Tuesday, October 19, 2010

In China, not all politics is local

I realize a lot of my posts are about BYD, and I think that attests to the prowess of their PR team and their ability to keep themselves in the news. (One could say the same for Geely.) Today's story, however, is not one that BYD's PR department would have wanted us to know about.

About a week ago the news emerged that BYD was being fined and having some of its factories in Xi’an confiscated as punishment for a land-use violation. This came as a bit of a surprise to me.

First, a little background

In July of 2009 BYD signed an agreement with the Xi’an High Tech Zone to build a factory that would expand production by 200,000 vehicles per year. That same month, two different village governments in Huxian County (in the Xi’an area) appropriated 725 acres of land for BYD’s project, and, according to law, compensated the people who were being moved off the land. As is turns out 91 percent of the land appropriated was arable.

Huxian County then asked the Xi’an city government to approve an expansion of the BYD project land to about 807 acres (90 percent of which would be arable). Xi’an City then passed this request up to the Shaanxi Provincial government who approved the request in November of 2009.

By the following month, BYD had begun construction on seven factory buildings including a dormitory, a mixing plant and surrounding roads on about 121 acres of land, 92 percent of which was arable. (The difference between the acreage being used by BYD and that requested by Huxian County is not immediately apparent.)

All of this came to light in July of 2010 when the Ministry of Land and Natural Resources ordered a halt in construction and launched an investigation into illegal development of arable land.

As I mentioned in an earlier post, the development of arable land has become a serious issue in China, drawing much discussion at the National People’s Congress in March of 2010. The law, as it pertains to this issue, also seems pretty serious: any potential non-farm use of arable land, anywhere in China, must be submitted to China’s State Council (the Cabinet) for approval.

By agreeing to BYD’s use of arable land for factory construction, the Shaanxi Provincial Government was clearly in violation of this law. It had no authority to grant an approval.

BYD, for its part, thought it had covered all its bases. It went to the local government and filed its request, and within a few months, it received the approval it wanted. And this kind of behavior by BYD and local governments was not out of the ordinary.

The Ministry of Land and Natural Resources, however, did not see it that way. It fined BYD nearly $500,000 and confiscated all of its illegally constructed buildings. And since an entire hierarchy of local officials from village to county to city to province had granted approvals, Beijing handed out punishments to them as well, meting out fines, warnings and demerits to 14 officials at various levels.

What this means

The fact that both BYD and local officials were punished was a clear signal from Beijing that this law in particular is not to be broken – killing a few chickens to scare the monkeys. Monkeys all over China are now duly warned.

What initially surprised me upon the announcement of the investigation in July was that the Ministry of Land and Natural Resources (MLNR) would enforce this law against BYD, a company that appeared to be among Beijing’s favorite private companies due to its success in selling low-emission cars and development of new energy vehicles. BYD was even the favored recipient of a loan from Bank of China last December for building a solar plant.

My assumption had been that someone above the MLNR, perhaps in one of the more powerful ministries like MIIT or the NDRC, would trump MLNR’s decision, and BYD would get off lightly. Well, a nearly $500K fine and confiscation of buildings is anything but light. (Fortunately for BYD, they weren’t also forced to restore the land to its pre-construction arable state!)

And this comes at an unfortunate time for BYD whose sales have been dropping. In the summer it announced a significant scaling back in projected sales for 2010 from 800,000 to 600,000. Its F3 (a Toyota Corolla clone) was the best selling sedan in China in 2009, but it wasn’t even among the top-ten sellers last month. Also, for reasons that are not entirely clear, BYD has backed away from its previous intention to introduce its all-electric E6 crossover in California this year.

But BYD’s difficulties are not the most important part of this story. The issue here is that Beijing is getting serious about the use of arable land, and it is sending out the signal that such abuses of the law will no longer be tolerated.

(This is, in my opinion, related to China’s concern for self-sufficiency which borders on paranoia. The apparent fear is that other countries will hoard goods China needs as it may now be doing with the rare earth metals that Japan needs. Perhaps China is not aware that the United States sold grain to the Soviet Union at the height of the Cold War. But I digress…)

Many China-watchers observe local governments getting away with ignoring Beijing’s dictates and assume this means that Beijing is powerless to enforce its will in the provinces. This simply is not true. As this incident demonstrates, even a relatively weak ministry can get its way when it wants to. Just because you can get away with breaking the law today doesn’t mean you can do it tomorrow.


Chinese sources consulted for this article:

比亚迪西安违法占地案处理超预期 14名官员被问责