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By Paul Davies, Bridget Reineking, and Andrew Westgate

President Xi has announced the creation of a new environmental bureau to oversee China’s state-owned natural resources. Establishment of the new bureau is one of the most notable outcomes of the recent meeting of the 19th National Congress of the Communist Party, and follows Xi’s pronouncement that building an “ecological civilization” in his country is necessary for the continued development of the Chinese people.

Currently, China’s natural resources are administered by a set of localized bureaus, which oversee natural resource assets without a centralized national monitor. Local governments are responsible for staffing and funding these bureaus, so economic agendas and industrial development have directed local environmental efforts for years. Frequently, local governments have stripped the protection bureaus of the ability to impose penalties or otherwise enforce environmental compliance measures. And even if the bureaus receive staff and funding, regional and local needs are generally at odds, often causing untimely and frustrating backlogs regarding the uses of resources and land. Without national coordination, even the best-intentioned regulators working for these bureaus have struggled to implement environmental policies.

By Paul Davies, Bridget Rose Reineking, and Andrew Westgate

In recent months, teams of inspectors from China’s Ministry of Environmental Protection and the Communist Party’s anti-corruption commission have conducted a slew of surprise inspections of various industrial facilities throughout China. Estimates suggest that China has temporarily closed as many as 40% of the country’s factories at some point in the last year — sometimes for weeks at a time. The recent crackdown is the fourth in a series of region-wide inspections that began in July 2016, which together amount to some of the most dedicated and comprehensive efforts to enforce environmental compliance in the country’s history.

China’s somewhat urgent enforcement of environmental laws appears — at least in part — motivated by China’s 2013 pledge to reduce emissions from heavily polluting industries by 30% before the end of 2017. Earlier this month, the country ramped up environmental pledges at the 19th National Congress of the Communist Party, announcing an ambitious plan to reduce the concentration of hazardous fine particulate matter (PM2.5) from 47 micrograms in 2016, to 35 in 2035, reported Xinhua, the China’s official press agency.

By Paul Davies, Bridget Rose Reineking and Andrew Westgate

At the 19th National Congress of the Chinese Communist Party, President Xi Jinping asserted his country’s emerging leadership in environmental stewardship and pledged to build a “beautiful China”. In his speech to the 2,300 delegates and guests assembled for the Congress’s opening session, President Xi lauded China’s burgeoning role as a global marshal of environmental reform.

Xi’s speech follows major efforts to reduce energy consumption and conserve resources across China — such as green finance initiatives facilitating lending to firms in environmentally friendly sectors; programmes for the development of alternative energy sources; and efforts to strengthen and enforce environmental laws and regulations. President Xi pointed to these efforts and proclaimed that China’s pursuit of sustainable development is both paying off domestically, and setting an example globally. 

By Paul Davies and Andrew Westgate

On 18 October 2017, the 19th National Congress of the Chinese Communist Party will convene, after the week-long National Day holiday, marking one of the most important dates on the Chinese political calendar. Among the issues that National Congress members will surely discuss, is the importance of implementing strategies to further China’s green development. A crucial aspect of this discussion will be determining how funding can be channelled towards clean development.

China has achieved unprecedented economic growth over the last four decades, and is predicted to become the world’s largest economy before 2030, overtaking the United States. A by-product of this success however, has been severe damage to China’s ecology and environment, which the country is already taking action to address.

By Paul Davies and Andrew Westgate

China’s State Council released an “Opinion Concerning Establishment of a Long-Term Mechanism for Early-Warning and Monitoring of Environmental and Natural Resources Carrying Capacity,” which will halt major projects in heavily polluted areas, according to a report from the official Xinhua news agency. The opinion also calls for authorities to use a new pollution alert system that tracks areas ranging from “green non-alert zones” that are the least polluted to “red zones”, where environment and natural resource pressures are greatest.

The opinion provides that in “red zone” areas, government authorities will suspend approval for projects. Companies responsible for environmental damage and local officials failing to implement the ban strictly enough will be held accountable, and could even be prosecuted for criminal liability. Conversely, the government may provide a financial reward for “green non-alert zones”.

The initiative is the latest development in China’s environmental crackdown, which has intensified this year, rattling the country’s ports, factories, and commodities markets, in particular. Economic analysts have suggested that China will sacrifice 0.2 percentage points in economic growth and approximately 40,000 jobs this year to achieve cleaner air in Beijing, Tianjin, and Hebei alone.

By Paul Davies and Andrew Westgate

Addressing a car forum in Tianjin, Xin Guobin, Vice Minister of Industry and Information Technology, announced that the Chinese government is developing plans to follow in the footsteps of some European countries to phase out fossil fuel-powered vehicles. “Some countries have worked out a timetable to stop production and sales of traditional fuel vehicles. Now the Ministry of Industry and Information Technology has launched a study as well, and will work with related departments on a timetable for our country,” Xin said. A phase out of fossil fuel vehicles could have a significant impact on air quality in China, where reports suggest that as many as 1.6 million people die each year from health issues related to air pollution.

With nearly 200 million registered vehicles at the end of 2016, China has the world’s largest car market. New energy vehicles and electric vehicle (EV) batteries are playing an increasingly important role in Beijing’s plans to turn China into a high tech powerhouse. China also has the largest cumulative total of new energy vehicles, ahead of Europe and the United States, which have the second and third largest totals respectively. In 2016, 53% of the 774,000 electric cars sold worldwide were sold in China. In order to meet next year’s demand, forecasters say that China alone needs to make 750,000 new energy vehicles — exceeding the combined worldwide demand in 2016.

By Paul Davies and Andrew Westgate

Market research has long recognized China as the largest investor in its own domestic renewable energy industry. According to Bloomberg New Energy Finance, China invested US$102 billion in 2015 alone. However, a report by the Institute for Energy Economics and Financial Analysis (IEEFA) found that China’s dominance in renewables is rapidly growing overseas as well.

The report details China’s robust international investment activity. In 2016, for example, China made 11 outbound clean energy investments exceeding US$1 billion for a total of US$32 billion — a 60% increase from 2015. China also ranked as the fifth-largest investor in renewable energy projects in other emerging markets in 2016, totalling US$19.7 billion since 2005. However, according to the report, China still directs a majority of its investments in renewables towards the United States, Germany, and other developed countries.

The report also found that China currently accounts for one quarter of global renewable energy capacity and one third of all global investment in renewables. Chinese manufacturing has altered the economics of renewable power worldwide, making solar generation cost-competitive with electricity from fossil fuels such as coal and natural gas. As a result, official figures indicate that coal consumption, the main component of China’s carbon emissions, fell in 2016 for the third year running.

By Paul Davies and Andrew Westgate

Chinese policymakers have indicated that the country’s Emissions Trading System (ETS) — which will be the largest system of its kind globally and the centerpiece of Chinese climate change policy — is likely to launch in November 2017 “at the very earliest”. The delay will enable China to announce the launch at the next UN Climate Change Conference in Bonn, Germany. However, Chinese officials have privately indicated that this likely will be a “formal” launch only, with allocation of emissions allowances and compliance obligations coming into effect during 2018. As a result, several of the existing ETS pilot programmes in Chinese provinces and major cities have begun to announce new allowance allocations for 2017, including for sectors covered by the national ETS.

The delay reflects a number of policy challenges that regulators at the National Development and Reform Commission (NDRC), China’s primary economic policy-making body, have struggled with in designing the ETS. For example, difficulties in obtaining accurate emissions data for each industrial sector covered by the system, determining benchmarks for the allocation of free allowances to industry, and whether pilot programmes may use offset credits (Chinese Certified Emissions Reductions) to satisfy compliance obligations during the initial compliance period. Verifying emissions data has been an issue for regulators managing China’s eight pilot programmes, with the Hubei Province recently delaying its compliance deadline due to problems verifying total emissions for 2016. The carbon market remains concerned about a potential oversupply of offset credits and reports that policymakers will exclude offset credits from the initial compliance phase of the new National ETS.

By Paul Davies and Andrew Westgate

On 22 June 2017, Chinese legislators released draft proposals to combat soil pollution in China at a bimonthly session of the Standing Committee of the National People’s Congress. The legislation complements the State Council’s ambitious plan to address soil pollution – an area not specifically covered by Chinese environmental law at present. Both  the Council’s plan and the corresponding draft legislation are a response to a series of highly publicised incidents, including one in Jiangsu Province where nearly 500 school students fell ill after exposure to contaminated soil. These incidents have focused public attention on the issue of soil contamination, which had previously received little attention due to the more obvious air pollution issues in Chinese cities.

The proposed law is similar to the United States Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund), in that the law requires landowners to investigate soil contamination where it is identified and imposes liability for soil contamination cleanup on the parties responsible for the pollution — or, if the responsible party cannot be found, on the landowner. The proposed law also establishes a pollution cleanup fund for situations in which the responsible party or landowner either cannot be located or lacks the funds to pay. In cases where the contamination occurred prior to the passage of the new law, a landowner held responsible may also apply to the cleanup fund for reimbursement of the remediation costs. In addition, the proposed law calls for regulators to establish tax benefits for soil remediation, standards for soil monitoring, reporting of contamination data, limits on the release of hazardous substances on farmland, and for more stringent environmental impact evaluations of construction projects (including the prohibition of construction on polluted land until the land has been remediated to the applicable standard).

By Frank Sun

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Chinese acquirers are playing an increasingly important role as buyers of private equity sponsored companies — nearly 200 portfolio companies were sold to Chinese entities in 2016. However, in our view, measures taken by the Chinese government to scrutinise transaction fundamentals more closely and slow capital outflows have impacted deals. The number of deals completed so far in 2017 has fallen to 63, compared to 109 at the same point last year. With Chinese deals now facing higher abort risks, we consider what buyout firms must know and do in order to achieve a successful exit.

Why Do the Deal?

Chinese regulators are focusing on the authenticity and commercial purpose of deals by Chinese companies. Acquisitions with a solid rationale that benefit the Chinese economy are unlikely to be rejected outright. So-called “irrational” deals (outside of a Chinese buyer’s core sector, particularly in the real estate, media, sports or hospitality sectors) will face greater regulatory hurdles. Private equity firms and their advisers need to factor this into any approach from a Chinese buyer.