By Tony Xu, Maarten Roos

When our firm performs due diligence on Chinese manufacturing companies, one of the most important focal points is whether the company has passed all relevant environmental impact assessments. Many foreign investors are unaware that after a company has been formally established in China with “manufacturing” in its business scope, an environmental assessment process will usually need to be completed before the company can start engaging in manufacturing activities. In fact under Chinese law, an environmental assessment must be completed for any kind of construction project, whether it involves a building structure, manufacturing process and machinery installation, as well as changes thereto (e.g. with a new production line).

Legal Framework

Over the past decade China has gradually become more serious about environmental protection, but the latest milestone came with the amended PRC Environmental Impact Assessment Law. Issued on 29 December 2018 by the Standing Committee of the National People’s Congress, this amendment introduced clear penalty standards for non-compliance and clarified potential criminal liability on individual managers. The amended law added to a legal framework that also includes the PRC Environmental Protection Law (2014), the Administrative Regulations on Environmental Protection for Construction Projects (2017) and the Environment Impact Extent Contents of Construction Projects (2018).

It is important to understand that this legal framework not only penalizes environmental pollution; it also promises heavy punishment of companies that fail to complete the administrative procedures of environmental assessment and approval as required under the law, including:

  • Suspension of construction, or suspension of production/operations if the project construction has been completed; and if such suspension is ignored, 5-15 days of administrative detention for the responsible person, as well as criminal liabilities in case the violation is serious;
  • A penalty of 1-5% of the overall project investment amount (for failure to declare for environmental impact assessment);
  • A penalty of between CNY 500,000 and CNY 2,000,000 (in case of fraud when completing the environmental impact assessment);
  • A penalty of between CNY 200,000 and CNY 1,000,000 to the company, and of between CNY 50,000 to CNY 200,000 for the responsible person, if the environmental protection facilities as required under the assessment are not constructed, or they have not passed acceptance inspection.

Environmental Impact Assessment Requirements

The law distinguishes between three categories for assessment depending on the expected environmental impact of a certain project. To determine which applies, the authorities will look at the environmental impact of not only the construction of facilities but also of the project once in operation.

Environmental Impact Extent Assessment Category

Environment Impact Extent Assessment Category
1. Significant Impact Environment Impact Report, a comprehensive and detailed appraisal on the project’s environment impact.
2. Slight Impact Environment Impact Statement, an analysis or special appraisal on the project’s environment impact.
3. Minimal Impact Assessment is NOT required but an Environment Impact Registration Form shall be filed.

To help determine the category that a certain project is in, the Ministry of Ecology and Environment has issued the Environmental Impact Extent Contents of Construction Project (in Chinese: 建设项目环境影响评价分类管理名录 (2018) which classifies projects as per different industries. Below some examples:

Environmental Impact Report Environment Impact Statement Environment Impact Registration Form

Environment Impact Report Environment Impact Statement Environment Impact Registration Form
22. Manufacturing by General Machinery
General Machinery Manufacturing and Maintenance Involves electroplating or spray painting, and annual use of oil paint (including diluent) is more than 10 tons Other projects (excluding projects with only assembly) Projects involving only assembly
36. Real Estate
Real Estate Development, Hotel, Office Occupancy, Standard Workshop / Project involving areas with sensitive environment; areas that require sewage disposal facilities Other projects

Environmental Impact Assessment Declaration Procedure

Once a company or investor has established the correct category, it must complete several steps:

Phase 1: Project Registration

  • Confirm project content and scale
  • Confirm investment amount
  • Submit project registration form to the authorities

Phase 2: Draft Environmental Impact Assessment Documents

  • Confirm pollution factors and corresponding with assessment agent on facilities to mitigate a potential environmental impact
  • Draft report (or statement) by assessment agent

Phase 3: Submission for Approval

  • Submit report (or statement) to authorities
  • Revise report (or statement) as per opinions of authorities

Phase 4: Construction Execution

  • Execute project construction
  • Build and implement facilities to mitigate a potential environmental impact

Phase 5: Project Completion Acceptance Declaration

  • Issuance of the acceptance report (this is done by the project owner; report should be recorded with the authorities).

Conclusions

Depending on the anticipated complexity of the project, the completion of an environmental impact assessment may require considerable time and resources. If however the assessment is not completed properly and if the matter is investigated later by the authorities, the consequences could be very serious. Not only can the environmental bureau levy high penalties, but it can stop operations while a new assessment process is completed. For many companies this would be a huge risk.

Furthermore, completing an assessment of a completed project may be more difficult and time-consuming if previous documentation (such as design drawings) are no longer available; while an ongoing investigation can make the requirements to pass the assessment ever more stringent.

Therefore, companies that have not completed proper environmental impact assessment procedures for all their construction or manufacturing projects (incl. both initial projects and extensions or changes to an existing project), are strongly recommended to do so without delay and before an investigation is triggered, whether by a random inspection or a third-party complaint. For companies that have completed their environmental assessment, an annual review may be considered to ensure that they remain compliant.

 

R&P China Lawyers is a boutique law firm focused on supporting foreign companies. We provide a full range of services to foreign investors with manufacturing facilities in China, and to international companies acquiring a Chinese manufacturing entity. For more information on our practice areas or for legal assistance, please contact Tony Xu (xujun@rplawers.com) or Maarten Roos (roos@rplawyers.com), or your usual contact at R&P.

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