Insight Magazine November 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 November 2009

INTERVIEW

JLL’s Colin Dyer REGULATORY UPDATE

Investment Structures POLICY UPDATE

2009 D.C. Doorknock

Water Worries Now is the time to take action and address China’s water pollution and scarcity problems

INSIGHT November 2009

The Journal of the American Chamber of Commerce in Shanghai

AMCHAM SHANGHAI

David Turchetti

21

26

By Elaine Wu

DIRECTORS

This year’s Washington, D.C. Doorknock focused on delivering a message that improving U.S. competitiveness in China and increasing U.S. exports to China will drive economic growth and create jobs in the United States.

BUSINESS DEVELOPMENT & MARKETING

Karen Yuen COMMITTEES

Siobhan M. Das COMMUNICATIONS & PUBLICATIONS

David Basmajian EVENTS

Jessica Wu

17 Structuring MNC Investments in China REGULATORY UPDATE

By Aaron Grundman and Hong Ye

FINANCE & ADMINISTRATION

Recent regulatory changes offer multinational companies the opportunity to reorganize their China businesses in a taxefficient way. However, it is important to ensure compliance with newly introduced general anti-avoidance rules.

Helen Ren

MEMBERSHIP & CVP

Linda X. Wang

INSIGHT

21 Ready for Recovery INTERVEW

EDITOR-IN-CHIEF

Justin Chan

EDITORIAL ASSOCIATE

By Justin Chan

The global real estate sector was hit hard by the economic crisis as pricing plummetted and investment sales dropped significantly.

Those days should be behind us, says Colin Dyer, president and chief executive officer of global services firm Jones Lang LaSalle.

Elaine Wu

COMMUNICATIONS ASSOCIATE

Weina Yang DESIGN

Alicia Beebe

26

LAYOUT & PRINTING

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

17

ISTOCKPHOTO

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

15

JONES LANG LASALLE

15 Enhancing U.S. Competitiveness in China POLICY UPDATE

ISTOCKPHOTO

F E AT U R E S

AMCHAM SHANGHAI

PRESIDENT

Brenda Foster

COVER STORY

Water Worries

By Justin Chan

China has some of the lowest amounts of per capita water availability in the world today. This water scarcity issue is worsened significantly by the fact that a large portion of the water that is available is polluted to the point that it is unfit for industrial use. The government is taking action, and there is a good opportunity for businesses to be a part of the solution.

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

3 News Briefs

11 Up to Speed

40 Deal of the Month

13 From Green Collaboration to Sustainable Shareholder ANALYSIS

MARKET PROFILE

China’s mobile phone providers are ramping up their 3G offerings ahead of the nationwide launch of 3G services in China.

Value

U.S.-China collaborations on greentech are beginning to take off.

INSIDE AMCHAM

33 From the Chairman: Building Connections 35 2009 AmCham Shanghai Corporate Social Responsibility Awards Finalists

36 2009 CSR Conference 37 Events in Review 38 Committee Highlights

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

MARCH 2009

INSIGHT

1

INSIDE INSIGHT

W

e are all eagerly awaiting more details on U.S. President Barack Obama’s trip to China this month. Officially, President Obama will visit Beijing and Shanghai from November 15 to 18 as part of a four-nation Asia tour that is centered on a visit to Singapore for the annual Asia-Pacific Economic Cooperation (APEC) meeting.

JUSTIN CHAN EDITOR-IN-CHIEF

While in China, Obama will meet with Chinese President Hu Jintao for the third time this year, signifying the importance of the U.S.-China relationship and the willingness of both sides to engage each other. Upon returning from the annual Doorknock in Washington, D.C., the AmCham Shanghai delegation reported that despite the difficult economy back home and a heated healthcare debate, officials in Washington were receptive to the message that enhancing U.S. competitiveness in China is beneficial to U.S. companies and U.S. jobs.

Turn to this month’s policy update for a full recap on the delegation’s busy week of meetings.

While in D.C., the delegation talked about the many business opportunities that exist in China for

U.S. companies, especially in the greentech sector.

While renewable energy – in particular solar and wind energy – typically get the most attention when it comes to investment, clean water is emerging as another top priority. This month’s cover story looks at the state of China’s water resources, which were scarce to begin with, but have only become scarcer following years of rapid industrialization and urban development. Even in a difficult economic climate that is still recovering from a recession, the Chinese government is investing heavily to ensure a safe and steady water supply, and many opportunities exist for businesses to be a part of the solution.

When the economy began its tailspin last year, one of the first sectors hit was real estate. But the worst is behind us, says Colin Dyer, global president and CEO of real estate services firm Jones Lang LaSalle. Check out this month’s interview for more of his thoughts on China’s real estate market and the adoption of sustainable practices. This month’s regulatory update column looks at the potential opportunities for multinational companies to restructure their investments based on recent changes to tax regulations.

IMAGINECHINA

News

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

CHINA BUSINESS

FDI rises in September China received US$7.9 billion of foreign direct investment (FDI) in September, a 19% year-on-year rise, according to China’s Ministry of Commerce. The increase signals a restored surge of confidence among foreign companies to invest in China after FDI suffered a 17.5% yearon-year decline in the first eight months of the year. It was the second consecutive month where FDI had risen after August saw a 7% rise from a year earlier, ending a ten-month series of declines. In total, the government approved foreign investment from 2,217 new companies in September, bringing the total for the first three quarters to 16,348 new companies investing in China.

Business climate index rises The National Bureau of Statistics reported in October that China’s business climate index, a measurement of business outlook, rose by 8.5 points in the third quarter. On the 200-point scale, on which ratings over 100 indicate economic expansion and ratings under 100 indicate contraction, the index climbed to 124.4 points in the third quarter of the year, up from 115.9 in the second quarter. The business climate index for large businesses increased the most, jumping 15.1 points to 148.1 for the third quarter, while the index for medium-sized businesses rose 6.5 points to 123.3 and the index for small businesses increased 8.5 points to 107.2.

The quarterly survey began in 1998.

China launches new stock market Trading has begun on China’s new Growth Enterprises Market, a

China GDP hits 8.9% in third quarter China’s economy grew 8.9% in the third quarter compared with a year earlier, moving closer toward the government’s annual target of 8% growth for the year. Massive government spending, including a US$585 billion stimulus plan and US$1.27 trillion in bank lending, has driven the country’s economic recovery.The third-quarter growth was in line with analyst expectations, although there are growing fears that the government’s massive spending may be inflating stock and property prices.

Policymakers have said that China’s moderately loose bank lending will continue until the economy is on more stable ground, and focus is now on steering the economy toward more sustainable, domestic growth. China’s economy grew 6.1% in the first quarter and 7.9% in the second quarter.

stock market catering to small private companies. The NASDAQ-style market, which is based in the southern city of Shenzhen, saw an initial group of 28 companies listed when trading opened on October 23. The new enterprise board, which will be operated by the Shenzhen Stock Exchange, is expected to raise startup capital for private high-tech firms; small and medium-sized companies in the sector have benefited little from the flood of bank lending this year that has mostly been going to larger companies and stateowned enterprises.

Aviation industry profits jump Despite a global crunch on aviation, China’s aviation sector reported profits of RMB9.1 billion in the first nine months of 2009 as domestic air passenger traffic grew by 23.6% year-on-year, according to the Civil Aviation Administration of China (CAAC). The growth in passenger volume was attributed partly to small airports, where passenger volume grew 26.7% yearon-year, after a series of CAAC policies subsidized small and medium-sized airports and regional routes. By the end

NOVEMBER 2009

INSIGHT

3

of last year, there were a total of 116 small airports in China, accounting for 73% of all airports in the country. In September, the Aviation Industry Corp. of China reported that China would need 3,796 new aircraft in the next twenty years to meet the fast-growing domestic demand for air travel; China had 1,191 passenger planes at the end of last year.

CORPORATE NEWS

Record China sales for Volkswagen German automaker Volkswagen (VW) announced in October that it had already eclipsed last year’s record number for sales in China in the first nine months of 2009.

“We surpassed the one million record sales landmark of last year already in middle of September,” said Volkswagen Group China Chief Executive Winfried Vahland. From January to September, 1.09 million VW vehicles were sold in China, a 37% yearon-year rise. In September alone, 150,000 vehicles were sold, breaking the previous monthly record. The company sold 1.02 million vehicles in China in 2008. VW now says it expects total annual sales in 2009 to achieve growth of more than 30% year-onyear. VW sells vehicles in China through joint ventures with First Automobile Works and Shanghai Automotive Industry Corp.

Gap to open first store in China U.S. clothing chain Gap, Inc. plans to open its first store in China in 2010 to take advantage of China’s market opportunities.

Gap Chief Executive Glenn Murphy told investors that the decision came after several trips to China during which he noticed no major presence of U.S. apparel brands. Analysts believe that the move is an effort to expand the company’s international presence in light of falling domestic demand for its products. Gap will work with some Chinese companies to provide services such as distribution but will own and manage the store itself.

An exact location for the store has not yet been finalized. International sales

by Gap, which also operates the Banana Republic and Old Navy chains, reached

4

INSIGHT

US$2.6 billion last year, roughly 19% of the company’s total store sales.

Coke opens RMB600 million plant The Coca-Cola Co. has opened an RMB600 million still, or non-carbonated, beverage plant in China, its largest yet investment in still beverage production in China. The plant, in the central city of Wuhan, is the company’s 39th plant in China and the third plant opened so far this year. The move is part of Coca-Cola’s attempt to meet Chinese consumers’ growing demand for still drinks, which already account for 30% of the company’s business in China. CocaCola bid last year for leading domestic juice producer China Huiyuan Juice Group, but the acquisition was denied by the Ministry of Commerce for antitrust reasons. CocaCola already operates brands such as Guo Li Chen (Minute Maid Pulpy) and Yuan Ye (Original Leaf Tea). Coca-Cola has committed to investing $2 billion in China over the next three years.

MACROECONOMICS

China’s fiscal revenue rises China’s fiscal revenue rose 33% year-onyear in September to RMB560.94 billion, marking the fifth month in a row that government receipts have increased, said China’s Ministry of Finance. According to the Ministry, the increase signals a strong domestic economic recovery for China but was also partly due to a relatively low basis in September of last year. Fiscal expenditure hit RMB657.74 billion in September, a 5.3% increase from the same month in 2008. In the first three quarters of this year, fiscal revenue topped RMB5.15 trillion, a 5.3% year-onyear increase, while fiscal expenditure in the same period rose 24.1% to RMB4.52 trillion.

China has said it plans to run a deficit of RMB950 billion for all of 2009.

China trade continues slump China’s foreign trade continued its long series of decline in September, with imports falling 3.5% and exports falling 15.2% year-on-year, according to China’s

NOVEMBER 2009

General Administration of Customs. The total value of imports and exports in the month was US$218.94 billion, down 10.1% from last year. However, the rate of September’s declines eased from previous months, with exports falling less then they have in nine months and imports falling the least since they began declining last November. In the first three quarters of the year, China’s trade fell 20.9% year-on year, although trade with the United States, its second-largest partner, fell only 15.8%.

The Asian Development Bank has said it expects total Chinese exports to grow in the fourth quarter this year.

Retail sales soar during National Day Sales of consumer goods throughout China reached a total of RMB570 billion during the eight-day National Day Holiday, according to China’s Ministry of Commerce. The bulk of consumer spending over the holiday was directed toward household appliances, jewelry, clothing and cars. Average daily sales during the period rose 18% year-on-year, which officials attributed to subsidies on appliances and cars provided to consumers as part of the government’s stimulus program. Meanwhile, China’s National Tourism Administration and National Bureau of Statistics reported that tourism revenue during the holiday reached RMB100.7 billion, a 26.4% yearon-year increase.

U.S. - CHINA

U.S. criticizes yuan inflexibility In a report to the U.S. Congress, the U.S. Treasury criticized China for the lack of flexibility in its currency and its rapid buildup of foreign reserves, calling both “serious concerns” which need to be corrected. The yuan remains “undervalued,” said the report and while U.S. lawmakers have insisted that China artificially weakens its currency to boost its export competitiveness, the report did not make such an accusation, writing instead that “no major trading partner of the United States” qualified as an exchange

NOVEMBER 2009

INSIGHT

5

rate manipulator. The Treasury made the statements in its semiannual report to Congress on whether any foreign economy manipulates its currency against the dollar.

China decreases holdings of U.S. bonds China cut its U.S. Treasury bond holdings from US$800.5 billion to $797.1 billion in August, according to Treasury data released in October. However, China’s Treasury holdings have risen 39% since August 2008 and China remains the top holder of U.S. debt. The Chinese government recently raised concerns over rising U.S. debt, fearing a weakening dollar could erode the value of its treasury holdings. Despite China’s cutbacks in August, in total, investors purchased US$28.6 billion more in treasury assets than they sold in August, with nations such as Japan, the second-largest foreign holder, increasing treasury securities from US$724.5 billion to US$731 billion.

U.S. seeks greater military ties Kurt Campbell, U.S. assistant secretary of state for East Asian and Pacific affairs, said during a three-day visit to Beijing that the United States seeks greater interaction with China’s military and that the two nations should develop “rules of the road” on how to cooperate in the future.

The speech came after the two sides experienced a series of standoffs involving its navy vessels in waters off the coast of China earlier this year. China temporarily suspended military exchanges with the United States last year after the United States proposed a US$6.5 billion arms package to Taiwan, but agreed to resume exchanges in February of this year and the two nations have had several rounds of military talks since.

CHINA OVERSEAS

EU places tariffs on Chinese pipes The European Union has decided to impose anti-dumping tariffs on seamless steel pipes from China to prevent “material injury” to European competitors.

6

INSIGHT

According to the European Commission, the tariffs are designed to punish Chinese exporters who were selling the pipes below cost in the EU. The tariffs will last for five years and range from 17.7% to 39.2%. According to state media, China is “dissatisfied” with the decision, claiming it ignores World Trade Organization guidelines on protectionism. The U.S. Commerce Department also announced that it has launched an investigation on the import of steel pipes from China, a move that China’s Ministry of Commerce has said it adamantly opposes.

China sells bonds in Hong Kong China began selling international yuandenominated sovereign bonds for the first time in Hong Kong this month in a move considered by some analysts to be China’s attempt to begin internationalizing its currency. The RMB6 billion sale is being managed by the Bank of China and the Bank of Communications. The bonds, which were issued on September 28, offered above-average yields to Hong Kong investors – 2.25% for two-year bonds and 2.7% for three year bonds. The yuan does not currently trade on global markets, although its use is approved in trade between certain Chinese cities and Hong Kong.

China’s largest gold company expands reach Zijin Mining Group Co., Ltd., China’s largest listed gold company, signed a memorandum of understanding with the Philippine government that outlines its plans to invest up to US$1 billion in gold and copper mining operations throughout the Southeast Asian country. Zijin already has holding subsidiaries in 20 Chinese provinces and seven foreign countries, making it China’s largest gold producer and its third largest copper producer. It has recently been pursuing acquisitions of mineral resources in several overseas projects and also announced last month that it had purchased over 21 million shares of Canadian Continental Minerals Corp., becoming its largest shareholder.

NOVEMBER 2009

GOVERNMENT & POLICY

China plans to boost western growth China’s National Development and Reform Commission (NDRC) announced in October that it will invest a total of RMB468.9 billion in projects designed to boost growth in western China throughout 2009. The 18 announced projects will range from railways to airports, hydropower facilities and shipping hubs. From 2000 to 2008, the NDRC has overseen 102 projects worth RMB1.74 trillion as part of China’s West Development Strategy, which is designed to balance the level of prosperity between China’s underdeveloped western regions and booming eastern coastal regions.

Moves to reduce overcapacity announced Chinese policymakers, concerned about overinvestment in six industrial sectors, launched a new initiative last month to curb the expansion of steel, cement, flat glass, coal chemicals, polysilicon and wind power equipment. As part of the guidelines, China has begun to withhold approval and is ordering banks to deny financing for projects in these sectors that are not in line with government policy, according to a joint statement by 10 ministries led by the National Development and Reform Commission. The statement also ordered local governments to look out for signs of overcapacity in aluminum, ship manufacturing and soy-crushing industries but did not immediately subject those sectors to the same restrictions. The effort came after concerns that too much of the government’s fiscal stimulus package was going towards the industrial sector.

CBRC urges careful lending China Banking Regulatory Commission Vice Chairman Jiang Dingzhi met with managers of China’s five biggest staterun lenders in October to remind them to maintain careful lending practices.

During the meeting, with the Industrial & Commercial Bank of China, China

Construction Bank, Agricultural Bank of China, Bank of China and Bank of Communications, the banking regulator urged the lenders to maintain a sustainable pace of lending and to manage risks and set up provisions to cover potentially faulty loans; Jiang asked the banks to increase their bad-loan coverage ratios to above 150% by the end of the year. The directives are a sign of the government’s cautiousness towards its banks’ credit risks after the nation saw a surge of lending in the first half of this year, during which new bank loans reached a monthly average of RMB1.2 trillion. Banks have since slowed their rate of lending, with new loans in September totaling RMB516.7 billion.

SHANGHAI BUSINESS

Investment and sales in Shanghai grow Shanghai experienced strong growth in both investment and retail sales in September, indicating that the city is undergoing economic recovery, according to figures from the Shanghai Statistics

Bureau. Investment in city infrastructure grew substantially, as spending on roads, bridges and other fixed assets grew 25.6% year-on-year. For the first three quarters of the year, the city’s fixed-asset investment rose 14.1% year-on-year. The city’s retail sales also grew in September at a rate of 14.3% year-on-year to RMB44.1 billion, and analysts believe that retail sales are likely to maintain strong momentum in the fourth quarter thanks to the ongoing government stimulus program.

Shanghai, Hong Kong form airport venture The Shanghai Airport Authority and Airport Authority Hong Kong have agreed to establish a RMB100 million joint venture to better manage Shanghai’s Hongqiao International Airport. The Shanghai airport operator will pay RMB51 million to acquire a 51% stake, while its Hong Kong counterpart will acquire the remaining 49% stake in the new Shanghai Hong Kong Airport Management Co. Hongqiao Airport is currently building a

NOVEMBER 2009

new terminal to be completed by next year that will increase the airport’s total area from 82,000 to 364,000 square meters.

VisionChina to buy Shanghai media group VisionChina Media Inc., which operates digital advertising screens on mass transit systems throughout China, has said it plans to purchase Shanghai-based Digital Media Group for US$160 million in cash and stock to expand its reach in subway and bus advertising networks. After the merger, which will close by the first quarter of 2010 upon completion of due diligence, VisionChina will be able to sell advertising on Digital Media’s 35,000 televisions in 32 subway and other railway lines throughout China, including 13 lines in Shanghai, making it the city’s exclusive subway advertiser. VisionChina’s Chief Financial Officer Scott Chen has said that the acquisition will allow the company to profit from the Shanghai 2010 World Expo.

Digital Media will maintain a 10% stake in VisionChina following the merger.

INSIGHT

7

CHINA & THE WORLD AUSTRALIA ASIA-PACIFIC Coal Mining Co. resubmitted its application for a US$3.2 billion takeover of Australian firm Felix SOUTH AMERICA Yanzhou Resources at the request of the Australian Foreign Investment Review Board. If it is approved, the takeover, which Felix has said is expected to be completed by December, would be the first ever takeover of an Australian company by a Chinese firm. Earlier last month, Yanzhou announced that it would launch an initial public offering within two to three years of acquiring Felix to float some of its Australian assets on the stock exchange, an announcement thought to improve the firm’s chances of having its application approved.

MIDDLE EAST

INDIA Tata Consultancy Services (TCS), India’s highest-earning software exporter, recently announced that it plans to increase its staff in China from 1,100 to 5,000 over the next five years to take advantage of the rising demand for outsourcing services in the country. The move comes as the Indian company attempts to break into growing markets in Asia-Pacific, the Middle East and Africa, which together currently account for about 7% of its current revenue. TCS entered the China market in 2002 and now has a strong presence in the country’s financial sector, with clients ranging from the Bank of China to the China Foreign Exchange Trade System, a unit of People’s Bank of China.

EUROPE ASIA-PACIFIC

KENYA Kenyan Prime Minister Raila Odinga and Chinese Premier Wen Jiabao pledged to strengthen ChineseKenyan bilateral relations at talks held during the 10th Western China International Economy and Trade Fair in Chengdu, Sichuan Province. Wen stressed the importance of boosting cooperation in such fields as trade, infrastructure development and culture and also stated that China will increase its financial assistance to African nations. China and Kenya are reportedly in talks to build a multibillion dollar transport corridor and port on the Kenyan coast to export Chinese oil drilled in southern Sudan.

AFRICA

RUSSIA Russian Prime Minister Vladimir Putin ushered through US$3.5 billion worth of trade deals between Russian and Chinese companies during a three-day visit to Beijing in October. The deals included a US$500 million loan from the Agricultural Bank of China to Russia’s Bank VTB. Putin also held talks with Chinese Premier Wen Jiabao, during which the two nations signed a framework agreement on Russia’s export of natural gas to China and an agreement of mutual notification in the event of ballistic missile or carrier rocket launches. This was Putin’s first official visit to China since taking office as prime minister in May 2008. Bilateral trade between the two nations totaled US$56.83 billion in 2008, making China Russia’s third biggest trade partner.

EUROPE

MIDDLE EAST NORTH AMERICA

MIDDLE EAST

BELGIUM Chinese Vice President Xi Jinping promoted a three-point proposal to strengthen bilateral relations between China and Belgium during a speech at the China-Belgium Economic Trade Forum in Brussels. Xi said that China and Belgium could both benefit from strengthening their economic cooperation, enhancing technological exchanges and eliminating trade barriers. The bilateral trade volume between the two nations reached US$20.2 billion in 2008. Xi’s visit to Belgium was part of a five-leg European tour that also brought him to Germany, Bulgaria, Hungary and Romania.

AFRICA SOUTH AMERICA

AFRICA

IRAQ State-owned oil and gas company China National Petroleum Corporation (CNPC) along with joint venture partner British Petroleum (BP) have finalized a deal with the Iraqi government to operate and develop the Rumaila oil field in southern Iraq. The two companies plan to boost production at the field from the current one million to around 2.8 million barrels per day over the 20-year duration of the project. CNPC will hold a 37 percent stake in the venture, which is expected to cost between US$14-20 billion, while BP will hold 38 percent and Iraq’s State Oil Marketing Organization will control the remaining 25 percent.

NORTH AMERICA

MIDDLE EAST

NORTH AMERICA ASIA-PACIFIC

UNITED STATES A new report by the Natural Resources Defense Council argued that the United States and China can together deploy large-scale carbon capture and storage (CCS) projects in China, eventually making it a world leader in carbon dioxide sequestration. Researchers found that with U.S. support as well as domestic and international investment, China, which recently surpassed the United States as the world’s largest emitter of greenhouse gases, could develop CCS technology to capture and store underground as much as 3,066 gigatons of carbon dioxide.

AFRICA

ECUADOR China’s Sinohydro Corp., a hydropower engineering company, has signed a US$2 billion deal to build a 1,500 megawatt hydroelectric plant in Ecuador. When completed, it will be the largest hydropower facility in Ecuador and will deliver 60 percent of the nation’s power. The Export-Import Bank of China will cover 85 percent of the project’s total cost, while the Ecuadorian government will pay the remainder.

Ecuadorian President Rafael Correa has said that the project will create 4,000 direct and 15,000 indirect jobs in the nation.

SOUTH AMERICA

8

ASIA-PACIFIC

INSIGHT

NOVEMBER 2009

SOUTH AMERICA EUROPE NORTH AMERICA

ASIA-PACIFIC

NOVEMBER 2009

INSIGHT

9

Discover How Conferencing Can Help You Be Green and Save Money 会议和协作服务有助于实现绿色环保，节约开支

Did you know conferencing and collaboration is now a real alternative to non-essential business travel?

Find out how, visit: http://greencn.conferencing.com 您是否了解您可使用会议替代非必要的商务出行，既省时又有效 更多资讯，欢迎访问http://greencn.conferencing.com

by Shanghai Shrine Co.

Conferencing and Collaboration For the Global Enterprise

10

INSIGHT

NOVEMBER 2009

www.shanghaishrine.cn

MARKET PROFILE

BY MARCUS GLADERS

ISTOCKPHOTO

Up to Speed

A

s all three of China’s mobile phone operators unleash their third generation (3G) networks and let users access the worldwide web on the go, now is a good opportunity to review the implementation of high speed mobile internet access in the United States and look at implications for Chinese operators, users and content providers as China ramps up its 3G networks.

Growing pains In the United States, the launch of 3G services was not without its troubles. As the exclusive carrier of Apple, Inc.’s popular iPhone, AT&T did not anticipate the surge of simultaneous users that clogged bandwidth and led to network bottlenecks.

Although an iPhone does not use an inordinate amount of bandwidth for basic functions such as telephone calls and text messaging, thousands of available programs rely on internet access for tasks such as ordering food, finding a public restroom and accessing social networking sites. Only after a public outcry over delayed messages, dropped calls and slow access did AT&T promise to upgrade its network infrastructure.

As users in China have already shown a strong interest in mobile internet access, the 3G providers will still need to ensure that their networks are equipped to sustain heavy bandwidth requirements.

Different standards in China China Unicom, which won the right to be the exclusive supplier of Apple’s iPhone in China and recently began accepting pre-orders, is betting the

phone will entice the masses to sign up for its 3G service. This is despite the fact that the iPhone has been hugely popular in China for a few years through illegal imports, although without the high speed access that Unicom promises to provide.

In contrast, China Mobile, the largest mobile operator by number of users, has decided to make the Lenovo-produced OPhone its flagship handset.

The OPhone will have a customized version of the open source Android operating system introduced

by Google and is being manufactured to support China Mobile’s home-grown TD-SCMA 3G standard. China Unicom’s 3G network and phones will use the WCDMA standard, which is common with the rest of the world.

Big impact of small apps It is fair to say that the iPhone, with its slick user interface and the ability to run many programs that utilize the internet, is the beacon of a paradigm shift in the world of mobile communication. Much of the functionality of a PC has been squeezed into a small, handheld device and users are beginning to expect mobile devices to work as fast as their broadbandenabled PC at home. If AT&T’s iPhone experience is any guide, then Chinese users will also want to download all kinds of different programs to their smart phones. China Mobile recognized this and preparations are underway for an online application store similar to Apple’s App Store on iTunes.

Essentially, the iPhone has converted the venerable mobile handset into a mobile PC with mass appeal. Making calls is also possible but it is not necessarily the most important, most fun, or most often used function of smart phones. This

NOVEMBER 2009

INSIGHT

11

China’s telecom companies are hoping for a flood of new users when they switch on their 3G networks.

is underscored by the fact the App Store now offers 85,000 applications and there have been more than two billion downloads since the store’s launch.

New business opportunities The potential of internet-connected smart phones for creating new business opportunities, especially in China, is significant. China currently has more than 710 million mobile phone users; even if just half of these users switch to smart phones in the next few years, they would outnumber the total number of mobile phone users in the United States.

Many companies are discovering mobile marketing via smart phone applications as an effective tool which can help to build a brand in countries where 3G networks are already established. The big difference between those markets and China in terms of opportunity is size. There will simply be many more smart phone users in China than in any other country and smart phone applications represent an alternative to traditional online advertising where marketers can interact more directly with potential customers. Although many marketing apps in existence today are available for free and not a significant source of direct revenue, they represent a unique opportunity to push the envelope in terms of targeted marketing and branding.

Outlook for China The largest impact on the lives of smart phone users in the U.S. does not come from simply having ready access to the internet. Instead, it is the fact that many little applications are now available to organize, inform, and entertain users on the go and make a real difference in their lives. Along those lines, Chinese smart phone users won’t stay far behind and will find creative ways to use their 3G phones.

Clearly, the advent of mobile internet to a large part of the world’s population is nothing short of a revolution. Its impact is far-reaching but cannot yet be fully gauged. Still, many companies have already started to explore how to use this technology to increase sales and reach customers through more targeted marketing. With the largest mobile phone user population in the world, the impact of 3G technology in China will be an important trend to watch as well.

Marcus Gladers is marketing manager for Psyma Business Research China. He can be contacted at marcus.gladers@psyma-china.com.

12

INSIGHT

NOVEMBER 2009

A N A LY S I S

B Y C L A R E N C E K WA N

A

cross the broad expanse of the U.S.-China economic relationship, few areas exhibit greater promise for close cooperation than clean tech and renewable energy. Both countries have seized upon the economic crisis to advance their plans for greater sustainability, uncovering strong mutual interests along the way.

To take a recent example, U.S and China officials announced the establishment of a new joint research center on clean energy in late July. There is still much to be worked out, but for companies looking for new ways to create value from green initiatives unfolding on both sides of the Pacific, the overall direction is clearly positive.

For U.S. and Chinese executives seeking to exploit emerging synergies in this space, a comparative look at the U.S. and Chinese stimulus plans can be a very useful place to start. Once the parallels have been identified, all manner of strategic alliances can be considered to enable a company to simultaneously pursue opportunities in what, more often than not, are the world’s two largest markets.

According to a report by HSBC Global Research, the U.S. and China will account for no less than 70 percent of the US$430 billion allocated to green spending among the world’s twenty largest economies. A large chunk of this spending is on infrastructure like high-speed rail and smart electric grids, but both countries are committing billions to achieve remarkably similar

ISTOCKPHOTO

From Green Collaboration to Sustainable Shareholder Value

goals in clean tech and renewables as well. In the U.S., for example, US$6 billion will be spent on waste treatment and water infrastructure, while China plans to invest US$40 billion on similar initiatives.

For any company active in clean water, partnering to go after business in both the U.S. and China is an option worth looking at, especially while war chests and shareholder tolerance for risk are still low. Given the recent protectionist sentiment creeping into the bilateral relationship with Buy American and Buy Chinese provisions, the ability to put a local face on an investment can also be very welcome.

There are already numerous examples in the marketplace of U.S. and Chinese companies seizing cross-border opportunities related to green spending. Consider the following cases covered in the press during the past few months: • A California-based company has lined up a series of Chinese partners with the intention of producing electric vehicles for both markets and beating more established players to the punch. The vehicle itself will be built by a state-owned auto company in China, while the lithium-ion batteries will be produced in the U.S., based on a design by another Chinese partner. The company is currently seeking U.S. stimulus funding for the U.S. facility.

• A New York-based diversified manufacturer, already partnering with a California company to develop a pilot smart grid project in Florida,

NOVEMBER 2009

INSIGHT

13

U.S.-China collaborations on greentech are yielding growth opportunities.

Analysis provided by

Clarence Kwan, National Managing Partner – U.S. Chinese Services Group uscsg@deloitte.com Timothy B. Klatte, Director – Global Chinese Services Group (021) 6141-2760 www.deloitte.com/cn/gcsg

“

U.S. and Chinese companies are coming together to create a sum greater than its parts.”

recently signed a cooperation agreement with China’s largest electricity transmission and distribution company. The Chinese company has been given a mandate to develop a national smart grid by 2020, which some industry experts say could entail spending in excess of US$10 billion annually.

• A joint venture between China’s largest solar panel manufacturer and a local U.S. partner announced that it won a bid to build a solar power plant for a local utility in Texas. The project will power 5,000 Texan homes when it goes online in 2010, and help the Chinese company further penetrate what it considers its largest future growth market.

In May, the company announced that it was also scouting for locations to build a new solar panel assembly plant.

Given the wide range of potential synergies to be exploited — markets, product, supply chain, talent and technology — the specifics of each case matter

14

INSIGHT

NOVEMBER 2009

less than the fact that in each instance, U.S. and Chinese companies are coming together to create a sum greater than its parts.

In many segments of the renewable energy market, the U.S. and China are emerging as dominant players. In both countries, stimulus spending is expected to act as a powerful accelerant of this process, opening new areas for cross-border collaboration between the public and private sectors.

The same phenomenon can be observed in other industries as diverse as automotive and healthcare.

This raises an interesting question for U.S. executives, regardless of industry – if the U.S. and China are the top two global markets in our sector, then shouldn’t they be the top two markets for us as well? If the answer is no, then your strategic investment priorities may not be aligned with your greatest opportunities for future revenue generation, placing long-term global competitiveness at risk.

P O L I C Y U P DAT E

BY ELAINE WU

Enhancing U.S. Competitiveness in China

F

rom September 21 to 24, a delegation led by AmCham Shanghai met with members of the Administration, Congress and other key decision makers during AmCham Shanghai’s 2009 Washington, D.C. Doorknock. Top U.S. officials were engaged on important issues concerning the American business community in China with a focus on enhancing U.S. competitiveness.

The delegation was comprised of representatives from Fortune 500 companies, SMEs and entrepreneurs (see next page for a complete list of delegates). A key objective of the 2009 Doorknock was to engage policymakers on the importance of trade with China. Since 2000, U.S. exports to China have grown 340 percent and China has become America’s third largest export market. Forty-eight U.S. states have seen at least triple-digit percentage increases in exports to China since 2000, and in 2008, 18 states had more than $1 billion in exports to China.

The delegation conveyed the message that improving U.S. competitiveness in China and increasing U.S. exports to China will drive economic growth and create jobs in the U.S., critically important as the American economy struggles to emerge from the economic downturn.

The AmCham Shanghai delegation focused on three key messages: 1. Trade promotion. While U.S. exports to China have increased dramatically, increased funding for U.S. trade promotion programs will help

American companies, particularly SMEs, to compete with our competition from the EU, Japan, Korea and competition from other countries, many of whom benefit from much stronger government support.

2. Greentech. China’s rapidly developing greentech market offers a tremendous commercial opportunity for American businesses. The delegation asked elected officials and policy makers to work with the American business community to develop the emerging greentech and clean energy market in China.

3. U.S.-China engagement. The delegation emphasized the importance of promoting continued engagement with China as the best way to ensure China meets its WTO commitments and to balance the U.S.-China commercial relationship.

Key meetings included those with the Department of Energy, Department of State, the White House Business Council, U.S. Secretary of Commerce Gary Locke, the offices of Democratic and Republican congressional leadership, the National Association of Manufacturers, the Brookings Institution and the Peterson Institute for International Economics.

During the meeting with Secretary Locke, he discussed his plans for expanding and increasing funding for the Foreign Commercial Service, as well as revising export control regulations to ease the limitations on U.S. companies exporting dualuse products to China and elsewhere.

The delegation also met with John Engler, the

NOVEMBER 2009

INSIGHT

15

AmCham Shanghai leads a delegation to Washington, D.C. for the annual Doorknock.

2009 AmCham Shanghai Doorknock Participants J. Norwell Coquillard Phil Branham Brenda Foster Jeff Bernstein Matthew Chervenak Ted Dean John Grobowski

Cargill China B&L Group AmCham Shanghai Emerge Logistics General Biologic BDA Faegre & Benson

Tom McCawley Charles McElwee Robert Roche Steven Tseng David Basmajian Patrick McNally

former Michigan governor and current president of the National Association of Manufacturers (NAM), who emphasized that more needs to be done by the U.S. government to encourage U.S. companies to sell American-made goods overseas. AmCham Shanghai and NAM agreed that a review of U.S. export control regulations is needed to improve American competiveness abroad. At the Brookings Institution, Chamber members met with Kenneth Lieberthal, director of the John L. Thornton China Center, and his team of China experts, who discussed the current mood in Washington toward U.S.-China relations and the overriding domestic priority of creating American jobs. Brookings expressed their interest in collaborating with AmCham Shanghai on future projects and reports with a particular focus on the Chamber’s work in promoting the greentech

16

INSIGHT

NOVEMBER 2009

Owens Corning Squire, Sanders & Dempsey Acorn International KPMG AmCham Shanghai AmCham Shanghai

sector and China’s growing service industry.

This year’s Doorknock was a huge success and one of the “best Doorknocks by far,” said AmCham Shanghai Chairman J. Norwell Coquillard. It presented the Chamber with an opportunity to share its messages about U.S. competiveness and the importance of continued U.S.-China engagement with toplevel policymakers in the U.S., and also laid the groundwork for potential partnerships and collaborations. In the weeks ahead, AmCham Shanghai will follow up with the representatives it met with and is looking forward to further visits to Shanghai by Administration leaders and members of Congress in the coming months.

For more information, visit the Doorknock Blog at www.amcham-shanghai.org/blog.

R E G U L ATO RY U P DAT E

BY AARON GRUNDMAN AND HONG YE

Structuring MNC Investments in China

S

ince the introduction of the Enterprise Income Tax (EIT) law that became effective in 2008, many companies have been reevaluating their China investment structures. In addition to the EIT’s statutory 25 percent income tax rate, the new law introduced several technology and management function-based incentives. However, the phase-out of tax holidays and the imposition of withholding taxes have caused the taxation of many China enterprises to increase.

For example, the EIT law maintains a separate company taxation base that existed under the previous income tax system; therefore, multinational companies (MNCs) with loss making enterprises cannot offset current losses against other group companies' taxable profits, which may have an adverse impact on the MNC’s effective tax rate.

The release of the long-awaited M&A tax regulations in May 2009 allowed China enterprises to engage in a number of different business reorganizations with relatively clear tax consequences.

Although not as comprehensive as similar rules in some other countries, the issuance of M&A tax guidelines is a big step forward by the Chinese tax authorities in offering guidance on how to reorganize China businesses in a tax-efficient way.

With the promulgation of new M&A rules and the general trend allowing companies to have a more broad business license scope, MNCs should review the effectiveness of current investment structures in China and consider whether such structures are efficient for both business and tax purposes.

Historical investment structures Current MNC investment structures in China can be summarized in three categories: (1) the MNC parent company directly invests in the equity of one or more Chinese subsidiaries; (2) the MNC invests through an intermediate holding company; or (3) the MNC invests through several intermediate holding companies, with each intermediate holding company investing in the equity of one or more Chinese subsidiaries.

There are many reasons for such diverse investment structures. Many MNCs have historically set up multiple entities because Chinese business regulations only permit a company to carry out certain business activities.

For example, a few years ago, a manufacturing entity was not permitted to carry out trading or service activities, and separate trading or service companies were required to provide such support.

MNCs also set up multiple entities in China for tax purposes. Under the old tax law which was superseded by the EIT on January 1, 2008, a qualified manufacturing enterprise was eligible for a tax holiday which exempted income tax on profit for the first two profitable years and taxed profits for the following three years at half the applicable rate. In order to maintain this favorable tax incentive, many companies would simply set up a new manufacturing enterprise at the expiration of the initial tax holiday.

NOVEMBER 2009

INSIGHT

17

Multinational corporations must take a careful look at recent regulatory changes when structuring investments in China.

“

MNCs with intermediate holding companies that were set up for pure investment purposes may want to review whether such holding companies have sufficient substance to avoid the application of general anti-tax avoidance rules.”

Current restructuring opportunities Under the new EIT law, dividend distributions are no longer exempt and are now subject to a 10 percent withholding tax under the domestic law, unless a reduction of the withholding tax rate is available under an applicable double taxation treaty. In the past, taxation of dividends was not a top priority for holding structure planning because dividends were exempt from withholding tax.

In the past several years, China has amended its treaties with Mauritius and Singapore and also signed a new double taxation arraignment with Hong Kong, all of which could impact holding structure planning. The revised China-Mauritius treaty removed the capital gain tax exemption on the disposal of Chinese subsidiaries with significant land holdings. The revised China-Singapore treaty and the new China-Hong Kong arrangement both offer a 5 percent dividend withholding tax rate, which makes Singapore and Hong Kong two of the more favorable holding jurisdictions for MNCs investing in China.

As mentioned above, MNC investments in China are often made directly by the overseas parent company. As an exit strategy, MNCs often opt to set up an intermediate company as a means to exit the investment in China through the sale of the intermediate company, thereby avoiding nonresident capital gains taxes on the sale of the Chinese subsidiary. These intermediate holding companies were often set up in low tax jurisdictions such as Hong Kong, the Cayman Islands, the British Virgin Islands (BVI), Mauritius and Barbados (the latter two were more popular for real estate companies due to favorable treaty treatment on capital gains).

For example, a BVI company has been frequently used by shareholders in Taiwan and Hong Kong as an intermediate holding company location.

The introduction of the new general antiavoidance rules (GAAR) allows the Chinese tax authority to challenge investment structures that are set up primarily for tax purposes and lack substance.

There have been several significant rulings recently where the tax authorities appeared to have challenged the transactions on the basis of the GAAR. In addition, the Chinese tax authorities have issued guidelines that apply to non-residents seeking

18

INSIGHT

NOVEMBER 2009

to enjoy the benefits of a reduced withholding tax provided by a tax treaty with China. In particular, the party claiming the benefits must demonstrate that it is a qualified resident of the other state and be the beneficial owner of an income item when applying for a reduced treaty withholding rate. MNCs with intermediate holding companies that were set up for pure investment purposes may want to review whether such holding companies have sufficient substance to avoid the application of GAAR. The following examples illustrate situations where a business restructuring may be advantageous to an MNC already invested into China.

Utilization of losses – With the abolishment of the tax holiday and other tax incentives (e.g., tax preferential regions), many MNCs will experience an increase in their China income tax obligations.

Therefore, reducing the overall tax burden in China has become a priority. As previously mentioned, China has no tax consolidation rules and the losses of one subsidiary cannot be used to offset the profit of another subsidiary. Merging a loss company into a profitable company may be one way to use unbenefited tax losses. The M&A rules now provide guidelines that allow for such mergers to be accomplished in a tax-deferred manner.

Reduce business tax cost on inter-company services – MNCs often centralize certain functions (e.g., management function and back-office functions) in a service subsidiary to improve business and cost efficiency. When these functions support other subsidiaries in China, the service subsidiary is required to charge a service fee to other subsidiaries benefiting from such functions that is subject to a 5 percent business tax in China. Merging a service providing enterprise into a service receiving enterprise would eliminate the intercompany transaction and the business tax cost.

Tax incentives for qualified new and high technology companies – Under the new tax law, a qualified high and new technology company can benefit from a reduced 15 percent income tax rate (reduced from the statutory rate of 25 percent).

Many companies have R&D functions but cannot qualify for the high tech status because other activities cause them to fail certain qualifying conditions. Separating R&D activities and the

related revenue producing activities from an existing enterprise to a new enterprise may allow the new enterprise to qualify for this incentive. The M&A tax rules allow for a tax-deferred split of an enterprise if certain conditions are met.

Restructuring may also be a tool to improve a company’s effective treasury management. For example, China’s regulatory rules permit a company to declare dividends only to the extent of the accounting profit less a mandatory reserve, but some companies may have excess cash without sufficient accounting profits. One possibility of transferring cash out of China would be to initiate a group company's acquisition of another subsidiary. The cash would be transferred to the shareholder in the form of the payment for the acquisition. In addition, certain equity reorganizations could facilitate the future deferral or reduction of withholding taxes by restructuring into a Chinese holding company or offshore holding company that can benefit from its country's tax treaty with China.

Conclusion This article describes just some of the possibilities offered by the numerous recent regulatory changes and MNCs should carefully assess their investment and business structures. Many tax and regulatory regulations are likely to continue evolving, including expected additional tax guidance on M&A transactions and other interpretations of the EIT. In addition, there could be additional relaxation of foreign currency exchange controls and business license restrictions over time. Accordingly, it will be critical to monitor these future developments and make the appropriate adjustments to an MNC’s business structure in China.

“

It will be critical to monitor future developments and make the appropriate adjustments to an MNC's business structure in China.”

Aaron Grundman is managing director of the U.S. tax desk and Hong Ye is a senior manager of international tax services at Deloitte Touche Tohmatsu in Shanghai.

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 employees as well as raising the profile of your Corporation both your talented NOVEMBER 2009 INSIGHT 19 among your peers and competitors.

20

INSIGHT

NOVEMBER 2009

I N T E RV I E W

BY JUSTIN CHAN

JONES LANG LASALLE

Ready for Recovery

F

or an overview of the global real estate market and to gauge the impact of the financial crisis on real estate activity in the United States and China, Insight recently sat down with Colin Dyer, global president and chief executive officer of leading real estate services firm Jones Lang LaSalle.

His responsibilities include guiding Jones Lang LaSalle’s strategic growth and vision in 750 offices spread throughout 60 countries around the world.

The global economic slowdown has resulted in similar declines in real estate in China and around the rest of the world, but Dyer envisions a recovery beginning in 2010 maintains a long term view. “Although we’ve been in China for 15 years, our company is 225 years old so we understand the importance of the long term,” he said. “We’re definitely here in China to build and develop our business for the long term.”

On the U.S. real estate market…

Colin Dyer: In real estate terms, the events of the last two years have been synchronized globally so there are very similar patterns internationally. The

credit crunch produced a precipitous drop in the level of investment sales in real estate and reduced the pricing in real estate around the world by the order of 40 to 50 percent. Transaction volumes fell hugely and pricing also dropped around the world.

In the U.S. market specifically, lease demand fell by about 30 percent and as a result, rentals also declined by similar amounts in office, retail and industrial.

The economy probably bottomed in the U.S. sometime around April and generally about 12 months after the bottoming, the rate of decline in employment stops and you begin to see a floor under rental activity. We expect there to be continued decline in demand for leased space until the first or second quarter of next year and then a stabilization of the leased market before moving up in late 2010 to 2011.

The investment sales market behaves slightly differently, by anticipating like stock markets do, and it is starting to anticipate recovery. There are sufficient indications across the world that this recession is following the patterns of previous recessions to be fairly sure that there will be a recovery in the course of 2010 in the U.S. market.

NOVEMBER 2009

INSIGHT

21

Insight talks to real estate services firm Jones Lang LaSalle’s President and CEO Colin Dyer.

“

As in many markets worldwide, short term there's a little bit of dislocation to sort out in real estate with the economic slowdown, but with the underlying growth rates, China will come through and pull away quite strongly.”

On the real estate market in China…

CD: The picture in China is quite different, largely because the Chinese government finances are in better shape, the Chinese banking system is in better shape and there is an underlying level of growth.

When you look within the Chinese market, there are some distinct differences between retail at one end and business at the other. In the retail market, shopping malls and retail-related logistics centers are all in quite heavy demand because consumer spending is continuing and the supply is quite constrained. Rentals and asset values have hardly fallen in the retail and consumer sector.

The further you get from the consumer sector though, the worse it gets. Export-oriented industrial warehousing has dropped in value by 30 percent and rentals have come down by about the same amount.

Within office space, there is a lower level of demand because of the recession against a massive level of supply. Many major cities also have large supplies of office space coming on stream. In Beijing, for example, there is about four to five years of supply set to be delivered in the next 24 months. So with the slack demand and strong supply, not surprisingly, prices have fallen.

The outlook for the China market…

CD: Clearly, the stimulus plan and spending on infrastructure have been very positive for the economy. The way in which the government has been able to stimulate financial markets by encouraging banks to lend has been successful and there is a lot of liquidity in the market now.

Oversupply is short term and will be absorbed, because of the underlying rate of growth in China, which is a very powerful mechanism. It could take two to three years for the overhang of supply to work through, but it will be worked through.

The immediate impact of the relaxed credit is that the prices in some sectors have been bid up, most notably in the residential sector. We’re seeing recovery in pricing and activity volumes as the government eases regulations and individual requirements around the financing of residential real estate and credit becomes available. However,

22

INSIGHT

NOVEMBER 2009

it remains to be seen how that process will work as the government inevitably tightens credit again over the next 12 months.

I’m very confident that China is going to continue with its trend of strong growth in the coming years. As in many markets worldwide, short term there’s a little bit of dislocation to sort out in real estate with the economic slowdown, but with the underlying growth rates, China will come through and pull away quite strongly. In advising clients in China over the last year, we’ve been helping many international investors who wanted to sell real estate and those properties have largely been purchased by domestic Chinese investors, which is a new trend.

We have also been helping companies reexamine what space is needed and use the opportunity of the current buyer and occupier friendly market to find better space. For corporate occupiers, this is the time to decide and secure space needs. While there was some time where corporate occupiers could delay their decisions or wait for prices to fall, this period has now ended. With the prospective market recovery coming, it is important for those who need to renew or take new space to start working towards closing on requirements because it is likely that particularly for the top A-grade space, the market will tighten fairly quickly once the economy picks up.

The investment market has a little more time to recover. There is lots of real estate, but the true top quality investment grade properties of international standard are quite a small market given the size of China, trading at around US$6-7 billion at the peak of activity. That market will grow for a couple reasons. First of all, there is a growing interest in good quality space. There is also a rapidly growing interest in sustainable space that is efficient in an energy sense and Chinese President Hu Jintao’s recent commitment to sustainable development during the United Nations Summit on Climate Change in New York will only reinforce that.

There is a major movement under way within the Chinese market, with the government allowing banks, insurance companies and Chinese corporates to invest in real estate for return purposes as opposed to just occupancy. This

The Changing Investment Landscape

means that a very large number of new purchasers of investment real estate will be appearing in the market and they will be sure to want good quality domestic stock at international standards. We believe that’s going to be a very significant market and we’re talking to all sorts of clients about to succeed in this new environment.

On sustainability and real estate…

CD: Real estate of all sorts contributes between 30 and 40 percent of the world’s carbon gas output and within that, commercial real estate plays an important role as a major contributor to the problem of greenhouse gasses. We recognized this three years ago and began to develop our own skills and commitment to energy efficiency and sustainability in buildings. We have developed some very significant skills to help both owners and users of real estate to improve the efficiency of their building stock.

We’re now beginning to transfer some of those skills and knowledge to the Asian market. In China, sustainability has not been high on the agenda of the Chinese real estate world. So far, it has really been a matter of build as fast as you can, which is understandable given the pace of growth and relative priorities. But in common with the rest of the world, China is becoming increasingly aware of the importance of the environment and the damage that can be done by poor environmental practices. President Hu’s statement in New York and the commitment China is making to lower its level of carbon output will give an important lead to the entire Chinese economy to begin to pay attention to this agenda.

Policy is very important in China and it is very powerful. The government is increasingly making a commitment to sustainability and will continue to bring everyone’s attention to the subject so it should rise in importance very quickly. Under U.S. President Barack Obama, the United States is showing signs of interest in sustainability as well, which the previous administration did not.

With the important United Nations Climate Change Conference in Copenhagen later this year, awareness will only increase worldwide. The fact is that there must be a worldwide commitment

Mainland China’s commercial real estate investment market is in the throes of a major structural change. The investor profile is altering with the rise of major domestic players and at the same time a dramatic fall in the number of foreign investors compared with activity levels of a few years ago. In particular, cash-rich Mainland institutions are becoming more acquisitive and are set to expand their presence significantly in the market over the short to medium term. Domestic institutionalization of Mainland China’s real estate investment market has some major implications for both local and foreign investors in the years ahead.

In the wake of the global financial crisis, the influx of international capital into Chinese real estate has plunged, just like in other global markets. However, domestic investors have started to become more prominent in the investment scene as investment-grade property has continued to emerge.

State-owned enterprises, developers, real estate investment trusts as well as insurance companies, which only received regulatory approval to invest last month, are all important players in the domestic investment market.

Some of the major considerations of this landscape shift include: • Increased institutional investment in real estate will lead to greater upward pressure on prices • Foreign investors will need to consider other avenues to work more closely with local players • A higher level of pre-commitment and less speculative construction activity is likely • Increased emphasis on partnerships between different types of players will be beneficial • Investment options will increase significantly This is an excerpt from the Jones Lang LaSalle report The Rise of Mainland China’s Institutional Investors. For more information, please visit www.joneslanglasalle.com.cn.

because this is something where if China does something and America does not, then it won’t solve the problem. Everyone needs to be committed to this.

On Jones Lang LaSalle’s sustainability efforts…

CD: We carefully measured our own internal carbon footprint, starting with the energy usage in each office around the world and included factors such as travel patterns in the final calculation. We then made a commitment to reduce that carbon footprint by 20 percent over a period of time and in addition, we have committed to working to reduce our clients’ carbon footprint by ten times our own each year. So last year we saved clients ten times as much energy as we ourselves saved.

NOVEMBER 2009

INSIGHT

23

“

When many people first think about sustainability in real estate, they think it is all about exotic building techniques and cutting edge technology.”

As we get more and more clients interested, we will continue to raise that figure. It is something we can do as an organization as a part of our corporate social responsibility. We can actually make a very big impact on the world’s carbon use because through our international business, we’re advising everyone from governments and developers on projects from construction right through to selling and managing buildings. We actually have a very broad view of the real estate world and we can help everybody improve at the same time.

When many people first think about sustainability in real estate, they think it is all about exotic building techniques and cutting edge technology. Initially, it isn’t about that. It is just about putting technology together in an intelligent way, better management, greater awareness and a commitment to make sure real estate is being run optimally.

In reality, there’s a lot that can be done with

24

INSIGHT

NOVEMBER 2009

just simple things. There are experiments taking place in research institutions with zero carbon buildings which are entirely self-contained that are theoretically possible but currently too expensive and relatively impractical. But the technology and learning from those experiments will be applied to the real world and gradually there will be steady improvements.

On Jones Lang LaSalle’s goals for China…

CD: We’re currently in seven cities and China accounts for about 4 percent of our global revenue.

Clearly, China is the most exciting growth market in the world and we naturally want to develop our business here. My ambition would be that within five years, China business will be more like 8 percent of our overall revenues. We will be investing here, adding to our teams and the number of cities where we operate as our clients require and demand it.

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.

NOVEMBER 2009 INSIGHT 25 * 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.

ISTOC KPHOTO

D

ating back to the Han Dynasty, when a water diversion system first provided irrigation for farms in what is now Sichuan Province, China’s 6,300-kilometer-long Yangtze River has been relied on to deliver prosperity. Over the years, its economic, cultural and historical significance has only grown stronger as the Yangtze River became a major artery for China, serving as a central transportation thoroughfare linking inland regions with the coast and as an important supplier of water resources where they were needed. It continues in that role today, now accounting for more than a third of the China’s total water supply.

However, for all the prosperity that the Yangtze River has generated, it has not been treated like the

26

INSIGHT

NOVEMBER 2009

vital and delicate resource that it is. As it stretches across the country, the river is lined by 186 cities including Chongqing, Wuhan, Nanjing and Shanghai that rely on it as the primary freshwater source. Yet many cities flanking the Yangtze River are brimming with industrial factories that discharge untreated wastewater and are packed with growing urban populations that release increasing amounts of raw sewage directly into the river every day.

In 2006, state media quoted a Chinese environmental expert who called the river “cancerous” with pollution. But because of the Yangtze River’s historical significance and its mighty status as China’s longest river, “many officials think the pollution is nothing for the Yangtze,” said Yuan Aiguo, a professor with the China University of Geosciences.

C OV E R S TO RY

BY JUSTIN CHAN

Years of rapid economic and urban development without much consideration for the environmental consequences have left China’s water resources in great danger. The government must act fast, with the cooperation of businesses and the general population, if it hopes to maintain and preserve the already scarce supply of water in China.

Water Worries The massive crisis facing the world’s third longest river is just the tip of China’s water crisis iceberg.

Although water pollution is clearly a major issue in China, water scarcity in some regions means there is already barely enough water to go around. Despite all its difficulties, the Yangtze River, along with the equally polluted Yellow River, is slated to be part of the ambitious South-North Water Diversion Project, an ongoing, multi-billion dollar, multidecade program designed to divert freshwater from southern areas where water is abundant to the arid, northern region where there is less rainfall and some rivers are beginning to run dry.

As industrialization and urbanization continue across China, the already intense pressure on China’s water resources will only increase. Growing demand for water resources together with decreasing supply

and deteriorating quality will only lead to a full-blown disaster if the situation is not addressed immediately.

Although the central government is aware of the potential crisis and taking regulatory action to tackle the water problem, officials need cooperation from the general public that must change the way it consumes such a precious resource and from businesses that need to implement environmentally friendly practices.

“Despite the magnitude of China’s environmental issues, the first signs of a new transformation are promising, with government, businesses, non-governmental organizations and other stakeholders aligning around the vision of a more environmentally sustainable China,” says the China Greentech Report 2009, a comprehensive report produced by the China Greentech Initiative.

NOVEMBER 2009

INSIGHT

27

IMAGINECHINA

Green technology, or greentech, has emerged as a solution to the broad spectrum of environmental issues facing China today and have the potential to help ease China’s water pollution and scarcity issues.

The challenge posed by years of rampant pollution and water shortages is daunting, but there are grounds for optimism as the government, population and businesses begin to form a united front to face the challenge head on.

Supply scarcity

Easing the Shortage One of China’s major water supply problems is the distribution disparity between its southern region, which has China’s longest river, the Yangtze River, and the drier northern and western regions. In fact, nearly 80 percent of China’s limited surface water supply is concentrated in southern regions.

In one effort to address the disproportionate distribution and spread nationwide access to water, the Chinese government has begun work on the South-North Water Diversion project.

The massive project, originally conceived by Mao Zedong, has been under study for decades. It was approved by China’s State Council in 2002 and calls for the construction of separate eastern, central and western water diversion routes from the south to more arid regions of northern China near Beijing. The State Council announced that it will invest up to RMB255 billion for the first phase of construction on the eastern route, which will run along China’s Grand Canal, and the central route running along a Yangtze River tributary. The central route was originally planned to be completed next year but completion was recently delayed to 2014, while the eastern route is expected to be completed in 2012. Work has not yet begun on the western route, which will be constructed along the Himalayan plateau and is not expected to commence in the near future.

The viability of the project is being questioned by many analysts who have raised concerns over its potential environmental impact. Diverting water from the Yangtze River, they say, would heighten the risk of drought along its watershed and the newly created waterways would cut through pastureland and displace local residents. The government recently began to relocate tens of thousands of residents along the central route. If construction goes on as planned, Project Director Zhang Jiyao says the South-North Water Diversion Project will cause a direct increase in China’s GDP of 0.2 to 0.3 percent annually and will provide 500,000 to 600,000 more jobs every year.

– Randy Kreider

28

INSIGHT

NOVEMBER 2009

According to the World Bank, China’s total annual renewable water resources amount to 2,812 km3, which is actually the sixth highest total in the world. However, on a per capita basis, freshwater availability drops to 2,156 m3 per year, just one fourth of the global average of 8,549 m3 per year and among the lowest levels of availability for a major country. Although water scarcity is a nationwide problem, availability challenges are exacerbated by the fact that the distribution of water resources in China is extremely uneven.

Southern China, defined as the part of the country south of the Yangtze River basin, accounted for more than 80 percent of naturally available water resources, 35.2 percent of arable land and 53.5 percent of the country’s population in 2000, says the World Bank. That left the northern region of China with just 19.6 percent of naturally available water resources to support 64.8 percent of arable land and 46.5 percent of the population.

Within the Beijing and Tianjin area, the situation is even more grim, as just 1.5 percent of the country’s water resources are available to sustain 10 percent of the national population and 11 percent of total arable land.

One of the most severe droughts in history devastated Hebei and Henan provinces in February, impacting five million people and 2.5 million livestock as winter rainfall levels were as much as 80 percent below normal. Wells that are typically used to water wheat crops ran dry, and attempts to divert rivers and other irrigation systems came too late to save many crops. Instead, the Ministry of Finance was forced to allocate nearly RMB87 billion to fund farmer grants and to bail out grain producers.

“The water supply situation is dire. In addition, changing weather patterns and rising temperatures associated with global warming will result in overall water losses in China and around the

world,” says Sheila Harvey, partner and head of law firm Pillsbury Winthrop Shaw Pittman’s climate change and sustainability practice. “That means a scarcity of all water across China – not just clean water.”

Although southern regions typically receive an average of at least 2,000 millimeters of rainfall per year, which is anywhere from five to ten times as much rain that falls in northern regions, 2009 has been a dry year even in southern China.

Precipitation in southern Guangdong Province declined 14 percent over the first ten months of the year, and the Xijiang River, which flows into the Pearl River Delta, is running at its lowest level since 1941. The lingering drought from earlier this year continues to plague 330,000 hectares of rice crop in eastern Shandong Province and spread to southeastern Fujian Province, where 110,000 residents recently faced shortages of drinking water.

Moving away from developed regions of the country into rural areas, the situation is even worse.

“Currently, more than 300 million rural residents, nearly a quarter of China’s total population, lack access to clean drinking water,” says Yingling Liu, china program manager at the Worldwatch Institute, a globally focused environmental research organization.

Pollution problems The huge amounts of pollution caused by three decades of rapid economic growth around China have been well-documented. Given the development agenda, the “build it first” attitude is understandable, but the environmental and social impact and the resulting economic losses of that approach are now becoming clear.

“An explosion of economic growth and urbanization combined with drought and pollution has squeezed China’s water supply and could threaten the country’s industrial and population growth,” says Sharon Nunes, vice president of Big Green Innovations in IBM’s systems and technology group.

One of the major contributors to the degradation of China’s water resources is the jump in wastewater discharge. As industrial production continues to grow steadily, so too does the amount of wastewater discharged from the industrial sector. The long reliance on manufacturing, particularly in water-intensive industries such as steel and chemical production, was largely

responsible for the 24.3 billion tons of industrial wastewater produced in 2006.

Since 1998 however, total municipal wastewater discharges have surpassed industrial discharges in China, according to the Ministry of Environmental Protection. This is attributable to rapid urban migration and the fact that just over half of all generated municipal sewage goes through some form of treatment before being discharged. As a result, municipal wastewater is significantly more damaging to the environment than industrial wastewater, since it carries a much higher proportion of organic pollutants and total nitrogen and phosphorus. Still, approximately 20 billion m3 of untreated municipal wastewater is discharged into China’s lakes and rivers each year, according to the World Bank.

One bright spot is Beijing, where extensive efforts to clean the city’s air and water leading up to the 2008 Summer Olympic Games yielded some lasting results. After winning the bid to host the games in 2001, ambitious environmental goals set by the city government included an urban sewage treatment rate of 90 percent and a wastewater recycling rate of 50 percent. By the time the Games opened last August, 41 new sewage treatment plants had been built and the urban sewage treatment rate stood at 93 percent, more than double the 40 percent treatment rate in 2001.

But until other cities around the country are able to catch up to Beijing’s lofty standards for municipal wastewater treatment, untreated sewage will continue to damage China’s water resources.

“Altogether, 40 percent of the water in China has been deemed unusable for drinking, agriculture or even industrial uses,” says Harvey. However, despite the fact that such a large portion of water is deemed unsuitable for use, it often gets used anyway, especially in rural areas, leading to toxic crops that are heavily contaminated with metals and other pollutants.

Catalyst for change “Water problems have been a major catalyst for stricter top-down policies and bottom-up pressure and protests,” writes Jennifer Turner, director of the China Environment Forum at the Woodrow Wilson International Center for Scholars. “Both trends could potentially help push China to create significantly stronger environmental governance institutions and better implement existing pollution and conservation laws.

NOVEMBER 2009

INSIGHT

29

“

Currently, more than 300 million rural residents, nearly a quarter of China’s total population, lack access to clean drinking water.”

“

One World Bank study estimates that the water crisis costs China more than 2.3 percent of GDP each year.”

The Chinese government is clearly now cognizant of the severity of the country’s water challenges and has implemented a series of regulations and programs to improve the situation.

The 9th Five-Year Plan (1996-2000) stressed strengthening water resource development while the 10th Five-Year Plan (2001-2005) emphasized the importance of improving water resources management. The 11th Five-Year Plan (2006-2010), with its core principles of scientific development and achieving a harmonious society, contains several policy goals such as implementing a more unified management framework, developing and innovating new water-saving technologies, reducing industrial water consumption, enhancing water recycling and reuse, regulating pollution discharge into major rivers and lakes, and raising the national municipal wastewater treatment rate.

The Standing Committee of the National People’s Congress also adopted an amended version of the Water Pollution Prevention and Control Law in February 2008. Originally passed in 1984 and amended in 1996, the law now details specific measures for preventing and controlling water pollution, outlines the responsibilities of different stakeholders and increases the penalties for water pollution.

Several Chinese non-governmental organizations (NGOs) have also sprung up, advocating issues such as pollution victims’ rights and full and transparent disclosure of pollution information. NGOs focusing on water issues generally appear to be very successful in gaining grassroots and media support, likely due to the ubiquitous impact of water pollution. Still, some question just how much can be done.

“The question of local enforcement over national once again means that effectiveness will likely be sporadic at best,” says Harvey. “Most rivers flow through numerous provinces, and because one province cannot force another to implement environmental laws more vigilantly, many provinces have little incentive to stop water pollution because they know upstream or downstream polluters will continue to pollute.”

Nevertheless, the central government continues to invest heavily into water solutions. According to the Ministry of Environmental Protection, China devoted RMB5 billion each year in 2007 and 2008 to clean up rivers and lakes, and an additional RMB7 billion was spent in 2008 on the construction of sewage treatment plants across the country.

In the economic stimulus package announced

30

INSIGHT

NOVEMBER 2009

last November, RMB230 billion was earmarked for conservation and environmental protection projects such as improving waste management and water management infrastructure.

Part of the solution The government also recognizes that policies and targets alone will not solve China’s water challenges.

“Smarter water technologies are needed for water measurement – reclamation, treatment and desalinization – and they have to be measurable,” says Nunes. “Smarter water management means building intelligence into water systems by using technology to monitor, measure and analyze entire water ecosystems.”

IBM is collaborating with the city of Shenyang and China’s Northeastern University to develop solutions using advanced analytics and information management to manage water efficiently. The partnership will apply water management solutions from IBM Research to analyze the city’s water data in order to gain information such as water quality and energy utilized for water management.

“Through this analysis, the city will be able to make more proactive decisions about water, cut down on expenses and energy usage related to water management, and maintain high water quality to provide the best possible service to citizens,” adds Nunes. IBM’s collaboration with the city of Shenyang is just one example of how businesses can contribute to solving China’s water problem. In fact, greentech solutions that focus on clean water are often some of the most impactful.

Of 75 existing and emerging clean water solutions, the China Greentech Initiative prioritized 12 solutions for a detailed evaluation in its report. Primary treatment and improved irrigation solutions had the highest environmental impact.

“This is due to their role in removing the highest percentage of pollution from the water in the treatment process and to their ability to significantly conserve water in irrigation, which presents an area of great improvement in China,” said the report.

Primary treatment solutions also ranked highly in terms of commercialization potential, due to the range of potential environmental benefits and their relatively unrestricted and accessible markets.

Although foreign investment currently only accounts for approximately 10 percent of China’s water industry, private sector investment is growing. “Under the current landscape in China, a significant opportunity is available to foreign

IMAGINECHINA

equipment providers who can provide high tech clean water solutions,” says Joseph Chan, a Shanghai-based partner at Pillsbury. “Moreover, under the 2007 foreign investment catalogue, this falls under the “encouraged” category with no restrictions on foreign ownership.”

Some challenges still remain for businesses, in particular the overlapping jurisdictional authorities of the seven ministries or commissions that currently regulate the water industry, a selective bidding process on government projects and an uncertain revenue stream for private investors on certain projects.

Still, Chan views the water investment market positively over the next year. “Greentech investment has become one of the pillars of venture capital and private equity investments in China,” says Chan. “While most of the attention has been paid to the renewable energy arena – especially solar and wind power – investors are beginning to look at water opportunities.”

Upstream battle The water situation in China is under serious stress and managing the already scarce water resources while sustaining economic growth will be a major challenge. Water distribution and use is inefficient and very poorly allocated. China’s water productivity rates below the average of middleincome countries and is nearly ten times less than high-income countries, says the World Bank.

Improving water efficiency will be a major challenge. Within agriculture, which accounts for 65 percent of total water use, only 45 percent of water withdrawn is used by farmers on crops. The rest is lost to leakage and waste through irrigation systems. Of the 24 percent of total water used by industry, only 40 percent is recycled, compared to an average of 75-85 percent in developed countries, says the World Bank.

The far-reaching consequences of a water crisis are not lost on the Chinese population and people are growing concerned. Still, they need to be a part of the solution and learn to use water carefully.

Earlier this year, cities across the country began to raise the price of water, a move that some experts called an official recognition of the fact that low prices are part of the water shortage problem, as cheap prices meant there was little motivation to conserve water.

On average, one cubic meter of water in China costs US$0.31, less than half the price in the United

States and anywhere from four to ten times lower than prices in Europe, according to Deutsche Bank. In Shanghai, residential water prices were raised 25 percent in June and a further 22 percent increase is planned for a year from now.

Improved efficiency will help reduce the stress of deep water shortages that could deeply impact the economy. One study by the World Bank estimates that the water crisis costs China more than 2.3 percent of GDP each year, of which 1.3 percent is attributable to addressing water scarcity and the remaining 1 percent is to counter water pollution and some of the associated effects such as sickness.

Although solving the water scarcity and pollution issues will be a massive undertaking, the Chinese government has demonstrated that it is committed to protecting and sustaining water resources around the country. Corporations are also recognizing that being a part of the clean water solution is good for business.

As for the famed Yangtze River, the Ministry of Environmental Protection announced a major review of pollution loads and waste discharge in February. The program is expected to determine current levels of monitoring, pollution and daily discharge before beginning a strict enforcement campaign. Businesses across ten provinces and municipalities will be reviewed and enterprises found to be discharging illegally will be severely punished. Given the Yangtze River’s importance in China’s water system, the initiative could have sweeping effects for water quality in China and set the tone for future programs.

Justin Chan is Editor-in-Chief of Insight. He can be contacted at justin.chan@amcham-shanghai.org.

NOVEMBER 2009

INSIGHT

31

DAMAGING DISCHARGE: Despite being the primary water source for many regions in China, years of freeflowing wastewater have left some parts of the Yangtze River unfit for even agriculture purposes.

32

INSIGHT

NOVEMBER 2009

INSIDE AMCHAM FROM THE CHAIRMAN

Building Connections

T

he AmCham Shanghai Doorknock Delegation arrived in Washington, D.C. in late September during one of the more high profile, hectic weeks of the year, with the healthcare debate ramping up, the G-20 Summit taking place in Pittsburgh and the UN General Assembly’s annual debate in New York. But despite the crowded agenda, we found officials in the administration and on Capitol Hill very receptive to the message we were trying to communicate: that enhancing U.S. competitiveness in China will have direct benefits for U.S. companies and U.S. jobs.

We were extremely pleased to find an overall willingness to listen and openly discuss common areas of interest. In the opinion of most participants, this was the best Doorknock ever, with a slate of carefully selected meetings where we were able to engage policymakers and senior advisors on the most pressing issues of the U.S.-China commercial relationship. Not only were we able to communicate our message, but it was clear our message was being heard, reflected by a Senate Committee hearing on U.S. export competitiveness held shortly after our visit. We also had the opportunity to listen to the concerns of U.S. policymakers and hear firsthand about the perspectives of their constituents. We are already working to follow up on the very productive week of meetings and will build on the groundwork for the potential partnerships and collaborations over the coming weeks.

J. Norwell Coquillard Chairman AmCham Shanghai

After a successful Doorknock, AmCham Shanghai is gearing up for an eventful end of the year.

Shortly after wrapping up the visit to Washington, D.C., we have focused more of our attention on advocacy efforts in Shanghai and other parts of China. Coming up next month, on December 1, is one of AmCham Shanghai’s signature events, the annual Government Appreciation Dinner. This is a prime opportunity for the Chamber to strengthen its close working relationship with the Shanghai Municipal Government and we expect another record turnout from local government officials. We look forward to your participation as we also welcome U.S. Ambassador to China Jon M. Huntsman, Jr. and introduce him to the Shanghai business community. AmCham Shanghai President Brenda Foster has already met and briefed Ambassador Huntsman about AmCham Shanghai and its activities. We look forward to spending more time with the Ambassador and other U.S. government officials in Shanghai and Beijing as we continue to enhance the environment for U.S. businesses in China.

Finally, AmCham Shanghai’s annual China Business Survey is wrapping up. We look forward to sharing the results next month when we launch the 2009 China Business Report. Thank you to all the corporate members who participated. The survey results will reveal the experience of U.S. businesses in today’s tough environment and will not only offer members a valuable resource for gauging the China market but will form the basis for many of our advocacy efforts.

NOVEMBER 2009

INSIGHT

33

INSIDE AMCHAM B O A R D O F G OV E R N O R S B R I E F I N G

Highlights from the October 2009 Board of Governors Meeting Washington, D.C. Doorknock Review The Chairman reviewed the Washington, D.C. Doorknock in late September. The trip was very successful with a series of targeted meetings that were very impactful. Other meetings with organizations like the Brooking Institution and the Peterson Institute were extremely successful and could lead to potential partnerships. He also commended the staff for excellent preparation efforts. AmCham Shanghai will follow a similar template for advocacy with the Shanghai Municipal Government.

Finance Report

Board Treasurer Matthew Targett reviewed the Chamber’s finances, noting that financial performance remains on target with budget projections.

Greentech: A Call to Action Conference

David Turchetti, vice president, programs, reviewed the sustainability conference, noting that very positive feedback was received from participants and sponsors. The conference also received extensive coverage in domestic and international media.

U.S. Consulate Briefings

The structure and content of the monthly U.S. Consulate Briefings have been changed after discussions with a consulate taskforce. Changes are being instituted to make the briefings more substantive and relevant to both the members and the Consulate staff.

IN ATTENDANCE Governors: Eddy Chan (by phone), Pierre Cohade, Norwell Coquillard (Chairman), John Grobowski, Minda Ho, Ted Hornbein, Murray King, Diane Long, James Rice, Matthew Targett and Chris Wurzel.

Attendees: David Basmajian, Jeffrey Bernstein, Justin Chan, Siobhan Das, Brenda Foster (President), Dean Ho, Nina Hsu, John Larkin, John Leary, Helen Ren, Chris Szymanski, David Turchetti, Linda X. Wang, David Wang, Jessica Wu and Karen Yuen.

REGRETS David Gossack

2009 AmCham Shanghai 2009 Corporate Social Responsibility Awards Finalists The AmCham Shanghai 2009 Corporate Social Responsibility Awards showcase organizations that have made notable contributions to further corporate citizenship in Shanghai and in China. By drawing attention to these organizations, the American Chamber of Commerce in Shanghai and its Corporate Social Responsibility Committee aim to acknowledge their efforts, as well as to encourage and provide models for other organizations to look to for their own CSR efforts.

AmCham Shanghai is pleased to announce the following finalists for the AmCham Shanghai 2009 Corporate Social Responsibility Awards. Listed in alphabetical order, they are:

CSR Award Category 3M China, Ltd. Bayer (China), Ltd. Coca-Cola (China) Beverages, Ltd. Dow Corning (Shanghai) Management Co., Ltd. General Motors (China) Investment Co., Ltd. KPMG China Mary Kay (China) Cosmetics Co., Ltd. PepsiCo Investment (China), Ltd.

Partnership Award Category Honeywell (China) Co., Ltd. & Safe Kids China Johnson Controls & Students in Free Enterprise China (SIFE China) Johnson & Johnson China Investment Co., Ltd. & Junior Achievement China

The winners for all award categories will be presented at the 5th Annual AmCham Shanghai CSR Conference and Awards – “CSR for Any Economy – Solutions for Businesses of Every Size” on November 19, 2009.

For more details, please visit: www.amcham-shanghai.org/csrawards

J U LY / A U G U S T 2 0 0 9

INSIGHT

35

AmCham Shanghai’s 5th Annual Corporate Social Responsibility Conference and Awards Ceremony

CSR for Any Economy – Solutions for Businesses of Every Size The American Chamber of Commerce in Shanghai presents its 5th Annual Corporate Social Responsibility Conference and Awards Ceremony on November 19, 2009. This half-day event addresses the challenges of starting up socially responsible programs in businesses of varying sizes and resources. Professionals from corporate social responsibility, human resources and consulting industries will gain practical advice on how to build and run their own CSR projects.

Senior management will discover how CSR can meet core business objectives and efficient ways to measure the benefits of CSR initiatives.

AmCham Shanghai’s CSR Awards have received exceptional nominations this year in five award categories; the 2009 award winners will be revealed in an awards ceremony following the CSR conference.

Ernst Coppens, chief financial officer of Bayer China, will discuss how the organization’s corporate social responsibility programs create long-term value for its business and set it apart from competitors, whilst also benefitting the communities they serve in China. Brenda Lee, vice president of Coca Cola China, Francis Hu, COO of 3M China, and Ge Jun, managing director of Intel China, will lead a senior executive panel on how to best communicate CSR issues to senior management and make them a part of company strategy.

Several workshops will take place throughout the afternoon. Johnson & Johnson, Hands on Shanghai, Junior Achievement and B&L Engineering will share their experiences on the challenges of running volunteer initiatives in organizations of all sizes. Clear benchmarks and effective ways to measure the impact of CSR programs on a company’s stakeholders will be addressed by consulting specialists Reputex, Syntao and Accountability.

Attendees will also discover how to identify the environmental sustainability needs of their enterprise and step-bystep action points for starting up a suitable program. Key senior CSR executives from KPMG and Intel China will relate their personal career paths and offer guidance for those looking to further their work 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

Questions? Please call (86 21) 6279-7119 ext. 5661 or email csr@amcham-shanghai.org.

36

INSIGHT

NOVEMBER 2009

Event Highlights

INSIDE AMCHAM

RECENT AMCHAM HAPPENINGS

AMCHAM SHANGHAI

Deputy Principal Officer Chris Beede (center)

October U.S. Consulate Briefing

Christopher Beede, deputy principal officer of the U.S. Consulate General in Shanghai, chaired the evening’s presentations. Beede highlighted the October 9 announcement that President Obama will be this year’s recipient of the Nobel Peace Prize, the selection of which is based on events of the past year and intended to propel further work in seeking peaceful resolution of international disputes. On October 7, the White House officially announced plans for the President’s November trip to Asia. Following the President’s participation in APEC meetings in Singapore, he will travel to Shanghai and Beijing. Details of the President’s activities while in China, including in Shanghai, are still under discussion between Washington and Beijing. On October 7, the White House had also announced the President’s intention to nominate David Huebner, an attorney with the Shanghai office of Sheppard Mullin Richter & Hampton and an AmCham Shanghai member, as the next U.S. Ambassador to New Zealand and the Independent State of Tonga. In September, Presidents Obama and Hu met in New York on the margins of the United Nations General Assembly. At the UN, President Obama chaired a meeting of the UN Security Council at the head of state/government level. World leaders there unanimously cosponsored and adopted a resolution committing to work toward a world without nuclear weapons and endorsing a broad framework of actions to reduce global nuclear dangers. September had also seen the G-20 Summit in Pittsburgh, which adopted President Obama’s proposed framework for strong, sustainable and balanced growth and agreed to strong international standards for bank capital. The G-20 also committed to phase out fossil fuel subsidies over the medium-term while providing targeted support to help the poorest. Beede also summarized U.S. imposition of temporary tariffs on certain types of tires from China to help U.S. industry cope with a surge of imports, and noted that China had subsequently threatened measures against poultry imports from the United States. To conclude the briefing, representatives from nearly every Consulate section briefly outlined their respective office’s responsibilities and functions. (Oct 13)

AmCham Shanghai

2009 China Business Report Thank you to all the members who participated in AmCham Shanghai’s 2009 China Business Survey.

This year’s report focuses on the objectives, plans and performance of U.S. businesses in China while also examining how AmCham Shanghai member companies are addressing top business challenges in today’s economic climate.

Summary results will be presented in the forthcoming 2009 China Business Report, due to be released in early December.

Special thanks you to the lucky draw sponsors:

MEDICAL CLINICS NOVEMBER 2009

INSIGHT

37

Committee Highlights

INSIDE AMCHAM

NEW IN COMMITTEES

AMCHAM SHANGHAI

Financial Services Committee

The Changing Landscape of U.S. Financial Regulation and Reforms The Obama Administration, Congress and financial regulators are currently in the process of drafting new laws and regulations that will affect the U.S. capitals markets and companies who list on them. AmCham Shanghai’s Financial Services Committee had the pleasure of hosting Lynn E.Turner, former chief accountant of the Securities and Exchange Commission (SEC), architect of the Sarbanes-Oxley Act, and senior advisor and managing director at LECG.Turner talked about the most recent developments on Capitol Hill regarding financial regulation and the implications for investors, public companies, and other market participants.

The current recession has been the worst global economic crisis since the Great Depression, demonstrated by record declines in revenues and profits, high unemployment levels, record bank closings and fiscal problems with state governments, said Turner. Legislation to reform the U.S. financial system is in the process of being introduced in Congress, but it will be a lengthy process, warned Turner. Among the topics for reform being considered are banking supervision, including the consolidation of banking regulators; the reform of credit rating Lynn E. Turner, LECG agencies; risk regulation; corporate governance; greater consumer protection; and regulation of hedge funds and private equity. Primary concerns with existing entities such as credit rating agencies involve their lack of independence from clients and little accountability. Credit rating agencies have become the “poster child” for the U.S. subprime crisis, said Turner. Other proposals being considered to reform measures such as corporate governance include improving the accountability of corporate boards, giving investors advisory votes regarding compensation, and establishing a risk committee. Because the U.S. government is busy debating the healthcare bill right now, financial reform legislation must wait to begin until after the healthcare debate has ended, said Turner. He expressed his view that discourse over financial legislation would most likely begin in the first or second quarter of 2010.

However, by the time financial reform is ready to take center stage, U.S. elections will be around the corner and U.S. legislators may be influenced by Wall Street lobbyists, who are heavy contributors to re-election campaigns, said Turner. Ultimately,Turner predicted that the final legislation to come out of Congress will be “regulation light,” and will not likely prevent a recurrence of the recent financial crisis. (Oct 22)

AMCHAM SHANGHAI

Suzhou Committee

Labor Market Tightening in Suzhou?

The Suzhou Committee convened for a roundtable discussion on budgeting and annual planning for 2010 at the Sheraton Suzhou Hotel & Towers. Members discussed salary levels and their views on expected percentages increases. At this time last year, most members planned for salary levels to remain relatively flat. However, this year the majority of Suzhou Committee members forecast a 5-9 percent increase in salaries.

Many attendees felt the forecasted salary increase is being caused by the relatively competitive Suzhou labor market. Some member companies have already started to see an increase in turnover and many believe that Suzhou will see a labor shortage next year. Also on the agenda was Suzhou Committee activity planning as well as a general discussion of Suzhourelated issues and concerns. (Oct 20) If you are interested in getting more involved in the Suzhou Committee, please contact Brian Seifert at brian.seifert@amcham-shanghai.org.

Event and Committee Highlights are reported by Kate Ryge, Brian Seifert and Elaine Wu. 38

INSIGHT

NOVEMBER 2009

INSIDE AMCHAM

Human Resources Committee

Fraudulent Activities and Unethical Behavior in the Workplace AmCham Shanghai’s Human Resources (HR) Committee hosted a roundtable on fraud and unethical behavior in the workplace as part of the committee’s Human Resources Director (HRD) series.

Beth Epstein and Bryan Lim, both from risk management company Hill & Associates, led an interactive discussion on exploring solutions to common fraud-related issues faced by enterprises doing business in China. Epstein explored the reactive side of fraud, referring to the reactions and processes that companies make after an allegation of questionable conduct is brought forward. She emphasized the need to first and foremost assess the impact that the allegation may have for the company and explained that those dealing with the issue must be objective in their investigation while limiting the number of people handling the case, so as not to unnecessarily involve employees. Epstein also discussed the difference between audits and investigations, likening it to the difference between a guard dog (the auditor) and a bloodhound (the investigator). She cited a number of case studies to underscore the importance of assessment and effective procedure in handling corporate fraud cases. Lim discussed the preventative

side of risk management, or the strategies that companies can utilize to avoid fraudulent and unethical behavior among employees before it even happens. Lim explained that there are three main reasons people commit fraud: financial pressure and motivation to maintain a certain lifestyle, an obvious opportunity or little likelihood of detection and consequences, and easy rationalization such as “nobody will notice,” “I’m just borrowing,” or “it’s how business is done in ___ (country).”The most effective tool a company has against fraud is to make sure that there are strong systems in place to deter employees from committing such an act by eliminating or minimizing temptation, and making sure that there is a process for discovering and dealing with fraud once it is detected, Lim said. He gave examples of “red flags,” signs of suspicious behavior or situations which may indicate that fraud is being committed, such as sudden ostentatious wealth or a high volume of cash payments. Lim also touched on résumé fraud, noting that some of the most common lies found on résumés are the fabrication of titles and misrepresentation of educational background. (Oct 22)

NOVEMBER 2009

INSIGHT

39

DEAL OF THE MONTH GENERAL MOTORS

A New Home for Hummer

GM unloads SUV brand to China construction equipment manufacturer Sichuan Tengzhong.

T

he original Hummers, also known as Humvees, were built for the U.S. armed forces and featured prominently in Operation: Desert Storm. Hollywood films and stars like Arnold Schwarzenegger popularized the vehicles and smaller mass market versions soon dominated U.S. roadways. But as gas prices skyrocketed and the economic downturn hit, Hummers were viewed as epitomizing the American addiction to gas-guzzling sports utility vehicles and were shunned by the general public.

When manufacturer General Motors declared bankruptcy in June, Hummer was one of the first brands slated for discontinuation. Now, Hummer is no longer an American brand.

On October 9, General Motors announced a definitive agreement to sell the iconic Hummer brand to Chinese firm Sichuan Tengzhong Heavy Industrial Machinery, marking the first major entry into the U.S. auto market by a Chinese company.

Financial terms were not disclosed, but Tengzhong reportedly agreed to purchase the Hummer brand for US$150 million, far below the US$500 million valuation given to Hummer during bankruptcy proceedings. Tengzhong will take over the entire line of Hummer vehicles, the Hummer trademark, intellectual property license rights to vehicle technology and existing

40

INSIGHT

NOVEMBER 2009

arrangements with existing dealers in the U.S. The current Hummer management team will continue to run the company, including CEO James Taylor, former general manager of the Cadillac brand.

Hummer sales thus far in 2009 are down 64 percent year-on-year and GM sold just 426 vehicles in September in the U.S. Tengzhong has said it hopes to restore Hummer’s success and revamp its image to appeal to today’s market by focusing on improving fuel efficiency. “Backed by a privately owned and well-capitalized company, we are going to be able to focus on providing customers with more efficient models that deliver Hummer’s promise of authentic, purpose-built design and engineering,” said Taylor.

GM will continue to manufacture all Hummer vehicles under contract in the U.S. until June 2011, with an optional extension until 2012, a move that is expected to secure more than 3,000 U.S. jobs. Tengzhong is expected to keep Hummer’s operations in the U.S. and is currently reviewing locations for Hummer’s new global headquarters in the U.S. “This transaction marks an exciting step for both Tengzhong and Hummer, as we invest in a business that has significant opportunity in the U.S. and around the globe,” said Yang Yi, chief executive officer of Tengzhong. The deal is awaiting regulatory approval both in China and in the U.S. -Randy Kreider

NOVEMBER 2009

INSIGHT

41

42

INSIGHT

NOVEMBER 2009