The Impact of China's New Air Pollution Regulation on American Direct Investment

Abstract

Every year, China's air quality is reaching hazardous level. Accordingly, China is adapting stringent environmental regulations under the new 13th Five Year Plan. The noticeable developments in the new air pollution regulations include: (1) mandatory air pollutant disclosure requirement; (2) shift towards non-compliance liability rule; and (3) increased penalty for transgression against wider range of industries. This paper first explains that these developments will induce American investments in China to carefully draft investment contracts, particularly confidentiality and limited liability clauses to minimize the risk of harsher penalties. The paper then argues that China's stringent pollution regulations will not negatively affect American investment trend in China, mainly because most American investments already adhere to the OECD standard, and disclosing environmental information will enhance entity's good reputation and attract investors.