi explains why local vendorsmay not want to accept U.S. currency, the problem with convertingmoney is common in many countries that control theircurrencies. “Until recently, it used to be difficult to convertdollars in Brazil,” he says.

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“We could go to a local bank in Nanchang and try to exchange thedollars,” says Tan, “but that requires the approval of theprovincial State Administration of Foreign Exchange (SAFE).”Obtaining such approval, he says, isn't easy. And going to aforeign bank operating in China would require approval from thecentral government financial authorities that could take a “verylong time.”

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Both types of loans, moreover, have quotas, which Tan says isthe central government's way of “controlling hot money” and keepinga lid on inflation. “In the old days, China needed forex, but theydon't need forex anymore,” says Tan.

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

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Merial's acquisition by Sanofi has opened a new financingoption for Tan, a system called entrust loans, where onecompany is allowed under Chinese law to lend to another, witha local bank acting as middleman for a fee. “We plan to use entrustloans from Sanofi operations in China, which are cash-rich, to helpfund our new factory,” Tan says.

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A complication, he says, is that Chinese tax authorities look atsuch 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 taxjurisdictions. “There is no fixed rule, but most of the timeif you use a 6.5% rate, there's no problem,” Tan says.

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

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