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“Have you seen the Fair Competition Review Regulations (hereinafter referred to as the Regulations) that came into effect on August 1?”

"I know that refunding taxes, land transfer fees, etc. are all prohibited."

This conversation took place between an investor and the person in charge of the invested company. This biopharmaceutical company has just reached an agreement with the government on the supply of more than 100 acres of land. Although the listing price cannot be lower than the reserve price, the person in charge admitted that "the final actual transaction price is still under negotiation with the government, and the other party will return the overpaid land transfer fee under other names."

The return of land transfer fees and taxes is a common preferential policy offered by local governments to enterprises, but they are all listed as prohibited in the Regulations. Therefore, the implementation of the Regulations is regarded as a watershed in attracting investment. The preferential policies commonly used in the past are banned, and local governments need to find new ways to attract investment.

It was in the months before the implementation of the Regulations on August 1 that provincial governments such as Beijing, Shanghai, and Jiangsu successively launched industrial investment funds worth tens of billions or even hundreds of billions of yuan. These government-funded mother funds hope to leverage more social capital to invest in currently popular sectors such as integrated circuits, biomedicine, and artificial intelligence, hoping to use investment to bring these emerging industries to fruition.

Such "fund investment promotion" will become an important option for local governments to attract investment in the future. At the same time, when simply reducing the cost of landing enterprises is no longer allowed, local governments also need to find local endowments besides cost advantages.

The strictest regulations in history

At the end of January this year, an announcement by the listed company Boqian New Materials on returning government subsidies attracted market attention. The company was required to return two bonus funds totaling 24 million yuan received in March 2023 and June 2023 on the grounds that it "did not comply with relevant policies and to regulate fiscal expenditure behavior." Boqian New Materials estimated at the time that this would reduce the company's net profit by 20.4 million yuan in 2023. In the end, the company lost more than 32 million yuan last year.

Behind the fact that Boqian New Materials was required to return the reward funds, local governments are standardizing preferential policies for attracting investment, which can be seen from the audit work report released in the middle of last year.

In mid-2023, Auditor General Hou Kai of the National Audit Office reported on the audit of central fiscal management in 2022. He mentioned that after focusing on the audit of fiscal revenue and expenditure management in 54 regions including 18 provinces and 36 cities and counties, and extending the audit to other regions based on common problems, it was found that 55 regions had illegally or disguisedly returned 22.508 billion yuan in taxes or land transfer fees. The report on the rectification of problems released at the end of the year mentioned that 55 regions had cleared and abolished tax refunds and other benefits issued in violation of regulations, and standardized investment promotion behaviors.

The National Audit Work Conference held at the beginning of this year once again proposed that some places have illegally introduced "small policies" and formed "tax havens" in attracting investment, and that illegal tax refunds will be severely investigated and dealt with.

This is considered a new round of cleanup of tax incentives. In fact, the central and local governments have gone through many rounds of negotiations to regulate investment promotion, including tax incentives. The last round of intensive cleanup took place in 2014-2015.

In December 2014, the State Council issued the Notice on Cleaning Up and Regulating Preferential Policies, namely Document No. 62. "The direction of Document No. 62 is very clear, that is, to comprehensively regulate preferential policies such as taxation, and to require that 'preferential policies that violate national laws and regulations should be stopped'. However, when attracting investment, local governments promised to grant preferential policies. If the policies are changed based on a mere notice, the credit of local governments will be affected, so they will encounter great resistance in implementation," a person close to the local investment promotion department told China Newsweek.

The result of the game was the "State Council Document No. 25" issued in May 2015, which proposed that the preferential policies that have been issued by various regions and departments should be implemented according to the specified time limit if there is a specified time limit; if there is no specified time limit but it is necessary to adjust, the local government and relevant departments shall establish a transition period in accordance with the principle of grasping the rhythm and ensuring stability, and continue to implement it during the transition period. At the same time, the preferential policies in the contracts signed between various regions and enterprises will continue to be effective; the part that has been fulfilled will not be retroactive. Wu Zhiyong, deputy director of the China Construction Policy Research Institute, told reporters: "This means that the cleanup was not a 'one size fits all', but a 'buffer zone' was set up."

However, the existence of the "buffer zone" has allowed some local governments to give companies even more tax incentives. The aforementioned person close to the local investment promotion department said: "Some local governments have signed tax refund agreements with companies for as long as 8 years or even longer. For some companies in industries with overcapacity, their profits are even based on government subsidies. In 8 years, some industries may have been upgraded, and subsidies will help some companies that should have been eliminated to survive."

The background of the current round of standardizing investment promotion behavior is the issuance of the "Several Measures on Standardizing Investment Promotion Behavior and Promoting High-Quality Development of Investment Promotion" (hereinafter referred to as the "Measures") by the General Office of the State Council, and the "Fair Competition Review Regulations" (hereinafter referred to as the "Regulations") which came into effect on August 1.

Many local government officials told China Newsweek that the Measures are of high standard and local governments regard the Regulations as a "supporting document" for the Measures. Public information shows that since July, there have been reports that governments at all levels have studied the Measures and have made statements such as "strictly abide by the red lines of systems and policies" and "strictly abide by the bottom line of investment promotion".

Wu Zhiyong believes that the current regulation of local government investment promotion is the "strictest ever". He told China News Weekly that the reason why it is called "the strictest ever" is that the standards of the "Measures" and "Regulations" are high, such as the "Regulations" issued by the State Council Order No. 783. On the other hand, judging from the response of local governments, some investment promotion behaviors have begun to be banned.

A first-tier city's "Twenty-item Investment Promotion Rectification Task List" that was previously circulated on the Internet proposed "immediate" rectification of all the "twenty" tasks. A person familiar with the local investment promotion policy told China News Weekly that this list was the result of benchmarking the "Measures."

Some local governments have also abolished previously issued investment promotion policy documents. On August 1, Xiangcheng City, under the jurisdiction of Zhoukou City, Henan Province, abolished two investment promotion policy documents issued in 2021 and 2022.

"Compared with previous rounds of cleaning up preferential policies for attracting investment, which were more from the perspective of budget management, this round of cleaning up is carried out under the background of the top-level design of a unified national market," said Wu Zhiyong.

In March 2022, the Central Committee of the Communist Party of China and the State Council issued the "Opinions on Accelerating the Construction of a Unified National Market", proposing to establish a catalog of preferential policies involving enterprises and make it public to the society in a timely manner, promptly clean up and abolish policies in various regions that contain local protectionism, market segmentation, designated transactions, etc. that hinder the unified market and fair competition, comprehensively clean up all kinds of preferential policies that discriminate against foreign-invested and non-local enterprises and implement local protectionism, and strictly conduct fair competition reviews on newly issued policies.

In addition to the severity, a local official told reporters that "State Council Document No. 62" proposed that the management of preferential policies such as taxation be used as an important basis for the promotion, appointment, management and supervision of leading cadres, but the effect has been limited in the past 10 years, and there have been few cases of accountability for this. "Unlike the round of cleanup in 2014-2015, there is no statement linking the two in the "Measures" and "Regulations". This means that the behavior of local governments in attracting investment will no longer be constrained from the perspective of official accountability, but the "Regulations" will grant external market entities the right to sue, thereby forcing local governments to make changes."

Because of this, August 1 is also seen as a watershed in reshaping investment promotion policies.

Where are the boundaries of preferential policies?

What investment promotion activities are regulated by the Measures?

"The Regulations can confirm the contents of the Measures. In addition to not being able to grant tax incentives to specific operators, they also cannot grant selective, differentiated financial incentives or subsidies, or preferential treatment in terms of factor acquisition, administrative and institutional fees, government funds, social insurance premiums, and other contents that affect production and operation costs. The principle is that local governments need to have a basis in superior laws when formulating preferential policies for attracting investment." A person close to the local government's investment promotion department expressed his emotion to China Newsweek that this cleanup will be serious, and a batch of illegal preferential policies will be cleaned up after August 1.

Wu Zhiyong told reporters that this round of cleanup targets "tax depressions" on the one hand and various "small policies" on the other. That is, local governments create various "policy depressions" by formulating "small policies" within the region, hindering the construction of a unified national market.

The first item in the aforementioned "Twenty-point List of Rectification Tasks for Business Attraction" is "comprehensively clearing up the industrial support policies and specific operational guidelines linked to taxation", which need to be "cleared up immediately". "Tax depressions" are obviously the focus of this round of clearing up.

"For local governments, there is no way to take action against central taxes such as value-added tax and business tax, but they can return some of the taxes retained by the local government to enterprises and link them to specific industries or enterprises. For example, Horgos once created a 'tax haven' for the film and television industry, causing film and television companies to flock to Horgos to register, which not only hurt other tax sources, but also hurt Horgos' local tax revenue," Wu Zhiyong explained.

The means of creating a low-cost "policy depression" are obviously not limited to tax incentives. Ma Jun, director of the Tax Research Office of the Financial Strategy Research Institute, told China News Weekly that as the tax incentives for enterprises are cleaned up, attention should also be paid to the tax incentives and fiscal subsidy competition for individuals that have emerged in recent years. For example, in order to attract enterprises to invest in the local area, policies such as personal income tax reduction and exemption, tax collection and refund, and resettlement allowance subsidies for corporate executives are implemented.

Wu Zhiyong said: "Various 'policy depressions' have led to the increasing 'involution' of preferential policies for attracting investment. Local governments generally use two 'leverages': one is to provide subsidies to enterprises before they go into production according to industrial policies, and the other is to provide subsidies for equipment purchases after enterprises reach full production. Tax returns and land transfer fees are often also made at this stage."

"Some productive service industries and high-end manufacturing industries are less dependent on low costs, but the industrial layout of China's economically underdeveloped central and western regions is quite different from that of the economically developed eastern regions. A large number of industries are still at the middle and low ends of the industrial chain, and the weapon for competing for middle and low-end industries is nothing more than the 'three lows', namely low labor costs, low land costs, and low environmental costs. Therefore, for the governments of the central and western regions, the practice of building 'policy depressions' has been tried and tested." Wu Zhiyong said that some middle and low-end industries even "take advantage" of the preferential policies of local governments, resulting in a group of migratory enterprises, which move away after enjoying the preferential policies of one place, or even move between different areas of a prefecture-level city.

Moreover, the strength of the preferential policies given by the government to enterprises is often not transparent. Some people from local investment promotion departments said that local governments often adopt the methods of "one case, one discussion" and "one enterprise, one policy", which is not transparent. The use of the retained portion of the tax refund by the local government may even cause the actual financial resources of the local government to deviate from the statistical data, which will affect the local government's independent financial resources.

On June 18, 2020, Chongqing Liangjiang New Area held a "cloud signing" in an intelligent way, such as "screen to screen" and "line to line", involving 23 key projects with a total investment of 20.23 billion yuan. Photo/Reporter Chen Chao

A person from a county government in Hebei told China Newsweek that in 2012, the local government introduced a leading food processing company and began to cultivate the local food industry. "However, these newly introduced companies made almost no tax contributions in the first few years after they went into production, and needed to enjoy tax incentives such as exemptions and refunds. The companies introduced in 2012 could only realize tax revenues of over 100 million yuan after seven or eight years."

An investor in the integrated circuit field gave an example to the reporter of a project he had handled. In order to allow a startup team of an integrated circuit company to land locally, a district government in the Yangtze River Delta first invested tens of millions of yuan in the form of equity and debt, and then added preferential policies such as land transfer fee refunds and equipment purchase subsidies. If all can be completed in the end, the district government's investment in this startup will reach hundreds of millions of yuan. "Moreover, the local government started negotiations when the founding team was still in the United States, and five cities in the Yangtze River Delta were vying for it."

Ma Jun bluntly stated that the central government is trying every means to increase local governments' independent financial control and will not continue to tolerate such self-defeating vicious competition behavior of local governments.

Wu Zhiyong introduced that in recent years, local governments generally hope to "buy" industries, enterprises, and even corporate headquarters or R&D departments. For example, in recent years, some local governments have proposed to build "headquarters economy", hoping to attract enterprises to relocate their headquarters to the local area through preferential policies, regardless of whether the economic activities of the enterprises are carried out locally, thereby damaging the tax sources of the places where the economic activities of the enterprises are carried out.

"In fact, coordination is being carried out between different regions. For example, in the same prefecture-level city, a company was originally registered in District A, but as the business develops, it moves to District B. District B will negotiate with District A. The relocation of the company has solved employment problems in District B, but future taxes will still be recorded in District A. After this round of cleanup, 'headquarters economy' may become more standardized. For example, new economic forms such as live streaming require more careful identification of whether the office and registration locations are consistent." Wu Zhiyong introduced.

The reporter noticed that the two investment promotion policy documents abolished by Xiangcheng City on August 1 included the "Xiangcheng City Interim Measures for Accelerating the Development of Headquarters Economy."

"For local governments, it is impossible to ban all preferential policies, but there are boundaries. On the one hand, local governments need to administer in accordance with the law, and preferential policies cannot exceed laws and regulations. Tax refunds, for example, are expressly prohibited. For example, in order to support the development of local new energy vehicle industry, some local governments stipulate that local taxis can only use models of car companies that have reached production in the local area. This obviously violates the right of all market players to enter the market equally, and is also a 'small policy' that should be cleared. Another boundary is that local governments cannot exceed their own capabilities when giving preferential policies." Wu Zhiyong told reporters.

Where is the investment attraction heading?

Local governments' investment promotion behaviors are being reshaped.

Judging from the reactions of various regions, economically developed regions have a more positive attitude towards the Measures. For example, Zhejiang issued a document requiring strict implementation of tax refund, tax reduction and fee reduction policies, and gradually clearing out improper market intervention and subsidies or refund policies linked to tax revenue.

A person from the investment promotion department of Shanghai Pudong New Area told reporters that if an enterprise wants to land, they will only ensure that all promised policies are implemented, but these policies will definitely be "fair and impartial" and will not be designed for a specific enterprise.

This round of cleaning up of preferential policies for attracting investment is indeed considered to benefit economically developed regions. A government investment promotion staff in southern Jiangsu lamented to China Newsweek that although "fair competition" has been emphasized more on the surface in recent years, they often don't know what policies can be given and to what extent, and feel that they can no longer discuss projects. "Just because you don't touch some policies that are clearly prohibited, it doesn't mean that others will follow the rules. In the case of fierce competition, there will always be people who offer policies that are 'below the floor'."

Regarding the response strategies of local governments, Wu Zhiyong said: "After the issuance of the Measures, the local governments that have expressed positive attitudes towards the Measures are concentrated in the economically developed regions such as the Yangtze River Delta, the Pearl River Delta, Chengdu and Chongqing. For the central and western regions, or the district and county governments, their attitude is more of 'wait and see'. On the one hand, it is currently in the policy publicity and learning stage, and it will take time to implement it at the district and county level. On the other hand, even if the Measures are truly implemented, local governments can still find 'flexible' ways."

For example, "zero land price" is common in various places, that is, after enterprises pay land transfer fees, local governments will return them to enterprises in the name of rewards. Wu Zhiyong told reporters: "Now and in the future, local governments will still use this model to attract enterprises, but they may learn from the operation model of China Fortune Land Development Industrial New City to a certain extent, that is, the government and enterprises only sign a framework agreement, and state-owned enterprises as industrial investment entities sign a gambling agreement with enterprises to implement some preferential policies. In other words, the way local governments will give preferential policies to enterprises in the future will no longer be the government directly returning taxes, land transfer fees, etc., but through market-oriented agreements signed by state-owned enterprises. Even when the attracted enterprises fail to complete the gambling agreement, the state-owned enterprises can sue."

In October last year, Wu Zhiyong accompanied the National Development Zone Association to Hunan for an inspection. Some municipal governments in Hunan have handed over land to urban investment companies for operation, and the urban investment companies then rent factories to enterprises. Even if the government promises subsidies, it is achieved through commercial contracts between urban investment companies and enterprises.

"This is the result we want to see in this round of cleanup, that is, to transform the original government-led and opaque 'one issue at a time' into commercial cooperation between two relatively open market players, or to force the iceberg to surface. If you want to 'roll', do it openly within the rules. Although it cannot solve all the problems, it can at least put them on a relatively standardized track." Wu Zhiyong said.

Above: On March 24, 2023, the 16th Shanghai Fengxian Cauliflower Festival and the investment promotion and new town and ancient town promotion activities were held in Huamizhuangxing Scenic Area. Photo/Visual China

Below: On November 22, 2022, the World Top 500 Dialogue with Hubei Roundtable was held in Wuhan.Hubei” is a major traditional investment promotion brand event in Hubei, which was held for the first time in 2018. Photo by our reporter Zhang Chang

In addition to changing the way of granting preferential policies, how should local governments build their own advantages in attracting investment in the future?

"The advantages and disadvantages of a place when attracting investment are not absolute. It is necessary to play to its strengths and avoid its weaknesses. When attracting investment, it cannot be divorced from the local location and resource endowments. Only when the local characteristic industries are transformed and upgraded can it be possible to extend to the high end of the industrial chain, rather than 'rushing in' to grab some so-called high-end industries." Wu Zhiyong analyzed to reporters that the direction of local governments' investment attraction in the future should rely on local endowments, attract leading enterprises, and develop industrial chains. "Now development zones in various places are usually supported by a group of large-scale enterprises, and often one enterprise can drive the development of a complete industrial chain."

Many local governments have proposed the concept of "chain investment promotion." Someone from the Yangtze River Delta investment promotion department told China News Weekly that, unlike the previous wait-and-see investment promotion and resource-based investment promotion, now more emphasis is placed on industrial chain investment promotion, carefully breaking down the map of a certain industrial chain, such as the integrated circuit industry, to find out which links are weak in the local area, and which leading, middle-level, or start-up companies are currently in these links, and then making precise connections. "When the relevant departments receive the annual investment promotion task, they will break down the industry they are responsible for in this way, and then formulate a plan, down to which companies are targeted each month, and which departments and street leaders need to visit the companies together."

It is crucial to avoid "rushing in" and recognize the local resource endowment. Wu Zhiyong told reporters that after experiencing the depletion of oil and gas resources, places like Yumen in Gansu are also exploring their other resource endowments, such as carrying capacity, which can allow some chemical industries that cannot be established in the economically developed eastern regions to be established.

Wu Zhiyong said that some enterprises do not pursue "low cost" blindly, but need a series of soft and hard environments. "For example, if a place's supply chain and logistics supporting capacity is insufficient, the added cost for the enterprise may even exceed the preferential policies that the enterprise can enjoy, which is bound to be unattractive to the enterprise. This belongs to the 'hard environment'. From the perspective of the 'soft environment', there is now the concept of future industrial communities, that is, solving people's employment and life in a space of 3-5 square meters, which will be attractive to talents. This is also the reason why many cities are creating youth-friendly cities. It is necessary to create a 'soft environment' to retain people." He added that policies targeting talents like this are not within the scope of this cleanup.

A founder of a biopharmaceutical company told the reporter: "Even within the Yangtze River Delta, different cities have different styles of preferential policies. For example, Shanghai is more inclined to subsidize talents, and the subsidies for enterprises are less."

Whether he can find suitable talents in the location of the enterprise is always an important issue for him. "Now all places have made great efforts to provide hardware conditions, but local governments should increase their efforts in attracting talents, that is, to care about the needs of people living and working in a city, such as high-quality living facilities and educational resources. In particular, some cities that lack colleges and universities naturally lack opportunities to show themselves to young people, so they should spend more effort to attract talents. For some companies that are located in non-first-tier cities, they rely more on their own strength to attract talents, such as providing good treatment, and local governments should also make more efforts in this regard."