Local sweeteners may sour for overseas investors

January 15, 2015 11:57
The practice of some local governments to grant free or cheap land to attract overseas investors may soon end. Photo: Bloomberg

Overseas investors, including those from Hong Kong, will enjoy fewer preferential policies on the mainland as Beijing is determined to review favorable policies designed by local governments.

According to documents released recently by the State Council and the Ministry of Finance, a crackdown is underway on local investment measures that are against central government policies.

In particular, the documents have clearly stated that land grant discounts, tax concessions as well as waiver or reduction of administrative fees, social security contributions and resources and environmental charges must be corrected.

Local governments have been ordered to collate and submit detailed reports on their existing preferential policies by the end of March for scrutiny.

A number of provinces and municipalities including Guangdong, Shandong and Chongqing have released documents and asked lower-level governments to check their policy lists.

The policy review came after the central government’s call to rethink the role of development zones, industrial parks and high-tech zones, where various preferential policies have been rolled out to attract investors.

Clearly, the policy scrutiny is part of a bigger effort at market order cleanup.

For decades, local governments have been eager to offer favorable fiscal, tax and supplementary policies to investors, especially those from overseas. For fear that investors might go to other regions, local governments have been very generous in rolling out incentives to beat the competition.

Investors, therefore, have been spoilt for choice, preferring cities or provinces with the most favorable policies.

Such a situation has wasted resources, created an uneven playing field and ushered a boom of development just for the sake of pushing up the GDP. That is why the central government is keen on cleaning up the irregularities against the backdrop of economic restructuring.

The overhaul of local investment “sweeteners” has some implications to overseas investors.

First of all, this means investors will enjoy fewer policy incentives, and some of the benefits they enjoy right now could be terminated after the cleanup campaign.

Investors in the inland regions may be affected more as governments there tend to grant more favorable policies in violation of national policies.

Second, land grants and tax breaks will be the centerpiece of the crackdown.

According to the government documents, the central authorities are particularly unhappy about local government’s generosity in these two aspects. It's not unusual for some governments to grant land to big multinationals at a very cheap price or even without charging them, while some companies enjoy multi-year exemptions from various forms of taxation including income tax.

As the central government is stepping up efforts to check local budgets and government revenues as a whole are slowing down, many of the sweeteners granted by local authorities can no longer be tolerated by the top leadership.

Therefore, overseas investors will have to brace themselves for a possible rise in their business costs, especially in the initial stage of investment.

Third, industrial parks, high-tech zones and development zones set up by local governments may lose their popularity as investment destinations.

Although national regulations allow some of these zones to implement preferential policies that include land and tax incentives, these policies are expected to be reviewed and more strictly implemented, as top policymakers are keen to make these zones more innovative and less reliant on direct policy incentives.

Some of these zones are likely to be closed and turned into normal business or factory areas that offer no more preferential policy support.

There could be some exceptions.

Certain specific industries and regions are expected to get policy backing from the central government. These industries will be mostly emerging industries that go well with national development strategies such as energy saving.

Areas to get central government support will be hub cities that can leverage their power in regional development. They include Xi’an, Chengdu, Tianjing and Xiamen.

That does not mean competition among regions to court investors will end; investment is still a major booster to a slowing economy.

Local governments will think of new ways to retain and lure investors. The measures may include talent program incentives, housing and living convenience, children education support, innovation awards, employee training, loan facilitation and easier access to local markets and state asset trade.

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The writer is an economic commentator. He writes mostly on business issues in Greater China.