China policies are driving a wood pulp expansion frenzy

By: Minnie Kong, Economist, Fastmarkets Forest Products

Over the last few years, many pulp and paper companies have unveiled aggressive expansion plans to invest in new wood pulp capacity in China. Our tracking shows 30 wood pulp projects with more than 30 million tonnes of capacity announced between January 2019 and July 2021. More than 60% of the announced capacity is concentrated in the Guangxi Zhuang Autonomous Region and Hubei Province.

In addition to forward integration benefits, which improves the economics of pulp production in China, favorable local government policies are key drivers behind the significant wave of capacity expansion. The government enforces environmental regulations, controls the permitting processes for new pulp lines and mills, and owns or controls most of the banks in the country, which make loans to the industry. The government also exerts a large degree of influence over forestry and controls land usage. So, understanding the current policies supporting the pulp projects in China is important to understanding the general course of the industry. Here, we provide a brief overview of the policies in the Guangxi Zhuang Autonomous Region and Hubei Province, the top two regions where new wood pulp projects are located.

Guangxi Zhuang Autonomous Region

The regional government released the “Industrial Promotion Work Plan for ‘Two-pronged Ten Billion Projects and New Projects'” in 2019, in a bid to attract enterprises to invest in the region. Wood processing and paper making is one of the 12 industrial clusters that the autonomous region is focusing on developing. Over the last 30 months, more than 14 million tonnes of new wood pulp capacity has been announced in Guangxi.

“Two-pronged ten billion” projects refer to major industrial projects with an investment exceeding RMB 10 billion or an output value exceeding RMB 10 billion. “Two-pronged new” projects refer to new industries and new technology projects. New industry projects include key projects such as strategic emerging industries, new formats and new models, while new technology projects refer to key projects that adopt new technologies to transform and upgrade traditional industries.

Major supportive policies for the above-mentioned industrial projects are as follows:

1. Increasing financial support strength
   Over 50% of the funds are collectively earmarked from the special funds for industrial and information development, innovation-driven projects, Beibu Gulf development, capital construction investment within the budget and so on every year. The use of the earmarked funds is approved and arranged by the “Two-pronged Projects” construction headquarters of the autonomous region to support their construction. The government investment guidance fund, Public-Private Partnership (PPP) project, government purchasing services, financing guarantee, loan with discounted interest, post-hoc awards and subsidies, and other means are comprehensively utilized to beef up support for the two-pronged projects.
2. Increasing banking and credit support strength
   Banking financial institutions are encouraged to support the construction of two-pronged projects by means of consortium loans, joint credit granting, concerted investment action, supply chain banking, M&A loans and bank-insurance interaction. And banking financial institutions are encouraged to list the enterprises in the two-pronged projects drive as key customers at the head office and branch levels and increase the allocation of credit resources.
3. Reducing tax burden for enterprises
   The preferential policies on value-added tax and income tax introduced by the state and the autonomous region shall be implemented. Education surcharges, employment security funds for the disabled, trade union dues and other expenses can be reduced or exempted for enterprises meeting the requirements according to regulations.
4. Prioritizing project land use
   The approval time for the use of forest land will be shortened and the approval mechanism for the use of forest land will be improved. According to the national land spatial planning, the government will accelerate the preparation and improvement of the park planning and give priority to the requirements of the national land spatial planning adjustment for the two-pronged projects and handle them expediently with a simplified procedure. The Department of Natural Resources of Guangxi Zhuang Autonomous Region has established a special office for the land service of the two-pronged projects to speed up the guarantee of project land use.
   
   
5. Further reducing the construction and operation costs of the project
   The two-pronged projects of the autonomous region are preferentially included in the scope of electricity market-oriented transactions in the autonomous region. The government will support enterprises to further lower power consumption costs by participating in annual long-term contracts, monthly bidding and incremental transactions, and will strive to control the power price at about RMB 0.5/kWh. The government will accelerate the pace of gas price reform, further bring down gas prices and implement direct supply when users of the two-pronged projects meet a certain gas consumption standard. The government will also effectively reduce the logistics costs of the two-pronged projects in the autonomous region.
6. Establishing a tolerance mechanism for project approval and a “green channel”
   For the two-pronged projects, the tolerance mechanism for investment approval and the investment commitment system of the project owner shall be implemented. After the completion of the initial main requirements, such as a project feasibility study and approval, environmental impact assessment and issuance of a land use certificate, the project owner can make a legally effective written commitment and the project construction can begin. The government will improve approval efficiency by reviewing and approving the two-pronged projects as they arrive.
7. Implementing the classified approval system for environmental impact assessments.
   The government will simplify relevant content when preparing the report on environmental impact assessment for the two-pronged projects located in an industrial park or industrial cluster district which has already gone through an environment impact assessment.

Hubei Province

There are also ambitious expansion plans in Hubei by several pulp and paper companies. Hubei Province, which was hit hard by Covid-19 in 2020, has sought to attract investment in the region with the aim of boosting and revitalizing its economy that was disrupted by the pandemic. The local government issued the “Opinions on Accelerating the Construction of Major Projects and Focusing on Expanding Effective Investment” after the lockdown was lifted in April 2020. According to the All-China Federation of Industry and Commerce, private enterprises invested RMB 476.5 billion (USD 68.5 billion) in 1,577 new projects in Hubei Province between late March and early August 2020 as part of the economic revival efforts in the region following Covid-19.

The key measures and investment stimulus in the Opinions include:

1. Reform the mode of land supply
   The allocation of new construction land quotas focuses on ensuring the construction of key projects in the province and giving prior support to these projects. To encourage the implementation of a transfer mode of a “sample plot”, all localities should study and put forward the related indicators of leading industries, project direction, investment intensity, etc. and declare these transfer conditions at one time, as well as promote the project as “starting construction upon acquiring the land”.
2. Improve the energy consumption mechanism
   The province seeks to optimize the allocation of total energy consumption quotas to ensure the rational use of energy for new construction and commissioning projects in 2020; it will also give priority to the arrangement of the energy consumption for the major national and provincial projects in the 14th Five-Year Plan. To facilitate approval for construction in accordance with the national industrial layout plan and commissioning plan, the major projects that were newly set up in 2020 and put into operation during the “14th Five-Year Plan” period are not subject to the total energy consumption quota.
3. To play a leading role in the pilot free trade zone
   The province will carry out system innovations for the entire industrial chain of leading industries in the pilot free trade zone and increase efforts to attract multinational companies and industry-leading companies.
4. Improve the efficiency of administrative examinations and approval procedures
   The provincial government will further standardize and streamline the approval procedures, speed up the improvement of the government big data service systems, optimize the integrated government service platform, vigorously promote the administrative examinations and approval procedures through “one network, one window and one office”.

Looking ahead, there may be more pulp and paper companies in China taking advantage of the favorable investment environment, as supporting policies, such as tax relief and streamlining applications and procedures, will continue to be offered under the Chinese government’s 14th Five-Year Plan in the post-Covid era. Meanwhile, environmental and resource concerns are driving the government to redirect the regional locations of capacity expansion in China. We will continue to keep an eye on these policies and their effects on the Chinese pulp and paper industry.

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