----By Mark Godfrey

China's spending on renewable energy is among the highest in the world, yet the country is not tapping the full potential of its wind and solar energy, two respected environmental experts told a recent European Chamber seminar on energy. China accounted for US$10 billion (?7.4 billion) of the US$46 billion invested in 2006 in renewable energy, Dr Eric Martinot, a senior research fellow at the Worldwatch Institute, an environmental research body, told a seminar in Beijing on March 28th.

Yet though China is second only to Germany in spending on renewable energy capacity, the country could do more to tap its renewable energy sources, said Martinot. China's output of renewable energy is so far mostly made up of small hydropower facilities and small-scale solar power. "Wind power is slower to develop here," said Martinot, who drew figures from the Renewable Global Status Report 2006, an overview of renewable energy markets globally published by a coalition of governments and environmental groups.

While the EU is the leading generator of wind power, China is climbing up the rankings every year, doubling its wind power capacity in 2006, said Martinot, lead researcher of the report, who predicted growth of 100 megawatts per annum in China's wind power capacity until 2020. China is the top exporter of solar panels used to generate electricity, but its own solar-power generation is largely confined to panels heating hot water in individual homes.

Recent phenomenal growth in China's power generating capacity (output has risen from 1.5 gigawatts (GW) in 1949 to 200GW in 1995 and 1,500GW in 2006), has been driven mostly by thermal coal, said another speaker, Zhao Xiusheng, Professor of Energy System Analysis at Beijing's Tsinghua University.

Coal accounted for 75 percent of power generation in 2005, said Zhao, compared to hydro power at 23 percent nuclear power at 1.5 percent. In 2006 China's natural-gas power generation capacity rose 10 percent and its nuclear power generation capacity rose by 14 percent. Yet coal also rose to 77.8 percent of China's power generation in 2006, Zhao pointed out.

Though China has pledged that 60 percent of energy will come from cleaner, gasified coal by 2050, the country had only tapped 26 percent of the 378GW in hydro power deemed by government to be "economically recoverable" by last year, added Zhao. He outlined the potential of hydro, solar and wind power in Xinjiang and Tibet as the Chinese government continues to roll out electricity supply to the more remote parts of the two regions.

Government support for decentralisation of power distribution is vital if hydro, wind and solar power are to be efficiently tapped, said Martinot. China's 2005 energy law included incentives for generation of renewable energy. Targets on wind power and renewable energy are very ambitious but realistic, he said.

China's targets on renewable energy are similar to those of the EU but it will use very different technology to achieve the target, explained Martinot. While EU member state France is aiming to obtain ten percent of transport energy from biofuels by 2015, China's energy sustainability policy will rest on "clean coal, coal gasification and energy efficiency as well as renewables," he said.

Inefficient power generation and usage are causing China to miss its targets on energy efficiency, said Zhao. "The Chinese government has in 2007 promised to close small-scale and inefficient power plants," he said. "The government will also place tariffs on companies who fail to meet local energy efficiency targets."

Though globally the bio-fuels sector has doubled in size since 2005, almost all of the growth has happened in Germany. "China's output of ethanol is, by comparison, small though output of feed stock for producing ethanol, including corn, is rising," said Martinot. Achieving the targets it set for energy generated from biomass will be hard for China, predicted Martinot, "because of the very diffuse nature of the feed stocks." China uses mostly rotted grain for its biomass energy generation but getting the material from farm to generating stations is often difficult.

New freedoms to franchise

On May 1st a new law covering the operation of franchises in China will come into effect. The law, which should make it easier for franchisors to enter the Chinese market, was the topic of discussion at a breakfast seminar hosted by the European Union Chamber of Commerc in China on April 11th.

The new measures set out what the obligations should be between the franchisor and franchisee. Both parties operate according to a contract: the franchisee agrees to operate its business according to the uniform business model and pay the necessary franchising fees, while the franchisor offers continuous business guidance to its franchisees.

Franchising is a business model used by the franchisor to break into a market quickly, but old regulations stated that before a company can start franchising, it needs to have had two outlets open in China for at least a year. Here there has been an important change: Christoph Hezel, a lawyer at Taylor Wessing, pointed out that while a company still needs to have two outlets opened, they no longer need to be in China.

The Trade and Distribution Working Group had lobbied on the issue of cross-border franchising through the 2006 Position Paper, so this change has been warmly received by the European Chamber. These new measures will give foreign franchisors easier access to the Chinese market but there are still important aspects to be aware of, particularly with regard to filing documentation with the authorities. It is also important to consider the structure of the business model, said Ralph Dreher, a tax consultant at PricewaterhouseCoopers, who outlined some tax-efficient structures and approaches to franchising business models.

The seminar also dealt with the practical aspects of operating a franchise in China. Randal Eastman, vice-president of the Dragonfly massage chain, explained the benefits for a company with rapidly filling outlets that needs to means to expand. "As a small company, with a small cash flow, we have grown organically in a way that allows us expand quickly, while minimising the risk," he said.

During the open-floor discussion, it was stressed that uniformity is key, and that it is unwise for the franchisee to grant special favours individual franchisees. "I tell foreign investors to act in China how they would if they were acting internationally," Hezel said. "They think that the market is so special that they make concessions, and they end up running into problems."

Tax-efficient advice

Since Reform and Opening more than two decades ago, China has encouraged foreign investment with gusto. Preferential tax breaks and other policies have been the carrots that Beijing dangled in front of foreign capital. This year, however, the central government is adopting a new method; with carrots out of season, it now appears to be reaching for the stick.

The government will introduce a new unified corporate income tax law next year, which will mean the end of preferential tax rates for foreign companies. The average tax rate for foreign-funded enterprises is 15 percent while local companies typically pay 33 percent. Under the unified tax rate, foreign firms will have to pay the same rate their local counterparts currently pay.

Understanding the impact of the new unified corporate income tax on transfer pricing was the subject of the European Chamber's event in Shanghai on March 22nd at the Radisson. The event, the first in a series on tax planning under the new tax, featured Philip Anderson, head of Ernst & Young China's transfer pricing group, as the guest speaker.

The new tax law was also partially driven by China's World Trade Organisation accession commitments, Anderson noted. Under the new tax regime, tax preferences would be given to industries, projects or products rather than be location-based, as they currently are. Some industries that will benefit under the new scheme are environmental protection, farming and forestry, energy conservation and high technology.

One of the subjects he touched on during his very detailed presentation was a short- to mid-term action plan to mitigate transfer-pricing risk. He advised companies to prepare related documentation well in advance, and to do so methodically and cost-effectively.

Another issue Anderson explored was tax-efficient supply-chain management (TESCM), which gives businesses greater control over tax costs when designing their supply chain. For a typical manufacturing business, for example, TESCM would see a principal located in a low-tax jurisdiction handling all contracts on both the supply and demand-side. This centralises the contracts between all parties in the production process, but doesn't alter the physical flow of goods. He added that TESCM should be used only for sound business reasons, and not only for tax reasons.

Anderson also discussed cost contribution agreements, which China is looking to implement in the near future. The well-attended presentation ended with a question and answer session.

Customs and enforcement

On March 23rd, 2007, the European Chamber and the Quality Brand Protection Committee (QBPC) jointly hosted a workshop titled "National and International Cooperation between Customs and Police on IPR Issues".

The key-note speakers and distinguished guests for this event were Bruno Dalles, head of the French Judicial Customs, Wang Zhiguang, a senior officer of the Economic Criminal Investigation Division (ECID) of the Ministry of Public Security, and Mr Li Qunying, director of the IPR Division of the General Administration of Customs.

The workshop brought together senior officers from Chinese customs and police as well as European officials and industry representatives, who had the opportunity to openly and constructively discuss forms of efficient cooperation between customs and police, both at the national and international levels.

Mr Dalles gave an overview of his role as head of the French National Customs Judicial Service and of how this service was created 10 years ago in response to the request of French customs to have competence in criminal matters. According to Mr Dalles, the creation of the Customs Judicial Service allowed effective cooperation with customs and judiciary police. Furthermore, the service engages in extensive international cooperation with other agencies.

Messrs Wang and Li acknowledged the importance of close cooperation and effective exchange of information between customs and police both in the national and international level and the fact that Intellectual Property Rights protection is a global issue. Mr Li also addressed the ongoing and future cooperation with foreign governments and organizations and the positive effect of international training and exchange of expertise.

Finally, before opening the floor to the industry representatives for their questions and comments, Philippe Griset, French Customs Counsellor for Asia, and Gilbert Caly from Service of Cooperation Technique International of Police (SCTIP, the French international police cooperation agency) briefly explained their roles and their cooperation with Chinese authorities in the fight to illegal trafficking.

The Q&A session gave industry representatives the opportunity to openly discuss with the key speakers relevant issues concerning IPR related cases and the importance of efficient communication between customs and police.

Breakfast meeting with Ambassador Abou

On Monday, April 2nd, some 15 members of the Executive Committee of the Chamber and corporate sponsors attended a breakfast meeting hosted by Ambassador Serge Abou.

The purpose of the visit was to enable the Vice-President to establish personal relations and permanent dialogue with various Chinese Ministries. He is seeking to develop relations on issues such as global and regional cooperation, climate change and energy efficiency. There are a number of key issues also to be raised including IPR, state subsidies, trade imbalance and low value of the yuan against the euro. During the course of the meeting, representatives from various sectors such as automotive, chemicals, energy, high-tech and services were able to highlight some of their concerns and the opportunities in China.

The event was another example of the close cooperation the Chamber has with the Delegation and through them the opportunity to engage in dialogue with senior officials from the EU.

During his meeting vice-president Vergeugen will be addressing Chamber members on the occasion of the Annual General Meeting.

Processing trade developments

On March 27th, the European Chamber's SME Working Group and Trade and Distribution Working Group jointly held a breakfast seminar on processing trade in Beijing. Processing trade, a bonded manufacturing method, accounts for over 55 percent of total import/export trade in China. Eighty percent of processing trade is carried out by foreign-invested entities, which import raw materials mainly from Japan, Korea and Taiwan, process in China, and export the finished products primarily to the US, EU and Japan (data refer to January-February 2006).

The first speaker, Gregory Nichols of PricewaterhouseCoopers Worldtrade Management Services, gave an overview of some of the most relevant recent regulations: Notice No. 139 on Adjustments of Export VAT Refund Rates for Certain Products and Supplement to Prohibited Category for Processing Trade, issued on 14th September 2006, MOFCOM Announcement No.82 on the Catalogue of Products under the Prohibited Category on Processing Trade (1st November 2006), and the Administrative Measures regarding Unit Consumption of Processing Trade, issued last January by the General Administration of Customs.

According to the new regulations, the list of products classified as "prohibited" for processing trade has been expanded and several industries that were formerly able to obtain VAT export refunds, such as the coal and natural gas industries as well as the textile and furniture industries, have seen their VAT refund rates decreased or abolished.

With regard to the unit consumption rate, the ratio between bonded imported components and finished goods for export, a new declaration procedure has been introduced widening enterprises' responsibilities and significantly expanding customs powers. Customs may now conduct on-site investigations to verify the accuracy of the unit consumption calculation reported by processing trade companies. Enterprises should be prepared to provide all the information requested by customs, including the information regarding the quality of the material, the product code and the unit consumption of finished products.

Following Mr Nichols's presentation, Lincoln Ying from Arkema Group gave a presentation on how the new regulations on processing trade have affected his company's business. Arkema SA is a publicly-traded chemical company, headquartered in Paris, with sales turnover of ?6 billion. In China the company manufactures tin stabilisers as heat stabilisers for PVC with broad applications in packaging such as for food and pharmaceuticals, wrapping films, portable water pipes and fittings. Eighty percent of the company's raw-material purchases is represented by three imported raw materials essential to produce the tin stabilisers, all of which have been classified as "prohibited products" by the notice.

However, as Mr Ying pointed out, since the new regulation should promote the health and environmental protection, these products, which have low environmental impact, are high value-added and are essential to accelerate the PVC industry's development, should not have been included in the abovementioned list.

The recent measures on processing trade discussed during the seminar could be considered as the first step of a broader government plan pursuing a healthier economic growth based on a higher quality of processing industries in China.

For more information about the Trade & Distribution and the SME Working Group, please contact Karolina Mog-Sidor at kmog@euccc.com.