Insight Magazine October 2009

w w w. a m c h a m - s h a n g h a i . o r g

INSIGHT The Journal of the American Chamber of Commerce in Shanghai October 2009

INDUSTRY FOCUS

Domestic Aviation POLICY UPDATE

Export Controls SNAPSHOT

Chemicals in China

From Manufacturing to Outsourcing China’s transformation from manufacturing to a services-based economy is bringing the country’s service outsourcing industry to new heights

INSIGHT October 2009

The Journal of the American Chamber of Commerce in Shanghai

AMCHAM SHANGHAI

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IMAGINECHINA

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IMAGINECHINA

David Turchetti

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ISTOCKPHOTO

17 China’s Chemical Challenges SNAPSHOT

V I C E P R E S I D E N T, P RO G R A M S

By Peter Fung, Norbert Meyring and John Morris

DIRECTORS BUSINESS DEVELOPMENT & MARKETING

Karen Yuen COMMITTEES

Siobhan M. Das COMMUNICATIONS & PUBLICATIONS

David Basmajian

Amidst continued economic expansion, China’s chemicals industry experienced rapid growth. But as the effects of the global economic slowdown continue, the industry must find ways to maintain growth.

21 The Impact of U.S. Export Controls POLICY UPDATE

EVENTS

Jessica Wu

By Ingrid Lombardo, Fannie Chen and Justin Chan

FINANCE & ADMINISTRATION

Helen Ren

U.S. export controls exist to protect the national and economic security of the United States. However, a recent study finds that some export controls severely limit U.S. business opportunities in China.

MEMBERSHIP & CVP

Linda X. Wang

INSIGHT EDITOR-IN-CHIEF

26 Ready for Takeoff

Justin Chan

INDUSTRY FOCUS

EDITORIAL ASSOCIATE

Elaine Wu

By Linda Witters

With incredible growth forecasted for the domestic commercial aviation sector, China has set its sights on building a domestic aircraft manufacturing industry on par with global leaders.

COMMUNICATIONS ASSOCIATE

Weina Yang DESIGN

Alicia Beebe LAYOUT & PRINTING

30 From Manufacturing to Outsourcing COVER STORY

Ella Shan Snap Printing, Inc.

INSIGHT SPONSORSHIP MARKETING ASSISTANT MANAGER

Sophia Chen

(86-21) 6279-7119 ext. 5667 Story ideas, questions or comments on Insight: Please contact Justin Chan (86-21) 6279-7119 ext. 5668 justin.chan@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.

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

F E AT U R E S

ISTOCKPHOTO

PRESIDENT

Brenda Foster

By Elaine Wu

China is turning into a globally competitive service outsourcing hub. Investments in infrastructure, technology and a widening talent pool are giving the outsourcing industry a huge boost.

I N S I G H T S TA N DA R D S

3 News Briefs

10 Manager's Notebook

11 Prospects for BRIC Consumer Markets

48 Deal of the Month

13 Challenging Environment for Foreign Insurers MARKET PROFILE

ANALYSIS

Although grouped together as the BRIC countries, Brazil, Russia, India and China are set to diverge on different economic and demographic development paths.

Despite advantages in global experience and scale, foreign insurers are having a difficult time gaining traction in China’s growing insurance market.

INSIDE AMCHAM

37 From the Chairman: Achieving Advocacy Goals 40 Greentech: A Call to Action

42 7th Annual Charity Golf Tournament 45 Events in Review 46 Committee Highlights

Special thanks to the 2009-2010 AmCham Shanghai President’s Circle Sponsors

MARCH 2009

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JUSTIN CHAN EDITOR-IN-CHIEF

s celebrations abound commemorating the 60th anniversary of the founding of the People’s Republic of China, it is a good time to reect on the incredible progress China has made in its social and economic development. Despite years of sustained economic growth that raised millions out of poverty and created leading international cities in China, the recent global economic downturn has called for a review of development objectives. Fueled by a robust manufacturing sector for many years, China has now set its sights on developing its services sector with the goal of decreasing reliance on potentially volatile external demand and increasing the skills and development of its workforce. This month’s cover story examines the services outsourcing sector, which has emerged as a priority for development.

On the strength of a strong talent pool, extensive infrastructure and growing domestic demand for services, China is poised to become one of the largest services outsourcing markets in the world.

Another sector that has become a major priority for the Chinese government is the domestic aviation industry. China has invested heavily in the development of its regional ARJ-21 jet and

the C919 jumbo jet with the hopes of eventually building design and manufacturing capabilities on par with Airbus and Boeing. Our industry focus looks at the current status of development and the challenges that lie ahead.

While it will largely be developed domestically, the ARJ-21 will be powered by General Electric engines, a prime example of the contributions U.S. businesses make in China. However, when considering the export of U.S. technologies, one must examine the impact of U.S. export controls, which exist to ensure the security of potential dualuse items. See our policy insight for the results of a recent survey jointly conducted by AmCham-China and AmCham Shanghai that examines the impact of U.S. export controls on U.S. businesses in China.

Finally, our snapshot column looks at the development of the chemical industry in China.

Fueled largely by exports and increasing domestic consumption, the chemicals sector in China was hit hard by the global economic crisis that caused demand to almost vanish. Companies are taking the opportunity to adapt and ensure that they can emerge from the downturn even stronger than before.

IMAGINECHINA

News

N NE EW WS S B BR R II E EF FS S

CHINA BUSINESS

FDI rebounds after prolonged decline China attracted US$7.5 billion in foreign direct investment (FDI) in August, a 7% year-on-year growth, according to the Ministry of Commerce. This was China’s first month of FDI growth in 11 months and followed a 35.7% year-on-year drop in July, which was the most severe reduction in nine months. FDI in the first eight months of the year fell 17.5% from the same period a year earlier. The August rebound signaled that China was still an attractive investment destination for many foreign businesses, who have been encouraged to restart investment in light of global economic recovery, noted analysts. Ministry of Commerce officials said that the increase in foreign investment would add to China’s gross domestic product (GDP) growth this year.

Construction leader sees boost in contracts China State Construction Engineering Corp., the construction branch of the Chinese government and China’s biggest homebuilder, announced that it signed RMB224.7 billion worth of new construction contracts in the first eight months of the year, a 20.4% year-on-year rise. In a filing with the Shanghai Stock Exchange, the company announced that its real estate sales had also jumped 84.7% year-on-year to RMB32.8 billion. China State Construction announced earlier in August that it had signed a US$1.7 billion deal with Revel Entertainment Group and Tishman Construction Corp. to provide construction management for a new casino on Atlantic City’s boardwalk, which is already half-built.

Previously, China State Construction

New tariff on Chinese tires On September 12, U.S. President Barack Obama announced his decision to impose a tariff of up to 35% on Chinese-made tires imported into the United States in response to complaints made earlier this year by the United Steelworkers (USW).The move came after the U.S. International Trade Commission voted 4-2 in favor of Obama imposing a 55% tariff, responding to a petition by the USW that a surge in Chinese tire imports had disrupted domestic tire production and cost 5,000 U.S. workers their jobs since 2004.The three-year tariff will start at 35% in its first year and will be reduced to 30% in the second year and 25% in the third year. In response, the Chinese government filed a complaint with the World Trade Organization on September 14, claiming that the tariff is a violation of free trade. China has also said that it will investigate possible dumping of American chicken products and automobile parts in China.

has built projects including the Beijing “Water Cube” for the 2008 Olympics and the Shanghai World Financial Center, the tallest building in China.

Retail sales continue rise According to the National Bureau of Statistics, China’s retail sales in August rose 15.4% year-on-year, reaching a total of RMB1.01 trillion and signaling the success

of the government’s stimulus package measure of providing subsidies for retail purchases in boosting domestic demand.

Sales of automobiles rose by 34.8% since last year, presumably a result of government tax incentives on new automobile purchases and subsidies for farmers to replace their three-wheeled vehicles or old trucks. Sales of decoration materials also rose by 36.6% and sales of clothing increased by 23.3%.

The total 15.4% August growth in retail sales

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was 0.2 percentage points higher than the year-on-year growth in July and brought the total retail sales for the first eight months of 2009 to RMB7.88 trillion, a 15.1% increase from the same period in 2008.

CORPORATE NEWS

GM raises expectations for China sales General Motors Co. announced in September that it expects its 2009 sales in China to rise by more than 40% yearon-year, putting the GM China Group on track to outsell its U.S. counterpart over a full year for the first time. The company’s sales in China rose by 113% in August from a year earlier, continuing its record of sales growth that has continued since January of this year. August also brought the China group’s all-time high in monthly sales of Chevrolet products, selling 23,771 units of the brand. GM China has reported total sales of 1.11 million units in the first eight months of the year, a 49.6% increase from the same period in 2008. GM meanwhile recorded a 20% year-on-year drop in August sales in the United States.

China Unicom links with Telefonica China Unicom and Spain’s Telefonica SA, Europe’s second-biggest phone company after Deutsche Telekom AG, have made an agreement to acquire US$1 billion in shares from one another. The joint purchases will leave Telefonica with an 8.1% holding in China Unicom stock and Unicom with a stake of up to 0.89% in its European partner.

The move will break Telefonica further into China’s immense mobile phone market, which had 702.7 million subscribers by the end of July, according to government data. Last month, China Unicom made an agreement with Apple, Inc. that would give it the right to sell Apple’s iPhone handset in China, where it is just launching operations of third-generation networks.

Google China chief leaves Kai-Fu Lee, Google Inc.’s first employee

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in China responsible for establishing its Chinese-language search engine, Google.cn, announced last month that he would be leaving the company to launch a Beijingbased entrepreneurial incubator program, Innovation Works. The departure from the U.S. Internet search giant comes at a time when it was narrowing its gap against Chinese search leader Baidu, the domestic search engine that controlled 62.2% of the market share last year, according to Beijing research group Analysys International.

Google’s market share in China was 27.8% last year, up from 16.1% in 2006. Lee recently announced that he had raised US$115 million to start his new company, which will set up a network for Chinese entrepreneurs and finance high-tech startups in the country.

World’s largest solar plant planned U.S. publicly held solar panel firm First Solar, Inc. has signed an agreement with the Chinese government to build the world’s largest solar panel power plant in the Inner Mongolian desert. The plant is set to begin producing 1 gigawatt of energy in five years before being reaching its final capacity of 2 gigawatts in 2019, which would provide enough energy to China’s grid to light up three million homes. Officials in the city of Ordos plan to set up 65 square kilometers of land for the photovoltaic farm. China has said it plans to have renewable sources account for 20% of the nation’s energy by the year 2020.

MACROECONOMICS

Bank lending rises in August Banks in China loaned out RMB410.4 billion in August, well below the monthly average of RMB1.2 trillion from the first half of the year but an increase from July’s lending total of RMB355.9 billion. The August number represents an increase of more than 150% year-on-year from RMB271.54 billion in August 2008. So far this year, Chinese banks have loaned RMB8.15 trillion, after having lent only RMB4.91 trillion in the 2008 calendar year.

The accelerated lending helped amplify

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the growth of China’s M2 money supply, a measure of cash in circulation and all deposits, raising it 28.5% year-on-year in August to RMB57.7 trillion.

Manufacturing maintains growth China’s manufacturing sector expanded at its fastest rate yet this year in August, marking a sixth consecutive month of expansion. China’s Purchasing Managers Index (PMI), a monthly index of growth recorded by the China Federation of Logistics & Purchasing, climbed to 54 in August from a July reading of 53.3; the monthly 100-point index indicates expansion with any reading over 50 and contraction with any number below 50.

The data indicates ongoing economic recovery for China, the world’s thirdlargest economy, as its largest companies continue to reap the benefits of the government’s stimulus program.

Housing prices rise in August Prices for housing in China’s 70 largest cities rose 2% year-on-year in August, the fastest pace of growth in 11 months, according to a report by the National Bureau of Statistics. The growth represented China’s third month of rising property prices and a 0.9% increase from July. Shenzhen, where housing prices rose 6.5% year-on-year in August, and Jinhua, where the gain was 6.9%, saw the largest increase in prices. Many analysts have attributed the gains to the government’s RMB4 trillion stimulus package, which has made funds more available and instilled investor confidence. However, some warn that the excessive lending may heighten the risk of a housing bubble.

U.S. - CHINA

Top Chinese legislator visits U.S. Wu Bangguo, the chairman of China’s Standing Committee of the National People’s Congress, met with U.S President Barack Obama, Vice President Joe Biden, and top U.S. lawmakers in a weeklong visit to the United States that was the first

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visit to the nation by a leader of China’s NPC in twenty years. During the visit, Wu, the highest-ranking Chinese official to visit the United States since President Obama took office in January, stressed the importance of strong relations between the United States and China, calling the two nations’ relationship “the most important, most dynamic, and most potential bilateral relationship in the world.” During the week, the two sides signed 41 agreements worth a total of US$12 billion on economic, technological and investment cooperation.

Wu also attended the China-U.S. Economic and Trade Cooperation Forum in Phoenix, where he expressed optimism towards the future of Sino-U.S. relations.

Kissinger praises China achievements Former U.S. Secretary of State Henry Kissinger called China’s achievements “extraordinary” as he congratulated the People’s Republic of China ahead of its 60th anniversary on October 1. Kissinger first went to China on a confidential visit in 1971 to lay the groundwork for the 1972 summit in Beijing between U.S. President Richard Nixon and China’s Chairman Mao Zedong, which was largely credited with eventually restoring U.S.-China relations in 1979. “When I first visited China in the 1970s, I could not have imagined that China would have developed as it has,” said Kissinger at a reception sponsored by the Chinese Consulate General in New York. He also noted that even after four generations of Chinese leaders and eight U.S. presidents, relations between the two countries remain of great importance.

CHINA OVERSEAS

China signs deals with Bahamas The governments of China and the Bahamas signed a series of financial deals during a recent visit by China’s top legislator Wu Bangguo, who was on a three-nation visit that also brought him to the United States and Cuba. As part of the agreements, China approved a loan of RMB400 million towards the construction

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of a highway from Nassau’s city center to its international airport. In addition, state-owned China State Construction Corp. signed a US$1.9 billion deal during the visit with Bahamas-based Baha Mar Resorts Inc. to take part in the construction of a 1,000 acre resort in Nassau. China State Construction will also invest US$99 million to acquire a 2.75% stake in the resort. Overseas construction accounted for 11% of the China company’s new contracts in the first half of this year.

CNPC borrows billions for expansion State-owned energy producer China National Petroleum Corp (CNPC), China’s largest oil and gas company, announced this month that it had received a US$30 billion state-backed loan from the China Development Bank to fund its overseas expansion and acquisition of oil assets. The five-year low-interest loan will “further enhance the nation’s energy security,” CNPC president Jiang Jiemin said in a statement. According to the company, China-owned companies have already made RMB82 billion worth of overseas oil and gas acquisitions this year, an 80% year-on-year increase.

CNPC already has projects in the Middle East, Russia and Africa, and its subsidiary PetroChina announced earlier this month that it would be buying a 60% stake in two planned Canadian oil sands projects from Canadian firm Athabasca Oil Sands for US$1.7 billion.

China exports, imports fall in August According to the customs bureau, China’s exports in August totaled US$103.7 billion, compared to US$134.9 billion a year earlier, a 23.4% year-on-year loss. That made August the tenth straight month of year-on-year declines in exports, but still signified a 3.4% increase from July when seasonally adjusted, the bureau said in a report. Imports also fell since last year by 17%, leading to an overall drop in the trade surplus of 45% year-on-year. For the first

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eight months of 2009, China’s total trade with Japan dropped 22%, with the EU, 21%, and with the United States, 16.4%.

GOVERNMENT & POLICY

Taiwan suspends U.N. bid For the first time in 17 years, Taiwan will not petition for United Nations membership this year, island President Ma Ying-jeou announced on September 4. Taiwan has failed in its previous 16 bids for membership following objections from China, which claims the island as part of its territory and strongly opposes Taiwan gaining status as a full member in the U.N. Tensions have eased between the two since Ma took office in May 2008 and called for a truce between the rivals. The decision not to bid for U.N. membership is presumably an effort by Taiwan to gain China’s trust, particularly in light of a recent visit to Taiwan by the Dalai Lama which angered the Chinese government.

China to close thousands of small mines Following fatal incidents at small coal mines in China throughout August, the State Administration of Work Safety announced in September that it would move to close 1,000 small-sized coal mines this year, according to state media.

By urging large coal miners to acquire small ones, the government aims to cut the number of small mines to less than 10,000 by the end of next year, improving the overall production capacity and safety of the coal industry. There were roughly 3,000 deaths in China’s mines in 2008, making them statistically the deadliest in the world. Since 2005, China has already closed more than 12,000 coal mines, all of which had annual output of less than 300,000 metric tons.

China adds fourth space launch center The China space program began construction in September of its fourth space launch center on the tropical island

province of Hainan in the South China Sea. The space program, which is run by the nation’s military, already has three locations in Jiuquan, Taiyuan, and Xichang, which in total have launched over 100 satellites.

Set to be completed by 2013, the new launch center’s proximity to the equator is expected to benefit the nation’s space prospects by requiring less fuel propellant to send satellites into orbit. China, which has launched three manned space missions since 2003, was the third country to have sent a person into space after the United States and former Soviet Union.

SHANGHAI BUSINESS

Unilever opens China R&D center Unilever, the world’s second-largest consumer goods maker, opened its first research and development center on China’s mainland in Shanghai in September. The Anglo-Dutch company will invest US$72 million into its sixth global R&D center, which will host roughly 450 research staff from 15 countries in the

30,000 square meter research center in the city’s Changning District. The company has said it aims to research traditional Chinese medicine and organic chemistry at its new location. Approximately 36% of Unilever’s 2008 revenue came from its Asia, Africa, Central and Eastern Europe division.

Firm bids RMB7 billion for Shanghai property China Overseas Land & Investment, Ltd. bid RMB7 billion for a 312,600 square meter plot of land in Shanghai at an auction last month, on which it plans to build a residential development. The property was listed at a price of RMB3.058 billion, but China Overseas, a subsidiary of state-owned China State Construction Engineering Corp., outbid its competitors to secure China’s biggest land transaction so far this year. The development company has set a goal to sell 4.3 million square meters of property in 2009. Real estate investment in China, spurred by massive

stimulus spending from the government, has risen 14.7% year-on-year in the first eight months of 2009, according to the National Bureau of Statistics.

Phone swipe-and-ride becomes available Chinese mobile provider China Unicom announced a new program in September that will allow its users to swipe their mobile phones to pay for taxi, bus and subway fares in Shanghai. According to the company, its mobile customers can bring their phones in to one of its outlets in order to install the function into their mobile phone’s SIM card, at which point their transport bills will be tacked onto their phone bills when paid for by phone.

The system was designed by China Unicom in collaboration with the Shanghai Public Transportation Card Company and Shanghai Fudan Microelectronics Company. China Unicom says it has 141 million mobile phone subscribers.

Nestled within a 588,500sq.m landscape of lush greeneries and a stunning central lake, Shanghai Pudong Software Park (SPSP) is in the forefront of the newly touted Silicon Valley of Shanghai situated within a 5-minute stroll from Metro Line 2.

SPSP is well recognized as the national software industry base, as well as the nation’s premier software outsourcing base.

Equipped with affluent IT talent pool and IT training classes, it is no surprise that many renowned global IT companies are already calling the prestigious SPSP their home.

LEASING HOTLINE

86-21-61821816 Email: info@spsp.com.cn www.spsp.com.cn

Furthermore, SPSP offers an extensive range of offices, conference centers and hotels for your business requirements. It also offers a diverse collection of modern residential spaces, restaurants, cafes and sports facilities.

Come and embrace the holistic vision of Work, Live and Play that will appeal to both your talented employees as well as raising the profile of your Corporation O C TO B E R 2 0 0 9 I N S I G H T 7 among your peers and competitors.

CHINA & THE WORLD

SOUTH AMERICA JAPAN ASIA-PACIFIC

Chinese Foreign Ministry officials expressed support last month towards the concept proposed by newly elected Japanese Prime Minister Yukio Hatoyama to create a long-term East Asian Community modeled on the European Union with a common currency. Chinese Foreign Ministry spokeswoman Jiang Yu said that there is a consensus to pursue the coalition between China, Japan, South Korea and the Association of Southeast Asian Nations (ASEAN), a trade bloc that now includes ten Asian nations.

Hatoyama assumed office as Japan’s Prime Minister on September 16.

MIDDLE EAST

PAKISTAN China and Pakistan have signed a deal to develop a new satellite, PAKSAT-1R, to be completed in approximately three years, according to Pakistan’s Economic Affairs Division. China will help fund the project with a soft low-interest loan of RMB1.35 billion for a period of 20 years.

Pakistan Space and Upper Atmospheric Research Commission and China Great Wall Industry Corp. will jointly develop the satellite. It will take the place of Pakistan’s sole operational communications satellite, PAKSAT-1, which will be taken out of operation in November 2011.

ASIA-PACIFIC EUROPE

CENTRAL AFRICAN REPUBLIC François Bozizé Yangouvonda, the President of the Central African Republic, made a weeklong visit to China this month during which he met with President Hu Jintao and Jia Qinglin, chairman of the Chinese People’s Political Consultative Conference. The two presidents signed several agreements to advance economic and technological cooperation between the two countries. This was the first visit to China that Bozizé has made since he won the Central African Republic’s 2005 presidential election.

AFRICA

FRANCE A Chinese delegation of human rights researchers, led by Chinese legislator Luo Haocai, pushed for greater human rights exchange between China and France during a four-day visit to the European nation last month. The group met with Michel Forst, secretary general of France’s National Consultative Commission of Human Rights. Luo stressed the importance of mutual understanding and broadening the two nations’ common ground on human rights affairs. Although China’s trade with France surpassed US$37 billion last year, there were moments of tension when French President Nicolas Sarkozy confronted China on issues of human rights and met with the Dalai Lama, leading to the postponement of an EU-China Summit.

EUROPE MIDDLE EAST

NORTH AMERICA MIDDLE EAST

RUSSIA The Chinese and Russian navies held joint anti-piracy military exercises off the Somali Coast last month, including simulated missions to locate and recognize ships from helicopters, tests of communications systems and the firing of deck guns. The training is in response to a recent rise in pirate attacks on merchant vessels in the region; there have been 156 such incidents this year, according to the International Maritime Bureau. The collaboration marks a deepening of Sino-Russian military cooperation; the two countries also conducted joint anti-terror military exercises in July.

AFRICA

SYRIA Liu Yunshan, head of the Publicity Department of the Communist Party of China, met with Syrian Minister of Information Mohsen Bilal in Beijing this month to promote press cooperation between the two nations. Bilal said that China’s recent reforms and its opening up to globalization have made it a focus of global media and an important press partner for Syria. China and Syria formally established diplomatic relations in 1956, and Syria officially recognized China’s full market economy status in 2007.

NORTH AMERICA

SOUTH AMERICA AFRICA MIDDLE EAST

UNITED STATES China President Hu Jintao left Beijing for a seven-day visit to the United States with plans of attending the Group of 20 (G-20) financial summit in Pittsburgh as well as the 64th annual general debate of the UN General Assembly, marking the first time since 1971 that a Chinese head of state has attended the debate. President Hu was also invited by President Barack Obama to attend the United Nations Security Council’s summit on nuclear nonproliferation and disarmament on September 24.

ASIA-PACIFIC NORTH AMERICA AFRICA

HAITI China’s United Nations Ambassador Zhang Yesui called for continued support for stability in Haiti in a speech to the UN Security Council on September 9. According to Zhang, economic and social conditions as well as institutions in the Caribbean nation are fragile and require strong international efforts in order to be improved. Zhang lauded the five-year-old United Nations Stabilization Mission in Haiti for its contributions to the effort.

SOUTH AMERICA

BRAZIL Brazil placed prohibitive tariffs on imports of Chinese footwear and tires last month as an antidumping measure to protect domestic industry, its Ministry of Development, Industry and Foreign Trade announced in a statement. The tariffs of US$12.47 on each pair of shoes and US$0.75 on each kilogram of tires from China will last for five years. A study by Brazil’s Commercial Defense Department showed that imports of Chinese footwear had risen 549% from 2003 to 2007.

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M A N A G E R ’ S N OT E B O O K

American Expat Tax Saving Strategi

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It is important for U.S. citizens abroad to ensure compliance with relevant tax codes when making investments.

he ‘expat life’ has numerous advantages, but a drawback to being an American expatriate is remaining subject to the U.S. tax code, which reaches across borders and requires U.S. citizens to pay taxes no matter where they live. While there are a number of ways to reduce the amount owed, it is important to minimize risks and ensure compliance.

The Wrong Way The desire to get their tax bill as low as possible is where some Americans take a drastic wrong turn. Some unscrupulous sellers of offshore products and services tell Americans that the IRS will not know about money held in offshore ‘tax havens’ unless they tell the IRS themselves. The idea is that the IRS cannot tax or come after money they are unaware of. Salesmen explain that tax havens have a vested interest in keeping client information confidential.

However, governments around the world are sharing more and more information each day and a number of tax havens that have upheld strict client privacy laws for years are finally beginning to release information.

If an American controls financial accounts outside the U.S. with aggregate value greater than US$10,000 at any point during the year, Treasury Department Form 90-22.1 must be filed. The government is recognizing that the most politically acceptable way to raise

Anthony N oto, CFA is the fou nder of Shanghaibased Noto Financial P lanning, a division of Diacron. H e can be co info@expat ntacted at -adviceonl y.com.

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tax receipts is to increase compliance with existing laws. Keeping quiet about money held offshore and hoping for the best is not a “tax-saving strategy,” but only increases the risk of serious civil and criminal penalties.

Further, tax treatment of offshore investments varies, and a number of offshore strategies designed to save taxes ironically could increase tax exposure. For example, if the IRS considers a tax-saving strategy to be a Passive Foreign Investment Company (PFIC); investors will face punitive taxation.

A Better Way For Americans that want to cut their tax bill in legal, efficient, and cost-effective ways, a three-tiered investment approach is recommended: invest in tax efficient investments, manage them well, and hold them in the appropriate types of accounts.

Tax Efficient Investments The primary goal of investing is not to save money on taxes and fees, but to make money. Fortunately, the most attractive investments in terms of risk-adjusted returns also happen to be the most cost-effective and tax-efficient. A diversified portfolio of index funds lowers overall risk and provides better long-term returns than the majority of actively managed funds.

Managed Well Regardless of which stocks or funds are chosen, trading in and out of them based on where you think the market is headed is not a good idea. Higher trading activity leads to higher transaction costs (including taxes), and countless studies show that market timing is counterproductive over the long-run. Trading should be based on your personal situation, along with periodic rebalancing, which realigns the portfolio with the appropriate level of risk and O C TO B E R 2 0 0 9

encourages buying low and selling high.

Held in the Appropriate Account Investors can further reduce their tax bill by making sure investments are held in the appropriate account from a tax perspective.

As an example, real estate investment trusts (REITs) are best held in tax advantaged accounts like an IRA. This allows you to avoid unfavorable tax treatment on nonqualified dividends. As another example, low dividend growth stocks are well suited for taxable brokerage accounts because stocks are not taxed until gains are realized or dividends are distributed.

Better Off Onshore Should you do what you can to reduce your tax bill? Yes. As an American, does that include moving money offshore? Not usually.

There can be good reasons to open an account outside the U.S., such as minimizing currency risk for upcoming expenses. However, if the primary goal is reducing taxes, the vast majority of Americans are better served keeping money in the U.S. Mass marketed offshore solutions sold by unregulated salesmen are best avoided, although customized offshore strategies created by professionals can make sense for some highnet worth individuals. But for most people, the costs outweigh potential benefits.

U.S. tax law is taking an increasingly tough stance on Americans with money offshore in the form of extra filing requirements, tax treatment of those assets, and penalties for non-compliance. Using the tax minimization strategies outlined above with money in the U.S., American expats can benefit from lower taxes, generally lower product and service fees, SIPC protection, more transparent and regulated financial markets, and less onerous tax filing requirements - all without worrying about a call or letter from the IRS.

A N A LY S I S

Prospects for BRIC Consumer Markets

Economic growth differences China has experienced the highest economic growth of BRIC countries since 2003, with average annual growth of 10.7 percent from 2003-2008, followed by India at an average of 8.4 percent annually. Russia and Brazil experienced lower rates of economic growth, although still averaging 7.1 percent and 4.1 percent growth, respectively, over the same period.

Before the onset of the global economic crisis, India and China relied on their manufacturing sectors for growth, while Russia and Brazil were particularly vulnerable to downturns in global commodity prices due to reliance on raw material exports.

Although China and India’s vulnerability to declines in external demand are now clear, as providers of secondary goods they should only

IMAGINECHINA

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he BRIC countries (Brazil, Russia, India and China) were first grouped together and designated by Goldman Sachs in 2001 as a quartet of countries offering high consumer potential that could overtake the economies of the developed world by 2050. The BRIC countries share certain characteristics, such as large populations, swiftly developing economies and, for some, high levels of natural resources on which to draw. Rapidly increasing incomes and huge consumer numbers offer consumer goods companies ample business opportunities. However, the BRIC countries are set to diverge both in terms of economic development and demographic makeup.

The most marked shift in demographics is in Russia, due to the fact that it is the only BRIC country experiencing population decline, a reducing labor market and a higher proportion of pensioners.

China could suffer from a combination of an ageing population and declining youth population, largely a result of the one-child policy instituted in 1979. Population growth will be relatively slower in China than in Brazil or India but the sheer size of its current population continues to promise a significant consumer base.

benefit from improving industrial technology.

Furthermore, accelerating incomes and strong population growth will increase domestic markets for these industrial goods, providing strong support for business sales.

Population growth factors Different rates of population growth will also lead the BRIC countries to diverge. All four countries have extremely large populations, creating a large labor force and varied consumer market. India’s population is expected to grow by 1.4 percent this year, followed by Brazil with 1.2 percent growth and China at 0.6 percent. In contrast, Russia’s population will contract by 0.4 percent.

Alongside these levels of population growth will be demographic shifts that will impact economic growth and consumer spending patterns. China’s one child policy means that the proportion of the population over 65 will rise sharply by 2020, from 9.1 percent in 2008 to 12.4 percent in 2020. China will also experience a population bulge when those born before the 1979 policy reach their peak consumption level around 2020, as they hit the height of their careers and income levels. However, the ageing population will put pressure on social services, potentially increasing the tax burden on the working population.

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Although often grouped together, the BRIC countries of Brazil, Russia, India and China are starting to grow apart.

Analysis provided by

For more information, please call (86-21) 6372-6288 or visit www.euromonitor.com

By contrast, while India also has a rapidly growing senior population, its high population growth means that it will still have a large youth population, with those below 15 years of age totaling 26.7 percent by 2020, the highest proportion of youth amongst the BRIC countries. Not only will this translate into an ongoing strong labor force but the youth population provides an important emerging consumer market that can be targeted as they begin working.

Demographic shifts to 2020 will favor Brazil and India, although the size of China’s population will still provide it with the world’s largest labor force and consumer market. Russian consumers will suffer the most from an increased requirement to pay for pensions and social support.

Outlook Euromonitor forecasts China to grow at an average annual rate of 9 percent over the next ten years,

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while India will grow by an average annual rate of over 7 percent. Russia will post average annual growth of just over 4 percent and Brazil will hit just below 4 percent between 2010 and 2020. As purchasing power parity increases among the BRIC countries, consumer spending will become an increasingly important economic driver. In 2008, private consumption expenditure totaled 36.9 percent of GDP in China, 55.7 percent in India, 48.5 percent in Russia and 60.7 percent in Brazil, leaving room for growth.

In China in particular, there is considerable room for expansion of consumer spending with increased domestic consumption helping promote further job creation and reducing dependency on exports. China’s most wealthy age group in 2008 was the 35-39 year old bracket, which had a total gross income of US$338.7 billion, indicating that this group will have the most disposable income to spend on luxury consumer goods.

MARKET PROFILE IMAGINECHINA

Challenging Environment for Foreign

Insurers

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oreign insurers have faced a difficult market in China over the last year.

Although their commitment to the Chinese market remains extremely strong and resolute, many are finding it difficult to secure economies of scope and scale. According to PricewaterhouseCoopers’ latest survey on foreign insurance companies in China, foreign insurers still have advantages from their global experience and scale, and can add significant value to the Chinese market through their expertise. However, in China, foreign insurers are challenged by a lack of critical mass and in aggregate still only account for a small segment of market share. The expectation coming from the 2009 survey is that foreign companies’ share of the life market will grow to just 8 percent in three years, which is much less optimistic than what was reported a year ago.

Conditions have been difficult for foreign insurers in China not only because of the general slowing of the Chinese economy, but also because large domestic companies have largely proved more resilient to the slowdown versus foreign competitors. This is attributed to the shift in consumer demands from investment-linked to protection-based products, which is an area of strength for domestic companies, as well as a trend of continued innovation and improvement of operations in domestic insurers, who also enjoy in-depth local market knowledge.

Many of the foreign companies participating in the survey have been in China for seven to 10 years.

Those involved in joint venture relationships have experienced challenges working with domestic partners who have limited experience in the insurance business. The global financial crisis and the severe drop in the equity market in 2008 added to these tensions. In the opinion of those surveyed, these developments resulted in a much more cautious and measured approach by regulators.

Market impact Evidence of the slow progress made by foreign insurers can be seen in market share statistics.

In June 2009, the market share for foreign life companies was 4.7 percent and for foreign property and casualty companies, 1 percent. Participants in the survey predict that by 2012, market share for foreign life companies will be around 8 percent and foreign property and casualty insurers may reach 2 percent.

For the first time, foreign insurers have identified the key driver of change in the marketplace to be domestic insurers. It is clear that large domestic insurers such as China Life, Ping An, China Pacific Insurance Company (CPIC) and People’s Insurance Company of China (PICC) represent a major competitive threat to foreign entrants. Foreign life insurers pointed out that the joint venture structure required following the opening of the Chinese market has been rendered unnecessary, given the dominant market position of domestic insurers.

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Despite global experience and scale, foreign insurers continue to face challenges in China's market.

Market Profile provided by

For more information, please contact: Shu-Yen Liu Actuarial Practice Leader, Asia PricewaterhouseCoopers China shuyen.liu@cn.pwc.com

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Despite challenges, foreign insurers anticipate solid growth and predict increased demand for a range of products.”

Strict regulatory environment Foreign insurers expressed the view that the global financial crisis will have a significant impact on future regulations. They believe that the new insurance law which comes into effect on October 1 is a major step towards a stricter regulatory environment. One foreign life insurer commented that in the first months of 2009, there had been 750 China Insurance Regulatory Commission (CIRC) notices and 650 of these had required written responses.

Tighter controls are anticipated across a broad platform. Solvency, risk management, corporate governance, consumer protection, product supervision and pricing are some of the areas expected to attract attention. Foreign insurers are focused on expanding their geographic presence in China. However, all 29 survey participants agreed that the license granting process had slowed down.

There was a general consensus that no new licenses had been granted since October 2008 and a relaxation in policy is anticipated in late 2009. Eighteen of the 20 foreign life participants would like to see the 50 percent ownership restriction abolished.

Bank entry into insurance On top of strong domestic competitors and the strict regulatory environment, foreign insurers are about to face a new and unpredictable force – the entrance of several large and mid-sized banks into the market. Foreign insurers are taking this threat very seriously. Ten foreign life insurers in the survey indicated that currently 50 percent or more of their new premiums originate in the bank assurance channel. While they anticipate that banks will manufacture and distribute more “commodity-like” insurance products, the future of this critical channel remains unpredictable.

There were also concerns associated with other channels such as agents and brokers, and direct channels like telemarketing and the internet.

Human resources Human resources remain a key concern to foreign

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insurers. Although staff turnover rates declined in 2009, the expectation is that they will pick up as the economy rebounds. There is still a skill shortage in some functional areas. Sales personnel and sales managers remain in high demand. Several survey participants also highlighted the prevalence of staff poaching by both domestic and foreign insurers.

There continues to be a very high turnover rate for life insurance agents. Termination rates are positioned typically in the 20 to 40 percent range.

However, one foreign life insurer engaged in a detailed review of its agent network revealed that it expects to terminate 70 percent of its agents in 2009. Another suggested it planned to recruit 10,000 agents in 2009.

Future growth Despite these challenges, foreign insurers anticipate solid growth and predict increased demand for a range of products. Life insurer highlighted opportunities in the sectors of universal life, participating products, guaranteed annuity products and health insurance, with critical illness products being particularly important. Group medical insurance and personal accident sectors are also expected develop. On the property and casualty side, growth is expected for small and medium-sized enterprise (SME) coverage, travel, health, bonds and export credit, renewable energy, cargo and marine, and national catastrophe insurance.

Premium growth projections are lower in 2009 when compared to 2008, with about half of the life insurers predicting growth of 20 percent or less in 2009. These projections increased for 2012, with only five companies anticipating annual premium growth below 20 percent. The foreign property and casualty insurers predict around 15 percent growth for 2009.

By 2010, these growth rates are expected to increase, with three companies predicting 20 percent growth, two predicting 30 percent, and another company 40 percent.

This article is adapted from a September 2009 PricewaterhouseCoopers study entitled, “Foreign Insurance Companies in China.”

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S N A P S H OT

B Y P E T E R F U N G , N O R B E RT M E Y R I N G A N D J O H N M O R R I S

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hile China imported more than US$84.5 billion worth of chemicals in 2008, it is emerging as a leading producer of many individual chemical products, including acids, dyes and pesticides. The global slowdown and subsequent weakening of China’s most important export markets are a cause for concern in an industry that has seen substantial capital investment and fierce competition. Most of the chemicals produced in China are supplied to domestic users, but many of these users also produce goods for export, so the sector has not been immune to a global slowdown.

The encouraging news is that many segments are by their nature likely to be resilient in a downturn.

Agro-chemicals is one such area; China now leads the world in the production of herbicides and pesticides.

There are other reasons for optimism. The chemicals sector is not only improving its own environmental footprint, but also promoting innovations that will help create efficiencies and improve environmental performance throughout the economy.

China is becoming an important center for

China’s Chemical Challenges

research and development, with much of this activity directed towards commercial application and customization to meet the needs of China’s increasingly sophisticated domestic market.

But as a whole, the chemicals and petrochemical sector in China has been severely hit by the global downturn. According to the China Petroleum and Chemical Industry Association, consumption of finished oil products – a major indicator for the industry – dropped by 8.1 percent and 8.6 percent respectively in November and December 2008.

The decline was accompanied by price cuts and a dramatic rise in stockpiles of chemicals.

The present status and prospects of China’s chemicals industry, as well as the challenges it faces, are unlike anything witnessed in the last three decades. While many companies have posted losses or lower profits in the fourth quarter of 2008 and slashed jobs around the globe, their China operations do not appear to have been so severely affected. For the multinationals, much will depend on how well they can ride out the crisis in their home countries.

The challenges faced by state-owned Chinese corporations are somewhat different and in many

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China's chemicals sector has been deeply hit by the global economic crisis, but there are opportunities to bounce back.

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Chemical companies now find themselves at the painful end of the down cycle.”

areas are backed by favorable policies from the government. Supported by industry-specific stimulus packages, Chinese chemical giants are still looking for opportunities to expand, even if current market conditions make it less of a priority.

Much hinges on the self-confidence of China’s markets and producers to buoy the sector, despite the grim projections for 2009. The agro-chemical sector is poised for growth, and support packages in the United States and China are intended to stimulate construction, so their success will have a direct impact on a number of specialty chemicals segments.

Global chemicals at the onset of the crisis Having enjoyed an extended period of strong margins driven by heavy demand and high prices, chemical companies now find themselves at the painful end of the down cycle. Although it is difficult to look too far ahead, prospects for the industry in the short to medium term are far from encouraging.

Global chemicals output could fall 6 percent in 2009, with output from the EU, the United States and Japan projected to be down by 8.25 percent, according to UK-based Oxford Economic Forecasting. Total chemicals output from China, however, may grow a little over 4 percent, the consultancy said.

Chemicals output fell more sharply than expected in the fourth quarter of 2008, with enduse demand collapsing and customers de-stocking.

Industry experts say that until the consumer comes back, chemicals demand will continue to decline.

The economic crisis that began in September 2008 coincided with several events hitting the chemicals industry. Global overcapacities had been building up, especially with Middle Eastern giants adding to capacity at an unprecedented level. The signs of oversupply and sluggish demand that were apparent since the beginning of the year started to look increasingly ominous for many corporations. Along with many other industries, the chemicals sector was hit by tightening credit and the consumer slowdown. Both domestic firms and multinationals in China saw a drastic decline

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in chemical exports.

The price of crude oil added to the industry’s woes. After a period of steep price rises, there was a significant drop in the latter half of 2008.

Rapidly falling crude oil prices proved to be even more dangerous than the ever-higher prices seen in the middle of the year. The sharp drop in oil price undermined producers’ ability to maintain product prices, which have fallen rapidly since.

The final days of 2008 were characterized by reduced operating rates, plant shutdowns and announcements of further cutbacks to secure tighter cost control.

Chemical companies have cut over 37,000 jobs worldwide since the onset of the global recession.

In addition to the huge number of redundancies announced in Europe and North America, thousands more workers have been forced into part-time work, as production has been cut in response to plummeting demand.

The multinationals’ response Evidence from the world’s chemicals markets suggests that most chemical businesses are in a deep slump. In February 2009, U.S. advisory firm Chemical Market Associates advised that the global chemical industry needed to immediately shut down 25 million tons of operating capacity to diminish the projected huge surplus in production that threatens to last through 2015. To tackle the unprecedented crisis, companies are speeding up restructuring programs to control costs. They are beefing up their analytical teams to monitor markets more effectively and senior executives are being asked to monitor costs and pricing in an effort to spot short-term money-saving opportunities.

Nearly all of the major global chemical companies have accelerated efficiency and restructuring programs that include closing plants and cutting jobs. In order to cater to rapidly increasing demand during the boom years, almost all major multinational chemical companies established a presence in China. However, the financial crisis has caused many international chemical firms to reassess much of their investment plans and cut staff worldwide.

Domestic challenges Over the last 30 years, as multinationals sought to leverage China’s domestic appetite for chemicals, local companies too became more innovative and competitive. Chinese chemical corporations have moved far beyond copying the technology of their international peers and competing on low cost. They have invested significantly in research and development and invested heavily in building petrochemical zones and complexes.

The industry was already facing slower growth before the knock-on effects of the global financial crisis. Existing mismatches between capacity and demand, and the distorting effect of pricing mechanisms such as controlled gasoline prices, are all being exacerbated in the current economic climate. The sharp drop in exports has led to a further buildup of inventories and consequent cash flow problems, especially for many of the smaller, low-cost players in the highly fragmented base chemicals sector.

However, the downturn could be seen as an opportunity for an industry shakeout: eliminating weaker players and allowing larger firms to emerge stronger and more efficient. Such consolidation would clear out the more inefficient industry capacity, especially those unable to meet the increasingly necessary technological upgrades.

Stronger players should be able to pick up weaker competition to develop a broader, more stable and reliable market share. The industry has already made moves towards restructuring, with successful development of upstream capabilities. But room remains to consolidate downstream and build more responsive and competitive local chemical services groups.

Current champions in the industry may require a change in mindset to achieve these gains. At present, many are guided by policy objectives such as building strategic resources or gaining technology transfers, as well as by the desire to directly maximize shareholder value. As pressures on profits and margins become ever more intense, they should grasp the opportunity provided by the need to respond to the current economic crisis and focus on how they can reorganize themselves.

Stimulus packages boost the industry The stimulus packages announced by the United States and China are expected to provide support to the chemicals industry. The US$787 billion stimulus bill could generate US$26 billion in additional demand for chemicals and derivative products over the next two years, which could have a knock-on impact for chemicals demand in China and the financial strength of international chemical companies planning investments in China.

A lot of expectations also ride on China’s RMB4 trillion stimulus package that includes spending on infrastructure projects and an emphasis on rebuilding regions hit by the 2008 Sichuan earthquake. The Chinese government also approved measures to help the country’s petrochemical industry survive the economic slump. The new strategy stresses industrial restructuring and loosens investment controls.

It follows similar industrial support packages that have been passed for the steel, automotive, shipbuilding and textiles industries.

The plan urges that key chemical industry sectors be prioritized to stabilize industrial development, ensure supplies of agrochemicals, promote key projects, implement finished oil product reserves and increase the supply of credit to the industry. Meanwhile, the plan also places restrictions on outdated production capacities, strictly curbs the piecemeal development of coal to chemical conversion projects, and halts approvals for projects to expand charcoal and calcium carbide production. The government also plans to invest tens of billions of renminbi in building new petrochemicals facilities and is prioritizing approvals for new oil storage and refining centers in locations such as Ningbo, Nanjing, Shanghai, Guangzhou, Quanzhou and Tianjin.

This article is adapted from an August 2009 KPMG study entitled, “Chemicals in China: Responding to New Challenges.” Peter Fung is Partner in Charge of Industrial Markets for KPMG China, Norbert Meyring is Asia-Pacific Chair, Chemicals for KPMG China, and John Morris is Global Head of Chemicals for KPMG Europe LLP.

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The downturn can be seen as an opportunity for an industry shakeout: eliminating weaker players and allowing larger firms to emerge stronger and more efficient.”

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P O L I C Y U P DAT E

B Y I N G R I D L O M B A R D O, FA N N I E C H E N A N D J U S T I N C H A N

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The Impact of

U.S. Export Controls

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here is a growing body of evidence showing that current U.S. export controls, which are designed to protect America’s national security interests, are outdated. Instead of protecting sensitive U.S. products and information, many measures cost U.S. companies huge business opportunities in China and elsewhere around the world.

According to the recent Impact of U.S. Export Controls survey jointly conducted by the American Chamber of Commerce in China (AmCham-China) and the American Chamber of Commerce in Shanghai (AmCham Shanghai), U.S. companies have lost hundreds of millions in sales to foreign competitors due to real and perceived restrictions from U.S. export controls. While survey respondents, comprised of U.S. companies with operations in China, responded with wide ranges in their estimates of the total negative impact of U.S. export control policies in terms of dollar amounts and lost U.S. jobs, the losses were clear and substantial.

In almost all cases where sales were lost,

international non-U.S. competitors provided equivalent products or services. This means that rather than boosting America’s national security, export controls instead increased European and other competitors’ sales at the expense of American companies. The survey findings emphasize the importance of implementing an export control policy that enhances the national and economic security of the U.S., while taking a realistic view of the availability of products in foreign markets.

But there are signs that changes to U.S. export control policy could be on the way. U.S. Secretary of Commerce Gary Locke recently expressed a desire to revisit export control policy and strengthen commercial trade with China. In August, the Obama Administration announced that a broad interagency review would be conducted on export controls of both dual-use (items that have both commercial and military applications) and defense items, stating that current export control regulations were “rooted in the Cold War era of over 50 years ago and must be updated to address the threats we face today and the changing economic and technological landscape.” Still, it

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Study finds that the United States is losing out on hundreds of millions in China.

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is up to businesses on the ground to provide the government with the most accurate and current information available about the economic and technological landscape, especially in China, so that any changes will achieve the desired results.

Millions in lost sales U.S. export controls govern the shipment, transmission or transfer of specific products and information to foreign entities. Outdated export controls restrict items and technologies that once impacted national security, but no longer do because of rapid technology developments and increasing availability in foreign markets.

This presents a severe challenge to U.S. companies in China competing against companies from countries without the same restrictions. Reforming these controls would provide U.S. businesses a level playing field to compete on in international markets.

Recent reports estimate that reform could increase U.S. sales in China by hundreds of millions of dollars annually for high-tech companies. Revising U.S. export control policy is a critical element to ensuring continued U.S. economic security and success over the next decades.

To help quantify the export controls’ damage to U.S. industry and measure the true impact on U.S. competitiveness in China, AmCham-China’s Export Compliance Working Group (ECWG) conducted the survey in April 2009, inviting members from AmCham-China and AmCham Shanghai to provide comments on how U.S. export controls have impacted their businesses. In total, 134 members completed the survey, 77 of them from AmCham-China and 57 from AmCham Shanghai. Among AmCham-China members, the greatest survey response came from the sectors of aerospace, information technology and internet services while AmCham Shanghai respondents tended to come from the electronics, engineering and technical consulting services sectors.

The survey produced some striking results.

Respondents whose businesses involve the export of licensable items reported customers preferred buying non-U.S. products due to concerns about American export controls at a rate of 51 percent.

Meanwhile, 25 percent of all respondents, and 47 percent of those with businesses involving the export of licensable items in China, have lost sales because of U.S. export controls.

Of those who had lost sales due to U.S. export controls, 96 percent found that their customers ended up purchasing similar items from nonU.S. sources. Among the 14 companies that provided value estimates, the total impact of U.S. export controls on lost sales was placed at more than US$560 million per year. Although most respondents were not able to provide value estimates of lost sales, the data given provides an estimate that the total value of lost sales and opportunities to American businesses in China could reach billions of U.S. dollars each year.

The ECWG compiled this compelling evidence of U.S. export control damage to industry in its report, “Lost U.S. Sales and Opportunities in China Due to U.S. Export Controls.” This report was then submitted to the U.S. Department of Commerce in April. In follow-up meetings, U.S. Department of Commerce officials and members of Congress expressed great interest in and appreciation for the data from the report. It had a particularly strong impact within the Department of Commerce and added momentum to existing initiatives to address export control reform.

Effects on business Two examples of industries that have transformed over the past decades from being largely military focused to having enormous commercial viability are the commercial aerospace and machine tool industries. Both would greatly benefit from a relaxation of export controls. China is pushing full steam ahead to become a member of the global community of commercial aircraft designers and manufacturers, an effort that presents tremendous opportunities for U.S. aircraft parts suppliers.

One example is China’s C919 large commercial transport aircraft currently being developed by the Commercial Aircraft Corp. of China (COMAC), a spin-off company of AVIC in Shanghai. COMAC is seeking to procure many of the key parts and components for the new C919 plane, including

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The total value of lost sales and opportunities to American businesses in China could reach billions of U.S. dollars each year.”

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Limits on technology transfer have the potential to hinder U.S.China cooperation that would not only contribute to a more sustainable environment but will encourage investment and create jobs.”

the engine, from abroad. COMAC has expressed its desire to cooperate with an array of international suppliers and manufacturers. In order for U.S. companies to participate in the C919 program, they will require the support and approval of the U.S. government, which has not yet decided what level of technology cooperation U.S. companies should offer their Chinese counterparts. However, several European and non-U.S. companies have already begun cooperation with COMAC on the C919.

While the growing commercial aerospace industry in China provides an example of huge potential for U.S. exporters, the machine tool industry illustrates the dangers of overly restrictive and outdated export controls. In the past, China manufactured lower level machine tools domestically, but imported higher precision and multi-axis tools from abroad. U.S. restrictions on the export of five-axis machine tools to China resulted in delays and prohibitions for many potential Chinese customers and prompted China to recognize their dependence upon foreign imports.

As a result, the Chinese government launched initiatives to inject capital and promote the domestic development of five-axis machine tools. Coinciding with accession to the World Trade Organization, the Chinese government made international equivalent standards development a priority in the machine tool industry.

As China built up its domestic machine tool industry, it continued to import the high-tech equipment from companies in Western Europe.

Through a combination of indigenous research and development programs and joint manufacturing and development with non-U.S. foreign machine tool conglomerates, China was able to establish several large and competitive high-precision, multiaxis machine tool manufacturers. These companies are developing and producing manufacturing equipment that is in direct competition with the top-level products of their foreign competitors, equipment that they could previously only import.

Green potential One emerging market that could greatly benefit from the loosening of overly restrictive controls on U.S. controlled technology in the future is the

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emerging green energy sector in China. Wind energy, for example, has experienced fast growth as international and Chinese domestic wind turbine and blade manufacturers establish production bases in China. Due to fierce competition in this market, technology breakthroughs are required to achieve higher capacity per unit, higher speed and efficiency, and lower noise.

One way to achieve these goals is to incorporate carbon fiber composite materials within wind turbine blades. Carbon fibers are lighter than traditional fiberglass, and their use could result in increased blade speed and higher energy output.

However, carbon fibers are currently restricted by U.S. export controls, and thus far, Chinese wind turbine manufacturers have had difficulty accessing them. While there are reasons to restrict the export of carbon fibers to military end users in China, there is no security threat in exporting them to commercial wind turbine blade manufacturers with no ties to the Chinese military.

Another example is the field of solar panels and high-efficiency lighting (LED). The majority of solar cells currently being produced in China are siliconbased. The most common manufacturing equipment being employed is non-controlled LPCVD and PECVD equipment. However, the next generation of solar panels uses a type of compound solar cell, called GaAs III-V, which is produced using controlled MOCVD equipment, which is also used to produce LEDs. Many Chinese green energy companies are looking to integrate the production process of solar cell manufacturing and LED production because the same equipment can be used for both. This is driving many LED manufacturers to consider also producing commercial solar cells. However, U.S. export controls pose a significant barrier for Chinese manufacturers who wish to import MOCVD equipment.

The green technology space is equally important to the U.S. and China from both an environmental and economic standpoint. As an international leader in greentech solutions, the U.S. should be able to take advantage of the sincere interest in China to develop clean energy solutions by promoting and selling its products in China.

Limits on technology transfer have the potential to hinder U.S.-China cooperation that would not

only contribute to a more sustainable environment but will encourage investment and create jobs.

Recommendations for U.S. Government U.S. industry is hopeful that the efforts of the ECWG and American businesses will result in changes for U.S. export control policy. This would allow U.S. companies to engage as responsible partners in future Chinese high-tech markets, such as aerospace, manufacturing equipment and green technology. The stakes are high and time is of the essence. Until the U.S. is able to properly calibrate its export control policy, American businesses will continue to lose hundreds of millions – if not billions – of U.S. dollars every year in China.

Meanwhile, their European and other non-U.S. competitors step in and fill the gaps.

The U.S. government’s broad interagency review of dual-use and defense item export controls is a positive step forward. When considering export

control reform, the U.S. government should base policy on up-to-date information about indigenous capability and non-U.S. foreign availability, especially in China. The U.S. government should also continue consultation with private industry for input on the control-list based on dynamic market changes.

Finally, the U.S. government should allocate more on-the-ground resources, beyond pre- and postshipments, to gather and assess information for upto-date Chinese domestic technological capability and foreign availability.

Ingrid Lombardo is a consultant at Larkin Trade International (LTI) Associates. She can be reached at ilombardo@larkintrade.com. Fannie Chen is a Policy Analyst at AmCham-China. She can be contacted at fchen@amchamchina.org. Justin Chan is Editor-in-Chief at AmCham Shanghai. He can be contacted at justin.chan@amcham-shanghai.org. A version of this article also appears in the October issue of AmCham-China’s China Brief magazine.

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The U.S. government should based policy on up-todate information about indigenous capability and non-U.S. foreign availability.”

I N D U S T RY F O C U S B Y L I N DA W I T T E R S

IMAGINECHINA

Ready for Takeoff China aims to create its own aircraft manufacturing capabilities, and has its first offerings, the ARJ-21 and the C919, in the works.

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he past few years have not been kind to the global airline industry, and China’s aviation sector is no exception. Whereas global airlines such as British Airways made headlines recently by asking its employees to work for free for weeks at a time, China’s leading airlines have been suffering as well. After a 2007 net profit of RMB604 million, Shanghaibased China Eastern posted a staggering 2008 net loss of RMB13.9 billion, prompting the central government to provide RMB7 billion in emergency funding.

While the current wave of news is certainly bleak, it hasn’t stopped China from forecasting a bright future, however far away it may be.

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China is still spending strongly, although the commercial aviation industry has been plagued by economic troubles in recent years. The government is furiously pumping money into the sector to advance its manufacturing capabilities in a bid to meet projected demand and achieve its aviation goals.

To improve and expand domestic infrastructure, the government has undertaken a massive effort with plans to construct 97 regional airports by 2020, increasing the nation’s total number of airports to 244 and better linking the more remote regions of the country to its commercial hubs in coastal regions. Upon completion of this initiative, more than 80 percent of the country’s population will live within 100 kilometers of an airport.

Continued aircraft demand The push to improve aviation infrastructure comes as domestic passenger and cargo demand continue to grow. Inbound tourism has decreased recently due to the global financial crisis and the spread of the H1N1 flu, but domestic travel is still predicted to rise by 8 percent in 2009, according to the National Tourism Administration.

This is good news for many Chinese airlines who have increased orders for planes such as the Airbus A320 and Boeing’s 737 Next Generation, both single-aisle aircrafts best suited for regional travel.

The changing face of China’s civil aviation industry led American aircraft manufacturer Boeing to predict that by 2028, China will become the second-largest market for commercial airplanes after the United States.

China is expected to purchase 3,700 aircraft over the next two decades with a potential market value of US$390 billion, more than tripling its total number of airplanes in operation to 4,560, roughly the same number flying in all of Europe today.

While the Chinese aviation industry has slid deeper into the red since Boeing’s forecasts were made in 2007, there is “cause for concern, but not for panic,” says Charles Alcock, editor of International Show Editions for Aviation International News.

“It is now clear that the rapid consumer growth that was set to fuel a massive increase in Chinese demand for air transport has, at the moment, been interrupted. However, the underlying assumptions of the Boeing forecast are still valid and will likely be fulfilled when economic conditions permit.”

Made in China Recently, Airbus, Boeing’s European competitor, stole the headlines by delivering its first “made in China” A320 aircraft to Dragon Aviation Leasing in June. This marks the first of many “made in China” planes to come, as the Tianjin Airbus factory plans on producing 10 more by the end of this year and a total of 286 by 2016, all to meet domestic demand.

The East-West partnership “reflects the high hopes that Airbus has of selling its aircraft in the vast Chinese airline market and its recognition that it is more likely to find commercial success with a “locally-produced’ product,” says Alcock.

“Secondly, it is a significant vote of confidence in the manufacturing capability of China that could pave the way for further international joint ventures of this sort. Airbus would not allow the aircraft to be made in China if it was not absolutely confident that quality and safety standards could be maintained.”

While Boeing has no plans as of yet to imitate Airbus’ China operations, it continues to invest in local manufacturing and production.

“Since the 1980s, Boeing has purchased more than US$1.5 billion in aviation hardware and services from China,” says Mark Hooper, managing director of Asia-Pacific corporate communications for Boeing. “This will more than double in the coming years. Today, there are more than 5,200 Boeing airplanes flying throughout the world with parts and assemblies built by China.”

Laurence Barron, Airbus China’s president, took it a step further by pondering the possibility of exporting entirely China-made planes abroad in the future. “You should consider Tianjin as the same as Toulouse and Hamburg,” said Barron in a statement. “There’s no reason why non-Chinese airlines can’t take ‘made in China’ A320s in later years.”

Hoping that such logic will appeal to airlines everywhere, China is working towards becoming an aviation player by developing two homegrown aircraft, the Advanced Regional Jet (ARJ-21) and the C919 jumbo jet.

To do so, an enormous aircraft assembly center was established in Shanghai in June with the aim of producing 11 ARJ-21s by 2012 and 50 per year by 2015. Besides a general manufacturing area, the center will also include zones dedicated towards research, development, and technological innovation and will employ 20,000 people, ten times the current workforce.

The C919 remains a work in progress as its developer, the Shanghai-based Commercial

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By 2028, China will become the second-largest market for commercial airplanes after the United States.”

Aircraft Corp. of China (COMAC), moves from design to production of the plane, with a maiden flight slated for a distant 2014. Although all stages of the process will be completed in China to ease dependence on foreign companies, some components, such as engines, will still be imported.

Leading experts believe that it will take approximately 20 years for China to develop its own engine, which has led some analysts to doubt whether other countries will purchase aircraft with recycled technology.

“China has enormous potential in terms of technology, workforce and market,” says Richard Aboulafia, vice president of analysis for the Teal Group, which supplies aerospace and defense industry market analysis. “But instead of focusing on growing their industry, learning new things and contributing to the global aviation business, China’s aviation plans revolve around reinventing older technology aircraft with a national flag on the tail. If China stays with this roadmap, the world won’t gain from their contribution, and China will waste a lot of money.”

Future outlook China’s ambitious foray into aircraft production has required and will continue to require significant investment. The government will be spending US$8.78 billion on the project over the next three to five years, with total expenditures expected to reach US$29.25 billion.

COMAC has so far received 181 orders for the ARJ-21, a 70-90 seat airplane that is expected to go on the market later this year. General Electric Commercial Aviation Services (GECAS) has bought 25 ARJ-21s in a RMB5 billion deal, the largest foreign order.

Until the global aviation industry gets back on its feet, it remains to be seen whether other airline companies will follow suit and snap up the new China-made planes. Many analysts remain wary, but Wu Guanghui, deputy general manager of COMAC, is upbeat and optimistic.

The “C” in C919, besides representing China and COMAC, “comes after Airbus and Boeing, so you will have ‘ABC’ in the aviation industry,” said Wu to Xinhua News.

“The name reflects our determination to compete in the international market.”

Linda Witters is a contributor to Insight. She can be contacted at linda.witters@gmail.com.

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2009

YEAR END

SPECIAL

RENEW BY DECEMBER 31ST AND

RECEIVE UP TO 3 MONTHS FREE

AmCham Shanghai members who renew by December 31, 2009 will receive a free membership extension of up to 3 months! √ A 3-month membership extension for two-year renewal √ A 1-month membership extension for one-year renewal The first 100 members who renew their membership during the promotional period will receive a free 4-issue subscription to BusinessWeek magazine sponsored by Steelcase, Inc. To renew, contact our membership specialists: Sandra Zeng, (86 21) 6279-7119 ext. 5676, sandra.zeng@amcham-shanghai.org Shirley Huang, (86 21) 6279-7119 ext. 5677, shirley.huang@amcham-shanghai.org Anita Ye, (86 21) 6279-7119 ext. 5659, anita.ye@amcham-shanghai.org Or renew online at www.amcham-shanghai.org/Renew to be eligible for the membership renewal lucky draw.

Special thanks to our lucky draw sponsors

Terms and conditions: * To be eligible for this promotion, payment must be received by 5pm, Thursday, December 31, 2009.

O C TO B E R 2 0 0 9 I N S I G H T 2 9 * The promotion is open to all members regardless of member category or membership expiration date. * Associate members are only eligible to renew until the expiration date of the company’s Corporate membership.

From Manufacturing to Outsourcing China is intent on transforming its economy from a manufacturing engine into a services hub, and the government has been pushing the growth of the country’s service outsourcing market. Aided by strong investments, extensive infrastructure, a developing domestic market and a vast talent pool, China’s outsourcing industry is set to become one of the largest in the world.

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C OV E R S TO RY

BY ELAINE WU

IMAGINECHINA

T

he global service outsourcing market

has grown into a trillion-dollar industry within the past decade, expanding into emerging markets and brimming with untapped opportunities. A relatively new industry, service outsourcing is a way for companies to transfer service operations to outside, professional providers and focus on their core businesses.

Known for its big added values, low resource consumption, minimal environmental pollution, and high level of internationalization, outsourcing enables companies to attain profits through standardization and scale, and is increasingly seen as a method for optimizing strategic and operational business processes.

Although still largely dominated by the field of information technology (IT) outsourcing, the service outsourcing market has expanded to include business process outsourcing (BPO) such as financial

services, accounting and legal process outsourcing, engineering research and development (R&D), and human resources management.

Exhibiting rapid growth, the global service outsourcing industry was valued at US$1.5 trillion in 2008. Worldwide IT outsourcing revenue, the largest segment within the entire outsourcing industry, reached US$592 billion in 2007 and is expected to hit US$829 billion in 2012, according to market research firm Gartner. Global BPO spending reached US$156 billion in 2007 and is projected to rise to US$239 billion in 2012, says Gartner.

The popularity of offshore outsourcing has also risen. In 2002, only 10 percent of multinational companies (MNCs) outsourced their IT work offshore, but that number rose to 70 percent by 2008, according to a recent KPMG report on global outsourcing.

As more companies choose to outsource

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China is now focusing its energy on transforming its reputation from the ‘factory of the world’ to balancing its manufacturing capabilities with the development of more skillbased service industries.”

their services offshore, multiple outsourcing destinations around the world have surfaced as attractive service provider bases. Countries like India, the pioneer of the global IT outsourcing industry, the Philippines, Malaysia, Romania, Ukraine, Brazil, Mexico, and increasingly, China, are viewed as top outsourcing locations.

Companies who elect to offshore their needs to foreign countries must account for a variety of criteria when determining which markets are best suited, including language capabilities, labor pool, infrastructure, cost, information security, and intellectual property rights (IPR) protection.

A new pattern is emerging where MNCs outsource to several different markets, diversifying their portfolio and combining the strengths and flexibility of several markets rather than relying on a single location. Under this new model China is asserting its rise as a leading global outsourcing destination.

“China is going to become more and more a place that companies look towards to service their outsourcing needs. A lot of companies are not only looking to China because of cost, but to de-risk their portfolios,” says Charles Hunting, managing director of Accenture’s Greater China outsourcing practice.

“Many companies are also using outsourcing in China as a means to first gain experience in the country and access to 1.3 billion potential consumers, with the ultimate goal of exposing their own products and services to the domestic market.”

China’s ascendancy Long known as a global manufacturing hub, China is now focusing its energy on transforming its reputation from the “factory of the world” to balancing its manufacturing capabilities with the development of more skill-based service industries.

During the time it took China to cultivate a hugely successful export economy that took advantage of its cheap and ample labor market, India managed to capture the majority of the market for offshore outsourcing of IT services. In an effort to change this, the Chinese government has committed to building an economy propelled by innovation, technology and service.

“As the economic crisis deepened last year, the Chinese government realized that they could no longer sustain the path they’ve taken in the past of being the manufacturing base of the world, which not only consumes a lot of natural resources but produces a lot of pollution,” says Walter Fang, vice

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president of Neusoft Corp., the largest IT outsourcing company in China. “In many developed countries, the service sector contributes to more than 60 or 70 percent of GDP. In China, that figure is less than half.

[The government] has recognized that outsourcing is the next wave of income for China, and they are determined to build up a service industry.”

In 2007, the Chinese outsourcing market was worth US$15.2 billion, with IT services valued at US$9.04 billion and BPO at US$6.16 billion, according to government numbers. Offshore revenues grew more than 40 percent in 2007 to US$2.28 billion, more than 15 percent of total volume. By 2010, China’s offshore work is likely to more than double to US$5.6 billion. By June 2009, there were more than 6,600 service providers based in China, employing more than 1.21 million people, announced China’s Ministry of Commerce However, China’s outsourcing market is still in its infancy, compared to its neighbor India. China holds less than 10 percent of the global market for outsourcing and offshoring services. In 2008, India’s service outsourcing volume amounted to US$42.2 billion, nine times that of China’s, reported a 2009 McKinsey & Company study. More than 2 million people were employed in India’s outsourcing sector, nearly double that of China.

Despite this, China’s service outsourcing market is burgeoning. While the economic downturn has impacted India deeply, largely because contracts with the U.S. and Europe have been reduced, the outsourcing industry in China has maintained strong growth. In the first three months of 2009, the contract value of China’s outsourcing industry reached US$2.6 billion, an increase of nearly 26 percent compared with the same period last year, said Chinese officials.

China’s outsourcing market has also been shaped by different factors than that of India. Growth of the industry has been founded on demand from neighbors Japan and Korea, as well as MNCs in China that need support for their China operations and the country’s own domestic market. China is taking advantage of the current downturn to expand into new markets, playing to its strengths in infrastructure and a diverse and wide talent pool.

“Keep in mind that India were pioneers in the IT industry 20 years ago and China started much later. Given time, they will without a doubt catch up,” says Girija Pande, executive vice president and head of Asia Pacific for India’s Tata Consultancy Services (TCS).

Some analysts believe this could be sooner than

IMAGINECHINA

expected. “China is learning from India’s mistakes and is catching up very quickly. China is going to be up there with India in the next three to five years,” says Ning Wright, a partner in KPMG’s advisory services. “Strong government support, the evolving maturity of Chinese outsourcing firms, and strong demand in the Japanese and domestic markets will drive exceptional growth in [the outsourcing industry].”

China’s edge China’s rise as a center for IT and other service outsourcing industries is due in large part to strong government support, relatively low labor costs, and an abundant labor pool. In recent years, the Chinese government has passed a slew of policies directed at boosting the development of the service outsourcing industry.

In 2006, China implemented the 1,000-100-10 Project, which seeks to establish 1,000 Chinese outsourcing enterprises with international qualifications, encourage 100 MNCs to shift their outsourcing businesses to China, and develop a base of 10 internationally competitive cities for service outsourcing. The plan aims to double the export value of the outsourcing industry and has more than US$1 billion in funding.

In addition to the selected cities such as Beijing, Shanghai, Suzhou, Hangzhou and Xi’an, 10 more cities have been designated as pilot service outsourcing regions, where companies are eligible for favorable policies such as tax breaks, subsidies, financial support, and IPR protection. Service outsourcing companies located in Suzhou Industrial Park, for example, can enjoy an enterprise income tax rate of 15 percent until 2013, compared with 25 percent elsewhere in the country.

Companies located in central and western parts of the country will also be eligible for favorable loans to start up service outsourcing projects. In an effort to provide jobs for millions of graduating students, the government is offering service outsourcing companies subsidies of up to RMB4,500 a year for every college graduate employed for at least one year.

No other country in the world has invested in infrastructure as much as China has in recent years. The country is investing US$586 billion in ports, highways, airports, power plants, as well as a modernized telecommunications network with high-speed broadband connections in major cities and other strategic locations.

On top of key improvements in infrastructure,

expansive new state-of-the-art software parks have been built in several cities including Shanghai, Beijing, Suzhou, Dalian and Hangzhou, attracting numerous companies to set up facilities. Dalian Software Park, spread over three square kilometers, is an example of a major outsourcing zone where nearly 400 companies employ 25,000 people, home to MNCs such as GE Capital and SAP. Compared to prevailing wage levels in India, wage rates are oftentimes 30 to 50 percent lower in China, although they tend to be higher in firsttier cities. In stark contrast, a recently graduated Chinese engineer might earn between US$250 to $300 per month, while Indian graduates can expect to receive an average salary of US$750 to $1,000 per month, according to India’s IT trade association NASSCOM. Perhaps most crucially, China has a massive talent pool of skilled technicians and engineers that are entering the workforce every year. “The big difference between a manufacturing and servicesbased economy is that the service industry is all about developing talent and skills,” says Fang.

Official statistics from 2005 put China’s engineering graduates at more than 600,000, compared to around 90,000 in the U.S. and 200,000 in India, according to a study published by Duke University. This year, more than 6.1 million students graduated from China’s universities, and many of these graduates come armed with critical language skills. Recognizing the importance of English language skills in winning business from western markets, the Chinese government has prioritized English instruction in schools and universities. By 2020, China will have the largest English-speaking population around the globe, says Hunting. In addition, the country has 2 million Japanese and Korean speakers, a boon to its two largest offshore clients.

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ENTRY-LEVEL EMPLOYMENT: The Chinese government is offering substantial subsidies to service outsourcing companies for every college graduate employed for a year in an effort to generate jobs in the industry.

IMAGINECHINA

PRIMING PROFESSIONALS: China aims to train 1.2 million new service outsourcing professionals by 2013.

China’s Ministry of Commerce has announced that China hopes to train 1.2 million new service outsourcing professionals by 2013, in addition to the current number of industry professionals, while one million college graduates are expected to find jobs in the sector during the same period.

“Considering the volume of people coming through its university system today, the levels of capacity in China will far exceed anywhere else in the world,” says Hunting.

Industry challenges Despite the strides China has made to lay the groundwork for a strong outsourcing industry, there are still hurdles that need to be overcome.

China is primarily still an exporter of BPO services rather than a consumer. At the moment, MNCs make up the majority of consumers of outsourcing work in China; Chinese organizations have expressed little understanding or reluctance to turn over IT or BPO duties to external service providers. IT outsourcing presently accounts for less than 10 percent of the IT market in China, compared with nearly one-third in the U.S. Both foreign and domestic clients remained concerned with issues of trustworthiness, confidentiality, the expertise of Chinese service providers, and the potential value of outsourcing.

For a country determined to build a successful outsourcing market, the ability of domestically owned Chinese companies, including state-owned enterprises (SOEs), to embrace the importance of outsourcing and its potential to deliver high-level results is of the utmost importance.

“The problem is that a lot of these [SOEs] have huge numbers of employees, and they tend to do everything under their own umbrella. There are no real financial or political incentives to outsource,” says Charlie Liu, President of VXI Enterprise Management, a BPO company specializing in call center services. “But the mindset is slowly

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changing; you’re beginning to see more awareness and outsourcing is becoming more popular across all business sectors.”

Ironically, although China has no shortage of entry-level engineers and technicians, the talent crunch affecting many sectors of China’s economy is especially prevalent in the outsourcing industry. Senior-level managers still comprise a low percentage of the workers in the domestic outsourcing market.

“There is a shortage of professionals in China with the level of management and technical experience required to deal with large, complex cross-border projects,” says Alan Fung, senior manager of risk advisory services at KPMG. However, large numbers of Chinese with overseas experience and skills are flocking back to China, driven in part by the financial crisis, and are being snatched up by service providers as project managers and senior-level executives, says Fung.

Another major challenge to China’s growth as an internationally competitive outsourcing market is that the industry is currently highly fragmented with thousands of small providers all competing for a share of the market. The sheer number of choices can make choosing a vendor a daunting task for a company unfamiliar with China’s market.

“MNCs coming into China need international service providers who have scale, credibility and global reach, and you don’t have players who are large enough yet in China,” says Pande. Smaller Chinese vendors may find it difficult to compete with foreign providers like TCS, who have the advantages of size, branding, global and regional reach, and international quality standards to attract larger contracts from more prominent clients.

“Chinese companies need to concentrate their efforts on making themselves bigger and better in order to compete in the global market,” says Wright. In order to do that, Chinese providers need to pursue mergers and acquisitions (M&A) and focus on internal growth, she says.

Another concern that clients raise when considering outsourcing in China involves the protection of IPR. There is still a negative perception of IPR protection in China, despite government efforts to combat it. Most vendors in China have adopted strict security measures for IPR treatment, and government measures such as more stringent regulations and encouraging the installation of licensed software at companies have reduced the occurrence of piracy.

But many in the industry believe that IPR issues

in China are often misconstrued to be much worse than they really are.

“IPR protection is not a unique problem to China. There is a risk, but it is no more inherent in China than it is elsewhere,” says Hunting. “The government is doing everything it can to reduce the risk and instance of fraud as it relates to IPR, copyright, patents, and information security.”

The rapid escalation of patent applications in China in recent years is a sign of this. China has had the fastest growth of new patents in the world, ranking sixth in the world in 2008 with 6,089 patent applications. Last year, Chinese telecommunications company Huawei Technologies Co. became the first Chinese company ever to file the most patents in the world.

A global outsourcing hub China is well on its way to becoming a global outsourcing base and significant progress is being made, although more still needs to be done.

Chinese providers are continuously moving up the value chain, evolving from early low-end work such as back-office administrative work and software testing to increasingly more high-end IT, business process and knowledge management procedures.

“There is a trend towards the diversification of outsourcing where you are seeing outsourcing companies moving up to higher value sectors such as finance and accounting, legal, human resources, market research and analytics outsourcing. As China’s talent pool grows, more companies will have the capacity to deliver these kinds of services,” says Fung.

The numbers of domestic service providers who are obtaining international certifications and qualifications are steadily increasing, allowing them to compete seriously with foreign companies for larger offshore contracts. The McKinsey & Company study found that the number of Chinese vendors who obtained the highest levels of Capability Maturity Model (CMM), the qualification for software development management, grew by 39 percent annually from 2003 to 2007.

These certifications have raised the profile of Chinese providers. By 2006, of the approximately 80 Chinese software companies with more than 1,000 employees, 35 had annual sales greater than RMB1 billion, compared to only 12 companies in 2002.

In addition to branching into specific knowledge-intensive fields, the Chinese outsourcing industry is bulking up on R&D and contract research outsourcing in the life sciences

and pharmaceutical fields.

There are currently more than 1,100 R&D centers operated by MNCs in China, focused on a range of sectors from electronics and communications to pharmaceuticals and chemicals, compared to less than 800 in India. International companies such as Microsoft, Nokia, Oracle, Fujitsu, Philips and DuPoint have all set up prominent R&D operations in China. By 2020, the Chinese government hopes to increase spending on R&D to US$110 billion, as part of a strategy to make China a world leader in science and technology.

The highly segmented outsourcing market in China has resulted in the beginnings of a mass consolidation effort. A flurry of M&A activity has occurred in recent years, as larger industry players jockey for leadership. “In a big way, the financial crisis and economic downturn of the past year are going to help consolidation efforts,” says Liu. Many Chinese service providers are also expanding beyond the traditional markets of Japan and Korea and aiming to break into more diverse markets. As one of China’s largest vendors, Neusoft is looking to build up a reputation and presence in western markets.

“Especially in today’s environment, outbound investment into developed regions like North America and Europe is a very good way for us to acquire the necessary skills, talent, and customer base to penetrate the industry much faster and to leapfrog [competitors],” says Neusoft’s Fang.

Most importantly, China still needs to improve upon its outsourcing image, say many industry insiders. “There are a lot of misconceptions about outsourcing in China, from language capability to IPR protection and a too-fragmented market.

China really needs to brand itself and promote what it has to offer to the world,” says Wright.

With government investments in infrastructure, technology and education, China is unlocking its vast potential to become one of the world’s leading outsourcing hubs.

“China is becoming an outsourcing origin as well as an outsourcing destination. As China develops more skillful service providers and they continue to scale up their size and capabilities, they will attract more and more work to China,” says Fang. “China’s outsourcing industry will maintain a very healthy growth momentum for a long time.”

Elaine Wu is an Editorial Associate at AmCham Shanghai. She can be contacted at elaine.wu@amcham-shanghai.org.

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China is becoming an outsourcing origin as well as an outsourcing destination.”

Supporting Organiser

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INSIDE AMCHAM FROM THE CHAIRMAN

Achieving Advocacy Goals

B

y the time this column reaches you, AmCham Shanghai will have completed another Doorknock trip to Washington, D.C. This year's trip comes at a particularly important time in the U.S.-China relationship, following President Obama's recent announcement on tire tariffs, President Hu's trips to Pittsburgh for the G-20 Summit and New York for the UN annual debate, as well as President Obama's planned trip to China in November. The administration has identified the U.S.-China relationship as a key priority that is vital to a recovery both on a global level and at home in the U.S. As the Voice of American Business in China, we focused our message on enhancing overall U.S. competitiveness in China by addressing three key points that can benefit U.S. companies in China the most: • Request increased funding for U.S. trade promotion programs that will help American companies, particularly SMEs, to compete in China.

• Ask elected officials and policy makers to work with the American business community to develop the emerging greentech and clean energy market in China.

• Promote continued engagement with China as the best way to ensure China meets its WTO commitments through bilateral dialogues such as the S&ED and the JCCT. Look to next month’s issue of Insight for more information on this year’s Doorknock and a full recap of our meetings with senior administration officials such as Commerce Secretary Gary Locke and key members of Congress, as well as other events such as our roundtable with the Brookings Institution. Our advocacy efforts will continue in Shanghai, as we look to build on our close working relationship with the Shanghai Municipal Government. Planning is already underway for this year’s Government Appreciation Dinner, scheduled for December 1, where we again expect over 100 officials from the local government to meet and network with members. We are especially excited for this year’s event as we also expect to introduce new U.S. Ambassador to China Jon M. Huntsman, Jr. to the Shanghai business community.

J. Norwell Coquillard Chairman AmCham Shanghai

This year's Doorknock message focused on enhancing U.S. competitiveness in China.

Finally, it is almost time to vote for the 2010 AmCham Shanghai Board of Governors. We are thrilled to present a very strong slate of candidates who I am positive will ensure that AmCham Shanghai continues to deliver value to members and remains the undisputed Voice of American Business in China. Candidate information and election platforms will be available on the website and at all AmCham Shanghai events. Voting begins October 12 and runs through November 2, with the final chance to vote at the Annual General Meeting on November 5. Remember, AmCham Shanghai is your organization, so make your voice heard!

The AmCham Shanghai 2009 Board of Governors: 2009 Chairman

J. Norwell Coquillard President Cargill Investments (China), Ltd.

2009 Vice Chairman

2009 Governors Eddy Chan

Ted Hornbein

James Rice

Head of China and Senior Vice President FedEx Express

Managing Director for Asia Richco, Inc.

Vice President & Country Manager Tyson Foods, Inc.

Matthew J.Targett

Pierre E. Cohade President, Asia-Pacific Region The Goodyear Tire & Rubber Co.

Head of Innovation Management Bayer Technology and Engineering

Murray King Managing Director Shanghai APCO Worldwide

Minda Ho John Grobowski Managing Partner Faegre & Benson LLP Shanghai

Executive Vice President Praxair (China) Investment Co., Ltd.

Diane Long O C T ODirector BER 2009

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Highlights from September 2009 Board of Governors Meeting Washington, D.C. Doorknock Update The President reviewed preparations for the Washington, D.C. Doorknock in late September.

Delegates have been meeting regularly and preparation materials have been distributed. In addition to meetings with Congress and the Administration, AmCham Shanghai will hold a roundtable with the Brookings Institution and a public event with the East-West Center. More than 25 meetings have already been scheduled, including with U.S. Commerce Secretary Gary Locke.

Expo 2010 Roundtables/Opportunities The President reviewed the series of roundtable meetings that will be held with members to devise a formal proposal for AmCham Shanghai cooperation with the USA Pavilion. An event will be held for members with IVG, which is handling the retail and F&B operations and is seeking vendors and suppliers for the USA Pavilion.

AmCham Shanghai will serve as a platform for

such events but will not be responsible for the selection process.

Nanjing Roundtable/Mayor’s Forum In conjunction with the Nanjing Mayor’s Forum to be held September 16-18, AmCham Shanghai will hold a roundtable discussion on Financial Services with Nanjing government officials. Financial Services Committee Chair Eric Zheng will lead a discussion. Board member Minda Ho will also represent the Chamber and will make an official address at the Mayor’s Forum.

Consul General Briefings The structure and content of the monthly U.S. Consul General Briefings are being reviewed in order to make the briefings more substantive and relevant to both the members and the Consulate.

A taskforce of AmCham Shanghai and Consulate staff has been created to conduct the review and upgrade the content of briefings.

IN ATTENDANCE Governors: Chris Beede, Eddy Chan, Pierre Cohade, Norwell Coquillard (Chairman), David Gossack, John Grobowski, Minda Ho, Murray King, Diane Long, James Rice and Matthew Targett.

Attendees: David Basmajian, Justin Chan, Siobhan Das, Brenda Foster (President), Dean Ho, Rajesh Parekh, Helen Ren, David Turchetti, Linda X. Wang, Jessica Wu and Karen Yuen.

REGRETS Ted Hornbein and Warren Wisnewski.

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Greentech: A Call to Action Landmark Conference Drives China’s Green Technology Market

More than 100 global thought leaders on sustainability convened on September 7 and 8 at the Shanghai World Financial Center to develop an action plan to drive China’s greentech market forward. Greentech: A Call to Action was based on market defining analysis and unprecedented U.S.China collaborative programs. The conference provided a roadmap to move from agreements and discussions to actionable greentech solutions.

In her keynote address, U.S. Senator Maria Cantwell (D-WA) said that China and the United States should dismantle outdated trade barriers and cooperate in developing clean energy to help battle climate change and tap job-creating market opportunities. Cantwell and Chinese officials both urged broader and deeper cooperation, noting that Cold War era limits on technology transfer are hindering both sides from taking advantage of opportunities to invest and create jobs.

Organized by the American Chamber of Commerce in Shanghai (AmCham Shanghai) and the Asia Society Northern California, Greentech: A Call to Action was intended to be a platform for executive and government decision makers to collaborate and drive U.S.-China cooperation which is essential to the development of a greentech market and a sustainable future. The two-day conference attracted international executives including Mark Norbom, president & CEO of GE China, Dr. Shi Zhengrong, chairman & CEO of Suntech, and David C. Wang, president of Boeing China, as well as political leaders from China and the U.S. including Fu Zhihuan,

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chairman, of the Finance Committee of the 10th National People’s Congress, and U.S. Senator Cantwell, chairwoman of the Senate Subcommittee on Energy.

“As two of the world’s largest economies, as well as the world’s largest importers of oil, consumers of coal and emitters of greenhouse gases, the U.S. and China have the potential to become world leaders in developing and deploying green technologies,” said Brenda Foster, president of AmCham Shanghai. “The private sector, working closely with government, will play a key role in defining this market.” A primary goal of Greentech: A Call to Action was to overcome impediments that have prevented the U.S. and China from working together in a truly joint partnership.

“As in so many other areas, the relationship between the United States and China will be crucial to tackling the problems of sustainability and climate change. If we deal with these issues in a positive and constructive fashion, we can begin to chip away at what will likely be the critical issue of the 21st century. We really don’t want to contemplate any other outcome,” said Bruce Pickering, executive director of the Asia Society Northern Californica.

The U.S.-China Clean Energy Forum, sponsor of 8 Initiatives designed to transform the energy systems of the U.S. and China, provided the conference with established bi-lateral cooperative programs. The China Greentech Initiative presented market defining insights from the China Greentech Report, the Initiative’s first deliverable launched on September 10 at the World Economic Forum meeting in Dalian,

China. Both organizations were presenting partners at the conference, along with PricewaterhouseCoopers, a thought leader with industry-focused expertise and also a founding partner of the China Greentech Initiative.

Kicking off day one of the two-day conference, Chairman Fu Zhihuan and Senator Cantwell joined Han Wenke, director general of the Energy Research Institute of the NDRC and Stanley H. Barer, co-chairman of the U.S.-China Clean Energy Forum, in a signing ceremony for the Clean Energy Forum’s 8-Initiatives for U.S. Clean Energy Cooperation. “U.S.-China collaboration is absolutely essential.This is not about adopting any particular form of technology, but rather creating an ongoing dialogue of leaders from the two countries focused on removing impediments and facilitating cooperation,” stated Barer. “The 8-Initiatives provides a roadmap for the way forward.”

United through the China Greentech Initiative, leaders from Beijing Shougang, BP, Cisco Systems, Corning, Climate Change Capital, GE, Owens Corning, Hitachi, IBM, Philips, Shui On Land, Suntech, Volkswagen and dozens more focused on "What’s Hot, What’s Not and Why" during greentech market sector roundtables. Topics covered in the roundtables were based on the Initiative’s nine month open source collaboration project and designed around an analysis of seven market sectors.

On the second day, the Conference hosted Catalyst Sessions with topics drawn from the U.S.-China Clean Energy Forum’s 8-Initiatives. Each session was moderated by a partner from PricewaterhousCoopers and covered topics such as solar technologies, electric vehicles, advanced coal, and sustainable biofuels. Results from the Catalyst Sessions defined focus areas for collaboration in order to catalyze market action moving forward.

“Collaboration is a core value at PricewaterhouseCoopers.

It is exciting to see the active adoption of this approach by the China Greentech Initiative, the U.S.-China Clean Energy Forum and here at the Greentech: A Call to Action conference,” said Ruth Dobson, advisory partner with PricewaterhouseCoopers.

For more information on the Greentech: A Call to Action conference, please check out the Resource Center on the AmCham Shanghai homepage by visiting: www.amcham-shanghai.org/greentech

Sponsors

by Shanghai Shrine Co.

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On a warm, late-summer day, more than 100 AmCham Shanghai members and friends hit the links at the Shanghai Silport Golf Club for AmCham Shanghai’s Seventh Annual Charity Golf Tournament. Each year, AmCham Shanghai hosts several charity events including the annual Charity Golf Tournament and Charity Gala to raise funds for charitable organizations that meet the objectives of the AmCham Shanghai corporate social responsibility mission. Last year’s proceeds went towards sponsoring a transitional school in Sichuan Province’s Li County and supported the Save the Children Organization in their efforts to build a health care network in Sichuan’s An County that today provides treatment to 2,472 children under the age of five. Currently AmCham Shanghai and AmCham Southwest China are working together to build a senior citizens activity center that will serve more than 300 senior citizens living in earthquake-affected Sichuan Province. AmCham Shanghai and Heifer International are also joining up to provide 4,000 families in 20 villages across Sichuan Province with training on Heifer’s Values-Based Holistic Community Development, which includes forming a community-based decision making system, developing personal leadership and group management skills, as well as learning how to successfully raise livestock.

AmCham Shanghai would like to thank all our members and sponsors for their incredible support of the Seventh Annual Charity Golf Tournament, as well as Tournament Organizing Committee members Jay Hoenig and Robert Benedetti. We look forward to seeing you again next year! (Sep 4)

Exclusive Champion Sponsor

Gold Sponsors

Exclusive Golf Cart Sponsor

Exclusive Awards Dinner Sponsor

Exclusive Backpack Sponsor

Exclusive T-Shirt Sponsor

Exclusive Sports Towel Sponsor

Exclusive Cap Sponsor

In-kind / Prize Sponsors

HSBC-WGC ART (16.1.09)

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AmCham Shanghai members can enjoy up to 3 FREE standard job postings every month.

In addition, we also provide 20 Candidate Invitations at RMB500: full access to our resume database and send up to 20 invitations to your target candidates.

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For more information, please contact Ms. Elaine Yang at (86 21) 6279-7119 ext. 5664 or elaine.yang@amcham-shanghai.org

Event Highlights

INSIDE AMCHAM

RECENT AMCHAM HAPPENINGS

The September Consulate Briefing focused on the arrival to China of new U.S. Ambassador Jon Huntsman, the progress of the USA Pavilion at the World Expo, and the introduction of Chris Wurzel as the consulate’s new Chief of the PoliticalEconomic Section. Due to Consul General Beatrice Camp’s travel to Beijing to meet Ambassador Huntsman and to brief him in detail on Shanghai issues, Acting CG Tom Cooney kicked Tom Cooney (center) addresses the AmCham Shanghai members. off the briefing by noting the positive energy throughout the China Mission and in the Chinese media created by the arrival of Ambassador Huntsman and his family. The Ambassador has already visited Chengdu to swear in the largest new group of Peace Corps volunteers in history, and Cooney reported that the consulate in Shanghai looks forward to a visit by Ambassador Huntsman early in his tenure. Chris Wurzel, a veteran U.S. diplomat in Northeast Asia (China, Korea, Japan, among other assignments) has moved to become Political-Economic Section Chief after spending the last year as the consulate’s first Nanjing Affairs officer. In his capacity as the USA Pavilion’s (USAP) deputy commissioner general, Cooney also briefed the membership on recent consulate actions in support of the Pavilion effort. Frank Lavin, USAP board member and Chair of the Steering Committee, provided further details and a presentation on several aspects of the steadily expanding effort, including fundraising, construction progress since the July 17 groundbreaking, and announcement of the USAP Board of Directors. Lavin welcomed former U.S. Consul General in Shanghai Kenneth Jarrett as the Board Chairman and thanked AmCham Shanghai President Brenda Foster for also agreeing to serve on the board. Perhaps the biggest hit of the presentation was a photo of the Pavilion structure in progress – already taking shape and recognizable by the artist’s renderings of what the completed structure will look like. Much work remains to be done, and the USAP non-profit team is readying plans to revamp its website to launch an online store, a mechanism for individual donations (as called for by many AmCham Shanghai members), and a channel for American citizens to volunteer to assist with Pavilion operations both in the important run-up to and during the six-month run of the Expo. (Sep 1)

AmCham Shanghai

SA VE NO TH THE VE UR DA MB SD TE ER AY, : 19 , 20 09

5th Annual Corporate Social Responsibility Conference and Awards “CSR for Any Economy Solutions for Businesses of Every Size”

The 2009 CSR Conference addresses the challenges of starting up socially responsible programs in businesses of varying sizes and resources. Workshops will be led on how to manage volunteer initiatives; establish effective CSR benchmarks; and assess a company’s sustainability needs. Leading organizations will advise on how to work with senior management to make CSR part of a company’s strategy and how to further a career in the field of corporate citizenship.

Tickets will be available for sale at the AmCham Shanghai office. Please note that all tickets must be prepaid no later than Friday, November 13. For registration details and event updates, please visit: www.amcham-shanghai.org/csrconference O Cemail T O B E R csr@amcham-shanghai.org.

2009 INSIGHT 45 Questions? Please call (86 21) 6279-7119 ext. 5661 or

AMCHAM SHANGHAI

September U.S. Consulate Briefing

Committee Highlights

INSIDE AMCHAM

NEW IN COMMITTEES

AMCHAM SHANGHAI

Eric Rongley, CEO and founder of Bleum (second right), discusses outsourcing in China.

Outsourcing: Current

Trends and Future Outlook for China

AmCham Shanghai, together with KPMG, hosted an event focused on the current trends and future outlook for the outsourcing industry in China at the Hilton Hotel Shanghai. Mr.Yang Guoqiang, vice president of the Shanghai Municipal Commission of Commerce, and Egidio Zarella, global partner in charge of information technology (IT) advisory at KPMG, delivered keynote speeches.The speakers addressed the growing trend of outsourcing in China, noting that while China’s industry is not quite on par with the outsourcing industry in India, it should nonetheless be considered a formidable industry heavyweight in years to come. During two separate panel sessions, experts from Bleum, Cognizant and NextHorizon shared their views on outsourcing practices in China in the areas of IT and business process outsourcing (BPO), while representatives from the Hina Group, Evalueserve, Accenture and TPI discussed the growing trend of outsourcing in the financial services sector, especially in light of Shanghai’s bid to become a global financial services center by 2020.

(Sep 17)

CSR Committee

Brian Gallagher, president and CEO of non-profit organization United Way Worldwide, shared the growth applications of corporate social responsibility (CSR) beyond philanthropy at an AmCham Shanghai CSR Committee event run on September 9 at the Four Seasons Hotel. United Way’s mission is to bring differing interests together including government, businesses and NGOs in order to make a community change.The organization currently works with 120 multinationals worldwide. It initiated talks with the Chinese government in the early 1990s, as well as collaborated with China Charity Federation in 1997. In light of the economic downturn, Gallagher stressed that enterprises now have a more significant role to play in CSR. While expressing optimism that companies are starting to view enterprise social responsibility as more than a public relations platform, he urged a further innovation of social responsibility efforts, stressing the importance for organizations to make both their progress and challenges transparent for others to learn from. In order to take a collective lead in driving change, companies must incorporate all stakeholders when identifying potential problems or opportunities.

This includes being accountable to the public, their own employees and also engaging customers and the community, said Gallagher. While enterprises in China often focus their CSR efforts on disaster relief contributions, Gallagher also suggested they could actively employ their efforts in a range of areas including volunteer programs. He cited the ventures of Microsoft and the China Foundation for Poverty Alleviation as key examples – the two organizations run ongoing initiatives to improve living conditions in China’s rural areas and are currently establishing mobile learning centers. (Sep 9)

Brian Gallagher, United Way Worldwide

Event and Committee Highlights are reported by Anna Bartram, Kate Ryge, and Elaine Wu. 46

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AMCHAM SHANGHAI

United Way: Beyond Philanthropy

INSIDE AMCHAM

AMCHAM SHANGHAI

Design & Construction Committee

Shanghai Design Series: Shanghai Tower

Jun Xia, Gensler

Shanghai Tower, slated for completion in 2014, will rise 2,000 feet about Pudong’s Lujiazui district and will be the second tallest building in the world. AmCham Shanghai was pleased to welcome Mr. Jun Xia, regional design director for global design and architecture firm Gensler, to discuss Shanghai Tower at a recent Design & Construction Committee event. Upon its completion in 2014, the Shanghai Tower will stand at 632 meters and be “the greenest skyscraper in the world,” said Xia. From the banks of wind turbines at the top of the tower to rainwater collection systems, the Shanghai Tower features a number of environmentally friendly features that are expected to earn the building the full three stars from China’s green building rating system and a gold rating from the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) rating system. Because the Shanghai Tower will be visible from all over Shanghai, the building concept could not be static and symmetrical, but instead required a dynamic design that would fit in with the rest of the skyline, said Xia. He noted that together with the Jin Mao Building and the Shanghai World Financial Center (SWFC), the Shanghai Tower will form a triangle of three very distinct buildings that complement each other very well. Wind engineering factored a lot into the building’s design and the rotation and tapering of the tower as it ascends help to offset wind resistance and reduce lateral movement, said Xia. The Shanghai Tower also features a curtain wall, or a double skin, made of transparent glass that allows lots of natural light to pass through while also serving as a buffer between the building’s interior and exterior space at higher levels. (Aug 27)

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DEAL OF THE MONTH IMAGINECHINA

China’s US$50 Billion Bet

China commits to the IMF’s first-ever bonds issue.

C

hina has recently been bidding for more formal inf luence in t h e I nt e r n at i o n a l Mo n e t a r y Fund (IMF) for itself and other developing countries including Brazil, Russia and India. In a move largely considered as a step in that direction, Yi Gang, deputy governor of the People’s Bank of China, signed an agreement with IMF President Dominique Strauss-Kahn to purchase US$50 billion of the IMF’s first-ever issued bond notes.

When the IMF first announced plans in June to begin issuing bonds to member countries as a way of raising funds, China was among the first to express interest. The agreement comes at a time when the 186-member IMF is seeking all the resources it can to strengthen its global lending ability. At the G-20 Summit in April, the group made a goal of raising US$500 billion to help the IMF provide financing for countries hit hardest by the financial crisis. Nations such as Mexico, Ukraine and Hungary have already sought IMF assistance. According to an IMF statement, China ’s unprecedented purchase will “boost the Fund's capacity to help its membership – particularly the developing and emerging market countries – weather the global financial crisis, and facilitate an early recovery of the global economy.”

For China, the purchase also presented an opportunity to further diversify its foreign

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holdings from U.S. Treasury bills, which make up about US$776 billion of its US$2.1 trillion in foreign exchange reserves; some economists estimate a total of two-thirds are invested in dollar-denominated assets. China has previously expressed fears that the dollar could face instability, possibly eroding the value of its foreign holdings.

The new IMF notes will instead be denoted in Special Drawing Rights (SDRs), the Fund’s quasicurrency for international reserves. The value of the interest-bearing asset is based on four currencies – the dollar, yen, euro and pound – and is currently worth roughly US$1.56. Chinese officials have previously suggested using the IMF notes rather than the dollar as an official foreign reserve currency, and some analysts believe the newly issued bonds could give it more clout in the international financial system. Furthermore, China announced that it would be buying the bonds with the RMB and not dollars, a move that could lead to the internationalization of the RMB if the IMF in turn uses the RMB to issue loans to its members or purchase assets from other financial institutions.

Brazil and Russia have also announced intentions to each purchase US$10 billion worth of the new IMF bonds, but neither have made a formal agreement.

– Randy Kreider

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