Investment Seeding

Investing In china’s crop seed industry might not be straightforward but it is a good bet for the future

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As any visitor is quick to notice, China is a land of foodies. It is common practice in China to knowingly prepare or order too much food for friends and guests. Food is intentionally wasted as a way for hosts to signal that they will not let their guests go hungry. So much food is being wasted that the government has launched a campaign to discourage the practice.

And for good reason. With 22 percent of the world’s population, China only holds 10 percent of the planet’s arable land. Measures from the Chinese government to combat the issue range from buying up arable land abroad to researching new agriculture techniques. A key question is how to grow more food with less land. This is where crop seeds come into play.

The Chinese Crop Seed Market
With an estimated worth of 17 billion USD, China is the largest crop seed market after the United States. Roughly 50 percent of the market is held by foreign companies. The state-owned companies that are active in the market largely sell old varieties of specific vegetables, although they have developed new varieties in recent years.

Since the 1980s, Chinese research institutes have begun to sell seed varieties to local farmers. More recently, private seed companies have rapidly started sprouting up. As such, the supply side of the market is fragmented into over 5000 small players. For foreign companies looking to break into the Chinese market, some of these make interesting take-over targets.

Possibilities for Foreign Investment
Given the food safety concerns at stake, crop seeds are a politically sensitive matter. Accordingly, the production of new varieties of crop seeds remains one of the few industries where foreign investors need to have a Chinese joint venture partner in order to invest. Approval is also required for the collection of germplasms and foreign ownership of companies that engage in genetic modification is prohibited altogether.

Under the current Seed Law 2013, separate licenses are required for seed production and seed trading of what are termed ‘major seeds’. The five major seeds are rice, corn, wheat, soybeans and cotton. In addition, the Ministry of Agriculture and its provincial branches maintain a list of other crops that are considered major seeds.

Companies that wish to engage in seed trading need to receive the Seed Trading License prior to applying for a business license with the Administration of Industry and Commerce, or request to have their business license amended.

In addition to a production or trading license, companies that import or export seeds need a seed import/export license as well. This is regardless of whether the seeds are classified as ‘major crops’. The State Council regulates the importation of genetically modified seed specimens separately.

Imported seeds need to meet China’s national industry standards, otherwise they can only be used for seed production.

New Draft Seed Law 2015
In May 2015, the Chinese government released a draft of the new Seed Law for public review. The proposed law makes several major changes to the licensing system.

For one, the production and trading licenses are merged into one license, called the Seed Production and Trading License. This license only applies to the five major crops mentioned above. The list with additional major crops appears to be abolished.

The law does, however, introduce a registration requirement for non-major crops. The Ministry of Agriculture maintains a list of these non-major crops. In this way, the new law appears to deregulate parts of the crop seed sector.

The same Seed Production and Trading License now also extends to the import and export of crop seeds, and the production and trading of genetically modified seeds.

At the same time, the draft law poses new requirements on foreign companies active on the Chinese seed market. If the law were to pass, all foreign invested companies producing or trading seeds need a Seed Production and Trading License.

In addition, a number of activities conducted by foreign entities are now subject to an approval procedure with the State Council. These include the investment, merger or acquisition of a Chinese seed company; the cooperation with a Chinese research institute; technical cooperation with a local entity, R&D activities, and the production and trading of seeds.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.

For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.