Insight Magazine March 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 March 2011

POLICY INSIGHT

Hu-Obama Summit CONSUMER SERIES

China's Retail Consumer FINANCE FEATURE

Globalization of the RMB

A National Resource Rich with human resources, China plans to invest in its labor pool and build a highly skilled, talented workforce for a new decade of growth

INSIGHT March 2011

The Journal of the American Chamber of Commerce in Shanghai

David Turchetti

12 A Thriving Business Environment

BUSINESS DEVELOPMENT & MARKETING

Karen Yuen COMMITTEES

Siobhan M. Das COMMUNICATIONS & PUBLICATIONS EVENTS

Jessica Wu FINANCE & ADMINISTRATION

Helen Ren

15 A Joint Effort for Cooperation

Tiffany Yajima

ASSOCIATE EDITOR

Esther Young

By Esther Young

The ﬁrst in a series of feature articles looks at China’s consumer spending habits and deconstructs China’s modern retail consumer.

Ashley Cahill DESIGN

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

18 Deconstructing China’s Retail Consumers CONSUMER SERIES

EDITORIAL INTERN

Alicia Beebe

By Ashley Cahill

Increased bilateral trade and improved commercial relations follow the Hu-Obama Presidential Summit in January and December 2010’s Joint Commission on Commerce and Trade (JCCT) meetings.

Linda X. Wang

MANAGING EDITOR

POLICY INSIGHT

MEMBERSHIP & CVP

INSIGHT

By David Basmajian

American business thrives in China despite a challenging business climate, ﬁnds AmCham Shanghai’s 2010-2011 China Business Report. The report features new China Business Climate Indices that rate factors such as “success” “conﬁdence” and “welcoming.”

DIRECTORS

David Basmajian

ABBY FITZGIBBON

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

SPOTLIGHT

IMAGINECHINA

Brenda Foster

F E AT U R E S

IMAGINECHINA

PRESIDENT

THE WHITEHOUSE

AMCHAM SHANGHAI

22 The Yuan’s International Ambition FINANCE FEATURE

By Ryan Balis

As China’s economy matures, the nation’s leaders are looking at new ways to internationalize the renminbi.

26 A National Resource COVER STORY

By Tiffany Yajima

China’s ambitious National Talent Development Plan aims to build the nation’s skilled workforce and is expected to transform China’s manufacturing-based economy to one driven by innovation.

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

3 News Briefs

8 Draft Internet Measures LEGAL ANALYSIS

Shu Liu of Davis Wright Tremaine analyzes the new draft measures governing China’s Internet information service market.

44 Deal of the Month

11 The Party and Us BUSINESS BOOKSHELF

Dean Ho reviews Richard McGregor’s new book on the inner workings of China: “The Party.”

INSIDE AMCHAM

32 33 34 35

From the Chairman: A Focus on Engagement Board of Governors Meeting New Member Listing In Memoriam: Remembering Nora Sun

37 AmCham Advocacy & Government Relations 39 Events in Review 42 Committee Highlights

INSIDE INSIGHT

TIFFANY YAJIMA MANAGING EDITOR

he promise of spring brings new beginnings. Although we are well into the year 2011, with the Chinese New Year following so closely on the heels of the western New Year, it feels as though we’ve barely just begun. In January, the Chamber released the annual 2010-2011 China Business Report, the results of which convey a thriving business environment for U.S. companies and an optimistic outlook despite operational challenges. Be sure to pick up your own copy today! While many of you enjoyed the spring holiday outside of China, Insight has been busy tracking the state of U.S.-China trade relations. This month, Insight’s policy feature reports on the outcomes of the Joint Commission on Commerce and Trade (JCCT) working group meetings and the HuObama presidential summit in January, as well as the package of trade deals that were negotiated in conjunction with the presidential meeting. For those readers with a penchant for internal politics, this month’s Business Bookshelf reviews Richard McGregor’s new book “The Party.” The book takes an informative look at the inner

workings of China and is a real page turner especially for those of us in Shanghai. In this issue, Insight also features a new series of articles on China’s retail consumer. The first article in this new consumer series examines Chinese consumer preferences while future articles on China’s retail market are currently in the works. Currency analysts will be pleased to read this month’s finance feature on the internationalization of the renminbi. When will the renminbi be fully convertible and widely used in global transactions? We may not know for certain, but Insight examines the steps China is taking to get there. As we continue to look ahead at what is in store for China, this month Insight focuses on the country’s new national human resource development plan that aims to transform China’s economy through the development of “talent.” The plan, with ambitious targets as far reaching as 2020, will be implemented over the next decade. Though competition for talent is fierce, U.S. companies thirsting for skilled professionals stand to benefit from the influx of talent.

IMAGINECHINA

News

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

CHINA BUSINESS

E-commerce investment claims top spot for Internetrelated investments E-commerce has become the most popular investment industry in the Chinese Internet market, shooting past online games. According to Beijingbased Zero2IPO Research Center, 46% of the 137 Internet-related investment deals made in 2010 involved e-commerce. By comparison, online games accounted for 18% of last year’s investment deals. Ecommerce’s strong showing is attributed to a growing US$714 million businessto-consumer sector and investments by large online retailers to expand logistics and distribution capacities. Meanwhile, investment in online games reached US$137 million last year, a year-on-year increase but shy of the US$189 million peak in 2008.

Car sales zoom ahead China’s domestic car market continues to grow rapidly, posting a 15.3% increase in January year-on-year despite tough government restrictions to limit the number of cars entering China’s roads and the end to government purchasing incentives. Though sales are down 4.8% from December, China’s dealers saw passenger car, SUV, minivan and other vehicle sales amount to over 1.4 million units thanks to strong demand in secondand third-tier cities. General Motors Co. says its January China sales are a record monthly high of 268,071 units, up 22% year-on-year. Ford Motor Co. also says its January sales in China are a record 53,340 units, up 20% year-on-year.

Energy intensity improves China National Bureau of Statistics data show China’s major energy consuming industries improved their energy

China pledges relief to calm food anxiety The State Council, China’s cabinet, issued a 10-point report on the country’s plans for encouraging food production amid fears of a severe drought coupled with rising food prices. According to the plan, China will invest more than US$1 billion in infrastructure improvements to help alleviate the impact of drought and spend US$180 million for equipment purchases.The government will provide small subsidies that break down to roughly US$2 per hectare for wheat-field irrigation and planting, as well as to treat crop disease.The moves follow a February report by the United Nations Food and Agriculture Organization warning that the current drought afflicting China’s major wheat producing areas, such as in Shandong province, could push up world food prices. Separately, China’s Ministry of Agriculture says drought has impacted more than a third of the country’s plantable area for winter wheat.Wheat supplies impact the price of flour needed for such Chinese food staples as noodles. China’s wheat imports have increased 36% to 1.2 million tons over the last year. intensity by 20% over the last five years thanks to government efforts to improve energy savings. Energy intensity measures energy consumption as a unit of GDP. The data show that major energy intensive industries, such as oil processing, electricity production and chemical manufacturing, achieved a savings of 400 million tons of standard coal. Such industries account for more than half of China’s total energy consumption but contributed over 60% to the nation’s energy savings.

Domestic RMB bonds expand 3.1% Data from the People’s Bank of China (PBoC) show China’s domestic yuandenominated bonds market expanded 3.1% in 2010 to RMB5.1 trillion (US$773.3 billion). National debt, debt issued by policy banks and short-term ﬁnancing bonds are the main products driving the expansion. PBoC data show China’s interbank market increased 22% year-on-year to RMB15.8 trillion, including RMB1.7 trillion in bonds

MARCH 2011

INSIGHT

issued by the Ministry of Finance. China’s interbank market currently is limited to China’s Finance and Railways ministries, policy and commercial banks and other ﬁnancial institutions. PBoC opened the interbank market to foreign ﬁnancial institutions on a trial basis last year. CORPORATE NEWS

PetroChina inks natural gas venture A subsidiary of PetroChina Co. and Calgary-based energy firm Encana Corp. announced a 50-50 joint venture to develop natural gas reserves in Canada’s British Columbia and Alberta provinces. If approved by Canadian regulators, PetroChina would pay US$5.43 billion for a 50% stake in Encana’s assets in an area covering 635,000 acres named Cutbank Ridge. The deal would be China’s largest ever investment in Canada’s energy sector. The venture is expected to help speed along production in difficult-to-extract shale and deep gas wells that include one trillion cubic feet of proven natural gas reserves and processing capacity of about 700 million cubic feet per day. The companies would split the profits and costs needed for further development on the site.

AgBank acquires insurance business Agricultural Bank of China (AgBank) announced it will pay RMB2.6 billion (US$392 million) to acquire a 51% stake in Jiahe Life Insurance Co. The deal involves AgBank’s purchasing slightly over one billion new shares issued by Jiahe Life, making AgBank the insurer’s majority shareholder. When complete, the acquisition will provide China’s fourth largest lender access to a booming domestic insurance market, which AgBank plans to tailor to residents in China’s rural areas. Jiahe Life was founded in Beijing in 2005 and has grown to 15 subsidiaries nationwide. The company oﬀers life, health, medical and accident insurances.

Six-megawatt wind turbine slated for launch Sinovel Wind Group Co. announced that

INSIGHT

it will launch China’s first independentlydeveloped six-megawatt wind turbine this June, boosting China’s growing Greentech industry. Sinovel also has claim to the nation’s first self-made five-megawatt turbine, launched last October. The company is turning attention to the development of a 10-megawatt wind turbine. Sinovel is China’s largest wind power maker and the world’s third largest by installed capacity, trailing Spain’s Vestas Wind Systems A/S and General Electric Co. In 2010, China became the world’s No. 1 wind energy market with a total of 41.8 gigawatts of capacity.

Dalian brewer under new ownership Japanese beer maker Kirin Holdings Co. will sell its entire 25% stake in Dalian Daxue Brewery Co. for an unspeciﬁed amount to Belgium-based global giant AnheuserBusch InBev NV. Once approved, Dalian Daxue will become a wholly owned subsidiary of Anheuser-Busch. Dalian Daxue was established in 2001 and has an annual capacity of 280,000 kiloliters of beer; it sold more than 200,000 kiloliters of product in 2010. Kirin has held its share in the company since 2004 and will maintain its other China-based subsidiaries, Kirin Brewery (Zhuhai) Co. and Hangzhou Qiandaohu Brewery Co. Previously, Kirin announced a non-alcoholic beverage joint venture in China with China Resources Enterprise Ltd. to help develop new product categories and reach new markets throughout China. MACROECONOMICS

China’s economy ofﬁcially No. 2 It is now oﬃcial: China is the world’s second-largest economy behind only the United States. Economic data released by Japan show its nominal GDP in 2010 was US$5.5 trillion, a 3.9% expansion yearon-year but below the US$5.9 trillion in nominal GDP China recorded last year. Japan’s economy had claimed the world’s No. 2 spot for 42 years after overtaking the former West Germany. But weak domestic demand, slowing export growth and a rising yen are weighing down Japan’s economy.

MARCH 2011

Meanwhile, China’s economy continues to expand rapidly, posting 10.3% growth in 2010, up from 9.2% in 2009.

CPI rises 4.9% nationally Official data show China’s Consumer Price Index (CPI), a major gauge of inflation, increased 4.9% in January yearon-year, up from 4.6% last December but below the more than two-year high of 5.1% recorded last November. Food continues to be one of the major drivers of growing inflation pressures. Prices on the majority of 29 foodstuff that the statistics bureau tracks increased in early February, led by a 10.1% surge on bananas and 7.9% on celery. China’s Producer Price Index, which tracts wholesale price levels, edged up 6.6% in January year-on-year and is above December’s 5.9% increase. In Shanghai, the city’s CPI in January increased 4.3%, easing slightly from 4.5% last December and coming in below the national average.

Import growth narrows trade surplus Customs data show China’s foreign trade surplus in January narrowed 54% yearon-year to US$6.5 billion due to strong domestic demand over the Lunar New Year and higher commodity import prices. Imports sped up 51% to US$144.2 billion, up from 26% growth last December. Exports grew 38% in January to US$150.7 billion, compared to an 18% increase last December. China’s trade surplus with the U.S. expanded 24% in January year-onyear to US$13.6 billion.

China’s manufacturing sector slows China’s Purchasing Managers Index (PMI), a key measure of the country’s manufacturing sector, shows manufacturing growth slowed in January to a ﬁve-month low. The PMI reading slid to 52.9% in January, a drop from December’s 53.9%, according to the China Federation of Logistics and Purchasing. China’s manufacturing sector has achieved a reading above 50, indicating expansion, for 23 consecutive months. The monthly slowdown is attributed to the

government’s eﬀorts to tame inﬂationary pressures, as well as the impact of increasing costs and decreasing orders. Analysts anticipate the PMI will drop further over the coming months given remaining economic uncertainty. U.S. - CHINA

Chesapeake-CNOOC strike energy deal Oklahoma-based Chesapeake Energy Corp. and the China National Oﬀshore Oil Corp. (CNOOC) reached their second shale oil deal in less than half a year, which will amount to a value of US$1.27 billion. Under the deal, CNOOC will acquire a 33.3% minority stake in Chesapeake’s oil and natural gas operations in Colorado and Wyoming, covering 800,000 acres. CNOOC will pay US$570 million initially and an additional US$697 million by the end of 2014. CNOOC will also cover two thirds of Chesapeake’s drilling and completion costs until the additional funds are paid. CNOOC’s other shale deal with Chesapeake occurred in October 2009 when it purchased a 33.3% stake in Chesapeake’s oil and natural gas operations in south Texas for US$1.1 billion.

Huawei aborts U.S. acquisition attempt Huawei Technologies Co. recently announced it is abruptly ending its bid to gain approval for technology patents that it purchased from California-based 3Leaf Systems in May 2010. The Shenzhen-based phone networks maker initially declined a request from the Committee on Foreign Investment in the United States (CFIUS) to voluntarily cancel the acquisition, saying it would wait for the outcome of a presidential review before selling the assets. The US$2 million deal has faced scrutiny from U.S. lawmakers on national security grounds. In 2008, Huawei abandoned a takeover bid of rival 3Com Corp. because of the U.S.’s national security objections.

China slims its U.S.Treasurys holdings U.S. Treasury Department data shows

China was a net seller of U.S. Treasurys last December for the second consecutive month. China sold US$4 billion, or 0.4%, of its Treasurys last December, dropping its holdings to US$891.6 billion. December’s sale is smaller than the US$11.2 billion China sold last November, ending four consecutive months of net buying. China remains the largest holder of U.S. government debt. Overall, overseas demand for U.S. Treasurys and bonds has slowed, with net purchases amounting to US$54.6 billion in December, down from US$61.7 billion in November. Net purchases of long-term U.S. securities fell 23% in December from the previous month to US$65.9 billion.

NASDAQ rings in the Year of the Rabbit On February 3, NASDAQ marked the Year of the Rabbit with an opening ceremony featuring Peng Keyu, consul general of the Chinese Consulate General in New York. “NASDAQ is well known and respected in China, not only for its economic and ﬁnancial clout, but also for its endeavor to promote inter-cultural understanding and people to people exchanges,” says Peng, who rang NASDAQ’s oﬃcial Opening Bell to signal a start to the day’s trading. The number of Chinese companies listed on the NASDAQ amounts to 170, up from 70 three years ago. Among those listed are Chinese heavyweights Baidu Inc. and Ctrip.com International Ltd. GOVERNMENT & POLICY

Foreign M&A deals face increased scrutiny China’s State Council is establishing a ministerial-level panel to review national security concerns and other implications of foreign mergers and acquisitions of Chinese ﬁrms. The National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) will lead the panel’s review of international deals involving defense, agriculture, energy, resources, infrastructure, transportation and equipment-manufacturing and technology industries. The panel will assess deals on the grounds of national security,

economic stability, social order and implications to China’s R&D capabilities for national defense. The new rules are slated to go into eﬀect in early March and ﬁll in procedures launched under China’s 2008 anti-monopoly law.

PBoC hikes interest rates The People’s Bank of China (PBoC) is raising interest rates for the third time since last October, as inﬂationary pressures continue to build in China. PBoC is adding a 0.25% increase both to the nation’s benchmark one-year deposit rate and the one-year lending rate, to 3% and 6.06%, respectively. The latest move is in line with Beijing’s targeting inﬂationary pressures in certain areas of the economy, particularly asset holdings and food. Some industry watchers anticipate Beijing will announce another round of rate hikes this year combined with other policy measures to prevent further price escalation.

China maintains suspension on coal exploration The Ministry of Land and Resources announced that China will continue to suspend coal exploration permits through 2013. The move extends an earlier suspension that went into eﬀect in March 2009 and was due to expire at the end of March. Previously, China halted coal exploration rights between February 2, 2007 and December 31, 2008, in an eﬀort to prevent both over-mining and “overheated investment in coal mine exploration, which may result in excess production capacity,” says the ministry. China is limiting the process of seeking coal exploration rights to “key coal mine projects” approved by the State Council or those given special exploration funds and approval from the ministry. SHANGHAI BUSINESS

Shanghai’s economy expands but pace moderates Government data show Shanghai’s economy expanded in January, albeit moderating as the Lunar New Year approached. Figures show the city’s

MARCH 2011

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industrial output grew 14% year-on-year to RMB255.7 billion (US$38.8 billion) in January but at a slower pace than 2010’s 18.4% average. Production among key industries, such as electronics and machinery equipment, is also moderating to 11.7% year-on-year, slowing from last year’s 14% average. Trade is growing strongly with imports surging 46% to US$18.7 billion and exports increasing 24% to US$16.4 billion. Relatedly, Shanghai-based Chinese companies are stepping up overseas investments, committing funds to 301 overseas projects in 2010 that amount to US$2.4 billion, a 57% jump year-on-year.

Housing prices continue rise, sales plunge Data from Shanghai’s existing housing index show citywide property prices increased nine points in January over last December and for the ﬁfth consecutive month. The average price of existing homes in 62 of the 72 areas monitored for price ﬂuctuations increased 0.46%.

INSIGHT

However, data from Shanghai Uwin Real Estate Information Services show a total of only 38,000 square meters of new homes were sold over about the ﬁrst two weeks of February, compared to one million square meters sold last January. To combat rising prices, Shanghai is cutting oﬀ sales on third or more homes among residents and second-home sales among non-residents. China is awaiting results of property tax pilots in Shanghai and Chongqing before implementing an anticipated nationwide property tax.

Yangpu tries to draw overseas Chinese home Shanghai’s Yangpu District is offering RMB1 million (US$152,000) to encourage overseas Chinese to return home to start a qualified business in Yangpu District. The program is aimed at the millions of Chinese living overseas, including the more than three million Chinese living in the U.S., predominately in New York and California. In addition to an initial RMB1 million, startups will receive free office

MARCH 2011

space and will have access to a guaranteed RMB2 million loan. Yangpu District’s innovation and enterprising base will determine whether projects qualify under the program.

Shanghai outlines five-year tourism vision The Shanghai Municipal Government is pledging to build Shanghai into a tourism hub over the next five years by encouraging both inbound and outbound tourism in the city. In Shanghai, the government plans to develop a wide range of attractions that appeal to different cultural backgrounds and spending brackets, including conference and exhibition centers, cruise trips, ecological tours and theme parks. The city is planning to upgrade its travel information centers, which number 45, and is looking at policies to support the tourism market, such as tax rebates for overseas tourists. The government will promote existing but underused bank financing services to encourage local residents to travel outside the city.

CHINA & THE WORLD

SOUTH AMERICA ASIA-PACIFIC

SINGAPORE: RMB deposit services expand HSBC is expanding the reach of its overseas yuan-denominated banking services to Singapore, becoming at least the second bank to offer such services there. The move opens opportunities for customers in Singapore looking to gain access to yuan for investment purposes and to diversify their investment holdings. HSBC says 20% of Singaporeans hold foreign currency deposits. HSBC’s yuandenominated deposit services are also available in Hong Kong, Malaysia and Japan, complementing China’s drive to internationalize the yuan. Previously, Singapore’s DBS Bank began offering yuandenominated investment services to help its customers buy the currency in Hong Kong.

MIDDLE EAST

ASIA-PACIFIC EUROPE

AFRICA

SUDAN: China to build airport in capital city of Khartoum The Hong Kong subsidiary of state-owned China Communications Construction Co. will build a new US$1.2 billion international airport to serve the Sudanese capital, Khartoum. The deal involves the construction of a runway long enough to accommodate a giant Airbus A380 jet, as well as other airport facilities. When complete, the airport is expected to boost Sudan’s international ties, which will be important for the sanction-hit country. As Sudan’s largest investor, China has made investments in Sudan’s oil sector and helped with the country’s infrastructure development.

EUROPE MIDDLE EAST

NETHERLANDS: Shell, Wison collaborate on clean energy Shell Global Solutions International, a unit of Royal Dutch Shell PLC, and Shanghai-based Wison Engineering Ltd. are teaming up to develop a “hybrid” gasiﬁcation technology demonstration plant in China. The new technology is known as “dry-feed, bottom-water quench” and builds upon existing gasiﬁcation technology, which converts coal into synthetic gas. The hybrid technology uses state-ofthe-art bottom-water quench technology to process a wider range of feedstock at a lower cost. The joint project combines aspects of Shell’s technology design with Wison’s experience in project design and engineering, leading to cleaner use of China’s large coal resources and potential to expand the market for synthetic gas.

NORTH AMERICA MIDDLE EAST

ISRAEL: China signs 500K-ton potash order Israel Chemicals Ltd., a fertilizer and specialty chemicals company, won contracts to supply several China-based customers with a total of 500,000 tons of potash over the ﬁrst six months of 2011. Potash is a potassium compound used to make fertilizer. With the latest deal, Israel Chemicals is well on its way to matching the 620,000 tons of potash it exported to China in 2010. The contract price is not speciﬁed, but the company says the price of potash is about US$50 per ton more than in 2010. According to the company, Israel Chemicals is the world’s sixth largest potash producer, mining 4.1 million tons of the material in 2009.

AFRICA

SOUTH AMERICA MIDDLE EAST AFRICA

NORTH AMERICA

CANADA: IMAX to expand China presence Toronto-based IMAX Corp. and Jiangsu Eudemonia Blue Ocean Cinema Development Co., a wholly-owned subsidiary of the state-owned Jiangsu Broadcasting Corp., announced an agreement to build four new digital IMAX theaters in China. The partnership allows IMAX to bring its big screens to moviegoers in Suzhou and Xuzhou in Jiangsu province, Kunming, capital city of Yunnan province, and Taizhou in Zhejiang province. Construction on the Suzhou theater will begin this August and in 2014 for the remaining three. IMAX is planning to rapidly grow its China business by building over 100 new theaters in China in the near future, up from 40 today, and lowering ticket prices to attract customers.

SOUTH AMERICA

NORTH AMERICA SOUTH AMERICA EUROPE

AFRICA ASIA-PACIFIC NORTH AMERICA

COLOMBIA: China proposing transcontinental rail link China is in talks with Colombia to build a nearly 140-mile railway that would link the country’s Atlantic and Paciﬁc coasts. A transcontinental railway nearly three times as long as the nearby Panama Canal would help boost trade links for China and build up Colombia’s infrastructure. The proposal also includes the construction of a new Colombian city near the Atlantic coast to assemble Chinese exports, which would help China reach Latin American destinations. The project has an estimated cost of US$7.6 billion and would be operated by the China Railway Group. China-Colombia bilateral trade reached more than US$5 billion in 2010, making China Colombia’s second largest trading partner.

ASIA-PACIFIC

MARCH 2011

SOUTH AMERICA ASIA-PACIFIC

INSIGHT

L E G A L A N A LY S I S

BY SHU LIU

IMAGINECHINA

In the wake of a high proﬁle dispute, China’s Ministry of Industry and Information Technology seeks greater protection of Internet users’ rights and interests.

he Ministry of Industry and Information Technology of China (MIIT) released the Interim Measures on the Supervision and Administration of the Internet Information Service Market (Measures) in January 2011. The Measures are a short document with a challenging task: to maintain fair and orderly competition in the Internet information service market while protecting the legitimate rights and interests of its users. To those who witnessed the battle between Tencent and Qihoo late last year, it is clear that the Measures are MIIT’s direct answer to this kind of problem. Tencent built its Internet empire around its most successful product, QQ, an instant messaging (IM) tool that dominates China’s IM market. Since the beginning of 2010, Tencent has been trying to expand into the antivirus software market by bundling its own security software with QQ, thus threatening Qihoo’s 360, the leading product on China’s antivirus software market.

The Qihoo-Tencent dispute In October 2010, Qihoo claimed QQ was secretly spying on its users and collecting data without their approval. To solve such security problems, Qihoo launched new security software that blocked certain functions of QQ. It soon became extremely popular among QQ users. Tencent claimed that

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MARCH 2011

Draft Internet Measures Inspired by Battle between Tencent and Qihoo it was malicious software that kidnapped QQ and announced in November 2010 that it would disable QQ in all computers that installed Qihoo’s new security software. Hundreds of millions of users in China were forced to either uninstall QQ or Qihoo’s security software. During the dispute, each company also used numerous pop-up windows on users’ computers that attacked the other company and released evaluation reports claiming that the other company’s software was malicious and thus illegal. Netizens complained that the two companies cared more about their business interests than their users and that their customers’ own computers became their battleﬁeld. Lawyers and scholars commented that the companies violated the Anti Unfair Competition Law and the Law on the Protection of the Rights and Interests of Consumers, and that Tencent’s acts violated the Antitrust Law. MIIT quickly took control by holding internal meetings with the two companies, ordering them to stop the ﬁght, resume their products’ compatibility and apologize to users. MIIT also said it would, with other relevant authorities, further investigate their conduct.

MIIT’s response The detailed provisions of the Measures are clearly tailored to the conduct of the two companies in this dispute. They forbid unfair competition practices

such as defaming competitors or their products, unjustiﬁably rendering other’s legitimate products incompatible, interfering with the operations of legitimate products, and misleading, deceiving or forcing users to uninstall or stop a competitor’s legitimate products. Under the Measures, Internet information service providers should be very careful about criticizing other providers’ products or services. The Measures state that, when one provider raises a question about the security, privacy protection or quality of another provider’s products or services, the former cannot publish an evaluation report by itself. Instead, it has to submit the questions to a third-party authority for evaluation. Forcibly bundling software and interfering with pop-up windows are expressly forbidden. The Measures also require Internet information service providers to ensure the safety of users’ personal information and forbid them from collecting, processing or disclosing users’ personal information without explicit authorization by law or explicit consent of users. An entire chapter of the Measures is devoted to dispute resolution. MIIT encourages the Internet industry to be self-disciplined, solving disputes through negotiation or mediation organized by industrial associations. However, MIIT and its local branches may play important roles as arbitrators. Article 18 states that once MIIT or one of its local branches issues a mediation opinion on the dispute, disputing parties must execute it before the deadline stipulated by the opinion. The Measures do not specify whether disputing parties may appeal the opinion under the Administrative Procedure Law or initiate a lawsuit against the other party after the issuance of the opinion.

The challenges of implementation Punishment for violating the Measures may not be enough to deter undesirable conduct. Violation of the provisions on unfair competition practices may result in ﬁnes between RMB100,000 to RMB1 million. Violation of the provisions on users’ interests and privacy can result in ﬁnes ranging from RMB10,000 to RMB100,000. However, for a company like

Tencent, whose gross profit in 2009 exceeded RMB8 billion, even a fine of RMB1 million seems nominal. Overall, the Measures show the authority’s efforts to regulate the Internet information service market and to protect users from unethical market competition. There are now more than 400 million netizens in China and the QQ-360 battle had a tremendous impact on many of them. MIIT’s release of the Measures sends a strong signal that it intends to intervene if a large number of netizens are affected. The Measures, however, overlap with other laws on competition and consumer protection. This leads to potential conflicts among overlapping laws and difficulties in coordination among different government departments. For example, according to the Anti-Unfair Competition Law, the administrative authority for industry and commerce has jurisdiction over unfair competition. But in the Measures, MIIT claims jurisdiction over unfair competition in the Internet information service market. Article 3 of the Measures state that when other administrative departments are involved, MIIT should contact the relevant authorities for joint administration of the matter. How this coordination will be accomplished, however, is still unclear. Lastly, there are lingering questions about the role of MIIT. Hundreds of millions users experienced QQ and 360 incompatibility, and MIIT made the two companies reach a solution in a matter of days thus ending the dispute. The Measures show that MIIT will continue to rely on its administrative power to regulate the market.

Conclusions The Measures are not final so they may still be subject to change. Even so, for Internet companies, the government’s efforts to regulate the Internet information service market are well worth noting. The MIIT is expanding its power to resolve disputes quickly at the administrative level. Companies should be more careful in criticizing their competitors, even if it appears fair and justifiable, and users’ interests should always be a company’s first concern. Shu Liu works at Davis Wright Tremaine LLP, Shanghai.

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“

Overall, the Measures show the authority’s efforts to regulate the Internet information service market and to protect users from unethical market competition.”..”

BUSINESS BOOKSHELF BY DEAN HO

The Party and Us

ichard McGregor’s new book “The Party” (Harper Collins, 2010) is sure to draw readers thirsting for insights on China’s governance and its prospects. It should also fascinate Shanghai’s business managers – particularly those who dealt with the Chinese enterprise in the 1990s. McGregor brings together seemingly unconnected events through the lens of his experience as the Financial Times Beijing Bureau Chief and its long-time correspondent in Shanghai. His research brings valuable insight in two respects. First, he drives us toward the intersection of the CCP and Chinese enterprise management. He describes pivotal meetings and policies that gave rise to current enterprise governance. Second, he sheds light on the strategy and mechanisms by which the CCP recently regained control of Shanghai. As to the CCP and the enterprise, McGregor describes how the CCP dealt with change from a government-owned workplace to one owned more increasingly by private citizens, foreigners and private investors. To preserve its inﬂuence, the Party decides to vet management, indoctrinate candidates and infuse its members into positions of control. McGregor pegs the transformational decisions that made that subtle shift possible. Paralleling the execution of this policy, China’s business expanded. The policy is now 15 years old and should be near full bloom. Outcomes are being shaped by a novel mix of compensation that includes political reward. This last detail should be of interest to foreign managers. At the time, we saw the policy as privatization and soothed ourselves observing, “Why, they are just like us!” Wrong. McGregor begins this part of the story in 1993, when the CCP moved beyond the bounds of government and injected itself into the heart of enterprise management. The Party adds this dimension to understanding management counterparts across acquisitions, mergers, joint ventures, suppliers and customers.

To the extent that change takes place in obscure events, McGregor’s insights sharpen my sensors. My second take-away is juicier. Foreigners in Shanghai love news of a good crime ﬁght and McGregor’s stories bring to mind a Chinese Eliot Ness with a nasty streak. In 2003, a property developer is nabbed for cheating displaced residents in the prestigious Jing’an district. In rapid succession, a Shanghai apparatchik is jailed for diverting pension money and the steps lead up to the Shanghai Party Secretary himself. And others fall. At the time, I heard pundits chortle that only when the outcome is certain will CCP Secretary Hu alight in Shanghai. He did so in 2005. McGregor lays out a deft and symbolic act of a power haircut. The Hengshan Moller Villa, the well-known landmark on Shaanxi South Road, becomes home to the inquisition and its fantastic design is now enriched in this Grimm Tale. The author devotes a full chapter to these and other events surrounding the “Shanghai Gang.” At the time they took place, I saw these events in isolation. But McGregor weaves the proceedings into a chilling case of Beijing’s bringing Shanghai to heel. Granting legitimacy to each of the actions, I ask the question anew: In the struggle to keep control, can the CCP allow Shanghai to achieve the character and prestige of New York, Singapore or London? This book is a great read and a serious reference for anyone interested in the inner workings of China. Dean Ho has lived in Shanghai since 1987. He is a founding member and former Chairman of the Chamber’s Manufacturers’ Business Council. He served as Chairman of the Board of Governors of AmCham Shanghai in 1999.

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S P OT L I G H T

A Thriving Business Environment

Despite the challenges, U.S. companies are thriving in China.

espite challenging market conditions and an increasingly competitive business environment, U.S. companies in China closed out 2010 with all-time performance highs and remain optimistic about their business prospects. The AmCham Shanghai 2010– 2011 China Business Report, which highlights the results of the Chamber’s annual survey of business performance in China, finds U.S. companies continue to show impressive financial results in China. Performance shot up in 2010 following what had been an uneven period of growth between 2008 and 2009. However, U.S. companies also report that China remains a challenging business environment for a host of reasons. Recruiting and retaining qualified staff is the No. 1 business challenge, and competition is picking up not only between U.S. and other foreign companies but between U.S. and Chinese companies – both private and stateowned. In addition, issues related to a problematic regulatory environment remain a top hurdle that can hinder growth, and in some industries threatens full and fair access to the China market.

A snapshot of U.S. companies in China First launched in 1999, AmCham Shanghai’s business climate survey is one of the longest running and most comprehensive surveys of American companies in China. This year’s survey was conducted online from mid-November to early December 2010. It was sent to AmCham Shanghai corporate members – all of whom are U.S.-based companies with operations in China. A total of 346 companies participated, yielding a response rate of 25 percent. This year’s respondents include a variety of companies of all sizes competing in vastly different

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sectors and industries. Manufacturing companies comprise 32 percent of the sample. One third fall into the services sector and six percent of the sample are retail companies. Rounding out the study, 27 percent of companies operate some combination of manufacturing, services and retail businesses. The survey includes responses from 19 industries ranging from the automotive industry to agriculture to telecoms and more.

Performance in 2010 U.S. companies in China had a strong year in 2010 and are poised for a very good 2011. This year’s survey results show that all key business indicators – profitability, revenue growth and operating margins – jumped in 2010, in some cases, substantially over 2008 and 2009. A record 79 percent of U.S. companies stated their China operations were either “very profitable” or “profitable” in 2010, up from 65 percent in 2009 and 70 percent in 2008. The percentage of companies reporting year-on-year revenue growth exceeding 10 percent more than doubled in 2010 compared to 2009. Between 2008 and 2010, the percentage of companies reporting an improvement in operating margins from the previous year doubled to 66 percent. Nearly half of all U.S. companies polled report that their operating margins were higher for China compared to their worldwide margins – another survey record. Many U.S. companies emerged from the economic downturn with a larger share of the China market in 2010. Nearly 61 percent of U.S. companies surveyed stated that they gained market share for their China products or services, up from 40 percent in 2009 and 52 percent in 2008.

Optimistic about 2011 U.S. companies are conﬁdent about their future

business prospects in China. A solid majority of companies (71 percent) report that they expect to increase revenue in China by more than 10 percent in 2011. An overwhelming 90 percent of companies say they have an “optimistic” or “slightly optimistic” outlook for their China business over the next ﬁve years. American investment in China is projected to not only continue in 2011 but to increase substantially over 2010 when many U.S. companies hit the pause button as a result of the economic downturn. Survey results indicate that the 41 percent of those surveyed expect to increase their investment in China by more than 15 percent in 2011 – double that of the forecast for 2010. A further indicator of the importance of the China market for U.S. companies is that China ranks as a top-three priority for roughly two thirds of U.S. companies and the No. 1 priority for 20 percent of them. “There has always been a great deal of optimism about the China market, mostly based on the hope of future opportunity,” says Steven Ganster, managing director of Technomic Asia, AmCham Shanghai’s supporting partner in this year’s report. “But now we’re seeing a more ‘mature’ or seasoned optimism, grounded in the reality that succeeding in China is critical to the future of the company no matter the challenges it presents.”

Major business challenges As in past years, this year’s survey asked U.S. companies to rank their top challenges to doing business in China. Concerns are evident in terms of operational challenges and a problematic regulatory environment that companies feel is not improving. U.S. companies state, as they have in past surveys, that finding, hiring and retaining qualified staff is their No. 1 business challenge. Human resource (HR) constraints were identified as the top operational challenge among 28 percent of companies surveyed. Roughly three times as many respondents this year identify HR constraints as their No. 1 business challenge versus the next highest challenge.

Competition is also picking up, not only between U.S. and other foreign companies but between U.S. and Chinese companies. Private Chinese companies and state-owned enterprises (SOEs) are playing a bigger role in China’s hypercompetitive market. The percentage of companies that feel competition from Chinese companies has “increased,” jumping to 72 percent in 2010, up from 56 percent in 2009. Issues related to a problematic regulatory environment remain a top operational hurdle that hinders growth and, in some industries, threatens full and fair access to the China market. Nearly two thirds of companies surveyed characterize the regulatory environment in which their industry operates as either “not changing” or “deteriorating” over the past year. Factors contributing to this outlook include inconsistent regulatory interpretation, unclear regulations, bureaucracy and a lack of transparency. U.S. companies are concerned about the risk of rising protectionism and inadequate enforcement of intellectual property rights (IPR). Among companies surveyed, 70 percent say that IPR continues to be a “critically important” or “very important” issue with over two thirds reporting enforcement of IPR in China has “stayed the same.” Bureaucratic licensing procedures, information restrictions and uneven enforcement standards all present daily operational challenges that can hinder growth. Companies point to uncertainty regarding the potential impact of regulations on foreign investment in certain technology industries. U.S. companies are also concerned about rising protectionism risks in China that have the potential to limit market access for U.S. products and services. Survey results show that 48 percent of companies report perceiving a regulatory environment that favors local Chinese companies over foreign rivals. China’s government procurement rules and “indigenous innovation” policies, which promote bringing to market home-grown technologies, may restrict opportunities for foreign companies

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An ‘In China for China’ strategy is one of the key shared characteristics of companies that score high on the Success, Conﬁdence and Welcoming indices.”..”

to compete fairly in China’s growing procurement market valued at almost US$100 billion. While most U.S. companies have not yet been impacted by China’s indigenous innovation policies, half of all survey respondents are either “very concerned” or “somewhat concerned” about the future impact to their business.

An increasingly complex market Just as there is no one “China market,” there is no single description that accurately depicts a U.S. company with operations in China. As the China market matures, the size, scope and breadth of U.S. companies active in China are increasingly representative of the diverse makeup of business in the U.S. market. New in this year’s report, AmCham looked at 2010 survey results and 2011 projections by major business sectors – manufacturing, services and retail – and by a number of notable industries for U.S. companies in China, including automobiles, energy, healthcare and chemicals. The sectors and industries were compared not only by common business performance indicators but by results to three broad indices: Success, Confidence and Welcoming. The findings, quantified in AmCham Shanghai’s China Business Climate Indices, were used as an analytical tool to group companies in a way that is meaningful to business performance in China. The goal was to measure performance quantitatively, thereby offering a more accurate and objective analysis in which to assess the survey results against key sectors and industries. Opportunities and challenges in China vary by the market sector and industry in which they compete. The results of the China Business Climate Indices reveal that the services sector faces the most challenges compared to manufacturing and retail sectors, which both are relatively more successful and have a stronger positive outlook moving forward. Results show the retail sector scores the strongest across all three Successful, Confident and Welcoming indicators. Among industries, the industrial electronics industry ranks as the most Successful, the automotive industry the most Confident and the chemicals industry the highest

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in the Welcoming index.

In China for China Another key takeaway of the report shows that the most highly performing U.S. companies continue to focus on competing in China’s rapidly expanding domestic market. An “In China for China” strategy is one of the key shared characteristics of companies that score high on the Success, Confidence and Welcoming indices. A strong majority of companies surveyed report producing or sourcing goods or services in China for the China market as their companies’ primary strategy, roughly at the same level as 2009 and over the 39 percent reported in 2008. In addition, 58 percent report that they import finished goods or parts from the U.S. into China to support their China operations. “Goodyear is ‘in China for China,’” says Pierre E. Cohade, president of Goodyear Asia Pacific. “Our biggest challenge is enhancing our production capability and talent pool to keep up with the demands of an increasingly competitive China market. To be successful, companies must invest in building both capacity and capabilities and apply best global business practices to perform well in this market.”

Is China a “welcoming” market? 2010 survey results indicate that, while some U.S. companies do not necessarily consider China as welcoming a business environment as they would prefer, they are nonetheless quite conﬁdent in their future business in the country. While there are challenges to be addressed, U.S. companies base their conﬁdence in the China market much more heavily on the fundamentals of market growth potential than they do on China’s shifting regulatory environment. For a complete version of the 2010-2011 China Business Report Executive Summary and Analysis of Results, go to www.amcham-shanghai. org/Chinabusinessreport. To purchase the entire report, email Rachel.jia@amcham-shanghai.org.

POLICY INSIGHT

BY ASHLEY CAHILL

fter a year of what most observers have called a challenging period in the U.S.-China relationship, Chinese President Hu Jintao’s arrival in Washington, D.C. on January 19 was greeted by all the pomp and circumstance that accompanies an official state visit: a military arrival ceremony, a 21-gun salute and an official state dinner. China did its part as well, arriving ready to do business with American companies. The presidential summit between President Hu Jintao and President Barack Obama was accompanied by announcements of trade and investment deals totaling more than US$47 billion. And in a clear effort to change the direction of souring U.S. public opinion, a vigorous public relations campaign was launched during Hu’s visit. “Experience China,” a campaign designed to promote a positive image of China, included a video broadcast in Times Square and television spots shown across the U.S. January’s Hu-Obama Summit came on the heels of the December U.S.-China Joint Commission on Commerce and Trade (JCCT) meeting and offered an opportunity for the two leaders to follow up on progress made at the JCCT. Taken together, the 21st session of the JCCT and the historic HuObama Summit are an important step forward in building the U.S.-China commercial relationship.

At the table Chinese Vice Premier Wang Qishan arrived in Washington with a delegation of nearly one hundred Chinese oﬃcials for the JCCT on December 14. The session was co-chaired by Vice Premier Wang, U.S. Commerce Secretary Gary Locke and U.S. Trade Representative Ron Kirk. Since 1983, the JCCT has served as the main platform for China and the U.S. to advance trade relations and promote commercial opportunities. The U.S. entered December’s discussions with the goals of

THE OFFICIAL WHITEHOUSE PHOTOSTREAM

A Joint Effort for Cooperation

strengthening intellectual property rights protection, eliminating discriminatory innovation policies and expanding market access for U.S. manufactured goods, agricultural products and services. Building on past JCCT sessions and the efforts of JCCT working groups throughout the year, the 21st JCCT session saw some positive developments. China announced stronger efforts to crack down on Internet piracy, including an intention to prosecute landlords who rent space to counterfeiters and a promise to address the purchase of illegal software. Chinese officials plan to promote the purchase of legal software through a pilot partnership project with 30 major Chinese state-owned enterprises. Additionally, China promised to allocate funds in current and future budgets for the replacement of pirated software used by China’s government itself. China announced its commitment to technology neutrality for 3G and future technologies, potentially opening the door for hopeful American telecommunications firms. With 3G infrastructure investment in China expected to reach between US$10 to US$12 billion in 2011, gaining market access to the Chinese market will be critical. Agriculture was an important matter of focus of the JCCT talks as well. U.S. agricultural exports to China in 2009 exceeded US$12 billion, approximately 17 percent of the total U.S. exports to China. However, most believe U.S. exports could be much greater. American farmers have been pushing for a reopening of the China beef market since China banned North American beef imports in 2003, after two cases of bovine spongiform encephalopathy, or mad cow disease, were discovered. While China

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Presidents Hu and Obama build on JCCT outcomes during Hu's ofﬁcial state visit in January.

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In preparation of Hu's visit, Chinese companies signed 70 contracts estimated to be worth US$25 billion in U.S. exports from 12 states.”

resumed imports of Canadian beef in June of 2010, U.S. beef has been effectively locked out of the market. Another major barrier is China’s refusal to remove an import ban on five specific cuts of meat out of concern that opening U.S. exports in these areas would impact China’s domestic producers. At the JCCT, China agreed to a staged opening of its beef market and to continue negotiations in 2011. During the meeting, China also lifted avian influenza-related bans on U.S. poultry products from Idaho and Kentucky. The U.S. requested similar bans be lifted from imports from four other states.

Supporting exports The announcement of billions of dollars in trade deals and investment helped ease, but not eliminate, trade tensions prior to the January 19 Summit. In preparation of Hu’s visit, Chinese companies signed 70 contracts estimated to be worth US$25 billion in U.S. exports from 12 states. Additionally, 11 investment contracts were signed worth more than US$3.2 billion. The deals span several industries, including chemicals, agriculture and machinery. China announced contracts with industry titans Honeywell, Navistar and Pratt & Whitney. General Electric (GE) inked deals in airplane electronics, high-speed rail and clean energy. According to the White House, the latest round of deals will create as many as 235,000 American jobs. In total, these deals, that included a US$19 billion deal for the purchase of 200 Boeing airplanes, are reportedly worth more than US$47 billion in increased exports. On top of these deals, Hu also announced during a trip to Chicago the purchase of 11.5 million tons of soybeans worth US$6.7 billion, the largest ever one-time purchase of U.S. soybeans. The deals serve not only to help support Obama’s National Export Initiative (NEI) to double U.S. exports over the next ﬁve years, but to underline U.S. exports to China as important to the creation of American jobs.

Productive engagement The 21st JCCT session laid the groundwork for further discussion on key commercial policy issues

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at the Hu-Obama Summit and resulted in a potential breakthrough related to Chinese government procurement practices. Incremental progress was made in enforcing China’s commitment to buy legal software for its governmental agencies. Since early 2010, the Obama administration has pressed China to modify its controversial “indigenous innovation” policies that encourage local competitiveness in certain industries by imposing what many consider discriminatory practices to limit the ability of foreign companies to bid on government contracts. Included in the Summit’s China-U.S. Joint Statement was China’s promise not to “link its innovation policies to the provision of government procurement preferences.” If followed through, China’s pledge would limit the impact of these policies. Although China joined the World Trade Organization (WTO) in 2001, it has yet to sign the Agreement on Government Procurement (GPA). The GPA is a legally binding agreement focused on government procurement practices and is based on the principles of transparency, openness and nondiscrimination. Another potential victory for U.S. companies competing in China’s US$100 billion government procurement market is China’s promise to include “sub-central entities,” or provincial and local government agencies, in its next offer to enter the GPA by the end of 2011. In its most recent offer in 2009, China committed only national government procurement to abide by GPA rules. China also pledged to conduct and publish its own audits to ensure that government agencies at all levels use legitimate software. However, this fell short of the independent audits that the U.S. software industry had been seeking in follow-up talks after the December JCCT. But, according to Assistant U.S. Trade Representative for China Claire Reade, China’s most recent commitment differs from previous promises because the new commitment is linked to agency auditing and involves a new set of ministries in monitoring the outcome.

The road ahead U.S. Secretary of Commerce Gary Locke, in an address to the US-China Business Council, called

the most recent JCCT meetings “productive” and the Chinese delegation “responsive.” While he conceded that the agreements of the JCCT were important as statements of principle and policy, he warned that they must “be turned into concrete action with results.” Locke described a multi-step process imperative to solving market access issues. For example, after making a statement of principle to address a problem, China must create binding laws that can be implemented at all levels of the government. Then, these laws must be accepted as a common way of doing business in China. Locke lamented that too often only the ﬁrst steps are implemented. In a recent address to AmCham Shanghai, Professor Shen Dingli, executive dean of Fudan University’s Institute of International Studies and director of the Center for American Studies, highlighted another key challenge facing the relationship: the issue of mutual mistrust. He

recommends that the U.S. and China “build mutual trust, understanding that China is committed to sustaining a stable relationship with America.” Despite the challenges, 2011 holds opportunities for the U.S.-China relationship. In Obama’s opening remarks at a private CEO roundtable attended by Hu and top U.S. business executives, Obama stressed that the U.S. “break out of the old stereotypes that somehow China is simply taking manufacturing jobs and taking advantage of low wages.” “The relationship is much more complex than that, and it has much more potential than that,” he remarked. Obama’s statements reﬂect a growing understanding that, as the relationship between the U.S. and China evolves, it is in both countries’ long term best interests to continue to search for ways to engage one another. Ashley Cahill is a contributor to Insight. She can be contacted at ashleyecahill@gmail.com.

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Despite the challenges, 2011 holds opportunities for the U.S.-China relationship.”

CONSUMER SERIES

B Y E S T H E R YO U N G

IMAGINECHINA

Deconstructing China’s Retail Consumers Companies must understand the subtleties of China’s consumer landscape to capture market share.

gainst a backdrop of strong economic growth, real per capita disposable household income in China doubled from RMB3,000 to RMB6,000 over the last decade. In a recent survey of households across China, 54 percent believe that their incomes will increase in 2011. Higher salaries and a positive outlook towards the future historically correspond to higher consumption rates, boding well for sales of everything from cleaning products to cars. In 2010, China’s retail sales grew at 18 percent, with 16 to 18 percent growth expected in 2011. Retailers are scrambling to carve out their niche among Chinese buyers, evident by the number of companies expanding into or entering

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the China market. Sporting goods retailer Adidas, for example, announced plans to open 500 stores in China in 2011. Clothing retailer Gap recently opened its China ﬂagship store in Shanghai. Apple Computer is looking to build its largest China store this year. Foreign retailers, it seems, are hoping to tap into what JPMorgan predicts to be “solid growth” in consumer demand in 2011. The Chinese government is unveiling plans to boost private consumption as it seeks to shift focus away from China’s export-based economy to a more sustainable domestic consumption model. To encourage spending, the government has implemented such policies as the expansion of consumer credit and building domestic infrastructure to ease logistical bottlenecks. A

tenet of China’s 12th Five-Year Plan (2011–2015) for development addresses building domestic consumption. The government is banking on the idea that domestic consumption can create more jobs per unit of investment, promote higher salaries per dollar invested and potentially spur entrepreneurship and innovation in a country seeking the next level of development. Although the retail market is expanding, challenges for driving growth include a high national savings rate and misperceptions about Chinese consumers purchasing behavior and patterns. Looking at the anatomy of the modern Chinese consumer can provide insight into the directions Chinese retail will follow and what actions retailers can take to meet their needs.

China’s new consumer class There is no one China market, and shopping habits vary across the Chinese demographic. Dollar-fordollar, the biggest spenders in China are young. Born or raised during the economic reforms of the 1980s that fueled China’s growth, they tend to be better educated, hold higher-paying jobs and live in first-tier coastal cities. With financial security and more access to retail choices, young, urban and educated consumers tend to spend more of their incomes than any other demographic in China. The triple costs of education, health and housing that may cause others to save may even have the opposite effect on this generation of spenders. With a square meter of property in Shanghai costing more than a square meter of property in Tokyo or New York relative to per capita income, and with 70 percent of consumers expecting housing prices to continue rising, some younger Chinese consumers are willing to forego property ownership to free up more spending money. “Housing costs are overwhelmingly expensive,” says Edward Yu, CEO of consumerresearch consultancy Analysys. “Young people don’t even bother saving for it.” The proportion of income that would otherwise go into real estate is thus shifted to more affordable rent, or in another likely scenario, young workers

may decide to live with relatives. In these cases, Yu speculates that savings act like disposable income, and these young consumers look to retail to “improve lifestyle and well being.” The act of shopping itself has become a lifestyle choice among the young, and their purchases reﬂect their pursuits. They disproportionately buy electronics, health products and household goods, which are similar to purchasing trends of the U.S.’s postWorld War II baby boomer era. Women are also more likely to spend on consumer products than men in China, with more of them joining the skilled job market due to ameliorating work conditions. A survey conducted by the China Market Research Group ﬁnds that 80 percent of Chinese women aged 22 to 32 plan to spend more over the next six months than they did in 2010. They are primarily spending their salaries on luxury goods, which are considered investments that could increase in value, as well as health and beauty-related products which may be seen as tools to improve their career prospects.

Savvy purchasing behavior Chinese consumers are displaying savvy spending habits that reflect a maturing consumer market. Buyers are seeking better value and quality across the board on all their products – and will pay more for it. Consumers increasingly focus on more intangible reasons to purchase products beyond their functionality. A 2010 study by McKinsey & Co. finds that 61 percent of laundry detergent buyers demand “good scents” (up from 40 percent in 2008) and “appealing package design” (from 16 percent in 2008 to 28 percent in 2010) as important considerations when choosing a detergent. In the wake of product safety scandals, consumers are also willing to buy more expensive products that guarantee safety. Shoppers are making their purchases based on personal values and are often willing to pay more for products that fit moral codes. The 2010 Green Brands Survey by Penn, Schoen & Berland Associates, for example, finds that Chinese consumers overwhelmingly value green products and 82 percent of survey takers indicate that they

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With ﬁnancial security and more access to retail choices, young, urban and educated consumers tend to spend more of their incomes than any other demographic in China.”

IMAGINECHINA

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Buyers are seeking better value and quality across the board on all their products – and will pay more for it.”

plan to spend “more” on green products or services in 2011. By comparison, 41 percent of consumers in France and 35 percent in the U.S. are willing to do the same though they also stated that they value green products. Chinese shoppers are also brand conscious, but balance it out with value. Though 45 percent of urban consumers believe that higher prices on any retail product correspond to better quality overall, they are not brand-loyal; 23 percent of shoppers will go out of their way to purchase items with the best price. Still, brands with proven track records are highly valued, and Chinese consumers will do more product research before making a purchase than their counterparts in developed nations. Many weigh media reviews or speak to those who have already made similar purchases. Word-ofmouth recommendations are highly regarded in China, and 36 percent of consumers will pay more for trusted products. Product research often takes time, but Chinese consumers are more willing to wait before purchasing a product to get the full spectrum of information. Chinese families on average spend three to six months on research before buying a computer and visit the store an average of four to ﬁve times to compare models. McKinsey reports

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that 73 percent of China’s urban citizens regard shopping as a leisure activity, with 45 percent choosing shopping as their favorite pursuit. Though shopping may be considered a pleasurable activity, many of these trips may not be accompanied by purchases and may instead be intended to survey purchase options. Chinese consumers tend to budget before buying anything and will spend within their income range and not on credit. Credit card usage in general is still limited in China. There are 0.13 credit cards per head of household in China, compared to 0.99 in the U.K. and 2.06 in the U.S., according to European consumer finance company Cofidis. While the rate reflects the relatively undeveloped credit card system in China, there is still an indication that Chinese consumers will ultimately purchase the best-value product within their means. Chinese shoppers look for products with an individual fit, which may extend beyond brand names. “Chinese shoppers have their own definitions of brands,” says Yu. “The known brands are not automatically the favorites. Nokia, for example, is the biggest brand in the world, but young consumers won’t necessarily purchase it. They chase smaller companies.” Part of the market fragmentation may even explain the development

of shanzhai products – those modified by local and individual retailers. Consumers may look to these individually tailored products to find features or services that fit their needs, price ranges and lifestyles.

Holding back: obstacles for spending and a look towards the future While the consumer outlook is positive, there are still challenges to translating spending power to actual consumption. Though young, urban residents may be spending more on consumer goods, the rest of China is not. Despite a growing economy and rapidly increasing income levels overall, private consumption among Chinese in 2010 accounted for 35 percent of the nation’s GDP – the lowest share among major advanced and emerging market economies. The U.S.’s and Japan’s consumption share, by comparison, stood at 71 percent and 55 percent, respectively. Part of the reason for a low consumption rate may be a reflection of substantial unmet demand for retail options. A survey by McKinsey indicates that trade services account for 18 percent of consumption in China’s rural areas, yet 70 percent of rural consumers indicate that they prefer retail outlets when they buy. A survey of residents in smaller cities shows that the more their incomes grow, the more likely they are willing to buy foreign goods. The Green Brands study reveals that consumers have difficulty finding environmentally friendly products. As savvy purchasers who heavily consider each purchase, consumers will wait instead of buying a product that does not exactly fit their needs or wants. The key to unlocking China’s market potential is to increase the reach and breadth of purchasing options that can meet the demands of these Chinese consumers. Yu believes that some of the greatest growth can be found moving away from the historically high-spending coast. “In the next 40 years, the growth engine will start moving inwards,” he says. “They are also increasing their income levels, they are also starting to seek higher living standards. They are becoming more used to spending.” The same traits may be applied to older generations,

which historically are China’s largest savers but are increasingly exposed to a changing way of life and more options that ﬁt their needs. Along with rapid growth, China’s consumer population is evolving. Technology, for example, has considerably changed the consumer landscape. The rapid expansion of Internet access in China has buyers tapping into a wider pool for recommendations and warnings about products. In addition, they have provided a platform for wider communities, with some gathering together online to make bulk purchases instead of having to rely on a close group of friends. Expanded use of the Internet also corresponds with an explosion of e-commerce. Chinese consumers increasingly look to online outlets to serve their value-driven purchase preferences and for access to a greater range of products. In 2009, an estimated 17 million individuals bought at least one item online. E-commerce sales were up 22 percent in 2010. With a generation of native Internet users now starting to gain income, e-commerce is set to grow. “E-retail won’t replace brick-and-mortar buildings,” says consumer analyst Bob Chao from iResearch. “But they will certainly play a main role in fueling the company’s sales.” E-commerce might be a viable option for retailers to access those in second- and- third tier cities. China is the place to watch for retailers. The China market holds great prospects for retailers, but only for those companies that seek to understand and embrace the market’s contradictions and capitalize on its trends. Some of the same established facets that characterize shopping in Western countries, including online portals and credit card usage, are still relatively new in China, and it remains to be seen how they will develop in the future.

Esther Young is Associate Editor of Insight. She can be contacted at esther.young@amcham-shanghai. org. This is the ﬁrst in a series of articles on the Chinese consumer. Turn to the next few issues of Insight for proﬁles of China’s retail markets and a look at how retailers are competing to meet changing consumer demands.

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The China market holds great prospects for retailers, but only for those companies that seek to understand and embrace the market’s contradictions and capitalize on its trends.”

F I N A N C E F E AT U R E

B Y RYA N B A L I S

IMACHIACHINA

The Yuan’s International Ambition An expanded role for the yuan is generating excitement and greater commercial use outside of mainland China.

s an economic powerhouse, China is in the unusual position of not having a national currency that plays a significant role globally. Data from the Swiss-based Bank for International Settlements’ 2010 Triennial Central Bank Survey illustrate the yuan’s global underrepresentation. In April 2010, 85 percent of all foreign exchange market activity involved the U.S. dollar on at least one side of the transaction, according to the survey. The yuan, also known as the renminbi (RMB), recorded only a 0.3 percent share worldwide. A global currency is a natural aspiration given China’s economic influence. China is working to achieve this goal by enhancing the international appeal, use and availability of the yuan, albeit cautiously and with a clear understanding of the long time frame necessary. “[M]aking the RMB an international currency will be a fairly long process,” acknowledges Chinese President Hu Jintao in written answers to the Wall Street Journal and the Washington Post earlier this year. An international yuan provides considerable benefits for China. Chinese companies already are finding that international trade in the local currency means trade settlement costs are potentially lower.

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A currency that eventually could have global reach as a reserve currency would increase China’s clout in world markets and complement the goahead from the State Council, China’s cabinet, for Shanghai to develop an international financial center by 2020. A widely accepted, frequently used and freely convertible currency will be key to realizing that vision. But China’s meeting the conditions necessary for an international currency means lifting control over tightly regulated financial and monetary systems. Capital controls strictly regulate cross-border currency flows, which helps China manage the yuan’s hotly debated exchange rate. The possibility for broad liberalization of the country’s currency regime over the long run is what U.S. companies see as the big prize. Currency internationalization could be the vehicle for punching through China’s “capital dam.” Whether the yuan becomes a major international currency is a story that will play out over the coming years or longer. Yet, China’s currency experiments already are garnering wider commercial appeal. Activity and interest in yuandenominated trade, investment and asset holdings outside the mainland are growing at a high rate, as commercial actors test the benefits of doing

business in yuan. But ﬁrst, what steps has China taken to internationalize the yuan?

Laying the foundation China’s most significant effort to position the yuan internationally occurred with its promoting wider use of the currency in foreign trade. China has accelerated its drive over the past year, tapping investor interest to increase the offshore availability, supply and attractiveness of the yuan. In 2009, the People’s Bank of China (PBoC), China’s central bank, took an important step by allowing qualified mainland-based companies to invoice and settle both import and export transactions in yuan under a pilot program. PBoC expanded the pilot in June 2010 and again last December. It is now available to more than 67,000 mainland companies, up from the original 365, in 16 Chinese regions without export destination restrictions. Building on the pilot, the State Administration of Foreign Exchange (SAFE), China’s foreign exchange regulator, announced last December that qualified Chinese exporters may keep foreign income overseas and may decide when to repatriate these funds to China. According to the Wall Street Journal, exporters had been required to immediately “surrender” foreign earnings for yuan. PBoC announced earlier this year that Chinese companies that are already qualified to settle cross-border trade in yuan may also make overseas investments in new ventures and mergers and acquisitions in yuan. Additional moves have followed to move the yuan towards internationalization. Starting next month, SAFE will allow domestic yuan options trading among Chinese banks, opening the potential for a more flexible exchange rate in the future. Businesses with legitimate hedging interests may buy the options to cover their exposure to currency swings but generally are restricted from selling these. China is concentrating on expanding offshore yuan offerings in Hong Kong, dubbed China’s “laboratory” for currency experiments.

McDonald’s became the first of a growing list of foreign companies there to sell yuan-denominated bonds following China’s deregulation of Hong Kong’s offshore yuan-denominated bond market last year, allowing foreign participation. These so-called “dim sum” bonds, which are also settled in yuan, have been allowed since 2007. But the market was relatively small because it was restricted to Chinese financial firms and the supply of existing offshore yuan was limited. Today, the dim sum market is growing in size and is broadening its reach. Foreign participants now include not only corporate institutions but also the World Bank whose RMB500 million bond sale last January is significant for its boosting the yuan’s international exposure and reputation. China is extending the geographical reach of the yuan. In the U.S., the state-controlled Bank of China recently began offering yuan-denominated financial services. In Russia, yuan-ruble trading began on the Moscow Interbank Currency Exchange (MICEX) last December. China has signed bilateral currency swap agreements with Hong Kong, South Korea, Singapore, Malaysia, Indonesia, Argentina, Iceland and Belarus, which amount to RMB802.3 billion (US$122.3 billion) over the past two years ending last December. The yuan is even finding its way to the Cayman Islands, according to reports that the Swiss-bank UBS is setting up a yuan-denominated fund in the Caribbean territory.

Increasing commercial activity China’s efforts are encouraging a greater volume of offshore and cross-border yuan-denominated commercial activity and generating foreign interest in holding the currency. The most progress has been seen in the areas of trade, investment and asset holdings. Trade Foreign companies, including McDonald’s, IKEA and Nokia, are testing the yuan in trade deals, reports the Financial Times, despite its limited use outside China. The yuan offers foreign companies with substantial business ties in China an

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China has accelerated its drive over the past year, tapping investor interest to increase the offshore availability, supply and attractiveness of the yuan.”

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Foreign companies are eager to tap the offshore yuan bond market to raise local currency cheaply and directly.”

opportunity to build stronger trading relationships with mainland partners and signals the importance of developing operations in China. For mainland companies, the major incentives are potentially lower trade settlement costs and practical benefits, including greater flexibility and convenience. Trade in a local currency removes the expense of acquiring foreign currency to complete a transaction. It also mitigates the impact of fluctuating exchange rates. A business decision for some international trade and investment companies is to hedge against a currency swing, leading to price and forecast inefficiencies. The numbers tell the story of how quickly the yuan has gained international commercial favor. Cross-border trade settled in yuan nearly quadrupled from a negligible amount before the trade settlement pilot was expanded to RMB385 billion (US$58.7 billion) by the end of November 2010, according to analysis by the Economist. Standard Chartered predicts China will process 20 percent of its imports in yuan by 2015, up from one percent as of last November. Investment Foreign companies are eager to tap the offshore yuan bond market to raise local currency cheaply and directly – i.e., acquiring yuan without the need to convert from a foreign currency. Han Lin, senior vice president at Wells Fargo Bank in Shanghai, points out that the market “offers foreign companies a critical capital markets tool to help hedge against expected yuan appreciation.” Caterpillar reportedly has obtained permission from Chinese regulators to remit capital from its RMB1 billion bond issued last November to support its financing business in China. Richard Lavin, a group president at Caterpillar, tells the New York Times that issuing the bond was less expensive than its borrowing from a mainland bank or trying to raise funds in dollars to convert later to yuan. For McDonald’s, the benefits of its RMB200 million bond appear to go beyond raising capital. The company’s landmark bond sale, though relatively little in amount for a multinational with over 1,000 restaurants in China, garnered

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substantial media coverage, “pleasing the Chinese government and raising the hamburger chain’s profile in the region,” reports the Financial Times. The dim sum market has shown robust development over the past year. In Hong Kong, foreign participation has helped to more than triple the market from RMB10 billion in 2007 to RMB35.7 billion (US$5.4 billion) in 2010, according to the Hong Kong Monetary Authority (HKMA), the territory’s de facto central bank, and Bloomberg, respectively. Only around 50 such bonds have been issued thus far because of a supply shortage. But HSBC predicts the market will expand, reaching RMB100 billion in new issuances annually by 2013. Asset holdings The yuan is rapidly becoming an attractive currency to acquire overseas given the relative short supply of the currency in offshore markets worldwide and what Wells Fargo’s Han points out is anticipation that yuan use will increase outside China, particularly in Asia. Pent-up demand is most visible in Hong Kong, which has been providing yuan-denominated banking services since 2004 and where the currency trades freely but at a premium. Offshore appetite for yuan is increasing to such an extent that the value of Hong Kong’s yuan deposits more than tripled to RMB314.9 billion (US$48 billion), or 4.6 percent of deposits, from June 2010 through December, according to the HKMA. Goldman Sachs predicts that figure could soar up to RMB2 trillion over the next three to five years. The yuan is also picking up in Hong Kong as a retail currency thanks to an ever-deepening pool of banknotes that are growing in acceptance at outlets and are available from dual-currency ATMs.

An international “redback”? Internationalization is the ﬁrst stage for transforming the yuan. Yet, China’s drive is unique considering the yuan’s conversion is, for the most part, limited under extensive capital controls. As the Wall Street Journal’s Dinny McMahon points

out, “China is currently writing the handbook” on how to turn a developing economy’s currency into a global one without making it freely convertible. Market forces traditionally have determined whether a currency gains wide international use and broad acceptance. Instead, China’s attempt is by design. This opens the question as to how China can reach its goal within a free market order. China could focus on building up the yuan ﬁrst in regional economies before going global, suggests Paola Subacchi, a research director at London-based Chatham House. This strategy could be successful because Asia’s economies are increasingly interlinked with China at the center. Already, yuan was the currency of choice for settling 90 percent of China-Vietnam trade, according to 2009 research by Wing Lung Bank. Meanwhile, overseas yuan-denominated commercial activity is likely to continue to grow as China rolls out new experiments to expand

the yuan gradually, a tiptoeing process known as “crossing the river by feeling the stones.” Potential products include yuan-denominated IPOs and stocks in Hong Kong, according to reports. There is excitement regarding the yuan’s growing popularity and what it could mean for liberalizing China’s ﬁnancial and monetary systems. But extensive capital controls that largely limit doing business in yuan to China means the advantages of using yuan are not overwhelming at the moment for U.S. companies. That may change as China continues with currency reform to internationalize the yuan, improving its commercial appeal and laying the foundation for, perhaps, its holding reserve status someday.

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

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China could focus on building up the yuan ﬁrst in regional economies before going global.”

A National Resource The central government’s new human resource development plan, aimed at cultivating talent over the next decade, will have far reaching implications, the impact of which will undoubtedly be felt widely among U.S. companies operating in China.

hough rich with human resources, China’s talent pool runs shallow. Human resources continue to present the single biggest challenge facing multinational companies in China. In January, AmCham Shanghai released ﬁndings from the 2010–2011 China Business Report, in which U.S. companies surveyed identiﬁed human resource constraints as the number one challenge to doing business in China. Since 1996, AmCham Shanghai has reported human resource constraints as the top ranking operating challenge facing American businesses each year. Talent recruitment and retention, high turnover rates, shortage of managerial talent and lack of availability of skilled, technical or professional workers are among the top concerns that continue to be raised by American companies in China across virtually all sectors of business and industry. As China’s state-owned enterprises (SOEs) grow in size and capability, U.S. companies are also reporting increased competition from SOEs for high quality talent. With a labor pool that nears one billion, or almost 77 percent of a population

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ABBY FITZGIBBON

C OV E R S TO RY

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

ILLUSTRATION BY JASON PYM

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IMAGINECHINA

HUMAN CAPITAL: China will increase the number of high quality talent in its workforce to 180 million by 2020.

topping 1.3 billion, it may come as a surprise that the world’s most populous country is lacking in human resource capabilities. But China is facing a human resource problem of potentially epic proportions precisely because of the size of its population relative to the quality of its personnel. Last May, China Daily quoted Chinese President Hu Jintao as recognizing human resources as the “most important resource” and “a key issue” that concerns the country’s development. That same month, Xinhua News openly reported Hu as labeling the quality of China’s workforce “poor” compared to that of developed countries. In a Chinese government-issued white paper on human resources last year, the State Council Information Oﬃce reports that only 114 million of China’s workforce is considered high quality “talent.” Talent, according to the government, refers to educated individuals with professional knowledge or special skills who are able to engage in “creative” work that “contributes to society.” In context, creative is read as innovative.

A national strategy The central government announced last year the National Medium and Long Term Talent Development Plan (2010–2020) (the Plan) that outlines the steps China will take to increase its highly educated and skilled national workforce

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over the next 10 years. Jointly issued by both the Central Committee and the State Council last June, the Plan is China’s first comprehensive national development strategy that encompasses human resources development. It signifies the importance that the government places on one of its most valuable resources: its human capital. China has outlined a number of policies to develop talent, or rencai, to meet the call for an innovation-driven economy and address the shortage of high-quality workers. These will be implemented starting from the highest levels of the central government. Overlapping goals On the heels of the release of the Plan, the Central Committee issued last December the guiding principles of China’s 12th Five-Year Plan for National Economic and Social Development (2011–2015) (FYP). Poised for approval this March at the annual session of the National People’s Congress, the basic tenets of the FYP as they relate to human resources include targeted science and technology education reform and improved human resources to find and nurture talent. This includes initiatives such as improving scientific achievement evaluations and rewards systems, encouraging overseas educated Chinese to return to China and raising the amount of investment in human capital over the next five years.

Investing in talent development In spending on human resource development over the next decade, China intends to widen its pool of 114 million skilled professionals to 180 million by the year 2020. In building up its talent, China plans to transform the country’s manufacturingbased economy to one driven by innovation. Fundamental to the development of talent is the central government’s pledge to spend up to 15 percent of the country’s gross domestic product (GDP) on human resources by 2020. According to the Plan, government investment will increase steadily to support the human resource sector, with the ratio of human capital expenditure in terms of GDP to grow to 13 percent by 2015. In 2008, that ratio stood at less than 11 percent. Additionally, China plans to increase the percentage of GDP it spends on research and development (R&D) to 2.5 percent by 2020 – a ﬁgure that stands at 1.4 percent today. The increase in percentage of GDP will go towards funding 43 professionals out of every 10,000 in the labor force to work on R&D in China. For a labor pool of one billion, that translates to roughly 4.3 million professionals in R&D by 2020. By comparison, at 2.7 percent of GDP today, the U.S. leads the world in R&D spending as a proportion of GDP but claims only 622,000 professionals working on R&D, according to the U.S. Department of Labor. Importing intellectual capital China plans to meet its human resource targets in part by attracting overseas skilled professionals to innovate in China. These professionals include both foreign passport holders and, more importantly, overseas Chinese. More than 1.6 million Chinese students and scholars studied abroad between 1978 and 2009, according to government reports. Of those, it is estimated that less than half a million returned to China to work after completing their studies. Dr. Wang Huiyao, a visiting fellow at the Brookings Institution’s John L. Thornton China Center, who helped draft the Plan, observes that although the trend towards a talent brain drain over the last three decades is now reversing, it is not necessarily because China has developed policies that incentivize talent to return home to work. Wang reports that the return rate for Chinese studying in the U.S. averages roughly 30 percent. However, the percentage of U.S.-educated doctoral candidates in the sciences and engineering who returned to China after graduation stood at

less than eight percent between 2002 and 2007. These five years represent a period of relative prosperity in the U.S. between the dot-com bust and the global economic crisis. On the other hand, during the global economic downturn, China saw the mass return of over 100,000 U.S.-educated Chinese graduates in 2009 alone. Were it not for the reversal of fortunes, it seems that fewer U.S.educated professionals would have returned to China. Part of the government’s strategy to attract overseas talent is to offer both professional and personal incentives to work in China. Following the directive of the Plan, for example, the China Association for Science and Technology (CAST) announced an initiative last year to increase the number of overseas talent, both foreign and Chinese, in its information database from 6,000 to 8,000. Those who belong to the database are recommended for China’s Thousand Talents Program, launched in 2008, that recruits academics and professionals at top institutions and enterprises overseas to work in China. On offer in China are government jobs, high-level positions in SOEs, university positions and access to full laboratory facilities. China Daily reports that between 600 and 800 new recruits, the majority of who were born in China, heeded the government’s call last year. Each new recruit received RMB1 million from the central government in addition to salary and other bonuses from their employers. As China ramps up its offerings of soft infrastructure, some will also take home attractive packages that may tip the scales in China’s favor. “We will increase spending on talent projects and launch a series of initiatives to offer talent-favorable policies in households, medical care and the education of children,” said Premier Wen Jiabao at a talent conference attended by China’s top leaders last May. Xinhua News reports that favorable policies under consideration could include taxation, insurance and housing incentives, children and spousal settlements, career development opportunities and research projects.

Outlook on implementation China’s achievement gap China’s import of talent will help the country make short-term gains under the Plan and the Five-Year Plan, but the majority of talent that China needs to transform its manufacturing-based economy to

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In building up its talent, China plans to transform the country’s manufacturingbased economy to one driven by innovation.”

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One of the real issues China can expect as it implements the Plan will be cultivating a workforce capable of innovation over the relatively short time period of the Plan.”

one driven by innovation must be homegrown. The return on educational investments, however, has not necessarily paid long-term dividends for a country whose economic rise historically relied on blue collar labor to stoke its manufacturing-based growth. China’s graduate glut is well documented, as Chinese universities continue to churn out well over six million graduates each year while the national unemployment rate sits at just over four percent. Today, the country has a 100 millionstrong college-educated workforce. By 2020, the central government plans to build a national reserve of 195 million college-educated workers – but to what end? One of the real issues China can expect as it implements the Plan will be cultivating a workforce capable of innovation over the relatively short time period of the Plan, says Patrick Moreton, managing director of the Washington-Fudan Executive MBA program in Shanghai. This is in part because building a workforce of talent capable of free thinking and innovation should feed down through an education system that supports these ideals. U.S. universities, for example, take a multidisciplinary approach to education that supports multiple career options. On the other hand, China’s current education system dictates a linear path at the undergraduate level that guides students down a single career path. An education system that determines student career trajectories at the onset can have far reaching effects. Whereas American workers have multiple opportunities to grow and reinvent themselves throughout their careers, in China, graduates tend to follow one career path their whole life. The issue is that the path followed by most Chinese graduates does not support creativity, flexibility and free thinking. As a result, the caliber and depth of China’s workforce does not always meet international standards for talent. Not surprisingly, China had an unemployment rate among university graduates of 12 percent, according to the Chinese Academy of Social Sciences (CASS) – a figure that some foreign media report was as high as 27 percent last year. Meanwhile, American businesses continue to report a lack of availability of talent as a topranking operating challenge. The disconnect between the under-availability of talent on the one hand, and the overwhelming number of graduates seeking gainful employment on the other sits like the metaphorical elephant in the room – and there is no easy solution.

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Cultivating talent development The central government has expressly targeted higher and professional education as priorities under the Plan. Professions that China hopes to boost cover both the hard sciences and those supporting the development of an emerging services sector. Five million science, technology and engineering experts and eight million service sector professionals are expected to help fulfill China’s ambitious innovation-driven talent development plan. But for any meaningful change to take place in these fields, a plan 20 years in the running may be more effective than one spanning a mere decade. “In dealing with human beings, development takes place slowly over time, particularly for rencai who require an additional seven to fifteen years of professional training on top of any undergraduate training they may have undertaken,” explains Moreton. In the hard sciences, the typical PhD takes between five to seven years to attain; to become a competent researcher through postdoctoral work or lab work requires up to 10 years of research under the tutelage of a leader in the field. Among academics, leadership in a field may require no less than 15 years of research. Moreover, the formula to cultivate talent, attract innovators and develop a spirit of innovation not only requires an academic environment that supports like-minded individuals but a regulatory structure that supports and protects intellectual property rights (IPR). “If you want to have the world’s largest economy you have to have talent capable of innovating, training other talent and responding and adapting to a changing environment,” says Moreton. A culture of innovation It makes sense, then, that as part of China’s larger goal to spur innovation, the government includes IPR protection as a key policy to foster talent. Among the most important measures to foster greater IPR protection are bolstered protection of inventors’ and IPR holders’ rights and interests, subsidies for inventions by individuals or smallto medium-sized enterprises, strengthened patent technology and transfer methods and advanced international cooperation on intellectual property.

Opportunities ahead China’s nationwide eﬀort to build an innovationdriven economy over the next decade can oﬀer a

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wealth of opportunities for players positioned in sectors that are targeted for investment. For one, China has opened new doors to foreign investment in the human resource development sector. “This is most likely the first time that the Chinese government has emphasized the use of foreign investment in talent development in China,” says Wang. “China even spells out in the Plan that it can utilize international financial institutions’ funds and foreign government loans to develop skilled labor programs.” Earlier this year, China’s State Administration of Foreign Experts Affairs Director Ji Yunshi expressed his agency’s willingness to work with international headhunting companies and employment agencies to recruit foreign talent for work in China. Targeted sectors for these experts include services, core technology and energy saving and emission reduction. Along with science, technology and engineering professionals, the government is also targeting the education and training of eight million service sector professionals as a priority. Education, logistics, food safety, tourism, political science, law, accounting, health and disaster prevention professionals are among those on the fast-tracked list. Educational institutions or professional schools positioned in these fields can expect to see their matriculation rates rise, along with profits on tuition, as students flock back to school. In addition, companies thirsting for talent in these fields can expect an influx of professionals in the short-term as skills in these professions generally require less time to develop than in the hard sciences.

Created by China By the end of 2020, China’s ambitious human resource plan envisions a labor pool ﬂush with talent. Though much of that talent will be fair game for both multinationals and SOEs, foreign businesses can expect to see increased competition from SOEs. For example, one of the more innovative goals under the Plan attempts to recruit up to 40,000 international professionals to work in China’s top SOEs. This will be made possible by the elimination of the requirement of Chinese citizenship for top SOE management positions. Notwithstanding the quantity of talent that will ﬂood the market, questions as to the quality of workers’ skills will likely linger. Whether China will attract or grow the level and quality of talent

envisioned under the Plan remains to be seen over the next decade. The attention the central government has given to the Plan and the emphasis placed on implementing its goals indicate the importance China places on its human resource capacity in today’s knowledge-based economy. It marks China’s ﬁrst real steps towards transitioning the country from a “Made in China” to a “Created by China”-based economy. But if the Plan is to have any meaningful impact, signiﬁcant time and resources must be spent developing talent and cultivating a spirit of innovation.

Tiffany Yajima is Managing Editor of Insight. She can be contacted at tiffany.yajima@amcham-shanghai.org.

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SCIENTIFIC SOLUTIONS: China aims to develop talent but there are no shortcuts to experience.

INSIDE AMCHAM FROM THE CHAIRMAN

A Focus on Engagement

appy Chinese New Year! I hope you are settling in from a relaxing break spent with family and friends.

The Year of the Rabbit is just getting started but already there is a lot to talk about. In January, we all watched with anticipation as President Hu Jintao and President Barack Obama met in Washington, D.C. for the ﬁrst State visit by a Chinese leader since 1997. By all accounts, the Summit went smoothly and was an important step in the ongoing bilateral dialogue between the United States and China. AmCham Shanghai and the U.S. business community in China were represented at the Summit by immediate past chair Robert Roche. Robert had a seat at the head table during the ofﬁcial state dinner, joining President Obama, President Hu, former U.S. Presidents Bill Clinton and Jimmy Carter and Secretary of State Hillary Clinton, among others.

Eric S. Musser Chairman AmCham Shanghai

Given the critical role that U.S.-China trade plays in relations between the two countries, AmCham Shanghai applauded the Summit’s focus on developing the business climate in China. It is the position of the Chamber that the economic strengths of the U.S. and China are complementary and that the healthy development of China’s economy is in the interest of not only the American business community but in the interest of the U.S. generally.

Bilateral dialogues like January's presidential summit are critical to the balanced development of China's economy.

On the same day as the Hu-Obama Summit, AmCham Shanghai released the 2010-2011 China Business Report. First launched in 1999, AmCham Shanghai’s business climate survey is one of the longest running surveys of American companies in China. Results from this year’s annual survey show American companies in China closed out 2010 with all-time performance highs and remain optimistic about their business prospects moving forward. But just as there is no one “China market,” there is no single description that accurately depicts a U.S. company with operations in China. This year’s survey results illustrate that, as the China market matures, the challenges and opportunities for U.S. companies vary by market sector and by industry. In the coming months, AmCham Shanghai is offering new ways to get involved in the Chamber. AmCham Shanghai has recently launched the Aerospace Committee and the Food, Agriculture and Beverage Committee. If you’re involved in either of those growing industries in China, I highly encourage you to stop by and check them out. The Chamber has also kicked off the extremely popular Young Professionals Forum, a new working group designed to serve the needs of AmCham Shanghai’s young professional members. Last, but certainly not least, on April 9 AmCham Shanghai will host the annual Charity Gala. This year’s Gala celebrates the music, spirit (and food!) of New Orleans’ Mardi Gras. Come out and have fun while doing good! The 2011 Gala will beneﬁt three worthwhile charities – the Soong Ching Ling Foundation, Heifer International and Marinedream. AmCham Shanghai is focused on meeting and exceeding member expectations. I encourage you to provide your feedback and input. Please send your thoughts to chairman@amcham-shanghai.org. Happy Chinese New Year and I wish you a happy and prosperous Year of the Rabbit!

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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

Board of Governors Meeting Highlights January 2011

February 2011

Approval of Board Ofﬁcers The Board approved Marie Kissel as Secretary and Eric Zheng as Treasurer of the 2011 AmCham Shanghai Board of Governors. Membership

The Board approved 74 new member applications. Charity Gala and Golf Tournament Beneﬁciaries

The Board approved three charity projects as beneﬁciaries of funds generated by the 2011 Charity Gala and the Golf Tournament. The Chamber will continue to support the Soong Ching Ling Foundation Mother and Infant Care Project, Heifer International’s Community Rehabilitation Program while also supporting the Marinedream Action!Blue Sustainable Leadership Program.

Selection of Ethics Committee Member Pierre Cohade, President, Asia Paciﬁc Region, Goodyear Tire Management Company, was elected as the ﬁfth member of the AmCham Shanghai Ethics Committee. Pierre will replace Ken Jarrett, Chairman, Greater China, APCO Worldwide, who resigned his seat to serve on the 2011 AmCham Shanghai Board of Governors. 2011-2012 Budget

The President noted that the 2011 Charity Gala “Mardi Gras” will be held on April 9 at the Grand Hyatt Shanghai in Pudong.

The President reviewed the Chamber’s strategic plan for the 20112012 ﬁscal year and a proposed 2010-2011 budget which was then approved by the Board of Governors. Priorities for the new year include the development of programs to support member business growth, expanding the Chamber’s regional footprint with a focus on the Yangtze River Delta, increasing the membership and enhancing retention, and developing a government relations and advocacy program aligned with members’ business objectives.

IN ATTENDANCE Governors: Paul Brown, Eddy Chan, Ted Hornbein, Kenneth Jarrett, Marie Kissel, Eric Musser (Chairman), Kevin Wale, Matthew Targett and Eric Zheng. Attendees: David Basmajian, Siobhan Das, Brenda Foster (President), Ben Kinnas, Helen Ren, David Turchetti, Linda X. Wang, Jessica Wu, Oliver Yang and Karen Yuen.

IN ATTENDANCE Governors: Andrew Au, William Brekke, Paul Brown, Eddy Chan, Ted Hornbein, Kenneth Jarrett, Marie Kissel, Jim Mullinax, Eric Musser (Chairman), Matthew Targett and Eric Zheng. Attendees: David Basmajian, Siobhan Das, Brenda Foster (President), Helen Ren, David Turchetti, Linda X. Wang and Karen Yuen.

APOLOGIES Andrew Au and Robert Roche.

APOLOGIES Kevin Wale and Robert Roche.

AmCham Shanghai 2011 Calendar

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

Immediate Past Chair

Robert W. Roche Acorn International

J A N U A RY / F E B R U A RY 2 0 1 1

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Eric Zheng Chartis Insurance 33

AmCham Shanghai New Members: January - February 2011

AmCham Shanghai Tenth Annual Shanghai Government Appreciation Dinner

U.S. Corporate Membership

Applied Biosystems Trading (Shanghai) Co., Ltd. LIU Jason Arlon Materials for Electronics Co., Ltd. Arlon Materials for Electronics Co., Ltd. LEE Wei-Lieh SUN Hua Nanjing Hands Real Estate Investment Consultant Armstrong Teasdale LLP, Shanghai Office (U.S.A.) Co., Ltd. PANG Emma MA Morgan Baker & McKenzie Shanghai Office Panduit Network Connectivity Distribution Co., LI Lan (Shanghai), Ltd. LIU Ningjun Becton Dickinson Medical Devices (Shanghai) Co., Ltd. YU Jinbao SanDisk Information Technology (Shanghai) Co., Ltd. SINGH Gursharan Bekaert Management (Shanghai) Co., Ltd. CHEN Yong Shanghai Accessen Group Co., Ltd. CHOO Kevin Blake Dawson Shanghai Representative Office, Australia Shanghai EDI Technology Computer Co., Ltd. SHENG Michael SU Chi Mike Burson-Marsteller The GSI Group (Shanghai) Co., Ltd. MCCALL Katie WEENEY James Michael Welch Allyn International Ventures, Inc., Shanghai Rep. Chang Shu AAM Automotive Driveline High Technology Manufacturing Co., Ltd. Shanghai Office Office JOSEPH Donald Leonard HE Larry China Novartis Institutes for BioMedical Research Co., Ltd. U.S. Associated Corporate CAI Amber Membership Delphi Automotive Systems (China) Holding Co., Ltd. AGCO (Changzhou) Agricultural Machinery Co., Ltd. JIANG Jay FURR David Design Continuum (Shanghai) Co., Ltd. Ansul Fire Equipment (Shanghai) Co., Ltd. CHENG Michelle CHUNG Kin Dow Corning (China) Holding Co., Ltd. BDP Project Logistics (China), Ltd. BURKS Jeremy BRUNNHOEFFER Gilbert Charles Fredrick CHEN Jonathan Huber Engineered Materials (Qingdao) Co., Ltd. JACQUES Rachelle S. KARPE Rajeev KANG Ping L.E.K. Consulting Ltd. SHI Jun CHEN Helen SU Wen VAN VOOREN Marie-France Mann+Hummel (China) Co., Ltd. JOHN Wenburg Ernst & Young WILLIAMS Jennifer Morgan Stanley Investment Consulting (Beijing) Co., Ltd., Shanghai Branch Faegre & Benson LLP Shanghai Office CLAVEL Alex MAO Yan QIN Rong Philips Healthcare (Suzhou) Co., Ltd. GUDAPAKKAM Lakshmi Federal-Mogul (China) Co., Ltd. LIU Lisa Royal Caribbean Cruises Ltd., Shanghai Rep. Office ZHANG William ZHANG Clement FMC Asia Pacific, Inc., Shanghai Rep. Office SUN John Non-Resident Individual Membership Greenheck Kunshan Co., Ltd. Monash University Malaysia FU Qi CHEW Elaine Haworth Furniture (Shanghai) Co., Ltd. Contact Singapore SU Jianzhong QUAH Chee Seng International Flavors & Fragrances (China) Ltd., Corporate International Affiliate Shanghai Branch ALEJANDRINO Eduardo III Membership Johnson & Johnson China, Ltd. Asia Asset Property Services (Shanghai) Co., Ltd. HSU Mike JIANG Shirley L.E.K. Consulting Ltd. Babyone Commercial (Shanghai) Co., Ltd. CHEN Ken LU Qiang Manitowoc Crane Group Asia Pte., Ltd., Shanghai Hagemeyer Commerce and Trade (Shanghai) Co., Ltd. Office SATTES Thomas WHEELER John Trotter Mattel Asia Pacific Sourcing Ltd. Mission Foods (Shanghai) Co., Ltd. LOW Edena FANG Carol Associate Membership Owens Corning (China) Investment Co., Ltd. LI Jun Abbott Laboratories S.A. (Shanghai Rep. Office) Pacific Geopro QIN Hongxu SHUAI Bowell Analogic Medical Equipment (Shanghai) Co., Ltd. Panduit Network Connectivity Distribution Co., HUPKE Rolf (Shanghai), Ltd. PINEDA Mauricio 34 INSIGHT MARCH 2011

Parsons Brinckerhoff Engineering Technology (Beijing) Co., Ltd., Shanghai Branch WANG Lei WU Henry N. Philips Healthcare (Suzhou) Co., Ltd. CINTOLO Nancy Yen KHONG Julian RITE-HITE Material Handling Equipment (Kunshan) Co., Ltd. PAN Jing Rockwell Collins International, Inc., Shanghai Rep. Ofﬁce SUN Linlan XIONG Ying Russell Reynolds Associates Co., Ltd. LIU Charlie Shanghai Johnson Controls International Battery Co., Ltd. AIKEN Kathryn Elizabeth Shanghai Roche Pharmaceuticals, Ltd. TANG Jihong Smith & Nephew Medical (Shanghai), Ltd. O'DELL David Stanadyne (Changshu) Corporation POTTER Brooks Textron Trading (Shanghai) Co., Ltd. WANG Qiang USA Cabot Microelectronics Corporation, Shanghai Rep. Ofﬁce HUI Richard

Individual U.S. Citizen Membership Atlantic Precision Resource, Inc., Shanghai Rep. Ofﬁce BARTON Natalie Standard Chartered Bank BOSNYAK Marc John General Biologic FRAGER John China Talent Group LI Steve Byer Dental Group MENG Fanhua Morgan Stanley RHEE Kenneth Valushar SIGMUND Floyd COLE Christopher HOANG Francis HUNEKE Lorraine LIU Ping TREBESCH Larry

Individual International Afﬁliate Membership Alberta Trade and Investment Representative Ofﬁce WRIGHT Nathan Geberit China/Geberit (Shanghai) Investment Administration Co., Ltd. SCHUMACHER Michael Geberit Shanghai Trading Co., Ltd. KOBER Christian KOENIGSLEHNER Manfred Joseph Mandarin Garden RYABOKON Alexander Moore Stephens VERSCHELDEN Andries Rouse Consultancy (Shanghai), Ltd. PAPAGEORGIOU Elliot

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.

IN MEMORIAM

NORA SUN AUGUST 6, 1937 - JANUARY 29, 2011 With the death of Nora Sun in Taipei on January 29, 2011, from injuries sustained in a horrific car accident on January 1, 2011, AmCham Shanghai has lost an old friend and strong supporter, and one of the brightest stars in the Shanghai firmament has been extinguished. As head of the U.S. Commercial Section of the U.S. Consulates, first in Guangzhou and then in Shanghai in the late 1980s and early 1990s, Nora was an advocate for U.S. business interests in China. Her family background and forceful personality gave her access to Chinese officials that would not have been possible for plain vanilla expatriate businessmen or diplomats. But Nora was definitely not plain vanilla. She could be as sweet as crème brulee and as sharp as a Szechuan chili. She was a warm and wonderful hostess and an invitation to one of her dinner parties was a guarantee of an evening well spent with excellent food, good company and good conversation. Nora was a great friend. She loved meeting people and her range of friends and acquaintances was amazing. She also had boundless energy. Like the Energizer bunny she never stopped going. Many were the nights when after a late dinner or party I was ready at 11 p.m. to drag my weary tail home to rest, but Nora was primed to continue partying until 2:00 or 3:00 in the morning. She never did share with me the secret to her vitality. Was it some esoteric combination of Chinese herbs brewed by her ayi and served to her every morning? Nora was a force of nature.Those who knew her could not but feel the strength of her personality. Her passing leaves an enormous hole in all of our lives. Life in Shanghai will be much less interesting without her. She will be terribly missed. I’d like to paraphrase Shakespeare and say to her, “Good night sweet princess. May choirs of angels sing thee to thy rest.” - Norman Givant, co-founder of AmCham Shanghai “Nora was such a stimulating and energizing presence. She perfectly bridged many different worlds and experiences, brought an interesting perspective and was a trusted source of advice.The amazing life she lived is an inspiration.” - Pierre Cohade, president, Goodyear Asia Pacific “Nora was such a multifaceted person that it wasn’t always easy to grasp her as a whole. She was both fiery and sympathetic; imperious and loving; a grande dame and down-to-earth – all at the same time.The world is far less interesting for her absence. Rest in peace, dear Nora.” - Patrick Cranley, director, Development & Alumni Relations, The Hopkins-Nanjing Center “We’ll miss her style, her verve, her glamour, her vintage Shanghainese and the way she filled a room with life. Nora’s greatest gift (of which she was justly proud) was her wide-ranging friendships – old, young, rich, poor, from around the world and around the city – she didn’t discriminate. Perhaps that’s how we should best honor her legacy: by widening our circles, not discriminating in friendships and living life to the fullest.” - Tina M. Kanagaratnam, CEO, AsiaMedia Ltd. “For over 20 years, Nora was the voice of those unwilling or not able to speak up. Over tea, majiang or wine, she would say it in only the way Nora could and get away with it. She asked the questions others were afraid to ask. Nora stood her ground, and stood up for others. Her energy and enthusiasm for life will always stay with me. She will be missed.” - Diane Long, vice president, UBS International

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MARCH 2011

AMCHAM ADVOCACY & GOVERNMENT RELATIONS

Promoting U.S.-China High Tech Trade and Investment AmCham Shanghai, AmCham-China and China’s Ministry of Commerce discuss future cooperation on high tech trade and investment promotion

mCham Shanghai and AmCham-China (herein collectively referred to as “AmCham”) representatives recently met in Beijing with Ministry of Commerce (MOFCOM) Vice Minister Jiang Yaoping to discuss cooperation in promoting high tech trade and investment between China and the United States. David Wang of Boeing China and Chris Szymanski of Semiconductor Manufacturing International Corporation (SMIC) led the delegation. The meeting occurred two days after the U.S.-China Joint Commission on Commerce and Trade (JCCT) Ministerial meetings in Washington, D.C., where both sides agreed to pursue mutually beneficial solutions for promoting and developing high tech trade. During the meeting with Vice Minister Jiang, AmCham expressed optimism for the future of U.S.-China relations due to increased government-togovernment exchanges with official visits at high diplomatic and working levels. As Chinese companies climb the value chain, they are looking to import high tech products from the U.S. and invest abroad to build brands and access markets. An increase in U.S. high tech exports and Chinese FDI into the U.S. will create American jobs and economic growth in both countries. However, there are significant challenges to advancing high tech trade between the U.S. and China and two of the foremost challenges discussed were the misperceptions surrounding export restrictions and foreign direct investment (FDI). Exports of American high tech goods to China have suffered from limitations on both the U.S. and Chinese sides. These limitations include imperfect government regulations, misinformation about markets and technology and insufficient or incomplete compliance practices among companies. Companies may immediately begin to increase U.S.-China high tech trade by educating enterprises on both sides and demonstrating strong compliance with trade regulations. AmCham is currently working on initiatives to bring high potential commercial importers and exporters together to remove and overcome barriers to trade in order to sign

contracts, generate revenue and create jobs in both countries. Similar to exports, FDI in the high tech sectors have been limited by factors on both the Chinese and U.S. sides. Anecdotes about Chinese investments blocked for national security or political reasons have become folklore within the high tech trade and investment community. Chinese companies report feeling unwelcome in the U.S. market. At the same time, Chinese restrictions on outbound investment dollars have also slowed progress in the development of Chinese multinational companies. The overall business environment at the macro level and trade compliance at the individual company level both play critical roles that impact the volume of high tech trade and investment. A robust regulatory framework, government transparency, equal treatment, trade compliance and protection of intellectual property are important facilitators of high tech trade. An absence of these qualities only limits high tech trade and cooperation. Trade promotion and trade restriction are two sides of the same coin. Over the past year, AmCham evolved from defending companies against trade restrictions to a more proactive position of promoting trade and cooperation in high tech industries. Through outreach efforts, such as AmCham’s meeting with Vice Minister Jiang, and targeted matchmaking efforts on both sides of the Paciﬁc, both countries can improve economic performance and political relations through increased high tech trade and investment. AmCham invites you to join us in these efforts in the coming year.

This article was written by Nina Hsu. Nina is a governor of The American Chamber of Commerce in China (AmCham-China) and vice president at Larkin Trade International. For more information about AmCham Shanghai’s efforts to advance high tech trade and investment, please contact Siobhan Das, AmCham Shanghai’s Director of Committees, at siobhan.das@amcham-shanghai.org. A version of this article appears in the January/February issue of AmCham-China’s China Brief magazine.

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Event Highlights

INSIDE AMCHAM

Immediate Past Chair Robert Roche Represents AmCham Shanghai at the HuObama Presidential Summit

U.S. Consul General Beatrice Camp (right) previews the Hu-Obama presidential summit in Washington, D.C.

January Monthly Member Brieﬁng

AmCham Shanghai and the U.S. business community in China were represented at the Hu-Obama summit on January 19 in Washington, D.C. by immediate past chair Robert Roche. Roche was afforded a seat at the head table during the Summit State Dinner, joining President Barack Obama, President Hu Jintao, former U.S. presidents Bill Clinton and Jimmy Carter and Secretary of State Hillary Clinton among others. As an entrepreneur, attorney and investor who has been doing business in China for more than a decade, Roche provided State Dinner attendees with a unique, on the ground perspective of the opportunities and challenges faced by U.S. businesses in China.

At the January Monthly Member Briefing, AmCham Shanghai was honored to host U.S. Consul General Beatrice Camp who reported on outcomes of the recent U.S.-China Joint Commission on Commerce and Trade (JCCT) meetings and previewed the upcoming Hu-Obama Summit. CG Camp reported on the arrival of the new Deputy Chief of Mission Bob Wang in Beijing, recent changes in several consular services, and a 30% year-on-year increase in visa applications at the Consulate. She described the dismantling of the 2010 World Expo USA Pavilion and how elements of the Pavilion are being used. One of the Pavilion videos, The Garden, is currently being shown to audiences in Afghanistan, who have noted parallels between the movie’s message and the perseverance of the Afghan people in their country’s reconstruction efforts. The Pavilion’s other main video, focused on alternative energy, was scheduled to be shown at a conference on clean energy in Taiwan. CG Camp reported that the December 2010 JCCT meetings in Washington, D.C. yielded agreements in a number of areas. She highlighted commitments on IPR enforcement, indigenous innovation standards and clean energy. Additionally, China agreed to accelerate its accession to the WTO Agreement on Government Procurement (GPA) and resume talks on lifting restrictions on U.S. beef exports in early 2011. CG Camp discussed the Hu-Obama Summit in Washington D.C., the first state visit by a Chinese president since 1997. On January 19, Hu is to attend a state dinner at the White House; AmCham Shanghai is represented at the dinner by immediate past Chairman Robert Roche. Hu then continues on to Chicago where he will tour a Chineseinvested auto parts plant, a joint U.S.-China clean energy project and a secondary school where Mandarin Chinese is taught. Other elements of the visit include a series of speeches and media events, Chinese buying missions, a U.S.-China Business Forum and a U.S.-China Business Dialogue during the visit. Camp reported that intense preparations were going on via a number of highlevel meetings between U.S. and Chinese officials in Beijing and Washington, D.C. (Jan 11)

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Event Highlights

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Leadership Lessons from the Financial Crisis

Dean of the Tuck School of Business Paul Danos.

AmCham Shanghai was honored to host Paul Danos, Dean of the top-ranked Tuck School of Business at Dartmouth College, who spoke to Chamber members about the factors that contributed to the global financial crisis and how business schools can create responsible business leaders. Danos argued that the crisis resulted less from the failure of leaders to behave ethically than from their failure to understand fully their responsibilities, duties and power and to update their knowledge in a rapidly changing world. According to Danos, the real breakdown that produced the crisis stemmed from legislative, regulatory and corporate players neglecting their fundamental duty to critically question existing financial practices. Danos said that he believed that banking system regulators were expected to have the highest levels of knowledge, power and duty in preventing a crisis. He also spoke about the overconfidence and under-education of finance-industry executives. Danos also addressed the role of business schools in producing future business leaders. He noted the vast improvement between today’s MBA programs and the programs from the past that produced today’s business leaders, especially in the realm of business ethics. The Tuck School of Business requires its students to take ethics classes, believing these courses will instill a healthy level of skepticism and inquisitiveness in its students. The Tuck School of Business continues to teach its students to question conventional theories and methods in order to become better business leaders of the future, he said. (Jan 18)

The Rise of China’s “5th Generation” of Leaders and Implications for Multinational Businesses John Hoffman, co-founder and principal of strategy and transactional consulting firm Exceptional Resources Group (XRG), recently spoke to Chamber members about the shift in power from China’s fourth-generation to the new fifth generation of leaders. As the first generation to be born after 1949, the founding of the People’s Republic of China, fifth generation leaders are not the same as their fourth generation counterparts. Whereas there is a similar distribution among geographical and factional backgrounds, there is greater diversity among educational backgrounds. Whereas top Chinese leaders have often been educated in engineering and hard sciences, fifth generation leaders have studied more diverse fields, such as economics and social sciences. This next generation is also more cosmopolitan through experiences in foreign study and travel. Hoffman then discussed the differences between Chinese and Western leaders as well as China’s commitment to promoting the competitiveness of domestic firms and national prestige around the world. Hoffman called multilateral relationship development management critical to dealing with the challenges of doing XRG’s co-founder business in China. John Hoffman. (Jan 25)

Journalist Series: Global Managing Editors of TIME and FORTUNE Magazine

FORTUNE and TIME magazine global managing editors.

AmCham Shanghai was pleased to host Global Managing Editor of FORTUNE magazine Andy Serwer and Global Managing Editor of TIME magazine Richard Stengel as they spoke on the portrayal of China in the U.S. Serwer and Stengel touched on China-related themes that may be included in the upcoming 2012 FORTUNE/TIME/CNN Global Forum. The 2012 Global Forum will focus on “the China story” and cover major trends in China including the consumer brand landscape and China’s “Go West” policies. One misperception Serwer hopes to address during the Forum is the view that China’s rise will inevitably result in America’s decline and that the relationship between the two is a “zero sum game.”

Stengel followed by providing his views on the U.S. political landscape. He spoke about the recent U.S. mid-term elections and explained that the new Republican majority in the House may actually help U.S. President Obama establish a reputation as a ﬁgure that can reach across divides, and may ultimately lead to constructive policy implementation. He echoed Serwer’s views on China’s negative perception in the U.S. and said he believes that China will play a growing role in American politics. The Obama administration will be challenged to manage good relations with China despite the fact that China is increasingly viewed by Americans as detrimental to the U.S. economy and U.S. job growth. (Jan 21)

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INSIDE AMCHAM

February Monthly Member Brieﬁng

Professor Shen Dingli (center) speaks on the signiﬁcance of the Hu-Obama summit.

AmCham Shanghai was pleased to host Professor Shen Dingli, Executive Dean of Fudan University’s Institute of International Studies and Director of the Center for American Studies, to speak to members at the Chamber’s February Monthly Member Briefing. Shen discussed the significance of President Hu Jintao’s official state visit to Washington, D.C. in January and U.S.-China relations during the Obama administration. Shen praised President Obama’s 2009 visit to Beijing, explaining that this showed an America that wants to engage with China. He commented on the importance of the differences in which Presidents George W. Bush and Obama handled Hu’s visits to Washington during their respective presidencies, noting the importance of formalities that Obama extended to Hu, such as the official state dinner and other signs of respect to the Chinese leadership. Shen explained that China’s intentions towards the U.S. are good and primarily focused on positive engagement. He described four significant elements of the Hu-Obama summit. First, Shen explained that China wants to reassure the U.S. that it is committed to sustaining a stable bilateral relationship and to nurture American reciprocity in this pursuit. Second, China raised the value of the meetings by supporting the development of a package of trade and investment deals across diverse sectors worth more than US$45 billion. Third, Shen spoke about the need to rebalance trade differences between the U.S. and China while promoting healthy competition. Last, Shen talked about the importance the younger generation will play in building trust between the U.S. and China. He praised the U.S. State Department program, the 100,000 Strong Initiative, to increase the number of American students studying in China to 100,000 over the next four years. (Feb 15)

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Committee Highlights

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Marketing & Media Committee Marketing to China’s New Family: the Evolving Mentality of Moms and Kids Mary Bergstrom explores trends in marketing toward China’s “new” family.

AmCham Shanghai’s Marketing & Media committee recently hosted Mary Bergstrom, founder of Bergstrom Trends, who gave an overview of the changing attitudes of families across ﬁrst- through fourth- tier cities in China. Bergstrom emphasized the paradigm shift from older generations of Chinese mothers, whose primary concerns were clothing, feeding and housing their children, to a new generation of mothers who not only assume the primary care-giver role, but who also have satisfying careers, social lives, sense of style and points of view. Though this change can create conﬂict and stress for mothers who are torn between the old and new family model, Bergstrom believes the push is towards a more modern image of a “mother.” The 80s generation of mothers are particularly interested in luxury products, as well as products that free up time from household tasks, such as pre-cooked meals and food delivery services. According to Bergstrom, mothers actually take cues from their children who are computer and Internet savvy. Following Bergstrom’s presentation, Andrew Sugarman, general manager and senior vice president at Disney English, presented on key drivers in mothers’ and kids’ consumer habits as they relate to education. Sugarman noted that, while the education of their children has long been the number one priority of parents, Chinese parents and kids are beginning to move from the “drill and kill” methodology to an approach that instills a passion for learning and allows children to have fun while doing so. Chinese moms are increasingly looking for educational opportunities that will provide a more holistic approach to education, a stark departure from the rote memorization model that has characterized Chinese education in past years. (Jan 14)

Logistics & Transportation Committee Challenges and Opportunities in China’s Logistics Industry in 2011 The Logistics & Transportation Committee was pleased to host Partner of Transaction Services for KPMG Jeffrey Wong as he presented key ﬁndings from KPMG’s recently released transportation and logistics outlook report Fast Forward: What’s Next for China’s Logistics Sector. In addition to providing a market overview of the logistics industry, he outlined future trends in the regulatory environment, developments in the industry and challenges and opportunities in 2011.

KPMG’s Jeffrey Wong discusses China’s 2011 logistics outlook.

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Wong stressed the healthy growth of China’s logistics industry in light of a rapidly expanding industrial base and increased domestic consumption. Because of this rapid growth, the government has highlighted logistics as a vital component to China’s economic well-being. The Chinese government, said Wong, has already made signiﬁcant investments in logistics infrastructure, including railways and airports. However, the ambition to improve the logistics environment is fraught with challenges, including weak enforcement of regulatory policies and a fragmented logistics market that limits market consolidation. Nonetheless, market demand for efﬁciency and market liberalization has presented opportunities for foreign players to succeed in China’s logistics industry. Following his presentation, Wong was joined by Leong Choong Cheng, senior director of business development at Menlo Worldwide Logistics, for an interactive Q&A session. (Jan 17)

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Information Technology Committee IT Compensation Trends in 2011

Elley Cao (center) presents on compensation trends in 2011 in the high-tech industry.

The Information Technology Committee recently hosted Elley Cao from Mercer to present on compensation trends in 2011 in the high-tech industry. Her presentation began with a brief overview of the global economy, followed by an introduction of compensation and benefit trends in the industry, and wrapped up with a look at talent retention. According to Cao, the employee turnover rate in the high-tech industry has been high, especially in China’s second-tier cities. The most difficult positions to fill and retain are R&D along with sales and marketing. Compensation and benefit trends in the high-tech industry in China saw a special salary adjustment in 2010. Among the trends for compensation in the high-tech industry is merit and salary increases for 2011, with second-tier cities having the most aggressive and highest increases especially in the hardware and software segments. In terms of benefit trends, companies are looking to increase training and development, work/life balance and supplementary medical benefits. One of the larger issues high-tech companies are facing is talent retention. The top three ways companies are trying to retain talent are through leadership development programs, career development plans and education assistance plans. The most popular retention practice for high potential employees is education assistance, such as specific training that will help in career development skills. Also, international assignments were one of the top retention tools, with one to two years being the optimal time period for such an assignment. The best retention strategies are tailored, recommends Cao, and should be used holistically rather than individually. (Jan 25)

Financial Services Committee 2011 China & Asia Economic Outlook AmCham Shanghai’s Financial Services Committee recently welcomed back Jonathan Anderson, senior economist at UBS, for an insightful discussion on the economic outlook for 2011 and beyond in China and Asia. Anderson highlighted key macroeconomic variables that contributed to China’s economic recovery in 2010 and important factors to watch in 2011, including the property sector, inflation, government policy and currency. Anderson stressed that the property sector this year would continue to play the prominent role in China’s economy as it has done in the last few decades. Anderson showed similar fluctuating trends across the steel, electricity and construction markets to explain China’s economic recovery and boom in 2010. Anderson explained that when excluding first-tier city real estate construction and speculation from his analysis, real estate nationwide is in fact being built for the purpose of replacing and upgrading existing residential real estate as governments rezone and improve cities. Anderson envisions the construction of replacement housing for older residential real estate as a macroeconomic trend which will continue for the foreseeable future. UBS Senior Economist Jon Anderson highlights the property sector as a key driver of China’s economy.

Anderson also debunked the myth of household consumption as a falling share of GDP. He noted that households were simply switching their purchases from durable to non-durable goods, maintaining leverage of their purchases through the use of cash. Anderson stated that general inﬂation and food prices are rising at a reasonable level for an emerging market. In addition, when comparing property price growth to household income growth in the last ten years, the affordability of housing has not fallen dramatically. (Feb 10)

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 ISTOCKPHOTO

A Great Wall in Bordeaux After two years of negotiations, a Chinese winemaker acquires a Bordeaux winery.

OF C O Wi ne s & Spi r it s , a subsidiary of state-owned China Nat iona l C ere a ls, Oi ls and Foodstuﬀs Corporation (COFCO), China’s largest food processor, manufacturer and trader, has acquired Chateau de Viaud, a French wine producer in the Bordeaux region for RMB100 million (US$15.2 million). Wine produced by the French chateau will be sold under COFCO’s wine brand, Great Wall. French wines represent about half of COFCO’s current imports. The deal, negotiated for more than two years, makes COFCO the first Chinese wine dealer to acquire a Bordeaux winery. It is the sixth major purchase by a Chinese investor of wine property in the region since 2008. The acquisition is part of COFCO’s broader strategy to globalize the Great Wall brand, which is currently sold in more than 20 countries, including France, Britain, Germany and Japan. As COFCO strives to strengthen its wine production skills, the acquisition will provide COFCO with opportunities to learn superior production methods. Local employees at the vineries of Chateau de Viaud will stay on after C OFC O j oins t he pl ant ing , bre w ing and marketing operations, and its brands will continue to be developed using local advantages. COFCO plans to buy grapes to produce other wines in

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Chateau de Viaud’s cellars. The son of Chateau de Viaud’s former owner, Philippe Raoux, will spend a year working for COFCO at the company’s headquarters in Beijing. In 2010, COFCO made its first overseas purchase of a US$18 million Chilean vineyard. That deal added an annual production capacity of 1,400 liters to COFCO’s operations. COFCO has expressed interest in making future acquisitions of Australian, South African and American wineries. The state-owned enterprise is listed in Hong Kong and served as the official wine supplier of the 2008 Olympic Games in Beijing. As a best-seller in China, domestic consumers consistently rate the Great Wall series China’s premier wine brand. COFCO was the first producer of Chinese dry white and red wines in the 1980s. The wine business in China, already booming, is expected to accelerate over the coming years. Wine consumption in China is expected to increase 32 percent to 1.3 billion bottles by 2013, according to Hong Kong-based Vinexpo, organizer of one of the world’s largest wine and spirits conferences. This year, wine consumption in China is expected to top 828 million liters. In 2010, China surpassed Germany and the United Kingdom to become the top export market for Bordeaux. China currently ranks as the world’s seventh-largest wine producer. – Ashley Cahill

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