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Plan to swap Rmb debt for foreign exchange

By Graham Earnshaw

SHANGHAI, May 7, Reuter – Shanghai Friendship and Overseas Chinese plans to take out large loans from foreign banks and swap as much of its renminbi debt as possible for foreign exchange, the company said yesterday.

If successful, the company, which runs a network of large department stores in the Shanghai area, would be the first in China’s booming retail sector to win permission to borrow from foreign banks, Friendship and a foreign banker said.

“We’re actively exploring the possibility of taking out foreign exchange loans from foreign banks this year, and we’re already in contact with foreign banks,” the company president Zhong Huajun said. “Of course, this assumes we obtain official permission. Our risk in doing foreign exchange loans is in the exchange rate, but the risk from our point of view is manageable because a large element of our income is foreign currency based,” she said.

“If we could do it, we’d like to swap out the entire debt for foreign exchange loans. The interest rates are lower and it would significantly reduce our costs,” Zhong added.

The company presently has outstanding bank loans of Rmb 230m (about HK$207.69m). Interest payments on loans last year amounted to Rmb8.4m, she said.

Friendship plans to take out loans of between Rmb40m and Rmb60m in 1996 to fund expansion. She expects foreign exchange control authorities will approve the transaction since the Bank of China is willing to act as guarantor for the loans. Asked about the possibility of a devaluation of the renminbi, which would have a significant impact on foreign currency loan holders, Zhong said: “I don’t see much chance of a devaluation in the next couple of years. There may be a gradual slide to some extent, but nothing serious.”

A foreign banker said he thought Friendship had a very good chance of getting approval for foreign currency loans given its foreign currency B-share status.

“According to the regulations, companies are not strictly allowed to convert foreign loans into renminbi. But they’ve probably thought that through. What the hell, this is China,” the banker said.

Zhong confirmed the existence of such a regulation, but said: “It is not strictly enforced. Also, some of our projects require foreign currency expenditure.” REUTER gae

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