Mining in China: Overview
Mining in China: Overview
by Guohua (Annie) Wu and Yingnan (Jason) Li
This article highlights some of the key legal issues commonly associated with the exploration and extraction of mineral resources in China.
These issues form part of any due diligence exercise conducted by an investor proposing to acquire mining assets or an interest in a mining project. This article looks at:
Mining investment in China.
The legal system applicable to mining in China.
Various mining laws.
Mineral ownership in China.
Different types of mining tenements available in China.
Rights of miners to access land against landowners' rights.
Imposition of royalties and other taxes by the various levels of government.
Rules and restrictions concerning foreign investment.
This article is part of the global guide to energy and natural resources. For a full list of content, visit www.practicallaw.com/energy-guide.
Overview
1. What are the recent developments in the exploration and extraction of mineral resources in your jurisdiction?
Primary mineral resources
In total, there are more than 10,000 (mostly coal) mines in China, producing a large amount of the world's supply. China is the world's largest producer of coal, gold and most rare earth minerals. In addition to production, China is also the world's leading consumer of most mining products, particularly thermal coal and iron ore, consuming around 49% and 58% respectively of global supply.
According to the Chinese Mineral Resources Report 2016 (which evaluates nationwide resources), at the end of 2015 the following were available:
125.7 billion tonnes of oil, of which 30.1 billion tonnes were recoverable.
90 trillion cubic metres of natural gas, with 50 trillion cubic metres recoverable.
122 trillion cubic metres of shale gas at a burial depth of 4,500 or fewer metres, with 22 trillion cubic metres recoverable.
30 trillion cubic metres of coal-bed methane at a burial depth of 2,000 or fewer metres, with 12.5 trillion cubic metres recoverable.
The evaluation states that China boasts great prospecting potential for 23 major minerals, including coal, iron ore, manganese, chromite, copper, lead, zinc, bauxite, tungsten, tin, molybdenum, antimony, nickel, gold, silver, lithium, pyrites, phosphate rock, potash, magnesite, fluorite, boron and barite.
Current activity
In the second quarter of 2017, the continuous fall of the price index of China's major mineral products reversed the trend of recovery of the weak mining market. Investment in the mining industry continued to shrink and from January to May 2017, total investment in fixed assets was CNY 270.7 billion, an 11.4% drop compared with the same period last year. In particular, total investment in mining and washing of coal, ferrous metal, non-ferrous metal and non-metallic mineral has experienced a year-on-year decline of 8.5%, 24.5%, 17.1%, 7.3% respectively.
Government policy
The government has implemented the following to boost the mining industry:
Relaxation of restrictions on foreign investment. On 28 June 2017, the Catalogue of Industries for Guiding Foreign Investment (2017 version) was issued. It eliminates certain restrictions on foreign investment in particular mining sector activities, including non-conventional oil and gas (fracking), precious metals and lithium ore.
Reform of examination and approval system. On 14 March 2017, the Ministry of Land and Resources (MLR) issued a notice cancelling the requirement for approval to change the scale of mining production. Since 2013, the MLR has cancelled 25 requirements for examination or approval on geology and mineral resources and cleared up all relevant non-administrative examinations and approvals, including the requirement for the minimum registered capital needed for mining rights.
Strengthening supervision and management. The MLR issued the Measures for the Publication of Information on Exploration and Exploitation by Mining Right Holders (Trial) on 29 September 2015. This set out that, starting from 1 July 2016, all mining right holders must promptly publicise on the MLR's website or in provincial level departments their exploration and exploitation information about land and resources and proactively co-operate with government supervision.
Mining and metal production generates large revenues which constitute a significant portion of the country's gross domestic product (GDP), but mining has recently experienced a marked decline. According to the National Bureau of Statistics, in 2016, mining contributed around CNY 182.52 billion to China's GDP, 27.5% lower than last year. The average profit margin in the mining industry in 2016 was 3.68%, a drop of 1.2% compared to 2015.
Regulatory structure
Regulation
2. What is the regulatory framework for the exploration and extraction of mineral resources?
Regulatory framework
The main laws and regulations governing the mining sector include:
Mineral Resources Law 2009.
Rules for Implementation of the Mineral Resources Law 1994.
Administrative Measures for the Block Registration of Mineral Resource Prospecting 2014.
Administrative Measures for the Registration of Mineral Resources Exploitation 2014.
Provisions on Administration of Mineral Resources Compensation Collection 1997.
Measures for the Preparation and Implementation of Mineral Resource Plans 2012.
Measures for the Administration of Transfer of Mineral Exploration Rights and Mining Rights 2014.
Other relevant laws and regulations include:
Catalogue for the Guidance of Foreign Investment Industries 2017.
Administrative Measures for Foreign-invested Mineral Exploration Enterprises 2008.
Mine Safety Law 2009.
Regulations for the Implementation of the Mine Safety Law 1996.
Interim Regulations of Resources Tax 2011.
Labour Law 2009.
Law on the Prevention and Control of Occupational Diseases.
Measures for Regulating Simultaneous Design, Construction and Operation of the Protective Devices for Occupational Diseases of Construction Projects.
Environmental Protection Law.
Circular of the Ministry of State Land and Resources on Further Regulating the Management of Transfer of Mining Rights.
Regulatory authorities
The most important regulatory authorities include:
Ministry of Land and Resources.
National Development and Reform Commission.
Ministry of Environmental Protection.
Ministry of Commerce.
State Administration of Taxation.
State Administration of Work Safety.
Customs Tariff Commission of the State Council.
See box, Regulatory Authorities.
Ownership
3. How are rights to the mineral resources held, and who holds those rights?
Under the Mineral Resources Law, all property rights and control over mineral resources in, under or on any land in China are vested in the State Council for and on behalf of the people of China.
The government grants permits to prospect or extract mineral resources. The rights to the mineral resources then pass to the person(s) who are granted the permits under the Mineral Resources Law. A mining permit can be granted to an individual, a company or a co-operative.
Authorisation
4. What are the key features of the leases, licences or concessions which are issued under the regulatory regime? Can these rights be leased by the right-holder?
Lease/licence/concession term
The right to prospect for and extract mineral resources under the current regulatory regime are obtained by:
Prospecting and extraction permits. Prospecting and extraction permits confer on the holder rights to prospect and extract mineral resources in China (mining rights). Mining rights can be obtained by applying to the department in charge of geology and mining at different levels ("competent authorities") or participating in the public bidding process. One important right enjoyed by holders of a prospecting permit is that they have an exclusive right to secure an extraction permit within the area covered by the prospecting permit if mineral resources are discovered. Prospecting permits are usually granted for three years (seven years for oil and gas). Prospecting permit holders can extend the term of their permits by applying to the competent authorities 30 days before its expiration. Each extension is for two years at most. For a large mine, an extraction permit can last a maximum of 30 years. For medium and small mines, they can last 20 and ten years respectively. Extraction permits holders can extend the term of their permits by applying to the competent authorities 30 days before its expiration, otherwise, the permit will automatically expire.
Transfer of mining rights. Mining rights (which include prospecting and extraction permits) can be transferred to eligible entities if certain requirements are met under the Measures for the Administration of Transfer of Mineral Exploration Rights and Mining Rights 2014.
Mining lease. Mining rights can also be leased. The procedures and requirements for leasing mining rights are administered in the same way as the transfer of mining rights.
Fees
The registration fees for mining rights are as follows:
CNY 50 to CNY 100 for prospecting permits.
CNY 200 to CNY 500 for extraction permits.
Liability
The primary obligations of a prospecting permit holder include:
Commencing and completing the prospecting within the set time frame.
Preparing mineral prospecting reports and submitting them to the competent authorities for approval.
Conducting prospecting in accordance with the construction designs and refraining from any unauthorised extraction.
Complying with laws and regulations on labour safety, land recovery and environmental protection.
Making immediate efforts to block the wells and holes caused by the prospecting and eliminating safety risks on completion of the project.
The primary obligations of an extraction permit holder include:
Extracting minerals within the term of the permit.
Protecting and using mineral resources in a reasonable way.
Paying the resource tax and mineral resource compensation fees.
Complying with laws and regulations on labour safety, land recovery and environmental protection.
Restrictions
An application for a mining permit will not be granted if:
The applicant is not qualified under the Mineral Resources Law (for example, the applicant does not have sufficient capital, knowledge, experience or equipment suitable for the extraction plan).
Application materials are not properly prepared and submitted.
The mining area applied for is subject to existing mining permits.
The mining area applied for is within a harbour, airport, military facility project, large industrial district, railway, important highway, river or natural reserves (unless approval is granted by competent bureaus authorised by the State Council).
Under the Mineral Resources Law, the consequences of failing to comply with any of the above obligations include:
Suspension of prospecting and mining activities and compensation for losses.
Confiscation of unlawful proceeds and products.
Revocation of mining permits.
Fines.
Criminal punishment.
5. How are such leases, licences or concessions awarded?
Application, public bidding and written agreements
The Catalogue for Prospecting and Extraction of Mineral Resources groups mineral resources into three categories (Category I, Category II and Category III).
Under the Ministry of Land and Resources Notice on Further Regulating the Assignment of Mining Rights, there are different ways to obtain the relevant mining rights for different categories of mineral resources, as follows:
For Category I resources, rights are granted to the first entity to apply for the prospecting rights (subject to relevant qualification requirements).
For all Category II resources and Category I resources where the mines have already been prospected and there is evidence to show that further prospecting work is worthwhile, the prospecting rights must be granted through public bidding.
For all Category III resources, extraction rights will be granted through public bidding. In this situation, no prospecting rights will be granted. This also applies to Category I and Category II resources where either:
the prospecting rights have been terminated (whether as a result of expiration of term or revocation) but the prospecting work has reached the level of "detailed exploration" and the mines can meet extraction design requirements; or
the extraction rights have been terminated or there were mining activities in the past and it has been proven that the reserves of mineral resources are worth being extracted.
Apart from by application and public bidding, mining rights can also be granted by written agreement between the applicants and the competent authorities. However, this happens only in very limited circumstances and subject to strict supervision and approval procedures.
On 16 June 2017, General Office of the State Council and General Office of the Central Committee of the Communist Party jointly issued the Plan to Reform the Regime of Assignment of Mining Rights (the plan). One of the most significant changes made by the plan is to cancel the grant of mining rights through application to competent authorities. Apart from the written agreement approach, any grant of future mining rights must be made through a public bidding process. This plan is now in pilot implementation in Shanxi, Fujian, Jiangxi, Hubei, Guizhou Provinces and Xinjiang Autonomous Region and will be implemented nationwide from 2019.
Transfer
Subject to approval from the competent authorities, prospecting or extraction permit holders can transfer their prospecting or extraction rights to other qualified entities.
The following conditions apply to transferring a prospecting permit:
Two years have passed since the permit was granted, or mineral resources are found that can be further prospected or extracted.
A certain minimum prospecting investment has been made.
There is no dispute over the ownership of prospecting rights.
Consideration for the prospecting rights has been paid.
Any other conditions required by the geology and mineral resources department of the State Council.
The following conditions apply to transferring an extraction permit:
One year has passed since extraction was commenced.
There is no dispute over the extraction right.
Consideration for the extraction rights has been paid.
Any other conditions required by the geology and mineral resources department of the State Council.
The transferor must meet the same qualification requirements as the applicant for the prospecting or extraction of the mineral resources. Typically, it takes 40 days for the competent authorities to decide whether to approve the transfer or not.
The procedures and requirements for leasing mining rights are administered in the same way as a transfer.
Environment
6. What are the main ongoing requirements for environmental protection?
China's Environmental Protection Law provides that construction projects with environmental impacts must be subject to environmental impact assessment (EIA). Without an EIA, project construction cannot commence. The Environmental Impact Assessment Law (EIA Law) provides different requirements for different types of construction projects. The Catalogue of Classification of Construction Projects Based on Their Environmental Impact groups construction projects into three types:
Projects with a potentially major impact on the environment. The constructor must submit an environmental impact report and hold a public hearing to ask for the opinion of relevant authorities, experts and the public.
Projects with a potentially moderate impact on the environment. The constructor must submit an environmental impact report form.
Projects with a potentially minor impact on the environment. The constructor must complete an environmental impact registration form.
The environmental impact report and report form must be prepared by qualified environmental impact assessment institutions and are subject to approval from competent environmental protection authorities. The environmental impact registration form need only be recorded. The EIA Law provides a basic outline of what must be included in an environmental impact report, including:
A brief introduction to the project.
A summary of the existing environment in project areas.
Analysis, prediction and assessment of impact that the construction project may have on the environment.
Description of measures that will be taken to mitigate any adverse environmental impact.
A comparison of the economic benefits and environmental impact.
A proposal for monitoring the environmental impact of the project.
A conclusion on the overall evaluation of the project's impact.
The project constructor must also:
Implement mitigation measures set out in the environmental impact report.
Rehabilitate adversely affected areas.
Adopt pollution prevention and control measures and ensure that necessary pollution control equipment is constructed and in operation simultaneously with the construction and operation of the principal part of the project.
Health and safety
7. What are the main ongoing requirements for compliance with health and safety regulations?
No mining enterprise is allowed to engage in production activities without a valid production safety certificate. Safety requirements for mining are mainly set out in the Mine Safety Law and its implementing regulations, which provide detailed compliance requirements on the following matters:
Facilities for ensuring safe production and preventing accidents.
Preventive measures against potential dangers of accidents.
Safe production responsibility system.
Safe production education and training.
Health requirements for mining are mainly set out in the Law on the Prevention and Control of Occupational Diseases and implementing measures, which provide detailed compliance requirements in relation to the following matters:
Pre-evaluation of occupational disease hazards.
Protective facilities for occupational diseases.
Occupational health training.
Evaluation on the effect of occupational disease hazard control.
Foreign ownership
8. Are there any restrictions concerning the foreign investment in and ownership of companies engaged in the exploration and extraction of mineral resources in your jurisdiction?
Restrictions on prospecting and extracting mineral resources by foreign investors are set out in the Catalogue of Industries for Guiding Foreign Investment (2017 version). According to this, foreign investors are prohibited from prospecting and extracting tungsten, molybdenum, tin, stibonium, fluorite, rare earth and radioactive minerals. When prospecting and extracting oil and natural gas (including coalbed gas but excluding kerogen shale, oil sand and shale gas), foreign investors can only participate through equity or co-operative joint ventures with Chinese investors.
Processing and sale of mineral resources
9. Are there any restrictions or limitations on the processing of extracted mineral resources?
Restrictions on the extraction and processing of mineral resources are mainly set out in the 2011 Industrial Structure Adjustment Catalogue. This Catalogue categorises various construction projects into three parts:
Encouraged projects.
Restricted projects.
Obsolete projects.
According to the Catalogue, no investment is allowed in new restricted projects. Relevant authorities cannot issue a permit or certificate for these new projects, and all financial institutions are prohibited from providing funds to them. Existing restricted projects can upgrade their productivity power and methods within a certain period and financial institutions can keep providing financial support. Restricted projects include but not limited to:
Production of certain petrochemical products, such as certain pesticides and nitrogen fertiliser.
Extracting and smelting tungsten, tin and antimony. To do this, companies must first obtain special access permits from the Ministry of Industry and Information Technology (MIIT). The first list of companies having access to the tungsten, tin and antimony industry was released by the MIIT in September 2013.
Smelting of gold ores by pyrometallurgy with daily processing amount below 100 metric tonnes.
10. Are there any restrictions or limitations on the sale of extracted mineral resources?
Tungsten, tin, antimony and ionic rare earth are categorised as special ores subject to protective extraction measures. The sale of these minerals and related products is strictly controlled and administered by the provincial government and State Council. They must be sold only to entities designated by the provincial government and no other entities are allowed to purchase them or their related products.
Tax
11. What payments, such as taxes or royalties, are payable by interest holders to the government?
The main payments made by permit holders to the government include:
Mineral resources compensation (royalties). The amount of mineral resources compensation equals sales revenue of mineral products, multiplied by the compensation rate, multiplied by the mining recovery rate coefficient.
Prospecting right user fee. For the first three years, the permit holder must pay CNY 100 per square kilometre each year, increasing by an additional CNY 100 per square kilometre each year from the fourth year onwards. The maximum fee is capped at CNY 500 per square kilometre each year. If there is state investment in the prospecting work, the permit holder must also pay the prospecting right price, which is subject to evaluation by a qualified evaluation agency.
Extraction right user fee. This fee is CNY 1,000 per square kilometre per year. If there is state investment in the extraction work, the permit holder must also pay the extraction right price, which is subject to evaluation by a qualified evaluation agency.
Resource tax. Basic resource tax rates are as follows:
crude oil: 5-10% of sales;
natural gas: 5-10% of sales;
coking coal: 8-20 CNY/ton;
other coal: 0.3-5 CNY/ton;
regular non-metal green ores: 0.5-20 CNY/ton or cubic metre;
noble non-metal green ores: 0.5-20 CNY/kg or carat;
ferrous metal green ores: 2-30 CNY/ton;
rare-earth ores: 0.4-60 CNY/ton;
other non-ferrous metal green ores: 0.4-30 CNY/ton;
solid salt: 10-60 CNY/ton;
liquid salt: 2-10 CNY/ton.
Value added tax. The tax rate ranges from 13% to 17% depending on the types of mineral resources or mineral products.
City maintenance and construction tax. For taxpayers located in cities, the rate is 7%. For taxpayers located in counties or towns, the rate is 5%. For taxpayers located in other places, the rate is 1%.
Land use tax. For a mine, the mining yard, gangue storehouse, dynamite storehouse, waste disposal site and roads used to transport ore are exempt from land use tax. Everything else must pay at the following rates:
large cities: CNY 1.5 to 30 CNY;
medium cities: CNY 1.2 to 24 CNY;
small cities: CNY 0.9 to 18 CNY;
counties, towns and industrial and mining areas: CNY 0.6 to 12 CNY.
Business income tax. The rate is normally 25% on taxable income and 20% for a non-resident entity whose income has no actual connection with its establishment in China.
Education surcharges. Educational surcharges are collected at the rate of 3%, based on the sum of VAT, business tax and consumption tax paid by the companies.
12. Does the government derive any other economic benefits from the exploration and extraction of the mineral resources?
The government does not derive any other economic benefits from the exploration and extraction of the mineral resources.
13. What taxes and duties apply on the import and export of mineral resources?
Generally, customs duties and VAT apply to the import and export of mineral resources. The consignees of imported goods and the consignors of exported goods must pay customs duty. The VAT rate for importing goods ranges from 13% to 17%, but for exporting goods the rate is usually zero.
Reform
14. Are there any plans for changes to the legal and regulatory framework?
On 16 June 2017, the Ministry of Land and Resources released a plan to reform the regime for assigning mining rights. The plan is now in force in six provincial areas and will be implemented nationwide before 2019. In addition to the cancelling the ability to obtain mining rights through application (see Question 5), the plan also made some other changes, including:
Further narrowing down the circumstances where mining rights can be granted by written agreements.
Delegating the power to approve to lower level administrations.
Implementing a comprehensive information disclosure system for mining permit holders.
The regulatory authorities
Ministry of Land and Resources of the People's Republic of China (MLR)
Address. 64 Fucheng Mennei Avenue, Xicheng District, Beijing China
T + 86 010 12336
W www.mlr.gov.cn
Main responsibilities. The MLR is the main regulator for the mining sector.
Ministry of Environmental Protection of the People's Republic of China (MEP)
Address. 115 Xizhimen Nanxiao Street, Xicheng District, Beijing China
T +86 010 6655 6006
W www.mep.gov.cn
Main responsibilities. The MEP is the main supervisor for environmental protection.
China Geological Survey (CGS)
Address. 45 Fuwai Avenue, Xicheng District, Beijing China
T +86 010 5163 2938
W www.cgs.gov.cn
Main responsibilities. The CGS is responsible for geological mapping and exploration of minerals with a view to providing information for investors.
Contributor Profiles
Guohua (Annie) Wu
Senior partner
Areas of practice
Mergers and acquisitions; mining; cross-border investment; private equity; corporate
Yingnan (Jason) Lee
Associate
Areas of practice
Mining; cross-border investment; corporate
This article was first published in the Energy and Natural Resources Global Guide 2017 and is reproduced with the permission of the publisher, Thomson Reuters.You can find the original article at http://global.practicallaw.com/w-011-1348.