Land-based fish farming in China

In recent years, China has been developing its aquaculture in coastal cities and regions and there is an increasing interest from local governments in land-based fish farming projects based on recirculating aquaculture systems (RAS). With access to know-how and relevant technology, Norwegian players are well positioned to take advantage of Chinese efforts to further industrialise its aquaculture.

Investment structure

A common project set-up is a split between an asset company and an operations company. The asset company holds the land lease, equipment and technology, while the operations company enters into a lease contract with the asset company and handles the daily operation of the facility and customer contracts.

This investment structure allows for a state-owned partner to enter the project on the asset company side by providing contributions in-kind such as land use rights. The foreign investor usually contributes ­technology to the asset company and opts to ­control 100% of the operations company. The economic ­balance of the project will be case specific, but return on ­investment for the state-owned partner is usually ­secured in the form of rent payable under the lease agreement while the international investor may also have upside through dividends from the operations company.

Financing and tax incentives

At the early stage, securing financing for the project is a key concern. While Norwegian financing such as through Export Finance Norway (Eksfin) may be an attractive option, Chinese financing is also available. Financing by Chinese sources may include capital contributions from local government funds. Such Chinese funds are usually organised as state-owned companies and their participation can be an advantage when dealing with local stakeholders. However, involvement of state-owned partners will generally necessitate 51% Chinese ownership. Securing other types of financing may require parent company guarantees or guarantees from other financially strong guarantors.

Land-based aquaculture projects may also benefit from certain Chinese tax incentive policies, which may vary between different areas. For example, income from the initial processing of aquaculture products is exempt from company income tax and sales from initial processing of self-grown fish products is exempt from VAT.

Practical challenges

Zoning issues are common for land-based aquaculture in China as there is no specific land category for aquaculture facilities. Land is divided into agricultural, construction and unused land, but there is currently no clear regulation on whether aquaculture facilities can be constructed on agricultural or construction land. While existing projects have been developed on land zoned as construction land, different local government authorities may also hold different views.

A fish farming certificate is required to sell fish products in China. However, under the Chinese fisheries law, certificates are only issued to projects that utilise water areas or tidal flats for aquaculture. It is therefore not clear whether land-based facilities qualify for a fish farming certificate under current regulations. A potential way around this issue for costal projects is if the ­project utilises both land and water areas, thereby allowing it to qualify based on the use of water areas.

There is governmental supervision throughout the project to ensure compliance with regulations and safety standards. In addition to the usual construction and environmental permits, aquaculture projects also have licensing requirements in respect of breeding areas and species. Foreign investors also need to bear in mind the foreign exchange controls in place under Chinese law which will be relevant for example in relation to any offshore financing or shareholder loans.

As supervision is carried out by local government, a good working relationship with the relevant authorities is an important criterion for success. Government support is also often required for permits and access to relevant subsidies and financing. The host government usually focuses on the scale of investments which will be landed in their local area in the form of registered capital. If the project is supported by local government funds and the foreign investors are mainly contributing technology and know-how, the project is often measured by whether it brings technological advancement and in particular technology aligned with national priorities such as development of more environmentally friendly solutions with lower water usage or higher productivity.

Conclusions

Aquaculture in China is developing with a focus on more sustainable solutions, as is the local market for fish products. This presents opportunities for foreign investors looking to develop land-based aquaculture projects locally in China. Norwegian players have the advantage of fish farming experience, relevant ­technology and know-how needed to succeed.

However, compromises may have to be made to find the best possible combination of land, water availability, local government support and local investment environment. And as always with foreign investments in China, finding the right local partners remains a key to success.