Tuesday, February 24, 2009

Approval of foreign investment in China to be linked to environmental index

In a notable step, China's Commerce Ministry announced late last week that approval of "foreign-funded enterprises" will now be based in part on an "environmental protection index" and a "land-use intensity index." According to Xinhua, the environmental index "will include capital input in the areas of environmental protection, annual sulfur dioxide emission and chemical oxygen demand." The land-use intensity index, meanwhile, "will include gross fixed-asset investment and the total area of land used, as well as a breakdown of how that land is used -- for example, for buildings, residential facilities or 'green' areas."

This new regulation, announced jointly by the Ministry of Commerce (MOC) and the Ministry for Environmental Protection (MEP), requires foreign-funded enterprises to submit assessments on these factors prepared by local environmental protection departments. Again according to Xinhua, the regulation is intended to "tighten scrutiny of energy-intensive and polluting facilities funded by foreign investments."

It's a little hard to read this particular regulation. Broadly, it seems like a promising step, but there are obvious difficulties with ensuring uniform enforcement of the regulation. The fact that local governments will prepare the environmental index assessments does nothing to address the rampant corruption that usually attends foreign investment approval at the local level. Nonetheless, given the level of foreign investment in China, the regulation could have a significant impact in terms of forcing foreign investors to pay more attention to China's environmental regulations. The capital input criterion is a clear reference to China's efforts to create a low-resource-intensity economy. The land-use intensity requirement may also help to reduce tensions in areas where industrial development is eating up valuable farmland. At a deeper level, this regulation, and the coordination between MOC and MEP, seems to bode well for MEP's stature relative to other, more established state ministries.

On two points, the regulation is a little disturbing. Most importantly, it says nothing about greenhouse gas emissions, though this isn't surprising given China's hesitancy to take any action that may disadvantage its own industry. Second, the regulation, in applying only to foreign-funded firms, carries a whiff of green protectionism. CGS would never, of course, argue that such firms are entitled to shirk Chinese environmental regulations, but one would hope that this regulation does not signal any less stringent enforcement of environmental regulations for state-owned enterprises or private domestic firms.

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