3. In the early 1990s, China decided that by 2000 it would boost its electricity-generating capacity by more than half. To do that, it planned on foreigners’ investing at least US$20 billion of the roughly US$100 billion tab. However, Beijing informed investors that, contrary to their expectations, they would not be permitted to hold majority stakes in large power-plant or equipment-manufacturing ventures. In addition, Beijing insisted on limiting the rate of return that foreign investors can earn on power projects. Moreover, this rate of return would be in local currency without official guarantees that the local currency can be converted into foreign currency, and it would not be permitted to rise with the rate of inflation. Beijing said that if foreign investors failed to invest in these projects, it would raise the necessary capital by issuing bonds overseas.

However, these bonds would not carry the “full faith and credit of the Chinese government”.

(a) What problems do you foresee for foreign investors in China’s power industry?

(b) What options do potential foreign investors have to cope with these problems?

(c) How credible is the Chinese government’s fallback position of issuing bonds overseas to raise capital in lieu of foreign direct investment?