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Beijing releases catalogue banning or restricting ‘new addition’ projects affecting high-tech field

27 November 2014
On July 21, 2014, the Beijing municipal government published the Beijing Municipality Catalogue of Prohibited and Restricted New Addition Industries (2014 Edition) (“Beijing Catalogue”).

The Beijing Catalogue marks a significant shift towards a more restrictive investment environment, being the first example of an ‘investment’ catalogue issued in China that does not encourage or specify areas open to investment but whose sole purpose appears to be to specify areas off-limits and restricted for further investment.

It would be easy to dismiss the Beijing Catalogue as being driven by air pollution concerns, but in reality it goes a lot further than just cracking down on polluting industries, with the sectors covered ranging from manufacturing to real estate development through educational institutions and TMT. The theme seems to be more about trimming over-capacity and over-concentration of certain types of facilities and resources. The obvious question it raises and does not answer is whether this is just a local initiative or more like ‘the thin edge of the wedge,’ and we will see this pattern replicated in other major cities such as Shanghai or elsewhere in China.

Implications of the Beijing Catalogue

Under the Beijing Catalogue, being classified as a “prohibited industry for new additions” means no more fixed asset investments or new entrants will be allowed in that industry; being classified as a “restricted industry for new additions” means restrictions will be placed on new investments in that industry in terms of location, scale, operating processes, or types of products.

The Beijing Catalogue does not apply to on-going projects nor to the reconstruction or upgrading of existing projects, with a few exceptions.

The Beijing Catalogue provides a general exception that if there are special policies provided in laws, administrative regulations or State Council documents or approved by the Beijing Municipal government to apply in “certain areas,” such policies shall be followed. “Certain areas” refer to the so-called High-End Industrial Functional Zones, such as Zhongguancun National Innovation Model Zone, Beijing Economic-Technological Development Area, the Central Business District, Finance Street, Olympic Core Area and other such zones and areas. So it would be fair to say that specially designated zones may provide for exceptions and carve-outs, but a silence in the law in these designated zones would mean the Beijing Catalogue would apply by default.

The Beijing Catalogue on its face is even-handed: it applies across the board to foreign and domestic investors alike, but it also includes a specific reference to foreign investment which remains subject to the Guidance Catalogue for Foreign Investment Industries (“Foreign Investment Catalogue”). This reference simply means that in addition to the Beijing Catalogue, foreign investors will also need to follow the Foreign Investment Catalogue. This means that foreign investors seeking to invest in Beijing will be subject to two preliminary layers of feasibility analysis, starting with the Beijing Catalogue and, if this does not impose a ban or restrictions on the sector in question, the Foreign Investment Catalogue.

Structure of the Beijing Catalogue

The Beijing Catalogue is divided into five sub-catalogues, with one generally applicable to the entire area of Beijing, and each of the other four applicable respectively to the Core Areas for Capital Urban Functions, the Extended Areas for Urban Function, the New Areas for Urban Development, and the Developing Areas for Ecological Preservation.

Under the Beijing Municipality Major Areas Functional Plan published in July 2012, the city is divided into four major areas generally based on the distance of an area from the center of Beijing, as well as functional plans for different districts which include: the Core Areas for Capital Urban Functions (Dongcheng District and Xicheng District); the Expanded Areas (Chaoyang District, Haidian District, Fengtai District and Shijingshan District); the New Areas for Urban Development (Tongzhou District, Shunyi District, Daxing District (where Beijing’s high tech zone is located) and the other areas of Changping District and Fangshan District) and the Developing Areas for Ecological Preservation (Mentougou District, Pinggu District, Huairou District, Miyun County, Yanqing County, as well as the mountain areas of Changping District and Fangshan District).

Main prohibitions and restrictions

Notable prohibitions/restrictions in the Beijing Catalogues include (1) in general, no new retail or warehousing facilities with a gross (construction) area of over 10,000 square meters, high end residential buildings, golf courses, hotels, office buildings, exhibition centers, hospitals, universities, call centers, and data centers will be approved in downtown Beijing; and (2) generally no new manufacturing facility will be permitted to be established in the Core Areas for Capital Urban Functions and the Developing Areas for Ecological Preservation. Even in the Extended Areas for Urban Function and the New Areas for Urban Development, there is a long list of products which are no longer permitted to be manufactured.

In contrast, that there are no prohibitions imposed on R&D, design, purchase, marketing, technical services, or financial services in relation to manufacturing industries.

Impact on the TMT sector

The prohibition on construction of new call centers and data centers is significant to market players in the TMT sector. According to the Beijing Catalogue, investments in establishing new call centers are completely prohibited in Beijing. Data centers are also generally banned except for cloud computing data centers with power usage effectiveness (“PUE”) value of under 1.5. PUE value is a measure of how efficient energy use, and a lower PUE value means more efficient power usage.

There has been market speculation since mid-April 2014 that investments in new data centers in Beijing would not be approved due to overcapacity and excessive energy consumption of the industry. However, no official documents have been published to confirm this until the publication of the Beijing Catalogue. The ban on new call centers and data centers appears to be the only two areas in the high-tech industry which have been affected by the catalogue. The carve-out for energy efficient cloud computing data centers illustrates how the central government is trying to balance promoting advancements in technology and energy consumption.

Conclusion

The Beijing Catalogue raises more issues than it answers. While concern over over-capacity in some industries is understandable, the Beijing Catalogue seems to be going in the opposite direction from years of reform that have given greater play to the role of the market in deciding investments. Arguably, it marks a return to central (urban) planning by imposing politically-driven prohibitions and restrictions on key industry sectors in the economy, such as real estate development.

Taking the example of the Shanghai FTZ, the extent of the social and geographical engineering and steering becomes apparent: the Shanghai FTZ has just opened up call centres to foreign investment in the form of wholly foreign-owned enterprises (although it also bans investment in the sensitive sector of data centres in the Shanghai FTZ), while the Beijing Catalogue simply bans call centres across the entire area of Beijing.

For foreign investors, some prohibitions in the Beijing Catalogue will look familiar. It remains to be seen whether the prohibition in the Beijing Catalogue is just a gesture by the Beijing municipal government in support of the central government’s decision or a real policy shift.

On a more positive note, according to comments made by Beijing municipal officials in many news reports but not mentioned in the Beijing Catalogue itself, the Beijing municipal government is encouraging investment in other sectors, including high-tech.

At the end of the day, there is clearly a serious pollution issue to address in Beijing and this is a positive first but significant step towards reducing air pollution and other forms of pollution in the capital (it notably does not address pollution by private cars). The big question that the Beijing Catalogue poses and does not answer is whether it is possible to impose other restrictions that run contrary to market demand and expectations, and whether the policy could backfire by giving rise to attempts to circumvent it; for example, by buying up and expanding existing capacity at inflated prices, rather than spreading investment around more evenly as intended by the drafters and backers of the Beijing Catalogue, leading to the inevitable result of consumers paying ever higher prices for the same goods and services.

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