Member Article

The People's Republic of China, a party to the Kyoto Protocol (2005), has been actively promulgating "greener" policies to improve China' environment and reduce carbon emissions. These green steps are creating potential new investment opportunities for foreign investors as China seeks to become more energy efficient.

One such step towards greater energy efficiency is reflected in the Opinion on Expediting the Implementation of Energy Management Contracting to Promote the Development of Energy Saving Service Industry ("Opinion") which was issued by the General Office of the State Council of China in April 2010. The Opinion is intended to encourage the implementation of energy-saving policies.

New Investment Opportunities

Pursuant to the Opinion, energy service companies ("ESCos"), as defined in the Opinion, are permitted to enter into contractual energy management ("CEM") arrangements with energy-consuming enterprises to provide energy-saving estimation, financing and restructuring services. The ESCos' return on investment and profit taking are linked to the energy-saving efficiency resulting from their services. Certain financial subsidies and tax benefits are also available to ESCos.

Benefits for ESCos

The Opinion sets out several policies to encourage the development of ESCos.

i. Financial subsidies

Pursuant to the Opinion, CEM projects shall be incorporated into the central budget and supported by a special fund out of the fund of the Central Government for energy-saving and emission of reduction. For qualified energy-saving reconstruction projects that are operated by ESCos under the CEM measures, the Chinese government will provide financial subsidies or other financial incentives.

ii. Tax-related benefits

The Opinion sets out various tax-related benefits for ESCos as follows:

(1) Business tax – ESCos implementing CEM projects are tentatively exempt from business tax;

(2) Value-added tax – the consideration-free transfer of assets resulting from the implementation of a CEM project by the relevant ESCos to an energy consuming enterprise is exempt from value-added tax;

(3) Enterprise income tax – subject to the relevant tax laws and regulations, a qualified ESCo operating a CEM project shall enjoy a three-year exemption from enterprise income tax commencing from the first income generating year, and a 50% reduction in enterprise income tax from the fourth through the sixth year; and

(4) Others – (a) reasonable expenditures paid to an ESCo by an energy-consuming enterprise pursuant to a CEM contract may be treated as tax deductible expenses without any need to differentiate between expenditures as a service fee or asset purchase price; and (b) assets transferred by an ESCo to an energy-consuming enterprise upon the expiry of a CEM contract shall be treated as wholly depreciated or amortized, and any transfer price of such assets received by the ESCo shall not be reckoned as its income for tax purposes.

iii. Improved financial support to ESCos

The Opinion encourages financial institutions to provide project financing, factoring and other financial services to ESCos through a variety of new loan products, expanding the types of permissible collateral and simplifying the application and approval procedures. ESCos may also apply for loans with banks secured against fixed assets invested in CEM projects.

Foreign Participation

The Opinion does not address foreign participation in ESCos or the eligibility of foreign invested enterprises to receive the specified subsidies or enjoy the preferential treatments. However, foreign participation in energy-saving industry has been encouraged.

In the Guidance of Directions of Foreign Investment issued by the State Council in 2002, foreign-invested enterprises that are able to conserve energy and raw materials and utilize resources and renewable resources comprehensively are listed in the encouraged category. In addition, the Several Opinions on Further Improving the Utilization of Foreign Investment, which was also issued by the State Council in April 2010, set forth several plans to encourage foreign investment in the new energy and the energy-saving industry sectors by amending the Catalogue for the Guidance of Foreign Investment Industries. The potential for foreign participation in this industry sector appears promising.

Conclusion

Considering the long-term development goal of achieving structural transformation of the Chinese economy, the Chinese government may be expected to take further steps to create a more dynamic market environment for the development of energy-saving industries, benefiting both the domestic and foreign investors alike. This energy-saving industry sector should provide excellent opportunities for foreign investors, and the ongoing development of relevant policies and laws in this sector should create new investment possibilities.

The upcoming 2010 Asian Games hosted by Guangzhou, China

From 12 to 17 November 2010 the 2010 Asian Games are going to take place in the host city Guangzhou, China and three neighbouring cities Dongguan, Foshan and Shanwei in the Guangdong Province. Guangzhou is the second city in China to host the Games after Beijing did it in 1990. This year's is the 16th Asian Games, with the first hosted by New Delhi, India in 1951. Like the Olympics, the Asian Games are held every four years.

This time, a total of 476 events in 42 sports will be held, making this year's Games the largest in the history of the Games. The 2010 Asian Games' official emblem is a stylized goat, the representative symbol of the host city Guangzhou which is also referred to as the "City of Goats" or "City of the Five Rams". The vision "Thrilling Games, Harmonious Asia" of this year's Asian Games represents a dream and a promise that the Games will uphold the spirit of the Olympics and the Asian Games - which is to promote unity, friendship and further exchanges between different countries and regions.

With a long history of over 2,200 years, Guangzhou is the capital of the Guangdong Province and has become the province's political, economic and cultural centre. Through the 2010 Asian Games, Guangzhou will be in the spotlight to show the world its continuous efforts being put in to develop it into an international metropolis functioning primarily as the biggest financial, high-tech and light industrial, and communication and transport centre in South China.

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