Current Policy Framework

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18th_National_Congress_of_the_Communist_Party_of_China

Historically, The People’s Republic of China has been a communist country, but in recent years it has been transitioning towards a mixed economy. Although reforms are ongoing, regulation is still stringent and difficult to navigate for smaller, privately-owned businesses. However, the regulatory environment is gradually improving thanks to recent policy developments. This section covers the most relevant policy topics for enterprises trying to gain a foothold in the Chinese market.

An Overview of Chinese Governmental Structure

The Chinese government is highly stratified and federalistic. The central government consists of four branches. The National People’s Congress (NPC) is the legislative branch, and also the most powerful branch of the Chinese government. Consisting of 2,987 members, it is a unicameral legislature that writes and deliberates legislation and validates decisions already made at the other levels of government. The executive branch, the State Council of the People’s Republic of China (SCPRC), acts under the authority of the NPC. It caries out the various executive and administrative functions of the Chinese central government through its various administrations and agencies. The judicial branch consists of of the Supreme People’s Court (SPC), local people’s courts, Courts of Special Jurisdiction, and the Supreme People’s Procuratorate (SPP). It resembles the United States’ court system but has more regional tiers. The fourth branch of the Chinese government is the military, which is effectively controlled by the Communist Party of China.

Local and provincial governments rule under the authority of the Chinese central government. Local officials such as governors and mayors are appointed by the central government. Although there are three de jure levels of local government, the five effective levels are province, prefecture, county, township, and village. There are also autonomous regions such as Inner Mongolia and Tibet and Special Administrative Regions (SARs) such as Hong Kong and Macau whose administrative rules differ from those of the rest of local government in China.

The Communist Party of China (CPC) is the dominant political faction in China. Officially, its alignment and ideologies are based upon democratic centralism and Marxist and Maoist thinking. Although there are technically nine legal political parties in China, the CPC dominates the political process at all levels in the central government. The CPC’s power is reinforced by governmental structure and procedure. For example, the CPC has de facto control of the military through the CMCPC, even though the military is officially controlled by CMCPRC.

Having at least an elementary understanding of Chinese governmental structure will help us garner a better understanding of China’s complex regulatory structure.

The Five Year Plan

The principal goal-setting for socioeconomic development in China is the Five Year Plan (FYP), which is a set of development goals and quotas that China aims to accomplish over the course of five years. FYPs are drafted by China’s National Development and Reform Commission (NDRC), which acts under the SCPRC. The guidelines set out by each FYP are extremely detailed and include both country-level guidelines and local-level guidelines. Although the FYP in China is now only a set of goals the nation seeks to reach rather than mandatory quotas that need to be met, such central planning strategies are a common feature shared by many planned economies.

More recent FYPs have reflected China’s efforts to reduce energy consumption and move towards sustainable development. The current FYP, the 12th FYP, lasts from 2011 to 2015. It has goals, mandates, and guidelines that reflect China’s push towards sustainability. Here is a list of some of the goals and mandates of the current FYP:

  • Reduce energy intensity (energy consumption per unit of GDP) by 16%.
  • Reduce carbon intensity (carbon emissions per unit of GDP) by 17%.
  • Increase non-fossil fuel sources of energy to 11.4% of the energy mix
  • Cap energy consumption at 4 billion tons of standard coal (tsc) by 2015
  • Cap electricity consumption at 6.15 trillion kWh by 2015
  • Increase energy efficiency by 38% by 2015
  • Increase total installed solar capacity to over 21 GW
  • Increase distributed solar capacity in Eastern and Central China to 10 GW.
  • Increase total installed solar capacity to 50 GW by 2020.

The goals of the current FYP build upon the goals of the previous FYP, and the goals of the next FYP are expected to build upon the goals of the current FYP. The next FYP will be adopted in 2016. Additionally, in the wake of China and the United States’ unprecedented climate agreement, we can expect to see the goals of the next FYP be modified to help meet emissions targets.

Policies, Initiatives, and Programs

This section provides an overview of some of China’s renewable energy and clean cooking technologies and associated programs and initiatives designed to further these policies.

Promotion of Energy Efficiency and Renewables

Energy efficiency and conservation has been an important part of Chinese policy since the late 1990s. It began with the passage of the 1997 Energy Conservation Law, which uses market-based policy tools to encourage the conservation of energy and efficient usage in all sectors. Policy tools used include taxation, financing and investment, subsidization, price controls, credit controls, and government procurement of energy resources and businesses. It was strengthened with an amendment in October 2007. Since then, energy efficiency has been one of the cornerstones of Chinese energy development policy. There has been a considerable shift towards renewables as well; this is reflected in recent policy. The 2005 Renewable Energy Law was China’s first renewable energy legislation. It uses both market-based and command and control policy tools to encourage the adoption of renewable energy technology. China is likely to push harder towards more sustainable energy practices in the wake of the recent climate agreement with the United States.

Source: Chris Lim.  Licensed under Creative Commons Attribution-Share Alike 2.0 Generic.

Source: Chris Lim. Licensed under Creative Commons Attribution-Share Alike 2.0 Generic.

Investment in Biodigesters

Biodigesters have been around in China since the 1950s, but the sector has only grown recently as the technology has matured and income levels have risen. Biodigesters are devices that use anaerobic bacteria to convert agricultural, livestock, and food waste into natural gas and fertilizer. Renewed growth began in the 1980s and has lasted into the 2010s after decades of stagnation. The government is encouraging the adoption of this technology through investment, subsidies, and working directly with biodigester enterprises to establish regional frameworks for achieving last mile distribution and use. Today, the biodigester industry employs 300,000 individuals and is supported by a service network of 6 provincial training bases, 536 county-level service stations, and 64,756 rural service networks. Currently, hundreds of enterprises have a share of the biodigester market.The Chinese Ministry of Agriculture invested a total of RMB 8.62 billion (about $1.4 billion USD) into the biodigester market over the period of 2001 to 2007. Growth has accelerated further in recent years thanks to a marked increase in investment. A total RMB 26.96 billion ($4.3 billion USD) was invested into biodigester technology from 2008 to 2011. This sector holds a lot of promise thanks to a maturing market and improvements to the poorly functioning service network.Promotion of Distributed EnergyBiodigesters have been around in China since the 1950s, but the sector has only grown recently as the technology has matured and income levels have risen. Biodigesters are devices that use anaerobic bacteria to convert agricultural, livestock, and food waste into natural gas and fertilizer. Renewed growth began in the 1980s and has lasted into the 2010s after decades of stagnation. The government is encouraging the adoption of this technology through investment, subsidies, and working directly with biodigester enterprises to establish regional frameworks for achieving last mile distribution and use. Today, the biodigester industry employs 300,000 individuals and is supported by a service network of 6 provincial training bases, 536 county-level service stations, and 64,756 rural service networks. Currently, hundreds of enterprises have a share of the biodigester market.The Chinese Ministry of Agriculture invested a total of RMB 8.62 billion (about $1.4 billion USD) into the biodigester market over the period of 2001 to 2007. Growth has accelerated further in recent years thanks to a marked increase in investment. A total RMB 26.96 billion ($4.3 billion USD) was invested into biodigester technology from 2008 to 2011. This sector holds a lot of promise thanks to a maturing market and improvements to the poorly functioning service network.

China Alliance for Clean Stoves

CACS was established by the China Association of Rural Energy Industry (CAREI) in collaboration with the Global Alliance for Clean Cookstoves, an initiative led by the UN Foundation that promotes the adoption of clean cooking technologies. CACS brings together clean cooking technology businesses as well as the government and serves as a platform for launching clean cooking projects. Oftentimes, the projects involve collaboration between enterprises and with government entities such as the Chinese Ministry of Agriculture, or are part of a FYP initiative. This program, being more market-based, is evidence of China’s efforts to seek out market-based solutions that would otherwise be solved using socialist policies.

One Solar Cooker and One Biomass Stove Program

Launched by the Chinese Ministry of Agriculture in 2007, this program seeks to address rural energy poverty by distributing energy efficient biomass stoves and solar cookers to families in rural areas, notably Tibet. Each beneficiary receives one biomass stove and one solar cooker. The Ministry of Agriculture purchases stoves from privately-owned enterprises through a bidding process and then distributes them to rural households in target areas. The program’s implementation process reflects the federalistic structure of the Chinese government. Enterprises first deliver stoves to counties and help with distribution to prefectural agricultural departments, who inspect the products and coordinate distribution to counties within each prefecture. County-level government performs installations and village-level government conducts public awareness campaigns and ensures usage of the stoves. Local-level operations include the distribution of bilingual informational pamphlets and the establishment of an after-sales network by cookstove enterprises.

So far, the program has distributed 79,833 biomass stoves and 244,474 solar cookers. It owes its success to its top-down distribution system and its special consideration for local conditions, norms, and habits. These factors have ensured that the technologies are distributed to the last mile and adopted there so that beneficiaries can reap all of the benefits of clean cooking technology. The program has been especially successful in Tibet, an area that lacks access to the grid and relies on traditional cooking and heating techniques.

Source: Tamserpo.  Licensed under Creative Commons Attribution-Share Alike 3.0 Unported.

Source: Tamserpo. Licensed under Creative Commons Attribution-Share Alike 3.0 Unported.

Regulations for Starting and Running a Business

Chinese law and regulations for business are wide-reaching, restrictive, and difficult to navigate. These policies have earned China a World Bank Doing Business Rank of 90 out of 189. This section walks through the basic process for starting a business in China, and some of the pitfalls that exist for SMEs and socially-focused enterprises.

The first step to starting a business in China is registering it and getting it approved. The entire process requires obtaining pre-approval of the company name, registration with the State Administration for Industry and Commerce (SAIC), the local statistics bureau, and the Social Welfare Insurance Center. It also requires a few administrative tasks, such as making a company seal, purchasing invoices, and setting up a bank account. More information can be found here. The government also performs an investigation into a business’ activities to evaluate whether it can adequately serve the public interest.

There a number of different business types a startup can register as. There is one problem: there is no specific registration for socially-focused for profit enterprise. Social enterprises are a fairly new phenomenon in China, so there is no legislation or regulatory framework that they can utilize to effectively gain a foothold in the market. Instead, they must choose from a number of government-sanctioned business structures that may or may not be suitable, depending on the goals an enterprise is seeking to accomplish. To adhere to one of these models, a business must be structured a certain way, both in terms of management and profit, and allow for varying degrees of intervention by the government. It is important to choose the right business model so that the enterprise can take advantage of tax exemptions, which is important for SMEs due to the fact that grants and donations are oftentimes required to cover startup costs and expenses before break-even. Without tax exemptions, social enterprises and SMEs would have to pay taxes on the grants and donations they receive.

The first type of institution an enterprise can register as is an NGO. An organization registered as an NGO must be a nonprofit. Registration is done through the Civil Affairs Bureau, and requires “dual management,” in which an NGO must find a local governmental bureau as a sponsor before they can become operational. This puts NGOs at the mercy of local government, which may not be desirable for many enterprises due to management and financial implications. Moreover, the path towards incorporation is long, complex, and not transparent. This would make registering as an NGO impractical unless an enterprise seeks to be a locally focused nonprofit.

Another type of registration is as a social welfare enterprise (SWE). SWEs are entitled to tax exemptions that proportional to the number of disabled workers they employ. SWEs can also receive loans and subsidies from the government. An organization seeking to register as an SWE must first seek approval from the government to determine if their mission is appropriate, and 35% of their employees must be physically or mentally disabled. This would be problematic for many social enterprises because of the way their business models tend to operate. Many consist of simply a central management structure and a few employees that may need to perform manual labor. However, if an enterprise is able to employ disabled workers, the SWE would be an excellent business model type to register as.

Non-profits can also register as Civilian-Run Non-Enterprise Units, which are barred from commercial activities and profit-making. They are set up as civil service institutions that operate in areas such as education, healthcare, science and technology research, employment, sports, social welfare, and legal services to name a few. They receive exemption from a few taxes.Social enterprises also have the option of registering as a commercial business. This business model allows for the most independence, but does not confer any tax exemptions or benefits from the government. Because it has the least restrictions, most of the social enterprises that are registered at all are registered as commercial businesses.

All of these business models may conflict with the needs and goals of a social enterprise. In this case, they can either incorporate abroad or in places such as Hong Kong, or simply not register at all. Many small social enterprises have chose the latter option, while larger, more business oriented social enterprises such as One Earth Designs have opted to set up their businesses in Hong Kong and operate in mainland China. Either way, it is very important to keep in mind that the current framework for starting a business does not make it easy for social entrepreneurs. Thankfully, the Chinese government has taken note of the growing social enterprise movement and is working towards policy changes that could make the regulatory environment a lot easier in the years to come.

The US-China Joint Announcement on Climate Change and its Implications

The United States and China, the world’s two largest emitters of greenhouse gases, signed a historic climate agreement in November of 2015. This is the first time that these two countries were successfully able to agree upon a set of goals for each other to reduce greenhouse gas emissions. It also is the first time that China agreed to peak its CO2 emissions. This comes in light of China’s ongoing efforts towards economic and environmental reform, as well as Chinese President Xi Jinping’s call for an energy revolution. China has agreed to increase non-fossil energy to 20% of the total energy mix by 2030 and peak CO2 emissions in the same year. This would require an installation of an additional 800-1,000 GW of carbon-neutral electricity generating capacity by the same year; a very ambitious goal. This is more than the amount of electricity generated by coal in China today, and almost as large as the total generating capacity of the United States.

Source: US Embassy The Hague.  Licensed under Creative Commons Attribution-NoDerivs 2.0 Generic.

Source: US Embassy The Hague. Licensed under Creative Commons Attribution-NoDerivs 2.0 Generic.

The agreement also includes provisions for collaboration between the US and China on sustainable technology development and planning initiatives. For example, it has established the US-China Climate Change Working Group (CCWG), which is a transnational platform for initiatives such as climate-smart cities, clean automobiles, carbon capture, greenhouse gas data management, and forestry. There are also initiatives to completely phase out hydrofluorocarbons (HFCs), a group of extremely potent synthetic greenhouse gases.

In China, we can expect this to have considerable influence on government policy. An increase in renewable energy subsidies would be expected. This is something that SMEs could certainly take advantage of if they are able to establish themselves; especially enterprises that deal in distributed energy. However, the catch to this is that distributed energy in a social enterprise context, relatively speaking, a niche market in China that is closing very quickly. Other sustainable technologies such as biomass gasification may prove to be a better area to deal in if a socially-focused enterprise wishes to take advantage of new policies.

  Next Section: Market Environment and Barriers to Entry