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Hanergy Solar Group (2016 Update)

Hanergy Solar Group (2016 Update)

Beijing based Hanergy is China`s largest, privately owned, producer of renewable energy. The group operates in the hydropower, wind power and the solar power fields, whilst it`s focus has now shifted towards the latter, the company has become the largest thin film solar panel producer in the world and has a presence in Europe, North America and Asia-Pacific. The company was featured in the MIT Technology Review’s “50 Smartest Companies of 2014” ranking,  due to its almost 1000 patents, mostly related to photovoltaic innovation.

 

 

Currently Hanergy’s installed capacity for hydropower exceeds 6 GW, whilst the same figure for wind power stands at 131 MW according to the company’s reports. The company also has the world’s largest, privately built, power station, Jin’anqiao. Its Wind power plants are in Jiangsu and Ningxia provinces.

 

However, today, the core business and focus of the company is the development and production of photovoltaic panels. Hanergy has made striking progress in becoming a global leader in the field, considering it only started the development of its photovoltaic arm 5 years ago. Local media in Guangdong, province where Hanergy launched its solar panel operations, coined new term – “Hanergy speed”. The company claims its annual capacity for producing PV panels is now over 3 GW, which would translate to 4 billions kWh of electricity annually. The group has signed construction agreements for solar power plants with a 4 GW total capacity in Inner Mongolia, Ningxia, Jiangsu, Hainan, Shandong, Hebei and other provinces, as well as in several European countries.

 

Hanergy focuses on thin film photovoltaic solar panels. Production line start-up costs are relatively high whilst efficiency is lower than traditional silicon panels, but the lower production costs and consistently improving transformation rate should increase thin film panels commercial attractiveness. Over supply in the solar industry forced numerous companies out of business, some of which were rescued by Hanergy Solar Group (HNS), in which Hanergy Group acquired a controlling stake in February this year.

 

Hanergy Group and Hanergy Solar Group have been aggressively expanding in both the domestic and international markets. It recently signed a partnership with IKEA, where it will furbish its retail stores with solar panels in the UK and China. Furthermore, by acquiring MiaSole and Global Solar Energy in the US and Solibro in Germany it has significantly strengthened its R&D capacity The latter has been working on improving conversion efficiency of Copper Indium Gallium and Selenium (CIGS) panels since the acquisition, with highest efficiency rate of patented panels being 15.5% conversion, while the latest lab tests are reaching 19.6% conversion: meaning about a fifth of sun’s radiation is being converted into electricity. Moreover, Hanergy has signed an agreement with Aston Martin Racing, and will explore possibilities of solar technology application in motorsports.

 

 

However, despite all positive news, Hanergy’s future plans seem to be both risky and reliant on Governmental patronage. The group’s investments into wind and solar farms are only 30% - 40% funded by the Hanergy itself, the rest of the capital usually coming from local governments. If Hanergy fulfills its expansion plans, it will have a solar panel production capacity of around 6.6 GW, while globally added capacity was just less than 40 GW last year, with a quarter of it coming from China. It believes that its markets success is dependent on it`s development and delivery to customers of its latest CIGS panels and considering Hanergy does not currently figure among the top sellers globally, all will indeed depend upon the volume of its CIGS panels shipped to end users.

 

 

Hanergy launches full-solar-power vehicles with daily range of 80km (2016 Update)

 

 

Hanergy Board chairman & CEO Li Hejun launched 4 new fully solar powered vehicles. The new series of vehicles includes the Solar O, Solar L and Solar A and sports car 'Hanergy Solar R” each targeted at different groups of users.

 

 

With a solar energy conversion rate of 31.6%, Hanergy's gallium arsenide (GaAs) dual-junction solar cell was awarded with a World Record Certificate by the World Record Association at the launch event. Previously, on 5 January, the technology had been recognized by the US National Renewable Energy Laboratory (NREL) for its record efficiency.

 

 

The four new full-solar-power vehicles are integrated with flexible, highly efficient GaAs solar cells, maximizing the area covered (3.5-7.5m2). Through a series of precise control and managing systems (including a photoelectric conversion system, an energy storage system and an intelligent control system), the zero-emission vehicles use solar energy as the main driving force. With 5-6 hours of sunlight, the thin-film solar cells can generate 8-10kW-hr of power per day, allowing the vehicle to travel about 80km (equivalent to over 20,000km annually), and hence satisfying the requirements for city driving under normal circumstances.

 

 

Users can manage different travelling and weather modes in a real-time, mobile, networked and smart way, selecting charging modes in accordance with varied weather conditions through Apps on their mobiles. In everyday-use mode, the vehicles can charge themselves with solar energy while traveling, making 'zero charging' possible for medium- and short-distance journeys. So, unlike traditional electric vehicles, the full-solar-power vehicles hence no longer need to rely on charging posts, eliminating the concept of 'distance per charge'. For weak sunlight or long-distance travel, the lithium batteries in the vehicle can get power from charging posts, enabling them to travel a maximum of 350km per charge.  

 

 

Hanergy claims that the four new vehicles are the first full thin-film solar power vehicles that can be commercialized, breaking the bottleneck of poor practicality of previous solar-powered vehicles. The firm has also signed a framework agreement with Foton Motor to cooperate on developing clean energy buses.

 

Enstrusted lending in China: a shadow...

Enstrusted lending in China: a shadow banking primer

By Luke Deer

 

Entrusted lending became the second largest source of financing in China in 2013 after bank loans and the largest shadow lending channel. This article explains the entrusted lending channel, looks at why it grew and at how recent changes to inter-enterprise lending rules may impact on entrusted loans.

 

 

Entrusted lending is a unique feature of shadow banking in China.  The ‘entrusted loan’ (委托贷款) channel was set up after a 1996 People’s Central Bank regulation which prohibited direct lending between non-bank entities, primarily between enterprises but also by government entities.

 

 

The first decade and a half of reform and opening after 1979 opened up informal non-bank financing activity on a large scale.

 

 

Together with widespread capital and goods shortages, the effect of these reforms by the late 1980s was a stop-start inflationary growth cycle at the macro-level, a crisis in profitability in the state-owned enterprise system and a major non-performing loan problem in the bank system.

 

 

China’s authorities’ were therefore seeking to bring non-bank financing channels under control. But legally choking off direct all forms of non-bank lending posed a problem for ‘legitimate’ financing and liquidity management, particularly among corporate affiliates and from local government financing entities.

 

 

Thus the ‘entrusted loan’ channel was set up as an official work-around to allow non-bank institutions to lend to each other indirectly via the official banking system.

 

 

Moreover, until very recently, China’s central bank, the Peoples’ Bank of China (PBOC) had sought to conduct monetary policy by directly controlling monetary aggregates through lending targets–and the ‘entrusted loan’ channel allowed the the PBOC to account for non-bank lending activity via the banking system.

 

 

Under the ‘entrusted loan’ facility banks conduct an agency businesses to facilitate loans between corporate and other non-bank entities for a fee.

 

 

Formally, the non-bank enterprise lender retains the risk on the principal and interest of its loan to its designated borrower and the banks get the right to fee income from the ‘entrusted loan’. But banks and non-banks entities could also use the entrusted loan channel to circumvent regulatory restrictions.

 

 

Until September 2015 regulators had sought to manage bank balance sheet risk by enforcing a 75 percent loan to deposit ratio, which stipulated that banks could not loan more than 75 percent of their deposit base. Because ‘entrusted loans’ do not appear as loans on bank balance sheets’ and are treated as an ‘other investment asset’ banks could use ‘entrusted loans’ to circumvent the 75% loan to deposit ratio by using the ‘entrusted loan’ channel.

 

 

The attempt by China’s monetary authorities to reign in bank lending between 2010 and 2013 led to a sharp growth in alternative balance sheet lending strategies by the banks, primarily through entrusted lending but also through issuing bankers’ acceptances.

 

 

As Chen et.al (2016) explain in a recent paper, monetary tightening between 2010 and 2013 led to a worsening LDR ratio for banks, especially for smaller second banks who were more easily squeezed by falling deposits.

 

 

It was these banks who turned aggressively to alternative lending strategies, such as ‘entrusted lending’ to mitigate regulatory risk of their worsening LDR ratio.

 

 

Banks could also trade ‘entrusted loan’ assets on the inter-bank market, and this provided further incentives for enterprising banks to build ‘entrusted loan’ businesses.

 

 

The result, according to Chen et.al (2016), was that “the share of entrusted loans in the sum of entrusted lending and bank lending tripled during the monetary tightening period [from 2011 to 2013].”

 

 

While entrusted lending could provide corporate and other non-bank affiliates with a liquidity and investment facility, entrusted loans could be used to lend to non-affiliates at interest rates above the prime lending rate to restricted industries as well for purely speculative financial investments.

 

 

From 2005 to 2010 the China Banking Regulatory Commission and the State Council passed a series of increasingly stringent restrictions on bank lending to overcapacity, polluting and ‘risky’ industries – especially real estate related sectors.

 

 

However, ‘entrusted loans’ did not count as bank loans so they could be used to circumvent lending to restricted industries.

 

 

The entrusted loan channel could also be used by companies with good access to official credit channels, such as large publicly listed enterprises and local State Owned Enterprises, to borrow at low cost from the banks and to lend at high interest rates to non-affiliates in restricted sectors.

 

 

For mature firms facing slowing growth, increased credit during the stimulus failed to offset the declining returns on investment in their core businesses, and instead they turned to speculative investment through high interest rate lending, including financing positions in the stock market.

 

 

A recent paper by Yan et.al. (2015) found that speculative lending through the entrusted loan channel was more common among publicly listed mature firms with lower growth opportunities, particularly where their earning capacity was below the prime lending rate.

 

 

While the growth of entrusted lending has attracted scrutiny, there has been little firm evidence about the the extent of speculative lending through the entrusted loan channel.

 

 

However new data reported by Chen et.al (2016) concludes that: “more than 60% of the total amount of entrusted loans was channelled to the risky industry between 2007 and 2013; out of these risky entrusted loans, 77% was facilitated by commercial banks.”

 

 

Recent policy moves may reduce ‘entrusted lending’

The entrusted loan channel was continued to grow in 2014 before eventually provoking a response from the authorities.

 

 

In January 2015, the CBRC brought in 5 restrictions on ‘entrusted loans’ designed to mitigate speculative investment though this channel by requiring that ‘entrusted loans’ only be used for lending to the ‘real economy’ purposes–and not for investing in stocks, bonds and other purely financial instruments.

 

 

Two further decisions in by the authorities in China may see a declining role for the entrusted loan channel.

 

 

First, as part of a wider shift in China’s monetary policy framework away from controlling credit aggregates, the loan-to-deposit restriction was removed by an amendment to the Law on Commercial Banks passed by the National People’s Congress Standing Committee in August 2015.

 

 

According to the CBRC spokesperson, the LDR ratio had been set up “to control liquidity risk” but it now longer fitted the reality of more diversified bank balance sheets and would instead be used as a ‘a liquidity monitoring indicator’.

 

 

The LDR ratio became a reason for banks to engage in regulatory arbitrage — and by removing the LDR ratio, banks would no longer be as constrained by the composition of the assets they could hold on their balance sheets.

 

 

Then, in October 2015, the Supreme People’s Court (SPC), ruled that direct inter-enterprise lending for ‘real-economy’ purposes would also be allowed between non-bank entities–removing the restriction on direct lending between non-banks which had been in place for nearly 20 years.

 

 

The SPC ruling on inter-enterprise lending was also subject the same 5 restrictions as had previously been applied to entrusted loans in January 2015, including the stipulation that loans must be for ‘real economy’ production and business activities.

 

 

The move towards an increased role for direct lending also fits the authorities desire for a more asset-based growth strategy.

 

 

Opening direct lending channels between enterprises will allow corporate affiliates to circulate working capital more easily, but it is not clear how the restrictions on types of allowed lending will be enforced by the courts.

 

 

Non-bank entities can go to the courts if their loan contract is breached, but they are unlikely to do so if the loan was used for investment in restricted industries or for purely speculative financial investments, which are explicitly prohibited loan use purposes under the SPC ruling.

 

 

The ‘entrusted lending’ channel will remain, but the incentives for using it are reduced because because corporate affiliates can now legally lend to each other directly and bank lending is not subject to the 75% loan-to-deposit restriction.

 

 

However, the extent to which the the ‘entrusted loan’ channel will be by-passed remains to be seen.

 

 

While enterprises can now legally engage in direct lending, finding partners and enforcing contracts can be costly and banks and other other financial institutions have an incentive to engage in the match-making inter-enterprise loans for fee income.

 

 

The opening of legal direct lending between enterprises also means we can expect more complex structured financing deals to be a growing feature of China’s financial system.

 

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This article was originally published in Frontiers of Finance in China

Luke Deer is a post-doctoral researcher at the University of Sydney and a Research Associate with the University of Cambridge Centre for Alternative Finance and with the Cambridge Judge Business School. Luke researches alternative finance in China and the Asia Pacific--with a focus on peer-to-peer lending and crowdfunding, and on financial innovation and central banking in China.

China, the Green Energy Superpower

China, the Green Energy Superpower

Investment in green energy is on the rise, and a world powered entirely by renewables is no longer a distant dream. It is the developing countries however, and China in particular, that is driving this green revolution. And these charts, from the REN21 Renewables 2016 Global Status report and the United Nations Global Trends in Renewable Energy Investment 2016 report, show how China is paving the way to a clean energy future.

 

 

 

 

1. China has the highest capacity for renewable power production

This chart shows the leading role China is already playing in the green revolution. It currently makes up about a quarter of the global capacity for renewable power, predominantly through wind power.

 

 

2. China takes the lead in wind power production

China is also the country with the most wind power capacity, and its lead over the US, in second place, increased by over 30 gigawatts in 2015.

 

 

3. Solar power is booming in China

The year 2015 saw huge growth in China’s solar power production. It moved into first place, ahead of previous solar leader Germany.

 

 

4. China is the biggest investor in renewable energy

In 2015, China had the biggest financial commitment to renewable energy, investing over $100 billion, an increase from $3 billion just over 10 years ago.

 

 

5. China helped push developing countries into the lead

Globally, $286 billion was invested in renewable power and fuels (not including hydro power) in 2015, and for the first time the developing world invested more than developed countries.

 

 

Source: World Economic Forum

New Pollution Action Plan for China

New Pollution Action Plan for China

A new set of Environmental regulations on air, water and soil pollution have recently been announced by China`s State Council: the Soil Pollution and Prevention Action Plan (also know as Soil Ten an “extension” of the Water Ten Plan). The plan outlines 10 headline actions split into 35 categories and 231 specific points aimed at making 95% of currently contaminated land fit to reuse for either agricultural purposes or urban development by 2030.

 

 

The first national survey on soil quality, released in 2014, showed the gravity of soil pollution. More than 16 percent of the samples taken nationwide were contaminated by heavy metals. Moreover, contaminants were discovered in 19.4 percent of surveyed farmland, 10 percent of forests and 10.4 percent of grassland.

 

 

Key targets:

  • To curb worsening soil pollution by 2020, and control soil pollution risks by 2030, with the aim to create a virtuous cycle in the ecosystem by 2050.
  • To ensure that over 90% of contaminated land can be utilised safely by 2020, and to increase this to 95% by 2030.
  • Using the next 2-3 years to focus on large-scale monitoring and finalising plans & laws; reining in chemical industries & heavy metals are key.

 

 

Soil pollution is the most difficult to tackle amongst soil, water and air; plus possibly the most expensive. Also, it is not possible to tackle soil pollution without addressing water pollution. Untreated wastewater can contaminate soil and conversely pollutants in soil can be washed into surface & groundwater sources contaminating them.

 

 

From the key actions to be taken, the government is signalling that it only intends to get a handle on the total area of contaminated farmland by 2018 and to only establish soil prevention & control related laws by 2020. The Soil Ten Plan singles out 8 specific industries:

 

 

  1. Non-ferrous metal extraction & processing
  2. Non-ferrous metal smelting
  3. Oil exploration
  4. Petroleum processing
  5. Chemicals
  6. Coking
  7. Electroplating
  8. Tanning

 

 

Action timeline:

  • By 2016, local governments need to finalise detailed work plans for submission to the relevant ministries;
  • By 2017, to set up national-level soil environmental quality monitoring points and monitoring networks;
  • By 2017, provincial soil remediation planning to be finalized and soil remediation result assessment methods to be issued;
  • By 2018, to finalise investigation of total area of contaminated farmland and assessment of impacts on agricultural products;
  • By 2020, soil environmental quality monitoring points to cover all the cities and counties; and
  • By 2020, to establish soil pollution prevention & control related laws and regulation system.

 

 

However one glaring challenge in the plan it the relatively limited number of  domestic companies with both the experience and infrastructure to clean contaminated land. Foreign companies with the required technologies are already involved in China, albeit participating in pilot projects funded by the World Bank or other international funds.

 

 

Analysts have estimated that the soil remediation market could be worth anywhere from RMB1-5 trillion, but authorities have struggled to determine who should pay for rehabilitating contaminated land. Many of the inland provinces targeted are not as rich as coastal regions and much of the responsibility for the costs now lies with relatively impoverished local governments.

 

China- Pakistan Energy projects reaching...

China- Pakistan Energy projects reaching fruition

The China- Pakistan Economic Corridor (CPEC) is now gaining momentum with the completion of phase 1 of a 300-megawatt solar photovoltaic power plant. Financed by the Export Import Bank of China and built by Chinese energy conglomerate Zonergy Co, has been connected to the grid in the Punjab Province of Pakistan at the Quaid-e-Azam Solar Park in Bahawalpur. A major milestone in the economic cooperation between China and Pakistan: this is the first phase of the 900MW plant that is to be the world's largest single photovoltaic power station. When completed (est. late 2016) the solar power station, will save 394,000 tons of standard coal and reduce 826,000 tons of carbon dioxide emissions every year.

 

 

The CPEC, a 3,000-km network of roads, railways and pipelines linking Kashgar in northwest China's Xinjiang Uygur Autonomous Region and southwest Pakistan's Gwadar Port, is also a major project of the "Belt and Road" initiative. Pakistani officials predict that the project will result in the creation of upwards of 700,000 direct jobs between 2015–2030, and add 2 to 2.5 percentage points to the country's annual economic growth. In addition to the Zonergy project, a number of new energy projects are being currently constructed by Chinese companies. In total over 10,400MW of energy generating capacity is to be developed between 2018 and 2020 as part of the corridor's fast-tracked "Early Harvest" projects in conjunction with the Bahawalpur PV plant.

 

 

The 1.65-billion USD Karot hydropower plant, the first investment project of the Silk Road Fund, is being developed by the China Three Gorges Corporation. Construction of the 720 MW project has begun and is expected to be put into operation in 2020.

 

 

The Port Qasim coal-fired power plant, is being constructed by Powerchina Resources Limited. The 2.085-billion USD project is due to be operational by the end of 2017.

 

 

SK Hydro Consortium is constructing the 870 MW Suki Kinari Hydropower Project in the Kaghan Valley with financing by China's EXIM bank.

 

 

The Jhimpir Wind Power Plant, built by the Turkish company Zorlu Enerji has already begun to sell 56.4 MW of electricity to the government of Pakistan, though under CPEC, another 250MW of electricity are to be produced by the Chinese-Pakistan consortium United Energy Pakistan.

 

 

Back to Coal

Despite several renewable energy projects, the bulk of new energy generation capacity under CPEC will be coal-based plants, with $5.8 billion worth of coal power projects expected to be completed by early 2019 as part of the CPEC's "Early Harvest" projects.

 

Mongolia - China relations

Mongolia - China relations

Mongolia’s economic potential is significant, with vast deposits of copper and coking coal situated close to its main market in China: according to World Bank estimates, Mongolia's economy in the coming decade will grow on average at 15 per cent. However, this potential is vulnerable as the country is increasingly reliant on two main commodities being exported to one country, making Mongolia susceptible to external shocks such as changes in commodity prices and demand in China. According to 2015 data from Trading Economics, China accounts for 89 percent of Mongolia’s exports and 26 percent of its imports and so the slowdown of the Chinese economy is of critical significance to Mongolia. Charting a course for the country from mineral wealth to long- term sustainable and diversified growth is a key task facing Mongolia.

 

 

Despite 70 years of Soviet domination, the majority of Mongolians today consider China a greater threat than Russia to its national identity and sovereignty. Although China is by far the bigger trade partner, Russia remains the more popular of its neighbors, however this might be changing.

 

 

The “Third Neighbor Policy” of building economic, political, social and military relations with outside countries, the United States foremost among them, speaks directly to Mongolian concerns about the influence of its neighbors. In the past the government has tried quietly to maintain as pragmatic an approach toward China as possible (despite strong public opinion to keep its distance). On Xi Jing Ping`s last visit in 2014, bi-lateral relations were upgraded to a “comprehensive strategic partnership”, and this has seen a distinct ramp up in Governmental relations.

 

 

Speaking of Xi JingPing`s visit, President Ts.Elbegdorj confirmed his satisfaction with the steady development of relations regarding the economy, culture, education, and humanitarian work and expressed the hope that the visit would serve as a “push to deepen the full strategic partnership between Mongolia and China.” Communications between Mongolia and China immediately dramatically increased, not only between citizens of both countries in the context of cultural exchanges, but also at the highest levels: President Ts Elbegdorj was in contact with Xi Jinping 5 times in 2014, and 3 times in 2015.
 

 

Infrastructure development.

Mongolia is keen to use China's rail network to deliver coal and other minerals to other markets as well as turning Mongolia into a "transit corridor" linking the Chinese and Russian economies. Integration of the Mongolian Steppe Route infrastructure project into the Chinese One Belt, One Road project in order to enhance cooperation in the field of agriculture and the creation of conditions required for increasing the export of Mongolian meat and meat products to China are well under way.

 

 

2014 saw a MOU for a high speed rail line project linking Beijing and Moscow through Mongolia signed by Russia and China during a visit to Moscow by the Premier of the PRC State Council Li Keqiang. This new passenger train project would reduce the 7000 km journey from 6 days to 2.

 

 


Growing debt crisis.

 

 

When a new Mongolian coalition government took office in 2012 facing extremely favorable economic conditions, including high mineral prices and strong demand from China. Gross domestic product had grown by 17.3% in 2011 and by another 12.3% in 2012. The mineral-rich country’s prospects were bright, however due to irresponsible borrowing (rapidly expanded spending on housing, government salaries, social welfare and pensions) over the last four years Mongolia now faces a debt crisis.

 

 

Mongolia became a significant global issuer of commercial paper. Between 2012 and June 2016, the government raised $3.6 billion, roughly one-third of GDP, on global bond markets, paying high interest rates. Adding in the swap arrangements with the Chinese central bank and other loan guarantees, Mongolia’s external debt position by 2015 became highly precarious, with total debt of more than 70% of GDP.

 

 

Coinciding with a continued collapse in foreign investment and a steady decline in global mineral prices due to China’s slowdown Mongolia’s growth has slowed sharply to 2.3% in 2015 and is likely to be zero or negative in 2016.

 

 

Looking to the future, three distinct possibilities arise:

 

Regional Renaissance: North-East Asia becomes more politically integrated, with strong economic growth. This
 gives Mongolia the opportunity to sell
 its main minerals and achieve economic diversification, and the challenge of managing export revenues in a way that prevents economic overheating and social unrest. The sector already accounts for
nearly 90% of the country’s exports and the foreign direct investment (FDI) it attracts amounted to nearly 50% of government revenues

 

 

China Greening: A revolution in environmental attitudes sees China lead the way in the “circular economy” and pioneering new products and services. This reduces demand for Mongolia’s main minerals, but opens up new opportunities to diversify into green products and services. Being next door to the world’s largest market presents a tactical advantage and tremendous opportunities, but also means the country’s economic performance is tightly coupled with that of China. This makes it important for Mongolia to understand emerging developments in China and what trade and investment opportunities they raise.

 

 

Resource Tensions: Geopolitical tensions ravage the region; natural resources are used for political leverage, making trade difficult. Mongolia struggles to access finance and markets for its minerals and to pursue diversification opportunities, but this scenario presents opportunities to carve out a role as a neutral and respected neighbour.

 

 

Mongolia’s newly implemented ‘third neighbor policy’ is one of the more innovative foreign affairs approaches in the country’s history. As the global political sphere changes rapidly, Mongolia’s political stability, economic developments, non-traditional national security environment, and far-sighted foreign policy strategies are crucial for continuing its democratic transition and keeping up with new developments in the Asia-Pacific

Reshaping the automobile market in China...

Reshaping the automobile market in China: digitisation

For many years, foreign manufacturers experienced record growth in China. But those days are over: last year, all major car makers reported slower growth in the world’s largest car market. China’s economic slowdown can only partially explain this phenomenon. The other reason is that local car brands have become serious competitors. Furthermore the rapidly proceeding digitisation of cars and traffic systems in China could amplify this trend.

 

 

Companies and policy-makers in China are promoting vehicle connectivity as ‘the Internet of Vehicles’. This concept covers all forms of vehicle integration within a digital infrastructure, including communication between:

  • A vehicle and its driver (or driver’s mobile)
  • Several vehicles
  • Vehicle and intelligent transportation systems
  • Vehicles and the internet
  • Vehicles and mobile networks
  • Vehicles and satellites (satellite navigation)
  • Car-related online services (pay-as-you go insurance).

 

 

Internet companies such as Baidu, Alibaba and Tencent dominate the Chinese internet and are key sources of impetus in driving the development of an Internet of Vehicles. Chinese smartphone manufacturers are the second driving force behind this trend. Xiaomi, LeTV, Huawei and ZTE have all discovered the automotive sector and re also committed to enhancing connectivity in the automotive sector.

 

 

Lastly state-owned companies are exploiting vehicle connectivity to consolidate the position of China’s Beidou satellite navigation system in the transport sector. Their long-term plan is to drive the American Global Positioning System (GPS) out of the market.

 

 

The companies involved in these new developments are all competing with each other, as they share a common goal: to design a digital ecosystem for connected cars that will provide them with a sales market for their own distinctive services and technologies and enable them to be independent of foreign suppliers and patents. They collaborate closely to this end, building cross-sector alliances where expedient. A lively network of powerful Chinese companies has thus emerged since the start of 2015, all of whom are working together to set up an Internet of Vehicles.

 

 

The Chinese Government is attempting to steer the development of the automotive sector through two fields of technology that have not been dominated by international players yet: e-mobility and the Internet of Vehicles.

 

 

Chinese car manufacturers have dominated the domestic market up till now, achieving a market share of around 75 per cent in 2015.2 A co-ordinated programme for promoting e-cars produced in China along with massive expansion and standardisation of battery-recharging facilities have helped to fuel this development.

 

 

The Internet of Vehicles represents a continuation of this strategy by the Chinese Government: they support Chinese companies in the digitisation of the automotive sector in the hope of securing them a competitive edge. Automotive companies are not the only ones to benefit, though: a number of other strategically important industries are also profiting, including the internet, information and communications sectors, quite apart from Chinese software makers. The Ministry of Industry and Information Technology (MIIT) is currently devising a strategy to promote the Internet of Vehicles as part of the 13th five-year plan (2016–2020).

 

 

Creating a competitive advantage for Chinese businesses, Beijing is no longer prepared to bow to international IT standards, patents and associated license fees, but would like to see Chinese standards adopted internationally instead. This applies to hardware and software systems for intelligent transportation systems as well as for satellite navigation and telecommunications infrastructure.

 

Source: Mercator Institute for China Studies

China State Construction Engineering...

China State Construction Engineering Corporation

China State Construction Engineering Corporation Limited (CSCEC) is China’s largest construction and real estate conglomerate. It is a public company listed on the  Shanghai Stock Exchange and ranked 37th among Fortune Global 500 companies in 2015.

 

 

Specializing in building construction projects, real estate development and investment, infrastructure construction and investment, as well as design and surveying operations. The Company’s main business activities comprise construction of residential projects, undertaking of municipal public works, road works and building construction works; undertaking of airports, housing, roads, bridges, water supply, medical facilities, hotels and tourism, government projects and sports facilities and other projects; real estate development activities; construction of highway, railway, municipal, energy, petrochemical, water, environmental protection and telecommunication projects and other infrastructure works, as well as architectural design, urban planning, engineering investigation, municipal public work design business, among others. Established in both domestic and international markets, China Construction operates in more than 20 countries and regions around the world.

 

 

National Growth.

The Company continued to enhance its infrastructure investment, construction and operation standards through high-end integration, investment/financing and business model innovations, revolving around the three major national strategies: the “Belt and Road”, “Jing-Jin-Ji Integrated Development” and “Yantze River Economic Belt”. During 2015, the value of newly executed infrastructure contracts exceeded RMB300 billion for the first time and hit RMB 314.0 billion, up 26.7% YoY. The Company has devoted itself to creating a fully integrated investment platform for “new urbanization” construction initiatives focusing on ten selected tier-1 and 2 cities.

 

 

In international contracting, China Construction is the countries largest international contractor and also the first to launch international contracting in China. With the encouragement of the Chinese government and financing assistance from the Export-Import Bank of China, CSCEC has taken increasingly bold steps as a builder and investor of overseas projects. By the end of 2015, its total contract value for overseas business was US$80.7 billion and total turnover of US$52.4 billion. China Construction has so far completed over 5,600 projects in some 116 countries and regions around the world.

 

 

Major Earnings in 2015 were: total revenue of RMB 880.6 billion, up 10.1% YoY. Specifically, revenue from the housing construction business was RMB 588.3 billion, up 6.0% YoY; revenue of the infrastructure business was RMB 141.4 billion, up 19% YoY; and that of the real estate business was RMB 142.4 billion, up 15% YoY.

 

 

Recent International contracts in include:

  • US$ 2.89 billion Pakistani Karachi-Lahore Motorway
  • Egyptian New Capital (~US$ 2.7 billion)
  • St James Suites in New Zealand, with the contract value of NZD130 million.
  • Renovation Works of 67 Municipal Roads in Libreville of Gabon.
  • Nairobi BULK Water Supply Pipeline, with the contract value of approximately USD 70 million.
  • CSCEC Middle East has been award the management facility project in Kuwait Sabah Salim University City.
  • Eastern Technological University of Panama Project with the contract value of US$176 million.
  • Oran Shopping Mall Project in Algeria with the value of US$99 million.
  • Concrete Supply Contract for a Package of Projects of China-Kazakhstan Khorgos Border Cooperation Center.
  • Crude Oil Refinery Plant in Lagos, Nigeria, with daily processing capacity of 400,000 barrels.
  • Indonesia Jakartar, Twin Tower Project.
  • Municipal road construction project of Nkayi City of Bouneza, Republic of Congo.
  • Commercial apartment development: 99 Hudson Street, New Jersey.
  • 62km Road Project in Zambia, with the contract value of ZMW177 million.
  • Dubai high-rise hotel project with the contract value equaling to US$94.82 million.
  • 190km road project in the West Province of Zambia, with a contract value of USD 200 million.
  • National Stadium Project in Ethiopia. The total contract price is USD$ 120 million.

 

 

Africa remains a favoured destination...

Africa remains a favoured destination for growth.

The story of China’s growing influence in Africa has caught the attention of many around the world but now people are worried about the apparent 84% plunge in Chinese investment across the continent. Admittedly, affected by the global economic downturn, Chinese investors are becoming more cautious when investing in volatile markets with political, currency or security risks, especially in the extractive industries. Engagement with Africa has become more diverse and complex, and certainly more beneficial to the continent.

 

 

Favoured destinations

African states with rich natural resources, such as Nigeria and Zambia, will remain favoured destinations as the host governments can leverage future income in exchange for infrastructure upgrades. Countries without much in the way of minerals to leverage, such as Ethiopia, will also welcome Chinese investors seeking to establish factories thanks to their strategic geographic locations and competitive labour costs.

 

 

In the infrastructure sector, Chinese players will be as active as two years ago. According to Deloitte, Chinese companies were responsible for 31% of all infrastructure projects in East Africa in 2014, compared to 18% contributed by European and American firms combined.

 

 

Inspired by China’s One Belt, One Road policy, Chinese construction firms will continue to pursue EPC (engineering, procurement and construction) contracts against bank or government guarantees provided by host countries. Such security will allow them to tap into competitive financing mechanisms provided by Chinese state banks and commercial banks, usually ranging from only 3% to 8%.

 

 

Further $60bn pledge

Recently, Chinese President Xi Jinping pledged another US$60bn of government financing to African projects over the next three years.

 

 

Admittedly, scholars have been critical of Chinese construction firms’ build-and-go approach, leaving no benefit to African people in terms of skills upgrades and community development. This will change, as some Chinese companies have been actively pursuing new means to remain competitive in the market.

 

 

CITIC Construction, a Chinese state-owned construction company renowned for the successful completion of thousands of housing units in Angola, has partnered with the IFC to launch a $300m investment platform with the aim to develop 30,000 affordable homes in sub-Saharan Africa over the next five years. Such initiatives will overturn those prevalent market perceptions that Chinese companies do not abide by international best practices in labour, environment and community engagement while doing business in Africa.

 

 

The number of Chinese factories seeking to enter new markets through export or factory relocation will continue to grow in 2016. Many of them express high interest in seeking local partners so as to transfer their equipment and knowledge into local businesses in industries such as steel, paper, pipelines and cement.

 

 

These companies would receive policy support from the Chinese government, which is mobilising resources to encourage Chinese manufacturing companies to export their products and technology to Africa.

 

 

Opportunities for African service providers

2016 will also become a good year for African service providers, many of which have been longing to service Chinese companies in legal, tax, human resources, marketing, public relations and other consulting fields.

 

 

Traditionally, Chinese companies tend not to employ African indigenous service providers because they assume a good relationship with African governments would enable smooth operation. This perception is changing as more Chinese companies run projects that require in-depth knowledge of market needs, distribution channels and local culture. In sectors such as electronic products, Chinese companies must establish top marketing and sales teams and focus on building strong brand images so as to compete with the large number of cheaper devices in the market.

 

 

Thus 2016 will see Chinese companies become more localised and socially responsible in Africa, and more willing to collaborate with established African and non-African players in the market. Whilst less finance will be invested in capital-heavy industries from China to Africa, the trend of Chinese engagement in the continent show no sign of stopping.

Zhuhai

Zhuhai

Overview.

Located in the southwest of the Pearl River estuary in Guangdong Province, with Hong Kong in the east and Macao in the south. It is a key point of the 21st-Century Maritime Silk Road. In just three decades Zhuhai has gone from a poor fishing village to a prosperous modern city as one of China’s first special economic zones: the city has always prioritized ecological development, boasting one of the best environments in China. Since the Hengqin FTZ (Free Trade Zone) came into operation in 2015, the city has played an increasingly important role in China’s Belt & Road Initiative. It has cooperated with Macao to build a world-class tourism and leisure center and China-Portugal economic and trade cooperation platform. Economic and trade relations with Latin American countries have also been continuously strengthened through diversification and the furthering of secure access to the outside world.

 

 

The second largest port city (behind Shenzhen) in China it has population of 1.6 million (2015. Zhuhai has three districts(Xiangzhou, Doumen and Jinwan) and five economic zones (Gaolan Port Economic, Zhuhai Hi-Tech, Zhuhai Free Trade, Hengqin FTZ, and Zhuhai Wanshan Marine Development Experimental).

 

 

The city has focused its industrial development on high-end services, high-end manufacturing, hi-tech industry, marine economy and eco-agriculture.  It is home to high-end manufacturing enterprises such as China National Offshore Oil Corporation’s (CNOOC) deep ocean engineering equipment department, Sany Heavy Industry, Ferretti, China Aviation Industry General Aircraft Co (CAIGA) and Gree Electric Appliances. The high-tech field is represented by Kingsoft, Xiaomi Tech, Meizu and United Laboratories.

 

 

Transport Links

 

 

The 55km Hong Kong-Zuhai-Macao bridge is an ongoing project due to open in 2018.

 

 

Gaolan deep water port is one of the leading International ports in Guandong province. Specializing in petrochemicals, energy and equipment the port handled 107 million tons of cargo in 2014. Following the opening of the Guangzhou-Zhuhai Railway and Gaolan Port Expressway at the end of 2012, the port has advanced its distribution and collection network. A harbor industry cluster involving fine chemicals, petrochemicals, electric power, energy, offshore equipment manufacturing, and leisure tourism has been formed, too.

Port logistics is a supporting industry of this zone. Fortune Global 500 enterprises such as BP, SANY, Shell, Lubrizol, Solvay, Hutchison Whampoa as well as central enterprises like CNOOC, PetroChina, SinoChem, COSCO, and Shenhua have settled here.

http://en.investgaolan.gov.cn/

 

 

Zhuhai Airport accommodated 4.08 million flights in 2014, this is expected to increase to 12 million by 2020.

 

 

Hengqin Free Trade Zone

Situated in the south of Zhuhai the Hengqin FTZ (Free Trade Zone) is only 34 nautical miles from Hong Kong. Covering 28 sq km, the FTZ plans a land reclamation project to double in land mass by 2020.

 

 

Preferential policies

  • Eligible enterprises in Hengqin are taxed at a reduced rate of 15 percent.
  • Administration of bonded or tax exempt production-related goods entering Hengqin from abroad has been conducted.
  • Production-related goods sold from areas of the Chinese mainland to Hengqin are treated as exports and enjoy tax refunds.
  • Transactions among enterprises located within the Hengqin FTZ are exempted from any value-added tax and/or consumption tax.
  • Hong Kong/Macao residents working in Hengqin receive the appropriate China Individual Income Tax (IIT) deduction from the Guangdong Provincial Government so that their effective China IIT burden would be close to what they would pay if they instead had been working where they are domiciled.
  • Clearance procedures for residents of Hong Kong and Macao entering and leaving Hengqin are simplified, with 24-hour passage at the Lotus Bridge Checkpoint.
  • Administrative regulations for Macao vehicles with single license plates (to be operated exclusively within Hengqin) have been issued.

 

 

Industrial Parks

These include: Zhuhai Hi-Tech Industrial Development Zone, Zhuhai Free Trade Zone, Wanshan Marine Development Experimental Zone, Zhuhai Aviation Industrial Park, Fushan Industrial Park.

 

 

 

LETS Creative Park

 

LETS Cultural District is located in the former Daishan Industrial Park, Qianshan, in the Xiangzhou District of Zhuhai. The Xiangzhou District is the political, economic and financial center of Zhuhai, hence, the ideal spot for a cultural park. The creative park will cover an area of 80,000 square meters and will be inaugurated this coming September. LETS is now renting the shop and office areas to interested clients.

 

By combining business with tourism, culture and recreation, LETS Cultural District will be able to cover different needs. A large business area will welcome creative companies and start-ups, and give them a platform where they can turn their ideas into innovations. Apart from office buildings, shared offices and a park, this quarter will also include interactive workshop areas that can be rented for the long run or as a pop-up workshop for a short period.

 

The new Hong Kong-Zhuhai-Macau Bridge which will be located in the Xiangzhou District will be completed soon. For this reason, Zhuhai’s business center will flourish in the upcoming years. Zhuhai is expected to become an economic power due to its new proximity to the international business centers Hong Kong and Macau. LETS Cultural District is ideally located in between the Nanping Bridge and the Qianshan Bridge. Hong Kong and Macau, therefore, are just a short journey over a bridge away.

 

Tax Evasion in China. The Trillion Yuan...

Tax Evasion in China. The Trillion Yuan Heist
"In any market, especially one as competitive the Chinese market, the % margin spent on tax makes an enormous difference to a company's bottom line, and therefore to their ability to grow and invest"
 

By Andy Clayton.

 

The Chinese market is not only famous for being “bigger that you can understand", but also "more competitive than you can imagine".

 

 

Competition in China is cut throat and can often seem rigged in favour of the local companies in China. Some advantages of Chinese companies, such as better customer understanding, or stronger abilities at cultivating relationships, are hard to learn quickly. But there is one area of 'advantage' that is not hard to throw open the door on: gaming the tax system in China. In any market, especially one as competitive the Chinese market, the % margin spent on tax makes an enormous difference to a company's bottom line, and therefore to their ability to grow, invest, attract investment, and ultimately enrich shareholders.  Local companies in China are past masters at the tricks used to gain a margin advantage over less flexible foreign competitors in China.

 

 

Here, we throw the door open on the world that many local Chinese companies operate in. In the heart of the system sits something that needs to be fully understood: Fapiao.

 

 

1. The Worlds most significant, yet least understood traded paper

Not many outside of China realise this, but there is a paper currency - a commodity - that forms a core part of transactions in an economy that still accounts for more than a third of global economic growth. It involves transaction of paper in exchange for payment; is actively traded on both grey and black markets; and by individuals and companies. They are called ‘fapiao'. They are printed VAT Invoices, though comparisons can be misleading, so we will simply call them what they are - fapiao.

 

 

2. What is a 'Fapiao'?

Every company in China, when registering with the Chinese Tax Bureau, must purchase a special printing machine. This machine connects to the Tax Bureau in China, and every time that a company receives a payment, they are supposed to print fapiao from this machine. This ensures that the Tax Bureau is aware of the full income of every company in China. 

 

 

3. Why do Fapiao's exist?

Fapiao are the Chinese Tax Bureau's main instrument of control over tax collection. In the UK and other Western markets, companies issue their own commercial invoices, then declare their books at the end of the year, on pain of a thorough audit. In China it happens the other way round - control at the point of transaction is tight, due to the physical issuance of the paper invoices ('fapiao'), whereas the year end audit is closer to a rubber stamping exercise. As long as company headline figures, particularly around profit and corporation tax, look acceptable, local Chinese companies are not held to much scrutiny on the details (although supervision at this stage of the process is gradually tightening up). 

 

 

The consequences of this system are multifarious, and it often leads to confusion amongst foreign companies in China as many Chinese counterparts get involved in the following practices:

 

 

  • 2 Prices: with Fapiao and without 

Particularly when dealing with smaller Chinese companies, there are often two prices available for the purchase of goods or services - one including fapiao, and a lower one without. To British ears this sounds suspicious, but given the constraints of the tax system in China then you can start to understand the logic behind this practice. 

 

 

In many cases, such as dealing with freelancers or small companies with limited fapiao, there may be no fapiao on offer at all, as only a company can be tax registered. This creates a significant headache. Not only does it reduce VAT that can be reclaimed on issuing sales fapiao, but it also increases the profitability of the company (because of the missing cost fapiao), leading to a ruinous corporation tax bill.  

 

 

  • Paying into Company Accounts and Personal Accounts

For companies that cannot or do not issue fapiao, the question then arises of how they receive money for the sale of goods or services in China. Fapiao are not the only point of control for the Chinese Tax Bureaus. The company's bank account is of course open to scrutiny, and all transactions therein are by default taken to be company revenue or cost transactions.

 

 

Many local companies in China therefore require alternative accounts to receive funds for which fapiao have not been issued. Personal accounts are commonly used for this purpose. General Managers of Foreign Companies in China are usually highly uncomfortable with this kind of arrangement, but in China it is still common to have to make payments to personal accounts.

 

 

  • Running 2 Sets of Books 

" the audited books are the sum total of sales fapiao issued, minus the total of all the cost fapiao they have been able to collect, regardless of provenance, and bear little relation to the true profitability of the company. " 

With multiple streams of income and cost, both 'on book' and 'off book', this makes company accounting irreconcilable. The only way these companies in China can square this circle is to run multiple sets of books - the 'real' management accounts, and the accounts presented for audit at year end. 

 

 

Managers of companies worldwide are familiar with the concept of 'getting the books ready for year-end', which typically involves tying up loose ends, confirming the nature of transactions, and allocating costs and income to the correct accounts. This requires a degree of skill wherever you are operating. However, nothing compares to the fiction that are the audited books of many Chinese companies.

 

 

Simply put, the audited books are the sum total of sales fapiao issued, minus the total of all the cost fapiao they have been able to collect, regardless of provenance, and bear little relation to the true profitability of the company. Hence, the rush to bring in fapiao for costs (and sometimes at any cost - see final point on fake fapiao below) 

 

 

  • Stretching the Directors Loan Book

There is a means of moving money between company and personal accounts, which is an important conduit in the structure outlined above, and that is the director's loan account.

 

 

If you check the balance sheet of any company in China, one oddity you may notice is wild swings in the Directors Loan account. This is because it is used as the means for getting money on and off the books. At any given time, many companies in China are either busy finding ways to repay loans to the Directors account, if they are able to obtain a surplus of cost fapiao; or paying money back in from the account, in the event that they have off-books income.

 

 

Many bosses of Chinese SMEs have a keen eye for this number, and will select deals in part based on whether it helps them with their Directors Loan balance issue.

 

 

  • Split Compensation Structures for Employees 

It is common practice amongst many Chinese SMEs to set up employee compensation structures as a mix of 'base' and 'reimbursement' pay. The purpose of this is to minimise the declared salary of the employee for both social security and income tax purposes. Ultimately, the cost to the company is reduced, thereby giving them a significant advantage, enabling them to undercut those who are fully compliant when quoting for a job. The argument to employees is that it increases their take home pay, which is compelling when there is often little value seen in payments to social security service.

 

 

This then puts the employee (or the Company, if they have agreed to cover it) in the position of having to 'procure' fapiao. Staff in China often obsessively hoard taxi bills, restaurant bills, even getting VAT invoices from the weekly shop, all to hand in as the 'cost' portion of their salary.

 

 

  • Applying for an Increase of Fapiao

The fapiao blank stock - the 'empties' to be printed on - have to be purchased from the local Chinese Tax Bureau. Incredibly, this requires a special application purchase, especially to increase the value of the fapiao allowed to be issued. This situation can lead to companies not being able to issue fapiao, therefore take payment, and therefore pay tax, because the Chinese Tax Bureau refuses to issue more stock!

 

 

So, Chinese finance managers up and down the country carefully manage their fapiao stock, and have to be fully aware of upcoming surges in income and prepare accordingly. 

 

 

  • Negotiating over Fapiao

" Few companies in China would make a payment until a fapiao (or at least scanned copy thereof) has been received"

The China business environment tends to have a lower level of trust than the UK, US or European economies. Actual exchange of payment for fapiao is a source of much negotiation and choreography. Few companies in China would make a payment until a fapiao (or at least scanned copy thereof) has been received. As Chinese VAT is paid monthly, and corporation tax in China quarterly, the cost of insufficient fapiao can quickly rack up.

 

 

Larger companies will often insist on painful payment terms, sometimes requiring several months after receipt of fapiao before making payment. This can be incredibly challenging for the supplier in China, as the income of the transaction is already declared to the Chinese Tax Bureau, regardless of whether funds have been received or not.

 

 

  • Chasing Fapiao

It is astonishing the time and effort bosses of Chinese companies have to put in to the chasing and acquisition of fapiao. Given the margins involved, these are often negotiations at the highest level. Many meetings and dinners between Chinese CEOs revolve around this topic. Many Chinese companies will have suppliers they regularly use as much because of the ability to issue extra fapiao, as because of their product or price.

 

 

This creates an elaborate supply chain of connections. Certain industries, such as restaurants, take large volumes of cash, and therefore can end up with surplus sales fapiao, and then may sit at the bottom of a complex fapiao food chain. 

 

 

  • Fake Fapiao

A level below this, there is a huge black market for the supply of fapiao. Many street corners in China are adorned with name cards for the vendors of fapiao. A large proportion of the spam SMSs received around China are for this purpose too. This is an area trodden with great caution. Many of these fapiao are issued by 'suitcase companies' set up hastily and shut down equally fast, existing briefly only for the purpose of maximum fapiao production. Fapiao are traceable, so when the suitcase company gets shut down, the Tax Bureau in China follows the trail to all the companies found using them, which leads to big trouble. 

 

 

In the past fake fapiao were used much more commonly, so the practice is still ingrained with many Chinese finance managers as acceptable. We have come across numerous foreign companies in China where, unbeknownst to them, their internal finance team were procuring fake fapiao, with initial un-benign consequences, which came back to haunt them later on. 

 

 

The distinction of 'fake' fapiao is quite blurred though. For example, paying an existing supplier a few extra % for surplus fapiao often happens, but would not be considered 'fake', even though that would not happen in the UK. These days, as a general rule, companies would generally only obtain fapiao from companies with whom they could prove some kind of trading relationship.

 

 

 4. Countless Shades of Grey 

A friend of ours, a local Chinese, recently completed a phd on the Chinese tax system. His comprehensive study attempted to catalogue the full range of taxes companies operating in China are bound to pay. His astonishing result showed that, if a Company operating in China were to pay all taxes legally due, these would total 112% of revenue. That's right, for every RMB 100 of sales a company makes, they technically owe The State RMB 112, (so why bother starting?).

 

 

In reality, only a proportion of these taxes are actually collected, but the fact is no-one in China is fully compliant. This explains a lot of the local practices described in this article. Like it or not, there are often only countless shades of grey.

 

-------------------------------------------

 

Andy Clayton is CEO of LNP China. LNP China offer an easy and secure solution for companies from overseas to thrive when doing business in China by managing all back-office operations, which allows firms to operate and trade in China without having to go through the time, cost, and risk of setting up and running their own company. Since 2007, LNP China have supported over £25 million of exports for their clients in China.

 

China Food Safety: Regulation, Markets...

China Food Safety: Regulation, Markets & Outlook

By Paul O`Brien for China Brain

Overview

 

Understanding how China regulates its food supply chain is greatly facilitated by dividing it into two broad categories. The first is regulation of all farming orientated activities (crop cultivation, animal husbandry and fishing) and the regulation of all associated farming inputs/outputs officially termed edible agricultural products as regulated by “The Law of the People’s Republic of China on Quality and Safety of Agricultural Products” which fall under the remit of China’s Ministry for Agriculture (MoA).

 

 

The second broad designation includes all other food trade and production activities which are regulated under China’s keystone food safety legislation The Food Safety Law (2015) and falls primarily under the regulatory remit of the China Food and Drug Administration (CFDA) at a domestic level with the help of China's customs authority the AQSIQ . (* It is also noteworthy that all subsequent trading of edible agricultural products is regulated by the CFDA).

 

         

 

With this important designation in place it is necessary to mention that the content of this article will be restricted to dealing with legislation and regulation of food trade and non-farming related production activities and will primarily reference China’s Food Safety Law (promulgated October 1st 2015) and all supporting regulations, administrative measures, provisions and guidance documents already promulgated in support of China’s overarching food safety law.

 

 

China has a two tier food supply chain and this is reflected in its new food legislation, its regulatory system and its associated economic development plans. China’s food safety targets are now firmly focused on its middle and upper classes (about 300m people) and for this reasons the content of this article will also be limited in scope to the regulation of this food supply.

 

 

In China there is an extensive network of farmers that fall somewhere in the middle of a spectrum between subsistence and small scale industrial farmers. They operate throughout the country, utilizing self-owned logistics and selling small volumes of seasonally available produce through completely unregulated channels. These farmers are a standalone supply chain, encompassing all supply chain elements. They embody the concept of a self-contained farm-to-fork supply chain and due to the ephemeral nature of their business activities are almost impossible to effectively regulate. They do however represent a significant but ultimately unquantifiable contribution to China's complete food supply chain. 

 

 

In addition there is an equally unquantifiable influx of foodstuffs imported through unregulated channels and then sold through social (weibo) and mobile media (wechat). 

 

 

Defining the Context: A Brief look at China’s Food Regulation over the last Decade

 

 

It would be remiss not to include a brief chronology of the recent legislative and regulatory changes that have occurred over the last several years to a decade culminating in the recent promulgation of China’s new Food Safety Law on October 1st 2015. I cannot also fail to mention the specter of food scandal which continues to plague China’s food supply chain and is inextricably linked with the development of China’s food safety legislation. Indeed for well more than a decade the development and implementation of the Chinese government’s food safety policies have been reactionary in nature and largely in response to scandals. A significant number of China’s most important legislative and regulatory changes have been kneejerk reactions in response to the illegal activities of food criminals and attempts to fill the gaps in supervision and enforcement capacity highlighted by these scandals. In contrast recent food industry policies have been developed with careful foresight and are indicative of the shift in China's economic development plans. 

 

 

A Chronology and Overview of Major Food Safety Scandals Precipitating Regulatory Changes (2004-2013)

 

 

2004: Fuyang Fake Infant Formula Scandal Precipitates promulgation of 2 hugely significant pieces of food legislation namely

  1.  GB 7718 – 2004 “General Rules for Labeling of Prepackaged Foods”
  2. GB 13432-2004 “General Rules for Labeling of Foods for Special Dietary Purposes” (Infant formula falls under this category

 

 

2004-2007: Sudan Red Scandal and Nestle Excessive Iodine Scandal

The Fuyang Milk Powder Incident was followed over the course of the next several years by a succession of scandals most notably the “Sudan Red G” scandal of 2005 and a scandal involving excessive iodine in Nestle produced milk powders .

 

 

2008-2009: Melamine Milk Powder Scandal

At the time the melamine scandal first broke China’s overarching food legislation was the “Food Sanitary Law”. As early as 2007, in the wake of recent scandals, there were rumblings of government’s plans to consolidate all of China’s disparate food legislative documents, administrative measures, standards and guidance documents into a single umbrella legislative document that would function as China’s food safety law.  It however wasn’t until the melamine scandal of 2008 was uncovered that a concerted government effort involving multiple ministries was finally undertaken, culminating in the promulgation of China’s first food safety law in 2009.

 

 

2009 -2013: Shineway Clenbuterol Adulterated Pork and Taiwan Beverage Plasticizer Scandal

  • These two incidents prompted the promulgated of GB 7718-2011 “General Rules for the Labeling of Prepackaged Foods in China.”

 

 

From Reactionary Legislation to Strategic Economically Orientated Food Safety Legislation. (2013-Present)

 

 

  • Up until March 2013 China’s food industry was regulated and administrated by numerous ministries each responsible for different elements of China’s food supply chain. Regulation of domestically circulated foods at this time was divided between the State Food and Drug Administration (SFDA), in addition to the Ministry of Health (now disbanded), the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) and the State Administration for Industry and Commerce (SAIC).

 

  • In March 2013 the government elevated the then SFDA to ministerial level status, renaming it the China Food and Drug Administration (CFDA) in addition to consolidating the regulatory responsibility previously designated to the aforementioned ministries under the sole regulatory remit of the CFDA. This became China’s first centralized regulatory authority tasked with ensuring food safety, production standards and the integrity of China’s food industry.

 

 

Key Authorities

  1. CFDA: Regulates China’s Domestic Food Supply China
  2. AQSIQ: Customs Bureau Responsible for Inspecting and Testing the compliance and safety of goods at ports
  3. CNCA: Work in conjunction with AQSIQ and CFDA to conduct onsite inspection of international manufactures exporting to China to ensure compliance with Chinese national standards
  4. NHFPC: Work in collaboration with CFDA to help develop national food safety standards

 

 

Recent Developments in China’s Food Industry

 

 

As we can see China's food industry has undergone a period of a rapid transformation in the last several years. Picking a single milestone as a reference point is a difficult task but looking back to March 2013, which saw the elevation of the SFDA to the ministerial level institution we know as today's CFDA, is probably a good line in the sand to help focus further analysis. Looking at the events that have transpired after this key marker helps us place the concerted regulatory efforts of China's primary food regulatory institutions namely the CFDA, AQSIQ, NHFPC in the context of China's broader economic goals and understand the rationale behind many of China's recent legislative and regulatory efforts. Our second marker is the Oct 1st promulgation of China's new food safety law and the heavy emphasis placed on regulating imported foods.

 

 

The Bigger Picture: Finding a Balance between Trade Stimulus and Food Safety

 

 

A key goal as expounded in the sessions of China's National's People’s Congress is to continue to shift China in the direction of a more consumption based economy, deregulate key industries and to allow market forces to have a stronger influence on government policy. The government has earmarked China's food industry (in particular food importation) as a key battleground to achieve these goals as evidenced in recent data (AQSIQ 2014) indicating 17.6% annual growth in the imported food sector (roughly 3 times domestic average).

 

 

3 Birds with One Stone - Food Safety, Market Forces and Increased Importation

 

 

  • The imported food supply chain with its clearly defined entry points is inherently more regulatable than China's domestic supply chain, meaning food safety can be more easily guaranteed. Combined with massive domestic demand for safe foods and the overall plans to allow market forces to dictate policy and to promote consumerism in its middle and upper classes China's recent food industry reforms and the contents of China's new food safety law begin to make sense.

 

  • Unfortunately China faces a bit of a catch 22....deregulation in any key sector of the economy poses significant dangers. If China reduces regulatory compliance requirements for imports it invites disaster in the form of food safety scandals. On the other hand if it over-regulates importation of food it runs the risk of suffocating international investment, fueling importation through grey and black market channels and hamstringing its economic development plans.

 

 

On a Knife Edge.....

 

 

Treading this precarious line between over-regulation at the expense of international investment and deregulation at the expense of food safety the majority of China's policies reflect an effort to find the stable middle ground. China is shifting its emphasis from supervision and inspection at ports which is already stretching the supervisory capacities of AQSIQ towards source control and post market inspection by CFDA with plans to phase-in onsite manufacturer inspection in country of origin using CNCA (similar to meat, dairy, aquatic products, birds nest), to all food commodities, more requirements for documentation and recording of foreign manufacturer credentials and  incrementally stringent inspection and testing of food imports for traders with a history of compliance issues at port. China plans to stimulate importation by reducing customs tariffs and reducing customs clearance administrative red tape which will bring about a more affordable, streamlined administrative process complete with user friendly IT-based recordkeeping for foreign enterprise exporting to China.

 

 

Haitao: The Leak Channel  

 

 

China's best laid economic plans and attempts to control food trade balance through technical barriers to trade must cater to the massive demand for imported foods from Chinese consumers which due to the litany of food safety scandals is increasing every year. Import and sale of foods through unregulated channels known as "Haitao" is an extremely destabilizing force for China's economy and in recent years, developments in China's food industry particularly the development of crossborder ecommerce and associated food regulatory reforms have attempted to address this, echoed by Premier Li Keqiang's recent calls to give Chinese consumers greater access to foreign consumer goods.

 

 

Some Key Points about China’s Food Industry and Markets

 

 

  1. an unmatched consumer base composed of a burgeoning middle class with serious discretionary spending power
  2. continued upward mobility of lower classes (more consumers)
  3. safe food sells - traceability and authentication of foods
  4. dissatisfaction and mistrust of domestically produced foods
  5. changes in family planning policy and an upcoming baby boom
  6. an equally important senescent demographic with an interest in anti-aging products, functional foods 
  7. a deep cultural appreciation for the multifactorial nature of disease and the role nutrition plays in prophylaxis. 
  8. despite this fact there are paradoxically low rates of breast feeding among Chinese mothers
  9. government calls for increased access to foreign consumer goods
  10. a switch from premarket inspection to postmarket supervision
  11. deregulation of specific importation and trade channels e.g CBEC
  12. an upcoming baby boom (change in 1 child policy)

 

 

Coupling of Food Safety Legislation and Economic Goals

 

 

Under China's new food safety law the government has clearly legislated with an emphasis on food importation and will also push accountability for any food safety issues to the food industry ensuring individual enterprises bear full responsibility for food safety issues. In line with this it has legislated for source control via CNCA audit of international manufacturers exporting to china, risk based supervision, credit/blacklisting, a self-regulating industry and shifting from premarket to postmarket supervision.

 

 

The Chinese government's food industry development strategy is perfectly encapsulated by developments in its infant formula and dairy industry over the last several years. The coupling of legislation and development of technical barriers to trade have been carefully designed to shape markets and harness consumer demand for imported goods as a force for domestic economic growth. (I'll revisit later)

 

 

Major food safety issues will mean manufacturers lose the right to export to China by being struck off the AQSIQ/CNCA accreditation list. For smaller issues during standard testing at port, any safety and compliance issues uncovered by the AQSIQ will cause manufacturers to accumulate penalties and be subject to incrementally stringent compliance requirements based on their track record.  CFDA will then be tasked with conducting monthly random sampling campaigns to mop up the unlikely problems that escaped the first 2 steps.

 

 

China’s Infant Formula Sector as the Model for Future Growth

 

 

In the next decade China will have the safest infant formula available anywhere. That will be just 10 short years after China's melamine scandal. The progress made in China's infant formula industry has been realized not by any massive improvement in domestic conditions, manufacturing standards, animal husbandry or pasture management but in savvy foreign trade policies and technical barriers to trade in the form of incrementally stringent regulations. Developments in China's infant formula sector encapsulate the key regulatory, economic, trade and business strategies adopted by China's government to improve food safety. It is the model which China's government will continue to use to rapidly improve the safety of foods circulating in its markets. When the Chinese government talk about focusing on imports, allowing Chinese consumers access to foreign products and letting market forces dictate changes in food safety the following is a broad overview of the strategy they follow.

 

 

  • Regulatory Selective Pressures at a Domestic Level

China implemented successively stringent regulatory requirements for domestic producers forcing closure and/or mergers of China's lowest technical capacity manufacturers and survival and consolidation of supply into the hands of China's fittest domestic manufacturers. In a few years the number of manufacturers went from several hundred to just 128.

 

 

  • Merger and Acquisition

The world’s largest international dairy manufacturers have engaged in multibillion dollar deals with China's largest infant formula manufacturers. International infant formula manufacturers get access to the world’s largest consumer base and a head start on competition through foreknowledge of pending regulations and changes to market access requirements. The Chinese manufacturers get access to raw materials from high value regions seen as the safest in the eyes of Chinese consumers ...Ireland, New Zealand, Holland, France, Germany, the experience of the world’s largest dairy companies and a share in the spoils of international companies’ profits.

 

 

  • Technical Barriers to Trade: Funnel and Control Supply

Once the first two strategies are in place controlling supply is particularly important. China first required CNCA onsite inspection of all infant formula manufacturers. Recent notices to WTO and draft regulations released here in China show how China will limit manufacturers to just 3 product lines and require registration of all infant formulas.  With the first 3 steps complete the boundaries between what is considered a purely Chinese enterprise and a international enterprise are becoming increasingly blurred. All players exporting to the Chinese market now have mutually vested interests with the Chinese manufacturers and their partner enterprises here in China.

 

 

  • Fitting the Economic Paradigm: Made for China

The food industry is an important sector of China's economy and particularly important from a cultural perspective. A consumption based economy requires consumer products that are in demand. From a food industry perspective this essentially equates to sourcing of imported packaged goods and the ingredients which are used in these products. The government has earmarked specific high risk high demand sectors for implementation of its food safety improvement strategy starting with infant formula and other "special foods", meats and aquatic products. Chinese national standards also increasingly require dedicated labeling and formulation strategies which forgo use of simple over labels on existing products produced in other markets.

 

 

Current Regulation of Food Safety in Mainland China

 

 

To further aid understanding of China food legislation and regulation it is necessary to further subdivide China’s food supply Chain into another 2 key categories specifically

 

 

  • Entry of imported food as controlled and regulated by the AQSIQ
  • Regulation of domestic circulation, production and trade as regulated by the CFDA.
  • In addition a significant number of Chinese national food standards are developed by the NHFPC (National Health and Family Planning Clinic) 

  

 

New Food Safety Law

 

 

Beginning in earnest at the start of 2015 Chinese food safety policymakers have been working flat out to build a solid foundation for practical implementation of China's food safety law on October 1st 2015 which will serve as the framework for development of China's food safety infrastructure over the next several years. China is heavily reliant on imported foods and this is reflected in the strong emphasis placed on regulating imports, particularly what China classifies as special foods and foods for special dietary purposes i.e. health foods, nutrient supplements, infant formula .

 

 

Understanding the NPC

Understanding the NPC

Every March, top lawmakers and political advisors gather in the capital from all over the country to attend the "lianghui," or "two meetings" where they review the performance of the government over the past year and hear new policies and major economic targets.

 

 

The two parts of the "lianghui" are the National People's Congress (NPC), which is the country's top legislature, and the Chinese People's Political Consultative Conference (CPPCC), a body that advises the government on a range of issues. The meetings typically last about 10 days.

 

 

Why is it important?

Premier Li Keqiang delivers a report on the government's work to the 3,000 delegates on the first day of the NPC conclave, which this year begins March 5. His press conference on the final day (March 15) is also closely watched because he fields questions from foreign journalists. The report Li delivers will announce China's targeted GDP growth for the year and other key figures, such as the national defense budget.

 

 

Compared to the Communist Party's big meetings, the "lianghui" is more visible, perhaps intended to provide the public with a bit of political theater.

 

 

What is the National People's Congress?

Technically it is the highest organ of state power. Its roughly 3,000 delegates meet once a year to ratify or approve policies, laws, the budget and top government personnel changes, which are mostly placed before it by other official organs. A 175-member NPC Standing Committee runs the legislature and passes laws between the annual meetings. It is chaired by Zhang Dejiang, No. 3 in the Communist Party after Xi Jinping and Li.

 

 

Has the NPC ever rejected legislation?

It has never voted down a proposed law, which has raised questions as to its function. However, since the legislature held its first meeting in 1954, there have been increasing instances of a lack of consensus. In 1982, three delegates abstained from a vote for the first time. The first "no" vote was cast six year later when Taiwan delegate Huang Shunxing voted against a nomination for chairman of the NPC's Education, Science, Culture and Public Health Committee. Then in 1992, only two-thirds of the legislature voted for the Three Gorges Dam project. More recently, hundreds of delegates have voted against or abstained from voting on the work reports given by the head of top prosecutor's office and the chief judge of the Supreme People's Court.

 

 

Who can be an NPC member?

Delegates are elected to five-year terms mostly by provincial people's congresses, who themselves are elected by lower-level assemblies. Only delegates at the lowest level – the county level or equivalent – are directly elected by the public. The People's Liberation Army also picks some members. The NPC has 2,943 members this year, meaning each one represents about 670,000 people. Some 406 delegates represent China's 55 ethnic minorities.

 

 

Then what does the CPPCC do?

The CPPCC is a collection of advisors that give party and government bodies suggestions on economic, political, cultural and societal issues. The membership is more varied than the NPC, and not everyone is a party member. Many CPPCC members are leading figures in fields such as academics, the legal profession and the business world. The body also has some star power, with luminaries like former NBA star Yao Ming and Hong Kong actor Jackie Chan holding posts.

 

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