Complex patchwork of corruption risks

China is very attractive to international capital, and numerous industrial parks and development zones have even become hot spots for foreign investment. But investment in industrial parks involves many potential risks as well. One of the risks is the investment policy risk, which is often overlooked by investors during the initial stage of an investment in industrial parks. Whether potential policy risks contained in the special industrial park investment patterns in China will be translated into actual damage depends on how well investors are aware of policy risks and what methods they are going to take to prevent and control them. The major task of an industrial park is to attract foreign investment in setting up factories in the park. During this process, the business attraction department or the management committee of the park often offers preferential tax or support policies to foreign investors.

Although these policies are attractive, they contain some risks.

What are the risks?

Changes in the laws or regulations of a government at a higher level. The preferential policies of an industrial park are often designed by the people’s government in a county or municipality where the park is located, and sometimes even by the administrative committee of the park. These “preferential policies” are mostly refined on the basis of the relevant documents of the central government or the government at a higher level, and mostly made as internal documents, rather than laws, regulations or rules. Therefore, in case of any conflict between newly enacted laws, regulations or rules and the policies of an industrial park, or in case the department of a government at a higher level introduces new policies to attract investment, it will be difficult to assure such policies will have legal force.

Policies in violation of the law. In order to attract foreign investors, industrial parks will sometimes make some preferential commitments by bypassing restrictions under laws or regulations. For example, some parks will promise investors that they can acquire land at an extremely low price by excluding others from bidding for the land, or that the actually transacted land price will be lower than the quoted price, and that part of the price difference will be returned to the investors. These commitments are actually in violation of Chinese laws governing land grant process and proceeds from such land grants, and should be null and void in law. These special commitments are implemented ultimately with the help of the management committees of industrial parks. This is very subjective.