By Paul Davies and Andrew Westgate

Despite a more challenging business environment, China remains a key market for multinationals. China’s economic growth rate might have slowed, but its GDP is still rising at a faster rate than most other countries.

As China enters the next phase of its economic growth, the government continues to implement reforms designed to restructure the economy – ending the reliance on exports and turning its attention to the significant consumer markets. Beijing and Shanghai are home to the offices and manufacturing facilities of more than 400 Fortune 500 companies. With much invested in China, multinationals are facing increased competition, rising costs and more stringent regulatory compliance.

Indicative of its developing economy, the Standing Committee of the National People’s Congress in Beijing passed the first amendments to China’s Environmental Protection Law (EPL) in 2014 – the first since the law’s initial passage in 1989. The EPL amendments were followed by a number of implementing regulations promulgated by the Ministry of Environmental Protection (MEP). Indeed, several recent cases illustrate that local government is making use of the increased penalties available under the amended EPL.

MEP reported that it has imposed daily fines in 26 cases this year, totaling nearly US$2 million. During the same period, 207 businesses were ordered to cease operations and 147 companies had a manager detained by the police. For example, Ronghua Industry & Trade Company was shut down and fined 3 million Renminbi for discharging 83,000 tons of untreated waste water into the deserts of Gansu province. As a result of the amended EPL, two executives were also detained and fined, with one criminally prosecuted.

Five Practical Steps to Ensure Compliance

Increased transparency requirements, coupled with more severe penalties under the amended EPL, are game-changing developments for all businesses operating in China, including multinationals. Firms should be proactive in addressing the new law, and take steps which include:

1. Conducting a thorough review of compliance efforts: The amended EPL requires firms designated as “key pollution entities” to disclose information on the pollutants they discharge or emit. Environmental impact assessments (EIAs) for construction projects must also be disclosed.
2. Aligning business strategy with the areas of focus identified by the government: Under the amended EPL, daily fines are imposed not only for the cost of pollution control, but also on the damages caused in the event a company fails to make the required corrections. Previously, it was common for the cost of compliance to exceed the maximum one-time fines for violations. Therefore increased penalties for polluters will encourage businesses to step-up their compliance efforts.
3. Engaging the local community on environmental issues: The amended EPL holds government officials accountable for environmental protection. Not only are environmental evaluations made public, but the performance of local government will be assessed with environmental goals in mind. Such change in legislation is prompting businesses to better engage with local government on how best to drive sustainable growth.
4. Developing a crisis management plan in case of a violation or environmental incident: In light of greater penalties, businesses should be prepared to overhaul existing operations should they result in non-compliance with the EPL. In addition to fines imposed based on failure to implement required corrections, penalties also include the detention of company officers. By holding executives and other personnel “directly responsible”, refusal to terminate construction projects with the required EIA, or refusal to cease unpermitted discharges, emissions, as well as production, can led to detention of company management. Citizens and organisations will have the legal right to report breaches in environmental regulations to the authorities. Moreover, NGOs are permitted to file civil lawsuits against persons illegally polluting or causing environmental damage under the EPL, provided that they are registered with the Department of Civil Affairs and have been exclusively engaged in environmental protection activities for five or more years without any legal violations. Such penalties demonstrate that the amended EPL is focused on correcting existing business practices which lead to environmental violations.
5. Ensuring that all interactions with government officials and state-owned enterprises comply with applicable anti-bribery laws, including US and EU laws: In particular, following the Tianjin explosions, it appears that there will be increased focus on compliance issues and corruption.

Reform Relying on Enforcement

The central government in China continues to press ahead with its environmental policy reform. Still in its nascent stage, the challenge multinationals will face in managing environmental risk will be shaped by the level of enforcement and implementation, which is expected to vary widely across the country.

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By Paul Davies and Andrew Westgate

This month, China’s Supreme People’s Procuratorate (SPP), the country’s most senior prosecution and investigation authority, issued a statement analysing the initial six months of its pilot programme launched in July 2015, which seeks to increase environmental accountability for industry and government authorities.

Aimed at expediting public interest claims, the two-year pilot gives increased powers to local prosecution departments. The pilot encourages resolving potential public interest claims before they reach court, with the SPP stating its priority of public lawsuits related to the environment and protection of resources.

As part of the programme, the SPP has given the local procuratorate offices in 13 provinces pre-trial powers to issue orders for companies or government authorities to stop illegal behaviour, provide restitution and pay compensation, issue public apologies and promote attendance at pre-trial mediation. The local offices also have the power to pursue claims to trial.

Piloting Progress

In January 2015, China amended its Environmental Protection Law to make it easier for a non-governmental organisation (NGO) to bring a claim following criticism of the difficulty of pursuing public interest claims in its national courts. The amendment to the legislation permitted those NGOs pre-approved by the government to bring public interest claims to court. This amendment was exercised in November when a court order was made on the first public interest case submitted by two NGOs (in this case two NGOs making a joint submission) under the amended environmental law. The NGOs had filed a claim in relation to a company illegally quarrying stone and dumping waste material between 2008 and 2011. In 2014, a court found three employees of the company guilty and sentenced them to imprisonment. The NGOs claim in 2015 requested that the offending company remove waste material and restore the area to its original state. The company was ordered to pay fines totalling 1.46 million yuan (US$230,000) and was given five months to restore the environmental integrity of the site.

Figures provided by the SPP show that between 1 July and 31 December 2015, local prosecution departments were involved in 510 pre-trial investigations, of which 313 were related to environmental issues. The announcement further detailed three environmental cases which were launched against local environmental protection bureaus following the investigations of local prosecution departments.

In the first of those three cases, prosecutors in the province of Shandong filed a claim on 21 December against a county-level environmental protection department for failing to fulfil its regulatory duties in its monitoring of a sewage firm, marking the first time prosecutors had made a claim against a government department in a public interest case.

In the other two cases highlighted in the SPP announcement, both in Jiangsu province, two businessmen were ordered to pay 3.5 million yuan (US$530,000) for remediation of pollution caused by improper storage and disposal of hazardous waste, and a paper manufacturer was found to have caused 20.7 million yuan (US$3,100,000) in environmental damage on account of releasing untreated wastewater.

The launch of the pilot programme, back in July, was greeted positively by some NGOs. It was viewed as additional local level government firepower strengthening efforts to combat industry failures to meet environmental standards. For example, the SPP announcement stated that in the two Jiangsu province cases, no NGOs could be found to meet the eligibility requirements to submit a filing, so the local prosecutors were able to take on the responsibilities and pursue a case which would have otherwise not been brought to trial.

Read more on China’s environmental policy:

What Multinationals Need to Know About China’s Amended Environmental Protection Law

This post was prepared with the assistance of Glen Jeffries in the London office of Latham & Watkins.

By Paul Davies and Andrew Westgate

The National Development and Reform Commission (NDRC), China’s central economic planning agency, issued several guidance documents relating to the upcoming national Emissions Trading System (ETS) in January this year. The documents, released in Chinese only, include: the forms that companies will be required to use to report their annual carbon emissions to NDRC;  the list of industries that will be subject to the ETS; the requirements for companies and personnel involved in the verification process; and a verification reference guide.

These guidance documents build on the preliminary rules for the ETS that NDRC released in December 2014, and represent another step in the development of the ETS, which President Xi Jinping has announced will be launched in 2017.

When launched, the Chinese ETS is expected to immediately become the largest carbon trading market in the world. China pledged, at both a joint-press conference in November last year and at the Conference of Parties in December 2015, to reduce its carbon emissions from peak level by 2030. The ETS will have major implications for all companies in covered industries. Petroleum, chemicals, construction, steel, non-ferrous metals, papermaking, electricity and aviation are cited as industries subject to the ETS.

Transparency and enforcement will be key challenges for regulators in China, but the verification guidance calls for verifiers to conduct on-site inspections, including sampling and analysis of emissions. If authorities can effectively force an emissions cap through a reliable verification system, the effects of the ETS will be far-reaching indeed.

Read more on China’s environmental policy:

Carbon Trading: A New Dawn in China

China Progresses with Increased Environmental Accountability for Industry and Government Authorities

What Multinationals Need to Know About China’s Amended Environmental Protection Law

By Paul Davies and Andrew Westgate

China has launched a green bond pilot initiative via the Shanghai Stock Exchange, encouraging further foreign investment in a rapidly growing asset class and paving the way for issuances by non-financial institutions.

This initiative closely follows the publication of green bond guidelines in December 2015 by the National Association of Financial Market Institutional Investors (NAFMII). The Shanghai green bond stock exchange initiative and the guidelines go hand-in-hand with China’s efforts to transition towards a green and low carbon economy.

The initiative will require independent professional certification of proposed investments, and issuers must commit to annual reporting and certain accounting practices (for example, separate accounts to receive bond proceeds). The separate guidelines issued are similar to the voluntary Green Bond Principles issued by the International Capital Market Association. These guidelines:

• emphasise that proceeds can only be used for green assets and projects;
• provide regulations on the allocation of proceeds, including ring-fencing procedures;
• require robust environmental information disclosure regarding decision-making processes and performance targets in the bond prospectus; and
• encourage issuers to arrange a third-party review of the bond in advance of issuance.

Green Bonds Gaining Momentum

Two Chinese banks successfully issued green bonds in January – Shanghai Pudong Development Bank Co. raised 20 billion yuan in China’s first domestic-only green bond launch, and Industrial Bank Co. issued green bonds worth 10 billion yuan. Shanghai Pudong had offers to buy twice the value of securities it sold and has since returned to the green bond market to raise another 15 billion yuan.

In addition to financial institutions paving the way in this market, corporates have turned to green bonds to finance future growth. In July 2015, the first green bond denominated in US dollars was issued by renewables company Xinjiang Goldwind Science & Technology Co and was nearly five times oversubscribed.

Looking Ahead – A Green Future

It is anticipated that Chinese green bonds may become more attractive than traditional financing options for environmentally-friendly initiatives, particularly as the PBoC is considering offering interest rate subsidies for green bond issuers to keep borrowing costs low and still attract investors to the growing market. For example, Shanghai Pudong and Industrial Bank will pay 2.95 percent interest annually on their three year green bonds. A rate for traditional finance bonds from commercial banks for the same duration is typically above 3 percent, resulting in savings of at least 10 million yuan per year for the bank.

Ma Jun, chief economist of the Research Bureau at the PBoC estimates that China will need to invest at least US$320 billion per year in green initiatives and projects over the next five years to meet its sustainability goals. Traditional financing options have historically been able to cover only 15 percent of this requirement. The guidelines and initiative assist in standardising green finance and encourage further international investment. The chief economist at Industrial Bank added that international investment in Chinese green bonds “means that China’s efforts to protect the environment and cut emissions are put under international supervision”.

China’s progress is, however, not without its challenges and a number of legislative details still need to be ironed out. The December 2015 guidelines are not mandatory and standards to quantify uniform benefit to the environment (for example, emissions savings per bond US$/yuan) are not fully developed. However, the market is alive to these issues.

For example, a proposed issue by renewables company BJ Jingneng Clean Energy was rejected by the market because the prospectus lacked key information regarding the “greenness” of the bonds.Environmental protection remains high on China’s political and business agenda, not least because of China’s G20 presidency. The initiative provides further access to an ever-growing and important market to corporate issuers and international investors. Bloomberg Business estimates that China’s green bond market may be worth US$230 billion in the next five years. Like the country itself, the Chinese green bond market is too big for the international business community to ignore.

This post was prepared with the assistance of Glen Jeffries in the London office of Latham & Watkins.

Read more on China’s environmental policy and green bonds:

•  China’s NDRC Issues New Carbon Trading Guidance
• China Progresses with Increased Environmental Accountability for Industry and Government Authorities
• What Multinationals Need to Know About China’s Amended Environmental Protection Law
•  How Environmental Lawyers Can Drive the Development of Green Bonds
• What is the Future of High-Yield Green Bonds?

By Paul Davies, Andrew Westgate and Alice Gunn

China’s Ministry of Industry and Information Technology (MIIT) has recently announced a revised version of the Restriction of Hazardous Substances (RoHS 1), which will come into effect on July 1, 2016.

The revised legislation (RoHS 2) has significant implications for domestic and international companies manufacturing electrical and electronic products in China (including component parts), or those importing such products into China.

Leveraging Europe’s Regime

RoHS 2 is heavily influenced by the European hazardous substances regime and is a further example of how China continues to emulate the European model as a basis for developing robust regulatory frameworks.

Whilst similar, there are some important differences between the compliance regimes, including:

• Exemptions. The legislation is aligned with the EU RoHS directive and the scope has been broadened from RoHS 1 to cover “electrical and electronic products”. Power generation, transmission and distribution equipment, however, are excluded from this definition. Yet the EU legislation provides for more exemptions (for example, large scale industrial tools) than the revised Chinese legislation. Without such exemptions, it may prove burdensome for companies in certain sectors to comply with RoHS 2 by the July deadline.
• Limits. RoHS 2 applies hazardous substance content limits only to those electrical and electronic products subject to compliance management as listed in a “catalogue”. This catalogue will be drafted in batches, but there is no indication in the legislation as to the release schedules. The true scope of the legislation, and its similarity with Europe’s framework, will depend on the inclusiveness of the upcoming catalogue.
• Restrictions. RoHS 2 restricts the same six hazardous substances as the EU RoHS directive: cadmium, mercury, lead and hexavalent chromium and their compounds, PBB and PBDE. The EU legislation, however, also contains restrictions for phthalates, which is absent from China’s restrictions.
• Packaging. RoHS 2 introduces packaging material standard conformity requirements. However, these requirements are not the same as those seen in Europe: not only must products containing certain hazardous substances be labelled as such, but the packaging must also provide an indication of the length of the “environmental protection use period” (the duration for which a product can be safely used).

For further guidance on the revised legislation, its development since 2011 or a discussion relating to EU RoHS similarities, MIIT has issued a guidance document (available in Chinese only).

This post was prepared with the assistance of Glen Jeffries in the London office of Latham & Watkins.

Read more on China’s environmental legislation:

China’s NDRC Issues New Carbon Trading Guidance

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What Multinationals Need to Know About China’s Amended Environmental Protection Law

China Gives Green Light for Green Bonds

By Paul Davies

China’s 13^th Five-Year Plan – Planning for a Greener Economy

Last month China’s thirteenth “Five-Year Plan” (FYP13) was approved, setting out a social and economic development blueprint for the country for the next five years. The plan lays out specific economic targets such as GDP growth rates and social development goals in tackling environmental, healthcare and education issues. Notably, FYP13 has a strong focus on tackling environmental challenges, with targets and measures to address several sustainability issues including climate change, air pollution, urbanisation and transportation.

These targets will guide Chinese regulators throughout the five-year implementation period of the plan and point to how China will balance growth with its commitment to a transition to a low-carbon economy.

At the Conference of the Parties in Paris in December 2015, China pledged to reduce total carbon emissions for a long-stop peak in 2030 and to reduce its carbon emissions per unit of GDP by 60 percent from its 2015 levels within the same timeframe. Such commitments “underscore the fact that the country is no longer merely concerned with the pace of growth, but with the quality of growth” according to the World Resources Institute. FYP13 is the first plan to include specific guidance on energy consumption control. Under the plan, China will limit its overall energy use to the equivalent of 5 billion tons of standard coal by 2020 (with coal historically being the prevalent source of energy in China, FYP13 measures energy consumption by reference to a coal equivalent).

So how exactly does China plan to meet this commitment when it simultaneously aims to develop its economy, targeting growth of more than 6 percent per year from 2016 until 2020? FYP13 provides some detail on a number of the strategies in place to tackle this challenge:

• Service industry focus: Increased growth will come from developing the service industry, a sector that typically has lower greenhouse gas emissions than more traditional growth sectors, like heavy industry and construction.
• Global issues, global solution: FYP13 notes that China will further deepen bilateral dialogue on carbon issues and climate action with its international counterparts.
• An emerging Green bond market: China will also develop its green finance market. Chinese banks and corporate institutions are reacting positively to China’s increasingly developed green bond market. China has recently issued green bond guidelines and created a pilot green bond exchange on the Shanghai Stock Exchange.
• Carbon trading market: China will launch a unified, national carbon emissions trading market in 2017, which will be the largest in the world.
• Increased reporting: Effective nationwide implementation of emissions reporting and third-party verification for key industry sectors, such as steel and coal. While information is limited at present, this proposal will determine the effectiveness of the new carbon emissions trading market.
• Championing renewables: China is likely to continue to be the largest manufacturer of wind and solar energy, and its investment in clean energy outpaces the United States, France and the United Kingdom combined. FYP13 also outlines a strategy to liberalise the oil and gas and electricity markets by way of reductions in government subsidies.
• Reenergising transportation networks: China will push for expansion of alternate energy vehicles and there will be a new focus placed on public transportation, in particular rail travel. In conclusion, at this stage, China has set itself a very targeted goal for the next five years in respect of its economy and has committed to making it greener and doing so quickly.

According to NRDC, FYP13 “targets make clear that [China] intends to ‘deepen’ the transition to clean energy and low carbon development in the next five years”. In comparison to the climate actions targeted in the last five year plan (FYP12), FYP13 provides an interesting contrast by setting quantified targets and detailing environmental actions. Although FYP12 was the first five year plan to consider the issue of climate change it did not provide a total energy consumption target nor provide as much granular detail on the mitigation techniques themselves. The increased detail in FYP13 is indicative of the increased focus and resources China is dedicating to climate action.

Read more on China’s plan for a greener economy:

China Revises Hazardous Substances Restriction Laws

China’s NDRC Issues New Carbon Trading Guidance

China Progresses with Increased Environmental Accountability for Industry and Government Authorities

China Gives Green Light for Green Bonds

What Multinationals Need to Know About China’s Amended Environmental Protection Law

By Paul Davis and Andrew Westgate

China, along with leaders from more than 150 countries, today signed the Paris Climate Change Agreement in New York.

New York Signing Update

Following final negotiation on December 12, 2015, today marked the first day that countries could formally sign the Paris Agreement. At the United Nations headquarters in New York, over 150 countries attended a signing ceremony to mark the occasion.

The Paris Agreement will be open for signature until April 21, 2017 and will enter into force 30 days after at least 55 countries representing at least 55 percent of global emissions have formally signed. Today was a significant step as large greenhouse gas emitters such as China, the US, and India each signed. United Nations Secretary-General Ban Ki-moon had said in March that he expected more than 120 countries to sign the accord on April 22. Obligations under the Paris Agreement will commence in 2020.

China Leads Low Carbon Future

China became one of the first countries to confirm that it would sign the Paris Agreement on April 22. It issued a joint presidential statement with the US in March in which both nations called on other countries to sign the accord in April “with a view to bringing the Paris Agreement into force as early as possible”.

China has an ambitious climate policy, as demonstrated by its 13th Five-Year Plan and the launch of its green bond pilot initiative. China is targeting reductions of 60 percent in carbon emissions based on 2015 levels by 2030. It has stated that its annual energy use shall peak before the year 2030. These targets, however, must go hand-in-hand with aspirations of 6 percent economic growth over the same period.

Today’s signature is further evidence of China’s commitment to the green economy.

Vice Premier Zhang Gaoli represented China at the signing ceremony. Zhang said that: “Going forward, China will continue to participate in and promote international efforts against climate change” and he emphasised the need to bring the Paris Agreement into force sooner rather than later.

China’s signature today is an important development for global climate change. China is, and will continue to be, an active and crucial participant in setting the dialogue and goals of the future low carbon economy.

This post was prepared with the assistance of Glen Jeffries in the New York office of Latham & Watkins.

Read more on China’s plan for a greener economy:

China’s 13th Five-Year Plan – Planning for a Greener Economy

China Revises Hazardous Substances Restriction Laws

China’s NDRC Issues New Carbon Trading Guidance

China Progresses with Increased Environmental Accountability for Industry and Government Authorities

China Gives Green Light for Green Bonds

What Multinationals Need to Know About China’s Amended Environmental Protection Law

By Paul Davies and Andrew Westgate

China’s National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) have ordered local authorities to stop construction of coal-fired power plants in 13 provinces where capacity already outstrips demand. A further 15 provinces will be required to delay construction of previously approved coal-fired power plants. These provinces include Shanxi and Inner Mongolia, home to much of China’s coal industry.

These orders reinforce China’s efforts to transition towards a lower-carbon economy – an economy no longer heavily dependent on coal power.

Redundant resources

The current surplus of coal is driven by increased generation from non-fossil fuel sources (wind, hydro, solar and nuclear), which grew by more than 20 percent in 2015. China aims to reduce its greenhouse gas emissions per unit of GDP by 60 percent from its 2015 levels by 2030. To meet this objective, the country is targeting a 9 percent cut in coal mining capacity over the next three years, resulting in an announcement by the Ministry of Human Resources of 1.3 million redundancies in state-owned coal companies. As the country shifts towards a less energy-intensive economy, it is inevitable that China’s energy resources will diversify and thus the role of coal will diminish.

Resource diversification has also coincided with a slowdown in China’s heavy industrial sectors, principally steel and cement.

In addition, energy prices are controlled by the state whereby producers still receive a relatively high price for coal, preventing the market from signaling the surplus. It is undeniable that coal supply outstrips demand in China. The NEA calculated earlier this year that no more than 190GW of additional coal-fired electricity generation is required before 2020 to meet the nation’s energy demands. However, projects adding a total of 300GW have already been approved. Song Ranping of the World Resources Institute noted that China’s government needs to address this issue and develop an early warning mechanism that informs local-level planning decisions to avoid the further addition of redundant coal capacity.

Does coal have any role in China’s low-carbon future?

For the time being, coal will continue to be China’s primary source of energy. It is too cheap, too abundant, and China has invested too much in coal plants to remove coal from its energy mix in the short-term. Yet China’s long-term climate policies require a fundamental shift away from coal; a shift that will be easier the earlier it is started.

That shift is already underway. Surprisingly, China’s coal production actually dropped 3.5 percent in 2015, with electricity generation from coal plants falling 2.8 percent and all power generation falling 0.2 percent – the first such drop in 50 years. Furthermore, the NEA published data showing that in 2015, the average coal-fired power plant was in use for 4,329 hours, the lowest figure in 69 years.

Coal cut-backs are set to be the new normal. Li Junfeng, Director General of the National Climate Change Strategy Research and International Cooperation Centre, a government-sponsored think-tank, says that coal power generation “will continue to drop with an annual speed of 2-4% and the non-fossil power generation will stay in a high growth rate of 20%.”  If this forecast materializes, China will experience a  rapid transition towards low-carbon power sources that could even result in meeting its climate targets early.

NDRC is demonstrating strong commitment to reducing coal-fired energy and has threatened strict punishments including denying operator licences and blocking finance for construction that proceeds without authorisation. It remains to be seen if China is able to effectively implement these deterrents through its local governments to enable China to effectively manage the supply and demand of coal.

It is anticipated that similar top-down efforts to reduce reliance on coal and to rebalance the power generation market will emerge. China’s ambitious green-economy plans have been welcomed across the globe. China now faces the challenge of implementing its low-carbon policies with the world watching.

This post was prepared with the assistance of Glen Jeffries in the New York office of Latham & Watkins.

Read more on the development of China’s environmental policy:

China One of First Countries to Sign Paris Agreement

China’s 13th Five-Year Plan – Planning for a Greener Economy

China Revises Hazardous Substances Restriction Laws

China’s NDRC Issues New Carbon Trading Guidance

China Progresses with Increased Environmental Accountability for Industry and Government Authorities

China Gives Green Light for Green Bonds

What Multinationals Need to Know About China’s Amended Environmental Protection Law

By Paul Davies and Andrew Westgate

The Shanghai Municipal People’s Congress has released the revised Shanghai Environmental Protection Regulations (in Chinese only) for public comment. The revised Regulations, which first came into force in 1997, apply exclusively in Shanghai, one of China’s most prosperous and business-intensive regions and are an example of China’s continued commitment at a local level to transitioning towards a low carbon economy.

Significant provisions

In this post, we will comment on those provisions in the proposed Regulations that are particularly significant or interesting to note in the wider context of the development of Chinese environmental law. China’s National People’s Congress passed an amended version of China’s national Environmental Protection Law (EPL) in 2014 – the first amendments since the law’s initial passage in 1989. Whilst many of the proposed provisions in the Regulations track the revised EPL (for example, the establishment of pollution caps), others are potentially very different, including rewards for meeting pollution goals and the issuance of an industry-by-industry catalogue. Below are the provisions to consider as a multinational business operating in Shanghai.

Public Interest Litigation and Environmental NGOS (Articles 5 and 8) These provisions echo the EPL by stating that citizens shall have access to environmental information, and the right to report violations and to protect their rights through litigation. The Regulations also express support for public interest environmental litigation filed by environmental NGOs in compliance with the law. This is a topical issue as several high-profile lawsuits have been filed over the last year by NGOs in China using the EPL’s citizen-suit provisions. However, China also recently passed legislation that stipulates extra requirements on the standing of overseas NGOs, and it remains to be seen what effect this will have on future public interest litigation.

Pollution Caps (Article 27), Project Suspensions (Article 31) and Remediation Obligations (Article 53) Article 44 of the EPL introduced a cap on the total amount of key pollutants discharged, with specific limits to be set by local governments. Article 27 of the Regulations follows the same format by stipulating the basic principles and rules for establishing limits for key pollutants discharged in Shanghai. This continuity between national legislation and local-level response is critical to enforcement. To aid enforcement of these limits, Article 31 provides that if a county, township or industrial park exceeds total emissions targets or fails to phase-out high-polluting industries, approval for industrial and commercial projects in that area may be suspended. It will be interesting to see how this will work in practice: for example, what happens if one high-polluting business’s conduct materially impacts on a more sustainable business’s ability to expand its operations in the same industrial park? In addition, Article 53 provides that an assessment of soil and groundwater quality must be conducted prior to the sale, transfer, or lease of an industrial property, and any contamination identified in such assessment cleaned up. No further details are provided including, critically, the standard of clean-up that would be required.

Regional Co-operation (Article 10) The Shanghai government will work with neighbouring provincial governments to establish cooperative coordination mechanisms to address environmental issues. This is a codification of an ongoing regional initiative between the governments of the city of Shanghai and the provinces of Zhejiang and Jiangsu to address pollution and water issues.

Support for National Emissions Trading System (Article 33) This Article states that the municipality of Shanghai supports an emissions trading scheme and will develop rules to facilitate trading. Shanghai was one of seven jurisdictions in which China launched a pilot regional emissions trading program, and the central government is likely to look to Shanghai and the other cities and provinces with pilot programs to be at the forefront of implementing the national emissions trading system, set to launch in 2017.

Enforcement monitoring (Article 37) This Article provides some detail on how the Regulations will be enforced, specifically noting on-site inspections, remote sensing, and patrol vehicles with infrared cameras. It is vital that enforcement of the legislation is effective and consistent, and the Regulations provide visibility on the methods the Shanghai authorities will use to monitor enforcement.

Sanctions (Articles 63-78, 81 and 82) The Regulations lay out fines for violations by individuals, companies and third-party verifiers, ranging from RMB 10,000 to RMB 1,000,000.

Innovative provisions (Articles 19 and 36) Demonstrating a departure from the EPL, the Regulations include some innovative provisions. Article 19 grants the local authority the ability to make an industry-by-industry guideline catalogue to specifically highlight industries and businesses that are energy-intensive and significant polluters. Those highlighted will face additional penalties, such as higher electricity tariffs and pollutant fees in an attempt to improve their “green credentials”. Article 36, in turn, offers rewards for entities that meet pollutant reduction targets. It will be interesting to see how these provisions work in practice.

It remains to be seen what will be included in the final Regulations and how effective enforcement will be achieved. In the meantime, the draft Regulations provide a helpful illustration of what we can expect in the future and why it is important to engage with such proposals as early as possible to ensure that whatever is implemented is both fair and effective.

This post was prepared with the assistance of Glen Jeffries in the New York office of Latham & Watkins.

Read more on the development of China’s environmental policy:

China Cuts Down on Carbon as Coal Falls Out of Favour

New Chinese Soil Pollution Law Planned for 2017 Could Be Accelerated

China One of First Countries to Sign Paris Agreement

China’s 13th Five-Year Plan – Planning for a Greener Economy

China Revises Hazardous Substances Restriction Laws

China’s NDRC Issues New Carbon Trading Guidance

China Progresses with Increased Environmental Accountability for Industry and Government Authorities

China Gives Green Light for Green Bonds

What Multinationals Need to Know About China’s Amended Environmental Protection Law

By Paul Davies and Andrew Westgate

China has made notable strides to transition towards a lower-carbon economy. Most recently, local authorities were ordered to halt construction of coal-fired power plants in 13 provinces where capacity already outstrips demand. Demonstrable of its efforts to end reliance on coal and invest in green alternatives, China is ramping up efforts to increase renewable energy use.

China is rapidly emerging as a renewable energy leader and has committed significant investment to achieve a low-carbon future:

• China invested US$110.5 billion in clean energy in 2015 – a 17 percent increase on the previous year, and nearly double the USA’s investment of US$56 billion.
• China’s capacity for solar power has grown 169-fold and its wind power capacity has quadrupled in five years.
• The total share of non-fossil fuels in energy consumption increased to 12 percent in 2015, putting China on track to meet its Paris pledge of 20 percent by 2030.

Whilst encouraging, these figures mask a common challenge faced by all countries seeking to diversify energy resources – renewables capacity going unused. For example, nearly 10 percent of China’s solar capacity remained untapped during Q1 and Q2 of 2015, and 15 percent of wind power remained unused across the year. Daiwa Capital Markets analysts forecast this figure could rise to 18 – 20 percent in 2016. This problem is also common in Europe and referred to as “curtailment”, which typically occurs because the market is structured to source energy from fossil fuels. Consequently, the market must evolve to achieve a fuller transition to renewables.

Combatting curtailment

China has taken steps to tackle the curtailment challenge via three initiatives:

1. Reducing coal power construction: China is curbing the development of new coal-fired power plants to reduce competition with renewables.
2.  Rules to guarantee grid sales of generated renewable energy: The directive, launched in March and available here (in Chinese only) set an annual minimum purchase guarantee for grid companies for wind and large-scale solar generation. Additionally, this measure helps to attract investment in renewable energy projects by locking in an end market. This directive is one of the climate change initiatives President Xi Jinping announced in his US-China Joint Presidential on Climate Change in September 2015.
3.  Imposing non-hydro renewable energy quotas on provinces and power companies: The National Energy Administration has imposed quotas for 31 provinces ranging from 5 to 13 percent, the exact figure depending on the energy production characteristics of a province (for example, the quotas are higher in wind and solar-resource rich Inner Mongolia and Liaoning). Furthermore, power companies must generate at least 9 percent of electricity from non-hydro renewable sources by 2020.

 Curtains for curtailment?

The measures discussed above are a timely and ambitious attempt to boost renewable uptake and reduce curtailment. However, as ever, the success of those measures will depend on how China is, like all countries, able to monitor developments and sanction against counter-productive market activity – a sentiment echoed by the World Resources Institute.

This post was prepared with the assistance of Glen Jeffries in the New York office of Latham & Watkins.

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By Paul Davies and Andrew Westgate

Green bonds, which tie the proceeds of the issuance to investments that have positive environmental and/or climate benefits, are a rapidly growing asset class. Recent figures have corroborated the narrative of growth predicted by industry experts.

In the first quarter of 2016, green bonds totalling US$17 billion were issued globally – three times the total amount issued in the same period in 2015, almost half of which are attributed to Chinese issuers. Banks continue to dominate issuances, but a recent corporate issuance shows the burgeoning development of the asset class.

Zhejiang Geely – perhaps best known in the UK as the owner of the London Taxi Company, manufacturer of London’s iconic black taxi cabs – recently issued US$400 million of green bonds. The funds will be used in part to develop green taxis in Europe, but also to fund electric vehicle design in Asia.

What’s next for green bonds?

As countries worldwide face increasing pressure to reduce carbon emissions, increased growth in the Chinese green bond market is likely as further issuances target international investors. The Zhejiang Geely bonds were marketed to international investors and were six times oversubscribed – demonstrable of the attractiveness of this growing asset class as investors seek to integrate environmental initiatives into their investment portfolios.

The next step in the development of the international asset class will likely result in the publication of regulations for Chinese corporate green bond issuances by the National Association of Financial Market Institutional Investors (NAFMII). The publication of these regulations, expected in the next few months, are anticipated to trigger increased global investment in China’s green bond market. Bloomberg recently reported on China’s increasing share of the green bond market, noting that banks and corporates are increasingly obtaining green certificates to enable future issuances.

Furthermore, it is anticipated that, following publication, NAFMII will release local government green bond guidance – resulting in Chinese onshore green bond municipal issuances and further development of the asset class.

As China continues to carve out an increasing share of the green bond market, it is clear that green bonds will be an important mechanism in its commitment to reduce carbon while balancing the books and stimulating international investment.

This post was prepared with the assistance of Glen Jeffries in the New York office of Latham & Watkins.

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By Paul Davies and Andrew Westgate

At the China-US Climate-Smart / Low Carbon Cities Summit held in Beijing on June 7 and 8, 2016 the world’s two largest carbon dioxide emitters announced expanded co-operation in their efforts to counter climate change.

One of the most important results of the summit was the signing of a memorandum of understanding (MOU) between the Compact of Mayors, a global coalition of mayors and city officials pledging to reduce greenhouse gas emissions, and China’s Alliance of Pioneer Peaking Cities (APPC), an alliance established in September 2015 at the inaugural China-US Climate-Smart / Low Carbon Cities Summit in Los Angeles to encourage developed cities to peak their emissions before the national 2030 target established at Paris. A total of 23 APPC member-cities and provinces are now committed to peaking emissions by or before 2030, up from 11 at APPC’s founding in September 2015.  Cities such as Beijing and Guangzhou have even committed to peaking their carbon dioxide emissions by the end of 2020.  According to the World Resources Institute, these 23 cities and provinces represent about 16.8 percent of China’s population and 15.6 percent of China’s carbon dioxide emissions.

China recognises that its cities must play a vital role in meeting the country’s ambitious climate change targets. It is estimated that 70% of the world’s carbon dioxide emissions can be attributed to cities. As urban populations increase and cities become more developed, the unchecked consequences will typically be higher carbon dioxide emissions from construction, residential and office buildings, vehicular traffic, and industrial operations.  Chinese policy makers will likely seek to differentiate between those developed cities that may find it easier to reduce their emissions and those cities, particularly in the Western region of the country, that are still rapidly industrializing and are thus less likely to be able to find “quick fixes” for carbon reduction.  One aim of the APPC is to promote cities with demonstrated success in green development to act as torchbearers for less developed cities.

The MOU includes pledges by the members of both APPC and the Compact of Mayors to: (i) establish ambitious and achievable targets and actions to control greenhouse gas emissions; (ii) report their greenhouse gas inventories; (iii) create a municipal or regional climate action plan to mitigate greenhouse gas emissions; (iv) and enhance bilateral partnership and cooperation between the US and China to support sustained partnerships and knowledge sharing.  While achieving peak carbon emissions by 2030 is an ambitious goal, drafts of China’s thirteenth five-year plan covering 2016-2020 (available in Chinese here) had already set a target for developed cities to peak their emissions ahead of the national 2030 target date.  Imposing more stringent targets on developed cities will be necessary to allow for continued growth in regions that are still industrializing.  In the coming months, the strategies implemented to achieve these targets in the 23 APPC cities and provinces across China will provide a preview of how climate changed may be addressed at the national level.

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By Amy Beckingham

In recent years, Chinese companies have become increasingly bold in the search for new deals, looking beyond the country’s borders for transformational takeovers. This year already, we have seen the largest ever outbound deal attempted by a Chinese company, with ChemChina’s $43billon bid for Swiss agribusiness Syngenta. As China becomes more relaxed about international deals, private equity firms looking to exit their portfolio companies should take note.

Chinese buyers have bought several private equity-backed assets this year. In March, KKR sold French luxury retailer SMCP to the Chinese textile maker Shangdong Ruyi. A month later, 3i sold baby products maker Mayborn to one of China’s biggest insurance companies, Ping An. Chinese buyers have been willing to pay high multiples for European assets, in the hope of importing products to their domestic market. Consumer and technology assets are of particular interest.

Directives from the Chinese state have emboldened both state-owned enterprises (SOEs) and privately owned enterprises. In April, China’s National Development and Reform Commission (NDRC) proposed loosening the rules on outbound takeovers. Under the proposals, companies will no longer need approval from China’s State Council to pursue a large takeover, or one in a sensitive industry. Companies will also be able to register their work on an outbound takeover with the NDRC more quickly, enabling companies to act faster in auctions.

We believe more Chinese companies will bid for overseas assets if the proposals are adopted. We expect to see more cases where multiple Chinese bidders are present in a bidding process. Buyout firms and their advisers should therefore consider the recent changes when launching a sale. Despite China’s growing acceptance of outbound deals, potential difficulties still remain. Politically sensitive industries are still likely to face scrutiny from the NDRC, which has the power to block transactions even late on in a process.

International regulators will also continue to scrutinize Chinese takeovers. The Committee on Foreign Investment in the United States (CFIUS), has already blocked several deals over security concerns, even those outside of the US. Elsewhere, a recent decision from the European Commission (EC) held that for Chinese SOE related transactions, the EC will include in its merger control assessment the EU turnover (and market presence in relevant European markets) of other Chinese SOEs in circumstances where there is common control. This will place extra scrutiny on Chinese SOE investments in the continent.

Although there are still reasons to be cautious, Private Equity firms can expect more interest from China for their assets. China has taken a more daring approach to deal making, and private equity should benefit as a result.

By Paul Davies and Aaron Franklin

China has become the world’s largest green bond market, with green bonds issued in the first half of 2016 reaching 75 billion yuan (US$11 billion), 33% of the world total. This figure is approximately two percent of the total assets of China’s commercial banks, and demand for green bonds is expected to rise to 20 times that much.

Green bonds provide access to an ever-growing and important market to corporate issuers and international investors. Bloomberg Business estimates that China’s green bond market may be worth US$230 billion in the next five years – an opportunity too big for the international business community to ignore.

China’s green agenda

Environmental protection is of high importance for China, both politically and for business. China is the world’s largest source of carbon emissions, and the air quality of many of its major cities fails to meet international health standards. Last November at the Paris Conference, China promised that its CO2 emissions would peak around 2030 and be cut per unit of GDP by 60-65% of the 2005 level.

Green bonds will be an important mechanism in China’s commitment to reduce carbon while balancing the books and stimulating international investment. Ma Jun, chief economist of the Research Bureau at the People’s Bank of China (PBoC), estimates that China will need to invest at least US$320 billion per year in green initiatives and projects over the next five years to meet its sustainability goals. Traditional financing options have historically been able to cover only 15% of this requirement. It is of little surprise therefore that China has prioritised green finance high for its G20 presidency and its recommendations on green finance is on the agenda at the G20 meeting in Hangzhou this September.

Critically, green finance is part of a much broader green agenda that China is putting into place. The new Environmental Protection Law and, in particular Articles 21 and 22, are a good illustration of the role economic instruments are now playing in Chinese environmental regulation. These Articles provide that the state will encourage and support environmental protection and support enterprises achieving pollution reduction beyond compliance standards by using “fiscal investment, taxation, pricing and government procurement policies.”

Defining green bonds

According to Ma Jun, in order for green bonds to play a bigger role in climate change solutions and economic upgrading, standards for green bonds must be clarified.

In China, green bond guidelines have been published by the PBoC and the National Development and Reform Commission (NDRC). Linked to the PBoC guidelines, the Green Finance Committee of China Society of Finance and Banking released the Green Bond Endorsed Project Catalogue in December 2015. The catalogue is an important supplement to the guidelines, setting out the boundaries of what is and is not considered “green.”  Regulations are also underway from the National Association of Financial Market Institutional Investors (NAFMII). It is expected that the standards and definitions overall will be applicable to 90% of bond issuers.

However, some of the projects which are permitted under the green bonds guidance in China may not meet the commonly-accepted standards for what is a green bond in other geographies, such as “clean coal” projects. China’s Industrial Bank used 26% of the proceeds from its inaugural green bond to finance “clean coal” projects – projects that seek to improve the emissions efficiency of coal-fired power plants. Such projects are included as possible use of proceeds, under the pollution prevention category, in the Green Bond Endorsed Project Catalogue.  However, outside of China, the funding of fossil fuel power generation would struggle to meet the international green bond guidelines and standards such as the Green Bond Principles and the Climate Bonds Standard. According to Sean Kidney, CEO of the Climate Bonds Initiative, “We do note that this bond fully meets regulatory requirements in China and we applaud that. While they have done a fantastic job pushing the green agenda in China, it’s likely that this bond won’t be included in our overall numbers.”

Green striping: the future?

It is perhaps problematic that a Chinese company could comply with the procedural norms of the international green bond market (such as those laid out in the Green Bond Principles) and could use the vast majority the proceeds to fund projects meeting any international environmental sustainability standard, but be shut out from investment by international green bond investors because a portion of the proceeds were eligible to be invested in, for example, clean coal. One potential solution could be for issuers to commit to use a specified portion of the proceeds of a bond for purposes that comport with international green bond standards (the “green stripe”). With this approach, rather than all green or all non-green, the bond would be “green striped.”  An analogy could be drawn between green striped bonds, and the methodology of ranking green bonds as light, medium or dark green.  For example, CICERO, a provider of second party opinions, uses different shades of green to reflect the climate and environmental ambitions of green bonds. CICERO labels bonds “light green” if the projects and solutions are environmentally friendly, but not by themselves a part of the long-term vision, whereas “dark green” bonds fund projects and solutions that realise the long-term vision of a low-carbon and climate-resilient future already today.

The primary advantage of using green striping in this manner would be that it would enhance the ability of international investors to participate in Chinese bonds by providing a way to invest without modifying their overall green investment criteria. Investors could account for their investment based on the percentage of the proceeds that are committed to meet international standards.

Environmental issues remain a key priority in China, and as the government works to implement its green agenda, we can expect more focus on green bonds. To sustain green bond issuances, standards must be clarified and current inconsistencies addressed.  Green striping could be one way to overcome a situation where it is unclear whether including certain project types within a projected use of proceeds prevents the entire bond from being “green”.

This post was prepared with the assistance of Alice Gunn in the London office of Latham & Watkins.

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According to a recent report released by Clean Energy Pipeline, global clean energy backing in the first half of 2016 totalled US$116.4 billion. China was the largest investor, financing US$15.3 billion worth of solar and wind projects and accounting for nearly 30% of the world’s total solar and wind investment.

Yet despite its significant investment, the output of China’s push into renewable technologies continues to be limited by its grid system, and subsequent curtailment. Curtailment occurs when energy is available, but the operator does not allow that energy to be delivered to the grid because there is no demand and/or the energy cannot be stored. According to the central government, nearly 15% of wind-generated electricity went unused in 2015. Also contributing to this challenge is the disconnect between where energy is generated and where it is needed. As an example, in 2014, 46% of wind power curtailment was caused by a failure to use electricity generated in the province of Gansu.

As China continues to promote and transition to a greener economy, and strives to meet its target to supply 20% of electricity from renewable energy resources by 2030, we can expect further investment in renewable energy technologies. But with the market currently structured to source energy from fossil fuels, it must continue evolve to achieve a fuller transition to renewable energy and optimise investments in wind and solar technology.

Haibing Ma, China Program Manager at the Worldwatch Institute recently said that: “Current policies can only solve the curtailment problem to a limited extent. The more important thing is electricity market reform.”

The National Energy Administration – the government body responsible for maintaining China’s electricity grid infrastructure network – has recently set a megawatt cap for new solar capacity installations as part of a bid to limit curtailment. It will be interesting to see what other measures are implemented to reduce renewable energy wastage going forward.

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By Paul Davies and Andrew Westgate

Now in its eleventh year, The G20 Summit heads to the city of Hangzhou, China – the first time a G20 summit has been held for heads of state in China. As this years’ destination, China is maximising its role as the host nation to not only highlight its position as an economic superpower, but also to push for continued commitment to climate change and showcase its market-leading role in green finance.

In preparation for the summit, China has not only spruced-up its host city, but has cleaned up its skies. Chinese authorities implemented strict controls on factories operating in the provinces of Zhejiang (where Hangzhou is located), Jiangsu and the city of Shanghai, as part of its short-term air quality plan to ensure blue skies during the G20. As significant industrial centres, the restrictions introduced impact global supply chains across various industries, yet such impact has not deterred the priority of air quality.

On the Agenda

Green finance development (both public and private) is expected to feature prominently on the summit agenda, following remarks by President Xi Jinping last year. Claiming 33% of all green bond issuances worldwide in the first half of 2016 (totalling US$11 billion), China leads the global market by volume, but also in analytic techniques for environmental risks according to Ma Jun, chief research economist of the People’s Bank of China. In addition, the Green Finance Task Force of the China Council for International Cooperation on Environmental Development released recommendations last year for establishing a modern green finance system. The recommendations included creating a green stock index, a green ratings system, public-private green funds, and nationwide carbon and pollution trading markets.

Its leadership in the global green bond market reiterates China’s commitment to improving environmental quality. Like many emerging economies, China is experiencing rapid urbanisation, resulting in polluted groundwater, contaminated arable land and dangerously high smog levels. Green finance is set to bridge the investment gap required to sustainably transition to a greener economy. It is estimated that China will need to invest at least US$320 billion annually to meet the country’s environmental goals – an investment that substantially exceeds public financial resources, which can only cover 10-15% of the required capital.

Consequently, China is likely to leverage the G20 to promote international investment opportunities in green finance to meet this shortfall. Investors are increasingly interested in the green economy, with sources citing “green services” as a US$1 trillion potential market over the next five years. Adopting innovative financial structures and defining a global standard (definitions, implementation and enforcement) will propel the green finance market forward and increase its access to the public capital markets.

Global market, international relations

China’s international diplomatic efforts in relation to climate change are complemented by its green finance push. The country’s pledge to peak carbon emissions by 2030 created momentum for the global climate agreement reached at the COP21 negotiations in Paris last November. Now China takes centre stage at the G20 to cement its leadership role in addressing global environmental issues.

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By Paul Davies, Gary Gengel and Andrew Westgate

In April 2015, the Final Report of the People’s Bank of China’s Green Finance Task Force made 14 recommendations to facilitate the establishment of China’s green finance system. Recommendation 13 proposed the imposition of lender liability on banks to force financial institutions “to take environmental impact into consideration in making investment and financing decisions”.

The practical consequence would be that banks and other financial institutions become liable for environmental pollution or damage caused by their borrowers. Although lender liability has been a feature of environmental regulation in Western countries in the past, it has been significantly scaled back, and most statutes provide a due diligence “safe harbor” for lenders. Otherwise, it is argued, lender liability becomes nothing more than a search for the “deepest pockets”.

Green Finance at G20

Green finance was a prominent topic at the eleventh G20 summit, which concluded last week in the city of Hangzhou, pushed to the forefront by the host country, China, which has cemented its position as a market leader in “greening” its economic system.

China’s commitment to green finance is well established– China’s government has been encouraging banks to take environmental issues into account with respect to their lending since it first issued green credit guidelines in 2007. In the months preceding the G20 summit, China had actively participated in international discussions regarding the development of green finance, highlighting China’s efforts to transition towards sustainable growth. China has become the world’s largest green bond market, issuing 33% of the world’s total in the first half of 2016. Increasingly, China is also adopting a leading role in establishing and developing the regulatory framework as green bonds become a fixture of environmental policy.

Commercial Banks Should Prepare for Implementation of New Guidelines

New guidelines for establishing the green financial system, released during the G20 Summit (4 September 2016), confirmed China’s earlier proposals to seek to introduce the concept of lender liability for environmental damage into China’s legal framework. The guidelines were published by the People’s Bank of China, but were jointly issued with six other government agencies, including the Ministry of Finance, the National Development and Reform Commission, the Ministry of Environmental Protection, and China’s regulatory commissions for banking, insurance and securities, indicating the breadth of government backing for these measures.

The introduction of lender liability would be a sea change in the environmental regulatory framework of what is now one of the world’s key manufacturing and financial markets. The new guidelines are anticipated to attract significant attention from around the globe. Banks and other financial institutions need to engage with the proposals as quickly as possible, with a view to not only seeking to clarify the scope and timing of any amending legislation, but also in considering what procedures and processes need to be in place to mitigate environmental risks associated with lending.

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By Charles Ruck

The exit outlook for Israeli M&A is especially positive, particularly in light of the ever-growing interest from the Far East. While the vast majority of inbound capital still comes from the US, China has emerged as a prolific investor in Israeli start-up and tech businesses.

Shanghai Giant Network Technology’s $4.4bn acquisition of Playtika, the social and mobile games business sold by Caesars Interactive Entertainment (CIE), is a marquee example of the increasing flow of capital coming from the East – Latham & Watkins advised CIE. Other investments have been equally eye-catching. At the end of 2014, Chinese search engine Baidu invested $3m into Pixellot, the Israeli sports video start-up. Baidu also provided financing to Carmel Ventures, the Israeli venture capital firm.

With a greater variety of foreign investors and acquirers hunting for high-quality Israeli assets, we can expect Israeli targets to achieve higher valuations.

Former President Shimon Peres, who sadly died this week, was a key figure in developing Sino-Israeli ties. China’s interest in Israel is to be celebrated, but local targets should be alive to the complexities and cultural nuances of entering a transaction or commercial agreement with a Chinese entity or entities. Investments or acquisitions originating from China will often have strong government and regulatory overlay. There can be multiple parties to the investment and a host of investors and financiers sitting behind the deal. At the extreme, regulatory uncertainties, divergent interests amongst investors, and government influence can impede deals, but there is always room for innovative solutions, including substantial deposits.

For this reason and several others, it is expected that early stage exits will continue to dominate the M&A market in Israel. In life sciences, for instance, the regulatory environment is becoming tougher making early exits even more compelling.

Furthermore, Israeli start-up founders tend to be serial entrepreneurs, enjoying the thrill of bringing a company to market rather than overseeing a revenue-driven business. Getting to the next level often requires a large workforce, a customer services team and logistics expertise, even a dedicated compliance unit. Selling to an acquirer that can deliver corporate management expertise, a sales force and marketing knowledge is a logical step for many Israeli start-ups. The arrival of the Chinese is to be welcomed, not least because it will heighten competition for Israeli start-up assets, yet the typical preference for early-stage M&A exits is unlikely to change.

By Lex Kuo, Hui Xu, Gail Crawford, Jennifer Archie and Serrin Turner

The Standing Committee of the National People’s Congress of the People’s Republic of China (PRC) has introduced China’s first and comprehensive Network Security Law (also referred to as Cybersecurity Law). The law will have far-reaching implications for parties that utilize the internet and handle network data and personal information in the PRC.

What this means for China’s internet users

Both individuals and entities which access internet in the PRC will be subject to enhanced security requirements and new regulation relating to the use and transfer of personal data. Network operators, equipment suppliers, security solution providers and other market participants will need to comply with the sweeping new security requirements and national standards, which will come into effect on June 1, 2017. Key requirements of the new law are set out below:

• The new law applies to all “operators” (i.e., owners, administrators and service providers) of networks in China. While it appears that the Network Security Law would primarily govern activities occurring on networks that are physically within the territory of the PRC, Article 5 authorizes PRC authorities to monitor and take preventive/defensive actions to defend against certain network activities that occur outside of the PRC, but create negative consequences in the PRC (such as security risks and threats, internet crimes and telecommunication fraud).
• More onerous rules have been introduced for Critical Information Infrastructure (CII) and Operators of CII (CIIOs). Tightening security requirements of such infrastructure is regarded as critical for the PRC’s national security or public interests.
• Personal information and critical data of CIIOs must be stored in China. Under the new requirements, cross-border transmission of personal data will need to be supported by business necessity, and will require a security assessment by government authorities. To comply with new data storage and transmission requirements under the Network Security Law, domestic and multinational corporations that qualify as CIIOs will need to reevaluate their internal processes regarding collecting, storing, processing and transmitting user information, and adjust accordingly.
• The new law introduces a class-based network security protection system, which applies to all network operators in the PRC. While the details of the class-based network security protection system require further definition, the Network Security Law sets out general compliance requirements to ensure security of network operations, including: the establishment of internal network security systems, implementation of measures to monitor and record security incidents; identity verification; information management of prohibited content; enhanced cooperation with government authorities; and compliance with mandatory national standards.
• Unique and interesting breach notification requirements have been introduced. In addition to notification of incidents, internet product and service providers must not install or distribute malicious programs under the new law. In the event products or services have been discovered to contain security defects, or that data leakages or other security risks have occurred, providers must promptly inform their users and take remedial action. At present, the new law does not specify a required notifications timeframe, nor does language clarify responsibility in cases where third parties or other unsanctioned actors install malicious products or services.
• Identity verification is now a requirement for certain network services, however the new law has not elaborated on how a user’s identity will be verified. Network operators must require verification of a user’s real name and identity upon execution of a service agreement or upon confirmation by network operators to provide users with network access, domain name registration, local/mobile phone networking access, instant messaging and information publication services. In practice, identity verification is increasingly commonplace in the PRC.

As present, the new law does not fully clarify the processes now required for cross-border data transfer security assessment, network product security reviews or degree of cooperation government authorities will require. Consequently, the new Network Security Law could present significant compliance challenges to market participants both in China, and those international entities accessing internet in the PRC. Yet, the law could also bring new investment opportunities for corporations such as network security certification services, and development and application of network security technologies and convenient digital ID technology. As the deadline for compliance fast approaches, organizations will need to follow further legislative developments closely to ensure full compliance by 1 June 2017.

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China’s State Council released its “Plan for Controlling the Implementation of the Pollution Discharge Permit System,” (the Plan), which establishes guidelines and policy goals for the pollution permitting system being designed and implemented by the Ministry of Environmental Protection (MEP), on November 21, 2016. The permits will set specific limits on the amount and concentration of each pollutant that may be emitted, and companies without a license will be forbidden to discharge any pollutants. However, the scope of pollutants that will be covered by the permit system is not yet clear, and some reports indicate that heavy metals and certain other toxic compounds will not be covered.

Implementation of the Plan will begin immediately for thermal power plants and paper mills, which were required to obtain permits by the end of 2016. The Plan calls for 15 other industries to be subject to its guidelines by the end of 2017, and all stationary sources of air or water pollution are expected to be covered by 2020. Licenses will be valid for 3 years after issuance, and for 5 years after the first renewal. The licenses will be issued by county and provincial-level environmental protection bureaus according to regulations and guidelines established by MEP. Information on issued licenses, applications, verification and enforcement activities will be made public beginning in 2017. The Plan is part of a broader trend towards transparency, and an attempt to engage the public in environmental stewardship and supervision, including through the use of citizen suits. How the government will address concerns related to confidential business information, however, remains to be seen. Violations of the limits contained in the permit will be subject to penalties ranging from a shutdown of the offending facility to criminal charges, depending on the circumstances of the violation. In addition, violations will become part of the offending company’s credit record, and may hinder their ability to borrow in the future.

China’s efforts to develop a pollution discharge permitting scheme date back to the 1980s, but the focus has been primarily at the provincial level. At present, 27 provinces and provincial-level administrative regions (such as Beijing and Shanghai) have issued policies relating to pollution discharge licenses, covering approximately 240,000 companies, according to Wang Jian, vice-director of the atmospheric management division of MEP. However, this plethora of local regulation, combined with a lack of effective enforcement and oversight, has not reduced the amount of pollution in the country, as evidenced recently by “red alert” smog conditions under which Beijingers celebrated the arrival of 2017. Shortly before the New Year, a group of lawyers brought the first administrative lawsuit against the local governments of Beijing, Tianjin and Hebei province for failing to enforce air pollution laws. Whether the courts will accept such a lawsuit, however, is uncertain.

Since January of last year, MEP has been working to develop a national system to comprehensively regulate pollution discharges as part of a full-scale overhaul of environmental regulation, beginning with the new Environmental Protection Law promulgated in 2014. Enormous challenges still remain in implementing an effective pollution discharge permit system, including setting appropriate guidelines for the discharge limits applied to companies, and whether such limits will be based on available pollution reduction technologies or historical emissions. Nonetheless, the issuance of this Plan by the State Council is another example of the shift towards robust environmental regulation in China.

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