Leveraging government grants for investments in China

After three years of Covid-induced limitations, China has opened up to the world again, fueling high expectations of its economic rebound by setting a GDP growth target of 5% for 2023.

In addition to important demand drivers such as infrastructure projects and domestic consumption, China will be further stimulating its economy in 2023 with additional tax and financial policies. This will help it make up for the momentum lost during the pandemic and put added focus on the country’s industrial development.

China has traditionally offered a broad variety of tax rebates and incentives on a national scale. The goal has been to attract foreign investment, expand research and development, develop central and western regions and boost key industries, like aviation, semiconductors, advanced manufacturing, software and artificial intelligence. In recent years, preferential treatment for small and medium-sized enterprises has also been added to the mix.

In addition, special fiscal subsidies are offered by local governments at the province, city, town or district level in order to promote industrial development, enterprise creation, new or expansion investment, and high-end talent. These are a second, sometimes overlooked source of preferential treatment and they should be carefully reviewed when plans are being developed to expand a company’s engagement in China.

Guidelines for small and medium-sized enterprises

For example, the city of Beijing has issued the “2023 Beijing Implementation Guide for Supporting the Development of Small and Medium-Sized Enterprises,” which will award up to RMB 5 million for projects that meet the relevant conditions for regional industrial innovation, environmental improvement and quality enhancement. To qualify, small and medium-sized enterprises need to fulfill certain criteria with regard to revenue, assets and number of employees on a per-entity basis. Industries targeted by the Beijing government include high-tech, advanced manufacturing, semiconductors and artificial intelligence, as well as pharma and medical devices.

One example is the cooperation on subsidies between Shanghai and the German states of Baden-Wuerttemberg and Bavaria for enhanced technology collaboration in the participating regions, including a fund that can reach RMB 1 million per project. As part of the cooperation, Shanghai Science and Technology Commission has entered into an agreement with the two state governments. Partnerships are being encouraged that enhance technology between Chinese and German companies, with each side granting subsidies to firms based in its own territory.

In Shanghai, for example, a new round of 24 “policy packages” for promoting investment was launched in April, using an industrial development fund of RMB 100 billion to increase investment within one fiscal year and reward major investment projects with a maximum of RMB 100 million per project. Subsidies of up to RMB 20 million are to be granted to encourage existing enterprises from various industries (but typically high-tech) to increase their capital and expand their business. Subsidies of up to RMB 10 million will be granted for the purchase and rental of office space as part of regional headquarter projects.

There is no regulation which would explicitly exclude foreign invested enterprises from receiving government grants. However, foreign investors may not be familiar with the intricacies and dynamics of such application procedures in China. In practice, the process does not typically follow a predictable step-by-step plan with clearly outlined preconditions and expected consequences when those preconditions are met. Rather, once the time window for applications has opened, companies that fall into the areas highlighted in the respective “measures” or “packages” present their case to the responsible authority for further review.

Taking the Shanghai special fund as an example, the local government generally carries out extensive investigations as well as on-site visits to enterprises in order to understand the development status and future trends pertaining to a certain industry. Once the budget for subsidies is approved by the legislature, the government then solicits projects from the public which meet the basic requirements. The declaration and supporting materials submitted to the government are then screened and reviewed by randomly selected experts and during a face-to-face review process. After passing all reviews, the most suitable projects are selected by the government, which signs technical contracts with the applicants stipulating the amount of public funds to be committed along with the timeframe and completion points for each project’s implementation.

Funds for specific industries

Universal special funds are generally awarded based on an enterprise’s status, e.g. where a multinational’s regional headquarters are located in China, and as long as the company fulfills basic requirements, such as demonstrating a relatively high compound growth rate, generating the appropriate operating income and having management authorization. If they meet these requirements, foreign invested enterprises can receive subsidies of up to RMB 2 million, which are allocated in one lump sum the following year in accordance with the enterprise’s revenue and tax payment scale. Other categories for subsidies include Giant HNTE (i.e. High and New Technology Enterprises with robust growth in revenue and IP/patent applications), Intelligent Factories (i.e. highly automated factories applying advanced technologies) and Leading Outbound TASE (i.e. Technologically Advanced Service Enterprises with very large outbound revenue).

Industry-specific funds apply to manufacturing enterprises carrying out technological transformation (such as upgrading production equipment, using green technology and conducting digital transformation) and research and development (such as investing in encouraged high-tech products, technologies and services). The enterprises are eligible to receive 10 percent to 30 percent of their investment in technological transformation and research and development.

Enterprises have a greater chance of receiving support if they are active in China’s priority industries, such as new energy, high-end equipment, biotech, next generation IT, new materials, new energy vehicles, energy conservation / environmental protection, digital creativity or other strategic and emerging sectors. This does not mean that traditional manufacturers are excluded, however; they are also eligible if they can demonstrate technological development. For example, a German chemical group’s Chinese subsidiaries were awarded a significant subsidy in the category of technological transformation. A German pharma group has been selected due to its research partnerships with local Chinese universities. What these companies have in common is that they have established a dedicated government liaison within their organization and made use of third-party advisors to prepare a comprehensive application that increased the chances of receiving a grant.

Conclusion

To prepare such applications, information on the relevant requirements needs to be collected and then assessed to determine whether the enterprise qualifies for the subsidy in question. If it does, the underlying materials for the application must be carefully assembled along with any supporting documents. Even though this process might be tedious, the application criteria might seem vague and in-house experience might be limited, foreign invested enterprises should nonetheless explore the area of government grants as a supplement to their investment and development activities in China.