Western China will experience a substantial influx of foreign investment as manufacturers gradually move inland away from the relatively developed and expensive east coast. Foreign goods and services are soon to follow, as Western China’s financial centers such as Chongqing and Chengdu experience increased demand for foreign brands.

Foreign law firms and their clients are generally unaware of the massive amount of new regulations coming from Chongqing, Chengdu, and Sichuan Province that both encourage and regulate local economies. These regulations will play a crucial role in controlling how foreign companies enter these western markets, and can be roughly generalized into regulations that either promote local economy or institute environmental and societal protections.

Promotion of Local Economy

Legal counsel for foreign companies should be especially cognizant of local regulations that either promote local companies, and subsequently discourage foreign companies, or encourage Chinese involvement. For example, Chongqing and Chengdu recently implemented their regulations for the recognition and protection of local famous trademarks (“本地著名商标”). Local famous trademark designations promote local companies and are often closely associated with local protectionism.

Both of these western cities have also enacted regulations that promote investment from Chinese with experience abroad (in Chinese, this term is “海归”, not “海龟”, which is sometimes mistakenly used by foreigners, and means “sea turtle”!).  The Measures of Chongqing Municipality on the Promotion of Development specifically provide that “local governments should focus their efforts on companies that are [ . . . ] established by Chinese citizens with experience abroad[.]”

Sichuan Province actually has a separate regulation called the Measures of Sichuan Province on the Protection of Investment Rights of Overseas Chinese Citizens, which provides a slew of exclusive protections for returning Chinese including 1) being treated as Sichuan citizens under the law, regardless of where they are from, 2) company tax exemptions for returning Chinese that use new technology or patents, and 3) relaxed remittance policies so that returning Chinese may send money earned in Sichuan to other countries.

Foreign law firms whose clients are participating in local economies in Western China should consider how such regulations will affect their clients. Depending upon their clients’ dedication to combatting competition with intellectual property, they may consider monitoring competitors’ potential use of corruption to obtain local famous trademark designations. Joint ventures with returning Chinese may create benefits for the company and its employees that would otherwise be unavailable in other parts of China or with local Chinese partners that have not studied or worked abroad.

Environmental and Societal Protections

Chongqing, Chengdu, and Sichuan Province have also instituted several environmental and societal protections within the past few years. These regulations are generally more lax than their east coast counterparts, but are also more stringent than the regulations in less developed areas of Western China. Manufacturers should thus consider how these regulations will affect their operations.

In comparison to regulations that promote local economies, these regulations are often more vague and set standards that are difficult to impossible to monitor. A great example is the Measures of Chongqing Municipality on the Promotion of Forest Expansion, which requires that at least 45 percent of Chongqing’s overall land must be covered by forest, and that at least 39 percent of urban areas must be covered by forest. Not only is it difficult to determine what percentage of a large populated area is covered by forest, but the regulations do not provide how Chongqing will enforce this requirement.

These cities have also implemented important societal protections. For example, the Measures of Chengdu Municipality on the Supervision of Product Quality, which was amended in 2012, establishes how Chengdu monitors product safety and quality.

Local environmental and societal regulations typically do not directly affect foreign companies that sell their goods and services to the local market. Generally speaking, foreign companies should be able to avoid regulatory complications if they adhere to the standards that they already established in other markets such as in East China. Of course, it is important that foreign companies always monitor product standards when utilizing new manufacturers, especially if those manufacturers are based in less-developed areas.

Posted by Paul Kossof

Paul is Vice-President / Legal Counsel - Gao Fei Consulting Services (Beijing) Co., Ltd.

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