China FDI: Ignorance No Defense
March 8th, 2008 | by This is China! |Steve Dickinson at China Law Blog wrote a compelling piece that explains China is changing the complexion of Foreign Direct Investment (FDI) it wants to attract to its shores in future.
“Under the revised edition of Guidance Catalogue for Overseas Investment Industries, promulgated by the government in December, overseas investors are being encouraged to enter fields such as recycling, clean production, renewable energy, environmental protection and efficient use of resources. They are restricted or banned from entering energy-intensive, polluting sectors or certain certain fields of resource exploitation, and export tax rebates for 1,115 commodities in these sectors have been ended.”
At the local levels of government at which I work - second- through fourth-tier cities - officials have been talking for the past year-and-a-half about no longer accepting polluting and labor-intensive industries; eg, textile and chemical processing. The revision to the Catalog of Overseas Investment really just codifies what was already happening in wealthier Economic Development Zones (EDZs): a movement away from unpopular and energy-intensive industries. Fourth-tier and fifth-tier cities are more open to the light industries cited in the Catalog revision, especially the further inland one goes into China.
The shadowy Adjustment Catalog of 2005 that Steve refers to has been the proverbial writing on the wall for the EDZs that have been denying license renewals and business approvals these past two years for industries that no longer fit in the resource- and environmental-imprint China is trying to create over the next twenty years. There are dozens of those sorts of EDZs now throughout Jiangsu Province (especially after last year’s algal bloom in Lake Tai), and around the cities that are positioning themselves as IT-, BPO and R&D hubs.
As well, most of the kinds of companies affected in the catalog are the tens of thousands of Asian SMEs that we’ve all been reading about and seeing closing shop in Guangdong Province (Taiwanese and Hong Kong companies), and in Shandong Province (South Korean companies). Remember, they’re “foreign” too, and haven’t contributed much to the overall evolution of Chinese industry and society beyond sopping farmers from the fields and workers from shuttered State-Owned Enterprises. Now, many of those former employees are finding the work pays less than what they now have in their counties and towns - and even fields.
Do I think the announcement radically changes the shape of FDI flowing into China’s second- through fourth-tier (what I call “x-tier”) cities from Western countries? No. But the revision to the Catalog of Overseas Investment certainly gives EDZs more guidance in what kinds of investments to deny. However, it certainly behooves Western companies to check the sources ahead of time should they stumble upon a more devolved x-tier location that chooses to ignore the Catalogs and encourages a Western investment that actually contravenes national-level policy. Should policy winds change and suddenly the x-tier EDZ has to confess it’s sins, the Western company will find when it loses its investment that ignorance is no defense in China.
10 Responses to “China FDI: Ignorance No Defense”
By All Roads on Mar 8, 2008 | Reply
Bill.
This is old news man. The catalog came out 6 months ago!
It is a topic I covered earlier in the year as I detailed how both Tianjin and Suzhou were looking to move away from the dirty industries.
Hope all is well
R
By China Law Blog on Mar 8, 2008 | Reply
Exactly. Have you either been involved with, come across, or heard of a foreign company that has been locally approved, but then is denied access to the electricity or the natural gas grid because it never should have been approved in the first place?
By All Roads on Mar 10, 2008 | Reply
CLB,
In short. yes.
feeling a bit set up on this one, I will only say that I know of a number of manufacturers who were involved in chemical, metals, and other “polluting” and “energy intensive” industries that were turned away recently. that is to say approval was never granted.
If you mean, do I know of anyone who had their approval taken away at the central level after being approved at local level. yes.
If you mean do I know of anyone who has been approved, has been in operation, and who has been taken off the grid… again, yes. it was part of the recent energy saving cycle where a number of Shanghai based factories were even affected. Energy intensive factories were taken off the grid first.
R
By This is China! on Mar 10, 2008 | Reply
Typically, companies that an Economic Development Zone approves also have a bad habit of writing into their contracts things like, “lowest electricity rates available,” and “unlimited supplies of natural gas.” However, the contracts that companies sign with the EDZs - which are organs of local government, even if certified by Central Government - do not bind the utilities to service levels the officials “sold” to the investor to get their project.
Utilities negotiation is a separate issue from meeting the criteria in the COII.
In other words, a company can do all the write things, meet all the approval criteria, AND even get their business approval but not get serviced by the utilities companies because of a hang in the terms of the agreement. The investor has to go round and start from zero in negotiating with each of the utilities companies. That’s a real gotcha that catches investors ALL the time; hence, many lose months of time and lots of money in the delays.
By Tim on Mar 10, 2008 | Reply
I am curious to see if you have seen specific restrictions within second tiers limiting the investment of export oriented companies or other types of companies specifically not limited in the catalogue. We are working on a project in Hangzhou and it seems that the local tax bureau no longer has interest in paying VAT rebates to new companies so as a matter of course the city, or at least the district and city level bureaus we have spoken to, have all told us they are not interested in export related projects.
By All Roads on Mar 11, 2008 | Reply
Tim,
I actually just had an interesting conversation about this with a Suzhou firm yesterday. Won’t get into the nitty gritty, but they were having problems with fapiaos as well.
My initial response to what you are seeing is:
1) Were they in one of the 3000 categories that saw reductions last summer
2) Are they “energy intensive” or “polluting”?
If yes to #1, then it is a national policy thing, not local/ provincial. If yes to #2, it would fall in line with the current greening of investment.
I have not worked with Hangzhou in a while, so I cannot comment on their mental state, but they were actively promoting FDI last year and have built a lot of infrastructure to support export. So, I am suspect that they are against new export models, and suspect that there is something else going on.
Bill - you heard of anything like this?
R
By This is China! on Mar 11, 2008 | Reply
The issue is not one of whether the investment’s industry is encouraged or not discouraged, but one of the local government having to pay the VAT rebate that the national government has sanctioned. The local governments don’t like letting money go like that, especially if they’ve grandfathered the tax incentives on manufacturers who are/will be paying very little taxes for years to come, possibly.
Almost every Economic Development Zone I investigated in Zhejiang and Jiangsu Province during a recent client site selection project said the same thing about the rebate the export-manufacturer sought, “Your investment is welcome so long as you find a trading company to work with or some kind of arrangement in another city so that our city does not have to pay the rebate.”
By Tim on Mar 11, 2008 | Reply
Neither applies. Export is all that we have discussed with the local authorities – no business scope, no custom codes for products -and so far everyone of the bureaus we have contacted has told us that they are no longer ‘interested’ in export oriented FDI, which means they will not allow the company to actually setup. We have decent contacts within the city and have received the same message at senior levels of the municipal government.
The explanation we continue to receive is that they do not want to have to pay the VAT rebate to new companies; and in particular the local tax bureau’s portion of the rebate. This explanation is not only coming from specific contacts but through no name phone calls to bureaus. We have not, however, verified with all districts or Hangzhou EPZ.
By All Roads on Mar 11, 2008 | Reply
Bill/ Tim
Both interesting comments.
My only additional question is how the size of a project may fit into this?
would GE/ Intel have a problem, or is this limited to SME?
R
By This is China! on Mar 12, 2008 | Reply
I know SMEs get this song and dance now throughout the east coast of China about local governments not wanting to pay the VAT rebate. I am guessing that larger players that will bring in greater tax revenues will have more room to negotiate payment of the VAT rebate by local governments, which will not feel as poor after reimbursement.