China’s chemical industry has been the world’s largest since 2011 – but as the nation aims to better align its economic development efforts with sustainable, high-quality principles (see: Made in China 2025), the industry has slowly lost momentum: in 2017, for instance, Chinese officials temporarily shut down an estimated 40 percent of the country’s chemical manufacturing capacity for safety inspections, and fined over 80,000 manufacturing units for breaching emission limits.

These shifts, in tandem with continued liberalization of China’s foreign investment regime, have created significant opportunity for innovative, environmentally friendly foreign players.

• The government’s 2016 Chemical Industry Development Plan promotes the standardization of new chemical materials (e.g. high-performance carbon fiber, graphene), digitization efforts (which, broadly speaking, should ramp up even more once the threat of COVID-19 passes) and the development of smart chemical parks;
• China’s 2019 Encouraged Foreign Investment Catalogue supports, via a lack of foreign shareholding restrictions and preferential tax and land policies, the manufacturing of green agricultural materials, components for energy-efficient vehicles, and more; and
• The National Development and Reform Commission (NDRC)'s Industrial Structure Adjustment catalogue, which guides industrial investment into the country, encourages chemical sub-sectors such as the development of high-standard oil production technology and cleaner production of dyes, organic pigments, and their intermediaries.

A growing number of foreign investors are establishing R&D centers in China too, but they should be well-versed in local Ministry of Commerce regulations, as well as intellectual property (IP)-related restrictions governing the export of technology developed through such activities.

Speaking of IP, the legal environment for the protection of foreign investors’ IP rights has improved significantly of late, with new prohibitions on forced technology transfers, liberalization in potential license terms and conditions, and assurances of trade secret protection. Still, foreign investors must take precautions. Despite recent changes, trade secrets, for instance, may remain difficult to protect; and, on the patent side, thoughtfully filed invention patents around key components and manufacturing methods is central to maintaining competitive advantage. When it comes to data protection, foreign investors should also proceed with caution, as well as an awareness of China’s data localization requirements (which are the same as the EU’s).

And this is just the tip of the iceberg.

The COVID-19 pandemic and the related emergency measures implemented by the Chinese authorities have significantly affected the Chinese chemical industry, resulting in the temporary closure of chemical plants, supply chain disruptions, and low market demand. These issues have had a material adverse impact on the ability of chemical companies to operate, as well as on the deployment of investments and the implementation of new projects. Fortunately, the Chinese chemical industry is already on a steady path of recovery as the pandemic was largely under control by April 2020. As of the time of writing, essentially all chemical plants in China have resumed operations, and the construction of a number of large foreign-invested chemical projects is being put back on track.

In spite of the turmoil caused by the COVID-19 pandemic, the Chinese chemical sector is projected to remain the world's largest and, as such, a fundamental market for foreign investors. Additionally, chemical companies may benefit from a range of opportunities in the wake of the pandemic. In particular, the demand for personal protective equipment (PPE) skyrocketed in recent months, driving up the demand for its raw materials, like polymer composite materials. Enterprises selected by the Ministry of Industry and Information Technology (MIIT) and its local counterparts as "Epidemic Prevention and Control Key Suppliers" can enjoy favorable governmental policies in terms of taxation, government funding, and bank loans. Additionally, the demand for chemical products, including innovative and efficient materials, to be used in connection with construction projects is likely to increase as China plans to foster the development of new infrastructure projects as a way to boost its economy as the country emerges from the pandemic.

Significant opportunities are out there for the taking in China – if chemical executives are innovative, diligent, and prepared to handle the country’s complex, ever-shifting regulatory landscape.

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