Insight Magazine January/February 2011 by The American Chamber of Commerce in Shanghai

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

January/February 2011

INTERVIEW

Dr. Kenneth Lieberthal POLICY INSIGHT

Leaked Diplomatic Cables AUTO FEATURE

Distribution Networks

Reinterpreting the Bilateral Relationship The U.S. and China are more interconnected now than ever, but both countries recognize the need to maintain a strong, stable bilateral relationship

INSIGHT Januar y/Febr uar y 2011

The Journal of the American Chamber of Commerce in Shanghai

David Turchetti

10 China’s Auto Retail Market

DIRECTORS

Karen Yuen COMMITTEES

COMMUNICATIONS & PUBLICATIONS

David Basmajian EVENTS

15 A Challenging Relationship INTERVIEW

Jessica Wu Helen Ren

Linda X. Wang

INSIGHT SENIOR ASSOCIATE EDITOR

Tiffany Yajima

ASSOCIATE EDITOR

Esther Young

EDITORIAL INTERN

Ashley Cahill DESIGN

Alicia Beebe LAYOUT & PRINTING

Ella Shan Snap Printing, Inc.

INSIGHT SPONSORSHIP SPONSORSHIP MANAGER

Sophia Chen

(86-21) 6279-7119 ext. 5667 Story ideas, questions or comments on Insight: Please contact Tiffany Yajima (86-21) 6279-7119 ext. 5678 tiffany.yajima@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

Special thanks to the 2010-2011 AmCham Shanghai President’s Circle Sponsors

By Justin Chan

U.S.-China relations continue to mature but contain fundamental challenges, says Dr. Kenneth Lieberthal of the Brookings Institution.

FINANCE & ADMINISTRATION MEMBERSHIP & CVP

By Kyle Sullivan

The evolving auto market presents opportunities for foreign and domestic manufacturers and auto distributors to expand their networks in second- and third-tier cities across China.

BUSINESS DEVELOPMENT & MARKETING

Siobhan M. Das

JASON PYM

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

AUTO FEATURE

ISTOCKPHOTO

Brenda Foster

F E AT U R E S

IMAGINECHINA

PRESIDENT

IMAGINECHINA

AMCHAM SHANGHAI

POLICY INSIGHT

WikiLeaks Triggers Diplomatic Tremor By Ryan Balis

While the leak of classiﬁed diplomatic cables carried with it the potential for embarrassment, there may be value to information that surfaced on U.S.-China relations.

24 Reinterpreting the Bilateral Relationship COVER STORY

By Tiffany Yajima

The start of a new year brings the opportunity to re-examine the U.S.-China bilateral relationship and consider what 2011 has in store for the United States and China.

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

3 News Briefs

40 Deal of the Month

8 A Promising Investment MARKET PROFILE

PricewaterhouseCoopers teams up with the Urban Land Institute to examine regional trends in the Asia-Paciﬁc real estate market.

INSIDE AMCHAM

30 From the Chairman: Partnering for Growth 31 Board of Governors Meeting 32 Shanghai Government Appreciation Dinner

36 New Member Listing 37 Events in Review 38 Committee Highlights

INSIDE INSIGHT

TIFFANY YAJIMA SENIOR ASSOCIATE EDITOR

appy New Year! A new calendar year is upon us and brings with it the opportunity to reﬂect on the achievements of 2010 while considering the direction we will all head in 2011. Last year showcased the city of Shanghai and its ability to host an event of historic size and proportion during the six-month Shanghai 2010 World Expo. As the new books on 2011 open, Insight is now refocusing on issues with a broader impact. China’s auto market is now the world’s largest, and foreign and domestic car manufacturers and retailers need to catch-up to Chinese consumers’ evolving preferences. This month’s auto feature looks at the various modes of distribution that auto retailers in China are using to earn their share of the market. In the lead up to President Hu Jintao’s planned visit to President Barack Obama in Washington, D.C. in January, this month’s cover story examines the political and economic facets of the U.S.-China relationship outside of what is regularly reported on by popular media. Hu’s upcoming visit signals the importance that both countries place on bilateral

engagement and open communication channels, and considers the magnitude of the upcoming presidential summit. This month, Insight takes an even deeper look at the topic of bilateral relations, and sits down with Dr. Kenneth Lieberthal of the Brookings Institution to gather his perspective on the nuances of American politics that shape China policy on Capitol Hill. Of course, we cannot forget what shaped the news in the last few months of 2010, when WikiLeaks began publishing classified U.S. State Department cables. This month’s policy insight considers the positive take-aways from the cables on U.S.-China relations, and finds that the United States and China have made progress – if somewhat limited – on the issues. Finally, let me take this opportunity to extend warm wishes and best of luck to Justin Chan, who after five years at AmCham Shanghai and 48 issues of Insight, recently moved on from the Chamber. We will miss you! To all of our readers of Insight, we wish you all the best in 2011!

CHINA BUSINESS

Entrepreneur confidence drops A recently completed survey conducted by the People’s Bank of China (PBoC), China’s central bank, indicates that confidence among Chinese entrepreneurs dropped in the fourth quarter of 2010 due primarily to increased raw material costs and decreased export orders. Though entrepreneurs are still “cautiously optimistic” of future growth from increased domestic orders, the Entrepreneur Confidence Index, a gauge of the views and projections of entrepreneurs, fell to 74.2%, a 5.2 percentage-point drop from the third quarter of 2010. The Raw Material Price Index rose 9.7 percentage points to 79.4%, while the price expectation index increased to 75.8% from 69.9%. The component index for input costs increased to 73.5% last December, the highest it has been since July 2008.

China on track to be second largest spender on R&D China is projected to spend US$153.7 billion on research and development (R&D) in 2011, up from US$141.4 billion in 2010, according to a report by nonproﬁt research group Battelle Memorial Institute. The increased spending sets China on course to overtake Japan as the second-largest spender on R&D. According to the report, China’s R&D is concentrated on cutting-edge technologies, including alternative energy, life sciences and advanced materials. R&D in the U.S. and Japan has traditionally focused on older ﬁelds, such as the automotive industry. Japan is projected to spend US$144.1 billion on R&D in 2011, up from US$142 billion in 2010. The U.S. remains by far the top spender on R&D, investing US$395.8 billion in 2010.

U.S. DEPARTMENT OF COMMERCE

News

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

U.S.-China JCCT session concludes in Washington, D.C. U.S. and China policymakers met in Washington, D.C. for the 21st session of the U.S.-China Joint Commission on Commerce and Trade (JCCT), where participants discussed bilateral trade issues and increased Chinese market access for U.S. businesses. Established in 1983, the JCCT is the main forum for addressing bilateral trade issues and promoting commercial opportunities between the United States and China.The two-day meeting, attended by U.S.Trade Representative Ron Kirk, U.S. Secretary of Commerce Gary Locke and Chinese Vice Premier Wang Qishan, resulted in an agreement by China not to discriminate in government procurement based on the origin of intellectual property, to address U.S. concerns on market access for American beef and to submit a revised offer to join the WTO government procurement agreement. The U.S. agreed to consider Chinese concerns over trade-remedy cases and export controls on highlevel technologies. Auto sales jump in China China’s auto sales increased 26.9% in November year-on-year, with approximately 1.7 million vehicles sold, according to the China Association of Automobile Manufacturers (CAAM). Total vehicle sales for 2010 are projected to increase 32% to roughly 18 million. Last year’s fourth quarter sales were likely fueled by buyers taking advantage of government purchase incentives that expired at the end of 2010. Incentives included a preferential tax rate

of 7.5% for purchasers of smaller cars, down from the usual 10%, in addition to a cash subsidy of RMB3,000 for purchasers of certain fuel-eﬃcient vehicles. Xiong Chuanlin, vice secretary of CAAM, expects growth in auto sales in China to slow to 10% in 2011.

SOEs dominate Chinese brand landscape According to research agency Millward Brown, one third of China’s top 50 brands

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are owned by SOEs and account for roughly 70-75% of the US$280 billion total combined value of the nation’s top 50 companies. China Mobile was ranked number one, with more than 570 million subscribers and a brand value of US$56 billion. Seven other SOEs are also in the top 10, including Industrial and Commercial Bank of China (ICBC), Bank of China, China Construction Bank (CCB), China Life Insurance and Agricultural Bank of China (ABC). Internet portal and game operator Tencent and search engine operator Baidu were the only two nongovernment backed corporations to make the top 10. CORPORATE NEWS

McDonald’s to increase investment in China McDonald’s Corp. announced plans to increase investment in China by 40% in 2011, opening 175-200 new restaurants to compete against Yum! Brands, the company’s biggest rival in China, whose franchises include KFC and Pizza Hut. In 2010, McDonald’s increased investment by 25% and opened 165 restaurants, bringing the total number of outlets in China to 1,100 stores. McDonald’s aims to operate 2,000 restaurants in China by 2013. The company holds a 16% fast-food market share, compared to Yum!’s 40% share. McDonald’s plans to experiment with new store design concepts in Beijing. A new concept called “LIM” or “Less is More” has already been introduced in four Beijing restaurants. McDonald’s sold yuan-denominated bonds in Hong Kong in 2010 to fund its China expansion plans.

IKEA aims to double stores in China IKEA plans to have between 16 and 18 stores in China by 2015, up from the eight stores it currently operates in eight Chinese cities. IKEA’s revenue in China rose 23% in the 2010 ﬁscal year to US$555.9 million, but China still does not rank in IKEA’s top ten markets worldwide. IKEA executives are optimistic about the expansion plans, predicting that China will become the

INSIGHT

company’s largest market in 15 to 25 years. IKEA’s China business model includes strict control over production, sourcing, logistics and retail. IKEA recently began construction on its second store in Beijing, at an estimated cost of more than RMB5 billion, representing the company’s largest single project investment worldwide.

KKR to invest in China liquor retailer Private equity firm Kohlberg Kravis Roberts & Co. (KKR) plans to invest an undisclosed sum in VATS Liquor Store Co., China’s largest liquor store chain. The deal marks KKR’s second Chinese investment after its US$150 million investment in Chinese milk supplier China Modern Dairy in 2009. KKR will join Chinese private equity firm New Horizon Capital in financing VATS. VATS was founded in 2005 and currently operates more than 270 outlets in all of mainland China’s provinces. The company plans to increase its number of stores to more than 1,000 in the next three to five years.

Longyuan Power Group to increase overseas wind farm investment Asia’s largest wind power generator, China Longyuan Power Group has announced plans to invest US$450 million in overseas expansion in 2011. The wind power projects will range from 300 to 1,000 megawatts and will be established in the U.S., South Africa, Kazakhstan, Australia and Hungary. Longyuan’s U.S. investment will focus on the acquisition of wind power plants and investing in the company’s own projects. The company is in the process of negotiating for three U.S. projects. It expects construction of ﬁve wind power plants in South Africa to begin in the second quarter of 2011. Longyuan aims to be the world’s largest wind-energy developer by the end of 2015. MACROECONOMICS

November FDI up 38.17% Foreign direct investment (FDI) into China topped US$9.7 billion through the month of November, rising for the 16th consecutive

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month. Inbound FDI for the ﬁrst 11 months of 2010 reached US$91.7 billion, up 17.73% from the same period a year before. China’s Ministry of Commerce (MOFCOM) reports that FDI has become more evenly spread between market sectors. The services and manufacturing sectors saw 29.3% and 6.2% year-on-year increases, respectively. China’s western region enjoyed higher growth of FDI inﬂows than the national average, increasing more than 38.98% compared to 16.2% growth in China’s eastern region and 18.4% in central China. MOFCOM expects total FDI between 2006 and 2010 to top US$420 billion.

Consumer Price Satisfaction Index falls The Consumer Price Satisfaction Index, released by the People’s Bank of China (PBoC), fell to 13.8 in the fourth quarter of 2010, the lowest since the Index was first released in 1999. Consumers cited rising costs as a reason for decreased satisfaction, with 74% of the 50,000 surveyed indicating that prices are too high. The Consumer Price Index, a measure of inflation, rose 5.1% last November, the highest in 28 months. Food prices increased 11.7% that same month – the largest increase since July 2008. To curb inflation, China increased interest rates last October for the first time in three years to 5.56%. Economists are anticipating additional interest rate increases in 2011.

China’s credit rating moves up Standard & Poor’s Rating Services upgraded China’s sovereign-debt rating to double-A-minus from A-plus based on China’s large foreign reserves, strong external asset position and a strong outlook for growth. The S&P also said that China’s financial strengths would buffer economic instability. “We believe the Chinese authorities would respond to future threats to financial stability with timely measures, based on our observation over the past two years,” said S&P analyst Kim Eng Tan. The assessment follows a similar assessment from Moody’s Investors Service, which also upgraded China’s sovereign debt rating last November.

China’s trade volume to top US$2.9 trillion According to China’s Ministry of Commerce (MOFCOM), the country’s foreign trade volume is projected to top US$2.9 trillion in 2010. The country’s imports and exports jumped 36.3% year-on-year to US$2.6 trillion in the ﬁrst 11 months of last year, increasing sharply from recession-level trade volumes in 2009. China’s 2010 worldwide trade surplus is expected to exceed US$180 billion, surpassing MOFCOM’s original trade surplus target of US$100 billion at the beginning of 2010. Minister of Commerce Chen Deming stated that he expects the country’s trade and international payments to be more balanced over the next ﬁve years and encouraged Chinese enterprises to invest overseas. U.S. - CHINA

wind power sector and to partner with U.S. companies that manufacture wind turbines, bearings and current converters in China.

CSR, GE partner for high speed railway deal Chinese state-owned locomotive manufacturer CSR Corporation has partnered with General Electric (GE) in a joint venture to manufacture passenger trains for high-speed railway lines in the U.S. The joint venture will invest US$50 million over the next two years on railway projects in Florida and California. The Obama administration will supplement the project with US$2.3 billion for the California project and US$1.3 billion for the Florida rail project. Last November, GE signed a memorandum of strategic partnership with China’s Ministry of Railways, solidifying the U.S. and China’s partnership in the sector.

China increases holdings of U.S. Treasury securities

38 China ﬁrms debut on U.S. IPO market in 2010

China has increased its holdings of U.S. Treasury securities for the fourth month in a row. China’s treasury holdings increased 2.6% last October to US$906.8 billion, the highest level in 11 months. Overall foreign holdings of U.S. Treasury securities have increased 1.1% to US$4.3 trillion. Roughly two-thirds are held by foreign governments and central banks. Japan, which holds the second-largest share of U.S. Treasury debt, increased its holdings to US$877.4 billion, rising 1.5% since October 2010. The U.S. federal budget deficit increased to a record high of US$1.41 trillion in 2009 but decreased slightly in the 2010 fiscal year to US$1.29 trillion. Some analysts expect the U.S.’s total deficit in 2010 to top 2009’s total.

A record 38 initial public offerings (IPOs) from Chinese businesses listed in the U.S. last year, raising US$4 billion. The strongest IPO was from Internet television company Youku.com, whose stock jumped 161% on its first day of trading. That was followed by Internet content and application delivery provider ChinaCache International, whose stocks gained 95% on its first day of trading. The most successful Chinese IPOs were Internet-related: six Chinese companies in the sector managed an average firstday growth of 79.5%, as compared to the remaining Chinese companies’ average 5.9% first-day gain.

Renewable energy ﬁrms urged to invest in U.S.

China to increase rare earth export tariffs in 2011

A senior oﬃcial of China’s National Energy Administration (NEA) has encouraged Chinese companies to invest in renewable energy projects in the U.S. Speaking at the China-U.S. Renewable Energy Investment Forum last December, Wang Jun, head of the department of new and renewable energy at the NEA, urged companies to focus on the

China’s Ministry of Finance has announced plans to raise export tariffs on certain rare earths in 2011. Although China’s State Council did not identify which rare earth products would be affected, the adjustment will come into effect on January 1, 2011. China controls 97% of currently available global rare earth supplies, which are often

GOVERNMENT & POLICY

used in the clean energy and high-tech sectors. China will maintain low import tariﬀs on 600 materials and key components including propane, butane and highdeﬁnition cameras.

China interest rates to gradually liberalize China will slowly allow its interest rates to become more market-determined, according to People’s Bank of China (PBoC) Governor Zhou Xiaochuan. To make monetary policy more effective, China should create conditions for market reform of interest rates, said Zhou. He encouraged commercial banks to gradually drop the proportion of their total revenue that comes from interest margins and said that interest rate pricing power should be allocated to companies that meet certain standards. The PBoC, as China’s central bank, currently sets official benchmark rates for loans and deposits, as opposed to the U.S. and other economies where the central bank influences market rates by adjusting the cost of short-term funds that it lends to banks.

China raises inflation target The National Development and Reform Commission (NDRC) revised its inflation target for 2011 to 4% from 2010’s 3%, adjusting for the recent jump in consumer prices. The Consumer Price Index rose 5.1% last November, the largest increase since July 2008. The higher inflation target comes with government efforts to curb its growth. Last October, China’s central bank increased the benchmark interest rate, and Beijing recently raised the reserverequirement ratio for the third time in a month. The NDRC, however, reiterated the government’s forecast of 8% growth in China’s gross domestic product in 2011.

India and China to double bilateral trade During a visit by Chinese Premier Wen Jiabao to India, China and India announced their intention to double bilateral trade to US$100 billion by 2015. Visiting India for the ﬁrst time since 2005, Wen stated that China would allow India increased access to

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its consumer market, highlighting China’s efforts to boost economic relations between the two countries. Wen also announced business deals between Chinese and Indian companies that are worth US$16 billion. “We are now creating an enabling environment to reach the next economic frontier,” said Nirupama Rao, India’s foreign secretary. Bilateral trade this fiscal year, which ends on March 31, 2011 is projected to be worth more than US$60 billion, increasing from US$42.4 billion last fiscal year. India and China are the world’s two fastest growing economies. SHANGHAI BUSINESS

Shanghai to establish cloud computing fund Shanghai oﬃcials plan to establish a government fund to support the development of cloud computing technology. Shanghai, along with Beijing, Shenzhen, Wuxi and Hangzhou, have been chosen by the national government to test and develop cloud computing

INSIGHT

systems, in which data and programs are stored in a central location and accessed via the Internet. Shanghai has committed to investing US$29.85 million within ﬁve years on cloud computing. Last August, the Shanghai Cloud Computing Industry Base was oﬃcially launched in the Shanghai Shibei High-Tech Park and a cloud computing innovation center in Shanghai’s Yangpu District was opened in October. China hopes to use the new technologies to develop smart grid transportation systems.

Shanghai banks to halt certain loans Shanghai government regulators ordered banks in Shanghai to halt loans for ﬁxedasset investments, a move that will primarily impact the construction and property development sectors. Loans in Shanghai surged last November, with banks issuing over RMB36.1 billion in loans which is seven times higher than the RMB4.8 billion that was loaned in November 2009. Banks were also ordered not to roll over loans

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for ﬁxed-asset investments that matured last December. The loans, which increase the amount of credit in the economy, have been partially blamed for fueling higher consumer and property prices.

World’s highest hotel to be built in Shanghai The Shanghai Tower J Hotel, set to occupy the 84th to 110th floors of the soon-to-bebuilt Shanghai Tower is expected to set the record as the highest hotel in the world when completed in 2014. The Shanghai Tower will challenge the Ritz-Carlton Hong Kong, expected to open in 2011 on the top floors of Hong Kong’s 484-meter high International Commerce Center. The Shanghai Tower, which will rise to 632 meters, will be the tallest building in Shanghai. The J Hotel’s height will surpass current world record holder, the Park Hyatt Shanghai, located on the 79th to 93rd floors of Shanghai’s current tallest building, the World Financial Center. The J Hotel is also expected to be the city’s most expensive hotel.

CHINA & THE WORLD

SOUTH AMERICA ASIA-PACIFIC

CAMBODIA: China and Cambodia build bilateral ties During Cambodian Prime Minister Hun Sen’s visit to China, the two governments signed thirteen deals in agriculture, finance and infrastructure projects. Infrastructure-related deals include Chinese financial aid for the construction of a 300-kilometer national road, the construction of several bridges, a canal and a coal-fired power plant to be run as a joint venture between a local Cambodian company and a Chinese firm. China agreed to allow exports of cassava from Cambodia, with Cambodia expressing hope that China will allow corn exports in the future. Both leaders plan to enhance bilateral ties through expanded Chinese investment in Cambodia’s economic zones as well as additional Chinese assistance to support the country’s economic development.

MIDDLE EAST

ASIA-PACIFIC EUROPE

CAMEROON: China Exim Bank loans millions to support Cameroon water project The Export-Import Bank of China agreed to loan Cameroon US$743 million for a water distribution project. The project represents a signiﬁcant expansion in infrastructure, providing water to two million people in Cameroon’s capital, Yaoundé, and villages along the pipeline. The United Nations estimates that only half of the country’s 19.5 million people have access to clean water. China’s Exim Bank, one of the China’s three policy banks that extend credit for governmentsupported projects, has announced plans to continue to provide loans in Africa. Cameroon’s government has hired the China National Machinery and Equipment Corporation on a 28-month contract to work on the project. Construction is expected to begin in January.

MIDDLE EAST EUROPE

NORWAY: China, Norway Strike Oil Deal China Oilfield Services Ltd. (COSL) and Norway’s Statoil ASA signed a five-year oil drilling contract expected to be worth hundreds of millions of dollars. As part of the agreement, Statoil will deploy an advanced COSL rig in the waters off Norway’s coast in 2011. COSL, China’s biggest provider of offshore oil service facilities, is majority-owned by state-controlled China National Offshore Oil Corp (CNOOC). Statoil is also working with China Petroleum & Chemical Corp., or Sinopec, on a technical study for deepwater exploration in the South China Sea. In the first 10 months of 2010, Norwegian imports from China, excluding ships and oil platforms, reached US$5 billion.

NORTH AMERICA MIDDLE EAST

AFRICA

PAKISTAN: Chinese bank to open branch in Pakistan During Premier Wen Jiao Bao’s recent visit to Pakistan, the Chinese leader announced plans for the Industrial and Commercial Bank of China’s (ICBC) to open a branch in Pakistan’s capital, Islamabad. Trade between China and Pakistan is expected to reach US$7 billion in 2010, a 29% increase from 2009. Bilateral trade is expected to increase 30% over the next ﬁve years. With the pact, Pakistan becomes the fourth country that Beijing-based ICBC has targeted for expansion. It recently completed the acquisition of a 90% stake in Bank Halim Indonesia, and has applied to set up in the U.S. and Russia.

NORTH AMERICA

AFRICA

SOUTH AMERICA AFRICA MIDDLE EAST

UNITED STATES: China to loosen U.S. beef restrictions following JCCT talks After two days of bilateral trade talks, China pledged to gradually loosen restrictions on U.S. beef imports of cattle under 30 months old. China has banned the importation of U.S. beef since mad cow disease was discovered in U.S. cattle in 2003. The U.S. hopes to reopen the Chinese market in early 2011 and plans to continue technical talks about sanitation and procedural issues. U.S. ofﬁcials from the Department of Agriculture plan to visit China in January to continue the discussions.

NORTH AMERICA AFRICA ASIA-PACIFIC

ARGENTINA: Sinopec acquires Occidental Petroleum assets China Petroleum & Chemical Corp., also known as Sinopec, announced plans to buy assets of Occidental Petroleum Corp.’s Argentinean operations for US$2.45 billion. The deal is Sinopec’s ﬁrst acquisition of an Argentinean company and would raise Sinopec’s oil production by more than 51,000 barrels of oil per day. The deal will also give China access to an estimated 393 million barrels in proven and probable reserves. Occidental Argentina holds interest in 23 production and exploration concessions in Argentina’s Santa Cruz, Mendoza and Chubut provinces. Most of the oil produced in Argentina is expected to be sold locally due to a heavy duty on oil exports. Sinopec bought 40% of Repsol SA’s Brazilian assets last year for US$7.1 billion. Chinese bids for overseas energy assets are expected to reach a record US$38.8 billion in 2010.

SOUTH AMERICA

ASIA-PACIFIC

SOUTH AMERICA NORTH AMERICA EUROPE

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ASIA-PACIFIC SOUTH AMERICA

INSIGHT

MARKET PROFILE

IMAGINACHINA

A Promising Investment Shanghai remains a favorite market for real estate investment and development.

For more information please contact:

Georgia Guo Marketing & Communications Manager (86 21) 2323 3597 georgia.guo@cn.pwc.com pwccn.com

hanghai is rated as the second most promising investment market and the third most promising development market for 2011, according to Emerging Trends in Real Estate Asia Pacific 2011, a real estate forecast jointly published in December by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP (PwC). The city shares top billing with Singapore, Mumbai, New Delhi and Hong Kong as the top five most favored investment markets in the report. Based on a survey of more than 280 international real estate professionals, Emerging Trends is optimistic about the overall prospects for the Asia-Pacific real estate industry. The “cloud has been lifted” from Asia-Pacific markets, with the fiscal outlook for most Asian countries more promising than that for Europe or the United States, says the report. “Many, if not most, Asian economies have rebounded to pre-crisis levels, and real estate markets, although mostly slower, are headed toward some semblance of normalcy,” said Steven Blank, senior fellow of real estate finance at ULI. “The distress that was so widely predicted a year ago for most of the region’s largest markets has by and large failed to materialize.” Blank noted that steady activity by buyers indicates that Asia’s real estate markets “are strong enough to grow into the high expectations current pricing trends imply,” particularly because of the shortage of both housing and commercial properties that persists in many areas.

INSIGHT

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Regional outlook Improving economic conditions across the region brought an end to declining rents and prices in most Asia-Pacific countries in 2010, with some markets (such as Japan) still groping for a bottom, and others (such as China) moving so fast they are sparking talk of a bubble. With regional growth expected to remain strong over the near term, investors voiced varying degrees of optimism over market prospects, with one caveat: a sovereign debt crisis in Europe or an economic reversal in the United States could yet knock the wheels off the Asia-Pacific recovery. While price action in the real estate market has been generally positive, deal flow remains meager. A standoff has developed over valuations and investment funds in particular have found the bid/ask spread hard to bridge. First, this is because sellers are holding out, hoping prices will rise further. Second, it is because many funds currently see richer pickings in the West. Third, it reflects a level of investor expectation that has been outstripped by the growing maturity of Asian markets, which today warrant a lower risk premium than they did in the “golden age” of Asian real estate investment ten years ago. On the financing side, Asia’s banks continue to rule the roost. Indeed, as alternative financing avenues such as international bank lending or Asia’s nascent securitization markets have dwindled, regional banks have gotten an even

tighter grip on an area they have long dominated. Their strong balance sheets have served to help prop up real estate markets because they have neither the need nor the inclination to undermine pricing by foreclosing on defaulting borrowers and unleashing a wave of distressed assets onto the market. Nonetheless, while lending conditions are improving, conservative bank lending policies have restricted investment in Asian property markets. According to investment prospect ratings, the top Asian markets in 2011 are Singapore, Shanghai and Mumbai. Interest in Singapore has risen because of its strong economy, resurgent financial sector and office prices that have been seriously depressed by an impending wave of new supply. China is again a dominant theme as investors try to position themselves in one of the world’s few growth engines. Shanghai has long been a traditional entry point to the mainland market, although this year interviewees have also identified the growing appeal of China’s secondand third-tier cities. Finally, Mumbai’s emergence on investors’ horizons reflects an interest in the newest emerging markets, which also include Vietnam. These markets present plenty of risk, but also a chance to get in on the ground floor.

City focus Regarding Shanghai, the report notes that while increases in property prices may have curbed some investor interest, the city continues to hold strong appeal. “Overall, investors still view the highpriced city as being on the steps of a recovery and they expect it to remain a target on many investors’ radar,” the report says. Development in the city will likely slow some as government regulations aim to limit overbuilding and curb speculation. Among the choices of “buy, sell or hold” by property type, the majority of the respondents recommended retail as a “buy,” and one-third recommended office space as a “buy.” The office sector also received a high rating for development potential. “China remains one of few economies offering significant growth and it enjoys the added attraction of a currency expected to appreciate against the U.S. dollar. However, the China market

poses challenges, including cash repatriation challenges and expected changes to property tax rules,” said Andrew Li, a PwC China partner. “Shanghai has some decline in investment rating value, though it still takes the second position. Interest in Shanghai investments might show some declines as prices climb. Some types of deals, especially office and retail, continue to grab the attention of investors,” added Sally Sun, a PwC China partner. Other top markets: Singapore, the top rated investment market, continues to attract major investors as its financial and high-tech industries flourish. The city’s gross domestic product (GDP) growth rate is expected to finish this year in the double digits and remain in the four-percent range the next three years. Mumbai ranked third as the most promising investment market and first as the most favored development market. “Mumbai is clearly the best performing and most active real estate market,” the report says. Despite some concerns about oversupply, development potential for most real estate sectors remains promising in this city. Hong Kong ranked fourth for investment prospects; its global appeal is a strong factor in its economic rebound, and robust demand is driving up rents. Although the development outlook is less positive (Hong Kong ranked 12th overall for development prospects), the residential sector shows potential. New Delhi ranked fifth for investment prospects and second for development prospects. The driving force: the government’s plans to boost infrastructure with new roads, railways and airports and its approval of development plans for tens of thousands of acres of land for urban development. On the whole, survey participants regard Asia as the part of the world that is showing the most growth in terms of the real estate industry. “The area’s economic expansion should be the key driver to help propel commercial real estate investments and developments across the region,” Emerging Trends says. “The real estate market is back, fund raising is strong in Asia, local banks are providing financing, and capital is everywhere.”

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China remains one of the few economies offering signiﬁcant growth and it enjoys the added attraction of a currency expected to appreciate against the U.S. dollar.”

A U TO F E AT U R E

B Y K Y L E S U L L I VA N

IMAGINECHINA

China’s Auto Retail Market Spurred by growth and evolving consumer expectations, car dealerships and ﬁnance companies have revamped their offerings.

hina has emerged from the global recession as the world’s largest auto market, with a total sales volume that eclipses the United States by a substantial sum. In 2009, China’s new vehicle sales reached 13.6 million units and total output hit 13.8 million units, up 46.2 percent and 48 percent from 2008, respectively. Though sales in 2010 may not grow as fast as they did in 2009, China’s auto market is poised for more impressive growth. According to recent China Association of Automobile Manufacturers statistics, China sold 7.6 million cars and produced 7.5 million cars in the first five months of 2010. The association forecasts that total sales and total output are each on track to exceed 15 million units in 2010. Original equipment manufacturers (OEMs) and auto distributors have grown significantly, along with the rest of China’s auto market. As a result, foreign and domestic OEMs are looking to expand their distribution networks throughout China, with a focus on second- and third-tier markets. Auto sales in these markets have outpaced sales in

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first-tier cities in the last five years. According to recent data, between January and September 2009, auto sales in second- and third-tier cities grew 41 percent and 51.4 percent, respectively, while sales in first-tier cities rose 33.6 percent.

Changing market landscape for auto dealerships China’s auto market has changed signiﬁcantly in the past two years. At the onset of the global ﬁnancial crisis, many dealerships and suppliers faced low liquidity levels and high debt ratios. As a result, OEMs began to cut vehicle prices to encourage consumer demand. Meanwhile, tighter access to credit and weaker OEM support led many analysts to believe that dealerships would fold in large numbers. Auto sales in China rebounded after the Chinese government in mid-2009 unveiled stimulus measures that offered tax breaks, subsidies for newvehicle purchases and looser credit for companies and individuals. According to the China Association of Automobile Manufacturers, year-on-year vehicle

sales grew 83.6 percent (reaching one million cars) in September 2009 and 50 percent in January 2010. By late 2009 and early 2010, demand had grown so dramatically that many dealerships were struggling to keep cars in stock.

Evolving retail formats China’s auto retail market is responding to a host of pressures. Since the onset of the global financial crisis, OEMs and independent distributors have been integrating their distribution networks to achieve economies of scale and greater financial viability. New retail formats that have emerged within the past several years show that retailers are becoming larger to adapt to market pressures and increasingly sophisticated consumer tastes. 4S model First established in China in 1998 and considered the most advanced marketing model, the 4S model offers sales, showrooms, services and spare parts all under one roof. These types of stores are expensive to operate and require significant investment and startup capital. This is largely because they offer high-end facilities located in expensive districts in downtown areas where rental fees are high. Top brands typically maintain multiple 4S stores in each major market, compounding costs and forcing some stores into the red. A report published by the Cheung Kong School of Business last year stated that nearly 80 percent of 4S dealerships along China’s coast operate at a loss. Despite its popularity among consumers, OEMs are not entirely satisfied with the 4S model. Manufacturers note that high-quality, reliable dealers are hard to find and relationships with dealers are generally difficult to manage. This is because 4S dealers tend to be local businesses that cater to a localized market and do not necessarily share the same strategies and objectives as OEMs, which have broader or national interests. Nonetheless, the 4S format’s high popularity among Chinese customers, who prefer the five-star treatment that these outlets offer, will likely keep this model in operation. Auto supermarkets In simple terms, auto supermarkets are large

dealerships. They come in many formats – 1S, 2S, 3S and 4S – and can be single- or multiple-brand dealerships. (1S outlets offer only sales; 2S outlets offer sales and services; and 3S outlets offer sales, services and spare parts.) The advantage of this structure is that it attracts more customers, who can find a variety of brands and models at a single auto supermarket without having to travel to different dealerships. The disadvantage is that many foreign OEMs refuse to sell directly to auto supermarkets because they do not want their models displayed alongside rival brands. Consequently, auto supermarkets must often purchase their stock from OEM-authorized dealerships at a higher rate. Several domestic OEMs are building their own auto supermarkets. For example, Jianghuai Automobile Co., Ltd. is building auto supermarkets at the county level to sell the full range of its vehicles, from sedans to light trucks. Chang’an Automobile (Group) Co., Ltd. is also building auto supermarkets in second- and third-tier markets, where it will offer autos produced by its wholly owned entity, Chana International Corp., and by its joint ventures (JVs). Chang’an currently has seven supermarkets and plans to expand this number to 100 by the end of 2010. Media reports indicate, however, that auto supermarkets that offer low- and mid-range vehicles face serious cost pressures and are at risk of failure. Facing rising operating costs and long-term price decreases, low- and mid-range automakers might struggle to afford distribution through supermarkets and may need to identify more costeffective distribution channels. Mega-dealerships Owned by a single distribution company, megadealerships are a network of OEM-authorized auto dealerships that sell multiple brands. Megadealerships are performing well. According to Beijing Business Today, about 25 percent, or 2,472 authorized dealers, belonged to mega-dealerships and accounted for 44 percent of China’s total auto sales in 2008. Prominent mega-dealerships in China include Guanghui, Pangda, Yongda and Zhongsheng. Auto trade markets Auto trade markets are essentially clusters of separately

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New retail formats that have emerged within the past several years show that retailers are becoming larger to adapt to market pressures and increasingly sophisticated consumer tastes.”

Foreign Auto Companies Expand Sales Networks in 2010 China’s promising auto market has foreign original equipment manufacturers (OEMs) looking to expand their sales network in 2010 and beyond. According to media reports, several major foreign brands have announced plans to open new dealerships across China, particularly in second- and third-tier markets. • Ford Motor Co. announced that it will signiﬁcantly expand its network of dealerships in 2010 but did not indicate by how much. At the end of 2009, Ford’s authorized dealer network included 241 full-service dealerships and more than 350 sales and service outlets across China. • General Motors Corp. plans to open 120 more Chevrolet dealerships by the end of 2010. • Honda Motor Corp. has announced that it will increase dealerships in China to 700 and boost annual output capacity by about 20 percent to 650,000 units by the end of 2010. • Mercedes-Benz GmbH will reportedly establish another 130 dealerships in China in 2010. • Nissan Motor Co., Ltd. has said that it will extend its network of dealerships from the current 367 to 408 by the end of 2010. • Saab Automobile AB plans to double its number of dealerships to 32 by the end of 2010. • Toyota Motor Corp. plans to add another 100 dealerships in China in 2010 to bring its nationwide total to 650. • Volkswagen AG plans to expand its distribution network in China from 1,000 to 2,000 dealerships by 2018.

owned 3S and 4S car dealerships that offer multibrand auto sales and services. They are comprised of multiple dealers, vendors and traders of thousands of vehicles. The advantages of auto trade markets are their economies of scale, one-stop shopping for maintenance and spare parts supply, which allow dealers to reduce operating costs and lower prices for consumers. Used-car buyers also favor auto trade markets, which allow car owners to trade in their old cars and receive a discount on new vehicle purchases. China’s largest auto trade market, North Asia Car Market in Beijing, has over 160 dealers. Auto parks Some large auto companies are beginning to form massive regional auto parks that include clusters of 4S outlets, repair and service outlets, reﬁnishing services for used cars and outsourcing centers that provide insurance and auto ﬁnancing services. Chongqing currently has one, and such regional parks are expected to grow in number.

Auto finance takes off Auto finance in China has grown significantly in recent years. According to the People’s Bank of China, auto loans totaled RMB158.3 billion

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(US$27.1 billion) by the end of 2008 – of which RMB31.8 billion (US$4.7 billion) came from auto finance companies. To regulate this market, the China Banking Regulatory Commission (CBRC) issued the Administrative Measures on Auto Finance Companies and related implementing rules in 2003 and revised and combined the two regulations in 2008. The measures define auto finance companies as non-bank financial entities approved by CBRC to offer financial services for auto purchasers and dealers in China. Major investors of these companies must be non-bank financial entities or enterprises that produce or sell motor vehicles. To support the auto finance industry, CBRC in August 2009 began allowing auto finance enterprises to issue public bonds to raise capital, with the hope that the companies will expand their portfolios of financial products to attract consumers. According to PRC media reports, the number of Chinese consumers that take out loans will increase 40-50 percent in the next decade, and total auto finance loans will reach more than RMB550 billion (US$80.5 billion) by 2025.

China’s used-car market grows – supported by government policies As new auto sales have grown, so have sales of used cars. China Automobile Dealer Association statistics show that the trade volume of used vehicles has soared from 250,000 in 2000 to more than 3.3 million in 2009. To take advantage of this growing market, major auto manufacturers have begun to offer used-car services for their branded autos at their certiﬁed dealerships in China. Most of the service packages cover used-car quality accreditation and assessment, certiﬁcation, replacement, quality guarantee and trading and transactions. Megadealerships also play an active role in the usedcar market. For example, Shanghai Yongda Auto Management Service Co., Ltd. started its used-car business in 2002 and now owns a trading market, evaluation enterprise, agent and two operating companies to provide a full range of services. Apart from consumer demand, several government policies and regulations have boosted

the used-car market. • The Administrative Measures on Used Cars, released in 2005, are the primary regulation governing the used-car market. The measures introduced a competition mechanism that allows OEM-authorized auto dealerships to run used-car businesses. The measures also regulate different parties – including trading markets, agents and operators – and strengthen the administration of organizations that appraise the value of used cars. • The Notice on Upgrading the Used-Car Trade Market was announced by the ministries of Commerce and Finance in July 2009. The circular aimed to improve the used-car industry. Initially, the PRC government selected 10 provinces and municipalities – Beijing, Hubei, Jiangsu, Jiangxi, Liaoning, Shandong, Shanghai, Shenzhen, Tianjin and Zhejiang – to receive ﬁscal funding to conduct pilot programs that focused on the management and information on used-car transactions to improve transparency. • The Auto Industry Revitalization Plan, released in 2009 by the State Council, calls for the establishment of a national appraisal and evaluation standards system and a temporary ownership registration system. The plan also calls for adjusting the value-added tax rate on usedcar transactions and encourages dealerships to participate in vehicle replacement programs.

Challenges and opportunities ahead China’s auto market is unlike any other in the world. In 2007, it overtook Japan to become the world’s second-largest car market and, in 2009, surpassed the United States as the world’s largest. China is selling cars faster than any other country in the world, but it is doing so with relatively immature retail formats, OEM-to-dealer relationships, consumer tastes and ﬁnancing options. China’s auto market is maturing, however. Retailers are consolidating and improving services with an eye toward retaining customers. Numerous retail formats have emerged in recent years, such as the mega-dealership and auto supermarket, offering consumers in different market segments a range of options for vehicle purchases. In addition,

more dealerships are offering auto ﬁnancing plans, allowing consumers to rely less on bank loans and personal savings to purchase vehicles. Used cars are also gaining traction among Chinese consumers. As these market trends develop, so will opportunities for retailers, OEMs and consumers in China’s auto market. The major challenge ahead for auto retailers is the ability to retain customers. Consumers are paying more attention to brand, image and style, and some buyers turn to a certain car solely based on its image and branding. This is particularly true for second- and third-time buyers. Foreign retailers must therefore understand and cater to local consumer preferences to ensure long-term success in China’s auto market. In addition to branding, retailers must also focus on the overall experience of purchasing a car. Chinese consumers tend to enjoy 4S or similar types of dealerships that offer the whole package: fancy showrooms, attentive sales personnel, aftersales service and spare parts. Dealerships that make the process of buying a car an enjoyable one will attract more customers in China.

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Consumers are paying more attention to brand, image and style, and some buyers turn to a certain car solely based on its image and branding.”

Kyle Sullivan is manager of Business Advisory Services at the US-China Business Council’s Shanghai ofﬁce. He can be contacted at ksullivan@uschina. org.cn. This article is adapted from an article that ﬁrst appeared in the July-August 2010 China Business Review. For the complete version, see www.chinabusinessreview.com.

China’s Auto Production and Sales 2000-2009 Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Production (10,000 autos) 206.9 233.4 325.0 444.4 507.1 570.8 728.0 888.2 934.5 1,379.1

Sales (10,000 autos) 208.9 236.4 324.8 439.1 507.1 575.8 721.6 879.2 938.1 1,364.5

Source: China Automotive Dealership Association

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The AMERICAN CHAMBER of COMMERCE in SHANGHAI

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I N T E RV I E W

BY JUSTIN CHAN

IMAGINECHINA

A Challenging Relationship

s the U.S.-China relationship continues to develop and mature, it is also becoming increasingly complex and sophisticated. From trade and currency regulation to human rights and military buildup, the United States and China engage on many different levels that reach far beyond the borders of each country. The broad reaching effects of the U.S.-China ties have led many to call the bilateral relationship the most important in the world. But along with all the benefits that the U.S.China relationship provides, there are fundamental challenges that could hinder the growth of bilateral ties. In the U.S., for example, both lawmakers and the general public have voiced discontent with China’s trade practices that have resulted in a ballooning trade deficit while many Chinese perceive the U.S. as trying to contain China’s economic rise. To gauge the current state of the U.S.-China relationship, Insight was pleased to sit down with Dr. Kenneth Lieberthal, director of the John L. Thornton China Center and senior fellow in foreign

policy and global economy and development at the Brookings Institution in early November. Prior to joining Brookings, Lieberthal was a professor at the University of Michigan, in addition to serving as special assistant for national security affairs and senior director for Asia on the National Security Council under President Bill Clinton. On the November election’s eﬀect on the U.S.China relationship… Kenneth Lieberthal: I don’t think the election itself will have a signiﬁcant impact on U.S.-China relations. Elections in the U.S. come and go. This one has been a hard fought one and, in some races, the China issue has certainly been prominent. In the closing stages of this election, people used any argument they thought may generate an additional vote or two. My own feeling is that the biggest impact is an extremely indirect but very important one. One of the major factors shaping the U.S.-China relationship in the future will be how successful the United States is in bouncing back from the problems it has encountered in the past few years.

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Dr. Kenneth Lieberthal of the Brookings Institution shares his thoughts on the U.S.-China relationship.

The third point is that this bill garnered enormous Republican as well as Democratic support. What that highlights is the deep and widespread frustration with which members of Congress see China’s international economic and trade practices. If I were the Chinese, that’s the lesson I would take from this. It’s not the speciﬁc bill, but the fact that it is one of the few things that got through the House with a large bipartisan majority. It’s hard to point to anything else that could do that.

CURRENCY COLLABORATION: The U.S. takes a multilateral approach to currency issues at the G-20 summit in Seoul.

I think it is more likely than not that this election will reduce our chances of bouncing back rapidly and in that fashion may have an impact on how our relationship is shaped. I hope I’m wrong in that assessment, but fundamentally one of the major factors in U.S.-China relations is how well the U.S. is doing. There’s a lot we need to do to regain our vitality and one characteristic of the U.S. over its history is not its capacity to avoid huge mistakes – we’ve made mistakes time and again – but the capacity to recover from mistakes and move forward. On the ramifications of the House bill on currency that passed in September… KL: There are three points. First, the House bill itself, by its own terms, would have virtually no impact on the U.S.-China trade balance. Assuming the Senate passed it and the president signed it, the reality is that the procedures are so cumbersome that at the end of the day, you would have to bring more than 1,000 cases under the bill to make a significant difference in U.S.-China trade. Secondly, the bill is not going to pass. I don’t think it will get past the Senate in the lame duck session and next year you’ll have to start with a new congress and a new bill. Even if the bill did get through the Senate, there’s every possibility the president would veto it. So I wouldn’t worry about it as a specific piece of legislation.

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On the current approach to engaging China on currency… KL: Since Senators Schumer and Graham became active on currency, the U.S. has treated currency as a bilateral issue, which in my mind has been wrongheaded from the start – it is a multilateral issue. What has changed now is that the U.S. executive branch is pushing very hard on a multilateral basis. You can’t follow what Treasury Secretary Geithner has done recently without saying that there’s a serious effort primarily focused on the G-20 to get to a multilateral agreement on principles that will have a real impact. For the first time, the U.S. is taking the multilateral side of this very seriously. If it doesn’t work reasonably effectively, this can again become bilateral very quickly because that’s the temper of politics in Washington, D.C. Keep in mind that on Capitol Hill, nobody represents the United States as a whole. Senators represent a state and members of the House represent a district within a state. It therefore makes it very difficult to put in a sophisticated multilateral context and gain support for issues that few people in the U.S. understand like currency flows, currency values and the effects on trade and global balances. There is no upside to that for individual members. There are certainly members who are very sophisticated and understand this and other complicated issues. But on the whole, this isn’t the kind of issue that does well on the Hill. The Administration has moved very hard with the upcoming G-20 meeting in Seoul to get this on a firm multilateral basis and, not surprisingly,

we’ve gotten a strong pushback from places like Germany that would have to bring their trade surplus down. A multilateral approach is the only way to go now. It’s politically not the most popular way in the U.S. but if you want to take this seriously as a substantive issue, it simply cannot be done bilaterally. The Administration is actually attacking the issue the way it needs to be attacked. I hope they can get traction, because if not, the global economy is in increased trouble and it is increasingly vulnerable. On the issue of mutual distrust between the U.S. and China… KL: The most worrisome part of the U.S.-China relationship is the underlying distrust of each other’s long term intentions. In our 30-plus years of diplomatic relations, while we’ve accomplished an enormous amount, the single greatest failure is the failure to establish mutual trust in each side’s long-term intentions toward the other. If you go back to the November 2009 joint statement during President Obama’s state visit to Beijing, it was the first time to my knowledge that the two governments have ever included the issue of distrust in a formal document that each side signed. I took heart from that because you can’t address an issue until you recognize that it is an issue. Giving that a prominent place in such a critical document is a very good development. Ironically, since that November summit, mutual trust has declined. There is no single reason why that’s occurred; it’s cumulative and some of the developments are from the Chinese side of the equation and some reflect what has happened in the U.S., such as with the weapons sale to Taiwan and the visit of the Dalai Lama. On the U.S. side, we told them we were going to do these things and we heard their objections. We felt the Chinese knew we were going to proceed and they should have expected it; they evidently felt that we had heard their objections and would take them to heart. So there was a sense of having been somewhat betrayed on each side. China has also changed its diplomatic style significantly in the last two years. One thing I

was very impressed by from about 1999 to early 2008 was the skill with which China addressed the issue of a China threat in the eyes of others. It built bridges of mutual reassurance throughout the region and was sensitive to the views of other governments around the region. Chinese diplomats showed up everywhere and were very attentive to the concerns of others in the region. There are several things that were very skillfully done to have people in the region see China’s growth and success as part and parcel with their own growth and success while limiting the potential problems in the security of other areas. In 2002 for example, China signed a declaration on the principles of conduct in the South China Sea which called for developing a formal code of conduct over time. However, in the last two years or so, it seems China has changed the playbook dramatically, and it is not fully clear why. There are a lot of things you can think of but they’re all speculative at the end of the day. The reality is that countries around the region have become very worried about how China is behaving and the resulting implications. In the last year or so, almost every country in the region except for Laos, Cambodia and Burma, has come to the U.S. government and said, “We need you to demonstrate that you’re here for the long run, on a large scale, and your presence here is robust.” Frankly when a country, whatever country it is, comes to you and makes such a statement, the status quo changes. If your response is to simply be consistent with what you’ve been doing, it is interpreted as an indication that you’re leaving. So a situation is created where if you don’t step up your engagement and be more robust in the region, the wrong signal is sent. On the increased presence of the U.S. in Asia… KL: On top of that, the Obama administration came into oﬃce feeling that the Bush administration had neglected Asia. Although the Bush administration did a lot to cultivate China, it never engaged with the rest of Asia on regional issues in a serious way. If you go back and look at President Bush’s speeches, what he talked about was the global war on terror and Asia’s obligations

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The most worrisome part of the U.S.-China relationship is the underlying distrust of each other's long term intentions.”

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The reality is that China is both a major power and a developing country and we've never had a country in that position before.”

in the global war on terror. While terrorism is an issue in Asia, it is not the only issue in Asia – there are a lot of other regional priorities. China moved in behind the U.S. very effectively as the Administration would talk mostly about terror while China would talk about regional growth and regional cooperation and regional infrastructure development. The Obama administration has prioritized a much more robust relationship with China on global issues as well as bilateral and regional issues, but also engaged the rest of Asia on regional issues in a serious way. It was not by accident that Secretary Clinton made her ﬁrst foreign trip to Northeast Asia – to Japan, South Korea and China – and that we are engaging with Asian regional multilateral organizations. This was all a very conscious effort since Asia is the most important region in the world to us. On top of that, we have recently been hearing from everyone that the U.S. has got to do more. My own view is that we in fact have recently stepped up more than we had anticipated because of the pressure from the region to do so. The trick is to maintain the right balance because no one in the administration dealing with China policy wants to be antagonistic or have an antagonistic relationship with China. But at the same time, our desire for a good relationship with China cannot become a signal to the rest of the region that we’re getting out of the way. We have equities all over this region and we’re pursuing them. The hope is that we can strike the right balance so that the whole region wins, including China. We are welcomed around the region and it is to the credit of the Administration that they are not only playing a robust role but are listening to people in Asia. This not what the U.S. has sometimes had a tendency to do (which at times has been more to show up and tell you the way things are going to be) but rather listening a lot and then trying to be responsive. For example, in the reaction to the sinking of the Cheonan we’ve been very supportive of South Korea. We have counseled them but South Korean President Lee Myung Bak and his government have absolutely had the lead on the issue. There are years past

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where that was less likely to have been the case. So the spirit of this has been pretty good but perhaps the Chinese don’t interpret it that way. On China’s changing global role… KL: One of the problems now is that China is both a country whose economy and presence has become important enough that it has global impact but it is a developing country. China still ranks well below 100 in per capita GDP, still has the issues that developing countries have writ large, plus it has the capacities of a developed country. The problem is that the capacities of a developed country make everyone look to Beijing to assume the global responsibilities of a major power. Yet China worries about the issues attached to being a developing country, and these fears make it unwilling to assume regional and especially global responsibilities on the whole because it is so focused on continuing domestic economic development, maintaining stability and defending its sovereignty. The latter are the classic issues of a developing country and the result is a disconnect between China’s focus and many others’ expectations. The reality is that China is both a major power and a developing country and we’ve never had a country in that position before. It’s unique and therefore it is not surprising that there is a signiﬁcant gap between global expectations and what China is willing and able to do. The issue has been debated across the board in Beijing and there’s no consensus as to how they ought to position themselves. The short-term danger is that the United States and others now see China as a power of global stature with responsibilities on global issues, but the Chinese are effectively taking an approach that is not in line with what a major power should do. Over the longer term, as China becomes stronger, it may show signs of having a sufﬁciently different view of what the global arrangement ought to be. This can also feed into distrust about long term intentions. Justin Chan is the former Editor-inChief of Insight. He can be contacted at justinkchan@gmail.com.

POLICY INSIGHT

B Y RYA N B A L I S

ISTOCKPHOTO

WikiLeaks Triggers Diplomatic Tremor

tremor, if not an outright politicalsecurity earthquake, struck the upper echelons of global diplomatic circles last November when WikiLeaks published the ﬁrst batch of the more than 250,000 secret U.S. Department of State cables it had obtained. “The documents will give people around the world an unprecedented insight into U.S. Government foreign activities,” reads a statement on the website of WikiLeaks, the Internet group dedicated to exposing secret information. Much of the world’s attention on the content of the documents has centered on the potential for embarrassment, strained relations among oﬃcials,

or worse. Leaked dispatches concerning talks between U.S. and foreign officials, including senior Chinese leaders, reveal frank sentiments, some unflattering comments and detailed observations on pressing issues facing U.S. foreign policy in the post-9/11 era. U.S. leaders roundly condemned WikiLeaks’ action as “reckless and dangerous.” The disclosure “puts people’s lives in danger, threatens our national security and undermines efforts to work with other countries to solve shared problems,” stressed U.S. Secretary of State Hillary Clinton at a press briefing. Governments from around the world lined up to express outrage. “I absolutely condemn the

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Leaked U.S. diplomatic cables reveal a U.S.-China bilateral relationship in transition.

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Sentiments revealed in the published cables generally offer encouragement that the world's most important bilateral commercial relationship is moving forward.”

placement of this information on the WikiLeaks website – it’s a grossly irresponsible thing to do and an illegal thing to do,” Australian Prime Minister Julia Gillard told an Australian radio station. Julian Assange, the controversial principal founder and editor in chief of WikiLeaks, is an Australian citizen. Supporters compare WikiLeaks’ disclosures to the New York Times’ 1971 printing of the Pentagon Papers, a top secret assessment of the Vietnam War by the U.S. Department of Defense. But the full impact of the latest document dump, dubbed “Cablegate,” remains unclear. Diplomatic cables dispatched by U.S. Embassy officials in Beijing and exposed by WikiLeaks tell little of great surprise. On the ever-maturing U.S.-China commercial relationship, sentiments revealed in the published cables generally offer encouragement that the world’s most important bilateral commercial relationship is moving forward. But first, how has the row over WikiLeaks come about?

Battle lines drawn A look at the inner workings of U.S. diplomacy is but the latest secret government documents WikiLeaks has offered up for public viewing. The group brought on the U.S. government’s scorn last spring when it posted a graphic video of a July 2007 Army helicopter attack in Baghdad that killed more than a dozen people, including a Reuters photographer and driver. Later, WikiLeaks released some 91,000 classified Afghanistan war logs and military reports dating back to 2004 and 400,000 classified U.S. military documents on the war in Iraq. Among the sensitive information exposed within the Afghanistan documents are “at least 100 instances dealing with Afghan informants,” some by name and village, as well as “the name of at least one U.S. intelligence operative,” according to a Washington Post search last July. A February 2009 cable sent to Clinton containing a laundry list of facilities and infrastructure around the world identified as critical to national security is

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one exposed cable noted for its potential value to terrorists. “[I]ts release, in essence, is providing a targeting list to a group like al-Qaida,” said U.S. State Department spokesman P.J. Crowley at a regular press briefing. While the released cables have garnered WikiLeaks enormous publicity, the group is paying a steep price and appears to be in a fight for its survival. A subsidiary of online retailer Amazon.com kicked WikiLeaks off its servers, citing the company’s terms of service that it says WikiLeaks violated. Next, eBay’s PayPal, MasterCard and Visa Europe refused payment services that WikiLeaks has used to collect donations. In early December, PostFinance, the finance arm of the Swiss postal service SwissPost, froze a WikiLeaks account containing tens of thousands of euros. A WikiLeaks press statement dated December 7, 2010 says WikiLeaks and Assange lost €100,000 euros (US$132,000) in one week. EveryDNS, a U.S. Internet traffic routing company, dropped WikiLeaks’ domain name from its domain name service following cyber attacks directed at WikiLeaks that threatened the company’s larger network. WikiLeaks was left to scramble to set up a Swiss domain name, WikiLeaks.ch. According to the Financial Times, the group switched online servers or website configurations four times in one week. Yet, a large volume of cyber attacks intended to cripple its site continues. Meanwhile, pressure is mounting in the U.S. to prosecute Assange. The U.S. Justice and Defense departments are conducting a legal probe to determine if publication of the leaks amounts to a crime. Neither Assange nor WikiLeaks has been charged. According to some legal experts, prosecution against a publisher would be a tall task in the U.S. Assange also faces his own, personal legal battle after turning himself in to a London police station on an international arrest warrant. Assange is wanted for questioning in Sweden on sexual misconduct allegations, which he denies. Assange was released on bail and has not been formally charged, according to a December 17 report by the Guardian.

While Assange fights extradition to Sweden, his presumptive supporters are stepping in to retaliate against those they regard as WikiLeaks’ opponents. In a campaign labeled “Operation: Payback,” computer hackers initiated cyber attacks that have choked off the websites of MasterCard, the corporate website of Visa, PostFinance, as well as those of the Swedish Prosecution Service and the website of the lawyer representing the two women accusing Assange in Sweden. WikiLeaks lists more than 2,000 “mirrors” set up across the world that replicate its website, thereby preserving the leaked content and maintaining online access to it. A surge in media attention surrounding Assange and WikiLeaks has led hundreds of thousands of users to flock to WikiLeaks’ Twitter and Facebook accounts, which have been key communication platforms for the group. In one week, WikiLeaks added an

additional 719,397 Facebook fans and 157,959 Twitter followers, according to social networking tracker Famecount.

Positive takeaways on U.S.-China relations Several exchanges between U.S. and Chinese leaders emerged from the leaks. While some content relates to ongoing U.S.-China challenges, two published cables in particular oﬀer signs of encouragement for the bilateral commercial relationship. On November 9, 2009, Chinese Vice Minister Liu He of the central government’s Central Leading Group on Financial and Economic Aﬀairs is quoted as describing as “terrible” the U.S.-China trade issues that blow up into larger political and social frictions in both countries but make up

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CHINA CABLES: Cables on China reveal the on-going challenges that both sides encounter.

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[W]e need to do a better job in helping Americans understand that the China trade relationship can actually be a good story for U.S. jobs and pay dividends far beyond the trade sector.”

only a fraction of overall trade. Liu added that “the Chinese Government understands the need to resolve the trade disputes,” according to the dispatch. Liu also reportedly told Robert Hormats, U.S. under secretary for economic, energy and agricultural affairs, that he “believed U.S. labor unions and upcoming mid-term (2010) U.S. elections both increase pressure for trade protectionism in the U.S.” China “harbor[ed] fears” that such action could “derail” the bilateral economic relationship in 2010, reads the cable summary. Trade relations between the U.S. and China had grown relatively tense at the time of Hormats’ meeting with Chinese economists Liu, as well as Chinese Academy of Social Sciences’ (CASS) Institute of World Economics and Politics Director Zhang Yuyan. Only months earlier, the Obama administration had slapped import duties as high as 35 percent on Chinese car and light truck tires. China quickly retaliated by levying tariffs on U.S. automotive products and chicken meat entering China, and later, other U.S. goods. Both countries were exchanging blows that risked escalating into a wider trade dispute. But the exchange between Liu and Hormats is welcoming because it suggests that some in China viewed tit-for-tat trade disputes as unproductive for both sides. The cable suggests an engaged China that not only pays careful attention to U.S. domestic politics but also places importance on avoiding harm to a mutually beneficial and increasingly interdependent commercial relationship with the U.S. Another positive cable is dated January 10, 2010, and is signed by Jon Huntsman, the U.S. ambassador to China. The dispatch singles out China’s rapidly widening consumer base as being an “enormous” opportunity for U.S. goods and services exporters to leverage, thereby supporting job growth back home. The ambassador (or unnamed cable author) stressed it being “critical that we find ways to better advance our bilateral economic policy.” There was a “need to find ways to keep the relationship positive” in light of challenges anticipated to “bring greater tension to

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bilateral ties” in 2010. “Of course we need to do a better job in helping Americans understand that the China trade relationship can actually be a good story for U.S. jobs and pay dividends far beyond the trade sector,” reads Huntsman’s dispatch. For example, the cable mentions initiatives the U.S. could undertake to reach out to China to boost Chinese investment, tourism and study in the U.S. The U.S. should work on “dispelling harmful myths,” overcoming a “misperception that our doors are closed” and identifying and reducing U.S. government-created barriers to key growth areas of interest to China. All suggestions pointed out would strengthen the U.S.-China commercial relationship.

What impact? Many analysts and officials view the leaks as breaking little new ground and having minimal real-world impact. “Every other government in the world knows the United States government leaks like a sieve, and it has for a long time,” remarked U.S. Secretary of Defense Robert Gates at a news briefing. “Is this embarrassing? Yes. Is it awkward? Yes. Consequences for U.S. foreign policy? I think fairly modest.” Perhaps the immediate impact is the U.S. government’s undertaking to shore up seemingly porous computer networks. It is widely believed that the WikiLeaks informant used the Pentagon’s classified network, SIPRNet, to access and copy classified material passed to WikiLeaks. Hundreds of thousands of government personnel and contractors could log on to the network. The Obama administration has responded aggressively to close security gaps. The White House’s Office of Management and Budget (OMB) has ordered a government-wide review within agencies and departments that handle classified information “to ensure that users do not have broader access than is necessary to do their jobs effectively….” According to a White House fact sheet, the State Department has since pulled its diplomatic cable files from SIPRNet

and suspended access through the network to its classiﬁed ClassNet and SharePoint sites. A November 28 Defense Department memo outlines steps the Pentagon is taking. Changes include: disabling the capability to copy data to removable storage media on the military’s classiﬁed computers; increasing “insider threat” training; and developing ways to spot unusual activity, analogous to fraud monitoring procedures used by credit card companies. Federal Times reports the latest security review is the Pentagon’s third in recent months. In the end, information management is by its nature an imperfect human practice. “[T]echnology is not the culprit here; a misguided person is,” points out Andrew McAfee, principal research scientist at the MIT Center for Digital Business, on the blog of the Harvard Business Review. A balance is needed between access and security, and some warn an information clampdown could be

harmful to the ability of U.S. government agencies to share information. “My belief is that we have to be very careful that we don’t overreact to a criminal act,” an anonymous senior U.S. intelligence oﬃcial tells Defense News. “All the breakthroughs in information sharing since Sept. 11 – they could all be put in question.” Meanwhile, fresh batches of cables continue to be released. Though China is mentioned in more than 8,300 cables – none labeled “Top Secret” – little damaging material to the U.S.-China bilateral commercial relationship has been revealed thus far. Viewed optimistically, the released cables reveal a maturing U.S.-China relationship. It is a relationship that recognizes setbacks are an inevitable part of healthy ties.

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Viewed optimistically, the released cables reveal a maturing U.S.China relationship.”

Ryan Balis is a contributor on AmCham Shanghai’s communications & publications team. He can be reached at ryan.amchamsh@gmail.com.

Is Your Company Represented in AmCham Shanghai’s Flagship Publication?

Insight is AmCham Shanghai’s monthly English business magazine. It offers detailed coverage of China business and economic news, regulatory developments, as well as feature articles on industry profiles and market trends. Regular columns profile new business ideas and share management advice and best practices. Insight also highlights AmCham Shanghai events, programs and committees activities. With a circulation of 7,000, Insight is now distributed among AmCham Shanghai members, the foreign business community in China, prospective members in China and the U.S., government officials and U.S. policymakers. Act now to book your ad in the 2011 Insight magazine and start enjoying special rates offered only to AmCham Shanghai members! To order a sponsorship space or for more information, please contact Sophia Chen at (86 21) 6279 7119 ext. 5667 or email sophia.chen@amchamshanghai.org.

Reinterpreting the Bilateral Relationship

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C OV E R S TO RY

B Y T I F FA N Y YA J I M A

In what both sides have acknowledged is one of the “most important” bilateral relationships in the world, the United States and China must ﬁnd ways to resolve their differences to bolster increasingly integrated and interdependent economic relations.

ILLUSTRATION BY JASON PYM

he year 2011 brings the opportunity to examine the underlying dynamics of what both the U.S. and China have acknowledged is one of the “most important” bilateral relationships in the world. But in the era of the 24hour news cycle, where sensationalism and political agendas seemingly shape the headlines, it can be hard to distinguish between fact and opinion. This is especially true of the United States and China, as media in both nations depict a relationship in trouble. But with political winds that can shift as fast as the rise and fall of daily tides, gauging the state of U.S.-China relations based on the current media landscape can be a rocky road to follow. The year 2010 presented a fair share of challenges in the bilateral relationship. Cracks began to emerge as early as January with reports coming out of Denmark that the 2009 year-end Copenhagen summit on climate change resulted in less than favorable outcomes for the environment, which some represented China as having undermined. In March of last year, news outlets found another fracture for divide as U.S. senators Charles Schumer of New York and Lindsey Graham of South Carolina introduced new legislation that would make it easier for the U.S. to find and correct currency misalignments against the U.S. dollar. In short, the legislators hoped to pressure China to raise the value of the renminbi, which they argued would increase the artificially low price of Chinese-manufactured goods and narrow the U.S.-China trade gap. But by April, the U.S. Treasury Department delayed its report on whether to label China a currency manipulator. Later that year, controversy over a cyber attack on Google Inc.’s servers, allegedly by Chinese hackers who sought to obtain confidential information, escalated when Google announced it would cease operating its google.cn search engine. Instead, Google announced it would redirect China search traffic to its Hong Kong site. Both U.S. and Chinese officials weighed in with opposing views on how to mediate the

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IMAGINECHINA

COMMERCIAL CONUNDRUM: U.S. Secretary of Commerce Gary Locke and U.S. Trade Representative Ron Kirk pressed China on trade issues at the JCCT meeting last December.

fallout in relations. While conflicts like these will occasionally occur and the points of divide on issues of importance are real, they form only a small part of the larger picture. Beneath the front-page headlines, the underlying U.S.-China relationship is complex and multifaceted. The larger relationship is framed by the increasingly interconnected commercial ties that unite two powerhouses in world economics and the maturing political relationship that defines its success. But what exactly defines the political and economic relationship and what are its implications?

The economics of bilateral relations Critical to sustainable economic growth in both countries, bilateral trade is a primary driver of the U.S.-China relationship. At US$366 billion in 2009, China and the U.S. enjoy one of the largest trading relationships in the world. That relationship is on track to maintain a strong trajectory of growth as U.S.-China trade reached US$327 billion through the ﬁrst three quarters of last year, and is projected to surpass US$400 billion by the end of 2010. China’s value Although the trade imbalance that is set to exceed US$227 billion in 2010 is a sensitive issue, for the U.S., China’s value as a trade partner is compelling. “China has to be a key part of any strategy to

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increase U.S. exports and jobs,” stressed U.S. Treasury Secretary Timothy Geithner at a Senate Finance Committee hearing last June. China is the third largest overall and fastest-growing U.S. export market and American exports to China have surged in the last decade, growing more than 329 percent since 2000 to reach US$69.5 billion in 2009. Last year’s third quarter cumulative export numbers hit nearly US$63 billion. But the reality is, while U.S. exports to China have increased and China’s import market continues to grow, the U.S. share of China’s import market is actually decreasing due to fierce competition. Given China’s size, even a small drop in China’s import market share has palpable implications. AmCham Shanghai’s September 2010 Viewpoint on U.S. export competitiveness in China finds that, in the period between 2001 and 2008, America’s export underperformance in China cost the U.S. nearly US$41 billion in potential gross domestic product, which translates into 270,000 lost job opportunities for American workers over the same period. U.S. dependence on China is not just reflected in concrete economic figures. American multinationals increasingly manufacture goods in China to sell to outside markets, sales generated by American companies are supported by China’s manufacturing capabilities, and U.S. companies with innovation and technology are turning to China to scale commercially viable operations. America’s importance At the other end of the spectrum, the consumerdriven U.S. market is essential to China’s exportfocused economic growth. The U.S. imports over US$300 billion worth of goods from China, creating a huge export opportunity for China as the world’s top exporter of manufactured products. In the first ten months of 2010 alone, China’s total exports to the U.S. topped US$299 billion. Estimated at more than US$2.5 trillion, China is also one of the largest holders of foreign reserves, two-thirds of which are denominated in U.S. dollars. “The U.S. financial markets have high volume and great liquidity. U.S. dollar assets, including U.S. government bonds, are an important part of China’s foreign reserve investments,” said a People’s Bank of China official to Xinhua News Agency on the importance of the U.S. financial market to China. Chinese foreign direct investment (FDI) in the U.S. is also growing exponentially as Chinese

investors are lured to invest in the U.S. because of state-level tax breaks, land purchase incentives, low-interest funding and financing incentives, as well as for American technology and innovation, high-quality production capabilities and reliable infrastructure, reports AmCham Shanghai in the June 2010 Viewpoint on Chinese FDI in the U.S. Chinese non-financial FDI in the U.S. has more than doubled in just two years, from US$462 million in 2008 to US$908 million in 2009, according to China’s Ministry of Commerce (MOFCOM). China’s interest in the U.S. as a strategic investment destination is also sure to rise. “Chinese firms are improving their investing acumen, which means more spending is likely on the way, including sophisticated deals previously out of reach,” says Derek Scissors, a research fellow at The Heritage Foundation who tracks Chinese FDI to the U.S. Meanwhile, American business invested US$3.6 billion in non-financial FDI in China in 2009 and brought along with it technical knowhow, innovation, expertise and managerial talent. In return, American companies gained access to China’s lower cost manufacturing capabilities and access to domestic consumers. Clearly, the interdependence of the U.S. and Chinese economies and the growing amount of trade and direct investment between the two countries creates a strong economic bond. But a continually growing and mature political partnership is what will bolster both countries’ longer term goals. “There’s no need to view trade, commerce or economic growth as zero sum games, where one country always has to prosper at the expense of another,” said U.S. President Barack Obama at the Asia-Pacific Economic Cooperation (APEC) meeting last November.

Political progress The U.S.-China relationship had a number of achievements in 2010: there was increased cooperation on international security and on global economic rebalancing, as well as small advances in healthcare, aviation and intellectual property. Seven presidential meetings have been held between President Barack Obama and President Hu Jintao – the most Obama has convened with any foreign leader since assuming oﬃce in 2009. Last year’s November G-20 Summit in Seoul, Korea, played host to the last presidential meeting

of 2010, with the state-run China Daily reporting that Obama and Hu’s 80-minute conversation “struck a positive note.” Other bilateral meetings produced significant commitments in 2010, as they served as constructive platforms for the U.S. and China to engage one another on a wide range of issues. At the May Strategic and Economic Dialogue (S&ED) held in Beijing last year, U.S. Treasury Secretary Timothy Geithner and Chinese Vice Premier Wang Qishan, who co-chaired the economic track, engaged in protracted discussions about the need to maintain open trade and investment, for financial sector reform, to work on the international financial architecture and the need for rebalancing of the massive trade deficit. Along the strategic track of negotiations, cochaired by U.S. Secretary of State Hillary Clinton and Chinese State Councilor Dai Bingguo, key issues focused on energy security and issues surrounding Iran, North Korea and Sudan. The 21st session of U.S.-China Joint Commission on Commerce and Trade (JCCT), held in Washington, D.C. last December, provided an opportunity for ministries and departments on both sides to review the progress made by JCCT working groups, while at the same time pressing each other for tangible results on past commitments. “This year we have pursued an aggressive year-round calendar of engagement with China at all levels of our government; we look forward to real progress as a result of these efforts,” said U.S. Secretary of Commerce Gary Locke in a press release ahead of the session. U.S. Trade Representative Ron Kirk and Chinese Vice Premier Wang Qishan joined Locke in leading the meeting. Following the close of the JCCT, Locke reinforced his optimistic outlook, calling the meeting both “productive and effective.” Wang Qishan sounded his own high hopes for progress following the JCCT, stating that, “Since the last JCCT session, China and the United States have taken a constructive, cooperative attitude and worked hard on resolving matters of concern to each side.”

Multilateral engagement Meanwhile, multilateral forums provided the opportunity for China and the U.S. to stand together on the world stage and push for global economic rebalancing and regional free trade,

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Seven presidential meetings have been convened between President Barack Obama and President Hu Jintao - the most Obama has convened with any foreign leader since assuming ofﬁce in 2009.”

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The activity represented by the American business community is going to mean a lot as it is the backbone of the U.S.-China relationship.”

and to engage on a host of security-related issues in the region. The G-20 Summit attended by Obama and Hu in Seoul, Korea last year produced a statement on principles on development and an action plan for future G-20 engagement. The Association of Southeast Asian Nations (ASEAN) meetings attended by U.S. Secretary of State Hillary Clinton in Vietnam last year encouraged security, prosperity and opportunity across Asia through discussions on climate change, trading and economic integration, democracy and human rights. Yokohama, Japan then played host to the 2010 APEC meeting last November that was attended by heads of state including Obama and Hu, as well as Japanese Prime Minister Naoto Kan, Australian Prime Minister Julia Gillard and Mexican President Felipe Calderón. Over the course of the three-day forum, business and government leaders from the 21 member economies in the Asia-Paciﬁc region discussed trade liberalization measures and how to stimulate regional economic growth and job creation through free trade. “The United States is looking to expand trade and commerce throughout the Asia-Paciﬁc,” said Obama, who expressed his commitment to the region. “The United States is here to stay.” As the frequency and depth of high-level engagements indicate, the U.S.-China relationship has progressed on the issues and, perhaps more importantly, demonstrate that there is a very healthy and meaningful level of communication between the governments of the two countries. This willingness to maintain a very high-level, high-frequency and open communication channel points to the commitment and importance that both governments place on the bilateral relationship.

Cautious optimism Looking into 2011, all eyes are focused on Hu’s trip to Washington, D.C. in January. Hu’s visit is significant not only because it is his first official visit to the U.S. since the Obama administration took office but, in a larger sense, because this is only the second time a Chinese head of state has visited the U.S. since China acceded to the World Trade Organization (WTO) in 2001. While China’s implementation of its WTO commitments has boosted bilateral trade and improved China’s integration into the global economy, key issues remain in the U.S.-China commercial

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relationship. In a letter to Chinese Vice Premier Wang Qishan ahead of the 21st JCCT last year, 32 U.S. senators urged China to resolve four longstanding bilateral trade issues during the JCCT and in advance of Hu’s January visit to the U.S. Intellectual property rights protection, China’s indigenous innovation policies, restrictions on U.S. beef imports and currency revaluation were among the key issues raised that the senators hoped China will make concessions on. “It is imperative…that the United States and China work together constructively in advance of President Hu’s visit to ensure its success,” reads the letter that, among others, was signed by the influential Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Senator Chuck Grassley (R-IA). Reports emerging from the recently concluded JCCT indicate that the battle continues to be waged on issues like intellectual property rights protection, the use of legitimate software in Chinese government agencies and Internet infringement liability, reports The Washington Post. The meetings did, however, produce a number of concrete, measureable and hard-fought wins for the U.S.: renewed access for U.S. beef and poultry exports to compete in China’s billion dollar meat import market, elimination of a requirement that alternative energy companies build demonstration projects before bidding on wind projects in China, and China’s commitment to rewrite its government procurement catalogue in 2011. China also renewed its commitment to accede to the WTO Agreement on Government Procurement (GPA) and agreed to submit a revised offer in 2011 that provides similar concessions to GPA signatories that they offer to China. This is widely considered a sticking point because China has missed two previous deadlines to sign the GPA. Doing so would ensure a more level playing field for American business in China’s US$100 billion government procurement market. Concessions like these will go a long way toward repairing relations and restoring confidence on Capitol Hill in China as a trade partner. As it stands today, says Dr. Kenneth Lieberthal, director of the John L. Thornton China Center at the Brookings Institution, the U.S.-China relationship contains fundamental challenges and questions about each other’s long term intentions. Currency legislation that passed the U.S. House of Representatives last year with an unprecedented level of bipartisan support is an indicator of the level of concern

AmCham Shanghai’s “talking points” on the U.S.-China commercial relationship that Congress has with recent developments in the relationship with China. “It’s hard to point to anything else that could do that,” says Lieberthal on the signiﬁcance of the House bill. Rather than focusing on points of divide, both sides are now looking for ways to advance the relationship and bridge the distances in the lead-up to the presidential match-up in January. In his address at AmCham Shanghai’s Tenth Annual Shanghai Government Appreciation Dinner last December, U.S. Ambassador to China Jon Huntsman, Jr. shared his own view that the challenge for Hu’s visit will be to “humanize” the U.S.-China relationship. “How do you bring it down to earth in ways that people in my country and people in this great country understand that they get value from a healthy and prosperous U.S.China relationship; to help people understand that by supporting the U.S.-China relationship, that it will improve their lives in some meaningful way?” he questions. Whereas the commitments that come out of bilateral meetings may at times fall short in terms of tangible results, Huntsman sees an opportunity for American businesses to step up their eﬀorts and come to a consensus where governments cannot. “The activity represented by the business community is going to mean a lot as it is the backbone of the U.S.-China relationship,” says Huntsman. Still, there are lingering questions that must be resolved to ensure a healthy and balanced U.S.China commercial relationship. Key among those issues is intellectual property rights protection and enforcement, market access, reciprocity and transparency and rule of law. “The U.S.-China relationship is too important to get wrong,” cautions AmCham Shanghai President Brenda Foster to Insight. “Engagement is the key. The U.S. should focus on those issues that most directly impact U.S. commercial interests in China while also identifying areas of shared interest.” “It’s not going to be easy; there are no shortcuts, no magic solutions,” concludes Ambassador Huntsman. “It’s a large, complicated, extremely important relationship. But we should never back away from working hard to identify our common and shared interests because there are far more of those than there are points of divide. And increasingly I’m convinced that the areas of commonality will converge with greater frequency as we work toward our respective goals.” The global, domestic, economic and political

When meeting with government officials from both the U.S. and China, AmCham Shanghai’s mission is clear - to support the success of our members by promoting a healthy business environment in China and to strengthen U.S.-China commercial ties. AmCham Shanghai believes that increasing U.S. competitiveness in China, while at the same time pressing China for full market access, will help American companies compete in the world’s fastest growing market and support sustained economic growth in the U.S. The Chamber has engaged U.S. government officials on: • Fully funding the Administration’s National Export Initiative • Enhanced trade advocacy including a Presidential trade mission to China • Targeted U.S. Export-Import Bank financing for companies exporting to China • Increased funding for effective U.S. government export promotion programs • Continued progress on export control reform • Improved U.S. city-state-federal cooperation on export promotion AmCham Shanghai supports engagement with China on issues that most directly impact American companies in China including: • Improved market access for American companies operating in China’s growing domestic market • Addressing limited progress made on IPR enforcement and protection • Reforming innovation policies which make domestic content a market access requirement to compete for government procurement contracts • Enhanced transparency in the formulation, enactment and implementation of rules and regulations issues that remain can be best addressed through multiple high-level communications at bilateral meetings and multilateral forums. Working-level platforms like the S&ED and the JCCT provide the relationship structural continuity and help to build confidence between governments, while at the same time, create substantive steps toward achieving joint goals. On a grander scale, participation in regional APEC and ASEAN meetings, as well as at global assemblies like the G-20 summit, situate the U.S.-China relationship in a global context. As the books close on 2010, the U.S. and China, as two of the world’s most powerful nations, not only have the responsibility but the duty to consider the shape and the desired outcomes of bilateral relations in 2011. It remains to be seen whether Hu’s visit to Obama will play out in the media in a positive light. But what seems to be true is that both nations recognize their common interest in maintaining a strong, stable bilateral relationship. Tiffany Yajima is Senior Associate Editor of Insight. She can be contacted at tiffany.yajima@amcham-shanghai.org.

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INSIDE AMCHAM FROM THE CHAIRMAN

Partnering for Growth

appy New Year and welcome back from what I hope was an enjoyable holiday season spent with family and friends. Naturally, at this time of the year AmCham Shanghai member companies, like the Chamber itself, are ﬁnalizing their plans and initiatives for the year ahead. With the tremendous opportunities available in the China market, these plans typically have an emphasis on growth. In service to our members you can be assured of AmCham Shanghai’s ongoing commitment to be the Voice of American Business in China and to be your partner as we strive to support your business goals. We’ve just concluded an eventful 2010 that included the highly successful and unforgettable Shanghai 2010 World Expo. The Expo served as a platform for AmCham Shanghai to deliver a wide range of programs and services to AmCham Shanghai members. As we turn the page on the Expo, enhancing the services to members will continue as a Chamber priority in 2011.

Eric S. Musser Chairman AmCham Shanghai

“AmCham Shanghai remains committed to serving your business needs by promoting a healthy business environment in China and strengthening U.S.-China commercial ties.”

Key initiatives include new and innovative programs and events that more directly impact member companies and enhance the Chamber’s regional footprint to deliver more services to members in Suzhou and other cities in the Yangtze River Delta region. Developing additional resources for SMEs will also be a priority, as will enhancing our partnership with the Shanghai Municipal government as they pursue their next big initiative – becoming an international ﬁnance and trading center by 2020. An additional focus area for the Board of Governors in 2011 is to work with AmCham Shanghai staff to establish a three-year strategic plan. Its primary objectives are to identify the initiatives that provide programs and services of value to our membership’s business needs, and to identify the capabilities and investments AmCham Shanghai requires to effectively serve our members in the years ahead. AmCham Shanghai remains committed to serving your business needs by promoting a healthy business environment in China and strengthening U.S.-China commercial ties. I’d like to encourage all our members to get involved in the many events, committees and programs available that contribute to this effort. After a busy and sometimes hectic year of the Tiger, the year of the Rabbit is said to be a “congenial time” in which diplomacy, international relations and compromise will be emphasized. While I wouldn’t predict anything but another fast-paced and competitive 2011 for Shanghai, I look forward to working with you to make the year of the Rabbit another successful year.

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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 December 2010 Board of Governors Meeting Committee Briefing Brian Noll, chair of the Suzhou Committee, briefed the Board on the committee’s annual agenda, recent activities and development plan for 2011. Financial Report Helen Ren, Director of Finance & Administration, presented an update on the Chamber’s year-to-date financial performance. With strong cost controls, financial performance remained on target with budget projections. Shanghai as an International Trading Center Governor Eddy Chan reviewed his presentation at the 2010 Shanghai Regional Headquarters Forum on November 20, an event organized by the Shanghai Municipal Government focused on Shanghai’s economic development goals. The presentation was very well received by the government officials

in attendance, who also expressed interest in developing closer cooperation with AmCham Shanghai.

IN ATTENDANCE Governors: Andrew Au, Bill Brekke, Eddy Chan (by phone), John Grobowski, Diane Long, Eric Musser (by phone), James Rice, Robert Roche (Chairman) and Matthew Targett.

Expo CSR Programs Award The President reported that AmCham Shanghai was awarded “Most Outstanding Partner” by the Shanghai Expo Volunteer Department and the China Youth Federation’s Shanghai Municipal Committee for Expo CSR Programs. During the course of the six-month Expo, AmCham Shanghai organized a number of CSR programs with numerous member companies to provide disadvantaged youth and senior citizens with an opportunity to attend the Expo.

Attendees: David Basmajian, Paul Brown, Justin Chan, Brenda Foster (President), Brian Noll, Helen Ren, David Turchetti, Linda X. Wang, Jessica Wu, Karen Yuen and Eric Zheng.

Certiﬁcates of Appreciation The President thanked Chairman Robert Roche for his leadership of AmCham Shanghai in 2010. Roche then presented each Governor with a certiﬁcate of appreciation and thanked the Governors for their support and leadership over the past year.

REGRETS Pierre Cohade, Murray King, Jim Mullinax and Kevin Wale.

The AmCham Shanghai 2011 Board of Governors: Chairman

Governors

Andrew Au Citibank China

Ted Hornbein Richco

Matthew Targett Bayer Technology and Engineering

Paul Brown International Paper Asia

Kenneth Jarrett APCO Worldwide

Kevin E.Wale General Motors China Group

Eddy Chan FedEx Express

Marie Kissel Baxter Asia-Paciﬁc

Eric S. Musser Corning China

Vice Chairman

Robert W. Roche Acorn International

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Eric Zheng Chartis Insurance 31

AmCham Shanghai Tenth Annual Shanghai Government Appreciation Dinner

.S. Ambassador to China Jon M. Huntsman, Jr. was joined by members of the AmCham Shanghai Board of Governors, Chamber President Brenda Foster and more than 400 AmCham Shanghai members to congratulate Shanghai on a historic Shanghai World Expo and to express the American business community’s appreciation for the Shanghai municipal government’s efforts to create a steadily improving business climate in Shanghai. “I would like to thank the Shanghai municipal government for truly building a competitive arena for American business,” said the Ambassador. “We should be proud of our achievements this last year. We have brought our countries, through our people, closer together.” AmCham Shanghai was honored to welcome Vice-Mayor Tang Dengjie, Chairman of the Shanghai Commission of Commerce Sha Hailin, Chairman of the Shanghai Municipal Government Foreign Affairs Office Li Minjun and more than 160 Shanghai officials. “This year’s dinner is a great opportunity for Shanghai to thank the U.S. business community for their support for 2010 Expo,” said Vice-Mayor Tang. “We look forward to increasing innovation driven aspects of the economy, lowering carbon emissions, improving services and developing a better environment.” The event highlighted the ongoing commitment of the American business community to Shanghai and the important role American companies play in Shanghai’s economic development. Through October of this year, U.S. companies invested approximately US$30 billion in 6,500 projects in Shanghai. Shanghai’s trade with the U.S. accounts for one-sixth of Shanghai’s total global trade. American companies in Shanghai played a key role in supporting the Shanghai World Expo by helping to ensure a U.S.A. Pavilion at the Expo, hosting several of the most popular corporate pavilions at the Expo, such as the GM, Coca-Cola and Cisco pavilions and holding business events during the Expo intended to draw additional U.S. investment to Shanghai and to greater China. AmCham Shanghai’s Board of Governors expressed their interest in continuing to support Shanghai’s ambitious development goals by offering the services and expertise of American corporate leadership as the municipal government sets its sights on becoming an international financial, logistics and trading center by 2020. (Dec 6)

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AmCham Shanghai Tenth Annual Shanghai Government Appreciation Dinner Plantinum Sponsors

Corporate Sponsors

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AmCham Shanghai New Members: November – December 2010 U.S. Corporate Membership

Educational Membership

Bradbury Machinery (Shanghai) Co., Ltd. ZANG Frank Cooper Electronic Technologies (Shanghai) Co., Ltd. LAW Kim Lee Horizon Lines, LLC LAM Hon Packaging Machinery Manufacturers Institute, Inc., Shanghai Rep. Ofﬁce BIAN Nanjie PGI China SU Guangming Pro-Link Global China Ltd., Shanghai Rep. Ofﬁce FENG Xiaolin Daisy Xuzhou Meritor Axle Co., Ltd. MI Rongjun

Babson College KELLEY Donna

U.S. Associated Corporate Membership

Associate Membership

AECOM, Ltd. XU Minda Albemarle Management (Shanghai) Co., Ltd. GHYOOT Silvio G.G. Jabil Circuit (Wuxi) Co., Ltd. LOW Choon Yien Johnson Controls Building Efﬁciency Technology (Wuxi) Co. Ltd. HE Xiaoyu Netherlands Dockwise Shipping B.V., Shanghai Rep. Ofﬁce ZENG Sheng York (Wuxi) Air Conditioning and Refrigeration Co., Ltd. HUA Xiaofeng Zhejiang Johnson Controls Battery Co., Ltd. CHOU Howard

Small Business Membership Leadingenes (Shanghai), Ltd. FONG Josephine LECG Shanghai, Ltd. UTLEY Rupert Yinghuan (Shanghai) Software Technology Co., Ltd. LAM Mark

Corporate International Afﬁliate Membership Leanorigin Consulting LI Hong TPN China Shanghai Inc. KLEIN Gary

Non-Resident Individual Membership ROGERS Angela

Non-Resident Corporate Membership Business Monitor International (Asia) Pte. Ltd. YAP Adeline

Corporate International Afﬁliate Membership GoIndustry DoveBid (Shanghai) Co., Ltd. YU Hugh LVR Financial Consulting Co., Ltd. YU Weili Praxis Language Co., Ltd. HORKOFF Henry Frederick Silk Road Telecommunication MALLEN Justin TUV SUD China Holding, Ltd. VON WAHL Dirk

Albemarle Management (Shanghai) Co., Ltd. DING Yiwei LU Jiaying American Bureau of Shipping, Shanghai Rep. Office ROGER Lewis WANG Ge AMO (Shanghai) Medical Devices Trading Co., Ltd. MA Qian Baxter (China) Investment Co., Ltd. ZUURBIER Tineke BP (China) Holdings, Ltd., Shanghai Branch WANG William Cooper Electronic Technologies (Shanghai) Co., Ltd. CHEN Hua Dover Corporation Regional Headquarter MIAO Rachel Federal Express (China) Co., Ltd., Shanghai Branch LUNG Augustine GoIndustry DoveBid (Shanghai) Co., Ltd. HOOD Maiyo James Graco H.K., Ltd., Shanghai Rep. Office HARBERTS Gaylord HARRIMAN Charles MeadWestvaco (China) Holding Co., Ltd. CHEN Paul CHEN Roger R. MOLLICA Anthony WANG Daniel XU Rosie Melaleuca (China) Wellness Products Co., Ltd. SONG Wendy Minnesota Precision Products (Suzhou), Ltd. YUN Xiaodong Morgan Stanley Information Technology (Shanghai), Ltd. ZHANG Richard Netherlands Dockwise Shipping B.V., Shanghai Rep. Office HUANG Evelyn Parker Hannifin Fluid Power Systems & Components (Shanghai) Co., Ltd. DAI Jane Parkway (Shanghai) Hospital Management Ltd. LEE Kenneth K

Shanghai Arcotronics Components & Machineries Co., Ltd. PAN Xinyu Silk Road Telecommunication ADAMS Sarah Staples Commerce & Trade Co., Ltd. KRISTIANSEN Anders Stryker (Suzhou) Medical Technology Co., Ltd. LI Bei Waste Management, Inc. CHAN Ray Whirlpool (China) Investment Co., Ltd. LU Yifan

Individual U.S. Citizen Membership Consona ERP Company FAREY Timothy Crowne Plaza Pudong RIERSON Miyuki Dxcelpartners Distribution Company MARTSEN Kirk Fudan University WONG David Limitless / Cumberland Container JARED Mark Macquarie Securities POWERS Timothy Oakwood Residence Hangzhou GERBER Robert Joseph Richina Global Real Estate MATIS Allen RTI International Metal, Inc., Guangzhou Rep. Ofﬁce XIAO Mike Rutledge Capital CARWELL Kellie Tellabs ARR Kevin Wufantuan.Com CONSTANTY Joseph KOWALSKI Andrew MOORE Andrew PAJER Mark PARKER Bethann

Individual International Afﬁliate Membership Infor Global Solutions YEE Kai Cheong Jungheinrich Lift Truck Manufacturing (Shanghai) Co., Ltd. KUEHNE Reinhild Shanghai Rou Furthest Industrials Solutions Co., Ltd. CHENG Joe Waldorf Astoria Shanghai on the Bund DE CUYPER Dirk KHOO Yen RAFFELSEN Andre

Special Membership Charitable Organization Shanghai Roots & Shoots ZWISLER Tori

3 6 I N S I G H T J A N U A RY / F E B R U A RY 2 0 1 1 Do you want to share more information about your company? Contact Sophia Chen at (86 21) 6279-7119 ext. 5667 or sophia.chen@amcham-shanghai.org for a “Standout Listing” opportunity in the New Members Section.

Event Highlights

INSIDE AMCHAM

Bestselling Author Steve Tappin Shares the Secrets of CEOs As part of the AmCham Shanghai Author Series, Steve Tappin recently spoke to Chamber members about his international bestselling book The Secrets of CEOs. Tappin focused on the ﬁve different ways CEOs lead their businesses and categorized CEO management styles. Commercial Executors, for example, focus on the day-today management of their companies and keep a close eye on the bottom line while Financial Value Drivers hold shareholder value as the number one priority and push to increase the company’s stock price. Other management styles that were discussed include Corporate Entrepreneurs, Corporate Ambassadors and Global Missionaries. After asking the audience to categorize their own CEOs, Tappin discussed his upcoming book, The Secrets of Chinese CEOs, which focuses on how Chinese CEOs manage their companies and gives insight on ways to work with them. The Secrets of Chinese CEOs is scheduled for release in 2011. (Dec 9)

Beecher Ashley-Brown (L) and Roger Wu (R) present on China expat hiring and compensation trends.

Aon Hewitt Presents Results from the 2010 Study on Expat Compensation and Benefits AmCham Shanghai recently hosted Beecher Ashley-Brown and Roger Wu from Aon Hewitt as they presented results from Aon Hewitt’s 2010 Expatriate, China Hire and Returnee Compensation and Benefits Study. The study highlighted trends in compensation levels and increase rates in addition to sharing the prevalence and value of various benefit programs by different expatriate categories. Brown began the presentation by providing an overview of hiring trends across China. While there was an overall increase of recruiting local talent in multinational corporations, the level of foreign talent hires remained steady. Most companies continue to supplement their local talent with foreign professionals, especially talent with management experience, in order to meet growth expectations. Compensation packages, however, have changed as companies reconsider the cost and benefit of certain employment compensation elements, including relocation expenses, compensation of lifestyle allowances and “hardship” allowances that are usually allocated to overseas talent who are relocated to China. The study found an overall increase in local China hires – that is, foreigners who are based in China – and compensation packages may not include the same allowances as relocated hires. However, foreign talent in China will continue to weigh job decisions based on compensation for housing, insurance and children’s education fees. (Dec 7)

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Committee Highlights

INSIDE AMCHAM

Tax Committee Income Taxes Accounting – 2010 Year End Hot Topics The Tax Committee recently hosted Terry Tam and Aretha Chen of PwC and Alice Loo of Deloitte who highlighted common mistakes in Chinese and U.S. income taxes accounting, the latest developments in uncertain tax positions and implications of recent China tax law changes. Tam discussed deferred tax accounting and gave an overview of top restatement issues in fiscal year 2010. He described commonly overlooked areas in tax accounting, such as impairment and acquisition accounting, and explained specific steps in dealing with tax provisions and deferred taxes. Tam stressed that asserting indefinite reversal in deferred tax accounting under the ASC 740-30-25 tax law requires the involvement of not only the tax department, but also the treasury, controllers and senior financial management.

Tax experts discuss UTP accounting.

Loo then followed with practical suggestions for uncertain tax position (UTP) accounting. She mapped a decision making process when faced with uncertain tax positions, including the scope of tax positions and six necessary steps to identify a company’s tax positions. Loo stressed that companies should weigh the amount of tax beneﬁts they can achieve through individual and cumulative probability calculation in order to maximize the company’s tax beneﬁts. Loo then displayed the process of UTP tabular reconciliation and effective settlement of tax positions that meet recognition thresholds. Chen closed with an overview of recent China tax law, IFRS and CAS updates. He detailed a Jiangdu, Jiangsu Province case study in relation to Circular 698, in which a reporting obligation was imposed on certain indirect transfers. The case study revealed the type of strong action taken by tax authorities on detection of indirect transfers and an assessment on the “commercial purpose” and “substance” of such transfers. (Dec 1)

Speakers highlight LEED projects in China.

Design & Construction Committee LEED Best Practices in China

The Design & Construction Committee was pleased to host Alessandro Bisagni, founder and managing director of sustainability consulting company BEE inc., who gave an indepth presentation on Leadership in Energy and Environmental Design (LEED) green building certification in China. He explained that China is one of the fastest growing markets for green buildings, with over 36 certified LEED buildings already built. However, LEED, a U.S.-based certification, poses challenges for its application in China: the certification text is only in English, and there is no mandated monitoring process during construction to ensure that the project meets LEED standards. In addition to these challenges, the lack of education on the purpose of LEED creates a misunderstanding that LEED is a short term solution to help sell green building projects. LEED green building certification, emphasized Bisagni, is meant to help provide long-term solutions to sustainability and energy savings. Following Bisagni’s insights, Becky Yi and Matthew Lee Burke from Robarts Interiors & Architecture held a panel discussion on LEEDcertified projects. Yi explained that one of her biggest challenges was the fast pace of construction, allowing her LEED projects to be completed quickly but making it much more difficult to scrutinize the process carefully. However, the fast pace of the projects is also an opportunity, allowing more LEED-certified buildings to be constructed on a yearly basis. (Dec 2)

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INSIDE AMCHAM

Speakers discuss the outlook for China’s retail market.

Marketing & Media Committee China’s Retail & Shopper Marketing Landscape

The Marketing & Media Committee recently hosted an event that forecasted retail and shopper trends in marketing to Chinese consumers. Carl Preller, managing director of Kantar Retail China, spoke about drivers of market evolution, China’s current development stage and an outlook for the future of retail in the Chinese market. Preller noted that the primary drivers of market evolution are shopper preferences, market consolidation and disruptive factors like regulatory changes. Currently, he said, China is moving away from exploration toward the penetration stage of market development. However, what sets China apart from other countries is that it is the most competitive market in the world: China is the only market in which every major global retailer operates in some form. With this in mind, Preller offered several predictions for the future. Preller explained that in the West, the exploration to penetration phase took approximately 60 years, but this development in China may be twice as fast. China will remain divided between three types of markets, with the lowest income bracket representing a signiﬁcant market demographic. Preller also said that China will start as a multi-channel and multi-format market, with dot.com retail playing a more important role than in the West. He cited Taobao.com’s unprecedented rise as an online shopping plaza, whose turnover is expected to reach RMB400 billion this year. Similarly, Preller predicts that Chinese shoppers will adapt much faster to mobile shopping than their western counterparts. (Dec 3)

Panelists review 2011 real estate trends.

Real Estate Committee Real Estate Outlook - Asia Pacific in 2011 and Beyond AmCham Shanghai’s Real Estate Committee was pleased to host experts at the Urban Land Institute (ULI) and PwC who presented key findings from their annual report, Emerging Trends in Real Estate, Asia Pacific. Speakers provided an outlook on Asia Pacific real estate investment and development trends, real estate finance and capital and other real estate issues. The presentation was followed by an interactive discussion about the China real estate market with a panel of Shanghai-based real estate professionals.

Steve Blank of PwC kicked-off the session with a summation of the Emerging Trends report. While the global real estate market remains somewhat depressed by the recession, the strong economic growth in China and other Asia Pacific regions has ensured that the local real estate market remains robust. Asia’s banks continue to drive the financing aspects of real estate, providing much of the capital. According survey respondents, Shanghai has one of the strongest real estate markets in the Asia-Pacific region. Following the presentation, Sam Crispin of PwC moderated an interactive panel discussion with Ryan Botjer from Tishman Speyer, William Dong from Shanghai Forte Land, Michael Klibaner from Jones Lang LaSalle and Kenneth Rhee from Morgan Stanley Real Estate Investing. Panelists discussed real estate issues specific to the China market. Klibaner stressed that the China market is equity-and-capital driven, which differentiates the China real estate boom from the debt-driven real estate market that was partially responsible for the property bubble in the U.S. Residential homes is also a promising sector as China’s increasingly affluent middle-class looks to upgrade their living conditions. (Dec 7) Event and Committee Highlights are reported by Ashley Cahill, Krisanna Oopik, Kate Ryge, Jonathan Shyu and Esther Young

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DEAL OF THE MONTH FISKER AUTOMOTIVE

Fisker, CGA Partner to Bring Luxury Electric Vehicles to China Fisker Automotive strikes a distribution deal with China Grand Automotive Group.

.S. electric car maker Fisker Automotive has negotiated a non-exclusive agreement with China Grand Automotive Group (CGA) to have Fisker vehicles distributed, marketed and serviced in China. CGA, a joint venture between Xinjiang Guanghui Industry Investment Group and Texas-based private equity firm TPG Newbridge Capital, will sell Fisker vehicles through its more than 200 outlets across 12 provinces in China. As the top passenger car trader in China, CGA sells 40 brands through its stores, including luxury brands Mercedes-Benz, Lamborghini and BMW. Fisker hopes the agreement with CGA will bring the company improved access to a China electric vehicle market that is expected to grow 30 percent in this year alone. Fisker’s first car, the Karma, is the world’s first luxury electric vehicle with extended range. According to the automaker, the Karma can travel about 50 miles on battery power alone. When the battery is depleted, a gasoline engine kicks in to generate electric power, providing an additional range of 250 miles. The first Fisker cars are being built in Finland but will soon be manufactured in the U.S. state of Delaware. The automaker also plans to use the U.S.-based plant to produce a new line of more

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affordable electric cars. The Karma is expected to be priced at about US$90,000 in the U.S. market. Fisker plans to unveil the Karma in China at the Shanghai Motor Show in April and for Karma deliveries to begin in the fall. The company currently partners with four other importers around the world and has expressed interest in forming additional partnerships in Europe and Asia. Already, the company has received 3,000 pre-orders for the Karma and predicts global sales of 15,000 vehicles per year. While China still lacks a system of charging stations and other necessary infrastructure, the government’s drive to lower vehicle emissions has helped to create an attractive market for electric vehicle manufacturers. Earlier this year, the Central Government launched a pilot program in five Chinese cities to promote the purchase of energy-efficient vehicles which includes subsidies for electric and hybrid vehicle purchases. Although Fisker differentiates itself as an environmentally-responsible luxury carmaker, other luxury auto brands are making changes to become more energy-efficient and to compete in the China electric vehicle market. For example, the legendary Italian car maker Lamborghini aims to reduce carbon dioxide emissions in its cars by 35 percent in the next five years. – Ashley Cahill

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