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Download this week’s newsletter as a PDF here: CPW No. 14 (April 21-30)
Dear friends and colleagues,
China goes on holiday Thursday for International Labor Day. Given that nothing is likely to happen in the following days and that this week’s newsletter is coming out a few days late, the next issue of CPW will come out at the end of next week.
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Dirty money
China’s legislature has passed a new Environmental Protection Law that takes effect on Jan 1, 2015. The new law looks good on paper, laying out much stricter fines and punishments for polluters and complicit officials and allowing environmental NGOs to take legal action against offending companies. However, as MEP Vice Minister Pan Yue stated in an interview after the legislation was passed, “Good environmental law only gets you halfway there. It needs to be implemented.”
In the mid-2000s Pan was an outspoken champion of stronger environmental regulations, but was sidelined after the 17th National Party Congress in 2007. Though he stayed on as Vice Minister of Environment, his portfolio was scaled back and his influence waned. If Pan’s statement is evidence of his reemergence, it should bode well for enforcement of the new law.
Cash-strapped local governments may also find the new law a convenient way of increasing revenue. The past few years have seen local governments being much more aggressive in imposing fines and fees on business as they look to limit budget shortfalls. MNCs tend to be the preferred targets of such actions; companies should make sure they are in compliance with the new law before it comes into effect next year.
Helping hand
China’s growing government debt is also spurring the government to promote public private partnerships (PPP) in an effort to get companies to contribute more to providing infrastructure and public services. At last week’s State Council meeting, the government said that it will allow private investment into major infrastructure projects in railways and ports, and eventually into other state-controlled sectors such as airports, utilities and oil and gas.
The new policy provides opportunities for private companies to win kudos with government officials while also making a handsome profit. China abounds with underserviced areas that could provide steady, long term returns for investors capable of making large upfront investments; for example, a new freight line to transport Inner Mongolia’s abundant, but trapped, coal seems certain to be a sound investment given China’s ever-increasing energy demand.
Many of these opportunities will come in China’s less-developed central and western regions where investment-led growth is still the order of the day. Li Keqiang promoted the Develop the West policy in his trip to Chongqing this week; operations in coastal provinces that have seen incentives from local governments dry up in recent years should find a more friendly investment environment inland.
What do you think
Infrastructure isn’t the only thing the government is seeking to outsource- it also wants some help with policymaking. Last Wednesday, the NDRC released the 25 areas of study for the 13th Five Year Plan. The NDRC has asked for outside organizations– including large companies and international organizations- to research these topics. Interested companies should send an email to 13-5plan@ndrc.gov.cn before May 5. All research must be completed by August.
As China’s policymaking process becomes more open and systematized, companies should refine their government relations strategies accordingly. China’s “big government” market means that business success is often predicated on being in line with policy trends. As channels for engagement multiply, companies need effective systems for mapping stakeholders, tracking issues and prioritizing outreach.
Risky business
The Politburo held its latest study session last Friday, at which fighting terrorism was one of the key focuses. As if to reinforce the point, Xi then headed to Xinjiang, the “frontline on terrorism”, where he visited military and armed policy units and once again vowed to fight terrorism.
Pouring more money into counterterrorism efforts may help to prevent large-scale attacks. But Xi’s calls for increased vigilance are also likely to have unwanted consequences at the local level. In the past week local officials outside Turpan detained 100 people for growing beards or wearing veils. Earlier this month, officials in Xayar County encouraged people to report those growing beards to the police. Such moves are likely to increase the ethnic tensions that are at the heart of China’s domestic terrorism problem.
We seem to say this every week, but China looks like an increasingly risky place to do business. Something to think about before you make that investment in China’s infrastructure that only pays off after 20 years…
Trading places
The main focus of this week’s State Council meeting was trade. The government renewed promises to further reduce tariffs in several areas where advanced economies have a comparative advantage, including services, advanced technological equipment and critical components. The government will also further simplify customs procedures. Good news for everybody.
Serve the people (who own the means of production)
Xi wished the workers of China and the world a happy International Worker’s Day, and Wednesday’s State Council meeting discussed “ensuring the basic rights and benefits of workers”. However, neither Xi nor Li mentioned giving labor unions and other organizations stronger legal protections. This is a poignant omission given the recent massive strike in Dongguan. Just so there was no confusion, the government also arrested the labor rights advocate who was advising the strikers.
China may be loathe to allow workers to organize outside official channels, but this will do nothing to stop the general trend of rising demands from workers and a consequent rise in labor costs. China’s workers, both skilled and unskilled, are increasingly savvy, and quick to demand more when they feel they are undercompensated. As labor supply continues to shrink, labor’s position will only become stronger. Companies in China need to factor in significant increases in labor costs into their long term planning.
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