Insight Magazine November 2013 by The American Chamber of Commerce in Shanghai

November 2013

Navigating the Zone Shanghai’s pilot Free Trade Zone will ease restrictions on foreign investment for two dozen industries but most investors are waiting for the details PLUS: Opinions from top executives

ALSO INSIDE • U.S. Pivot in Perspective • President’s Report

HOW’S YOUR BUSINESS DOING? AmCham Shanghai’s annual Business Climate Survey is coming!

Survey results form the basis of the China Business Report, a publication that is considered a mustread for business leaders, policymakers and media on both sides of the Pacific. Complete the survey and get a chance to win two economy class round trip tickets from Shanghai or Beijing to over 230 U.S. cities that Delta operates or a new iPad mini! Free report and summary presentation to all survey respondents. Online survey will be sent to all corporate members in November.

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The China Business Report will also be available as a download on Apple’s iBooks and Barnes & Nobles’ Nook. Visit www.amcham-shanghai.org/publications

INSIGHT NOVEMBER 2013

The Journal of the American Chamber of Commerce in Shanghai

amcham shanghai President

Kenneth Jarrett VP OF PROGRAMS & Services

Scott Williams

F e at u r e s

11 President’s Report

15 The Expat Express

column

By Kenneth Jarrett See the debut quarterly column from the AmCham Shanghai president.

VP of Administration & Finance

Helen Ren Directors Business development & Marketing

Stefanie Myers Events

Yangtze River Delta

By David Fishman

A daily commute between Shanghai and the YRD is a way of life for many.

Jessica Wu Government Relations & CSR

Steven Chan

imaginechina

Patsy Li Committees

Membership & CVP

Linda X. Wang

INSIGHT EDITOR-IN-CHIEF

Bryan Virasami

18 The Pivot in Perspective regional security

By Robert S. Ross

The U.S. pivot to Asia started long before the Obama administration’s initiatives, says a China expert.

Senior Associate Editor

Erika Wang senior communications associate

Ryan Balis

Design

Alicia Beebe

22 Navigating the FTZ – Special Coverage

Shanghai’s pilot Free Trade Zone could prove to bring about significant benefits for foreign investors but many are waiting for the details. See 14 pages of coverage written by legal and government experts.

Printing

Mickey Zhou Snap Printing, Inc.

INSIGHT Sponsorship (86-21) 6279-7119 ext. 5667 Story ideas, questions or comments on Insight: Please contact Bryan Virasami (86-21) 6279-7119 ext. 5668 bryan.virasami@amcham-shanghai.org Insight is a free monthly publication for the members of The American Chamber of Commerce in Shanghai. Editorial content and sponsors' announcements are independent and do not necessarily reflect the views of the governors, officers, members or staff of the Chamber. No part of this publication may be reproduced without written consent of the copyright holder.

COVER STORY

I n s ig h t s ta nd a r d s

5 News Briefs

shutterstock

Intern

Beverly Chan

13 Deal of the Month

MONTH IN PICTURES

Highlights from Recent Events

EXECUTIVE dining room

Best Place for a Thanksgiving Meal

INSIDE AmCham

Shanghai Centre, Suite 568 1376 Nanjing West Road Shanghai, 200040 China tel: (86-21) 6279-7119 fax: (86-21) 6279-7643 www.amcham-shanghai.org

40 From the Chair 41 Board of Governors Meeting 46 Government Relations 48 Event Highlights Cover illustration by saya wang

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Special thanks to the 2013-2014 AmCham Shanghai President’s Circle Sponsors

Editor's note

ne of the more difficult yet interesting aspects of being the editor of this magazine is to find a way to illustrate the cover story. The art and design should accurately reflect the story, yet capture the imagination of readers so they are inclined to open it up. The pilot Free Trade Zone (FTZ) is one of those stories that comes equipped with complications and various angles. The FTZ means something different to everyone and if you attended the AmCham Shanghai event at the Ritz-Carlton Pudong in late October, you probably realize that there are more questions than answers. One of the panelists at the event referred to the FTZ as a “new round of reform and opening up” and told the record crowd that the registration process at the zone is “shorter” and “so brief, so simple.” Audience members raised questions about specific topics while one asked if the FTZ will “change our lives.”

Bryan Virasami editor-in-chief

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The “guiding principles” in the government’s Framework Plan for the FTZ was a bit more direct. “We should further unleash our minds, dare to pilot, and promote reform and development by opening up the economy … ” it read. Our cover story contributors, Timothy Stratford and Scott Livingston, are two of the brightest American attorneys working in China today and they add some context to the FTZ story. You can also find candid opinions from executives at five prominent companies operating in China plus a breakdown of the FTZ from Damon Paling of PwC. This is one of those stories that editors like to say “has legs” and the CPC’s Third Plenary Session set for early November is expected to produce more details about the FTZ while China’s leaders are expected to announce many other bold reforms, according to observers. Stay tuned.

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News

n n ew ew s s b br r ii e ef fs s

CHINA BUSINESS

Alipay buys China fund manager Alipay, the online payment unit of Alibaba Group Holding Ltd., has acquired control over Tianhong Asset Management Co. for RMB1.18 billion (US$190 million), giving Zhejiang Alibaba E-Commerce Co., parent company of Alipay, 51% of Tianhong. The cooperation is intended to improve the security and services provided by Alipay and Tianhong’s newly colaunched fund and payment platform, Yu’E Bao, China’s first fund investment platform for online shoppers. Designed to help Alipay customers invest online in a money market fund, Yu’E Bao attracted 2.5 million users within the first week of its launch in June.

Lenovo remains top PC maker China’s Lenovo Group held on to its position as the world’s top personal computer (PC) maker despite global PC sales suffering an 8.6% decline to 80.3 million in the third quarter, the lowest since 2008, according to figures by research firm Gartner. Gartner attributed the drop to a worldwide consumer shift from PCs to tablets. Overall shipments of the Beijing-based technology company rose 2.8% over a year ago, amounting to 17.6% of the world’s PC market and leading HewlettPackard Co. by 0.5%. Gartner reported a 13.7% decline in PC sales in the Europe, Middle East and Africa region, as well as a 11.2% decline in Asia-Pacific, while U.S. sales increased by 3.5%.

China Vanke sales up 33% China Vanke Co., Ltd., China’s largest

Wang Jianlin, chairman of Dalian Wanda Group, tops this year’s Forbes China Rich List

China’s rich become US$150b richer China’s 400 richest people became US$150 billion wealthier this year, according to Forbes magazine’s latest China Rich List. The number of dollar billionaires rose to a record high of 168, up from 113 billionaires in 2012, despite the economy having expanded at 7.7% last year – its worst performance since 1999. Net assets of the top 100 people on the list soared 44% from a year earlier to US$316 billion. Forbes attributed the increase in wealth to growth in industries such as the Internet, auto, entertainment and property. Wang Jianlin, chairman of property giant Dalian Wanda Group, topped the list with a net worth of US$14.1 billion. He was followed by beverage tycoon Zong Qinghou, who slipped to second place this year despite his wealth increasing 12% to US$11.2 billion. Rounding up the top three is Robin Li, founder of search engine Baidu, whose wealth jumped 37% from last year to US$11.1 billion. At seventh place is Yang Huiyan, vice chairman of Foshanbased property developer Country Garden and China’s richest woman with a fortune of US$7.2 billion. Yang also tied with Li Zhaohui of Haixin Industrial as the youngest member on this year’s list at age 32.

real estate developer, reported a 33% yearon-year revenue growth of RMB128.5 billion (US$21 billion) in the first nine months of 2013. Nearly 11 million square meters of residential space reached deals

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nationwide from January to September, Vanke reported. By month, the Shenzhenlisted company sold 1.31 million square meters of gross floor space in September which generated RMB15.57 billion in

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revenue, compared with 1.33 million in August and 1.05 million last September. According to figures by data provider China Real Estate Index System, the average price of housing in 100 cities rose 9.5% year-on-year in September.

CORPORATE NEWS

Wanda Cinema, Coca-Cola ink deal Wanda Cinema Line Corporation and Coca-Cola China announced an agreement to provide the beverage giant’s soft drinks at Wanda movie theaters. The partnership also involves market development, brand promotion and CSR initiatives. According to the agreement, the companies will utilize their official online platforms to co-launch marketing events and will also work with the nonprofit organization One Foundation to build China’s first nonprofit cinema. Wanda Cinema Line’s parent company, Dalian Wanda Group, acquired U.S.based cinema operator AMC Theatres last year for about US$2.6 billion. The group has also announced plans to invest RMB30 billion (US$5 billion) in building the 540-hectare Qingdao Oriental Movie Metropolis in Qingdao, eastern Shandong province, slated to become the world’s largest film studio upon its expected completion in 2017.

Unilever opens plant in SW China Consumer goods giant Unilever opened its third manufacturing plant in China in Pengshan County, southwestern Sichuan province. Covering an area of 27 hectares, the RMB300-million (US$48.7-million) facility is slated for completion in 2015. Designed to become one of Unilever’s largest production bases in the world, the Sichuan plant will supply products to other countries in addition to catering to the Chinese market, the company said. Unilever opened its largest global production base in 2002 in Hefei, eastern Anhui province, which in 2012 reached

an output value of RMB16 billion. Last year, it launched an industrial park project in northern Tianjin. Emerging markets account for 57% of the company’s business, with China a key market.

Christie’s banks US$25m in inaugural auction Christie’s inaugural auction in mainland China, held on September 26, earned the art auction house RMB153 million (US$25 million) without buyer’s premiums. A ruby and diamond necklace was the top seller at RMB18 million, while Picasso’s “Seated Man” – the first work by the Spanish artist to be auctioned on the Chinese mainland – fetched RMB9.6 million. The auction was attended by 112 buyers. Christie’s became the first international art auction company to be allowed to operate independently in the mainland after it received its license in April. But foreign-funded companies are still banned from selling Chinese cultural relics, which form a significant segment in the market.

Walmart to restructure China business Walmart, the world’s largest retailer, will close more than 20 stores in China over the next year as part of a China business restructuring that includes new management structures and more efficient purchasing offices, the Bentonville, Ark.based company said. The underperforming stores to be closed represent about 2.5% of its total sales volume in China. The company also announced it will add up to 110 new stores in China in the next three years. Walmart China’s net sales, excluding an online grocer business, rose 6.3% in the second quarter year-on-year though customer traffic fell 6.8%.

Shaw opens eastern China factory Dalton, Ga.-based Shaw Industries Group Inc. opened a carpet-tile plant in the city of Nantong, eastern China’s Jiangsu province. The 210,000 square-foot factory is expected

to provide a key foothold in the Asian market, the company said. According to the company, two-thirds of the world’s carpet tile is sold outside of North America, with sales in China growing at 20% annually, making it the world’s third largest carpettile-purchasing country. The company said it has hired 100 workers at the China facility and expects to employ 250 at full capacity. It employs 15,000 people in its Georgia facilities.

MACROECONOMICS

China’s economic growth rebounds China’s economy grew by 7.8% year-onyear in the third quarter, up from a twodecade low of 7.5% the previous quarter, data by the National Bureau of Statistics showed. The first nine months reached 7.7% growth, with a GDP totaling RMB38.68 trillion. Industrial output increased 9.6% in the first nine months and retail sales, main indicator of consumer spending, increased 12.9% from last year. The government launched a mini-stimulus of higher spending on public works, prompted by a drop in global demand for Chinese goods. The International Monetary Fund forecasted Chinese growth in 2013 at 7.6%, which would be its weakest performance since the early 1990s.

China CPI reaches sevenmonth high China’s consumer price index (CPI) rose 3.1% in September from the 2.6% rise in August, the highest increase in seven months, according to data by the National Bureau of Statistics. The inflation exceeded market expectations of 2.9% but still fell under the official target of 3.5% for the year. The government attributed the CPI increase mainly to a recent surge in food prices, which recorded a 1.5% gain from August to September and a 6.1% gain from last year, affected by unfavorable weather conditions in southern China and seasonal demand from the Mid-Autumn and national holidays.

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China’s September FDI increases 4.88% China’s foreign direct investment in September rose 4.88% from last year to US$8.8 billion. FDI from January to September totaled US$88.6 billion, a 6.22% increase from the same period last year. China’s non-financial overseas direct investment in the first nine months increased 17.4% year-on-year to US$61.64 billion. These increases came despite a decrease in the country’s GDP growth from 7.7% in the first quarter to 7.5% in the second quarter. In comparison, investment from the U.S. increased by 21.3% to US$2.88 billion from last year’s January–September period.

China’s exports shrink, imports grow China’s exports shrank 0.3% in September year-on-year and were sharply down from August’s 7.2% growth, according to data from the General Administration of Customs. Compared with a year earlier, China’s exports to Hong Kong fell 4.1%, while exports to Taiwan dropped 8.6% and those to the European Union fell 1.1%. But exports to the U.S. rose 4.2% and to Japan grew 1.3%. Import data remained strong, with September imports rising 7.4% year-on-year, slightly up from the 7% rise in August. The country’s trade surplus narrowed in September to US$15.2 billion, from US$28.52 billion in August.

China’s manufacturing sector grows China’s factory sector edged up to 50.2 in September from the previous month’s 50.1, according to the HSBC purchasing managers’ index (PMI). New export orders stood at 50.7, up from 47.2 in August. A reading above 50 indicates expansion while a reading below 50 indicates contraction. But despite output and new orders growing in September, expansion was fractional after seasonal adjustments, HSBC noted. The survey

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also showed factories cut jobs for the sixth consecutive month in September, due to worker resignations and firm downsizing.

U.S.-CHINA

China passes U.S. as largest oil importer China has passed the U.S. as the world’s biggest net oil importer, according to September data by the U.S. Energy Information Administration (EIA). The EIA said that Chinese oil consumption outstripped production by 6.3 million barrels per day, which indicates the country had to import that much to fill the gap. The figure was attributed to faster economic growth and strong auto sales, which rose by 11% in August. But the U.S. still consumes more oil per capita than China does. In September, Americans used 18.6 million barrels per day of oil and other liquid fossil fuels compared to the 10.9 million that Chinese used. Despite going through a cool down, China’s economy is still forecast to grow by nearly 8% this year.

Kansas to open office in Beijing The City of Wichita, Kansas is opening an office in Beijing under the facilitation of Kansas Global Trade Services in an effort to build partnering opportunities with China’s growing aviation industry. Budgeted at US$300,000 to US$500,000, the Beijing office will not only connect Wichita and China aviation businesses for products and services but also work to provide intellectual property protection. Funding will come from private sponsors from China and Kansas. Wichita manufacturers such as Beechcraft Corporation and Cessna Aircraft Company have already donated a year’s worth of funding for the office.

GE Healthcare to build factory in China GE Healthcare Life Sciences, a unit of GE Healthcare, and biologics manufacturer JHL Biotech announced they will build a

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new biopharmaceutical factory in Wuhan, central China. Located at the Biolake Science Park, the factory is expected to be fully operational in the beginning of 2015. Founded by a group of biotech veterans and backed by venture capital firms including Kleiner Perkins Caufield & Byers China Fund, Sequoia Capital, Burrill & Co. and China Development Industrial Bank, JHL Biotech develops and manufactures biologic medicines.

GOVERNMENT & POLICY

Beijing to issue air quality warnings China has announced plans to pilot an air quality warning system in the cities of Beijing, Tianjin and surrounding areas starting in November. China’s Meteorological Administration and the Ministry of Environmental Protection jointly released the plan, which put the alert system at three levels. When the air quality index is set to go beyond 500, a level I warning will be issued for three consecutive days. A level II warning will be issued for air quality index readings between 300 to 500 and a level III warning will be issued for readings that fall between 200 and 300. The government aims to cut the density of inhalable particulate matter by at least 10% in major cities nationwide by 2017.

Shanghai aims to slash PM2.5 by 2017 Shanghai unveiled its Clean Air Action Plan aimed at reducing the concentration of PM2.5 by 20% to the 2012 level by 2017. The plan included targets for pollution prevention in energy, industry, transportation, construction, agriculture and social life. One of the highlighted measures in the Shanghai plan is forbidding coal burning, with more than 2,500 boilers and 300 industrial furnaces that use coal to be closed down or shifted to clean energy by 2015. Coal firing will be completely banned in 2017. Statistics from the Shanghai Environmental Protection

Bureau showed the average PM2.5 level in Shanghai from June 2012 to June 2013 was 56 micrograms per cubic meter. The level was high compared with international levels but outmatched the national standard of 75.

Effort to boost solar power manufacturing China is offering a 50% rebate on valueadded tax to manufacturers of solar power products starting from October 1, 2013, until the end of 2015 as an incentive to continue producing despite lagging sales and increasing debt. Declining demand has left several solar power firms in serious debt, with the top 10 Chinese solar power sector companies owing up to RMB100 billion (US$16.3 billion), according to the official Xinhua News Agency. Wuxi-based Suntech Power Holdings, the world’s top solar panel maker, defaulted on its debt early this year, followed by LDK Solar Company, the world’s largest producer of

solar wafers in terms of capacity.

SHANGHAI BUSINESS

allowed companies to complete customs clearing in an hour, compared to two days previously.

Shanghai FTZ measures boost business

Greenland snatches majority stake in New York property

New measures to ease corporate registration and customs clearing procedures in the pilot Shanghai Free Trade Zone, which opened on September 29, have attracted a record number of registration applications. More than 1,900 companies submitted registrations in the zone in the first three working days after the national holidays, nearly triple the number for the whole of last year, zone administration officials reported. A simplified registration and processing system on trial in the zone has helped corporations get business licenses within four working days, down from 29 days. Another initiative, a fasttrack customs declaration procedure, has cut business storage costs by 10% and

Shanghai-based Greenland Holding Group Co. agreed to buy a 70% stake in New York’s Atlantic Yards, a 22-acre residential and commercial real estate project in Brooklyn. Greenland will co-develop the project with Forest City Ratner, a unit of Cleveland-based Forest City Enterprises Inc. The deal includes infrastructure and apartment units but excludes the Barclays Center, home of the National Basketball Association’s Brooklyn Nets, and the first housing tower under development, the companies said in a joint statement. The partnership will allow the delivery of 6,400 units of housing, including 2,250 units of affordable housing. The project is expected to cost more than US$5 million, according to Greenland.

CHINA & THE WORLD

SOUTH AMERICA ASIA-PACIFIC SIA PACIFIC

MIDDLE EAST

INDONESIA: ICBC Leasing, Garuda Indonesia ink US$1.7b deal ICBC Financial Leasing signed an operational leasing agreement worth US$1.7 billion with Garuda Indonesia, the country’s largest state-owned airline. According to terms of the deal, ICBC Leasing will lease five Boeing B777-300ER wide-body jets and six Airbus A320-200 narrow-body jets to Garuda Indonesia. Owned by the Industrial and Commercial Bank of China, ICBC Leasing focuses on leasing business in areas including aviation, shipping, energy and power, transportation, engineering and machinery.

ASIA-PACIFIC SIA PACIFIC EUROPE

AFRICA

UGANDA: CNOOC signs US$2b contract for Ugandan oil field State-owned China National Offshore Oil Coporation (CNOOC) settled a US$2 billion deal to develop Kingfisher oil field in western Uganda over the next four years. The field has estimated reserves of 635 million barrels of oil, of which 196 million are recoverable. Once development is completed, commercial output will begin in 2017 with an estimated 30,000 to 40,000 barrels of oil produced per day. CNOOC said it plans to build 40 development wells, a planned refinery, a 50-kilometer oil pipeline and other infrastructure for production achievement.

UNITED KINGDOM: Tesco, CRE sign supermarket JV deal British retail giant Tesco PLC has signed an agreement with state-run China Resources Enterprise Ltd. (CRE) to create a retail joint venture in China. According to terms of the deal, Tesco is paying CRE US$558 million to buy 20% of the venture, which combines Tesco’s 134 stores as well as its shopping mall businesses with CRE’s 2,986 stores and is expected to generate sales of US$16.2 billion. The deal is expected to close in the first half of 2014, subject to regulatory and shareholder approval. Tesco, which entered China in 2004, has stores in 11 provinces, mostly in Shanghai, Tianjin and the northeastern province of Liaoning.

NORTH AMERICA

EUROPE MIDDLE EAST

MIDDLE EAST

DUBAI: Huawei launches first Mideast logistics hub China’s Huawei Technologies Co., Ltd., launched its first Middle East logistics hub in Dubai’s free port zone Jebel Ali. The information and communications technology solutions provider said the center would initially focus on customers in the telecommunications sector and will serve Huawei’s markets in the Gulf region as well as in the Middle East. The company also announced plans to invest at least US$20 million in the facility’s expansion over the next three years. Huawei established its Middle East headquarters in Bahrain 10 years ago. One of the fastest growing markets for Huawei, the Middle East contributed US$2 billion in revenues for the company in 2012, an 18% increase year-on-year.

AFRICA

SOUTH AMERICA MIDDLE EAST AFRICA

ASIA-PACIFIC SIA PACIFIC AFRICA NORTH AMERICA

NORTH AMERICA

UNITED STATES: Fosun to buy One Chase Manhattan Plaza Chinese conglomerate Fosun International Ltd. will buy the office building One Chase Manhattan Plaza in New York’s financial district for US$725 million. The firm said it will buy the property from JPMorgan Chase. The reconstruction of the World Trade Center and the upgrading of the Fulton Street transportation hub will enhance the value of the real estate, Fosun said. The 60-story One Chase Manhattan Plaza was previously the global headquarters for Chase Manhattan Bank. Fosun, while publicly listed in Hong Kong, is considered China’s largest private conglomerate, with about US$28 billion in assets.

SOUTH AMERICA

NORTH AMERICA EUROPE SOUTH AMERICA

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SOUTH AMERICA ASIA-PACIFIC SIA PACIFIC

CHILE: Deal to open astronomy research center in Santiago The Chinese Academy of Sciences (CAS) has signed an agreement with Chile’s National Commission for Scientific Technological Research (Coinicyt) to set up a collaborative astronomical research partnership. The first CAS institution established outside China, the new facility will be headquartered in the Chilean capital of Santiago. According to the agreement, starting in 2014, the new Chile-China Joint Center for Astronomy (CCJCA) will receive a bilateral fund of US$3 million annually to build observatories, develop new technology and conduct joint research and training programs. The cooperation aims to open more opportunities for future scientific partnerships and enhance astronomical research in China.

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PRESIDENT ’S Report

Figuring Out the FTZ After attending the plenary session of the Shanghai mayor’s International Business Leaders Advisory Council (IBLAC) this morning, I feel well primed to write this new feature of the Chamber’s Insight magazine – a quarterly report from your president. Through this column I hope to give you, our members, a better understanding of the Chamber’s direction and priorities. I will also use this column to comment on developments that affect the interests of our members, such as Shanghai’s launch of the Pilot Free Trade Zone, to give one current example. With that as introduction, let’s begin. It was evident from the IBLAC presentations, which focused on building Shanghai’s soft power, that Shanghai is again on the move. The city’s determination to join the ranks of the world’s leading cities remains as strong as ever. In that context, the Free Trade Zone (FTZ) initiative received numerous references. At this stage, there are still more questions than answers about the FTZ, but one point should be clear – it is an important initiative for Shanghai and one that could bring tangible benefits to foreign companies. It is also an initiative linked to China’s larger economic reform agenda and one that enjoys the blessing of senior Chinese leaders, even if Shanghai’s leaders bear the main burden of making the FTZ experiment a success. I have been struck that less than one month after the official launch of the FTZ, the tone of some Western analysts has already turned negative. One indeed might ask why the FTZ was launched with such haste, when few details have been ironed out. One could even take this one step further and argue that the incompleteness of the initiative, despite its many potential positives, only reinforces the skepticism of those who believe China is unable or unwilling to provide the transparency and regulatory predictability so deeply desired by foreign investors. In my view, it is too soon to jump from such doubts to a dismissal of the FTZ as an empty gesture. After all, this is not the first time that policy details have lagged behind bold policy pronouncements. It is entirely possible that national leaders felt compelled to proclaim the general policy decision first in order to silence critics and pave the way for the real

work of turning the FTZ concept into a reality to move forward. For our members, we are in the familiar position of not knowing what to expect from a Chinese government initiative. Should we feel excited or skeptical? For now, it might make the most sense to simply suspend judgment, but prepare to benefit from this potentially significant development. For the Chamber, we want to help you make an informed judgment. Toward that end, we will be arranging a number of events with guest speakers – both from the government and the private sector – to unravel the mysteries of the FTZ. This will be an ongoing process and a high priority for the months ahead. Keep your eye on our events calendar for more information. Just as Shanghai is on the move, so is your Chamber. My first two months on the job have been a flurry of activity: a successful Washington Doorknock that included the signing of SME Center-related MOUs with the Commerce Department and the Trade Development Agency, the October opening of our new office in Suzhou and the holding of two signature events – our annual Manufacturing Summit conference and our annual Corporate Social Responsibility conference. We also had discussions with the Shanghai government on the FTZ as part of our effort to shape this evolving initiative. It’s been an exciting start. To end this first column on a purely personal note, allow me to express how delighted I am to serve as your Chamber president. I’ve inherited a professional and motivated team and share their commitment to helping you succeed in this dynamic, but highly competitive, market.

Kenneth Jarrett President

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U.S .-China B Y ST E V E N C H A N

Delegates Deliver in D.C. AmCham Shanghai met with Washington policymakers to discuss the business climate in China, sign key agreements

he bilateral economic and trade relationship between the U.S. and China, regulatory challenges and bu s i n e s s opp or tu n it i e s we re am ong t h e t op i s s u e s r ai s e d during AmCham Shanghai’s annual Doorknock in Washington, D.C. in September. A delegation of 12 seasoned China experts led by AmCham Shanghai Chair Robert Theleen and AmCham Shanghai President Kenneth Jarrett met with officials in the U.S. capital including staff of senior lawmakers over three days. They highlighted key issues and challenges impacting American companies in China. The high-level delegation, comprising senior executives of U.S. companies based in China, held 50 meetings with Members of Congress and congressional staff, senior Obama Administration officials and leading think tank representatives. While Congress and the press were generally preoccupied with Syria and the looming budget talks, the delegation successfully communicated key messages during the meetings. Delegates discussed the business climate (opportunities and challenges) for U.S. companies in China and expressed support for a Bilateral Investment Treaty (BIT) between the U.S. and China, the pilot Free Trade Zone (FTZ) in Shanghai and A m C h am Sh ang h ai’s Sm a l l an d Me d iu m Enterprise (SME) Center. Some of the topics the delegation raised include market opportunities created by China’s continuing economic transition; the increasing trend of American companies in China for the China market; and regulatory and business challenges which impede American companies’ capacity to operate, expand and grow their businesses in China such as rising costs, human

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resource constraints, and IPR infringement.

Agreements During the Doorknock, AmCham Shanghai held the official Washington launch of the SME Virtual Center and signed a Memorandum of Intent (MOI) with the International Trade Administration of the U.S. Department of Commerce and a Memorandum of Understanding (MOU) with the U.S. Trade and Development Agency (USTDA). The MOI with the Commerce Department seeks to explore opportunities to develop strategies and carry out activities to enhance the competitiveness of and opportunities for U.S. businesses in Shanghai. It also seeks to serve as a springboard for a future formal partnership between AmCham Shanghai and the U.S. Department of Commerce. T he MOU w it h U ST DA w i l l mutu a l ly promote each organization’s activities and programs to key stakeholders focusing on doing business in China and supporting U.S. SME exports and investment. Delegates also met with 15 Washington reporters during a media roundtable and released two Viewpoints: U.S. Competitiveness in China: Opportunities and Challenges in America’s Fastest Grow ing O vers eas Market and Oppor tunities for U.S. Small and Medium Business in China.

Steven Chan is Director of Government Relations and CSR at AmCham Shanghai.

d ea l o f t h e m o n t h B y E r i k a Wa n g

Courtesy Fosun International Ltd.

Atlantis Sanya will be the first in China and the third in the world

Fosun, Kerzner Mega Resort to ‘Astonish’ Guests

hanghai-based Fosun International Ltd. announced plans to build a US$1.6 billion ocean-themed mega resort in the city of Sanya, southern Hainan Island, in a joint project with Kerzner International Holdings Ltd., operator of South Africa’s Sun City and the Atlantis brand of hotels. According to terms of the agreement, Kerzner will manage the resort, while Fosun is fronting the capital and owning the real estate. Construction will begin by the end of 2013 and will be completed in 2016. Atlantis Sanya – the first Atlantis resort in China and the third Atlantis worldwide after Paradise Island in The Bahamas and The Palm on Dubai’s artificial Palm Island – will be targeted mainly at local clientele and employ more than 3,500 staff. Located along Haitang Bay and overlooking the South China Sea, the 153-acre resort will include 1,300 guest rooms, 18 bars, a water park and marine exhibits. “China is the perfect location for our next Atlantis destination resort,” said Alan Leibman, CEO of Kerzner, in a press release. Sol Kerzner, chairman of Kerzner, said: “I know this property will astonish and amaze guests – I have been working with the designers to come up with something that captures all the wonders of

Atlantis, with its magnificent sense of discovery, w hi lst a ls o int ro ducing ne w exp er iences specifically for Sanya.” Experts say that leisure travel is expanding in China faster than in Europe. More than 22 million overnight stays – most by domestic tourists – were registered in Hainan in the first eight months of 2013. Hainan already has more than 200 hotels, and at least 30 five-star hotels are in the pipeline for the next five years as local authorities seek to tap into the growing up-market tourism business in China. The holiday island has attracted scores of international developers in recent years, including InterContinental, Starwood and casino operators MGM Resorts and Caesars Entertainment. According to Qian Jiannong, president of Fosun Tourism & Commercial Group, the company has invested in major projects over the last three years, including Greek-based jewellery and accessories maker and duty-free store operator Folli Follie, China International Travel Service and Atlantis Sanya. Along with a partner, Fosun also made an offer of US$729 million earlier this year to buy Club Méditerranée S.A. as part of a plan to help European brands expand in China. Set up in 1992, Fosun, though publicly listed in Hong Kong, is considered China’s largest private conglomerate with US$28 billion in assets.

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Ocean-themed destination to overlook South China Sea

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ya n g t z e r i ve r d e lta B Y D AV ID FISHM A N

The Expat Express imaginechina

A daily commute between Shanghai and the Yangtze River Delta is a way of life for many businesspeople

Passengers scan their tickets at the Shanghai Hongqiao Railway Station in 2010

angzhou and Suzhou are popular destinations for many American executives and other expats looking for a relaxing place to spend a weekend – or even as a daytrip option – as they’re fairly close to Shanghai. Over the past decade, the presence of U.S. manufacturers in these two cities and the rest of the Yangtze River Delta (YRD) region has been climbing steadily. As a result, more and more senior executives take daytrips to the YRD – or the reverse to Shanghai – on a daily basis. One of these so-called reverse commuter is Brad Feuling, CEO of the Kong and Allan Group, whose main offices are in Shanghai’s Xuhui District. Feuling jumps on a high-speed train at the Suzhou Industrial Park (SIP) train station departing for Shanghai every day. It’s an unusual

arrangement that some might consider exhausting, but not Feuling. “When I tell people I commute every day from Suzhou, I get some big eyes,” Feuling says. “People are like: ‘Wow, that must be far.’ But when you work out the door-to-door time expenditure, it’s actually very comparable to some commutes from within Shanghai.” Although this is a relatively new phenomenon here, a modern transportation infrastructure suggests the number of expat commuters will rise. Rosario Di Maggio, manager for Shanghai and the Yangtze River Delta at Dezan Shira & Associates in Shanghai, said 50 percent of his firm’s clients are outside of Shanghai, necessitating his frequent travel to other YRD cities. He explained that in recent years, many small firms, not just in manufacturing, are moving to smaller

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Dan Krassenstein

cities such as Wujiang or Nantong. China’s massive buildup in high-speed train capacity has proved to be a boon for Di Maggio and others who must commute frequently. Trips to meet clients in Ningbo now take one-third of the time that they used to and he said he hopes to cut his commute even shorter. “When I go to Nantong on a client visit, I still have to take an older generation train, then a bus, then a cab sometimes, to reach the client’s offices,” says Di Maggio. “It’s just part of the business. You go where the clients are.” Dan Krassenstein, director of Asia Operations for Pro c on Pa c i f i c L LC , w h o s e re g i on a l headquarters are in Shanghai, relies on several manufacturers in the YRD. Krassenstein travels frequently and points out that high-quality business hotels, the ability to buy train tickets online and

Rosario Di Maggio

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faster trains all make life easier. “When I first started out in China, going to Hangzhou took three hours. It was a hot, sweaty experience with people sitting on the floors, sometimes chickens too,” says Krassenstein. He says he believes renting a vehicle is currently “unacceptably expensive” in China and prefers to take the trains as much as possible, eschewing car rentals unless absolutely necessary.

Commuter science Feuling of Kong and Allan said it takes some experience for the daily commute to go from grind to a smooth ride. He said that finding one of the scarce taxis at the SIP station can be tricky, but he has it down to a science. “I know which train carriage will open its doors closest to the stairwell

and let you get in the taxi queue fastest,” he says. “You can tell who the regular commuters are because we’re all moving to that one carriage as we approach the station.” He’s learned to turn the commute into a productive trip each day. “I’ve realized that the commute gives me more time to consider strategic directives for the company. I can think about the top three-four things that I need to get done daily, the critical internal and external partners I need to meet with. Having that time is in fact really valuable.” Eric Wu, a tax manager for the Suzhou branch of PricewaterhouseCoopers China, is based in Suzhou and spends about half of his time working in Shanghai. To deal with the challenges of being based in two cities, Wu maintains apartments in both locations, with his main home in Shanghai and a rental in Suzhou. He relies on the high-speed train as well, and said his company has saved cash due to the faster trains. “We used to have to rent a car and driver for day trips between Suzhou and Shanghai for nearly RMB800 for the day,” Wu says. The high speed rail is the dot that makes all the difference, they say. All top five economies by GDP in the YRD have high-speed train service within eight kilometers of their central business districts (CBDs), and of the top 10 YRD economies, only Nantong lacks highspeed train service. By contrast, Foshan currently has no dedicated high-speed train service, although it has the third highest GDP in the Pearl River Delta (PRD). Additionally, Dongguan is the fourth largest economy in the PRD but is serviced by a high-speed railway station 43 kilometers from its CBD.

It’s the rail Construction of high-speed railways continues at a breakneck pace. With the recent midSeptember completion of a high-speed railway connecting Fuzhou and Nanchang, China has just broken 10,000 kilometers of high-speed rails. According to government statistics about railways

currently under construction or planned for construction, this number will break 20,000 kilometers by 2020. Most likely to positively affect business travelers in the YRD region is the Shanghai–Nantong G-train railway link, which is projected for completion in 2018 and will serve a number of S u z h o u’s c o u n t y - l e v e l c i t i e s , i n c l u d i n g Zhangjiagang, Taicang and Changshu. Currently, Nantong-bound train travelers from Shanghai must first go to Zhenjiang, just shy of Nanjing, and then swing back east, for a total travel time of five hours. Upon completion, the Shanghai–Nantong railway will reduce the Shanghai–Nantong train travel time to just one hour. For some, the daily commute is a bigger adjustment. While travel between Suzhou and Shanghai is convenient for some, Dustin Davis, general manager for Norplex-Micarta in Changzhou, sees the commute as a sacrifice. When he first moved to China three years ago, Davis only considered Shanghai due to the reputation for having decent international schools and health clinics. At the same time, however, his company was constructing new facilities in Changzhou 170 kilometers away, or just a bit longer than the distance from New York City to Philadelphia. Now, Davis lives in a bare-bones efficiency apartment in Changzhou Monday through Thursday. On other days, he must take the hour-long ride to Shanghai to see his family. He sees the decision to live and work in two separate locations as a career advancement move, while cautioning the challenges it brings. “It’s tough, you’re not at home every day and you’re not at work every day either,” says Davis. “I had to be in Changzhou on my son’s first day of kindergarten and when I got home that day, he was already asleep so I didn’t even get a chance to ask my son about his first day of kindergarten.”

David Fishman was a summer intern at AmCham Shanghai’s YRD Center Suzhou Office.

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Dustin Davis

Brad Feuling

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When I tell people I commute every day from Suzhou, I get some big eyes,” – Brad Feuling, CEO, Kong and Allan Group

r e g i o n a l s ecu r i t y B Y RO B E RT S . ROSS

The Pivot in Perspective Robert S. Ross is professor of Political Science at Boston College; associate, Fairbank Center for Chinese Studies, Harvard University; and senior advisor, Security Studies Program, Massachusetts Institute of Technology.

The U.S. pivot to Asia started long before the Obama administration’s initiatives, says a China expert

ince John Kerry became U.S. Secretary of State in February 2013, observers in the U.S. and East Asia have suggested that the U.S. has abandoned former Secretary of State Clinton’s “pivot” to East Asia. For example, Indonesian Ambassador to the U.S. Dino Djalal asked “Is the pivot to Asia in the second-term Obama administration sustainable with all the attention to the Middle East?”

Also, prominent South Korean commentator Kim Young-hie argued that “Washington’s primary concerns have veered away from Asia, the Korean Peninsula and North Korea” and that the Obama administration’s policy toward North Korea is “strategic neglect.” Kerry has adjusted U.S. foreign policy, but the perceived swings in U.S. policy are imaginary. The pivot was mostly imagery, rather than substance, and criticism of contemporary U.S. policy reflects a fundamental misreading of policy. The U.S. did not pivot to East Asia in 2010. Rather, the pivot began in 1997. In the aftermath of the 1996 Taiwan Strait crisis, the U.S. realized that it may have to fight a war with China over Taiwan, regardless of the cause of such a war. Thus, in 1997 the Clinton administration began the transfer of U.S. naval forces from Europe to Asia; it redeployed a Los Angeles-class submarine from Europe to Guam. By the end of the George W. Bush administra-

DoD Photo by Glenn Fawcett

U.S. Defense Secretary Chuck Hagel and China’s Minister of National Defense Gen. Chang Wanquan at a Pentagon press briefing in August where they met to discuss, among other things, the rebalancing of U.S. forces to the Asia-Pacific

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U.S. revisionism The U.S. is the most powerful country in the world. It necessarily influences global strategic

State Department photo by William Ng

tion, the U.S. has deployed to East Asia every advanced air and naval militar y platform, including Virginia-class submarines, B-1 and B-2 bombers, F-22 aircraft, SSGN guided missile submarines, missile defense technologies and drone aircraft. In 2010 the Pentagon reported that it would deploy 60 percent of U.S. naval ships to Asia. But by that year the U.S. had already deployed 58 percent of ships to East Asia. The U.S. also strengthened alliance relations with Japan and significantly enhanced defense cooperation with Singapore, Malaysia and the Philippines. From the 1990s through the Bush administration, countries throughout East Asia expanded cooperation with the U.S., reflecting their confidence that the U.S. had the capabilities and resolve to respond to the rise of China. Even as the U.S. Army fought land wars in Central Asia and the Middle East, the U.S. Navy and Air Force strengthened their presence in East Asia. The quarterly supplemental budget funded the U.S. ground wars, so that the annual U.S. defense budget was mostly unaffected, allowing the U.S. to continue actively to balance the rise of China. But by the end of 2012 the situation in East Asia was the worst since the end of the Cold War. The South China Sea territorial disputes had escalated and Sino-Vietnamese and SinoPhilippine tensions suggested the possibility of hostilities and a greater risk of U.S.-China conflict. The Sino-Japanes e maritime dispute had escalated, involving the U.S. in a dispute over insignificant islands. Tension with North Korea had escalated and North Korea resumed testing of nuclear weapons. Meanwhile, U.S.-China relations deteriorated; China opposed U.S. policy toward Iran and Syria and withheld cooperation on the Korean Peninsula, even as Sino-Russian relations improved.

U.S. Secretary of State John Kerry chats with Chinese President Xi Jinping prior to the APEC Leaders’ Official Dinner in Bali, Indonesia, in October

and political developments. Similarly, every East Asian country reacts to U.S. policy. Just as Washington had been the cornerstone of postCold War regional stability, it has been a source of recent regional instability. The Obama administration’s pivot was novel for the symbolism of its assertive diplomacy. Clinton traveled to East Asia more than her predecessors, earning praise for her attention to the region’s multilateral institutions. But the pivot also challenged regional stability. Since 1975 Washington understood that Indochina was strategically unimportant for the U.S. but that it was vital to Chinese security. But in 2010 the Obama administration initiated annual naval exercises with the Vietnamese Navy and established a U.S.-Vietnam “strategic partnership.” Clinton twice visited Hanoi in 2012 and Secretaries of Defense Robert Gates and Leon Panetta both visited Hanoi. Panetta visited Cam Ranh Bay and declared that it was a major part of the U.S. Navy’s plans for East Asia. It was inevitable that China would respond with suspicion and push back against U.S. policy. In 2010 the U.S. intervened in the South China Sea territorial disputes. Clinton sided with the Southeast Asian countries in their demand for

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But whereas the Obama administration has remained committed to East Asia, the White House and Secretary of State Kerry have also reversed many of the pivot’s more destabilizing initiatives…”

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…Washington has accepted the new status quo in the East China Sea.”

multilateral negotiations with China. In 2012, she assured Manila that the U.S. would fight to defend the Philippines, just as Chinese and Philippine ships faced off at Scarborough Shoal. U.S. policy had encouraged Vietnam and the Philippines to challenge Chinese sovereignty and security. China responded with coercive diplomacy. From 2010–2012, the Obama administration increased U.S. troop presence in South Korea, increased the scale and frequency of U.S.-South Korean joint exercises and deferred the transfer operational control (OpCon) of South Korean forces to Seoul from 2012 to 2015. Given North Korea’s rapidly deteriorating military capability, Chinese leaders interpreted these moves as aimed at China and they bolstered cooperation with North Korea. The U.S. also seemed to back Japan in its 2012 territorial dispute with China. Although in

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September 2012 U.S. diplomats had privately told Japanese leaders that Washington opposed Japanese “nationalization” of the Senkaku/Diaoyu islands, frequent public statements by senior U.S. officials that U.S. treaty commitments covered Japanese defense of the islands had persuaded Tokyo that the U.S. supported a tough response against Chinese naval activities. China responded with increased presence in disputed waters.

Renewed restraint Since John Kerry became Secretary of State in February 2013, the United States has adjusted its East Asia policy. But just as the U.S. had never left East Asia, it remains committed to East Asia. The Obama administration’s policy adjustments do not reflect preoccupation with events in the Middle East nor domestic budget politics, but its recognition that

Restoring stability It is not a coincidence that following these

U.S. Navy

significant aspects of the pivot were detrimental to U.S. interests and regional stability. In 2013 the U.S. has continued to bolster its regional presence. In 2013 the U.S. Navy’s first Littoral Combat Ship was deployed to Singapore and the U.S. Navy has strengthened cooperation with the Philippines. In October the U.S. and Japan agreed to strengthen alliance defense cooperation. And the U.S. budget impasse has not affected U.S. naval presence in Asia, despite the criticism of many observers. Moreover, the U.S. has remained active in regional diplomacy. Since April 2013, Kerry has visited East Asia three times and Secretary of Defense Chuck Hegel has visited the region twice. Kerry was especially active in negotiating policy coordination with China and South Korea toward North Korea. But whereas the Obama administration has remained committed to East Asia, the White House and Secretary of State Kerry have also reversed many of the pivot’s more destabilizing initiatives. Washington no longer advocates a “strategic partnership” with Vietnam and there has not been a U.S.-Vietnam naval exercise since 2012. Regarding the South China Sea territorial disputes, Washington no longer mentions the sovereignty issues and it has distanced the U.S. from both Vietnamese and Philippine claims. Its policy toward the Sino-Japanese maritime dispute is more circumspect in its support for Japan and Kerry praised Japan’s “restraint,” rather than support its resistance to Chinese policy. In effect, Washington has accepted the new status quo in the East China Sea. On the Korean Peninsula, Washington has worked closely with China to constrain North Korea and it has opened negotiations with Seoul to transfer war-time operational control (OpCon) of South Korean forces to Seoul in 2015.

Hillary Clinton, then U.S. Secretary of State, departs USS Fitzgerald docked in Manila Bay on Nov. 16, 2011

changes in U.S. foreign policy, East Asia has experienced greater stability. The tension on Korean peninsula has subsided and Sino-South Korean relations have improved. In the South China Sea, Sino-Vietnamese tension and regional maritime tension over disputed territories have subsided and Chinese economic and diplomatic cooperation with ASEAN has considerably improved. Simultaneously, U.S.-China relations have improved. U.S.-China diplomacy is characterized by mutual satisfaction with growing cooperation. U.S.-China military-to-military diplomacy has significantly expanded. And Chinese opposition to U.S. p olic y toward Syr ia and Iran has diminished. Since early 2013 the U.S. has adjusted its East Asia policy. The Obama administration has strategically distanced the U.S. from Indochina and has removed itself from the sovereignty disputes in the South China Sea and the East China Sea. And it has worked with China to constrain North Korea’s nuclear program. Greater U.S. moderation and restraint have not undermined U.S. security. On the contrary, U.S. policy adjustments have merely returned U.S. policy to the East Asia policy of the George W. Bush administration. The outcome has restored regional stability, improved U.S.-China relations and reduced risk of regional hostilities.

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The Third The Shanghai pilot Free Trade Zone is billed as a major economic reform initiative and while foreign companies appear optimistic, many are waiting for the details to emerge B y TI M OTHY P. ST R AT F O R D A N D S C OTT L I V INGSTO N

he success of the pilot Free Trade Zone (FTZ) and its impact on foreign companies may take years to fully evaluate, but it’s certain that the experiment is an important part of Xi Jinping’s reform priorities aimed at liberalizing the flow of goods and services and developing Shanghai into an international financial center. Officially launched on September 29, the FTZ provides an opportunity for Chinese leaders to test and refine these economic reform initiatives before their potential roll-out nationwide. For foreign investors, the zone has the potential to provide a number of new investment opportunities. As set forth in the State Council’s Notice of the General Plan of the China (Shanghai) Pilot Free Trade Zone, the Shanghai FTZ will loosen restrictions for foreign investment in 23 service sectors, including banking, financial services, healthcare and technology. The zone will also replace the current investment approval process required of all foreign direct investment with a “negative list” approach that eliminates all but ministerial filing obligations for

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investments in industries not included on the list. According to officials from the Ministry of Commerce and the National Development and Reform Commission, China has adopted a negative list approach in part to help it prepare to conclude a bilateral investment treaty (BIT) with the U.S. that is likely to include commitments defined on a negative list basis. Additionally, these same officials have said that the zone will help position China to join the Trans-Pacific Partnership (TPP) currently being negotiated by the U.S. and 11 countries in the region. Despite these positive steps, initial reactions to the Shanghai FTZ have been reserved, with investors concerned that vested interests and a lack of implementing specifics may hinder the zone’s full development. Still, domestic and foreign investors assessing the prospects for the zone should find encouragement in the lessons of history. Since the opening of the Shenzhen Special Economic Zone in May 1980, Chinese leaders have demonstrated a preference for managed incremental economic reforms launched initially on a

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Wave? pilot basis, over sudden, broadly-implemented reforms, and their associated risks to economic and social stability. In addition, past leaders have successfully used external pressures and opportunities, such as the WTO accession process during the late 1990s, to drive a domestic reform agenda. The Shanghai FTZ shares the hallmarks of these past initiatives and, as the most visible expression of Xi’s economic reform policies to date, could signal the launch of a third wave of economic reform – following Deng’s original reform and opening 35 years ago and China’s 2001 entry into the WTO. Investors should not dismiss its potential significance at this early stage.

Contemplated reforms China’s plan for the pilot Shanghai FTZ provides a first indication of the economic reforms being contemplated by Xi. Of its several aims, three stand out as being most significant for foreign investors. First, the plan anticipates China’s conclusion of a BIT with the U.S. and adopts a “negative list” approach for investment approvals that eliminates, for all non-listed industries, the current approval process required for inbound foreign investment and

Timothy P. Stratford

Scott Livingston

Timothy P. Stratford, managing partner at Covington & Burling in Beijing, previously served in Washington, D.C. as the Assistant U.S. Trade Representative responsible for U.S.-China trade relations from 2005–2010. Scott Livingston is an associate at Covington & Burling and advises international clients on regulatory compliance, government affairs and corporate matters.

replaces it within the zone with a “filing for the record” requirement. Foreign parties contemplating investment in industries listed on the negative list, however, will need to apply for investment approval as before. For investment in non-listed industries, this imaginechina

Potential investors register at the pilot Free Trade Zone

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FTZ Measures in Focus

The following list was excerpted from the government-issued lists that may be of interest to foreign enterprises looking at exploring opportunities within the pilot Free Trade Zone. These measures apply only to enterprises that are registered in the Shanghai FTZ.

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Banking Services Permit qualified foreign-invested financial institutions to establish foreign-invested banks. Permit qualified Chinese private investors to jointly establish Sino-foreign equity joint venture banks with foreigninvested financial institutions. When conditions are met, banks with restricted licenses may be established in the FTZ at the appropriate time. Subject to the strengthening of effective supervision and the improvement of related administrative measures, permit qualified Chinese-invested banks in the FTZ to carry out offshore business. Professional Medical Insurance Establish foreign-invested professional medical insurance organizations on a trial basis. Financial Leasing Remove the minimum registered capital requirement for financial leasing companies establishing a single aircraft or single vessel subsidiary within the FTZ. Permit financial leasing companies to concurrently engage in commercial factoring business that is associated with its principal business. Ocean Cargo Transportation Loosen equity restrictions for foreign investors in Sino-foreign joint venture (cooperative or equity) international shipping enterprises. Relevant pilot administrative measures shall be formulated by the competent department in charge of transportation under the State Council. Ships operating under a foreign (non-PRC) flag that are wholly Chinese-owned or owned by an enterprise where the Chinese party is the controlling party are permitted to carry foreign trade import/export containers between Chinese domestic coastal ports and the Port of Shanghai on an initial pilot basis. International Shipping Management Permit the establishment of wholly foreign-owned international shipping management enterprises. Value-Added Telecommunication Sectors Subject to the guarantee of network information security, permit foreigninvested enterprises to engage in certain designated sectors of valueadded telecommunication services. State Council approval shall be obtained where such business conflicts with administrative regulations. Gaming Consoles Permit foreign-invested enterprises to engage in the production and sale of game consoles. Following content examination by the department in charge of culture, the gaming consoles can be sold to the Chinese domestic market. Legal Services Explore means and mechanisms to strengthen cooperation between Chinese and foreign (including Hong Kong, Macao and Taiwan) law firms. Credit Investigation Services Permit the establishment of foreign-invested credit investigation companies. Travel Agencies Permit qualified Sino-foreign equity joint venture travel agencies registered in the FTZ to engage in outbound tourism business (except to Taiwan).

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Representatives of two companies show off their business license at Shanghai Waigaoqiao Free Trade Zone on September 29 Human Resource Agencies Permit the establishment of Sino-foreign equity joint ventures for human resources intermediary agencies, provided the foreign-owned equity does not exceed 70%; permit service providers from Hong Kong and Macao to establish wholly-owned human resources intermediary agencies. Reduce the minimum registered capital requirement for foreigninvested human resources intermediary agencies from US$300,000 to US$125,000. Investment Management Permit the establishment of joint-stock foreign investment companies. Engineering Design The requirement to show engineering design achievements for the initial qualifications application will be eliminated for foreign invested engineering design enterprises (not including engineering surveying) established in the FTZ and providing services to Shanghai. Construction Wholly foreign-owned construction enterprises within the FTZ carrying out Sino-foreign joint construction projects in Shanghai will not be subject to equity restrictions for the construction projects. Performance Brokerage Agencies Eliminate equity restrictions on foreign-invested performance brokerage agencies, and permit the establishment of wholly foreign-owned performance brokerage agencies to provide services for Shanghai. Entertainment Venues Permit the establishment of wholly foreign-owned entertainment venues to provide services in the FTZ. Educational and Vocational Training Permit the opening of Sino-foreign cooperative commercial educational training institutions. Permit the opening of Sino-foreign cooperative commercial vocational skills training institutions. Healthcare Permit the establishment of wholly foreign-owned medical agencies. Courtesy Covington & Burling LLP

Restricted Zone: Salt, Subways and Villas

Some items on the “negative list” that some may not expect: • Wholesale of salt (prohibited) • Publishing of books, newspapers and periodicals (prohibited) • Construction and operation of golf courses (prohibited) • Construction and operation of villas (prohibited) • Investment in venues to provide Internet access (i.e., cybercafé) (prohibited) • Construction and operation of nuclear power stations (equity controlled by Chinese party) • Construction and operation of large-scale theme parks (restricted) • Erotic industry (prohibited) • Construction and operation of city subways and light railways (equity controlled by Chinese party)

reform should significantly decrease the time and uncertainty associated with setting-up and opening a business in China. The negative list for the Shanghai FTZ was released on September 30 and classifies nearly 200 sectors as either restricted to foreign investors or permitted only with government approval. Government officials have acknowledged that while the first iteration of the negative list is somewhat lengthy, it will be pared down in subsequent versions following the further development of the Shanghai FTZ. Second, the plan relaxes restrictions on 23 service industries previously restricted or prohibited to foreign investment such as b an king and f inancia l s er vices, cer t ain va lue-adde d telecommunication services (e.g., cloud computing and other Internet-based service offerings), healthcare and entertainment (see side box for complete list). Third, the plan champions the “acceleration of innovation within the financial system” through, among other measures, allowing RMB capital account convertibility, market interest rates and cross-border RMB handling within the zone. However, how such measures will be opened to foreign investors, and how they may be cordoned off from affecting the rest of the country,

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remain unclear. Within the zone, the plan also permits foreign investors to open foreign-invested banks, and Chinese banks to carry out improved offshore banking business. The combination of enhanced banking services and capital account convertibility could limit some of the challenges to outbound investments currently faced by Chinese companies.

Political context The prospects for the zone’s success are best understood by placing it within its greater economic and political context. For the past several years, there has been growing recognition that China’s present investment-led growth model has run its course and that further market reforms are needed to sustain China’s historic 30-year growth trend. Now in the initial phase of a likely 10-year presidential term, President Xi Jinping has placed economic reform at the forefront of his domestic agenda. He is assisted in this effort by Premier Li Keqiang, who is widely understood to be the driving force behind the establishment of the Shanghai FTZ. As vice premier in 2012, Li sponsored an influential reform-

Premier Li Keqiang

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Many are comparing Shanghai’s pilot FTZ to Shenzhen’s special established 30 years ago

oriented report entitled “China 2030: Building a Modern, Harmonious, and Creative High-Income Society.” Jointly drafted by the World Bank and the Development Research Center of China’s State Council, the report called for significant structural and economic reform, a strengthening of China’s financial system, and the accelerated development of China’s innovation capacity. Xi’s decision to use the Shanghai FTZ as a testing ground for economic reform echoes Deng Xiaoping’s use of similarly purposed special economic zones beginning in the late 1970s. As such, it is but one example of how Xi’s administration has used historically successful reform models to push forward its reform agenda. This appeal to historical models was first seen in December 2012, shortly after his appointment as General Secretary of the Chinese Communist Party in March, when Xi chose Shenzhen as the destination for his first inspection tour. Shenzhen is closely linked in China’s collective memory with Deng’s reform and opening initiatives, both as the first special economic zone opened in 1980, and as one of the more significant stops on Deng’s 1992 “Southern Tour,” which reaffirmed China’s commitment to market reforms following the uncertainties of the post-1989 era. Xi’s visit paid homage not only to Deng, but also to Deng’s commitment to reform. Second, the leadership’s striking interest in concluding

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certain previously resisted trade agreements with the U.S. and other countries parallels Chinese Premier Zhu Rongji’s use of the WTO accession process to drive domestic reform during the late 1990s. In Ju l y at t h e U. S . - C h i n a Strategic and Economic Dialogue, for example, China surprised many obs er vers by accepting “preestablishment” coverage and a “negative list” approach as a basis for negotiating a U.S.-China BIT. The significance is that China would be required to grant “national treatment” not only to American investments after they are established in China but also to economic zone American companies and individuals seeking to invest in China (i.e., dur ing t he “preestablishment” phase), except in sectors and subject to conditions specifically listed in an annex to the treaty. Also during the past three months, Chinese leaders have for the first time expressed serious interest in joining the TPP, an ambitious treaty currently being negotiated by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the U.S. and Vietnam. In addition, China has very recently expressed interest in participating in the Trade in Services Agreement (TISA) currently being negotiated at the WTO. Xi’s decision to simultaneously push both a new pilot FTZ and trade negotiations with other countries may indicate an effort to buttress each initiative in anticipation of possible resistance to such reforms by state-owned enterprises or other powerful vested interests. Linking the two initiatives increases the visibility of each, and further suggests the depth of Xi’s commitment.

Prospects for economic reform Despite the support of the two highest ranking officials in China’s political and party hierarchy, the long-term impact of the Shanghai FTZ remains uncertain. The South China Morning Post indicated that Li faced considerable domestic opposition from China’s financial industry regulators, who are hesitant to open the sector to foreign investment. The Wall Street Journal added that Li’s

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absence from the official opening of the Shanghai FTZ on September 29 “suggests to some that the zone had been effectively demoted or that it was a focus of top-level disagreement.” Clearly, Xi and Li face an uphill battle in convincing China’s entrenched bureaucratic interests (most likely, various regulators and China’s prominent state-owned enterprises) to support the economic policies planned for the zone.

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…This reform should significantly decrease the time and uncertainty associated with setting-up and opening a business in China.”

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East China Sea

Hangzhou Bay Yangshan Free Trade Port Area (Harbor)

What is the Shanghai FTZ? In the face of this uncertainty, foreign investors on the outside of China’s opaque decision-making process will want to look for signals over the next few months to gauge whether the Xi administration is investing the necessary political capital to drive reform within the Shanghai FTZ and for the country at large. Three potential events may signal likely success for the reforms: Adoption of Shanghai FTZ-like Market Reforms at the Third Plenum In November, the Chinese Communist Party (CCP) will meet at the Third Plenum of the 18th CCP Central Committee. CCP plenums are generally held on an annual basis and provide an opportunity for the party’s top leaders to discuss major matters and plan reform. The Third Plenum is particularly significant as it is generally used by incoming officials to promote their vision of China’s future and the proposed reforms needed to attain their goals. Indeed, it was at the Third Plenum of the 11th CCP Central Committee that Deng took control of the CCP and launched China’s “reform and opening” movement. Expressions of support for reform policies similar to those found in the Shanghai FTZ – particularly a nationwide streamlining or removal of administrative approvals, or liberalization of financial controls – may indicate further room for experimentation in Shanghai’s FTZ. Appearance of a High-Profile Leader in Support of the Zone

The Shanghai Free Trade Zone is, effectively, a merger of the four bonded zones currently located on the far eastern borders of the Shanghai municipality. Its expected total geographic area of 28.78 square kilometers makes it approximately one-third the size of Hong Kong Island (81 square kilometers).

When China’s economic reform initiatives slowed in the post1989 period, it was Deng’s “Southern Tour” that was widely seen as reigniting market reforms. The appearance of Li or another high ranking official at the zone would be a strong signal that internal opposition to the zone has weakened or been defeated. Release of Specific Implementing Regulations Finally, and most importantly, the success of the Shanghai FTZ will ultimately be determined by the type of investment and regulatory environment established for investors. If forthcoming regulations give full play to the ambitious goals of the FTZ, then many of the concerns currently surrounding the zone will diminish. Failure of any of these three events to materialize, however, may signal the presence of significant domestic opposition to the Xi administration’s reform initiatives. The zone will thus serve as a canary in the coal mine for the fate of China’s economic reforms as a whole, and the associated opportunities for enhanced foreign participation in the China market.

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What Do You Think? Several senior executives offer their take on the pilot FTZ

Tom Liu CEO of ChinaScope Financial Limited The FTZ’s establishment is an important step toward China’s financial reform. What excites me about it is the currently unanswered question about whether the capital raised in the zone can be used outside the zone via business activities (e.g., can you drive outside the zone a car leased from a leasing company that is set up in the zone and that purchases foreign cars at a much lower cost; can banks that are set up in the zone and enjoy open forex exchange fund companies outside the zone, etc.). In practice, the answer to this question would be very difficult to deviate from “yes,” and once that happens, the competitive playing field in China will alter dramatically and the country will face the level of reform that can only be rivaled by the Reform and Open Door Policy engineered by Deng Xiaoping. This reform will invite the world into China’s backyard with few restrictions and it will force the lazy and non-competitive to either shape up or give way to those who can. For companies like ChinaScope that thrive off the advancement of the financial sector, which is a leveraged play off the general economy, we are excited by the establishment of the FTZ, because it marks the beginning of a structural change that will fundamentally prolong the sustainability of China’s economic growth.

Andrew Au Chief Executive Officer, Citi China Citi China is delighted to be the first global bank approved to establish a presence in the China (Shanghai) Pilot Free Trade Zone (FTZ). We applied for this license in support of the government’s move towards economic reform and the promotion of Shanghai as a competitive international financial center. The FTZ will be a test bed and directionally it is the right thing to do. For the financial services sector, the FTZ is expected to provide foreign and domestic, public and private sector players a level-playing field. Citi is well positioned to participate in and contribute to the development of various areas, including trade finance, cash management, RMB internationalization and convertibility, as well as interest-rate liberalization. We will bring our global network and capabilities to China, and leverage our century-long local knowledge and experience to play an active role in the process. We are confident of the prospect of China’s economy and the capability of the Chinese leaders. Citi China has always been at the forefront of the financial services industry in China, and we believe the FTZ will offer us great opportunities to further grow our franchise in China for many years to come.

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Vivian Jiang Deloitte National Leader of Tax and Legal Services for Mainland China, Hong Kong SAR and Macau SAR The launch of the China (Shanghai) Pilot Free Trade Zone has been likened to the establishment of the Shenzhen SEZ and some are saying: “no change.” We still believe that the pilot will come to signify the start of the transformation of China’s economy into a developed global “market-driven” economy. Reform is a must for sustainable, strong growth of China’s economy. Many at the highest level of government believe undertaking reforms now is necessary. Further, global trends (e.g., Japan but not China was invited to join the Trans-Pacific Partnership) and the pace at which China’s major trading partners are concluding trade pacts is forcing China to open up. The Changjiang Delta The Changjiang Delta contains all of the elements required to drive super economic growth: large pools of capital for investment, world class manufacturing capacity, an educated and entrepreneurial talent pool and a large and wealthy consumer base. The pilot FTZ’s Overall Framework Plan integrates all the necessary key reforms. The Pilot FTZ possesses the attributes critical for success: right timing, right location and the right people. As one of the leading professional services firms in China, we welcome and enthusiastically support the opening up of China’s economy and its transformation into a developed, global market-driven economy. Our advice to business: Although you might ultimately decide not to proceed for the time being, the pilot FTZ should nonetheless now be on your list of opportunities for serious consideration.

Kelvin Lee Head of Multinational Corporates, China, BNP Paribas The pilot FTZ represents a positive step forward in the development of the financial sector itself and concurrently accelerates product innovation while following the changing needs of customers operating in this FTZ. Areas such as cross-border (i.e., overseas FTZ, FTZ onshore) liquidity management, commodity trading, inventory financing, capital account and debt capital markets are expected to be granted more flexibility of which its development, to a large extent, has been constrained by current regulations onshore. Free RMB convertibility and a market-driven interest rate regime are of immense importance to Shanghai in its journey to become an international financial center by 2020. The pilot initiative offers an experimental ground for the government to “test run” those concepts. Meanwhile, foreign banks are given a unique opportunity to participate and contribute to its refinements. With much of the details and specificity yet to be revealed at this point, key questions remain on: • What different values will it bring as compared with special administrative regions, e.g., Hong Kong? • Are we going to see more profound changes coming out of the Shanghai pilot FTZ as compared to Tianjin Binhai Financial Innovation and the Shenzhen Qianhai Economic Zone? • How will the FTZ interact with China onshore? Will some of the cross-border constraints we see today be removed or softened to create new possibilities? Overall, we are still in an initial phase of this plan. The government remains open and it is our role to propose and promote new ideas that are consistent with the outlined framework and yet groundbreaking to instill changes with more substance over form.

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Anthony Couse is managing director of Jones Lang LaSalle for Eastern China. Couse heads the Investment Business for China and Commercial Leasing Business for Shanghai.

One Step at a Time Anthony Couse B Y A NTH O NY C O U SE

he FTZ’s announcement is a signal of the government’s continued commitment to moving forward with financial reform and to positioning Shanghai as a global financial center. It is expected that the zone will allow for experimentation with pilot reforms in financial deregulation, RMB convertibility and interest rate reform that eventually could be expanded to the rest of Shanghai. This would benefit the city’s financial services industry, and could help attract a larger presence of financial and downstream professional service firms, increasing office demand in the city’s existing central business districts (CBDs). However, it is important not to oversell the zone’s immediate impact on the Shanghai office market, and instead to view the project as one step in a process that will play out over the course of several years. First, it will take time for the pilot reforms to be rolled out to the other areas of the city to make sure the reforms are manageable and sustainable. Second, the experience of existing global financial centers shows that most house a large population of specialized workers, including lawyers, accountants and other financial experts – something that Shanghai still lacks. Third, a mature financial center requires business transparency and a mature legal system. Shanghai will be hard-pressed to upgrade its workforce and business environment simply by changing a set of laws and regulations. For these reasons, we do not see the FTZ as a replacement for Hong Kong nor does it challenge the role of Hong Kong, due to Hong Kong’s mature base of talent, legal infrastructure and regulatory institutions. There is limited possibility that the three coastal areas that

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comprise the FTZ will become “new CBDs.” The question has been posed by some of our clients, who have compared the FTZ t o t h e s itu at i on a b out 2 0 y e ar s a g o i n Luj i a z u i , a n underdeveloped area which has grown into the financial center of Shanghai. There are two main reasons that “another Lujiazui” is unlikely to emerge in the FTZ. First, in terms of the location, the three areas of the FTZ are all situated along the coastal edge of the city and are about 25 to 50 kilometers from the closest Pudong decentralized Grade A submarkets, let alone CBD areas. In addition, these zones are currently occupied in large part by warehouses and lack a business environment that could compete with downtown. Finally, from a city planning perspective, the government does not intend to build a new financial or business center in the new FTZ. As a result, there are restrictions placed on the type of real estate allowed to be developed in the FTZ. The FTZ’s location, land availability and existing business environment mean that the government will not look to create new competition between the FTZ and the existing Lujiazui or even the future Qiantan submarkets. The prospects are somewhat better for the FTZ’s impact on the warehouse sector, particularly the bonded market, much of whose properties lie within the FTZ’s boundaries. We do not expect the FTZ to become a major shopping destination. At this stage, there is no indication that a special tax regime will be in place to enable duty-free shopping or duty-free outlets. However, preliminary reports do suggest that select e-commerce sites will partner with the zone, but this does not extend to any particular tax benefit. We do see opportunities, however, to invigorate sales of imported items if any tax reductions are granted in the future.

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Goods, Customs and Taxes Damon Paling is a partner at PwC China and Jieying Ni is a senior manager at PwC China.

How will the pilot Free Trade Zone impact the trade in goods? Damon Paling

Jieying Ni

B Y D A M O N PA L ING A N D J IEYING NI

ubsequent to the State Council approving the establishment of the pilot Shanghai Free Trade Zone in August 2013, a series of administrative measures have been issued by the State Council, Shanghai Municipal Government and other authorities covering both trade in goods and trade in services and that are designed to: • Maintain the leadership of inbound investment while competing against other economies • Transform from “government-oriented” to “market -oriented” environment • Further internalize the RMB • Be a testing ground for duplication in two to three years We will first offer an overview of the new Shanghai Free Trade Zone or FTZ and an overview of what may be considered with respect to trade in goods. According to the measures, the following areas will be opened up: • Finance (banking, health medical insurance, financial leasing) • Shipping (ocean transportation, international ship management) • Commerce and trading (value-added telecommunication operation, sales and service of game and amusement machines) • Professional services (lawyer service, credit information sur vey, travel agency, talents intermediar y ser vice, investment management, engineering design, construction) • Cultural services (performance brokerage, entertainment venue) • Public services (education and job skill training, medical service) Current foreign investment policies applied to companies outside of Shanghai FTZ will be suspended subject to any

exclusion as documented in the much-discussed “negative list.” The production and distribution of game and amusement equipment by foreign-invested companies registered in the Shanghai FTZ is allowed. The game and amusement equipment and devices can be sold in the domestic market after approval from the Ministry of Culture. In the current regulatory framework, such machines are prohibited from importation and distribution in China.

National treatment National treatment from an investment perspective refers to the treatment granted to foreign invested companies; i.e., these are now in principle the same as those granted to domestic companies. Except for sectors specified in the negative list issued by the Shanghai Municipal Government and other prohibited sectors, foreign-invested enterprises in almost all sectors only need to make a record-filing or re g i s t r at i on pro c e du re ( t h e s am e a s t h e i r d om e s t i c counterparts) instead of the normal review and approval procedure. Sectors subject to national treatment cover various industries. In this regard, the Standing Committee of the National People’s Congress approved that the three pieces of law on foreign-invested companies, Sino-foreign joint ventures and Sino-foreign cooperative companies would be suspended to implement the Shanghai FTZ. National treatment is expected to largely alleviate foreign investor administrative burdens.

Tax environment Key tax policies and incentives are to support innovative business models that are encouraged investments in the Shanghai FTZ, rather than to provide generally reduced tax

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For Shanghai to compete regionally with the likes of Hong Kong and Singapore in the logistics area, red tape at the border needs to be reduced.â&#x20AC;?

rates or universal incentives to all sectors. For instance, the Overall Plan granted the export VAT refund to financial leasing companies in the Shanghai FTZ, which is not possible in mainland China currently except for the pilot domestic companies in Tianjin Binhai New District.

Investors injecting non-monetary assets as capital into companies registered in the Shanghai FTZ may average the premium arising from the asset appreciation over five years for CIT and Individual Income Tax (IIT) purposes. High-demand talent or professionals in short supply may enjoy preferential IIT treatment equivalent to those available in Zhongguancun in Beijing in respect to gains derived from share-based payment granted by companies registered in the Shanghai FTZ. Additionally, industry is expecting further preferential tax policies to be granted by the central government in subsequent announcements, such as for the ones for offshore business and overseas equity investment. Attractive local incentives in the form of financial subsidies are also anticipated.

Trade in goods and customs For Shanghai to compete regionally with the likes of Hong Kong and Singapore in the logistics area, red tape at the border needs to be reduced. The following actions will be taken by Customs and

imaginechina

The registration center is also a popular attraction for local residents

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Commodity Inspection and Quarantine (CIQ) in the Shanghai FTZ to facilitate trade: • Simplified Customs procedures and requirements such as “enter first, register later” for incoming overseas shipments • Single electronic Customs/CIQ window for document submission • Classified supervision on the goods for bonded warehousing and manufacturing, goods for international transit and certain goods sourced domestically with a risk-based approach • Improved supporting measures such as single office for Customs/CIQ with common working hours and designated areas for physical goods inspection In short, Customs supervision on the border between overseas and the Shanghai FTZ will be loosened or even eliminated significantly while the enforcement of Customs (e.g., collection of duty) will still exist when the goods are moved between the Shanghai FTZ and locations outside of it in China.

CIQ measures The measures allow companies registered in the Shanghai FTZ to choose the time to make the CIQ declaration before the goods are moved out of the Shanghai FTZ. Setting up a third-party CIQ authentication institute for imported and exported commodities in the Shanghai FTZ is encouraged. A credit mechanism regarding the test result will be established. This means that a third-party certificate on goods quality may be accepted by CIQ during the import CIQ declaration and inspection, which will save delivery lead time during the import/export declaration process. Both existing and new trading companies, including thirdparty logistics providers, can expect to benefit from these reform measures for international trade. However, companies registered in the Shanghai FTZ that intend to only import goods into the domestic market may not benefit from the aforesaid CIQ inspection-friendly measures until the thirdparty verification system is well established. Continuous monitoring of the implementation regulations in the future is necessary as the above Customs and CIQ reform measures are likely to be rolled out over a period of time. It is also worth noting that Shanghai Customs has been active in recent times to enhance trade facilitation such as through the deployment of a paperless clearance system to selected companies. What else can companies trading in goods expect? The establishment and operation of the new Shanghai FTZ is a milestone for the government to promote and deepen ongoing reform. The procedure for companies set up in most sectors should become as simplified and comparable to that

“

The new Shanghai FTZ may have to be physically expanded so that available supply can match increased demand.”

adopted by domestic counterparts. Such foreign direct investment policies may help relevant companies save logistic costs when operating a regional distribution center and similar operations such as a bonded repair center. Wider commercial factors should also be considered such as the location of suppliers, destination markets, schedules for aircraft and vessel arrivals, departures and routes, utilization of free trade agreements and so on. One area for trading companies to monitor is the rising cost for operating or leasing a bonded warehouse within the Shanghai FTZ. With land supply of only 28.78 square kilometers and certain areas, such as Waigaoqiao Bonded Logistics Park already running at full capacity, any increase in demand is likely to increase prices. The new Shanghai FTZ may have to be physically expanded so that available supply can match increased demand. Trading companies in certain retail sectors may also have to monitor and work with Shanghai Customs to control any “grey channel” imports that might arise under new e-commerce business models. The new Shanghai FTZ also allows companies to establish a Bonded Exhibition and Trade Platform (BETP) in designated areas. Our observation is that such “designated areas” are likely to be approved within or even outside the premises of the Shanghai FTZ, provided that import tax collection can be secured firmly according to relevant taxation policies. In other words, American companies may have a chance to perform and extend bonded exhibition activities to outside of the Shanghai FTZ. Customs and CIQ reform does not happen overnight, so companies trading in goods should continue to monitor the various trade facilitation reform measures that will be implemented. The AmCham Shanghai Trade Facilitation Task Force will continue to work closely with Shanghai Customs and CIQ to assess these developments.

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Christopher Wingo is managing director of China Sage Consultants (Shanghai), which helps U.S. SMEs sell more effectively in China.

Big Benefits…Eventually A longtime China executive says SMEs could reap wide benefits in the FTZ if they qualify

Christopher Wingo

B Y C h r i s top h e r W i n g o

he government’s plan to launch a pilot Free Trade Zone (FTZ) in Shanghai has created a buzz among foreign businesses engaged in China. As is typical of many big Chinese government initiatives, however, no one is sure what to expect. While the foreign business community, especially big financial firms, is hoping for something “revolutionary,” a review of the information released to the public suggests for the FTZ something more evolutionary will take place. This begs the question: if large multinationals and investors are unsure of how to proceed, what are small- and mediumsized businesses to think?

The impetus China’s old export-driven model is dying off and the government knows it. According to The Wall Street Journal, “without substantial changes in the next five years, IMF economists estimate, Chinese growth could fall to an average of 4 percent annually through 2030,” which is down from a high of 14.8 percent in 2007. Premier Li Keqiang and Liu He, President Xi Jinping’s purported “economic handyman,” have been pushing hard for market-oriented changes. They and their allies believe allowing foreign capital a bigger role “and making banks compete on interest rates, among other changes, would funnel more money to privately owned high-technology and service firms and help remake the economy,” the article says. Visionary reformers know changes are in order but vested interests and left-leaning officials keep pushing back. Unable to roll out far-reaching national reforms without major resistance,

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reformers are approaching the problem in a pragmatic, metered way. Just like the Shenzhen SEZ in 1980, the new FTZ will be the first of many small steps ultimately adding up to a reformed national economy.

Policy changes The exact policies are still vague. While the preliminary rules keep almost all non-Chinese entities sidelined, local media are reporting that Chinese companies, from places such as investment-oriented Wenzhou, are scrambling to register in the FTZ. The prevailing attitude among these companies is “get in now, worry about the details later.” On the surface, the new FTZ is a business in China’s dream. The zone has been widely reported to be the brainchild of Premier Li Keqiang and is expected to have the biggest impact on the financial sector. Though still non-specific, government published financial sector goals include: • Freer conversion of RMB to foreign currencies • Interest rate liberalization allowing the market to set rates • Fewer investment restrictions on incoming foreign investment and outgoing Chinese investment (specific to companies inside the zone) Domestic banks have been quick to move, but, only two foreign banks, Citigroup and Singapore’s DBS, reportedly have so far committed to open branches in the zone.

Other objectives • Making international trading more efficient and easy with easier import and export processing as well as movement of

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goods within the zone • Developing the area into an internationally recognized shipping hub • Facilitating the development of the services sector, law, architecture, financing, leasing, credit rating and insurance, healthcare, high-tech, HR and trade services, etc. • Gaming? Yes, you will be able to manufacture and buy a legal copy Xbox in the zone. One thing not talked about in the media but identified with our own research is a government sponsored e-commerce platform to facilitate international e-commerce transactions for companies selling both to and from China.

SME perspective Overall, the proposed policy changes could eventually afford big benefits to foreign SMEs operating within China. Consider the benefits of available, reasonably priced financing for capital investment and business transactions; a more efficient importation process that affords lower costs, reduced time and ultimately more competitiveness in the market; available, competitively priced and more professional services including HR, credit checks and insurance; and much easier RMB conversion to foreign currencies that will facilitate international transactions and possibly even profit repatriation. If these policy changes materialize, SMEs should be able to focus more on the business at hand and less on inefficient maneuvering to get things done. For those SMEs that happen to be one of the aforementioned service businesses, you can imagine the increase in operational flexibility that theoretically could be enjoyed within the FTZ. As an SME, we are most interested in the potential application of the government sponsored e-commerce plat for m. Our underst anding is t he gover nment has established a single entity within the zone that has set up and will manage the e-commerce platform or, more appropriately, an international transaction platform. It seems a company can use the service even if they do not have a business entity within the zone.

Consider these scenarios SCENARIO 1: A U.S.-based SME has a U.S.-made product line that Chinese consumers just might like. The SME could use the platform to process RMB transactions, including the

A new e-commerce platform could benefit SMEs

collection of duties. The SME receives a U.S.-dollar payment. The SME likely has to market its own product because it is not sure if the platform provides for some type of storefront. Apparently, several big handbag manufacturers (not SMEs) will use the platform to sell direct to customers, saving them as much as 30 percent over China retail prices. SCENARIO 2: A China-based SME has China-produced products to sell abroad. In the past, such an SME transacted through an international trading company or, assuming it is licensed, exported directly. With the new e-commerce platform, the export process should be streamlined, resulting in ease of use and lower cost. Now the SME can avoid what has been a complicated, drawn-out and costly export and money collection process. The e-commerce platform is supposed to be ready for business by the end of October 2013, and although many of its capabilities and operational details are yet unknown, it certainly is something to watch. As with many things “China,” the FTZ initially may be more of a signal of what policymakers want to eventually implement nationwide. It will take years before the zone is set up, tweaked and running according to an understood and stable set of policies. It will take much longer for those “thousand steps” to a national rollout. For now, all companies engaged in China, including SMEs, should keep their eyes on the zone, watching for the right time to make a move.

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s mall bu s i n e s s B Y R YA N B A L IS

Small Business Success in China AmCham Shanghai releases new Viewpoint targeted to U.S. SMEs

hina offers a growing market for U.S. small- and medium-sized enterprises (SMEs) to sell billions of dollars worth of goods and services, while providing a boost to the U.S. economy and creating thousands of new American jobs. Delegates on AmCham Shanghai’s fall 2013 Doorknock to Washington, D.C. brought this central message to the nation’s capital on behalf of the increasing number of U.S. SMEs targeting China for export, business expansion and investment opportunities. During the three-day Doorknock in mid-September, delegates met with key U.S. officials and thought leaders to discuss the business climate for American companies, including SMEs, and the tremendous opportunity China offers. Ahead of the Doorknock, AmCham Shanghai published a Viewpoint targeted to U.S. SMEs and brought copies to Washington, D.C. to distribute. Titled Opportunities for U.S. Small and Medium Business in China, the report looks in-depth at the opportunities and challenges that smaller American companies face in China. Below are highlights from the Viewpoint.

SMEs in China D e f i n e d b y t h e U. S . S m a l l B u s i n e s s Administration as businesses with fewer than 500 employees, SMEs are celebrated for being engines of economic growth, bringing with them to China the latest technology and product and services innovation. Despite China’s economy slowing to 7.8 p e r c e nt g r ow t h i n 2 0 1 2 , C h i n a o f f e r s a tremendous opportunity for U.S. SMEs given its growing consumer market – the world’s second

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SME Exports: an Opportunity Only 1% of U.S. SMEs export to any country Exporting SMEs: 1%

Non-exporting SMEs: 99%

2011 Source: U.S. Department of Commerce

largest – and a rising middle class that McKinsey & Co. estimates will reach 400 million by 2020. In 2011, U.S. SMEs registered US$36.4 billion in export sales to China – SMEs’ third largest export destination – supporting approximately 190,000 American jobs that year, according to U.S. Commerce Department data. China also is a significant source for two-way investment. According to the Rhodium Group, some US$6.7 billion in both Greenfield and acquisition investment flowed from China into the U.S. in 2012. The group estimates that C hines e foreig n dire c t invest ment (FDI) supported 27,000 American jobs in 2012 – with that number set to rise to between 200,000 and

400,000 U.S. jobs by 2020. U.S. SMEs in China compete in a variety of industries. For example, SMEs recently looking to enter China include tier-1 and tier-2 supplier companies supporting large organizations, information ser vice companies, financial organizations, wholesale importers, specialty consumer product companies and professional service firms including legal and tax service organizations. Despite opportunities in overseas markets l i ke C h i n a , SM E s are re l at ive ly i n a c t ive internationally. U.S. Department of Commerce data show that only about 1 percent of the nation’s nearly 28 million SMEs export. Among those that do, a little more than 10 percent – or roughly 31,400 small companies – export to China. Reasons include SMEs often lack the resources, knowledge and experience required to compete and win in overseas markets, including China. According to the 2013 AmCham Shanghai SME Challenges Survey, conducted in July 2013, SMEs contend with a host of business challenges that range from increasing costs and human resource constraints to day-to-day challenges such as locating potential customers and navigating a complex regulatory and policy environment in China. Additionally, the threat of intellectual property theft is particularly acute for SMEs, given rampant piracy in China and SMEs’ limited resources to seek redress.

Recommendations According to the Viewpoint, U.S. SMEs increasingly are seeking business opportunities in China, notwithstanding challenges, and are looking to the U.S. government and publicprivate partnerships, like the AmCham Shanghai SME Center and online SME Virtual Center, for targeted support. AmCham Shanghai recommends that the U.S. government take the following specific, targeted actions to provide SMEs with the resources,

knowledge and expertise to seek opportunities overseas, while offering the support small businesses need to grow and expand their workforce back home. 1. Set a goal to double the number of exporting U.S. SMEs from 1 to 2 percent by the end of 2014 and task relevant U.S. government agencies with hitting this target. 2. Create more innovative financing products through U.S. Export-Import Bank (ExIm) financing to help U.S. SMEs sell exports to China and enjoy the same access to export financing as their overseas competition. 3. Increase the capacity and resources of U.S. government agencies and programs dedicated to enhancing U.S. SME competitiveness in key markets like China and develop expansion of public-private partnerships with organizations like AmCham Shanghai to support that objective. 4. Increase outreach efforts to promote the U.S. as an open and welcoming destination for foreign investment and encourage district export councils and other local economic and trade organizations to support mutual twoway U.S.-China trade opportunities. 5. S t r e n g t h e n c o m m u n i c a t i o n o n U. S . government ser vices to raise awareness among targeted U.S. SMEs and improve the e x p or t cl i mate for t wo - w ay t r a d e and investment. 6. Strengthen coordination with U.S. state and city efforts to promote their local companies in the China market through use of efficient low-cost platforms and encourage more interaction in state-to-province and U.S. cityto-Chinese city direct interaction to promote trade and investment.

Visit www.amcham-shanghai.org to download Opportunities for U.S. Small and Medium Business in China. For more information about the AmCham Shanghai SME Center and SME Virtual Center, visit sme.amcham-shanghai.org.

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Despite opportunities in overseas markets like China, SMEs are relatively inactive internationally.”

inside amcham from the chair

De Facto Ambassadors Last month, I described some of the experiences and messages we left congressional leaders and government agencies during our Doorknock delegation to Washington, D.C. just before the federal government shutdown. Back in Shanghai, Ken Jarrett and I recently hosted a breakfast with some of our leading AmCham members and a distinguished team of scholars and diplomats from our friends at the Brookings Institution, one of America’s leading think tanks and a close friend of AmCham. Led by Strobe Talbott, Brookings’ President and former Deputy Secretary of State under President Clinton, and his colleagues, we received a briefing like no other I have ever heard during my years in China. Quite simply, we heard a grim analysis of how the congressional impasse, which led to the shutdown, has damaged our reputation by placing America, in many ways, on the defensive as to the very system which has been held in the highest regard throughout the world. Mr. Talbott was brilliant in his description of events but he left me shaken about the political culture that exists in our nation’s capital. In contrast to Mr. Talbott’s remarks, what cheered me up was the positive and enthusiastic message which several of our fellow members related to our guests. They spoke of the overall optimism of the American business community with sanguine and clear-headed views describing the American business success story in China. In fact, American companies have been de facto ambassadors for American values and our culture here in China for the past 30 years. It is important to remind ourselves that each of us, in various ways, plays a diplomatic role in our work and in our private lives in China. Some refer to this as the “soft power” of American products and culture. I prefer to say it reflects the considerable efforts of a large number of men and women who work in a wide range of American companies which are contributing to the quality of life here. One more bright spot worth mentioning is the recently published World Bank report on global poverty. From 1981, when the total world population below the poverty line was approximately 1.8 billion people, by 2012 that grim statistic was reduced by half. Even more surprisingly is the fact that 95 percent, or roughly 700 million, of those brought into the early stages of the middle class were from China. The middle classes of China are no longer a dream; they are a reality. And we told our friends from Brookings that American companies were producing products and services “in China, for China” to serve this educated, urban-dwelling middle class in more and more innovative ways. We can all be thankful and proud of being a part of this historic achievement. For those of you Americans who will be spending Thanksgiving in China, I wish you and your families a very happy Thanksgiving and the blessings and joys of the season.

Robert Theleen Chair of the Board of Governors

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november 2013

inside amcham B OARD o f g o v e r n o r s b r i e f i n g

Highlights from the October 2013 Board of Governors Meeting Chair’s Report Robert Theleen, Chair, provided an update regarding the recent Washington, D.C. Doorknock visit from September 16 to 18. Theleen thanked all participants, including visitors from AmCham China (Mark Duval and Tim Stratford) and AmCham Southwest (Ben Wang) and particularly the corporate attendees who made this one of the best and most productive D.C. Doorknocks. Nomination and Elections Committee Update Andrew Au, Chair of AmCham Shanghai’s 2014 Nomination & Election Committee (NEC), provided an update on the annual NEC election. From September 7 to 10, the NEC Committee interviewed interested candidates running for Board seats for 2014. Twenty-two candidates qualified to run for positions. The candidates represent a broad number of industries and skill sets. Financial Report Helen Ren, Vice President of Finance and Administration, reported new memberships grew by approximately 8 percent in Q2 (July to September) over Q1. Expenses were held in check and contributed to controlling the slight reduction in planned net revenue. Revenue for Q2 was noted to be below plan. Some

of this is recognized as seasonal and primarily due to lower memberships and sponsorship revenue falling below the target. Overall, the Chamber is in a strong financial position. Member Card Benefits Patsy Li, Director of Marketing and Business Development, reported on the newly updated Member Card Benefits program, which now offers discounts from 70 companies. Restaurants, hotels and service companies are offering up to a 30 percent discount to members. Members are encouraged to take advantage of these benefit programs and may visit the Chamber’s website for more information.

In Attendance Governors: Andrew Au, Keith Cole, Sherman Chu, Pilar Dieter, William Duff, Curtis Hutchins, Robert Theleen (Chair), Eric Zheng Apologies: Jimmy Chen, Lienjing Chen, Peter Sykes Attendees: Steven Chan, Kenneth Jarrett (President), Patsy Li, Helen Ren, Linda Wang, Scott Williams

The AmCham Shanghai 2013 Board of Governors Governors

Chair

Robert Theleen ChinaVest

Andrew Au Citibank China

Jimmy Chen FedEx Express

Sherman Chu Cisco Systems

Keith Cole General Motors

Pilar M. Dieter Solidiance

Chen Lienjing Pratt & Whitney

Peter Sykes Dow Chemical

Eric Zheng AIG Insurance

Vice Chair

Curtis Hutchins Eaton (China) Investments

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AmCham Shanghai New Members U.S. Corporate Membership Cognizant Technology Solutions (Shanghai) Co., Ltd., Tianjin Branch ZHONG Jianping

Cargill Investments (China), Ltd. CLEMENTS Sharon Chrysler Asia Pacific Investment Co., Ltd. BERTOLDI Giancarlo

Jones Lang LaSalle Surveyors (Shanghai) Co., Ltd. MCCORD Steven

Cisco Systems (China) Research and Development Co., Ltd. RAZNJEVIC Ivo

Pacific Bridge Medical (Shanghai) Co., Ltd. LI Mary

Coach Shanghai Limited PETERS James

Skidmore Owings & Merrill Architectural Consulting (Shanghai) Co., Ltd. CHIOW Silas

Eli Lilly Asia, Inc., Shanghai Rep. Office SHAO Wei Li

U.S. Associated Corporate Membership

Harvard Center (Shanghai) Co., Ltd. JI Veronica

Husky Injection Molding System (Shanghai), Ltd. JIAO Chunyan

ITW (China) Investment Co., Ltd. CHEN Jian Teng

IMAX (Shanghai) Multimedia Technology Co., Ltd. CHEN Jiande

Johnson & Johnson China, Ltd. DONG Lingzhen

Platinum Software Systems (Shanghai) Co., Ltd. CAO Joy Quaker Chemical (China) Co., Ltd. STEEPLES Adrian Shanghai Westinghouse WEC Nuclear Equipment Technology Co., Ltd. BHAN Rajesh Corporate Int’l Affiliate Membership Anomaly (Shanghai) Advertising Co., Ltd. LEE Ngai CREA ( Shanghai) Co., Ltd. STEMPER Thomas Shanghai NUS Enterprise Services Co., Ltd. ANG Angelyn Small Business Membership TZG Partners Limited WANG Allan Associate Membership AIG Insurance Company China Limited CAREY John AMEC Engineering & Consulting Shanghai Co., Ltd. ARMSTRONG David

FTI Consulting (China) Ltd. LEE Puishan

KPMG FITZPATRICK Elizabeth LI Jun NORWOOD Brett A. Marian (Suzhou) Co., Ltd. HORNBEIN Theodore Cotton Milliken Commercial and Trading (Shanghai) Co., Ltd. PAN Joel Morgan Stanley Management Service (Shanghai) Ltd. LIAW Greta Nexteer Automotive (Suzhou) Co., Ltd. LI Jun Nordson (China) Co., Ltd. ZHOU Ling Quaker Chemical (China) Co., Ltd. JIANG Hong Shanghai Roche Pharmaceuticals, Ltd. HARRINGTON Edward Skidmore Owings & Merrill Architectural Consulting (Shanghai) Co., Ltd. TOMICH Eric Teleflex Medical Trading (Shanghai) Company Limited PU Qiangling The Nielsen Company (GZ), Ltd., Shanghai Branch WANG Yang YANG Renee

Tishman Speyer Real Estate Consulting (Beijing) Co., Ltd., Shanghai Branch MURAO Michiko Individual U.S. Citizen Membership A Plus Studio LEWIS Jewels Bosch (China) Investment, Ltd. WINKLER Patrick CCTONG CHIN Augustine Ferro Corporation CHAU Wu Fives Cinetic China PEPLINSKI Thomas Grant Thornton WIEMAN Amy Robert James Lloyd LLOYD Robert James Walt Disney Imagineering Shanghai ROSA Gregory CHING Warren DELACH Robert FRANC DE FERRIERE Nicolas GARDNER Joshua HWANG Lin KING Christopher LO Michael Chih-Yao WLODAWSKI Mark Individual Int’l Affiliate Membership Canada China Business Council JOERN Travis Euro ventures Group VAAHTO Antti Non-Resident Corporate Membership reakingpoint Consulting Co., Limited B LEE Tulipe Insurance Services International LEE Marina Interface Engineering, Inc. ZHANG John

Do you want to share more information about your company? Contact Patsy Li at (86 21) 6279-7119 ext. 8966 or patsy.li@amcham-shanghai.org for a “Standout Listing” opportunity in the New Members Section.

AmCham Shanghai

Panelists at AmCham Shanghai 2013 Manufacturing Summit James McGregor, chairman, China for APCO Worldwide

Keith Cole, vice president of Government Relations and Public Policy, GM

Sherman Chu, general counsel for Cisco Systems (China), and AmCham Shanghai President Kenneth Jarrett speak during a Monthly Member Briefing on October 8

Xu Dinghuan, counselor of the State Council and chairman of the Chinese Renewable Energy Society, speaks during a panel at the 2013 Forbes China Rich List launch event on October 16

Month in Pictures

Guests at AmCham Shanghaiâ&#x20AC;&#x2122;s Yangtze River Delta (YRD) Center Suzhou Office ribbon-cutting ceremony

From left: Eric Zheng, president and CEO of AIG (China), Sun Yan Yan, vice director of Suzhou Industrial Park Administrative Committee (SIPAC), Kenneth Jarrett, president of AmCham Shanghai, and Jonathan Shyu, YRD Center Manager

AmCham Shanghai staff get ready to run at the 2013 J.P. Morgan Corporate Challenge

AmCham Shanghai President Kenneth Jarrett, front left, signs a memorandum of understanding with U.S. Trade and Development Agency Director Lee Zak during the 2013 Washington, D.C. Doorknock

Government Relations Michigan Governor Rick Snyder Visits AmCham Shanghai

NGO Meets Enterprise Focuses on Corporate Involvement

AmCham Shanghai Vice Chair Curt Hutchins delivered remarks at a reception for Michigan Governor Rick Snyder and his trade delegation, co-hosted by AmCham Shanghai and the Michigan China Office in September. Governor Snyder highlighted the state’s key export sectors – automotives, manufacturing, agriculture and tourism – as well as top universities that attract hundreds of Chinese students to the state each year. Hutchins noted that many Michigan small businesses are engaged in China, and AmCham Shanghai’s Small and Medium Enterprise (SME) Center serves as an excellent platform to support their business growth and development. Last year, Michigan exported US$3.3 billion to China and China ranked third in the state’s top export destination. Marie Wang, development manager at Orbis International, speaks during the NGO Meets Enterprise workshop

AmCham Shanghai held the quarterly NGO Meets Enterprise workshop on October 11, featuring Orbis International, Rende Foundation and the Shanghai Charity Foundation. The workshop focused on corporate involvement and partnership opportunities. Marie Wang, development manager from Orbis International, highlighted the organization’s key programs and successful corporate partnerships. Orbis works in developing countries to combat deteriorating or complete loss of eyesight by providing locals with hands-on training and public health education while improving access to quality eye care, advocacy and partnerships with local health organizations. For example, the Flying Eye Hospital (FEH) program, provided by FedEx, flies throughout the world carrying advanced equipment to train doctors and medical professionals as well as to provide urgent medical services, noted Wang.

Michigan Governor Rick Snyder delivers remarks during a recent reception in Shanghai

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NOVEMBER 2013

Yisu Wang, assistant secretary general from Shanghai Rende Foundation, explained the organization’s focus on public service by promoting philanthropy and innovation. Frank Tang, executive manager of the project department, and Joy Qiao, senior supervisor and director assistant of the fundraising department at Shanghai Charity Foundation, shared insights on the organization’s focus of supporting elderly and children by sponsoring education programs and providing relief to those in poverty. The foundation provides professional training to elderly caregivers, as well as supplies educational toys, painting materials and books to children at day care centers, he added.

Manufacturing Summit Speakers Tackle Innovation, Costs and More

s costs of production and labor continue to increase in China, U.S. manufacturers are increasingly focused on product and process innovation and supply chain efficiency to boost productivity and manage costs, according to top executives from leading U.S. companies in China at the AmCham Shanghai 2013 Manufacturing Summit, held at the Ritz-Carlton Shanghai Pudong on October 17. The full-day summit attracted more than 100 top business leaders from Dow Corning, Harry Wong, managing director of Universal Precision Engineering & General Motors, Cisco Systems, Bayer Sourcing, shares insights on business growth during a discussion MaterialScience, Dover Corporation, Alcoa, Honeywell, KPMG and APCO. Diversified Industrials and Global Lead Partner for General Motors AmCham Shanghai President Kenneth Jarrett at KPMG, noted a resurgence of innovation at a time when noted in his opening remarks: “As China continues its industrial manufacturers globally are experiencing a period of slow to structure adjustment and economic upgrading, U.S. manufacturers modest growth and intense global competition. “Innovation is a maintain a leading edge during this transformation by offering critical element of growth…In terms of where manufacturers fulfill innovative business processes, cutting-edge products and Chinathe various aspects of the value chain, compared with four years based R&D that can tailor products for local needs. By doing so, ago, there clearly is a shift to increased focus on R&D, product American manufacturers are not only well equipped to address development and high intellectual property production in China in the intensifying challenges of manufacturing in China, but also well order to stay competitive,” Dobbs said. positioned to tap into the growing opportunities in China’s Supply-chain efficiency was another key theme. Leading domestic market.” companies in manufacturing are building strong supply chain Jeremy Burks, president of Dow Corning Greater China, said: partnerships and leveraging key suppliers to create a value chain “Rising cost forces manufacturers to rethink their strategies. The that sustains long-term mutual benefit. Hanbo Wang, director of shift we’ve observed from working with our customers is that supply-chain operations of Cisco Systems, said during a panel instead of asking for low cost products, they are increasingly discussion that in addition to making its own product design to fit looking for products and solutions that could boost their supply chains for cost reduction, Cisco is committed to partnering productivity and efficiency as well as optimize their operational with strategic suppliers and helping them optimize products and process.” processes for shared value creation. Jeff Dobbs, global sector chair & U.S. national section leader –

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Supporting Organization

Event highlights

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Chamber Opens Yangtze River Delta Center Suzhou Office AmCham Shanghai held a ribbon-cutting ceremony on October 15 for the newly constructed AmCham Shanghai Yangtze River Delta (YRD) Center Suzhou Office, located in the Suzhou Industrial Park at Suzhou International Financial Centre (Room 803-A Building 24 Times Square, Huachi Street). Kenneth Jarrett, president of AmCham Shanghai, Sun Yan Yan, vice director of Suzhou Industrial Park Administrative Committee (SIPAC), and more than 40 AmCham Shanghai members attended the ribbon-cutting ceremony.

Kenneth Jarrett, left, Sun Yan Yan, second left, and guests at the YRD Center Suzhou Office ribbon-cutting ceremony

Jarrett remarked that the opening of the Suzhou office marks an important occasion in AmCham Shanghai’s ongoing effort to support the investment and business needs of American companies in Suzhou and the Greater YRD. He also described the important role American companies play – and will continue to play – in the modern economic development of the YRD and the strong relationship established over the past years with Suzhou and other YRD cities. Jarrett indicated that the AmCham Shanghai YRD Center Suzhou Office will expand the Chamber’s programs and services and support the growing membership in Suzhou and the YRD. Sun congratulated the Chamber on the grand opening of the YRD Center Suzhou Office and expressed the willingness of the Suzhou Industrial Park (SIP) to continue a good relationship and cooperation to maintain a positive business climate for American companies and to achieve the common goal of regional modernization. Sun also mentioned that the SIP is now home to more than 1,000 U.S.-invested enterprises.

Author Navi Radjou Explores Jugaad Innovation Navi Radjou, co-author of the best-seller book Jugaad Innovation: A Disruptive New Business Paradigm, spoke at AmCham Shanghai on October 15 to a group of guests, the latest installment of the Chamber’s Author Series. Radjou spoke on the new innovation model offered in the book, which conceptualizes creating more business and value for society while minimizing the use of limited resources. Radjou explained that there is no correlation between the amount of R&D invested in an innovation and the market success of the product. Many large companies in the West spend immense amounts of time and capital, yet achieve very little in return, he noted. These companies generally have vast monetary resources but lack the flexibility to create and implement the innovations demanded in the global marketplace. Firms in the West have become more focused on patents and creating closed systems where outside views are shunned. Instead, Radjou argues these companies need to have an inclusive attitude which uses varied ideas and resources to focus on the social needs of a diverse market. Radjou urges companies in the West to look to the East for a frugal, flexible and inclusive approach to innovation – what Radjou calls the “Jugaad approach.” He gave various examples of companies throughout Asia, such as the Tata Group, that are making a significant impact on society by creating simple innovations from relatively low investment. This approach creates more value for customers, shareholders and a global society while using less limited resources such as time and money.

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Committee highlights

inside amcham

Small Business Committee Industry Roundtable on Employee Retention Strategies AmCham Shanghai’s Small Business Committee hosted an industry roundtable on employee retention strategies for SMEs in China featuring Karl Qiu, human resources director for Greater China at ITW, and Joyce Zhou, human resources director for Asia Pacific at FMC Corp. The event was held on October 15 at AmCham Shanghai. Zhou noted that 58 percent of companies have retention policies in China, with leading monetary retention policies including higher paying benchmarks, salary raises and sign-on retention bonuses. Leading non-monetary encouragement includes fast track promotions, overseas postings and offering employee counseling services. She added that small businesses with limited resources can benefit most by focusing on offering new employees the ability to learn and develop new skills and competencies and offering variable pay based on overall and not just financial performance as a way of cultivating long-term employee relationships that last. Based on his own experience, Qiu said that the top three turnover reasons based on exit interviews were: limited career development opportunities, not competitive salaries and short-term job challenges. Exit interviews lead to valuable insights, such as employees wishing to be recognized for work behaviors and not just for dollar or number outcomes, and workers wishing to have career development opportunities to interact more with upper level management and be inspired by the corporate strategy. Both speakers acknowledged the importance of top leaders’ engagement as essential to employee retention. Not just senior management, but line managers play key roles in employee retention and in prioritizing resources for top performers and critical talent. While pay is one important component, career development plans by employers, clear goals and communication, coaching and feedback, and performance bonuses are equally essential, they stressed.

Human Resources Committee and Manufacturers’ Business Council Managing Workplace Conflicts Members of the AmCham Shanghai Human Resources Committee and Manufacturers’ Business Council attended a joint event on September 25 on managing workplace conflicts. Held at the AmCham Shanghai Conference Center, the event featured visiting professors Tom Kochan of MIT’s Sloan School of Management and Arnold Zack of Harvard Law School. The professors discussed the elements of multi-option workplace conflict management systems. They shared Visiting professor Tom Kochan of MIT’s Sloan School of their insights on the skills needed by managers, workers and other Management speaks to AmCham Shanghai members participants to resolve workplace disputes; what to do if conflicts occur; responding in crisis situations; and building conflict management capacity in global supply chains. The main message of the event centered on effective communication to identify and mitigate potential issues before they escalate, for example, by putting in place cross-communication channels within an organization. Though many workers are aware of these channels, many do not trust them but instead resort to collective discussions among peers, which can further increase rumors or incite negative behaviors such as labor stoppages, the speakers noted. They added that many companies are also seeing “copycat” conflicts, workers in one location see the perceived positive outcomes of disturbances at other facilities, while the use of social media among employees to collectivize is also on the rise, they added.

For more information on AmCham Shanghai’s 22 industry-specific committees, please contact committees@amcham-shanghai.org.

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EXECUTIVE DINING ROOM We asked executives to tell us about their favorite place to enjoy a traditional Thanksgiving meal in Shanghai. Here is what they said. Courtesy Madison

Ronald G. Campbell, Managing Director – China, Alcoa Wheel Products (Suzhou) Co., Ltd. Best: Waldorf Astoria Shanghai on the Bund Remarks: “I have been here for each Thanksgiving since 2005. Off the top of my head, I can recall T-day dinners at Le Meridien, JW Marriott, Hilton, Char, Pinnacle Peak and Waldorf Astoria. The best was at Waldorf as they had an American chef who understood the concept of overindulgence and U.S. traditions. However, I have mostly been disappointed by the Shanghai restaurant scene for a traditional gathering. At one place, I had to ask the French chef for mashed potatoes (which he took as validation that all Americans are totally uncivilized). Another didn’t quite get the idea of a large meal and had me feeling like Oliver Twist asking for an extra helping of gruel. Finally, I can recall one restaurant that didn’t want to actually carve the turkey – that was for display only. The one place that I have yet to try is Bubba’s.”

David Basmajian, Head of Policy, Baxter APAC Area Best: Madison

Courtesy Waldorf Astoria

Remarks: “Try Madison’s for a ‘made in China’ Thanksgiving Day meal. Using all locally sourced ingredients, I like Chef Austin Hu’s new approach to the classics – stuffing, roast turkey, cranberries and more. But you won’t forget you’re taking part in America’s favorite holiday tradition. I’ll even eat the brussels sprouts!”

Ross Shuster, President – Asia, United Technologies Best: Home with friends Remarks: “In the U.S., a traditional Thanksgiving dinner would be spent at home with family and with traditional family recipes. As an expat, the extended family are the fellow expat friends – so an evening with the extended ‘China family’ and a menu of numerous recipes from many families only makes sense.”

Ron Wardle, CEO – China, Export Now (Shanghai), Inc. Best: Shook! at The Swatch Art Peace Hotel Gregg A. Pinick, Head of School, Concordia International School Shanghai Best: Concordia International School Shanghai

Courtesy Shook!

dining area Remarks: “We gather together as a school faculty with many of our families for a special Thanksgiving dinner served in our dining area. Our team enjoys being together. This event also allows us to celebrate with our families as well. Everyone really seems to have a great time.”

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Remarks: “A fantastic view of the Bund, succulent juicy turkey, superb traditional Thanksgiving dinner with all the trimmings. One of the best in Shanghai. Super friendly and professional staff.”

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