Insight Magazine October 2010

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

INSIGHT The Journal of the American Chamber of Commerce in Shanghai October 2010

MARKETING FEATURE

Green Brands in China REGULATORY UPDATE

Collecting Market Information SUSTAINABILITY FEATURE

Eco-cities in China

Protecting Against Counterfeits A brand protection strategy in China must account for the activities of counterfeit syndicates

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INSIGHT October 2010

The Journal of the American Chamber of Commerce in Shanghai

David Turchetti DIRECTORS

BUSINESS DEVELOPMENT & MARKETING

Karen Yuen COMMITTEES

Siobhan M. Das COMMUNICATIONS & PUBLICATIONS

David Basmajian EVENTS

Jessica Wu FINANCE & ADMINISTRATION

Helen Ren

MEMBERSHIP & CVP

Linda X. Wang

INSIGHT EDITOR-IN-CHIEF

Justin Chan

SENIOR ASSOCIATE EDITOR

Tiffany Yajima

ASSOCIATE EDITOR

Esther Young

EDITORIAL INTERN

Ashley Cahill DESIGN

Alicia Beebe LAYOUT & PRINTING

Ella Shan Snap Printing, Inc.

INSIGHT SPONSORSHIP SPONSORSHIP MANAGER

Sophia Chen

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

11 A Tale of Sustainable Cities

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

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By Tiffany Yajima

To cope with rapidly increasing urban migration, China is committing to the development of sustainable, environmentally friendly cities.

13 China’s Housing Market: Which Way to Go? POLICY INSIGHT

By Chaoping Zhu

As the central government continues to tackle high residential property prices through new policies, new options are emerging for low-cost housing.

17 When State Secrets are not Secret REGULATORY UPDATE

By Edward Epstein

The recent case involving Chinese-born American geologist Xue Feng caused concerns about obtaining market intelligence in China.

21 A Preference for Green Brands MARKETING FEATURE

By Scott Siff

Chinese consumers stand out from consumers in other parts of the world for their preference and desire to purchase green products and services.

24 Protecting Against Counterfeits COVER STORY

By Kevin Biggs

Counterfeits goods can be a major problem in China, but by understanding how counterfeit syndicates operate, companies can devise effective strategies to protect their brands and trademarks.

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

3 News Briefs

44 Deal of the Month

9 New Whistleblower Incentives Stress FCPA Compliance LEGAL UPDATE

Peter Wang and Jerry Ling of Jones Day discuss new whistleblower incentives that increase the importance of strict FCPA compliance.

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

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IMAGINECHINA

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

SUSTAINABILITY FEATURE

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Brenda Foster

F E AT U R E S

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PRESIDENT

IMAGINECHINA

AMCHAM SHANGHAI

31 From the Chairman: The Real Impact of Currency Legislation 34 2010 Charity Golf Tournament 36 2010 Sustainability Conference

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New Member Listing Events in Review 2010 CSR Conference Committee Highlights

INSIDE INSIGHT

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JUSTIN CHAN EDITOR-IN-CHIEF

he protection of intellectual property rights is one of China’s most persistent and ongoing challenges. Despite steady improvement in intellectual property protection laws, counterfeit goods are prevalent in China and the country is believed to be the source for a significant portion of counterfeit goods appearing around the world. Before deciding to start operations in China, companies must undertake a thorough assessment to determine a strategy for protecting its brand, reputation and assets.

This month’s cover story looks at the growth of counterfeit syndicates in China and how companies can combat counterfeiting of their products. With new manufacturing technologies and an increasing number of sales channels and international networks, counterfeit syndicates are growing in size and sophistication. However, companies can employ a number of preventive and reactive measures to protect their brands and trademarks.

Access to current and accurate market information is another regular challenge that many foreign companies face in China. This summer’s sentencing of Chinese-born American geologist

Xue Feng for buying information related to China’s oil industry caused significant concern among the foreign business community. Our regulatory update examines the law related to state secrets and market information to determine the impact on foreign companies’ ability to seek market research.

As we get towards the conclusion of the Shanghai 2010 World Expo, it is time to turn the discussion of “Better City, Better Life” into concrete action.

The sustainability feature looks at how a number of partnerships across the country are creating sustainable communities featuring advanced technologies and city-based environmental solutions. Interest in green communities should be high in China, as this month’s marketing feature reveals that Chinese consumers are arguably the greenest among all countries surveyed by marketing and research firm Penn Schoen Berland. At the same time, the survey revealed that current demand for green products and services is not being met.

Finally, the policy insight article takes a deep look at the residential housing market and the impact of ongoing government action attempting to lower the cost of residential housing for Chinese citizens.

IMAGINECHINA

News

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

CHINA BUSINESS

Sharp increase in China credit card usage predicted Chen Bin, client business leader at MasterCard Advisors, LLC in China, estimates the number of credit cards issued in China will reach 1.1 billion by 2025, making China the world’s largest credit card market. Citing China’s rapid urbanization as a driving factor behind increased domestic spending, Chen also expects credit card expenditure to increase to US$2.5 trillion. According to the People’s Bank of China, the central bank, there were 207 million credit cards in issue at the end of June, a 10% increase from the same time last year. The number of credit card users has quadrupled since 2006. Currently, China UnionPay has the only national electronic payment network.

Car sales end decline Car sales in China ended a four-month decline month-over-month by increasing 9% in August from July. The industry sold 1.2 million units in July, a 56% increase year-over-year. Foreign automakers General Motors Co., Volkswagen AG’s Audi brand and Mercedes-Benz AG all reported surging sales growth in China. Analysts estimate between 16 and 17 million vehicles will be sold this year in China, the world’s largest car market. Meanwhile, the government is considering expanding green vehicle subsidies, which have helped to drive sales. A subsidy could extend to installers of electric car charging stations, vehicle manufacturers and drivers by offering preferential usage fees.

China improves position in global competitiveness rankings China moved up two slots to number

Shenzhen SEZ turns 30 On September 6, China’s top leaders, along with Shenzhen businesses celebrated 30 years of the founding of the Shenzhen Special Economic Zone (SEZ) in August 1980. Shenzhen was China’s first such economic reform zone established by late Chinese leader Deng Xiaoping whose reforms set the foundation for China’s economic explosion. “The central government will continue to support the development of special economic zones as a first experimenter and a brave innovator,” said Chinese President Hu Jintao at the ceremony to mark the occasion. Additionally, the People’s Bank of China (PBoC) issued commemorative RMB100 gold coins and RMB10 silver coins. Over the past 30 years, Shenzhen has evolved from a small fishing village in China’s Guangdong Province to a modern metropolis of 8.9 million people.

Shenzhen serves as a key destination for foreign investment and is the birthplace for many hi-tech start-ups. In July, the economic zone was expanded to a land area nearly six times its original size.

27 on this year’s index of the world’s most competitive economies. The Global Competitiveness Report 2010–2011, produced by the World Economic Forum (WEF), a Swiss non-profit, attributes China’s improved position to financial sector advances and infrastructure construction. “The biggest strength of China is its large and growing market,” says Jennifer Blanke, WEF lead economist.

Notably, China’s ranking is widening compared to other emerging BRIC economies Brazil (58), India (51) and

Russia (63). The report assesses countries on 12 competitiveness factors, including infrastructure, macroeconomics, health and primary education. Switzerland earned the top spot, followed by Sweden, Singapore and the U.S. CORPORATE NEWS

Roche Holding to increase investments in China To tap into China’s growing healthcare industry, Swiss health-products company

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Roche Holding AG is expanding jobs, diagnostic operations and pharmaceutical research and development in China.

Roche’s expansion was announced amid the company’s shrinking operations in the U.S. and Europe, where it is cutting costs and facing pressure from regulatory bodies. Roche plans to work with community clinics around China, part of a government initiative to provide healthcare to 95% of China’s population.

At the same time, rival healthcare companies are also expanding in China.

Pharmaceutical company Novartis AG plans to invest US$1 billion for research and development, while Pfizer Inc. also has announced plans to expand.

IBM to help standardize patient records IBM Corp. is working with a group of hospitals in Guangdong Province to set up systems that will standardize and manage traditional Chinese medicine (TCM) patient records. In the future, the records may allow statistical analysis of traditional TCM techniques, allowing TCM doctors to refer to a greater pool of patients to create treatment plans. In addition, the move may provide statistical evidence on the effectiveness of non-Western remedies.

IBM is among technological companies cooperating with Chinese hospitals as part of the government’s US$124 billion healthcare reform. Dell Inc. is partnering with China Telecom Corp. to standardize electronic health records.

China to get its own Nissan brand Nissan Motor Co. announced the launch of a China-only passenger-car brand in early 2012, as the Japanese automaker aims to capture a larger share of China’s growing demand for affordable vehicles in the world’s largest car market. Nissan and Dongfeng Motor Group Co., Nissan’s partner in a 50-50 joint venture in China, will jointly produce and sell a no-frills car named Qichen (meaning “Venus”). Most vehicle development on the new brand’s first model will also take place in China to take

advantage of Nissan’s existing platform and cheaper labor costs. Nissan hopes the line will boost sales to one million units annually from its Chinese joint venture, which sold 519,000 units last year.

Starbucks adds 400th coffeehouse Starbucks Corp. added its 400th mainland China location by opening two stores on the same day in Changsha, the capital of Hunan Province in central China. The openings expand the Seattle-based coffee and food chain’s presence in inland China where it also has outlets in Wuhan, the capital of Hubei Province. China is Starbucks’ second largest market following the U.S. Since opening its first China location in Beijing in 1999, Starbucks has become the largest coffeehouse operator in China.

NEC to offer cloud computing in China Japanese technology company NEC Corp. is setting up a joint venture with Neusoft Corp., China’s largest IT outsourcing provider, to set up cloud computing networks in China, the first time NEC has done so outside of Japan. NEC will hold a 70% stake and will set up the joint venture in Dalian, in eastern Liaoning Province, with 70 employees. NEC says it expects the cloud computing market in China to grow to US$2.3 billion by 2012, expanding by an average of 30% per year. Cloud computing is a technology in which computer services are provided over the Internet and data are housed in a centralized computer instead of users’ individual desktops.

RMB164 billion. Total retail sales this year now amount to RMB9.75 trillion, up 18.8% from the same period last year.

Property rates remain steady For the second month in a row, property values across 70 large and medium Chinese cities remain steady, according to National Bureau of Statistics (NBS) data. It is the fourth consecutive month that growth has slowed since a 12.8% record increase in property values in April. The property price index, however, shows a 9.3% increase from 2009, showcasing the challenges to a wider government effort to curb soaring property values through credit curbs and tighter mortgage requirements. The NBS also says that the Chinese government will start collecting data on vacant housing. The property data come before the traditional September peak in property sales.

Import growth continues surge China imported US$119 billion worth of products in August, a 35% increase year-over-year and a 13% rise from July.

By contrast, China’s exports increased 34% in August year-over-year to US$139 billion but at a slower pace from July’s 38% rise. For the first seven months this year, customs data show China imported US$767 billion, a 47% increase, while the country exported US$1.6 trillion, a 36% increase. Meanwhile, the Chinese government is launching an import drive to encourage an expansion in imports of advanced technology and equipment that are in short supply domestically.

U.S. - CHINA

MACROECONOMICS

August retail sales increase 18.4%

President Hu meets top White House staff

China’s National Bureau of Statistics data show retail sales of consumer goods in China are up 18.4% year-over-year for the month of August, with sales totaling RMB1.26 trillion (US$187.7 billion). Consumption in urban areas accounts for RMB1.09 trillion – an 18.8% increase – while data on rural spending show a 15.9% increase to

Chinese President Hu Jintao met with Lawrence Summers, director of the White House’s National Economic Council, and Deputy National Security Advisor Thomas Donilon on their trip to China to discuss topics ranging from currency valuation and China’s relationship with North Korea. President Hu stressed

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“working together” with the U.S., while the U.S. delegation emphasized a “healthy U.S.-China relationship.” The visit marks a series of scheduled high-level talks between the U.S. and China; President Hu and Premier Wen Jiabao are scheduled to visit the U.S. over the coming months.

China exports medical equipment to the U.S. Chinese medical equipment company Mindray Medical International, Ltd. is reporting US$325 million in sales in the first half of 2010, a 10.5% increase, thanks in part to U.S. hospitals’ demand for lower-cost equipment amid budget pressures. Mindray offers patient monitors, ultrasound equipment and other medical equipment that cost 40% less than mainstream models. The Shenzhen-based company, which has offices in New Jersey and Washington, is aided by cheaper labor and a willingness to sacrifice profit margins to boost sales. The U.S. market accounts for a fifth of Mindray’s sales. Mindray currently employs 400 workers in the U.S.

Gov. Schwarzenegger urges investment in high-speed rail In Shanghai as part of a six-day trade mission, California Governor Arnold Schwarzenegger urged China to invest in California’s proposed high-speed railway. “We look to China to build our high-speed rail, to be part of the bidding process that we are going to go through,” said Gov. Schwarzenegger. The high-speed rail is part of California’s planned US$150 billion investment in transportation and infrastructure. The state has already been awarded US$2.3 billion in federal funds to build the high-speed railway, which will connect Los Angeles to San Francisco.

GOVERNMENT & POLICY

Identification required for new mobile accounts China’s Ministry of Industry and Information Technology (MIIT) announced rules that mobile phone users must

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present identification when subscribing for a new number beginning September 1. Existing users will eventually need to register by name as well. The rules apply to Chinese users as well as foreigners who need to present a passport or alternative identification to register. The government intends for the new rules to thwart spam, fraud and objectionable messages. The China Ministry of Information Industry (MII) says over 300 million of China’s nearly 800 million mobile phone users are unidentified. China has 814 million mobile subscriber accounts and adds more than five million a month, making China the largest mobile market in the world.

Premier Wen says foreign business will be treated fairly Addressing a spat of complaints from foreign companies operating in China, ranging from insufficient protection for intellectual property to inconsistent rules enforcement, Chinese Premier Wen Jiabao promised that foreign business will be treated fairly and that China has a commitment to open trade and maintaining a favorable investment environment.

Speaking at the World Economic Forum’s Annual Meeting of the New Champions in Tianjin, Premier Wen admitted that China’s policies “were not clear enough” but noted that foreign companies in China had “reaped good returns” and have enjoyed substantial growth in China. He also spoke about a government commitment to reduce wasteful use of energy and China’s support for sustainable businesses and technologies.

Wuhan invests in electric vehicle production Following a national pledge for new energy vehicle growth, government and industry leaders in central China’s Wuhan say they intend to invest US$443 million to build Wuhan into a major electric vehicle production base. The city’s Hannan District government and Wuhan-based Grand China Electric Vehicles Co. signed a pact to produce 3,000 battery-powered vehicles

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every year, along with 3,000 packages of core auto parts, for total annual sales of US$1.5 billion. Wuhan has been one of the strongest proponents for electric vehicles in China, signing a deal with Nissan Motor Co. this year to promote the use of electric cars in Wuhan and pledging to build batterycharging stations in the city.

First Chinese woman sworn in for UN court Xue Hanqin was sworn in as a judge for the International Court of Justice (ICJ), becoming the first Chinese woman to serve on the court. Xue was sworn in along with American Joan E. Donoghue. It is also the first time in ICJ’s history that two female judges have served simultaneously. Xue, a veteran Chinese diplomat and formerly China’s ambassador to The Hague, is the third Chinese judge to join the ICJ. Following the swearing-in ceremony, both Xue and Donoghue immediately assumed their court duties and oversaw public hearings concerning racial discrimination in Georgia and Russia.

SHANGHAI BUSINESS

China Telecom offers free WiFi surfing China Telecom Corp. Ltd., China’s largest fixed-line phone operator, is offering Shanghai-based China Mobile and China Unicom users free outdoor Wi-Fi services for two hours every day. Shanghai users should apply at China Telecom for a limited number of accounts. According to China Telecom, the process takes “less than a minute.” Free WiFi services are already available at Shanghai’s airports and other public areas, though China Mobile charges RMB0.06 per minute of outdoor service. It is the first time a company is providing WiFi services for customers on other carriers.

Pudong to invest in hi-tech start-ups As part of Pudong’s RMB2 billion (US$298 million) project to lure entrepreneurship to the area, the Pudong District Government

agreed to invest RMB340 million in six hi-tech start-up companies. The six companies will receive the funds through two state-owned venture capital firms and, per the requirements of the investment, are focused on advanced technologies and “global perspectives.” The Pudong District Government hopes to attract growth industries such as integrated circuits, biomedicine and new materials.

Pudong’s new and hi-tech enterprises account for RMB147 billion in revenue, 26% of Pudong’s total industrial output.

Property sale sets price record A parcel of land in Pudong District sold for RMB4.8 billion (US$706 million) or RMB35,490 per square meter, a record sales price for a residential property in China. The record-setting sale is above the previous high of RMB32,000 per square meter set last December for a site in Yangpu District. The winning bidder, Zhuoguang Holding Co., a subsidiary of Hong Kong conglomerate The Wharf

(Holdings) Ltd., plans to develop luxury homes on the 54,415 square meter riverside site next to the Lujiazui Financial Center and the Expo Garden. Homes built there could fetch prices of RMB100,000 or more per square meter.

closes on October 31. Around 18 million Expo tickets have been purchased but remain unused.

2010 WORLD EXPO

During Tibet Week at the Shanghai 2010 World Expo, the city of Lhasa, capital of the Tibet Autonomous Region, and Shanghai struck an agreement that soon will make it easier for Shanghai residents to visit Tibet. New tourism services will include luxury train travel, additional flights, as well as more five-day shortstay trips, up from three, around Lhasa for residents from Shanghai and other big cities. Tibet continues to be a draw for Chinese mainland tourists, as well as international visitors, receiving a total of more than 5 million visitors from January through August this year, a 25% increase year-over-year. The region’s tourism income has increased 37% year-over-year, hitting RMB4.4 billion (US$653 million) through August.

Expo welcomes 50 million visitors Over 50 million people have officially visited the Shanghai 2010 World Expo, with the 50 millionth visitor crossing the gates at 5:31 pm on the 133rd day of the Expo. Expo organizers are gearing up to welcome a surge of visitors during the Mid-Autumn Festival and National Day holiday, as well as the Shanghai Tourism Festival. Pavilions are closing down for maintenance repairs, and tickets for October are being restricted. Online travel agency Ctrip.com estimates there could be 600,000 to 700,000 visitors per day during the month of October, with visitors aiming to visit the Expo before it

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Tibet establishes new tourism links

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CHINA & THE WORLD

SOUTH AMERICA ASIA-PACIFIC

INDIA: Suzlon Energy to open China-based R&D center Indian-based wind power company Suzlon Energy announced plans to open a research and development facility in China that will also manufacture its turbines for export. The 120-megawatt wind turbines produced for export to Brazil will be the first time Suzlon is using its operations in China for sales overseas and is part of a broader plan to increase exports from China. Suzlon already operates R&D centers in Belgium, Denmark, Germany, India and the Netherlands. Suzlon chairman Tulski Tanti said that Suzlon is considering listing its China-based assets on the Hong Kong Stock Exchange, calling the listing a “medium-term” plan. Founded in India in 1995, Suzlon is the largest wind turbine manufacturer in Asia and the third largest worldwide.

MIDDLE EAST

ASIA-PACIFIC EUROPE

China to increase SEZ investment During a China-Africa Experience-Sharing Program hosted by the Chinese government and the World Bank in Beijing, Chinese officials expressed their commitment to increase spending in Africa’s Special Economic Zones (SEZs). The World Bank added that it will support diversified Chinese investment beyond minerals and infrastructure sectors. China supports economic zones in Zambia, Mauritius and Tanzania, as well as the planning of zones in Nigeria, Egypt and Ethiopia.

The Zambia-China Economic and Trade Cooperation Zone was the first African SEZ established

by China in 2007. China’s investment in African economic zones will help domestic firms enter the African market.

AFRICA

DENMARK: Chinese, Danish mobile executives discuss industry cooperation Around 50 top Chinese and Danish mobile internet executives attended a forum in Copenhagen to discuss the development of the mobile industry in China. The forum was co-sponsored by the Investment Department of the Ministry of Foreign Affairs in Denmark and the Mobile Internet Great Wall Club (GWC) in Beijing. The GWC is a non-governmental, non-profit organization whose goal is to create a platform for executives in the mobile internet industry. GWC Founder and President David Song offered to help Danish mobile companies collaborate with Chinese companies. The GWC delegation is on a nine-day visit to Northern Europe to promote greater cooperation between foreign mobile internet companies and GWC members.

MIDDLE EAST EUROPE

NORTH AMERICA MIDDLE EAST

AFRICA

PAKISTAN: Chinese rescue team provides support A 55-member Chinese rescue team landed in Islamabad to assist with disaster relief efforts following a series of devastating floods. The team brought more than 100 types of relief materials and equipment and more than 1,500 kinds of medicine to combat acute diarrhea and respiratory tract infections. The relief work will mostly focus on medical assistance as well as setting up a field hospital in the area. The rescue team is expected to remain in the disaster-stricken region for approximately three weeks. Immediately after the floods, China was the first nation to commit aid. Pakistan Ambassador to China Masood Khan has thanked China for its generous relief efforts.

NORTH AMERICA

SOUTH AMERICA MIDDLE EAST AFRICA

UNITED STATES: Ministry of Railways signs MOU for California high-speed rail During a visit from California Governor Arnold Schwarzenegger, China’s Ministry of Railways signed a Memorandum of Understanding (MOU) with the Bay Area Council for investing in California’s future high-speed rail network. The MOU will allow the Council to provide assistance and consultancy services on high-speed railway construction to the Ministry of Railways and other companies under the ministry. Gov. Schwarzenegger has said that many countries will be bidding to build the high-speed rail and the state will be looking to China for financing support.

In January, California was awarded US$2.3 billion in funding from the American Recovery and Reinvestment Act that President Obama made available to states for high-speed intercity rail. The total cost of California’s high-speed rail is expected to exceed US$40 billion.

AFRICA ASIA-PACIFIC NORTH AMERICA

SOUTH AMERICA

NORTH AMERICA SOUTH AMERICA EUROPE

BRAZIL: Chinese banks to invest in Brazil high-speed train China Railway Construction Corp. and China Northern Locomotive & Rolling Stock Industry Group Corp. are bidding to build Brazil’s high-speed rail linking the country’s two biggest cities, Rio de Janeiro and Sao Paulo. China Development Bank Corp. and the Export-Import Bank of China have pledged to lend financial support to the group of Chinese companies bidding for the project. A team set up by China’s Ministry of Railways will organize railway-engineering contracts for Chinese bidders. Other bidders include firms from Japan, Korea, Germany and Spain. The high-speed rail system is expected to cost more than US$19 billion and be completed in 2017.

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L E G A L U P DAT E

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n July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). The Act contains new protections and incentives for individuals who report fraudulent or illegal activities of corporations subject to U.S. securities laws, including the Foreign Corrupt Practices Act (FCPA).

The FCPA is a U.S. law that prohibits corrupt payments to foreign officials and requires corporations with securities traded in the U.S. to keep accurate accounting records and create adequate internal controls.

Under the Act, individual whistleblowers, or whistleblowers acting jointly, who report FCPA and other securities violations, can receive between 10 percent and 30 percent of any monetary sanctions imposed in resulting enforcement actions.

These payments are measured by the sanctions imposed not just by the Securities and Exchange Commission (SEC), but also by those imposed in “related actions” brought by the U.S. Department of Justice (DOJ) or other agencies.

Rising FCPA enforcement in China FCPA enforcement actions are on the rise worldwide with more than 130 cases currently under investigation by U.S. authorities. In particular, enforcement actions involving the China operations of multinational corporations have increased substantially. Since August 2004, the U.S.

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New Whistleblower Incentives Stress FCPA Compliance government has initiated over 30 FCPA enforcement actions arising from China-related business conduct, growing from four actions in 2004-2005 to 15 in 2008-2009, while eight additional multinationals have disclosed current, ongoing investigations for possible FCPA violations arising from their China operations.

The SEC and DOJ have levied significant penalties against corporations and individuals for violations of the FCPA in recent years, including a record US$800 million fine in 2008. The promise of bounties, measured as a percentage of such large penalties that continue to increase both in size and frequency, threatens to have immediate repercussions on the enforcement environment faced by corporations with securities traded in the U.S.

Eligibility for bounties The Act seeks to pay bounties to whistleblowers who voluntarily provide “original information” to the SEC. The original information must lead to a successful SEC enforcement action that results in monetary sanctions exceeding US$1 million or to monetary sanctions in related actions. The SEC has the discretion to award any amount between 10 and 30 percent of the monetary sanctions imposed, and determines the precise amount of any award by taking into account factors such as: (i) the significance of the information provided by the whistleblower; (ii) the degree of assistance provided by the whistleblower; (iii) the programmatic interest

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Compliance with the Foreign Corrupt Practices Act in both the U.S. and China is now more important than ever.

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The new incentives will result in more investigations of those corporations subject to the FCPA.”

of the SEC in deterring violations of the securities laws by making awards to whistleblowers; and (iv) other factors the SEC may establish by rule or regulation.

Whistleblowers may receive an award even if the violation of the rule or regulation underlying the relevant enforcement action occurred prior to enactment of the Act, and notably, the Act does not limit the scope of eligible bounty claimants to U.S. citizens or to employees of the guilty corporation.

Whistleblowers are permitted to be represented by counsel, and those who choose to provide information anonymously are required to have an attorney.

Anti-retaliation The Act also creates a private right of action for employees who have suffered retaliation because of any act done by the whistleblower in: (i) “providing information to the [SEC]” in accordance with the provisions of the section; (ii) “initiating, testifying, or assisting in any investigation or judicial or administrative action of the [SEC] based upon or related to such information”; or (iii) “in making disclosures that are required or protected” under the Sarbanes-Oxley Act of 2002, the Securities Exchange Act of 1934, or any other law, rule, or regulation subject to the SEC’s jurisdiction. The Act also expands the coverage of Sarbanes-Oxley whistleblower protections to include employees of subsidiaries of publicly traded corporations if those subsidiaries are included in the traded corporation’s consolidated financial statements.

Pros and cons of the incentives Proponents of the whistleblower incentives argue that the promise of a financial windfall is necessary to encourage key witnesses to come forward in light of the personal and professional risks associated with reporting violations. They point to a 2008 report from the Association of Certified Fraud Examiners, which found that more than half of the 1,000 fraud cases studied were discovered by tips, often from employees; only 4 percent of cases were found by external auditors, such as the SEC. As one expert noted in written testimony to the House

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Committee on Financial Services, whistleblowers are the “best and cheapest” source of cases.

On the other hand, it is not entirely clear that increased financial incentives for whistleblowers will result in better corporate compliance. Such rewards may create an incentive for employees to hide or ignore ongoing violations until they become more serious before reporting them externally, rather than taking proactive measures to stop ongoing violations. Moreover, giving witnesses a financial stake in enforcement actions arguably undermines the legitimacy and reliability of complaints and thus the SEC’s credibility in prosecuting those cases, and may foster spurious reports that could drown out the voice of legitimate whistleblowers. Allowing whistleblowers to submit reports anonymously only increases the risk of false alarms. The time and effort spent investigating such false accusations would be borne not only by the corporations involved, but also by the SEC.

Next steps The SEC is currently in the process of soliciting public comments on and drafting new regulations for the Act, including rules for the new whistleblower provisions of the Act. It is yet unknown what guidelines these regulations will provide, and whether these regulations will be able to encourage legitimate complaints. Regardless of whether the whistleblower incentives will ultimately produce better corporate compliance, the initial public comments have already made one thing clear: the new incentives will result in more investigations of those corporations subject to the FCPA. Now, more than ever, corporations operating in China that are subject to the FCPA will need to ensure that their compliance programs are sufficient. Not only has the U.S. Government increased its attention on China-related business conduct in recent years, but the likelihood of both independent employees and third party individuals reporting violations and the risk of false positives have just gone up dramatically.

Peter Wang and Jerry Ling are attorneys in the Shanghai office of Jones Day. For more information, visit www.jonesday.com.

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ne of the key messages coming out of Shanghai this year is that of sustainable development.

AmCham Shanghai’s annual Sustainability Conference, this year themed Green Cities: A Call to Action, along with the ongoing Shanghai 2010 World Expo, has helped drive the topic to the fore. The Shanghai World Expo is the first expo to encompass a city theme and the message that development and sustainability go hand-in-hand is coming across loud and clear.

How can the concept of sustainable development be implemented in China? “Necessity is the mother of invention,” says Ellen Carberry, managing director of the China Greentech Initiative. Everything about China is growing – foreign investment is rising, gross domestic product growth is accelerating, China has the fastest growing economy in the world, as well as the world’s second largest economy. But China is also the world’s top carbon emitter, with more than 150 cities in excess of a million people and a conscious strategy to increase the number of cities with more than a million people in the next decade of growth.

As a result, increased urbanization and population concentration is expected to rise (China’s urbanization rate is expected to grow from 47 percent today to 64 percent by 2025), with the living space per capita and per capita energy use expected to hit record numbers. Based on the country’s sheer numbers alone, China’s rate of growth has the possibility of pushing the world’s energy consumption levels to potentially unsustainable levels if left unchecked. Certainly, now is a time of necessity.

As the largest carbon emitter, China must develop policies at the macro level to reduce the country’s carbon emissions and put policies in place

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A Tale of Sustainable Cities for the implementation of green technology to create renewable energy. Building up these policies at the national level will take time. In the meantime, individuals can start by reducing their own carbon footprints at the micro level. As a developing country, cities in China can leapfrog to advanced energy technologies and adopt city-based solutions to develop clean and renewable energy resources like solar, wind, geological and clean coal energy, as well as develop ways to conserve energy usage while maintaining a high quality of life. City governments in China are just now getting behind the rhetoric, building “eco-cities” as models for other cities nationally and worldwide.

Green city development What defines an eco-city? Simply put, an ecocity is self-sufficient in its energy usage, operates using renewable energy resources and supports a low- or zero-carbon urban environment. There are roughly 60 eco-city projects currently in development across China, according to Goh Chye Boon, CEO of the Sino-Singapore Tianjin EcoCity project. Speaking at the AmCham Shanghai Sustainability Conference in September, Boon was joined by David Nieh, general manager of Hong Kong property developer Shui On Land, and Chris Twinn, director of Arup’s Building Engineering Sustainability Group, for a panel discussion on the successes and challenges of planning, designing, building and marketing eco-cities in China.

The Sino-Singapore Tianjin Eco-City project is just one example of a successful foreign-Chinese partnership for the development of an eco-city in China. The 30-square-kilometer collaboration project broke ground in mid-2008 and is currently under development in the northern port city

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Several ecopartnerships are creating green cities in China.

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Tying in the message of conservation and investment is important to emphasize that people are buying in to a sustainable lifestyle.”

of Tianjin. Goh explained that the most crucial decision in the planning stage was site selection. To avoid taking “productive agricultural land” off the market, the developers looked for what Goh says was “the worst piece of land” – that is, land that was eroded from industrial development that had a “bad” ecological footprint – to turn into a model city.

For planners like Goh, another big challenge is finding a way to market the idea of an eco-city to developers to design, create and build a city that is not only functional in design but innovative in its use of green technology and financially viable as an investment vehicle. To create a sustainable business solution, developers have to consider whether the people who will live in the eco-city can “subscribe to the lifestyle,” says Nieh. The key is to find the right balance between functionality and green innovation.

Selling the lifestyle In developing a marketing plan for Shui On’s project in Dalian, the company decided on a name that conjures up the idea of an eco-city but which does not explicitly use the word “eco” in its branding. The development project is being dubbed as “Dalian Tiandi” – referring to heaven and earth in the city of Dalian. “As a real estate developer, we are selling a lifestyle,” says Nieh. The concern is that referring to the project as an “eco-city” might date the project to a period of time when the concept was trendy.

Dalian Tiandi is a 26.5-square-kilometer “urban center” currently in development that is expected to be launched by 2020. One of the communities in Dalian Tiandi, Huang Ni Chuan, is being marketed toward “green-living enthusiasts” interested in “experiencing world class lifestyles of health and sustainability,” according to Shui On’s website.

The marketing and management of the property must also consider the average Chinese consumer who views property as an investment. The idea of shelling out money for monthly management fees does not appeal to the Chinese, explains Nieh. To attract Chinese purchasers, Shui On has developed tailored sales packages that link management fees to green incentives. In looking at month-to-month usage of utilities, property owners in the Dalian Tiandi project can offset their monthly management

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fees in proportion to the amount of utility savings achieved through conserving water and electricity.

Tying in the message of conservation and investment is important to emphasize that people are buying in to a sustainable lifestyle. In some eco-cities, houses that are being built will be fueled by completely renewable energy resulting in substantial savings to consumers in the long run.

But if the developer markets the property only as a great return on investment because of its energy saving – and therefore cost saving – technologies, people will spend the extra money saved on highcarbon items, cautions Twinn.

For example, with lower electricity bills, consumers may feel they can spend more on electronics.

Homeowners may go out and spend the money they have saved on utilities to purchase vacation packages.

Any short-term carbon savings end up squandered over the long term. To avoid consumer complacency, Twinn suggests developers drive the message home that energy conservation is a significant component of the lifestyle. “You can build a green city but it can be undone very fast,” adds Goh. Reducing our carbon footprint is certainly a message the government can get behind. The central government has committed to bettering the environment and reducing China’s green house gas emissions as reflected in the country’s 10th and 11th five-year plans (2001-2005 and 2006-2010, respectively). But it is clear that China’s policymakers have to put the infrastructure in place at the national level to drive sustainable development at the individual level. The need for innovation and research and development in the renewable energy industry, as well as the commercialization of green technology to drive the eco-movement forward are key messages that came out of this year’s Sustainability Conference.

Until the government can put the implementing framework in place, city-based projects like the Sino-Singapore Tianjin Eco-City project and Dalian Tiandi, that adopt foreign-Chinese business models, can lead the way.

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

POLICY INSIGHT

BY CHAOPING ZHU

IMAGINECHINA

China’s Housing Market: Which Way to Go?

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he debate over China’s rising residential housing prices has long been a key concern for China’s policymakers and a series of initiatives have followed in an attempt to cool the overheated market. China’s government is now faced with a “trilemma” of simultaneously managing growth in the real estate sector, controlling inflating prices and curbing speculation on investment properties. Controversy will continue to surround the government’s latest round of policy measures and the effects of these housing market controls on the residential property market unless a sustainable solution is reached.

Early signs of a market correction emerged in July, indicating that controls would be loosened.

In response, transactional activities in Shanghai and Beijing rose slightly. However, two speeches

by Chinese Vice Premier Li Keqiang in August indicating that stricter oversight would follow, combined with rumors about a pilot property tax scheme in the works, signaled a new wave of strengthened market controls that may turn residential property investors skittish.

Although the central government is showing an unprecedented level of determination to curb out-of-control housing prices through regulatory controls, significant structural changes to China’s economy are critical to sustaining long-term results.

Close scrutiny of the country’s economic outlook and low-cost housing policies in first-tier cities

could indicate that China’s double-track housing system – a separated real estate market comprised of publically funded low-cost housing and privately owned high-end housing – is finally shaping-up after a long-lasting imbalance in the Chinese economy.

Tightening-up policies In two separate speeches on August 13 and 21, Vice Premier Li stressed the central government’s goals of curbing housing speculation and improving the housing security system, signaling a new wave of severe policies toward correcting the property market. In the several rounds of housing market controls promulgated over the past decade, never had the government been so forthright, as Li conveyed the government’s promise to “uncompromisingly crack down on housing speculation.”

Given that Li is widely expected to succeed Wen Jiabao as premier in 2010 and oversee the administrative arm of the Chinese government, it is important to consider his stance on curbing property speculation when forecasting the efforts China will take to shore up long term economic restructuring and housing reform. At the same time, there has been an increase in the number of substantive policy measures targeting housing speculators, property developers and local governments.

The so-called “differentiated mortgage rule” is a targeted and effective way of reducing housing speculation. In mid-April, China’s banking regulator,

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Despite policy changes aimed at lowering residential housing prices, the formation of a doubletrack housing market will prop up housing prices in the long run.

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Policies to cool down the housing market must be accompanied by support to local governments.”

the China Banking Regulatory Commission (CBRC) raised the minimum down payment for second homes from 30 percent to 50 percent and increased the mortgage rate by 10 percent. In early August, China’s large state-owned banks, including the Industrial and Commercial Bank of China, the Bank of Communications and the Bank of China, halted third-home loans in Beijing, Shanghai, Guangzhou and select second tier cities. Foreign banks such as Standard Chartered, DBS and HSBC were ahead of the curve, having suspended thirdhome loans since April.

Meanwhile, China’s public housing fund administrators adopted complementary guidelines and upgraded investigation procedures on fraudulent activities for low-interest loans. As a result, the issuance of personal commercial mortgage loans in Shanghai decreased 50 percent from RMB34 billion in the first quarter of 2010 to RMB17 billion in the second quarter.

For developers, stricter policy enforcement is placing greater pressure on working capital. The CBRC not only ordered more rigorous investigations into developers’ credit statuses, but also cooperated with the Ministry of Housing and Urban-Rural Development to suspend loans to developers blacklisted for hoarding land. In Beijing, the government introduced a third party trust and supervision mechanism into the present advanced payment system so that developers can only sell residential properties and accept payment from buyers after the main structures of buildings have been completed. This has helped prevent developers from misappropriating funds. The issue of cash flow for property developers generally attracts attention as a result of policy changes, and it is expected that smaller developers will start selling off superfluous properties before the year’s end to recover their working capital.

Local governments are also major stakeholders in the property market given their reliance on fiscal revenue generated from land sales. When housing prices drop, local government revenues shrink while the risk of non-performing loans grows. Due to this causation effect, policies to cool down the housing market must be accompanied by support to local governments. It is expected that the introduction of a property tax will have two functions: one to

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squeeze out market supply through higher holding costs for speculators and the other to provide stable cash flows for local governments.

Policymakers’ dilemma Managing the property market is a crucial part of the central government’s efforts to limit the impact of the global financial crisis on China’s economy. With the fear of a double-dip recession looming ahead, the government now faces the dilemma of having to choose between economic growth and managing skyrocketing prices in the property market.

In 2009, capital formation contributed to 92.3 percent of China’s gross domestic product (GDP) growth, while property investment accounted for roughly 60 percent of capital investments. The real estate sector’s high contribution to growth justifies the assertion that real estate is a pillar of the Chinese economy. “Real estate is driving the industries of steel, construction materials, appliances and textiles,” says Chief Economist Yao Jingyuan of the National Bureau of Statistics.

During the global financial crisis, net exports – another traditional pillar of the Chinese economy – dropped dramatically, dragging down the country’s growth rate. Policymakers engaged in heated discussions over whether the housing market should be left unconstrained until a time when growth and employment would go unaffected.

Concerns over a possible economic slowdown were so strong that when housing market control policies were announced in April, the Chinese stock market dropped by 20 percent in the following two months.

On the other hand, concern over the negative impact of over-valued housing prices is growing.

Critics argue that consumption is squeezed by high housing prices that make initial down payment and mortgage loan repayment difficult for urban middle class families. But the risks associated with nonperforming loans in the banking system could be of greater concern to policymakers. The rent yield of a home at a market-to-market price is merely 2 percent, which amounts to a percentage even lower than the one-year savings rate of 2.25 percent or the nation’s inflation rate of 3.5 percent. This low yield is unsustainable for investors, especially those who

entered the market late last year, in addition to being a huge risk for mortgage-granting banks. The CBRC led two rounds of stress tests earlier this year and released results that appeared optimistic under the assumption of a 30 to 50 percent drop in housing prices. One implication of these tests is that housing prices should be controlled to prevent the sudden accumulation of systematic risks.

Another aspect of this dilemma is the increasing inflation rate. Although both the Chinese government and consumers have felt the impact of inflation on consumer goods beginning this year, a rise in the interest rate is yet unforeseeable. In 2009, low interest rates helped support government-backed infrastructure projects and prevented speculative capital inflow. However, if the nominal interest rate is kept lower than the inflation rate, negative real estate interest rates are supporting a potential asset bubble that may generate a rise in housing prices.

Loose monetary policies worldwide could squeeze China out of its imperative to increase its benchmark interest rate in the event that domestic investments are lowered and quick appreciation of the RMB is triggered. Under this scenario, the only effective tool of the central bank is to use its administrative authority to supervise and control the flow of loans.

Facing this dilemma, policymakers must find a solution to the difficult problem of how to handle the trade-off between short-term stability and long-term sustainability. A partial solution in the short term is to raise mortgage rates while keeping interest rates low. The downside is that this method leaves loopholes for real estate speculators.

Consumer loans, collateralized loans for business and other types of loans could be manipulated to support housing investment activities.

A persistent imbalance To understand the Chinese property market and forecast its future development, attention should be paid to the persistent imbalance in the Chinese economy and the resulting premium placed on home ownership in large cities.

At the macro level, an imbalance in regional development and urbanization is a long-term problem. Centralization of productive resources like

transportation, foreign markets and jobs in large urban cities naturally pushes up premiums on land and housing prices. Local government revenue from land sales is an indicator of how essential land sales are to government budgets. In 2009, government revenue generated from land sales totaled RMB1.5 trillion, with Shanghai and Hangzhou each collecting RMB100 billion and Beijing collecting RMB92 billion.

With higher levels of revenue generated by an increase in land sales, local governments can reinvest capital into infrastructure projects and social service schemes. In turn, local governments can raise local housing prices and collect incrementally higher percentages generated from subsequent rounds of land sales. Policies that rebalance regional development and foster urbanization of rural areas can help centralize productive resources in newly urbanized areas.

Access to public services is another factor that contributes to the high premium placed on home ownership in China’s large and urban cities, and hence significantly contributes to the high cost of residential properties. Ownership of urban homes has become an important criterion in determining residents’ access to public services in large urban cities as they are limited to only those who own residential properties in that city. This connection is strengthened by China’s “hukou” or household registration system under which public services such as education, retirement and healthcare are bonded to the place of a person’s hukou. Some policies dictate that only a hukou in a local private home can guarantee full access to local public services. Given the linkage between housing and public benefits, high demand for residential housing in urban cities creates an artificial premium on property ownership.

The fundamental imbalance in the economy and the challenges of an overheated housing market require comprehensive reform of China’s economic structure and public policies. It is unrealistic, however, to expect a sudden change to rebalance the economy. The premium placed on home ownership in large urban cities makes it difficult to meet demand from low- and even middle-income households in large cities.

Double-track low-cost housing could be a

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If the nominal interest rate is kept lower than the inflation rate, negative real estate interest rates are supporting a potential asset bubble that may generate a rise in housing prices.”

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The premium placed on home ownership in large urban cities makes it difficult to meet demand from lowand even middleincome households in large cities.”

potential solution. Publically funded low-cost housing was proposed as a complement to the liberalized housing market when China initiated its housing reform in the 1990s. This so-called “double-track” housing system places oversight of publically funded low-cost houses with local governments, and has enabled local governments to provide urban low- to middle-income families with affordable housing options. The separation allows for a more liberalized market for high-end private homes that serves the middle to upper classes.

Following the National People’s Congress Standing Committee meeting this spring, pressure for local governments to jump-start construction plans for low-cost housing has gathered. Local governments have since announced increased responsibility for meeting the basic market demand for public, low-cost, urban housing. Early this year, the Beijing municipal government announced a “two 50 percent” goal for the construction of low-cost housing (50 percent of land supply should be dedicated for low-cost housing

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and 50 percent of the planned construction area should start before the end of this year).

This policy initiative for low-cost housing will have two opposite effects. One is to temper demand for residential properties and tame the price increase for high-end homes. The other is to cut the supply of high-end homes to support their high price tags.

In the long run, this could allow the relationship between the price of the high-end housing market to realign with China’s true monetary conditions and income growth. Although the uncertainty of short-term policies will have some negative impact on the market for high-end homes, the market in international cities such as Shanghai and Beijing will be supported in the long run by an inflow of talent, resources and capital.

Chaoping Zhu is a research analyst for the AmCham Shanghai and Brookings-Tsinghua Center Joint Research Project. He can be contacted at chaoping.zhu@amcham-shanghai.org.

R E G U L ATO RY U P DAT E

B Y E DWA R D E P S T E I N

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When State Secrets are not Secret

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ree markets thrive on the unimpeded and rapid flow of information, and the global economy is increasingly an information-based economy. It is therefore impossible to imagine doing business without rapid and detailed knowledge about one’s competitors (whether state-owned or private) and about the supply and demand for products and the raw materials from which they are made.

So it is not surprising that a shiver ran down the back of the U.S. business community in China when Chinese-born American geologist Xue Feng was sentenced by a Chinese court to eight years’ imprisonment for buying information related to China’s oil industry. Xue was employed by IHS Inc., which describes itself as “a leading source of information and insight in pivotal areas that shape today’s business landscape: energy, economics, geopolitical risk, sustainability and supply chain management.” Along with Xue, three Chinese nationals were convicted of stealing state secrets.

The case began in November 2007, when Xue disappeared and was weeks later found to have been detained by China’s State Security Bureau. His case has been shrouded in mystery ever since. The real facts and the reasoning behind his conviction can only be pieced together from media reports and informal channels. They tell the story of Xue being formally arrested in 2008 on charges of

stealing state secrets related to China’s oil industry, including a database that showed the location and condition of oil wells belonging to state-owned (and publicly traded) behemoth China National Petroleum Corporation.

The charges were not brought before a court until July 2009 (IHS was not charged) and, even then, the charges were promptly returned to the prosecution for further investigation, which lasted almost a year until Xue and his accomplices were brought to trial in 2010. Although the U.S. government was represented at his sentencing in July 2010, the court’s judgment has not been published.

Without a public judgment, we can only speculate on the court’s reasoning and try to understand the law related to state secrets on its face. Articles 111 and 282 of the Chinese Criminal Law of 1997 (Criminal Code) create the crimes of unlawful dealing in state secrets.

Article 111 covers “stealing,” “intercepting,” “purchasing” or “unlawfully providing” “state secrets” or “intelligence” to foreign organizations or individuals. Article 282 covers the provision of state secrets to Chinese organizations or individuals. Xue was presumably convicted under Article 111 as he is a naturalized U.S. citizen, although he was born in China.

The penalties under Article 111 are much more severe than those under Article 282 and provide

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The dilemma of U.S. companies collecting business information in China.

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To convict a person of supplying or receiving a state secret, it is not necessary to establish that it is a secret at all.”

generally for imprisonment of five to 10 years or, in serious cases, imprisonment of 10 years or more to life. Article 113 of the Criminal Code further provides that persons convicted of crimes under Article 111 may have their personal assets confiscated, and in extremely serious cases, may be subject to the death penalty.

There appears to be no dispute that Xue purchased the information he was accused of stealing in the ordinary course of his employment with IHS. Therefore, the application of Article 111 of the Criminal Code to Xue’s case really depends on whether Xue knew the information constituted “state secrets” or “intelligence” because Article 111 of the Criminal Code requires criminal intent and is subject to Article 14 of the Criminal Code.

Article 14 requires that an intentional crime only be punishable if the person knew the act would create harm to society and either intended the harm or was reckless in the consequences of the act.

Sweeping definitions of state secrets and intelligence Surprisingly, the Criminal Code does not itself define the key concepts of “state secrets” and “intelligence.” The Supreme Court did, however, apply the definition of “state secrets” to the Criminal Code in a 2001 judicial interpretation of the 1989 State Secrets Protection Law (amended in 2010) (State Secrets Law) and its May 2010 implementing regulations (Implementing Regulations) .

The State Secrets Law defines “state secrets” as information related to China’s national security or national interests and which has been classified as “state secrets” according to a closeddoor procedure. The State Secrets Law and its Implementing Regulations list a wide range of confidential information which must be classified as “state secrets” because disclosure may jeopardize or affect China’s national security or other national interests in terms of politics, economy, national defense, diplomatic relations or other areas.

It is to be expected that in China the types of protected information will be much more broadly conceived than in the United States, but at the very least they are generally consistent with the idea of

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protecting national security, the economy and the country’s territorial integrity.

If this were as far as the definition went, it would be very difficult to say that the business data Xue was convicted of stealing (even of a state-owned enterprise) constitutes a “state secret” because there would be a very tenuous connection between business data and the types of information that are defined as both confidential and classifiable.

However, the Supreme Court’s interpretation goes further, taking the view that a person shall be guilty of the crime of taking state secrets under Article 111, even if the information is not classified as a “state secret,” if the person knows or should know the information is related to China’s national security or national interests.

This judicial interpretation suggests that to establish a crime under Article 111 of the Criminal Code, it is not necessary to establish that a person supplying information to persons overseas knew that the information was classified or was classifiable as a “state secret.” Furthermore, it is not even necessary to establish that such information was confidential and unavailable in the public domain. Instead, it would be sufficient for the court to establish that such person merely knew or should have known that the information s/he dealt with was somehow related to China’s national security or national interests.

In other words, to convict a person of supplying or receiving a state secret, it is not necessary to establish that it is a secret at all. For the purposes of applying Article 111 of the Criminal Code to a case, this effectively expands the meaning of “state secrets” beyond what is defined in the State Secrets Law and its Implementing Regulations.

The legal dilemma does not end there. The Supreme Court’s interpretation of “intelligence” as defined in Article 111 of the Criminal Code is so broad that it applies to any information related to China’s national security or national interests which is not available to the public or should not be available to the public according to relevant regulations.

“Intelligence,” in this sense, is limited to what is or should be confidential. The court still has enormous discretion to determine whether a

particular piece of information is related to China’s national security or national interests. If it is, the supplier and receiver of the “intelligence” may be convicted of a crime even if the intelligence is already in the public domain but should not have been. For example, if Chinese military intelligence data were leaked onto the Internet (as what happened in the recent Wikileaks case where U.S. military reports were published online), the further dissemination of such intelligence by any Internet user would be a crime.

According to foreign media reports, one of Xue’s defenses was that he did not know he was dealing with state secrets. However, even that defense is likely irrelevant because the trial court could simply have convicted him of the crime under Article 111 of the Criminal Code based on the Supreme Court’s judicial interpretation that he knew or should have known the information he was buying was somehow related to China’s national security and interests.

In effect, the Supreme Court’s interpretation of “state secrets” has created a new crime of stealing information that is not only not confidential and not classified as confidential, but which the defendant knew or should have known was related to national security and interests. This offends the fundamental principle of the Criminal Code that conduct shall not be a crime unless it has first been made a crime under the Criminal Code. But the practice of creating crimes by analogy has a long history in China and was only abolished by the current Criminal Code in 1997. The Supreme Court’s expansive interpretation of the law shows that old habits die hard.

The impact on U.S. businesses in China The potential that economic and business data may be considered state secrets according to such sweeping interpretations has alarming consequences for U.S. companies collecting business data in China. U.S. companies must be able to determine in advance of receiving and transmitting such data that it is not only not classifiable as state secrets or intelligence under China’s laws and regulations, but must also be able

to determine whether that information relates to China’s national security and interests even though it is in the public domain.

The collection of data about China’s natural resources is thus fraught with danger. Even if you can see such resources with your own eyes or obtain the information from published sources, handling such information is arguably a crime in itself because natural resources relate to China’s national interests. Similarly, collecting business information about state-owned companies from public sources may be a crime if such information is deemed to relate to national security or other interests. For example, information about the mobile telecommunications infrastructure in China could well be deemed to relate to national security or other state interests.

Perhaps for this reason, state-owned enterprises administered by the central government have recently been given new instructions by the StateOwned Assets Administration on how to classify their commercial secrets. Ominously, they have also been told that “where state-owned enterprises’ commercial secrets are required to be changed to state secrets, they must be classified as state secrets according to the statutory procedure.” In fact, there is no detailed procedure for classification of “state secrets” provided in any law in China and there is no published classification list of “state secrets.”

The protection of information related to national security, the economy and China’s territorial integrity is certainly essential to any country’s national sovereignty. But the lack of precise legal definitions and transparent application of the law according to at least the basic concept of due process creates alarming uncertainty. The foreign business community in China will hope that the judgment in Xue Feng’s case, and similar cases involving foreign parties, will be published, and that more legal guidance is forthcoming on the permitted limits of collection of economic and business data on China in China.

Edward Epstein is the managing partner of Troutman Sanders’ Shanghai office. He can be contacted at edward.epstein@troutmansanders.com.

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The lack of precise legal definitions and transparent application of the law according to at least the basic concept of due process creates alarming uncertainty.”

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M A R K E T I N G F E AT U R E

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n a recent worldwide poll that examined consumer attitudes on environmental issues, Chinese consumers stood alone.

They were, not surprisingly, different from consumers in developed countries in the West, and also stood apart from consumers in other developing markets like India and Brazil.

The implications of these differences for companies doing business in China are enormous.

The sixth annual Green Brands Survey was conducted in 2010 by Penn Schoen Berland, in cooperation with Landor, Cohn & Wolfe and Esty Environmental Partners. The survey includes responses from over 9,000 people, polling between 1,100 to 1,220 respondents in each of eight countries that included the U.S., U.K., Germany, France, Australia, China, Brazil and India. It comprises one of the most in-depth and broad looks at environmental attitudes around the world and assesses the key differences among countries.

Green consumers How exactly is China different from and similar to other countries? First and most strikingly, Chinese consumers are arguably the greenest of all countries surveyed. Indeed, in this respect, the three developing powerhouses of China, India and Brazil all stand out as being greener than their western counterparts – a sharp contrast to the generally held prejudice that western consumers care more about the environment than their counterparts in the developing world.

Several sets of poll responses tell this story.

When we asked whether people planned to spend

A Preference for Green Brands more, less or the same on green products and services in the next year, 82 percent of Chinese consumers said more, the highest of any country surveyed. China is followed closely by India at 81 percent and Brazil at 73 percent, while the Western countries lag far behind. In the U.S., only 35 percent say they would spend more on green products, and in the purported bastions of “greenness,” France’s and Germany’s numbers are 41 percent and 31 percent respectively.

This behavioral measure seems to be no mere temporary symptom of the slower economic recovery in Europe and the U.S. When we framed the question as a more fundamental attitudinal measure – i.e., to get a read beyond current short-term buying activity – the answers are essentially the same.

For example, in response to a question asking how important it is to you, when thinking about what brands to buy, that a company is environmentally friendly or is a green company, 40 percent in China, 50 percent in India, and 49 percent in Brazil say “Very Important” – compared to 16 percent in the U.S. and U.K., 30 percent in France, 15 percent in Australia and just 9 percent in Germany. These are striking differences that turn many conventional assumptions on their head about where the most important markets for green products are.

Supply and demand The second set of differences between China (and to some degree Brazil and India as well) and the western countries involves the reasons consumers give for not buying more green products and services. Consumers in the U.S., U.K., Australia,

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Penn Schoen Berland's survey provides key insight into purchasing behavior around the world and the future of green marketing.

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The market is failing to deliver the range and number of green products consumers want.”

France and Germany say the biggest challenge to purchasing green products and services is by far the high price, as they responded that “they are too expensive.” As noted above, these are the same five countries whose citizens are less likely to say it is important to buy green products and services – thus further emphasizing the focus in those countries on the perceived higher cost of buying green.

In contrast, the top challenge cited by consumers in India and Brazil is the limited selection of green products and services from which to choose, and the second-highest response is that green products and services are difficult to find. In other words, there is something of a market failure in those countries in the green arena. Consumers are ready and waiting for more green products and services, but demand currently outstrips supply.

China is a little different from both groups. The top challenge Chinese consumers identify is “green labeling or product information is confusing or not trustworthy,” and their second-highest response, which basically ties the first (just one point lower), is that there is a limited selection from which to choose.

The story in China has similarities to Brazil and India – namely that the market is failing to deliver the range and number of green products consumers want – but with the added complication that even when it comes to those products that purport to be green, Chinese consumers are unsure whether they can trust those claims.

Indeed, reliable certifications are an issue in a number of countries around the world. When asked what most influences your willingness to purchase environmentally-friendly or green products, certifications are the first or second choice in China, India and Brazil, as well as in France and Germany.

By comparison, “past experiences with the product” is the top choice in the U.S., U.K., Germany and Australia. But China gives certifications a higher score than do any of the other countries.

The implication from these findings is that, especially in China, but elsewhere as well, it would be in companies’ interest either to prompt the government to develop widely-recognized and trustworthy certification programs, or for the

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companies to band together to do it themselves.

In the meantime, in their search for whatever information they can find about which products and services are green, consumers are actually more willing than expected to pay attention even to companies’ own advertising. Everywhere except France and Germany, consumers are more likely to say that advertising about green products helps consumers make informed choices than to say they tune out. And in China, India and Brazil, those numbers are 80 percent or more.

What can we learn from this? Don’t be shy about telling consumers what you’re up to on environmental initiatives and activities. Whereas green advertising may be hitting its saturation point in places like France, and may be moving from differentiating to a cost-of-entry attribute in the U.S. and U.K., it still has the potential to be a real differentiator in the trio of developing countries we surveyed. It’s just a matter of framing the green messages in a way that resonates.

Green perspective This key insight brings us to a third way that Chinese consumers are different from their counterparts in other countries – the general level of optimism about the environment. Understanding this backdrop is critical to developing messages that connect.

As a core foundational question in the survey, we asked people whether the state of the environment is headed in the right direction in their country or whether it is off on the wrong track. The countries fall into three groups on this question. In India and Brazil, consumers emphatically feel the state of the environment is on the wrong track in their country. In all other countries except China – i.e., the Western countries – people also say the wrong track, but not so strongly. China is different from all of them in that consumers there said clearly that the environment is on the right track.

This outcome creates a very interesting overlay to the prior findings. It says that when consumers in Brazil and India say they are willing to pay more for green products and services, that willingness is driven by deep concern about the direction of

TOP 10 GREENEST BRANDS BY COUNTRY the environment in their country. In China, by contrast, the preference for green is driven less by concern or anxiety, and more by a sense of optimism and progress – which is the underlying sentiment that green-related messaging should tap into China to resonate most effectively. That’s not to say that they feel the environment is in good shape now in China – just that the problem has been recognized and things are moving in the right direction.

One further finding supports this insight.

When we asked people whether they are more concerned about the economy or the environment, the Western countries, not surprisingly (given the earlier finding that price is the biggest reason they don’t buy green more often), say the economy. On the other side of the spectrum, India and Brazil said the environment, by a large margin. China, however, this time lining up with the Western countries, says the economy. We can see from the results discussed above, that this is likely driven by their sense that the environment in their country is actually now heading in the right direction.

The fourth insight worth mentioning about the views of Chinese consumers is actually one they share with all the other countries surveyed.

The poll question asked what specific activities a company can do to make you think they are green.

The top answer in every country is for companies to “reduce the amount of toxic or other dangerous substances in [their]products and business processes.” So when thinking about the content of messaging and the nature of green efforts, this is the area to focus on in particular.

The greenest brands Finally, the last thing worth taking a look at is the actual brands that Chinese consumers identify as the most and least green. Chinese consumer respondents were exposed to 45 top brands from a number of different categories and asked to rate each on its greenness – the same exercise asked of consumers from other countries.

In China, the top brands are largely technology brands. Included in the top ten are Microsoft, Intel, Lenovo, Nokia, Apple and in the top spot, Haier.

Interestingly, China was the only country with such a tech-heavy set of top 10 brands – only India had a somewhat comparably strong set of tech brands.

In general, the top spots in each country were held by so-called “in me, on me, around me” brands – those that offer products and services related to things consumers put in or on their bodies, such as food and cosmetics. In the U.S., for example, the top 10 brands include Burt’s Bees, Whole Foods, Tom’s of Maine, Trader Joe’s, Aveeno and Publix – a very different set of companies from those in China’s top 10. Although the exact reason for this was not explicit in the poll results, it does suggest that there may well be a strong opportunity in China for food and cosmetics brands to better connect with Chinese consumers by tailoring their messages to appeal to the Chinese perspective.

Regardless of the brand, the poll is clear that Chinese consumers are eager for more green offerings, clearer and more reliable green information and messages that better connect with Chinese consumers’ own particular take on green issues and greenness in brands. The opportunity could be huge for companies that do it right, and at the moment, not enough companies are.

Scott Siff is the Executive Vice President of Penn Schoen Berland. For more information, please visit www.psbresearch.com.

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BY KEVIN BIGGS

Protecting Against Counterfeits Before tackling the issue of counterfeiting activities in China, one must first understand the counterfeit syndicates that are producing fake products and how they operate. Only then can a strategy to protect a brand and tackle counterfeiting be devised.

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espite steady improvement in China’s intellectual property laws, counterfeiting continues to pose a major challenge to multinational corporations. By some estimates, 50 percent of the world’s counterfeit goods originate in China. The presence of counterfeit goods in markets around the world pose health and safety risks to consumers and cause brand holders to lose billions of U.S. dollars per year.

There are a number of reasons for the persistent high level of counterfeiting activities in China, namely high profits and local employment generated by illicit trade, local protectionism, weak enforcement and the growing sophistication of counterfeit syndicates.

Counterfeiters, through the use of new technology, are able to produce high-quality brand knock-offs in a growing number of sectors, including alcohol, consumer and luxury goods, entertainment, electronics, pharmaceuticals, software, tobacco and vehicle parts. Through the use of online sales

channels and extensive international networks, a growing number of counterfeit goods are entering overseas markets, particularly in North America and Europe. In order to counter these sophisticated groups, multinationals need to have robust preventive and reactive strategies as part of their brand protection programs in China.

Counterfeit syndicate operations Counterfeiters in China can range from small familyrun operations seeking to make quick profits to large international syndicates comprised of wealthy business owners and organized crime groups. The latter poses the most significant challenge to multinational brands and are also the most difficult to dismantle.

Large syndicates often establish a complex web of business operations in order to conceal the true nature of their business. The masterminds behind major counterfeit syndicates usually do not engage in the direct manufacturing

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IMAGINECHINA

RETAIL WEB: Counterfeit products often go through a complex journey before reaching retailers.

of counterfeit goods. Instead, they outsource production, assembly, packaging and labeling to different manufacturers. The bulk of counterfeit manufacturing takes place in Fujian, Guangdong and Zhejiang provinces.

However, manufacturing does take place in other regions of the country. Due to the concentration of supply chains around certain cities or regions in China, counterfeit production of similar goods often takes place in the same area.

For example, Yunxiao County in Fujian Province is well-known for counterfeit cigarette production.

In some instances, original equipment manufacturers for brand owners use an additional production shift to produce gray market goods.

Gray market goods are those that are produced and then sold outside of normal channels authorized by the brand owner. In some industries, such as tobacco, syndicates may outsource to highly secretive underground facilities.

Syndicates also utilize modern just-in-time production to fill orders and to maintain low inventory in case of raids by law enforcement. For this reason, warehouses are often located away from production facilities and registered to front companies that hide the true ownership of the goods. Front companies, or shell companies, are often set up to appear as legitimate companies, but in reality engage primarily in illicit operations.

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The distribution of counterfeit goods is also decentralized. Typically, counterfeit products are distributed throughout China by a network of distributors affiliated with organized crime groups.

Some distributors may be dealers operating a shop in a wholesale market such as those found in Yiwu, Zhejiang Province. The dealers located in “fake markets” in major cities may buy directly from the manufacturer or the businessperson running the syndicate.

The use of online trading websites has also made the distribution more complex as individuals and small businesses can purchase fake goods and resell them on the Internet to make a profit. The Internet also greatly facilitates the sale of fakes to overseas markets. Throughout this distribution web, a large number of products trickle down to the retail sector. Some Chinese government estimates indicate that 15 to 20 percent of products sold in China are counterfeit. Even some legitimate retail outlets knowingly sell counterfeited goods because, in many cases, the quality is high and the profits are lucrative.

Counterfeiters’ risk management tactics Security and risk management is integrated into the business practices of counterfeiters.

At facilities engaged in the production of counterfeits, employees are often a close group of locals constantly on guard against outsiders trying to uncover their illicit operations. These facilities will often use closed circuit camera systems to monitor the production facility and surrounding area. Communication between manufacturers and distributors are often done face-to-face to minimize phone usage and the parties involved in these interactions may use special code words to hide the true nature of their business deals.

When distributing counterfeit goods, syndicates often change vehicles and use multiple license plates that may often be fake. These risk management tactics make it difficult for law enforcement or private investigators to conduct surveillance.

As dealers tend to be the most exposed in a counterfeit syndicate, large syndicates have begun to use “risk funds” to ensure that dealers do not divulge the masterminds of the business. Typically, these funds will go to the family members of a dealer if they are sent to jail.

Bribes to local officials and customs are also common tactics used to secure counterfeit operations. In some jurisdictions, syndicates can purchase “insurance” from corrupt customs officials to ensure that the counterfeit goods will reach their destination. This form of insurance can cover goods shipped out of China and goods entering overseas ports. Additionally, to avoid detection at borders and ports, counterfeiters will ship genuine goods together with fake ones.

Violence, including the use of guns, is also employed when high-profit counterfeit operations, such as those involving alcohol and tobacco, are threatened by enforcement agencies or private investigators. This is of particular concern in remote areas where local protectionism is prevalent.

In some areas, the local government may depend heavily on counterfeit production to provide jobs, as well as major tax contributions. As a result, it is very difficult to carry out raids in these types of locations without being accompanied by enforcement authorities from the provincial or city level of the government. In these locales, it is also possible that officials will turn a blind eye to the use of threats or violence by syndicates.

Although guns are tightly controlled in China, smugglers transporting arms primarily through the Yunnan border region in southwestern China are known to supply guns to syndicates. As a result, when planning raids in some areas, risk management experts recommend that companies

conduct surveillance on the target, develop contingency plans in case the counterfeiters resort to violence and work closely with the proper enforcement authorities. In some cases, law enforcement and private investigators have been beaten and even killed when conducting raids.

Preventing counterfeiting Multinationals need to take proactive and reactive measures to minimize exposure to counterfeiting in their operations. Ultimately, due to the pervasiveness of the problem in China, prevention is the top priority. There are a number of preventive measures that companies should implement to protect their brands. Many of these measures will also mitigate other business and reputational risks in the China market.

When establishing a presence in China, companies need to register all intellectual property (IP) with the proper local authorities. This includes registering with and educating customs authorities about your IP so that they can better identify fakes.

Companies will also want to have strong language about IP infringement in all contracts with employees and third parties. In particular, contracts with suppliers should include noncompete and termination for misconduct clauses.

Brand owners also need to include an agreed upon process for retrieving IP in case of termination. If brand owners do not retrieve all their IP or do not witness the destruction of their IP, the terminated supplier can easily begin producing counterfeits.

Before entering new markets in China, companies should also undertake a thorough market survey that accurately identifies the level of counterfeits in the market. Multinationals need to pay particular attention to both online and retail sales channels, as well as the presence of fakes in wholesale markets. All intelligence gathered about counterfeits should be documented in a database that is updated and analyzed periodically.

The collection and analysis of counterfeiting information is critical to establishing linkages between different groups and business figures.

Companies need to frequently monitor the market for new trends and players involved in counterfeiting or other unauthorized sales. By encouraging suppliers, customers, distributors, licensees and other third parties to share information about counterfeits, companies can gather valuable street-level intelligence.

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Some Chinese government estimates indicate that 15 to 20 percent of products sold in China are counterfeit.”

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Diligently collecting intelligence about counterfeit operations will help to identify specific targets to investigate.”

IP threats may not always come from outside a company’s operations or supply chain. Suppliers either operating on their own or in conjunction with a syndicate may produce copies of a product during extra shifts at night. Due diligence and background checks on suppliers, distributors, contractors, licensees and important hires are useful in identifying suspect business practices, connections with organized crime and other reputational issues.

Researching the registered details and verifying that the company has a physical operating location will help to uncover shell companies. It is also advisable to consult with competitors and industry associations to verify that a potential partner and its senior management are known in the industry.

Companies with particular IP concerns should carefully analyze how a supplier treats sensitive projects and what security measures are in place at their facilities to prevent the loss of IP. Frequent monitoring of suppliers will also help prevent the leakage of IP. As part of their supplier audits, companies should periodically carry out unannounced site visits at different hours of the day.

Stolen IP can also fall into the hands of counterfeiters by way of employees. In addition to conducting background checks on employees, foreign firms should also ensure that physical and information security is robust enough to effectively minimize the risk of IP theft from within the company.

Ethics training can also be an effective tool in preventing IP theft. This includes explaining ethics and IP policies to both employees and third parties.

By demonstrating a strong commitment to ethics and creating hotlines for reporting IP theft or other unethical practices, foreign firms empower employees and suppliers in the fight against fakes.

Reactive Measures Diligently collecting intelligence about counterfeit operations will help to identify specific targets to investigate. When a tip is received or counterfeit goods are discovered in the market, foreign brand owners can disrupt counterfeit operations by investigating, conducting raids and prosecuting known members of the syndicate.

The following case study highlights the investigative process and benefits of surveillance and raid actions. A multinational company discovered unauthorized online sales on an

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independent website of its branded product in mainland China. The website that sold the product was not part of the company’s official sales channel and lab tests confirmed that the products sold from the website were counterfeit.

The company engaged a risk management firm to determine the nature and extent of the counterfeiting activities and identify the entities involved. During this undertaking, the following investigative process was followed: • Conducted interviews with the whistleblowers and stakeholders about the presence of counterfeits in the market.

• Based on the information collected, conducted research to determine the counterfeiters and related parties involved.

• Conducted background checks on the counterfeiters, including linkages to other companies and plants.

• Conducted site visits in areas where the counterfeiters operated.

• Conducted control purchases with public notarization.

• Conducted surveillance on the delivery vehicle and entities of interest.

• Identified and located a key warehouse and packaging center.

At the conclusion of a detailed investigation and surveillance of the target, the following results were achieved: • Coordinated raids with the Public Security Bureau (PSB) and the Administration for Industry and Commerce (AIC).

• Conducted concurrent raids and arrests at the packaging center, warehouse and delivery site.

• Joint operations seized more than 80 cases of counterfeit products with a street value estimated at RMB1.2 million.

• The police ultimately arrested a number of individuals for their involvement in one of the area’s largest counterfeiting syndicates. Several individuals are now in jail.

As the above case demonstrates, surveillance plays a key role in revealing the extent of a target’s counterfeiting activities. If a raid is arranged too hastily, this may lead to a loss in valuable intelligence about the wider operations of a syndicate. In some cases, this could mean letting a shipment of fake goods leave the warehouse. In order to catch the

IMAGINECHINA

SMART RAIDS: Cooperation with city or provincial-level authorities can lead to successful raids.

ultimate masterminds of a syndicate, it may be necessary to hold-off on a raid in exchange for a more detailed understanding of a syndicate’s wider distribution network.

Prior to engaging local law enforcement to carry out a raid, brand protection managers need to assess the level of local protectionism. This will help determine whether or not local authorities can be trusted. In some cases, it may be better to deal with law enforcement at the provincial level. Cases where law enforcement have entered suspected factories but returned empty-handed, claiming that it was not possible to conduct a raid are not uncommon. This kind of response may be due to protection from a local official or someone inside the law enforcement agency.

One way to minimize the risk of counterfeiters being tipped-off in advance is to meet with law enforcement at a neutral location and only reveal the specific target en route to the raid location.

Ultimately though, the success of a raid requires close cooperation with the local PSB, AIC and other enforcement officials depending on the type of product being counterfeited.

Maintaining a close relationship with the PSB is also helpful in the event that counterfeiters resort to violence. As mentioned above, the combination of local protectionism, a remote location and high profit margins can motivate counterfeiters to attack police and private investigators. Individuals overseeing a raid should ensure that well-prepared

contingency plans and exit strategies are established prior to the raid.

In addition to working closely with Chinese enforcement authorities, multinational companies may want to consider working with major industry associations such as the Motion Picture Association of America or the multi-industry Quality Brands Protection Committee. These types of groups can help to lobby the Chinese government and pool funds to go after counterfeiters. Brand owners may also find it helpful to work with their local diplomatic mission to help monitor or contact the Chinese government regarding a specific case.

The increasing sophistication, internationalization and prevalence of counterfeiters in a growing number of markets pose a serious threat to many foreign firms’ brands. Cooperation with Chinese authorities, industry associations and overseas enforcement agencies are beneficial in pursuing counterfeiters. However, brand owners also need to have their own anti-counterfeiting programs in place to protect their individual brands. By implementing preventive and reactive risk management strategies, multinationals can wage an effective campaign against counterfeit syndicates in China.

Kevin Biggs is editor of the China Risk Report and senior consultant for risk intelligence with Hill & Associates in Shanghai. He can be contacted at kevin.biggs@hill-assoc.com.

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The Real Impact of Currency Legislation

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s the U.S. continues its steady, but so far jobless, economic recovery, U.S. policymakers have rightfully set their sights on increasing exports to create American jobs and generate sustained economic growth. The American business community supports this effort and an increasing number of U.S. companies have targeted China as an important export destination for their products and services. And for good reason – China is the fastest-growing market for U.S. exports and is arguably the most important destination for future export growth.

But on Capitol Hill, China is receiving increased attention of a different kind. Support is building for legislation meant to force China to revalue its currency in hopes that it will protect jobs in the U.S. It is election season in Washington and voting for a bill to “get tough on China” is a mouthwatering political opportunity for congressmen fighting for their political lives. For Chinese leaders, this is also a chance to make political hay with the Chinese people – they don’t want to be seen letting the U.S. push China around on a well-publicized issue.

Robert Roche Chairman AmCham Shanghai

But American businesses in China aren’t focused on short-term political calculus; our goal is increased U.S. exports and sustained economic growth at home. Most American companies understand that legislation meant to force RMB revaluation won’t create American jobs. In fact, it may just do the opposite.

American businesses in China aren't focused on short-term political calculus; our goal is increased U.S. exports and sustained economic growth at home.

There are two scenarios how currency legislation might play out.

The first is that currency legislation is signed into law and Chinese imports are slapped with a tariff.

What happens next? China retaliates against the U.S. by imposing tariffs on American exports to the China market. U.S. exports to China become less competitive by five or 10 billion dollars and American jobs reliant on those exports are lost.

In the second scenario, China blinks. The RMB is allowed to quickly appreciate. What happens next?

As the dollar remains the primary anchor for the RMB, all of China’s trading partners will benefit equally based on the new USD-RMB exchange rate. Currently, our competition – Germany, Japan, South Korea and other EU nations – has a disproportionate share of China’s import market so the benefit of a stronger RMB will be disproportionately taken by them.

There is one clear winner in both scenarios – America’s competition in the China, who will benefit when the U.S. remains or becomes even less competitive in the China market.

At this point, the currency bill has become a political issue on Capitol Hill and at best, is only a partial solution. The real question is what is the best way for Congress to create American jobs? A productive and effective way is to support the president’s National Export Initiative (NEI), which is a great first step to boosting U.S. exports and creating new jobs. Even better, would be for the U.S. government to take targeted, specific action focused on increasing the competitiveness of American companies exporting to China, the world’s fastest-growing export market. America’s biggest competitors enjoy a commitment to trade promotion at the highest level of their government and have been focused on the China market for years.

In AmCham Shanghai’s latest Viewpoint, U.S. Export Competitiveness in China, we find that the U.S. ranks behind Germany, South Korea and Japan in exports to China. These countries not only export

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tens of billions of dollars more to China by volume, they are managing to maintain more market share than the U.S. in an increasingly crowded China market. China’s potential is so great for U.S. exporters that capturing one additional percentage point of China’s import market translates to $12.3 billion in additional exports and over 76,000 American jobs.

When it comes to export promotion, “Germany is the model,” says General Electric Chief Executive Officer Jeffrey Immelt. Germany, which has an economy less than one fourth as large as the U.S., exported two-thirds as much as the U.S. to China in 2009. Trade missions are considered an “official instrument” of German Trade Policy. Chancellor Angela Merkel oversaw approximately US$5 billion in new trade deals that benefit German companies on a trade mission she led to China in July, her fourth in the past five years.

A trade mission to China led by President Obama would dramatically raise the profile of U.S. goods overseas and help U.S. companies win new Chinese customers. Presidential leadership brings instant credibility in a country like China, where government plays a major role in the economy.

To enhance U.S. export competitiveness in China, the U.S. needs to ramp up its efforts to match funding and resources committed by China’s non-U.S. trading partners. The models are already out there. Fully funding the NEI while placing additional focus on the China market will help American companies compete in the world’s fastest growing market and provide new job opportunities for millions of Americans.

Visit the AmCham Shanghai website at www.amcham-shanghai.org to see the latest Viewpoint, U.S. Export Competitiveness in China – Winning in the World’s Fastest-Growing Market.

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

Highlights from the September 2010 Board of Governors Meeting New Board Members The Chairman welcomed the new honorary governors representing the U.S. Consulate in Shanghai, Bill Brekke, Principal Commercial Officer of the Foreign Commercial Service, and Jim Mullinax, head of the consulate’s Political/ Economics section.

Committee Briefing Brian Fenerty, co-chair of the Human Resources Committee, briefed the Board on the HR Committee’s annual agenda, recent activities and development plans.

Membership Update 83 new member applications were approved over the past month.

2010 Washington, D.C. Doorknock Phil Branham, Chair of the 2010 Washington, D.C. Doorknock, gave an overview of the trip

scheduled for September 27-29. The primary goals of the Doorknock are to advocate on issues close to the membership, establish AmCham Shanghai as a thought leader on the U.S.-China commercial relationship and build relationships with elected leaders and the administration to discuss issues impacting the business environment in China. The delegation consists of 13 delegates (including representatives from AmCham-China and AmCham Southwest) and 2 staff members.

Key messages for this year’s Doorknock include the importance of exports in driving the U.S. economy and what the U.S. government can do to support exports and improve the competitiveness of U.S. exports in China.

New Committees The Board approved the establishment of the Food, Agriculture & Beverage Committee and the Aerospace Committee.

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IN ATTENDANCE Governors: Bill Brekke, Eddy Chan, Pierre Cohade, John Grobowski, Diane Long, Jim Mullinax, Eric Musser, James Rice, Robert Roche (Chairman) and Matthew Targett.

Attendees: David Basmajian, Phil Branham, Justin Chan, Siobhan Das, Brian Fennerty, Brenda Foster (President), Helen Ren, David Turchetti, Linda X. Wang, Jessica Wu and Karen Yuen.

REGRETS Andrew Au, Murray King and Kevin Wale.

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8

AmCham Shanghai Members Golf for a Good Cause

More than 120 AmCham Shanghai members and guests joined to make AmCham Shanghai’s Eighth Annual Charity Golf Tournament a tremendous success.The full-day event, held on September 3 at the Shanghai Silport Golf Club in Kunshan, featured an 18-hole tournament with in-round straightest drive, longest drive, closest to the pin and beat the pro challenges in addition to separate putting and chipping.

Teams played in a Texas Scramble competition format and vied for prizes that included 2010 WGC-HSBC Champions tickets, a golf tour package, weekend hotel stays and other prizes. The team of Nancy Gougarty, Brian Kaiser, Rashid Salahutdin and Rodney Rodavich won the Lowest Gross team score category while the team of Bob Lifsey, Brian Darling, John Carpenter and Martin Takahashi won the Lowest Net team score category. Participants enjoyed a BBQ buffet dinner and an awards ceremony following the tournament.

Every year, AmCham Shanghai hosts several charity events as part of its ongoing Corporate Social Responsibility program. This year’s tournament will once again support AmCham Shanghai’s efforts to promote sustainable rural development and help families affected by the 2008 earthquake in Sichuan Province, in cooperation with Heifer International. To date, AmCham Shanghai has funded the purchase and distribution of 272 goats.

This year’s Charity Golf Tournament will also support the Mother and Infant Care Program administered in cooperation with the

Shanghai Soong Ching Ling Foundation, as well as the Shanghai Roots and Shoots Million Tree Project.

Since its inception in 2006, the Mother and Infant Care Program, which funds improved healthcare for women and infants in rural Guizhou, Guangxi and Yunnan provinces, has enabled the safe delivery of nearly 5,000 babies and the construction of 12 birthing centers in China. In 2008, the program was extended to offer Shanghai Soong Ching Ling Foundation Medical Scholarships to 60 medical students from disadvantaged families. AmCham Shanghai has partnered with the Shanghai Soong Ching Ling Foundation since 2006.

The Shanghai Roots & Shoots Million Tree Project aims to plant one million trees in Inner Mongolia by 2014 to help stop desertification and offset China’s greenhouse gas emissions. Roots & Shoots helps individuals, companies and schools calculate their carbon footprint and voluntarily offset them by planting trees in China.

AmCham Shanghai is proud to support and collaborate with the Soong Ching Ling Foundation, Roots & Shoots and Heifer International and the important contributions these organizations make throughout China. We would like to thank all our members and sponsors for their incredible support of the Eighth Annual Charity Golf Tournament and we look forward to seeing you back on the course at Charity Golf Tournament next year!

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AmCham Shanghai 2010 Sustainability Conference:

Green Cities: A Call to Action Building on the Shanghai 2010 World Expo’s theme of “Better City, Better Life,” AmCham Shanghai and the Asia Society co-hosted the 2010 Sustainability Conference, entitled Green Cities: A Call to Action. The Conference brought together professionals from a wide range of industries as well as the public and private sectors to discuss the incorporation of sustainable practices in modern urban and industrial development. The Conference, held from September 16-17, at the Pudong Shangri-La Hotel, provided a forum for companies across the urban development value chain in China to catalyze business opportunities as well as foster a dialogue between the private and public sector. The Conference kicked off with a presentation from Mark Ginsburg of the U.S. Department of Energy’s Office of Energy Efficiency and Renewable Energy, who spoke about the role of government in urban transformation.

Ginsburg praised the establishment of the U.S.-China Energy Cooperation Program, which works to strengthen cooperation between the United States and China on clean energy issues. He described the ongoing partnerships between U.S. and Chinese sister cities, like the exchange between Columbus, Ohio and Hefei, Anhui Province on alternative energy concepts and Denver, Colorado and Chongqing’s electric vehicle partnership. Greensburg, Kansas and Mianzhu, Sichuan Province, both devastated by natural disasters, are working together to develop disaster-resistant infrastructure. Ginsburg described these partnerships and ongoing cooperation as an opportunity for the U.S. and China to “create changes that will stun the world.” Following Ginsburg’s presentation, Zhang Yingxin, deputy director general of the Ministry of Commerce (MOFCOM), agreed with the idea that the U.S. and China should seize the opportunity to work together on clean-energy issues, calling the countries economically and socially complementary.

Representing the private sector, Kevin Wale, president of GM China, Albert Wong, chief commercial officer of GE China, Shane Tedjarati, CEO of Honeywell China and India, and David C. Wang, president of Boeing China, gave presentations highlighting the ways multinationals are contributing to the promotion of sustainable practices and environmentally-friendly progress in China and abroad. Zhang Yue, CEO of Broad Air Conditioning explained that the low price of energy is one of the biggest barriers to promoting energy conservation and creating a distributed power system. He said legislation requiring mandatory technological changes is necessary to implement energyefficient technologies and foster the development of green cities.

Washington Governor Christine Gregoire, in Shanghai as part of a state trade mission to China and Vietnam, joined a Conference panel to speak about Washington’s role at the forefront of sustainable development, supported by tax incentives, public investment and citizen commitment. With 100,000 green jobs created, a booming wind power industry and plans to build a new electric highway, the state is a prime example for the rest of the nation. On the same panel, Huang Feng, deputy chairman of Shanghai Commission of Commerce, described municipal government policies supporting environmentally-friendly development in Shanghai. He spoke about ways for multinational companies to participate in the development of Shanghai’s green sector. He lauded Pratt and Whitney’s successes in Shanghai, including becoming the first company in China to achieve platinum LEED accreditation. After the Conference, AmCham Shanghai and MOFCOM hosted an eco-business retreat to Hangzhou, focusing on green city practices and a visit to the model eco-district of Yuhang.

– Ashley Cahill

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AmCham Shanghai New Members: August - September 2010 U.S. Corporate Membership American Bureau of Shipping, Shanghai Rep. Office PRIDE Richard Design Continuum (Shanghai) Co., Ltd, HOSMER Christopher MaxLinear (Shanghai), Co., Ltd. XU Wen MEGTEC Thermal Energy & Environmental Technology (Shanghai), Ltd. LU Zhouyang

Corporate International Affiliate Membership HKS Architects (China), Ltd. CORRIGAN Jesse Raymond Knight Frank (Shanghai) Property Consultants Co., Ltd. BARNEY Nathaniel Oldenburger Interior Products (Shanghai) Co., Ltd. FUGLER Helge Von

Visteon Asia Pacific, Inc. HOWEL Robert WARD Steven VSC Ryerson Global Trading Co., Ltd. WANG Lei

Individual U.S. Citizen Membership Behring Group, Ltd. BEHRING Colin China Leaders for Global Operations (CLGO) MIT-SJTU KEITEL Robert S.

Ubidyne Shanghai Rep. Office SHAO Jude

Non-resident Corporate Membership

U.S. Associated Corporate Membership

Rosetta Stone, Ltd. MEAD Andrew

FT-MFD PENG Sam

Associate Membership

HCL Technologies Limited GU Richard

Ametek Commercial Enterprise (Shanghai) Co., Ltd. PANG Alex Ashcroft Instruments (Suzhou) Co., Ltd. FAN Sam Barbie (Shanghai) Commercial Co., Ltd. CRISPELL Gar Clifford Chance LLP, Shanghai Rep. Office (UK) HARDER Stephen Coffee Guests (Shanghai) Food Co., Ltd. XIA Maria Hill Jianke Project Management (Shanghai) Co., Ltd. KARDOUS Abdo Zhejiang Biomet Medical Products Co., Ltd. WANG Guosheng

Small Business Membership Algas-SDI Gas Equipment (Suzhou) Co., Ltd. LEUNG Paul B2B International Consulting (Beijing) Co., Ltd. HEDLEY Mark China Business Group, Inc., Shanghai Rep. Office LU Eva Edamame Inc. SHEN Ing-Nan Nancy Gold Star Precision Tools Company CURTIS Chris Vibgyor, Inc., Suzhou Rep. Office YAO Jane

Akzo Nobel (Asia) Co., Ltd JORN Seiero

Albemarle Chemicals (Shanghai) Co., Ltd. GHYOOT Silvio Bureau Veritas Consulting (Shanghai) Co., Ltd. NICHOLLS Michael Dow Chemical (China) Co., Ltd. MA Ross Ecolab (China) Investment Co., Ltd. WU Yiqin General Electric (China) Co., Ltd. WHITE Jason JPMorgan Chase Bank (China) Co., Ltd. Shanghai Branch TAO Rong London International Group, LLC CHOU Aileen Paypal Information Technologies (Shanghai) Co., Ltd. HUA Lu Rayco Asia Pacific Investment Management (Shanghai) Co., Ltd. LIU Jie Shanghai Hormel Foods Co., Ltd. NEUFELDT Swen Shanghai Wicresoft Co., Ltd. CALDWELL Michael William Solutia International Trading (Shanghai) Co., Ltd. WANG Lenny URS Consulting (Shanghai), Ltd. WANG Jackie

Huntsman Company LANG James Pacific Epoch MCGUINN Ian STR MCCONKIE Thomas Sunnen Products Company BURTON Michael URBN Hotels & Resorts / SPACE Development - Sustainable Development BARRACK Scott EPERJESY Mark SHEI Edward VIDA Tim JOHNSON Michael

Individual International Affiliate Membership BNP Paribas, Hong Kong Branch HUANG Eric China Greentech Initiative HEPBURN Chitra China Medical Tourism Inc. YANG Jian Law & Associates Law Corp.

CHAN Mona Martin Bencher Scandinavia, Ltd. MICHALAK Marcin Wikborg Rein & Co., Shanghai Rep. Office SVIGGUM Geir

Do you want to share more information about your company?

O C TO B E R 2 0 1 0 I N S I G H T 3 9 Contact Sophia Chen at (86 21) 6279-7119 ext. 5667 or sophia.chen@amcham-shanghai.org for a “Standout Listing” opportunity in the New Members Section.

Event Highlights

INSIDE AMCHAM

September U.S. Consulate General Briefing

(L-R) Robert Roche, Tom Cooney, Brenda Foster

During the September briefing, Acting Consul General Tom Cooney highlighted the USA Pavilion’s milestone of welcoming its five millionth visitor on September 6. The USA Pavilion now expects to welcome seven million visitors by the end of the Expo – one million above the Pavilion’s original target. Cooney previewed upcoming high-level visits that will include President Carter’s trip to Shanghai on September 8, as well as the visits of Governors Schwarzenegger of California, Pawlenty of Minnesota and Gregoire of Washington. Due to soaring visa demand, the visa section has adopted a new “double shift/work through lunch” measure to keep pace. The wait time for student visas as of September 7 was 15 days while the wait time for business visitors is 48 days. Cooney noted that many of the new officers joining the Consulate this month bring with them a tremendous amount of previous China experience. New FCS Chief Bill Brekke is a veteran of many assignments in East Asia, most recently in Beijing, and is joined by Deputy Paul Taylor who also moved from Beijing. Keith Schneller is the new director of the Agricultural Trade Office; he previously served in Taipei and Guangzhou. New Political-Economic Section Chief Jim Mullinax has substantial regional experience in Hong Kong and Jakarta, while newly arrived Consular Section Chief Kristin Hagerstrom brings experience gained around the globe.

(Sep 7)

U.S. Government Delegation: California Governor Arnold Schwarzenegger AmCham Shanghai and the Bay Area Council jointly hosted Governor of California Arnold Schwarzenegger, as the Republican governor discussed steps California is taking to ensure its growth and prosperity and potential partnerships made between California and China. After introductions by AmCham Shanghai President Brenda Foster, Chairman Robert Roche and Shui On Group Chairman Vincent Lo, Gov. Schwarzenegger was joined by Jim Wunderman, CEO of the Bay Area Council, for a question and answer session.

They discussed products and services that California exports to China, including those from California’s highJim Wunderman interviews California Governor tech, greentech, bio-tech, entertainment and agriculture Arnold Schwarzenegger industries. Gov. Schwarzenegger discussed the next steps for California’s growth, emphasizing the need for innovation and cooperation. He said he is impressed with China’s rapid development and praised Chinese leaders’ “courageous vision” for longterm growth. He urged for greater California-China partnerships for sustainable development, particularly in funding California’s proposed high-speed railway. After thanking the audience, he spoke of his hope of returning to Shanghai. “I’ll be back,” said the former Hollywood movie actor, referencing his memorable line in the Terminator film series. (Sep 13)

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INSIDE AMCHAM

U.S. Government Delegation: Minnesota Governor Tim Pawlenty

Minnesota Governor Tim Pawlenty

AmCham Shanghai recently hosted Minnesota Governor Tim Pawlenty and a delegation of Minnesota business leaders at a luncheon event. Gov. Pawlenty spoke about the need for friendly competition between the U.S. and China in the trade arena. He stressed the importance of reducing trade barriers and promoting free and open markets. According to Pawlenty, China has imported more than US$1 billion of Minnesota products every year since 2005, making it the state’s second biggest trade market after Canada. Moving forward, Gov. Pawlenty said that innovators need confidence that they are operating in an environment that is stable and predictable. He also emphasized the need for a level playing field among trade partners, saying that in order to have friendly trade relations, countries must treat each other fairly. He praised AmCham Shanghai, calling it a constructive, on-the-ground voice for the advocacy of U.S. business interests in the U.S. and China. Gov. Pawlenty then spoke about the need for the U.S. to remain competitive. He warned American businesses to avoid complacency and remember that “nostalgia is not a strategic plan.”

He said that the U.S. must remain focused and committed to ensuring its citizens are inventive, collaborative, innovative and technologically-equipped in order to ensure future prosperity. (Sep 13)

Expo CEO Series: Grainger CEO James T. Ryan and Chicago Mayor Richard M. Daley AmCham Shanghai was pleased to welcome James T. Ryan, Chairman, President and CEO of Grainger Industrial Supply as part of the Chamber's ongoing Expo CEO Speaker Series in September. Joining Ryan was Chicago Mayor Richard M. Daley who led a delegation of Chicago-based businesses to Shanghai.

Mayor Daley discussed Chicago as a global city before introducing Ryan who shared his ideas on how businesses can enhance the productivity of their Chinese operations. Ryan spoke of the need to Grainger Chairman, President embrace a new paradigm in managing indirect and CEO James T. Ryan materials spending, as well as getting in front of key global trends such as safety, sustainability and business continuity/emergency preparedness in order for foreign companies in China to raise their productivity levels. “By consolidating vendors and embracing technology, businesses can drive down costs and focus their resources on core business operations,” said Ryan. On the topic of workplace safety and global trends, Ryan suggested that businesses put plans in place to address future issues. “Grainger’s mission is to be the trusted partner to people who keep facilities safe, efficient and functional,” said Ryan. “We’re seeing a steady shift in China towards a greater focus on worker and factory safety, and organizations are recognizing the cost benefits of a proactive investment in this area.” (Sep 20)

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CSR: At the Core of Business Success and Sustainability AmCham Shanghai’s 6th Annual Corporate Social Responsibility Conference and Awards Ceremony – November 18, 2010 The American Chamber of Commerce in Shanghai proudly presents its 6th Annual Corporate Social Responsibility (CSR) Conference and Awards Ceremony on November 18, 2010.

AmCham Shanghai’s CSR Awards Board has received exceptional nominations this year in five award categories and the 2010 award winners will be announced in an awards ceremony following the CSR conference.

This year’s CSR conference CSR: At the Core of Business Success and Sustainability, will roadmap how CSR functions throughout a company, from corporate governance to human resources to community outreach. CSR professionals will gain hands-on training on how to implement sustainable programs and integrate CSR initiatives into their business strategies.

“One of our committee’s goals has been to provide practical information and guidance on a broad range of CSR concerns,” says Victoria Moy, chair of the AmCham Shanghai CSR Committee. “Our 2010 CSR Conference does exactly that and is by far the most ambitious program we have ever offered.”

During the Conference, Hans d’Orville, deputy director-general of the United Nations Education, Scientific and Cultural Organization (UNESCO), will discuss the multiple facets of CSR and the crucial role enterprises have in driving socially responsible behavior and impactful programs.

A senior executive panel will include representatives from this year’s CSR Awards finalist companies who will advise attendees on how to gain CEO buy-in when planning CSR initiatives.

Extensive training and in-depth panel discussion workshops will run throughout the day to address key concerns such as: tackling corruption, developing a socially responsible supply chain, incorporating CSR into small business culture and using social media to your advantage to communicate CSR efforts.

Speakers include: • Hans d’Orville, deputy director-general of UNESCO • Experts on current CSR issues in China • Senior executives from top U.S. businesses • Experienced leaders from international and local charitable organizations Workshops include: Morning Session: • How to Achieve a Socially Responsible Supply Chain in China • Tackling Corruption – A Practical Guide to Help Enhance Economic Sustainability • Managing Corporate Volunteerism in China Afternoon Session: • Building a Great Educational Program into your CSR Portfolio • How to Communicate CSR • CSR Action Plans for Small Businesses • How to Select an NGO Partner 4 2 the I N S I2010 G H T CSR O C TConference O B E R 2 0 1 0 and Awards Ceremony, For more information about visit www.amcham-shanghai.org/csrconference.

Committee Highlights

INSIDE AMCHAM

Panelists discuss the convertibility of the RMB.

Financial Services Committee

Education & Training Committee Localization of Training Delivery in China

RMB Convertibility and the Operational Challenges to Trade

The Financial Services Committee recently hosted Han Lin, senior vice president of Global Payment Services, Wells Fargo Bank, Greater China, to present on the future of China’s currency, the renminbi (RMB) or the yuan, as a global trade currency. “China has been very progressive in how they measure and monitor the convertibility of the RMB,” says Lin. He spoke about the challenges of making the RMB an internationalized and trade settlement currency, including the need for full transparency in convertibility and a global yuan clearing system. He also outlined the macro issues in RMB internationalization and the challenges in the current RMB convertibility framework. Lin explained that internationalizing the RMB would increase stability for Chinese exporters exposed to foreign exchange risks. The presentation was followed by a panel discussion on the implications and effects of the RMB’s changing role in global trade. Panelists included Xinyuan Zhang from the Bank of China’s International Settlement Department, Jian Wu, vice general manager of the International Business Department at HengTong Optic-Electric Company and Cheng Ye, vice president of Global Trade Services at Wells Fargo Bank in China. (Sep 8)

General Committee Event

Labor in Today’s Environment

AmCham Shanghai recently hosted policy, HR and risk management experts to discuss the rapidly changing labor environment in China and how companies can anticipate and address labor Panelists present on China’s labor concerns. Kenneth Jarrett, Greater China vice environment. chairman of public affairs consultancy APCO Worldwide, spoke on the overall economic, social and political backdrops that drive China’s labor environment, including the government’s push for labor reform and the urbanization of the workforce. Jarrett also discussed an anticipated increase in worker unrest as a growing number of employees begin to expect and demand higher-quality workplace environments and higher pay.

Beecher Ashley-Brown, East China general manager for HR consultancy Hewitt Associates, then shared HR trends from Hewitt’s recently completed Best Employers market study on contract labor. He revealed an overall trend of growth, citing an 82.5 percent net increase in employee headcount, though the figure includes a high turnover rate. He explained that companies that have successfully retained their employees in China tend to diversify their salary schemes with variable pay and reward systems that offer clear goals and incentives. Paul Ingram, senior risk management consultant with Hill & Associates, concluded with an overview of labor unrest risks, emphasizing that the best solution to labor unrest is prevention, while open communication between employees and employers can save the stress and expense associated with lengthy labor disputes. (Sep 10) Event and Committee Highlights are reported by Ashley Cahill, Krisanna Oopik, Tiffany Yajima and Esther Young.

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The Education & Training Committee was pleased to host Andy Wong, senior consulting partner with BlessingWhite, and Gene Slusiewicz, global sourcing team manager with the PAC Group to present on the localization of training delivery in China. According to the speakers, as companies strive to reach Chinese consumers, they must take advantage of the unique skills and perspectives of employees who understand the Chinese market and culture. To do this, a growing number of companies are implementing localization policies and programs, which often results in fewer expat leaders of company operations in China. Wong explained that to be successful, companies must understand the importance of coaching employees effectively and adopting a strong organizational culture to support these relationships. He warned of the mismanaged ways many companies have attempted to localize in the Chinese market, including an overreliance on translations. For example, translating an English company motto or product name directly into Chinese could result in loss of meaning or significance. Slusiewicz observed that although many companies enjoy sales growth in China, they are suffering from shrinking profit margins due to inefficiencies and low productivity.

As foreign companies continue to expand their operations in China, they must hire the right people to ensure efficiency and productivity to succeed in the market. (Sep 14)

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DEAL OF THE MONTH IMAGINECHINA

AIA and ICBC Strike a Deal

ICBC to begin selling AIA products through bank branches.

A

merican International Group Inc.’s (AIG) AIA Group Ltd. recently signed a bancassurance agreement with the Industrial and C om m e rc i a l B an k of C h i n a (ICBC) that will allow ICBC, China’s largest lender by assets, to sell AIA life insurance products at ICBC branches. AIA will provide ICBC with support in product development, marketing and sales training while developing its direct marketing, telemarketing and wealthprotection planning. The expansion of its multichannel distribution model will offer costeffective products to consumers. AIA has operations in Shanghai, Beijing and Shenzhen, and in Guangdong and Jiangsu province, selling life, accident and medical insurance products.

Bancassurance agreements, also known as the Bank Insurance Model (BIM), are becoming more popular in China as they allow insurers to increase clientele through banks’ larger sales networks and allow banks to diversify intermediary income.

Under such agreements, insurance companies can maintain smaller direct sales teams as products are sold by the partner bank. AIA has 17 smaller bancassurance arrangements in China, giving it access to more than 1,000 bank branches. Two of these agreements are with China Life Insurance Co. (LFC), the country’s largest insurer by

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premiums, and People’s Insurance Co. of China, Ltd. AIA has more than 80 similar bancassurance agreements throughout the Asia-Pacific region.

AIA is the only foreign life insurance company in mainland China to own its Chinese operating license outright and the deal with ICBC will help AIA maintain its position as the leading foreign life assurer in China. In 2009, AIA wrote a total of US$1.1 billion in premiums in China which account for roughly 10 percent of its total premiums in Asia. With more than 25,000 sales agents throughout China, AIA has a 21 percent share of the foreign assurer market. However, there is still significant room for growth as this share represents only one percent of China’s total life assurance market, which is the world’s sixthlargest.

AIA has announced plans to list on the Hong Kong Stock Exchange by the end of November, in an initial public offering (IPO) expected to raise US$15 billion. The company hopes to gain approval from the Hong Kong Stock Exchange listing committee by September 21. Some of the money raised from the IPO will go towards repaying the Federal Reserve Bank of New York, which holds US$15 billion in preferred equity in AIA. – Ashley Cahill

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cloud nine

As it turns out, cloud nine isn’t even outside.

Your natural choice to Canada Air Canada provides daily services on all four nonstop routes between China and Canada.

Air Canada’s in-flight experience features lie-flat suites in the Executive First cabin offering customers the comfort and privacy of first class lie-flat suites at business class prices.

Air Canada China Call Center

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