2. In the early nineties, China decided that by 2000, it would boost its electricitygenerating capacity by more than half. To achieve that, the country planned to offer direct equity investments to foreigners of at least $40 billion out of the roughly $100 billion tab. However, the State Council of the Peoples Republic of China has announced that, contrary to investors expectations, foreign investors are not be permitted to hold majority stakes in large power-plant or equipment-manufacturing ventures in the country. In addition, the State Council has insisted on limiting the rate of return that foreign investors could earn on power projects. Moreover, this rate of return would be in local currency without official guarantees that the local currency could be converted into dollars and it would not be permitted to change in line with the rate of inflation in the country.

As a contingency measure, the State Council also said that if the country failed to raise capital from the direct equity investments from foreign investors, it would raise the necessary funds by way of issuing bonds overseas. However, these bonds would not carry the "full faith and credit of the Chinese government.

Q2. (b) (Continued)

1. What problems do you foresee the foreign investors will face if they are to invest in these China's electricity-generating projects directly?

(6 marks)

2. How credible is the Chinese government's contingency measure of issuing bonds overseas to raise the required capital? (7 marks)