The Chinese government is working to combat an environmental crisis largely caused by its own policies. The answers so far: dramatic speeches, jargon-laden white papers, and of course, more policy.
The more tangible moves include closing factories, limiting car travel, and even swatting flies. From a regulatory standpoint, however, China has changed its tax and foreign investment laws to steer capital from overseas toward projects that improve the environment—or at least, ones that don’t make it any worse.
Central to that strategy is the Catalogue for Guidance of Foreign Investment in Industry, a government-published tome that classifies industries as encouraged, permitted, restricted, or prohibited. If a foreign company’s business falls under the first category, it needs only provincial-level approval to make an investment in China. If it finds itself in a restricted industry, an investment in China would be subject to a review at the national level, a far more onerous process than simply passing local muster.
Last published in 2004, the catalogue was updated and re-released in December 2007, twice as heavy as the last one and with some significant changes. In the latest edition, a number of industries and businesses that could contribute to a better environment in China were officially placed in the “encouraged” column, while some polluting industries found themselves downgraded by Beijing.
Hou
The Beijing government “has become much more serious” about environmental needs, says John Hou, a partner at King & Wood in the Chinese city of Guangzhou. “Before, the government just thought that gross domestic product would speak for itself.”
Included in the laundry list of industries, products, businesses, investments, and technologies being encouraged by the government via the catalogue are clean mining, recycling, wind, water and solar power, organic foods, pollution detection equipment, eco-friendly construction materials, and the recovery of industrial wastewater. Polluting and energy-intensive and some resource-related investments are now restricted or forbidden by Beijing.
McKenzie
“The government is being more selective,” says Paul McKenzie, a partner in the Beijing office of law firm Morrison & Foerster.
In addition to the catalogue is the tax law. China abolished its old corporate income tax system last year. Until then, foreign investors received a preferential rate of 15 percent, while Chinese domestic corporations had to pay 33 percent. But China harmonized its tax code in 2007, and now all corporations pay a universal rate of 25 percent.
But the Chinese government also said it would offer lower rates to encourage certain industries and promote certain national goals. Environmental protection and related industries were mentioned as targets of this policy.
Together, the two measures—the catalogue adjustments and the tax incentives—are part of a broader re-orientation of the Chinese economy. The government wants to move the country away from the old economic model of low-cost manufacturing and export and get it into a new model of cleaner, higher value-added industry and domestic demand.
In most cases, the new catalogue and new tax law will have little effect on the operations of U.S. and European corporations in China. Most companies from the West already have exceedingly high environmental standards. Their home country laws, their corporate charters, and their own ethics prevent them from being major polluters in China or anywhere else outside their home jurisdictions.
The government wants to move the country away from the old economic model of low-cost manufacturing and export and get it into a new model of cleaner, higher value-added industry and domestic demand.
Indeed, foreign corporations—especially through their respective Chambers of Commerce—have been leaning on China to promote better environmental regulations and more thorough enforcement. Professionals in the industry say that the main polluters are the small Hong Kong- and Taiwan-owned manufacturers in Guangdong, China’s industrial heartland.
Still, lawyers and accountants in China also say their clients are looking carefully at the new regulations and new tax code. The incentives themselves will necessarily change the environmental practices of larger companies, they say, but the reforms are likely to color where companies decide to put new plants or to expand existing production.
From the C-suite perspective, the reforms are a mixed blessing. The cost of doing business is rising briskly in China, and new regulations (coupled with a notorious inefficient bureaucracy) don’t help. Businesses have welcomed the harmonized tax rate, but the 10-point rate increase many foreign companies now face is another complication executives must consider as they contemplate their China strategy and presence. Then again, if a company gets a tax break because it makes an environmentally friendly technology or product, that’s an incentive to invest in, or remain in, the country.
Silverman
“Right now it’s all so new,” says Scott Silverman, a lawyer in the Beijing office of the law firm O’Melveny & Myers. “But we are getting a lot of questions about it from clients.”
It will be some time before the full effect of the tax code is known. As with all laws in China, how local officials implement it will have enormous consequence. Much of the code is open to interpretation, experts note, and ultimately Chinese officials will use it as a tool of industrial policy to suit the needs of Beijing leadership.
The catalogue, however, is clearer. It’s a list that is published, with much less room for error or bargaining.
“That’s the thing about the catalogue. You either fit into it or you don’t,” Silverman says. “If you are a shoemaker, you can’t convince them that you make refrigerators.”
Some in China have doubts about the new policies. While the intent is applauded, the effectiveness is questioned. One environmental lawyer calls the efforts unfocused and wonders if they will make a real difference to the environment and the country. The catalogue, for example, simply lowers the barriers, reducing the number of hoops a company must jump through to be in a preferred industry, rather than doing much to push the process ahead, he says.
“I am afraid that it is a shotgun approach that hasn’t been coordinated at the highest level,” says Charles McElwee in the Shanghai office of the law firm Squire, Saunders & Dempsey. He notes, for example, that biofuels are now considered a restricted industry; he describes that as a step backwards. The reforms really only encourage businesses to be environmentally friendly, and “‘encouraged’ doesn’t do you a lot of good,” he says.
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