Insight Magazine September 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 September 2010

REGULATORY UPDATE

Indigenous Innovation POLICY INSIGHT

CFIUS Reviews INTERVIEW

China’s Go West Policy

Taking China’s

Real Estate Temperature

A look at the effects of policy measures aimed at cooling the property market

INSIGHT September 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

ASSOCIATE EDITORS

Tiffany Yajima Esther Young

COMMUNICATIONS ASSISTANT MANAGER

Weina Yang 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.

12 The Chinese Hospital Market

Next in China's Indigenous 17 What's Innovation Program?

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21 Addressing National Security Concerns

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TIFFANY YAJIMA

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

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ISTOCKPHOTO

Brenda Foster

F E AT U R E S

ISTOCKPHOTO

PRESIDENT

IMAGINECHINA

AMCHAM SHANGHAI

HEALTHCARE SERIES

By Andrew Chen

Insight’s four-part healthcare series closes with a look at the Chinese hospital market and how future reforms may introduce new opportunities for private enterprises.

REGULATORY UPDATE

By Richard Grams

A revised circular issued in April softened some of the indigenous innovation policy’s proposed requirements, but foreign-based manufacturers still have several concerns.

POLICY INSIGHT

By Stewart Baker and Stephen Heifetz

Careful planning and understanding of potential roadblocks to investment in the U.S. can help Chinese investors navigate CFIUS.

Go West Policy: Opportunities in 24 China's Chengdu and Xi'an INTERVIEW

By David Basmajian

Insight discusses the impact of China’s Go West policy with Chengdu Mayor Ge Honglin and Xi’an Deputy Mayor Han Song.

28 Taking China's Real Estate Temperature COVER STORY

By Ryan Balis

A number of government policies issued over the past year have focused on cooling China’s red hot real estate sector. Despite the recent market slowdown, there are still concerns about a potential bubble that could have far-reaching effects if burst.

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

3 News Briefs

48 Deal of the Month

MANAGER’S NOTEBOOK

11 Balacing the Ethics Formula

Professor and author Dr. Abdullah Telmesani discusses how to balance employee/employer ethics in times of difficulty and uncertainty.

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

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

INSIDE AMCHAM

35 From the Chairman: Preparing for Capitol Hill 38 2010 Independence Day Celebration 41 AmCham Shanghai New Member Listing

43 2010 China Auto Forum 44 Events in Review 46 Committee Highlights

INSIDE INSIGHT

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his month marked a number of momentous occasions at AmCham Shanghai and in the world at large. In August, the media tore into a frenzy surrounding news that China’s second quarter GDP reached US$1.34 trillion, with the motion in place to overtake Japan as the world’s second largest economy by the year’s end.

With a population more than quadrupling Japan’s the news comes as no surprise.

TIFFANY YAJIMA ASSOCIATE EDITOR

The news does serve as a reminder that, although China is the world’s fastest growing market with huge potential and untapped opportunities, serious roadblocks exist. This month’s regulatory article looks at new developments in China’s indigenous innovation policies and the opportunities and challenges that MNCs can encounter moving IPR to China.

Earlier this summer AmCham Shanghai released a Viewpoint on Chinese foreign direct investment in the U.S. which looked at the benefits and impact of increasing Chinese investment to the U.S. This month’s policy article illuminates the channels to help navigate the murky waters of the Committee

on Foreign Investment to the U.S. It’s been one of the hottest summers on record but Expo continues to draw hordes of spectators to the site. As part of the Chamber’s Expo Provincial Government Forums, AmCham Shanghai hosted a number of provincial government officials leveraging the Expo to draw in investors to their provinces. Insight sat down with Chengdu Mayor Ge Honglin and Xi’an Deputy Mayor Han Song who discussed the outlook for development in West China under the government’s Go West policy.

With all the attention on Expo, the summer slowdown has given us a chance to reflect on China’s most challenging issues. Real estate prices are heating up faster than ever despite attempts to cool the market. This month’s cover story takes a step back to consider how government measures are helping deflate property prices. And as comprehensive healthcare remains a top priority of the Chinese government, Insight’s four-part series on healthcare closes with a look at the health of the hospital industry and opportunities for private investors to rejuvenate the system.

IMAGINECHINA

News

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

CHINA BUSINESS

GM and SAIC to produce lowcost cars General Motors Co. and Shanghai Automotive Industry Corp. (SAIC) are partnering to develop and produce small fuel-efficient automobiles. The cars will be developed in GM’s Detroit research facility and in the GM-SAIC Pan Asia Technical Automotive Center joint venture research facility in Shanghai.

The efforts will focus on engines in the 1 to 1.5 liter range. Using technologies such as turbocharging and gasoline direct injection, GM and SAIC hope to increase fuel economy by 20%. GM and SAIC plan to launch three cars and two light trucks by the end of 2012.

Housing prices rise 10.3% in July Real estate prices rose in 70 Chinese cities by 10.3% in July year-over-year.

New apartment sales showed the highest growth rate at 12.7%, while second-hand apartment sales showed a 6.7% increase.

Guangzhou-based property developer Gemdale estimates that increasing supplies and decreasing transactions will drop housing prices in the second half of the year. July’s figure is already a 1.2% decrease from June.

Taiwan approves trade pact with China The Legislative Yuan in Taiwan approved the Economic Cooperation Framework Agreement (ECFA), a wide-ranging trade pact with China that will reduce tariffs on hundreds of products that cross the Taiwan Strait.The deal opens opportunities for increased cross-strait trade and investment.

Though met with resistance from opposition Taiwanese lawmakers,Taiwan President Ma Ying-jeou says the trade pact will allow Taiwan more leeway to sign free trade agreements with other countries. Economists in Taiwan estimate that it could raise Taiwan’s economic growth by 1.65 to 1.72% and generate between 257,000 and 263,000 new jobs. According to the trade pact’s details, China will reduce tariffs on Taiwanese goods worth US$13.8 billion while Taiwan will reduce tariffs on Chinese goods worth US$2.9 billion. China will ease market access to 11 service sectors that include banking, insurance and accounting. China is currently Taiwan’s biggest bilateral trade partner at roughly US$110 billion.

Chinese bank profits jump Chinese banks are posting strong performances in the first half of 2010, as China Merchants Bank and the Bank of Communications showed a 60% and 30% increase, respectively, in net profits. Strong borrowing demand, wider lending margins and higher interest and fee incomes are contributing to the numbers. Analysts estimate lower full-year earnings than last year as the domestic economy slows and the government increases credit

provisioning to cool soaring property values. UBS AG estimates a 5% on average net profit decrease for China’s major banks in 2011 while JPMorgan Chase estimates a 3-4% decrease.

Chinese still reluctant to spend A new survey of consumer attitudes by the Economist Intelligence Unit reveals that Chinese consumers remain frugal when it comes to spending even following the

government’s implementation of a RMB4 trillion stimulus package, tax breaks and other incentives to boost car and appliance sales. Chinese consumer savings rates remain high. Though 91% of survey respondents say they are “optimistic about the future,” two-thirds of Shanghai residents save a quarter or more of their household income; one-third save 35% or more citing health care, education and retirement concerns as reasons to save.

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CORPORATE NEWS

AgBank completes largest IPO on record

required to alter its merger terms and conditions since the antimonopoly law was enacted two years ago.

The Agricultural Bank of China completed the largest ever initial public offering (IPO) on August 12, raising more than RMB150 billion despite a tumultuous start. Stocks began trading on July 15 in Shanghai and in Hong Kong the following day. The bank’s stabilization agent, Goldman Sachs Group Inc. in Hong Kong, spent RMB550 million buying shares on the open market to boost stock values higher than the IPO’s original price offering. 40% of AgBank’s Shanghai offering was sold to 27 strategic investors including China Life Insurance and China State Construction. After a decade of industry restructuring, AgBank is the last of China’s four largest banks to list publicly.

China Unicom to distribute Apple’s iPad

Xinhua and China Mobile join up on online search

China’s economy surpasses Japan in Q2

State-owned China Mobile Communications and Xinhua News Agency announced plans to enter the online search market in a joint search venture. Xinhua has already partnered with China Mobile to provide mobile news to the company’s 554 million mobile phone users. The new enterprise will compete against established players Baidu Inc. and Google Inc. which hold a respective 70% and 24% share of China’s online search market. Last June, the People’s Daily launched a beta search engine named Goso that also offers a microblog service.

China’s second quarter gross domestic product (GDP) figures rose above those from Japan, setting China on course to pass Japan as the world’s second-largest economy by year’s end. China is charting a US$1.34 trillion output over the three months that ended in June, which is above Japan’s US$1.29 trillion. China’s accomplishment, notable in its timing during a difficult recession, is accompanied by a high growth rate. China’s GDP increased 10.3% in the second quarter, while Japan’s grew 0.4%. China passed Germany for the number three position in 2007; fourth-place Germany is currently followed by France and the U.K. The U.S. remains the largest economy in the world with a projected GDP of US$14.6 trillion for 2010 compared to China’s projected GDP of US$5 trillion for 2010.

Novartis-Alcon deal approved Novartis AG and China’s Alcon Inc. will command the largest global share of the ophthalmological anti-infection product market after the Ministry of Commerce approved Novartis AG’s US$28.1 billion acquisition of Alcon. The Ministry of Commerce attached a set of conditions under China’s antimonopoly law, including a requirement to halt sales to a Taiwanese contact lens maker. This marks the sixth merger involving a foreign company that China’s Anti-Monopoly Bureau has

China Unicom, the second-largest mobile carrier in China, has finalized an agreement to be the sole China distributor for computer maker Apple Inc.’s iPads.

The company is already the sole provider for Apple’s iPhone in China, although it has had to contend with sales of imitation Apple products. The iPad will use the same 3G micro SIM card that is used in the new iPhone 4. Both of Apple’s latest products are expected to be launched in China in September. The iPad is already available in Hong Kong, Japan and Singapore.

MACROECONOMICS

July CPI increases 3.3% China’s consumer price index (CPI) rose 3.3% in July from a year earlier on higher food prices according to the National Bureau of Statistics. Though the figure is higher than Beijing’s CPI target of 3%, the numbers for July are thought to be shortterm impacts because of unusually high

food prices and will likely decrease next month. Experts claim the government should raise interest rates at a 3.5% rise in the CPI, although it is reportedly unlikely that there will be a rate change this year.

U.S. - CHINA

Currency bill sponsors step up campaign Two co-sponsors of a U.S. House of Representatives bill that would penalize imports from any country that “undervalues its currency,” are drumming up support among congressional leadership to put the bill to vote this fall.

In a draft letter addressed to Speaker Nancy Pelosi (D-CA) and Majority Leader Steny Hoyer (D-MD) among others, Representatives Tim Ryan (D-OH) and Tim Murphy (R-PA) claim H.R.2378 would level trade imbalances and protect U.S. jobs.

Anshan abandons U.S. steel factory joint venture Vice Chairman Chen Ming of Anshan Steel Co., China’s fourth-largest steelmaker, recently announced plans to drop the company’s proposed minority stake in a new steel plant in Mississippi after facing likely rejection of the deal by the Committee on Foreign Investment in the United States (CFIUS). The future of the planned steel-rebar plant, led by the U.S.’s privately owned Steel Development Co., is unclear. The proposed joint venture already has garnered heavy criticism from inside the U.S. Congress. Some members claim the venture would threaten U.S. jobs and national security. Voicing their concern, 50 members of the Congressional Steel Caucus are urging Treasury Secretary and CFIUS Chairman Timothy Geithner to “thoroughly investigate” the deal.

CHINA OVERSEAS

Sany to launch concrete production in Germany China machinery group Sany Heavy Industry Co. is set to start production on concrete pumps in a new factory in

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Cologne, Germany – historically the center of engineering technology – in a move that portends Sany’s ambitions to challenge the German engineering market. In 2006, Sany overtook Germany’s Putzmeister as the world’s largest producer of concrete pumps. Production at the German plant aims to start in early 2011 and will include a research and development center. Sany is one of several Chinese companies that have expanded its presence in Europe. Sany rival Changsha Zoomlion Heavy Industry Science & Technology Development Co. recently purchased Italian concrete pump maker CIFA S.p.A.

ZTE to build mobile network for Europe Chinese telecoms equipment maker ZTE Corp. has signed a RMB1.3 billion contract to build a mobile network in Hungary for Telenor ASA. With RMB61.2 billion in sales, ZTE is the seventh largest network equipment maker in China. In the first half of 2010, one-fifth of ZTE’s revenue came from mature markets mostly in Europe. ZTE created a WiMAX network for Telefonica SA in Spain and upgraded mobile networks for Dutch phone company Royal KPN NV and other Telenor affiliates in Europe. ZTE is approaching the U.S. market as well, though the company is encountering resistance from U.S. industry and lawmakers citing security concerns.

Chinalco, Rio Tinto partner in Africa The Aluminum Corp. of China Ltd. (CHALCO) and Australia’s Rio Tinto Ltd. have signed a contract to develop infrastructure for a Simandou iron ore mine project in eastern Guinea. CHALCO will invest US$1.35 billion for a 47% stake in the deal that will diversify its metal business. Facing a 12% drop in the price of aluminum, CHALCO stands to benefit from investment in what some analysts claim is the world’s biggest undeveloped iron ore deposit.

China sells U.S.Treasury bonds China was a net seller of U.S. debt for the

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second month in a row, decreasing its holdings by US$24 billion in June. Part of the amount may be distorted because some purchases may have been routed through the U.K. and Hong Kong. Though China remains the biggest foreign holder of U.S. Treasury bonds, there is evidence that China may be swapping U.S. debt for Japanese and European debt. China’s current holdings are worth US$843.7 billion, down from April 2010’s historic high of US$900.2 billion. The price of U.S. Treasury bonds has increased as demand for U.S. government debt remains strong among Japan and U.K. purchasers of Treasury holdings.

GOVERNMENT & POLICY

Beijing allows broader RMB use The People’s Bank of China (PBoC) announced a pilot project that would allow foreign central banks and overseas lenders to use renminbi (RMB) to invest in the domestic interbank bond market. Beijing hopes the move will encourage RMB use in trade and decrease China’s reliance on the U.S. dollar. Though it was lauded as a move towards RMB internationalization, the program will still be subject to PBoC currency quotas as the central bank closely monitors the currency’s gradual appreciation.

Beijing to drop death penalty for economic crimes A draft amendment to China’s criminal code, submitted for a first reading to the Standing Committee of the National People’s Congress, suggests that 13 economy-related and non-violent crimes may be dropped from the list of crimes punishable by death. Removing the death penalty for those crimes would not “negatively affect social stability nor public security,” according to Director of Commission for Legislative Affairs Li Shishi. Economic crimes considered for abolishment include several types of fraud, certain types of smuggling, fraudulent use of financial bills and forging letters of credit. China currently has 68 specific crimes that are punishable by death.

SEPTEMBER 2010

Urbanization plan underway in Chongqing Under one of the largest household registration reforms in China, Chongqing officials have called for 10 million farmers to relocate to Chongqing’s urban centers. The municipal government will offer relocation services and temporary social security, education and healthcare benefits, in addition to financial compensation, to help farmers establish themselves in urban areas before receiving their official urban “hukou” or residence permits. The plan will also address the high unemployment rate in rural Chongqing by encouraging residents to find permanent work in the city. Two-thirds of Chongqing’s 31 million residents currently live in rural areas.

SHANGHAI BUSINESS

Levi Strauss & Co. launches new brand in Shanghai In the company’s first-ever product launch outside the U.S., Levi Strauss & Co. unveiled its new Denizen line, an affordable line aimed at younger Chinese consumers, in Shanghai. A pair of Denizen jeans sells for US$40-60, well below the over US$100 price tag that the company’s high-end jeans garner in the U.S. Home to many of the company’s fashionable and wealthy 18 to 28 year old target demographic, Shanghai will be the test grounds for the new line. Though Denizen’s tailoring and design are not specific to the China market, the Shanghai launch indicates Levi’s interests and stake in Chinese consumers. The company has over 500 retail stores in China.

Hon Hai to open electronic retail branches Taiwanese electronic gadget manufacturing giant Hon Hai Precision Industry Co., historically a productionbased corporation, will partner with German retailer Metro AG to open 10 large electronic stores in the Shanghai area by the end of 2011. Hon Hai, which operates

under the trade name Foxconn, will also open between 45 to 50 branches of Cybermart, a small retail chain purchased a decade ago, in a push to increase domestic consumption of electronic retail goods. Hon Hai is currently the world’s largest contract manufacturer of electronics.

TPG to set up RMB private equity fund In conjunction with Shanghai’s municipal government, TPG Capital Ltd. is looking to raise RMB5 billion (US$736.5 million) to fund its first RMB-denominated private equity fund. The fund will focus on investments in medium- to largesized companies. Financial services firm Blackstone Group LP and private equity firm Carlyle Group are also setting up RMB-denominated funds following the Chinese government’s recent announcement of reforms that would increase foreign firms’ access to the country’s capital markets.

2010 WORLD EXPO

Delegation marks 60 years of China-India relations Citing the US$50 billion value of ChinaIndia bilateral trade, Indian Ambassador to China S. Jaishankar called for increased Indian and Chinese industrial cooperation during a forum held in conjunction with India Day at the Expo. The 90-strong India delegation urged Indian enterprises to invest in China’s pharmaceuticals industry, machineries and engineering products. The forum also marked 60 years of India-China diplomatic relations and attracted over 400 participants.

Low-carbon cardholders skip lines Visitors to the Shanghai 2010 World Expo will be allowed to skip lines in select pavilions with a new “low-carbon” transportation card. The cards will be available for purchase at various outlets in Shanghai including at the We Are the

SEPTEMBER 2010

World Pavilion at the Expo. The price of one card reportedly will help offset one ton of carbon dioxide emissions which helps contribute to the Expo’s ongoing efforts to promote green energy. Expo organizers aim to make the event between 60-70% carbon neutral by October 31 and fully carbon neutral in four to five years through energy conservation and city-wide improvements in infrastructure.

WWE wrestling comes to Expo Pursued by an enthusiastic fan base that lined up as early as 6:30 am for tickets, World Wrestling Entertainment (WWE) staged its first live match in China as part of the Expo.

All 8,000 tickets were snapped up within an hour of their 9:30 am release. Wrestling stars John Cena, Chris Jericho and Randy Orton were among the performers at the special Expo extravaganza. Though the Expo event was marketed as China’s first introduction to the WWE, WWE fights are broadcast in 10 provinces in China and reach a potential 90 million homes.

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CHINA & THE WORLD

SOUTH AMERICA ASIA-PACIFIC

VIETNAM: Vietnam and China promote bilateral trade Vietnamese Minister of Industry and Trade Vu Huy Hoang and Chinese Minister of Commerce Chen Deming met in Hanoi to discuss China’s and Vietnam’s trade relationship and prospects for closer cooperation. Bilateral trade is expected to reach US$25 billion this year, up from US$20 billion in 2009. Through the first six months of 2010, Vietnam reported more than US$13 billion in bilateral trade with China. Both trade ministers agreed to encourage local authorities in border provinces to work together to prevent smuggling and illegal trade activities. The ministers also discussed the need for greater cooperation in promoting trade and in multilateral forums.

MIDDLE EAST

SOUTH AFRICA: President Zuma visits Beijing In his first state visit to China, South African President Jacob Zuma met with President Hu Jintao to discuss ways to promote expanded Chinese investment in Africa’s largest economy. The leaders focused on strengthening bilateral ties, calling their countries’ relationship a “comprehensive strategic partnership.” The two sides signed seven inter-governmental agreements in the fields of mineral resources, energy, environmental management and transportation. Through the first half of the year, bilateral trade reached US$10.8 billion, up 56% year-over-year. South Africa imports more from China than any other country, leading to a record US$2.7 billion trade deficit in 2009.

ASIA-PACIFIC EUROPE

AFRICA

NORTH AMERICA MIDDLE EAST

Tibet Airlines plans routes to Europe Tibet Airlines is planning to launch routes to Europe within five years and to expand its aircraft fleet to 50 by 2020. With hopes of becoming an air hub for western China, the airline will begin operating flights within China in August 2011. Tibet Airlines, the first Tibet-based air carrier, is a joint venture between Tibet Autonomous Region Investment, Tibet Sanli Investment and Tibet Ruiyi Investment. The airline expects to operate flights to South Asia and Southeast Asia by 2013 and direct routes to European countries by 2015 or 2016. Currently, there are six airlines operating routes in Tibet’s five airports, with a sixth airport under construction.

MIDDLE EAST EUROPE

AFRICA

KUWAIT: Sovereign wealth fund doubles IPO investment Kuwait’s sovereign wealth fund, the Kuwaiti Investment Authority (KIA), agreed to more than double its investment in the Agricultural Bank of China’s initial public offering (IPO) from US$800 million to US$1.9 billion. The Qatar Investment Authority (QIA) also raised its stake to US$6 billion from US$2.8 billion. Eleven major investors were chosen for the bank’s Hong Kong share offering, including QIA and KIA, with a combined US$5.45 billion worth of shares. With total proceeds from the offer equating US$22.1 billion, AgBank’s Shanghai IPO became the biggest IPO in history. The Industrial and Commercial Bank of China’s 2006 IPO raised US$21.9 billion.

NORTH AMERICA

SOUTH AMERICA MIDDLE EAST AFRICA

CANADA: China and Canada strengthen tourism links The first group of Chinese tourists under the Approved Destination Status (ADS) agreement visited Canada. The agreement, expected to open a “new chapter of friendship” between China and Canada, was signed last year in Ottawa during President Hu Jintao’s state visit to Canada. The purpose of the agreement is to promote tourism, communication and cooperation between the two countries. Now that the agreement is in effect, both sides expect tourism to increase. Chinese nationals are expected to make about 100 million trips abroad annually by 2015. The China National Tourism Administration states that the Chinese government has decided to turn China’s tourism industry into a strategic pillar industry for the national economy.

ASIA-PACIFIC AFRICA NORTH AMERICA

SOUTH AMERICA

BRAZIL: Chinese firm to build electric vehicle factory Chongqing’s Zongshen Industrial Group signed a deal with Brazil’s CR Motors to build Brazil’s first electric-powered vehicle factory. The factory, to be located in Sapucaia, in the mountainous region of Rio de Janeiro, is expected to start operating in the first half of 2011. The vehicles will be built under the Brazilian Kasinski brand, acquired by Zongshen last year for US$80 million. Zongshen announced the US$11.4 investment after unveiling its newest line of electric scooters. The company plans to use the new factory to supply not only the Brazilian market but the entire continent. Currently, Zongshen’s vehicles are manufactured only in China. This year, China became Brazil’s biggest foreign direct investor.

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SOUTH AMERICA NORTH AMERICA EUROPE

SEPTEMBER 2010

SOUTH AMERICA ASIA-PACIFIC

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M A N A G E R ’ S N OT E B O O K

Balancing the Ethics Formula: A Tool for Guiding Our Choic

The Ethical Toolkit can help balance employee/employer ethics in times of difficulty and uncertainty.

A

chieving higher levels of ethical conduct, as is the case of achieving all optimal positions, is a balancing act.

For corporations, ethical attitudes and sustainable success are achieved by striking a balance between the bottom line on one side and the interests of employees and the community at large on the other. Employee ethical behavior and success, on the other hand, is achieved by balancing personal interests with company interests.

The formula above, according to Deloitte’s 2010 Ethics & Workplace Survey, seems to be partially compromised. In their struggle to survive the recession, some companies have had to make drastic decisions that were not typical to their corporate culture norms.

These actions and decisions have naturally led to employee uncertainty about their company’s intentions.

This feeling of uncertainty and lack of clarity shaped the responses of 46 percent of the employees surveyed when they indicated that a lack of transparent leadership communication would drive them to seek new employment opportunities.

Furthermore, 48 percent of employed Americans who plan to look for a new job when the economy is more stable cite a loss of trust in their employer as a result of how business and operational decisions were handled over the last two years.

While the ethics formula above may not have been consistently followed, the good news is that it did not collapse. The Deloitte survey indicates that, despite having feelings of uncertainty about their companies’ decisions and actions, 72 percent of respondents still believe that their employers are responsive to their work/life balance needs. In essence, the employees believe that their employers are still honoring the fundamentals of the ethics formula and are attempting to Got an article idea for “Manager’s Notebook”?

Contact Insight Editor-in-Chief Justin Chan at justin.chan@amcham-shanghai.org.

balance their companies’ interests with the employees’ interests.

In the case of employers, the ethics formula of employees can also get partially compromised under pressure and in times of uncertainty. According to the survey, 91 percent of employees surveyed indicated a tendency to behave ethically at work when they had good career-life balance.

This indicates that the employees’ ethics formula of balancing their interests with their companies’ interests can also be compromised under pressure.

It is clear that in times of difficulty and uncertainty, the balance of the ethics formula can be upset by both employers and employees. To minimize ethical breaches, companies have elaborate codes of ethics to guide employee and employer choices.

From my experience and from teaching professional ethics, it became evident that balancing the ethics formula comes from inside us, not from codes of ethics. Making choices between ethical and non-ethical actions are among the most personal decisions that we don’t usually discuss with others. Therefore, it is important to simplify this formula and make it readily available to employees and employers, whenever needed, and with total privacy.

The Ethical Toolkit

and his family if he overlooked one of the conditions that this supplier did not satisfy. The dilemma John faced is clear.

Overlooking the supplier’s condition would not affect his company negatively, and no one would ever notice. In trying to arrive at a decision, John followed the two-step Ethical Toolkit test as follows: The Internal Test: In this step, John checked his gut feeling about awarding the contract to this company and realized that he felt uncomfortable about it. However, knowing that awarding the contract to this company would not affect his company negatively countered his hesitation.

The Disclosure Test: In applying the second step, John looked at whether he would feel good about letting his colleagues, his family and others know about the basis for awarding the contract to this supplier.

Thinking about that made it very clear to him that choosing this supplier would not be ethical, since he would not be comfortable with letting others know about the real basis for awarding the contract to this supplier.

This Ethical Toolkit can be used by employees and employers at all levels. It can also be a useful guide or exercise for board members and executive committees in clarifying the ethical bases for executive choices.

To simplify the ethics formula and improve its applicability for employees and employers, there is a practical tool which I call the Ethical Toolkit. The following case study outlines the two-step toolkit and its applicability to professional practice.

While evaluating tenders from various suppliers, John noticed how close the bids were in terms of price and quality. During the evaluation period, John was indirectly informed that one of the suppliers was willing to pay for a personal trip for him

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esani Dr. Abdullah Telm d an or th is an au former university professor who nal taught professio n ca He ethics. be contacted at hoo.com.

Telmesani77@ya

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H E A LT H C A R E S E R I E S

BY ANDREW CHEN

Insight’s ongoing healthcare series looks at the Chinese hospital market and how future medical reforms may introduce new opportunities for private enterprises.

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he total number of hospitals in China has increased by 3 percent annually and hospital bed capacity has grown by 4.7 percent to a total of 2.6 million beds. Although the majority of China’s hospitals are relatively small, capable of accommodating fewer than 100 beds, the number of large healthcare institutions continues to escalate, with 23 percent more hospitals having more than 800 beds in 2008 compared to the year before.

According to the Ministry of Health (MOH), about 80 percent of the country’s medical resources (hospital staff, beds and equipment) are concentrated in large urban hospitals. The largest urban hospitals are much more crowded than smaller hospitals, with people waiting in long lines for even minor ailments. The development of smaller hospitals that might alleviate that problem has lagged as smaller facilities lack the financial resources to upgrade facilities and recruit good doctors. Meanwhile, chronic underfunding has left rural hospitals and clinics inadequate and outdated.

With rising costs and a quickly aging population, China needs to establish a cost-efficient healthcare

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infrastructure to provide disease prevention and low-cost medical services for citizens. To do so, the government must optimize resource allocation to increase overall efficiency and confine spending to reasonable levels.

Foreign participation There is growing domestic and foreign interest in investing in China’s hospitals, particularly within the small private hospital sector. For instance, the Qingdao government in Shandong Province is considering private funding to support the city’s state-run hospitals. Such an initiative would open the door for private financing to shore up underfunded public institutions, enable them to run more efficiently and reduce their dependence on income from drug sales and medical equipment.

The World Bank’s International Finance Corp.

(IFC) has expressed interest in promoting publicprivate sector cooperation in the healthcare industry by investing in hospitals, and is prepared to invest US$700 million in China. Taking advantage of this opportunity, Chindex International negotiated US$35 million from the IFC as part of a US$100 million expansion of its hospital and clinic network

IMAGINECHINA

The Chinese Hospital Market

in China. Currently operating two 50-bed hospitals in Beijing and Shanghai that serve approximately 65 percent of the expatriate patient base in those cities, Chindex is planning to establish two 150bed hospitals in Beijing and Guangzhou to serve Chinese patients.

China will benefit from forming joint ventures with foreign hospital operators and foreign healthcare management companies to improve hospital profitability. Multinational company (MNC) providers, however, can expect to encounter hurdles down the road. Healthcare provision remains one of the restricted sectors in the Catalogue for Foreign Investment and foreign ownership is limited to 70 percent with a minimum investment of RMB20 million. In the past, this minority shareholder structure has caused MNCs to struggle for control over their ventures. Moreover, private and foreign hospitals are excluded from preferential value-added and business tax treatment.

The hospital value chain Hospitals in China can be classified into three categories by their ownership type: public, private and military. Public hospitals, owned by the state government, account for more than 90 percent of China’s hospitals and can be further broken down to three types. Class 3 Hospitals serve major cities at the provincial level. Most patients are currently treated by this type of hospital. But because Class 3 Hospitals handle a disproportionate number of operations and outpatients, the quality and efficiency of healthcare at these hospitals is often impacted. Class 2 Hospitals serve at the county level and offer outpatient and inpatient services. Finally, Class 1 Hospitals and community hospitals in rural areas operate on a much smaller scale and are poorly utilized.

Private hospitals, owned by private enterprises, account for less than 10 percent of total hospitals in China and usually target the wealthy. They are usually much smaller in scale compared to public hospitals and have specialized focus areas. Military hospitals are owned by the People’s Liberation Army and operate on their own rules.

In terms of type of service provided, generalcare facilities comprise the majority of hospitals,

although specialized and traditional Chinese hospitals have seen considerable growth in recent years. General hospitals have wide treatment coverage, focus on treatment of severe diseases and take on a leading role in medical research.

Hospital reform New patient referral system China plans to improve the level of healthcare through its recent medical reform. Under the reform guidelines, a new patient referral system will be established to increase efficiency and improve service accessibility and affordability. Class 1 and community hospitals will become the first point of contact for the general population: patients will visit them for their first diagnosis. This will help reduce costs and avoid unnecessary usage of hospital resources. These primary care providers are also expected to provide appropriate health management and regular check-ups as disease prevention measures. Class 2 Hospitals will be turned into either Class 3 or Class 1 Hospitals to simplify the service structure. Finally, Class 3 Hospitals will include only specialized hospitals focusing on advanced treatment and research. For private hospitals, the market is expected to grow with government support and increased investment, allowing them to compete with Class 3 Hospitals in the long run.

Funding for new and existing hospitals Developing a primary care sector is a priority for government funding, with the reform program building on changes that have already been initiated. In a number of cities, pilot programs are under way to implement a gatekeeper role for urban community health centers for which the government will likely assume greater financing responsibilities. The government plans to fund the establishment of 29,000 new community hospitals, upgrade 5,000 hospitals and add at least one clinic in every village in the next three years.

In urban areas, 3,700 community health centers and 1,100 community health stations will be created. The government also plans to increase training and improve quality of care in rural areas.

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The government plans to fund the establishment of 29,000 new community hospitals, upgrade 5,000 hospitals and add at least one clinic in every village in the next three years.”..”

IMAGINECHINA

PRESCRIPTION PURCHASE: The distribution of medication in China will be affected by ongoing reforms.

The reform plan aims to add 1.37 million village doctors and 160,000 community doctors in the next three years. An incentive program is also in place to encourage urban hospitals to help train primary care physicians and healthcare workers in rural areas, as doctors in larger hospitals and disease control agencies need to serve in rural hospitals for one year as a prerequisite to a promotion.

Medical reform will transform the hospital sector to sustain long-term stability and prosperity.

About RMB850 billion or 65 percent of the reform plan funds will be used to increase basic medical insurance coverage to 90 percent of the total population by 2011. Expanding insurance coverage will encourage people to seek treatment from hospitals, which will increase hospital revenue.

Drug purchasing reform Drug purchasing replaced by structured tendering process In 2001, the Chinese government initiated a tendering process for the majority of drug purchases by hospitals as part of a broad plan to improve the hospital system. However, the central government failed to install a national tender purchasing model, instead leaving local governments to adopt their own drug purchasing procedures. By the end of 2007, roughly two-thirds of provinces implemented local provincial procurement systems.

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Through provincial tender purchasing, China’s central government expected to increase price transparency and reduce the number of middlemen involved in the pharmaceutical sales process in China’s provinces. However, tendering now takes place every one to two years and the tendering schedule is often inconsistent between cities and provinces causing inconvenience and confusion for companies participating in the process.

Physical and online auctions of drugs are two formats for tendering. The city of Ningbo recently enacted a new annual tender policy for non-profit hospitals that demonstrates the physical auction process. The bidding process is by invitation only and each supplier can submit only one bid. The winning supplier is selected based on the drug’s price and only one supplier is chosen for each drug.

Online auctions also offer a good alternative to the physical tendering process, but allow little to no room for price negotiation.

Branded loophole One of the most important changes in the drug procurement process is the new limit on the number of generic drugs made available in hospitals. Hospitals can no longer stock more than two products with the same active pharmaceutical ingredients (API) marketed under different trade names in an attempt to reduce the availability of generic drugs in hospitals. The policy’s impact is more detrimental to generic drug companies than MNCs, as researchbased companies can influence hospitals to keep a branded drug as one of two drugs in stock thereby overriding the bidding process.

Influencing outcomes In addition to drug price, factors such as drug quality, supply consistency and technical support can also influence the outcome of the tendering process. The current policy requires drug manufacturers (rather than distributors) to submit bids and present their products to the tendering authority to win support.

However, due to a recent spate of product safety crises, Chinese authorities have become cautious of the quality of products that come from manufacturers that participate in the bidding process.

Looking ahead for further reform, the R&D-

based Pharmaceutical Association Committee (RDPAC), a multinational industry association, is advocating for a hospital purchasing system that does not use bidding as the only method of reducing drug prices. As an increased number of healthcare professionals are now being invited to participate in the decision making process, greater acceptance of factors like quality, consistency and support may help guide the future of the drug tendering process.

Anti-corruption campaigns Initiated in 2006, China’s anti-corruption campaign is a vivid example of the government’s attempts to improve the nation’s hospital system. It has greatly influenced doctors’ prescription practices, especially in major cities that have higher levels of government and media scrutiny.

The campaign has resulted in the conviction of nearly 700 people in the healthcare sector, including the execution of the former head of the State Food and Drug Administration (SFDA), and demonstrates the government’s tough stance on bribery and illegal practices. The Ministry of Supervision estimates that the cost of corruption in the healthcare sector amounted to over RMB600 million based on the more than 2,500 cases investigated in 2006. The costs of undetected corruption could be much higher: bribes amounting to RMB270 million were confiscated as part of a recent amnesty deal.

Under anti-corruption legislation, doctors’ licenses may be revoked if they accept bribes from drug manufacturers to prescribe their drugs. Physicians are therefore cautious of sales representatives on hospital premises and some hospitals avoid publishing new drug lists to avoid being accused of violating anti-corruption policies.

Implications Large hospitals will be targeted for premium products Large hospitals will soon require a growing amount of government subsidies as revenues fall when patients shift to community and rural health centers for treatment and diagnosis of routine ailments.

At the same time, due to increasingly strict price controls for basic drugs, large hospitals will have to seek revenue from patented drugs, the pricing power of which remains controlled by the drug manufacturers. Consultation and treatment fees will have to rise to compensate for lost revenue from drug sales. Large hospitals must continue to invest in advanced equipment, technology and research and development to maintain their leading position. This will allow large hospitals to increase revenues from premium prices but will also boost costs and risks.

Manufacturers should target devices for primary care hospitals to maximize revenue With the penetration of healthcare reform, primary and secondary care providers will increasingly invest in facilities, which will present a huge demand for products appropriate for the middle market and for government procurement. Moreover, new diagnostic services performed at community care centers, including health management and regular check-ups, will translate into demand for diagnostic equipment and technicians.

Targeting the affluent demographic may help foreign players to capture market share in the private hospital sector China’s private hospital sector will likely flourish with support from the government. Policymakers should encourage private players to participate to improve the quality of care, especially for China’s growing middle- to upper-class. Although current medical insurance plans do not cover expenses incurred at private hospitals, there are an increasing number of people willing to pay out-of-pocket for services at Western standards. The reform should create a fair and orderly market environment in the long run, which will encourage more investors to participate in the Chinese hospital sector.

Foreign care providers may consider entering the Chinese private hospital market via joint ventures or partnerships with local providers after careful assessment of long-term profitability.

Andrew Chen is a manager with Deloitte Consulting in Shanghai. He can be contacted at andrechen@deloitte.com.cn.

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There are an increasing number of people willing to pay out-of-pocket for services at Western standards.”..”

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R E G U L ATO RY U P DAT E

BY RICHARD GRAMS

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What's Next in China’s Indigenous Innovation Program?

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hina’s accession to the WTO was seen as an opportunity to break down the many non-tariff barriers already working against foreign investors and exporters with sights on China’s burgeoning domestic consumption.

Almost ten years later, many are concerned that market access is becoming more restricted. In addition to the continuously vexing problem of standards and their administration by China’s labyrinthine bureaucracies, all eyes are now on foreign participation in government procurement and the impact of laws and regulations that implement new policies on indigenous innovation.

As a reflection of a “Buy China” policy, the requirement of China’s Government Procurement Law (2002) that all PRC government agencies purchase domestic goods and services is relatively uncontroversial because of its large carve-out of those required items which cannot be obtained within China. However, China’s indigenous innovation policies go well beyond favoring domestic goods and services in government procurement.

Indigenous innovation is a government policy response to China’s perceived over-reliance on foreign technology and intellectual property that was first fully articulated in national documents dating back to 2006, making it clear that the Chinese government has intended for some time to develop a national catalog for government procurement of products that meet indigenous innovation criteria.

Through indigenous innovation, the PRC government seeks to limit reliance on foreign technology and brands by promoting the creation and commercialization of Chinese-owned technology and intellectual property and by imposing discriminatory practices to discourage foreign participation in certain industries.

To date, local governments in Beijing, Shanghai, Tianjin, Wuhan, Chengdu, Fujian and Jiangxi have each published indigenous innovation catalogs and begun to implement procurement policies that give preference to products certified as indigenous innovation products. Very few products produced by foreign-invested businesses in China (e.g.

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Indigenous innovation may promote local goods in the short run, but have consequences for China's global ambitions.

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These developments and concerns about controversial changes to China's patent law...fed media speculation that Circular 618 was part of a wider discrimination against foreign technology and intellectual property rights holders.”

only two products in the Shanghai catalog) have received accreditation. Governments at the central and local level have also introduced financing and tax relief schemes to incentivize the development and use of indigenous innovation products by Chinese companies.

Circular 618 The foreign reaction to these developments reached a fever pitch when, on November 15, 2009, China’s Ministry of Science and Technology (MOST), the National Development and Reform Commission (NDRC) and the Ministry of Finance (MOF) jointly issued a Circular on Promoting the Accreditation of New Indigenous Products in 2009 (Circular 618) and a separate set of accreditation application procedures. Together, these documents lay out specific rules for introducing a new national-level indigenous innovation catalog of certified products and China’s product accreditation procedures. The catalog covers the following six broad product areas: computers and application equipment, telecommunication equipment, modern office equipment, software, new energy equipment and high-efficiency energy-saving products.

Then on December 29, 2009, the MOST, the MOF, the Ministry of Industry and Information Technology (MIIT) and the State Asset Supervision and Administration Commission (SASAC) released a list of 240 types of industrial equipment which government planners hope domestic companies will begin producing in order to reduce dependence on foreign manufacturers. The equipment is listed in priority for accreditation as indigenous innovation products.

These developments and concerns about controversial changes to China’s patent law, which came into effect in October 2009, fed media speculation that Circular 618 was part of a wider policy of discrimination against foreign technology and intellectual property rights holders.

Partly in response to the concerns voiced by foreign trade and industry groups about Circular 618, on April 10, 2010, the MOST, the NDRC and the MOF jointly released a Draft Circular Regarding the Launch of the National Indigenous Innovation

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Production Accreditation Work for 2010 (Draft Circular). The Draft Circular affirms Circular 618 and the application rules issued in November 2009.

However, it relaxes key restrictions on intellectual property rights (IPR) and is intended to elicit comment on the proposed accreditation procedures.

The main features of the Draft Circular are as follows: • Products: the list of eligible product categories is the same as for Circular 618: computers and application equipment, telecommunication equipment, modern office equipment, software, new energy equipment and high-efficiency energysaving products.

• Eligibility criteria: products must meet general PRC legal requirements and comply with China’s national industrial and technology policies, must represent advanced technology and either offer obvious benefits in conserving resources, raising energy efficiency and/or reducing pollution or must represent a substantial improvement in terms of structure, materials, quality/craftsmanship and performance. Products must possess reliable quality and bear compulsory accreditation (if subject to a compulsory product accreditation regime) and possess all special licenses (if subject to a special licensing administration requirement).

Furthermore, the product must have already been released in the market and be manufactured in China by a lawfully registered business that a) owns the product’s IPR (i.e. patents) in China or has a license to use the IPR in China and b) has exclusive rights to the product’s registered trademark or has the right to use the trademark in China.

• Accreditation process: online declaration via the MOST website (http://program.most.gov.cn) followed by submission of documents to any regional MOST office is needed prior to September 10, 2010.

Preliminary examination of all submissions is to be carried out by experts organized by MOST, the MOF and the NDRC. Provincial MOST offices will file their accreditation recommendations with MOST at the central government level before October 20, 2010. Based on the accreditation recommendations, MOST officials will then compile a preliminary list of products to be included in the national catalog and make the list available before the end of 2010.

The principal amendment adopted by the drafters of the Draft Circular relative to Circular 618 is that whereas Circular 618 requires companies to own the relevant patent(s) and trademark(s), the Draft Circular only requires companies to have a lawful right to use such IPR.

What now?

Although the initial response to the Draft Circular has been less shrill than with Circular 618, it has been predominantly negative. This ignores the many foreign-based manufacturers who regard the development of China’s indigenous innovation accreditation system as a potentially lucrative opportunity to bid for PRC government procurement contracts.

Government procurement represents a huge market in China. When China’s combined public sector is factored in (i.e. all government departments and agencies, government-funded institutions, as well as state-owned enterprises), the total value of government procurement spending annually is between US$88-100 billion and covers a wide range of industries.

A significant proportion of technology products purchased in China are developed outside of the country and, under the Draft Circular, these products will not be eligible for purchase by government agencies. There are, no doubt, technology companies that are keen to comply with the accreditation requirements in order to supply software and will be prepared to transfer key technology or trade secrets to Chinese companies in order to qualify for procurement bids.

Nevertheless, for most foreign technology companies (as well as for domestic industry and ultimately for the PRC government), indigenous innovation presents numerous difficulties.

China’s indigenous innovation policy constitutes a market entry barrier for any foreign business seeking government procurement contracts. Many foreign companies will simply be unable to compete for PRC government procurement contracts because they will not be able to obtain accreditation for their products.

The eligibility criteria set forth in the Draft

Circular are an improvement over those outlined in Circular 618 – they do not require that patents for accredited products be owned by an entity in China, and trademarks on the products no longer need to be registered in China. However, meeting the other criteria may not be so straightforward for foreign-invested manufacturers.

Manufacturers that decide to bid for government procurement contracts will need to ensure that their products are submitted before the September 10 deadline for accreditation examination. They also need to ensure that those products actually meet the criteria. Products manufactured outside of China or without proper licenses to use patents or trademarks in China will not be eligible. For any products which are still in development, spread over a variety of jurisdictions, manufacturers need to take steps to ensure that they too will meet accreditation criteria. Although the Draft Circular does not require local ownership of the relevant patent or trademark, in practice, preference may be given to accredited products backed up by Chinese patents and trademarks. Where a new technology or design feature is the outcome of collaboration between a foreign-invested entity and overseas affiliates, it may be necessary for most of the critical work to be carried out in China to ensure that the new feature can be patented.

Seek accreditation or not?

For those products which do meet the criteria, should you decide to seek accreditation?

There are several reasons why many technology companies will decide not to seek accreditation.

First, the accreditation process outlined in the Draft Circular does not inspire confidence that technology and IPR will be protected. The widespread perception reported by the media is that product examinations will be carried out by experts at government facilities, not at third-party testing agencies, and the scope of examination will go well beyond innovation features and will review underlying technology secrets.

Secondly, for multinational corporations (MNCs) and developers of sensitive and cutting

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The accreditation process outlined in the Draft Circular does not inspire confidence that technology and IPR will be protected.”

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Barring foreign products from government procurement will, in the long run, render local manufacturers less competitive.”

edge technology, developing products for sale in a single market – even one the size of China’s public sector – is a complete non-starter. To remain competitive, these companies need to sell their products and services globally.

Thirdly, companies fitting the above description may decide to forego government procurement opportunities in China out of fears that exposing technology secrets to the Chinese government may hurt their exports outside of China.

To date, there are no authoritative empirical studies on the effect of the indigenous innovation policy on Chinese technology. But as with protectionist policy makers the world over, China has not understood that such policies are fundamentally anti-competitive and will ultimately lower standards and harm the interests of Chinese manufacturers and consumers. Barring foreign products from government procurement will, in the long run, render local manufacturers less competitive.

China’s indigenous innovation policy will become a policy thorn in the side of the PRC government as well. Although other countries impose restrictions such as local content on government procurement, none make nationality of IP ownership a market access criterion and nearly all, including the U.S. Buy American Act, feature a variety of carve-outs for foreign suppliers to avail themselves of. China has, for the moment, stepped back from demanding Chinese ownership of IP but restricting government agencies from buying products which are not listed in the national catalog is blatantly protectionist and contrary to China’s WTO obligations.

When China joined the WTO in 2001, it committed to becoming a signatory to the WTO Agreement on Government Procurement (GPA) which requires non-discriminatory access to all government purchases. China also committed to treating products manufactured in China by foreign-invested entities the same as products manufactured by Chinese entities.

China’s 2007 proposal to join the GPA was rejected amidst strong criticism by other GPAmember countries and it appears that the most recent proposal, submitted on July 9, 2010, is likely

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to be rejected as well because it seeks to bar foreign companies from competing on most of China’s government procurement contracts.

In its 2010 proposal, China addresses some of the complaints about its 2007 offer but backs away from the fundamental GPA principle of guarding against protectionism. China’s indigenous innovation policy will restrict most government purchases of foreign technology and brands to those that have been accredited and included in China’s national catalog. The 2010 proposal also seeks to exclude all sub-central government agencies and all state-owned enterprises from GPA coverage, drastically reducing (by at least half) the size of China’s government procurement market.

The 2010 proposal imposes thresholds, far higher than those set by other GPA member countries, on the value of Chinese government contracts that foreign companies will be able to supply. Far from creating a level playing field for government procurement, China’s latest GPA proposal would raise protectionist barriers around most of its government procurement market.

Ultimately, it is in China’s interest to obtain membership in the GPA so it can enjoy market access to government purchases in GPA-member countries. This hinges on China putting forward a proposal that is acceptable to all current GPA members. The current proposal will likely not be acceptable and although China has shown remarkable resilience in the face of criticism about its indigenous innovation policy, it may find that GPA membership will be withheld unless it de-links government procurement from that policy (or further relaxes it). Until then, or until some other compromise is found, the restrictions that China is now seeking to impose on foreign technology and brands through its indigenous innovation policy will be overshadowed by a wall of restrictions that Chinese companies will face when it tries to bid for government procurement contracts in GPA-member countries.

Richard Grams is a partner in the Shanghai office of Troutman Sanders LLP. He can be contacted at richard.grams@troutmansanders.com or +86 21 6133 8988.

POLICY INSIGHT

B Y S T E WA RT A . B A K E R A N D S T E P H E N R . H E I F E T Z

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Addressing National Security Concerns

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n February 2008, China’s Huawei Technologies and Bain Capital abandoned a proposed venture to acquire 3Com in the face of an adverse decision by the Committee on Foreign Investment in the United States (CFIUS or the Committee), which reviews foreign acquisitions of U.S. companies for national security implications.

In late December 2009, CFIUS sank the proposed acquisition of Firstgold Corp., a U.S. mining company, by a large Chinese mining firm.

In the last week of June 2010, CFIUS was blamed for scuttling a proposed U.S.-Chinese joint venture between U.S.-based Emcore Corp., a manufacturer of fiber optics and solar panels, and China’s Tangshan Caofeidian Investment Corp. Amid rumors that CFIUS was prepared to recommend U.S. President Barack Obama to block the deal, the companies abandoned the venture.

And in July 2010, 50 lawmakers representing the Congressional Steel Caucus urged CFIUS to scrutinize a joint venture between U.S-based Steel Development Co. and China’s fourth-largest

steelmaker, Anshan Iron & Steel Group, causing the Chinese firm to review its investment strategy.

These cases illustrate at least two potential roadblocks Chinese companies can encounter investing in or acquiring U.S. targets: (1) CFIUSraised concerns about national security and (2) political concerns raised by Congress. Recognizing and preparing for these concerns can help increase the success rate of Chinese companies investing in or acquiring American targets.

Navigating CFIUS Chaired by the Department of Treasury, CFIUS is comprised of various agencies with securityfocused and trade-focused missions. At weekly in-person interagency discussions of each case pending before CFIUS, representatives from security-related agencies, such as the Departments of Homeland Security, Justice and Defense discuss deals that have the potential to raise concerns about national security. These discussions are held with representatives from U.S. trade agencies

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Careful planning and understanding of potential roadblocks to investment in the U.S. can help Chinese investors navigate CFIUS.

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While some highprofile Chinese investments in the United States have faced hurdles, many have been successful, including some that faced hurdles initially.”

that include the U.S. Trade Representative and the Department of Commerce.

CFIUS operates on the presumption that foreign direct investment and free trade generally are in the national interest. While CFIUS members rigorously scrutinize each acquisition for potential threats to national security, the Committee in practice approves almost all investments or acquisitions it reviews – typically between 100 and 200 each year.

CFIUS generally is required to make a decision within 30 days from the time it receives a formal filing unless the Committee affirmatively decides to utilize extension mechanisms. If approved, a deal is largely insulated from challenges on national security grounds. While the President has statutory authority to block or unwind a foreign acquisition over concerns of national security, CFIUS approval ensures that this authority will not be exercised. For that reason, even though a CFIUS review generally is voluntary for the transacting parties, most parties file with the Committee if they believe that the acquisition touches national security or critical assets.

If the Committee becomes aware of a deal that has not been filed but which touches on national security, CFIUS has the authority to compel a filing.

Committee personnel routinely review the press and trade journals for reports on transactions that have not been filed.

Security analysis The analytical inquiry assesses the threat, vulnerability and consequence of a foreign acquisition of an American target. Discussions generally focus on the acquirer’s intent and ability to cause harm (the threat), whether and how the target assets might be exploited to breach national security (the vulnerability) and the consequences of a successful exploitation of American resources (the consequence). These factors guide the Committee’s efforts to protect against espionage, illicit acquisitions of sensitive technology and the risk of mass casualties, among other concerns.

The Emcore-Tangshan deal likely raised concerns because of the role of Emcore’s fiber optics products in highly strategic and espionage-vulnerable U.S. communications systems. This deal is the third

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Chinese investment in less than three years that has been abandoned publicly because of CFIUS. Some of the concerns the CFIUS review raised can be attributed to widespread publicity over alleged Chinese hacking of U.S. networks, raising deep suspicions about espionage.

Congressional concerns When the Congressional Steel Caucus urged CFIUS to examine the deal between Steel Development Co. and Anshan Iron & Steel Group in July, the U.S. lawmakers expressed concerns about the effect of Chinese investment on U.S. steel markets and Chinese access to American steel production technologies.

In a letter urging CFIUS to review the joint venture, the Congressional Steel Caucus referenced national security as a reason for the request. The letter also referred to concerns about whether Chinese investment in the U.S. steel industry will cause a loss of domestic manufacturing jobs. That latter concern, rather than national security, seems to be the driving force behind the actions of the Congressional Steel Caucus.

These concerns are reminiscent of the Chinese National Offshore Oil Co.’s (CNOOC) failed attempt to acquire American oil giant Unocal, then the ninth-largest oil company in the world.

That deal was vociferously opposed by U.S. oil interests, particularly competing bidder Chevron.

After a political firestorm, CNOOC dropped its bid in August 2005, allowing Chevron to ultimately acquire Unocal’s assets.

In both cases, the motivations behind the resistance to CNOOC’s and Anshan’s investments seemed to have less to do with national security and more to do with domestic and corporate politics.

Preparing for success While some high-profile Chinese investments in the United States have faced hurdles, many have been successful, including some that faced hurdles initially. In general, the political concerns that prompt strong congressional reactions to Chinese investments have declined. This decline

seems at least partially attributable to efforts to educate Congress on the potentially constructive role of Chinese investment in the United States – especially in terms of domestic job creation.

But for the foreseeable future, Chinese investment in strategic American sectors will continue to be scrutinized. Chinese investors and U.S. target companies accordingly need a communications plan that addresses these concerns. It would be wise, for example, to craft a media plan that promotes the job-creating benefits of the investment. That message needs to be honed and targeted to the right audiences.

Chinese investments that can be construed as creating espionage opportunities will likely continue to raise CFIUS skepticism. Sometimes that skepticism can be overcome through risk mitigation agreements, whereby transacting parties agree to take certain security measures to win CFIUS approval. Such measures often have included the appointment of a security officer, the creation of a written security plan, security screening for certain employees, the periodic

provision to the U.S. government of customer lists, access to company books and records, audit rights to confirm compliance with all required security measures and other provisions. These so-called risk mitigation agreements are less commonly used today, because legislation enacted in 2007 requires a consensus among all of the CFIUS agencies as to the need for (and details of) such an agreement, and such consensus often is illusive. But Chinese investors and U.S. target companies should think through risk mitigation strategies, particularly if acquisition of the target company creates espionage opportunities.

Stewart Baker and Stephen Heifetz were, respectively, Assistant Secretary for Policy and Deputy Assistant Secretary for Policy Development at the Department of Homeland Security, where they reviewed CFIUS cases, negotiated risk mitigation agreements and helped revise CFIUS laws and policies. They now are partners in the Washington office of Steptoe & Johnson LLP.

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For the foreseeable future, Chinese investment in strategic American sectors will continue to be scrutinized.”

I N T E RV I E W

B Y DAV I D B A S M A J I A N

China’s Go West Policy: Opportunities in Chengdu and Xi’an Insight discusses China’s Go West policy and investment opportunities in Western China with Chengdu Mayor Ge Honglin and Xi’an Deputy Mayor Han Song.

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ith the support of dedicated leadership, ambitious planning and strong financial incentives, the first ten years of the China Western Development program, or the “Go West” campaign, has yielded impressive results.

As the second decade of the campaign begins, the successes of Beijing’s ambitious strategy have created a strong foundation for continued growth.

In response to tax and investment incentives and growing local market demand, many multinationals have set up shop in major western cities like Chengdu, Chongqing and Xi’an. Projects like Intel’s assembly and testing facility and Motorola’s research and development center in Chengdu will support the growth of new industries

utilizing innovation and technology. The landscape of western cities is being further transformed through the arrival of auto companies, retailers and luxury brands looking to benefit from consumers’ rising spending power. After a decade of high gross domestic product (GDP) growth rates and rising foreign investment, officials from the West are dedicated to improving life for their citizens and becoming modern, world-class cities.

In Shanghai to speak as part of AmCham Shanghai’s Expo Provincial Government Forum series, Chengdu Mayor Ge Honglin and Xi’an Deputy Mayor Han Song recently sat down with Insight to discuss China’s Go West campaign and their plans for achieving sustainable growth and development in west China.

Chengdu: Creating “Intelligent Communities” of the Chengdu Municipal Committee of the Communist Party of China. AmCham Shanghai was honored to host Ge in August to speak about investment in Western China and Chengdu’s development into a first-tier city.

Ge Honglin, Mayor of Chengdu

Ge Honglin has held the position of Mayor of Chengdu since 2003 and is Secretary of the Party Leadership Group and Vice Secretary

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On Chengdu’s appeal to foreign investors…

Ge Honglin: Chengdu’s government services are a major source of appeal for investors. Chengdu’s government policies promote a transparent and competitive investment environment. By maintaining open communication and cooperation with our current foreign investors, we are able to attract new companies to Chengdu.

It is common in other cities to ignore companies once they have invested and set up operations.

Generally speaking, many leaders are unwilling to meet with these companies to avoid hearing any problems or criticisms. However, in Chengdu, I

encourage companies to provide criticism so we can improve and create solutions. We have actually created a criticism management mechanism where we work to solve problems one at a time. This mechanism has allowed us to respond to investor feedback and better prepare for the future. As we continue to work with foreign investors, we are focusing on operating with the highest level of honesty, efficiency and open communication.

On Chengdu’s efforts to rebuild after the 2008 earthquake…

GHL: We have used the post-quake reconstruction as an opportunity to fundamentally improve infrastructure in the earthquake-stricken area. After the completion of the reconstruction, these rural areas will enjoy significant improvement, rivaling their counterparts in coastal areas. The reconstruction plan focuses not only on making places livable, but also on building better infrastructure, even in areas unaffected by the earthquake. China’s vast rural areas still severely lack sufficient levels of investment.

During our reconstruction, investment from the government played a significant role. A good example of this assistance is the construction of the railway from Chengdu to Dujiangyan. The proposed start of construction was in June 2008, but was unable to begin until October 2008.

Despite that, the line went into operation this May. The railway was built at such an incredible pace thanks to funding from the local government and the railway department of China. This high-speed railway has greatly improved the development of the earthquake-stricken area of Dujiangyan, especially the tourism industry.

On Chengdu’s future…

GHL: One of Chengdu’s major goals is to establish itself as a “world modern garden city,” developing in an eco-friendly way. While some cities strive to be like New York or London, our first step is to build Chengdu into a second-tier city of the world, contributing to the world economy as a highly urbanized and modern metropolis.

Our next step is to become known as “Intelligent Chengdu.” As Chengdu has already satisfied the

city’s basic needs, we need to develop efficiently.

Intelligent Communities, a project between Chengdu’s government and Cisco where Cisco was introduced to a local real estate developer, is a good example of this type of development.

The local developer only knew how to wire the buildings using traditional means until Cisco introduced the developer to modern technologies and ways of operating. Although the cost was higher for the real estate developer and for local residents, the new system proved superior. In this case, the government didn’t pay anything for the project but succeeded in promoting the intelligent development of the community.

On China’s Go West policy...

GHL: The first decade of the Go West policy laid a foundation for development in China’s western region. The next decade will resemble the economic boom that occurred in Shanghai from 1992 to 2000. Through local market demand, western China will begin to drive China’s economic growth.

In the past, when western Chinese cities could not offer enough good employment opportunities, people had to leave their hometowns to look for work. As transportation infrastructure in the West has improved and the logistical cost of doing business has decreased, more companies have come to the West to invest. Now, because people do not have to leave to find employment and can build their homes in the West, the demand for goods like appliances and cars will increase.

The second major result of the Go West policy is the West’s increasing ability to attract talent and highly skilled labor. Chengdu is becoming more appealing as property prices in Beijing and Shanghai continue to rise and it becomes more difficult to obtain residency in first-tier coastal cities. Chengdu will continue to welcome this inflow of talent.

Another important factor is the leadership personnel exchange and communication between China’s East and West. When officials from eastern cities come to the West, they use their experiences to teach us more innovative and effective approaches.

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In Chengdu, I encourage companies to provide criticism so we can improve and create solutions.We have actually created a criticism management mechanism where we work to solve problems one at a time.”

Xi’an: Targeting capital investment along with new ideas and talent

Han Song, Deputy Mayor of Xi'an

Han Song has been Deputy Mayor of Xi’an since 2006. As Deputy Mayor, he is responsible for investment promotion, domestic and foreign trade, market supervision and the Xi’an International Trade & Logistics Park. AmCham Shanghai was honored to host Han in July to discuss opportunities for foreign investors in Xi’an as part of AmCham Shanghai’s Expo Provincial Government Forum series. Insight recently sat down with Han to discuss Xi’an fast-paced development, foreign investment opportunities in Xi’an and what the city hopes to take away from the Shanghai Expo.

On the importance of foreign investment for Xi’an’s development…

Han Song: With double-digit annual GDP growth over the past ten years, Xi’an’s recent development has been reliant on fast growth in investment. For the past three years, annual GDP growth has been higher than 14.5 percent. Because Xi’an is an inland city, investment is necessary to drive development.

The most important sources of investment are municipal government spending and private capital from all sectors of the city. These funds should be channeled into investment to develop the city. However, we cannot only depend on government spending and private capital inflows.

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To fund the city’s construction and development, we need more outside capital investment. I believe that the arrival of more foreign investment to Xi’an will have a significant influence on people’s management ideas and outlook.

I firmly believe a city’s real development cannot solely rely on capital inflow; it should also depend on the elevation of its ideas, knowledge and ability to learn. These factors will accelerate the city’s development. From this perspective, we are more welcoming of foreign investment, whether capital investment or trade, while striving to broaden the perspectives of the people of Xi’an. Xi’an not only needs capital to fund development, but also ideas and talent.

On industries for American companies to invest in Xi’an…

HS: For American companies, Xi’an’s five pillars of industry are good areas to invest. These five areas are quite broad and can absorb a lot of investment.

The industries include high-tech industries, tourism, cultural restoration and development, equipment manufacturing and modern services. There are also plenty of investment projects and opportunities for cooperation within these industries.

American companies should also understand the implications of the Go West policy and grasp the opportunity to invest in inland Chinese cities.

We understand that working with foreign investors requires frequent communication and regularly working together to solve any problems that arise.

Operating in this way is an important measure to improve the city’s attractiveness as an investment destination and to strengthen cooperation with companies.

On Xi’an’s fast-paced development…

HS: The last ten years of Xi’an’s development have been supported by sustained high levels of investment. The next decade will depend on increases in investment capital coming from several sources: the municipal government, the private sector, the

central government and foreign investors.

These main sources of investment will not change for a number of reasons. First, as the city develops, the municipal government’s fiscal revenue will grow. Second, since the Chinese government has opened up sectors previously restricted to private investment, capital from the private sector will increase and more opportunities for similar types of investments will be created. Third, as Xi’an becomes a more attractive destination for investors and its business environment continues to improves, the pace of foreign investment will accelerate. Last, the second 10-year period of the central government’s Go West policy begins this year. This will result in more projects and capital flowing into the western region, including Xi’an, which is a very important city in this region.

On the impact of China’s Go West policy…

HS: The first thirty years of China’s reform and opening up has mainly benefited the coastal cities in the east and south. During the first decade of the central government’s Go West policy, Xi’an, as well as other inland cities in western China have benefited greatly.

During the next ten-year period, more funding will support the policy in China’s middle and western regions. The Go West policy will have a far reaching impact over the next ten years. These policies will improve the business environment that U.S. companies have concerns about. Seeing the results of these policies will give them incentives to invest in the western region in inland China and in Xi’an. The Go West policy represents a great opportunity. I have been telling many people recently to carefully study this policy and grasp the opportunity.

On learning from the Shanghai Expo…

HS: The Shanghai Expo has served as a great platform for global communication and the showcasing of cultures from all over the world.

The Xi’an government has witnessed first-hand the importance of the event’s influence and communication opportunities.

Next year, Xi’an will host the Xi’an Horticulture World Exposition. My team and a government

delegation from Xi’an have visited the Shanghai Expo to learn from the city’s experience in hosting such an event. We hope that hosting the 2011 Horticulture Expo will be an opportunity to teach more people around the world about Xi’an just as the Shanghai Expo has done for Shanghai.

We estimate there will be about 10 to 20 million visitors to Xi’an for next year’s Horticulture Expo. These visitors and the event’s activities will help to promote Xi’an and give people a more comprehensive understanding of the city’s culture, society and investment environment.

The Xi’an municipal government will work hard to ensure the success of the Horticulture Expo. This exposition, just like the Shanghai World Expo, is a grand event orchestrated by the Chinese government. We are confident that the Horticulture Expo will have a significant impact and will succeed in educating more people about Xi’an. The city will benefit through improvements to the urban landscape and the environment of the city, as well as the broadening of citizens’ global perspectives. I firmly believe that hosting the 2011 Horticultural Exposition will bolster the reputation of the city of Xi’an and strengthen confidence in Xi’an’s investment environment.

“

During the next ten-year period, more funding will support the policy in China's middle and western regions.

The Go West policy will have a far reaching impact over the next ten years.”

David Basmajian is Director and Communications & Publications at AmCham Shanghai. He can be contacted at david.basmajian@amcham-shanghai.org.

Additional reporting by Ashley Cahill.

China's Go West Policy In 2000, the Go West campaign was launched by the central government to develop and modernize China’s vast interior and western regions. The policy seeks to bridge the gap between the economies of China’s coastal regions and western China by developing infrastructure, attracting foreign investment, increasing environmental protection, promoting education and retaining a high-skilled labor force. Through favorable tax and investment incentives, Go West has produced massive investment in interior infrastructure including airports, highways, power grids and high-speed rail.

These investments have paved the way for the arrival of new industries and foreign firms. As wages and property prices continue to rise in China’s coastal cities, more companies are looking west to host new operations and investment.

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Taking China’s Real Estate Temperature

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C OV E R S TO RY

B Y RYA N B A L I S

China’s property market may have cooled, but there is life yet for growth.

C

TIFFANY YAJIMA

hina’s central government has paid an unprecedented level of attention to reining in the country’s real estate market.

Earlier this year, Beijing rolled out a series of the strictest regulations to face any real estate market. The meat of the policies raise down payment requirements on first and second homes, increase borrowing rates for second home purchases, tighten restrictions on presale properties and deepen scrutiny of borrowers’ credentials, freezing out cross-city buyers. Banks in certain cities have the discretion to reject mortgage applications outright on third (or more) home purchases.

China’s government is showing no signs that it plans to lift or to loosen the policy noose. Statements from the leadership reiterate Beijing’s tough stand targeting buyers of investment properties. On August 13, Xinhua reported Chinese Vice Premier Li Keqiang as saying that “the government would continue to regulate the housing market and resolutely crack down on speculative property investment and other unreasonable market demands.”

Beijing may have achieved its desired outcome to cool the market. Still, some market watchers are voicing concern about the risk of a potential bubble, pointing to, for example, the dizzying acceleration in property prices in the residential market this year. What explains the price growth that set records

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IMAGINECHINA

SALES SLUMP: Slower growth in residential property has led to fewer home sales.

earlier this year but which appears to have tapered off recently? Going forward, what are the prospects for a healthy property market in China?

The market reacts Official data for July show sales prices in 70 of China’s medium- and large-sized cities increased 10.3 percent year-over-year, dropping from an 11.4 percent uptick in June, according to China’s National Bureau of Statistics (NBS). July’s reading marks the third consecutive month of slower yearover-year price growth. Real prices on secondary homes in China’s first-tier cities decreased between three and seven percent between the end of April and the end of July, according to real estate firm Knight Frank.

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The rate of sales price growth is slowing not only in Beijing, Shanghai, Guangzhou and Shenzhen.

Official data also show slower price appreciation in many smaller cities. Recent run-ups in price growth in cities such as Sanya and Haikou are exceptions to what appears to be a general mellowing across much of the market, unlike the record-setting pace in April or May. “House price inflation is slowing and should continue to ease further in the months ahead, but so far it has been a gradual deceleration rather than an abrupt correction in prices,” Brian Jackson, senior analyst at the Royal Bank of Canada in Hong Kong, tells Agence France-Presse.

Meanwhile, the dramatic slowdown in sales volume witnessed last spring continues, as many buyers, especially investors and prospective luxury buyers, maintain “a wait-and-see” approach. In Shanghai, Nanjing and Hangzhou, transactions have been cut in half over the first six months of the year, while sales in Beijing have decreased 40 percent, reports China Daily, citing government statistics. The volume of luxury sales fell 26 percent between June and July among homes priced above RMB50,000 (US$7,400) per square meter, reports Shanghai Daily, citing London-based firm DTZ. Many units in China’s largest cities remain unsold. “Between the end of April and the end of June, the total area of unsold homes in Beijing, Shanghai, Guangzhou and Shenzhen rose 8 percent, 13 percent, 24 percent and 3 percent respectively,” according to Knight Frank. Instead, a booming rental market has emerged, driving up rental prices. The sales slump, by contrast, has forced large numbers of real estate agents to look for new careers.

The commercial market would be a logical focus of attention at first glance because the sector has not been a focus of Beijing’s policy moves, unlike the residential side. But commercial property is a different animal. “The nature of commercial real estate is such that it demands significantly higher amounts of capital in order to participate,” says Amy Sommers, a national partner at the law firm Squire Sanders in Shanghai.

The growth rate of commercial floor space sold and sales volume are up 9.7 percent and 16.8 percent, respectively, according to the NBS. China Daily reports that Vanke, China’s largest publicly traded property developer, wants to add 20 percent to its commercial property volume. Another heavyweight developer, Poly Real Estate Group, plans to dedicate 30 percent of its investments for commercial properties within three to five years.

Although commercial property market growth is strong, according to official figures, anticipation for the same frenzied buying in residential properties earlier this year to shift to the commercial side may be dubious. “Given the large potential supply in [first-tier] cities, the office market is unlikely to see the sort of speculation seen in the residential market, which was partly driven by the lack of supply,” according to DTZ’s most recent report on Chinese real estate.

Demand-driven Some observers point to so-called property speculators – or investors – as one of the principal forces that drive up property sales prices. They point to a Chinese Academy of Social Sciences (CASS) study that suggests 64.5 million urban apartments are vacant across China. According to media reports, the official government think tank based its research on dormant electricity usage; utility companies disagree with the study’s findings.

But several demand-driven factors may help explain the earlier frenzy of investment-centered activity.

First, many Chinese look to property as a means for safe asset storage amid inflationary expectations. The holding cost for property investors is negligible because the government does not levy a property tax – although this may change.

Shanghai is one of two municipalities that applied in recent months for the State Council’s approval to collect a housing tax. The central government is considering the launch of a property tax on a pilot basis in 2012 or 2013 that would eventually be extended nationwide.

Property ownership is valued because it is seen as a tangible investment, points out Michael Kurtz, head of Asia strategy at the financial services firm Macquarie Securities, in the Wall Street Journal.

“So a well-off middle-income Chinese family with savings to deploy may rationally choose to put their savings into even an empty housing unit,” he writes.

Second, few investment alternatives exist. The stock market is seen as volatile, and stowing savings in a Chinese bank does not return a rate even matching inflation. But the recent housing policies in place or under consideration are now aiming to make it far more difficult to buy a home other than a primary residence and more costly to hold these properties for investment purposes only.

In response, many Chinese real estate investors are bargain hunting in down markets overseas,

despite tight foreign exchange rules in China that limit overseas currency flows. A credit crunch in some foreign locations means that investors with capital on hand are especially welcome.

The demand for international property among Chinese buyers is so strong that Knight Frank calculates that approximately 10 percent of new London residential properties are sold to mainland or Hong Kong investors, reports Reuters. These Chinese investors accounted for the largest share of foreign investors from January to March this year, according to the firm.

Chinese buyers are finding upscale properties in London catered to Chinese tastes (e.g., a “missing” fourth floor). U.S. firms help organize property tours for potential Chinese buyers, who are among the top international buyers of U.S. real estate when combined with Hong Kong buyers, according to a June report by the National Association of Realtors.

Seeing the demand, developers in the United Arab Emirates and Indonesia are planning to attract Chinese investors to their high-end properties.

The rationale for looking at foreign properties is not only for their investment potential. “Chinese come to the U.S. not for the huge profit, it’s for the stabilized market,” Kenneth Li, an agent with Century 21, tells the New York Times. Chinese buyers also want properties that can serve as temporary residences on business trips or as homes for their sons or daughters studying overseas.

What goes up?

Dr. Kenneth Rogoff, a Harvard University economics professor and former chief economist at the International Monetary Fund, ignited wide interest in July when he warned on Bloomberg Television that China’s property market was “starting” a “collapse” that is “going to hit the banking system.” Andy Xie, former Morgan Stanley Asia-Pacific chief economist, wrote in Beijing Review, “In my opinion, it is very likely the Chinese property market would collapse much like the United States did in 2008.”

Do such warnings hold water?

Michael Klibaner, national director and head of research for real estate firm Jones Lang LaSalle in China, makes the case that China’s market does not have the same features that set the stage for the U.S. housing collapse. In China, he points out, high down payment requirements mean owners hold relatively higher levels of equity and are utilizing lower rates of leverage when taking out mortgages.

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The recent housing policies in place or under consideration are now aiming to make it far more difficult to buy a home other than a primary residence and more costly to hold these properties for investment purposes only.”

“

With a large part of Chinese investment in property being financed with savings, not borrowed money, and mortgage debt being a slow share of output, it is more difficult to argue that China’s property market is a bubble.”

“Leverage is the key source of risk in a property market,” says Klibaner. “So, one of the things that we take comfort from is you won’t have forced selling as a result of negative equity and that vicious cycle of forced selling…begetting more forced selling.”

In an April report, London-headquartered Lombard Street Research writes, “With a large part of Chinese investment in property being financed with savings, not borrowed money, and mortgage debt being a low share of output, it is more difficult to argue that China’s property market is a bubble,” writes the firm. “In principle, the market is very, very healthy,” Richard Van Den Berg, managing director at ING Real Estate Investment Management, tells Bloomberg.

Although highly cash-invested owners have an incentive to hold property, China’s banking regulators appear not to be taking any chances.

The China Banking Regulatory Commission (CBRC) is ordering state banks to undergo a series of “stress tests” on lending to the property market and industries connected to housing. The exercises assume up to a 60 percent decrease in property prices – a dive analysts are not forecasting.

“Chinese banks were initially asked to test a 30 percent decline in property prices and the results were reported to be quite benign,” Qing Wang, Morgan Stanley’s chief economist, tells Reuters.

“So banks are now being asked to conduct a more meaningful stress test.”

That the results reportedly show China’s state banks, in theory, could survive a significant decline is perhaps not surprising considering their relatively low levels of exposure to the property sector. People’s Bank of China (PBoC) records show loans to the residential sector make up a fraction of loans on the books. In 2009, a year of record lending, loans to the residential sector accounted for less than 15 percent of total Chinese state banks’ loans for that year.

A “healthy” correction With policy restrictions expected to remain in place, analysts see some price relief on the way over the next few months. Jones Lang LaSalle forecasts a 15 to 20 percent correction in the shortto medium-term which will be seen most visibly in new mass market apartments in first-tier cities.

“In a market that has performed as extraordinarily well as China’s has over the last 18 months, we would view a 20 percent correction as sort of a

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healthy thing for the market,” says Klibaner.

In July, Standard Chartered forecast a steeper 30 percent markdown in China’s largest cities. Some real estate developers are already slashing prices to jump start a quiet sales market. According to Reuters, one third of developers in China have cut prices, and an additional 30 to 50 percent may follow suit this year. “Most large developers…will be willing to make gestures of price reductions as a move to preempt further policy intervention from the authorities,” explains Knight Frank.

In Beijing, developer Shimao Property Holdings is launching a four-tower luxury development discounted to RMB65,000 (US$9,600) per square meter, reports China Daily. In addition, the first 20 units sold are offered at RMB45,000 per square meter under a promotional plan with a further discount for outright buys. “Without the market adjustment, we’d price these units above RMB80,000 per square meter,” Xu Shitan, the firm’s executive director, tells the paper.

On the supply side, development in the pipeline appears to be moving ahead depite a deceleration in the pace of new residential projects being built.

Among 30 developers recently polled by Standard Chartered, 24 say they are not postponing any construction projects in second- and third-tier cities, reports the Wall Street Journal.

Investment in new properties is slowing after jumping earlier in the year. The most recent official data show the volume of residential investment nationally fell 25 percent between June and July; total real estate investment fell 29 percent over the same period. “The enthusiasm of developers in investing and developing new real estate…has declined sharply,” says Sommers.

Meanwhile, Beijing is planning to add to the number of affordable housing units. The Ministry of Housing and Urban-Rural Development says China will build 5.8 million such units this year and has committed RMB60 billion (US$8.8 billion) for the effort, reports China Daily.

Additionally, there are reports that the China Insurance Regulatory Commission (CIRC) is considering allowing insurance companies to finance affordable home development, among other public works projects.

Going forward China’s leaders will need to grapple with long-term structural pressures that will continue to impact demand.

IMAGINECHINA

“There’s a massive unmet demand for residential housing,” explains Klibaner.

“Commercial development has only constructed housing for about 20 percent of the population,” he adds. In Beijing, social housing programs support 60 percent of the city’s residents, according to a recent report by the Beijing University of Technology and the Social Science Academic Press.

Klibaner points out that prior to the late 1990s, Chinese relied on government-developed and government-owned housing. Privately-owned homes were encouraged only in the mid-1990s.

“We’re looking at 50 years of pent-up demand,” he says.

The result, years later, is a large market not only for first-time home buyers looking for all the benefits that owning a home provides.

Buyers also include established owners looking to upgrade their residences. So-called “upgraders” accounted for between roughly 35 to 40 percent of homebuyers over the past year, according to data from CLSA cited by Jones Lang LaSalle.

Additionally, China’s urban population is increasing by the millions each year because of mass urbanization. Since the reform era began in 1978, the proportion of official urban residents has rocketed from 18 percent that year to 46 percent by 2008, according to the NBS. Some 350 million additional rural residents are expected to migrate to cities by 2050, adding housing demand.

Finally, land sales are a sizable source of local government revenue. In 2009, these sales accounted for 29 percent of budgetary revenue in Beijing, Shanghai and Tianjin (RMB92.8 billion, RMB104.3 billion and RMB73.2 billion, respectively), according to official statistics cited

by DTZ. At the high end, land sales accounted for 51 percent (RMB105.4 billion) of Hangzhou’s revenue and 57 percent of Foshan’s (RMB33.2 billion).

Real estate is such an important sector of the Chinese economy that it contributes to 57.9 percent of the nation’s gross domestic product, according to Xinhua. A healthy real estate sector is desirable for the larger economy and for providing local governments with a dependable revenue stream. Workers, especially from China’s rural areas, depend on job opportunities created by real estate construction. Some 60 industries, including steel and other industrial commodities, are tied in to that construction.

The fundamentals are in place to drive housing growth for some time to come. But with so much riding on a strong real estate sector, China’s leaders will face a decision whether to intervene further if another round of significant price escalation occurs again.

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

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Real estate is such an important sector of the Chinese economy that it contributes to 57.9 percent of the nation’s gross domestic product.”

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INSIDE AMCHAM FROM THE CHAIRMAN

Preparing for Capitol Hill

I

t has been a busy summer in Shanghai as Expo hit its half-way mark and the USA Pavilion continues to be a top draw hitting 4 million visitors as of August 14.

Over the past few months we’ve had many opportunities to meet with U.S. state and federal government officials in Shanghai to visit the Expo and to meet with the American business community. AmCham Shanghai was pleased to host many of them and provide Chamber members the opportunity to pass along their front-line experiences of doing business in China.

Most recently, the Chamber welcomed U.S. Senator Dianne Feinstein (D-CA), Senator Evan Bayh (D-IN) and a Congressional delegation led by Representative Hank Johnson, Chair of the House Subcommittee on Courts and Competition Policy. Governors from the States of Hawaii and Texas have been hosted by AmCham Shanghai and the governors of California, Minnesota and Washington will visit later this month.

Robert Roche Chairman AmCham Shanghai

From September 27-29, we will continue our ongoing dialogue with the U.S. government when we travel to our nation’s capital for the 2010 Washington, D.C. Doorknock. A delegation of Chamber members will engage the Obama administration, members of Congress and other key decisionmakers on important issues facing the American business community in China.

U.S. company operations in China can play an even bigger role in driving U.S. economic growth and supporting and creating thousands of high-paying jobs at home.

Our primary objective in Washington will be to communicate the importance of advancing U.S. export competitiveness in China through improved trade promotion, trade advocacy, export financing, better federal-state coordination and other policy tools outlined in the Administration’s National Export Initiative.

At the same time, we’ll encourage U.S. officials to continue to engage China on issues that most directly impact the business climate for U.S. businesses in China. These include improving market access for American companies, improving IPR enforcement and protection, enhancing transparency in the formulation, enactment and implementation of rules and regulations and working with China to rethink innovation policies, such as indigenous innovation, which threaten to limit the ability of U.S. companies to compete for government procurement contracts.

By increasing U.S. exports and improving the business climate for American companies in the world’s fastest growing market, U.S. company operations in China can play an even bigger role in driving U.S. economic growth and supporting and creating thousands of high-paying jobs at home.

With its sustainable urbanization theme of “Better City, Better Life,” the Shanghai 2010 World Expo provides a backdrop to AmCham Shanghai’s annual Sustainability Conference. A sustainable urban environment is, of course, a message we can all get behind. But at this year’s Conference we will strive to determine what businesses and governments need to do now to make this vision a reality in our lifetime.

Green Cities: A Call to Action, to be held from September 16-18 here in Shanghai and co-organized with the Asia Society, will engage over 100 global thought leaders and senior government officials from the U.S. and China. The Conference will bring together experts from the fields of technology, research, architecture, business and policy to develop a clear vision of how businesses and governments can work together to create a more sustainable urban future. The Conference is an opportunity for member companies to make positive contributions to society while continuing to develop their businesses – another message that I think we can all support.

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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 July 2010 Board of Governors Meeting Committee Briefings Victoria Moy, chair of the Corporate Social Responsibility (CSR) Committee, and Michael Klibaner, chair of the Real Estate Committee, briefed the Board on their committees’ annual agendas, recent activities and development plans.

Membership Update 63 new member applications were approved over the past month.

Election Auditor Approval The Board approved the Nominations & Elections Committee’s recommendation of PricewaterhouseCoopers as the Election Auditor for the 2011 Board of Governors Election.

CSR Sichuan Project The President reviewed a recent visit to project sites in Sichuan Province that are supported by AmCham Shanghai-raised funds, such as a senior citizens center and the livestock project in partnership with Heifer International. Nearly 800 senior citizens are supported by the senior citizen center and taking part in activities such as gardening, reading and computer courses. The Heifer program has funded the purchase of 272 goats thus far. A film crew accompanied the AmCham Shanghai group and is producing a documentary to share the positive outcomes.

IN ATTENDANCE Governors: Andrew Au, Murray King, Eric Musser, James Rice, Robert Roche (Chairman), Matthew Targett, Kevin Wale and Chris Wurzel.

Attendees: David Basmajian, Justin Chan, Norwell Coquillard, Michael Klibaner, Siobhan Das, Brenda Foster (President), Victoria Moy, Helen Ren, David Turchetti, Linda X. Wang, Marjorie Woo, Jessica Wu and Oliver Yang.

REGRETS Eddy Chan, Pierre Cohade, David Gossack, John Grobowski and Diane Long.

The AmCham Shanghai 2010 Board of Governors: Chairman

Governors

Andrew Au Citibank China

Murray King APCO Worldwide

James Rice CSM Global

Eddy Chan FedEx Express

Diane E. Long UBS International

Matthew J.Targett Bayer Technology and Engineering

Pierre E. Cohade The Goodyear Tire & Rubber Co.

Eric S. Musser Corning China

Kevin E.Wale General Motors China Group

Robert W. Roche Acorn International

Vice Chairman

John V. Grobowski Faegre & Benson LLP Shanghai

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Held on Saturday, July 3 at the scenic Le Meridien She Shan Resort, AmCham Shanghai’s annual Independence Day Celebration, this year themed “the Great American West,” was a tremendous success! AmCham Shanghai members and their families and friends enjoyed an action-packed day complete with indoor and outdoor games and activities, live music and dancing to classic American hits, and food and drinks from some of Shanghai’s best restaurants.

AmCham Shanghai President Brenda Foster, Chairman Robert Roche and U.S. Consul General Beatrice Camp kicked-off the festivities with welcome remarks. Also making a celebrity appearance was Miss USA 2010 Rima Fakih who judged the watermelon eating contest and led the kid’s parade.

Activities such as three-legged races, a watermelon-eating

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contest, a water-balloon toss competition, a T-shirt painting competition and hat decorating were a huge hit for both children and adults. Guests enjoyed holiday favorites such as hamburgers, hot dogs, pizza, pulled-pork sandwiches, cornbread chili and cookies and brownies.

The Independence Celebration also featured a lucky draw, where guests had a chance to win a range of prizes including spa and massage gift certificates, restaurant vouchers and a grand prize of two United Airlines round-trip tickets for travel to the U.S. AmCham Shanghai would like to thank all our members and guests who came out to join us for our Independence Day Celebration, as well as our generous sponsors. We hope to celebrate with everyone again next year!

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AmCham Shanghai New Members: June – August 2010 U.S. Corporate Membership A123 Systems (China) Materials Co., Ltd. WANG, Mingde Agribrands Purina (Jiaxing) Feedmill Co., Ltd. LEE, Heung Kee BRC Imagination Arts (Shanghai) Co., Ltd. QI, Bob Cargill Animal Nutrition (Nanjing) Co., Ltd. GU, Meihong Compuware Covisint (Shanghai) Software Services Co., Ltd. LIU, Helen Davison Design & Development (Shanghai), Ltd. ZHOU, Pauline DMP Metal Products Co., Ltd. WANG. David Ferro (Suzhou) Perfromance Materials Co., Ltd. BELL, Mattias Peter Fisher Dynamics Automotive Seating Components (Shanghai) Co., Ltd. ZHOU, Roger Genband (Shanghai) Co., Ltd. YANG, Ping Honeywell Fire & Security Systems (Shanghai) Co., Ltd. TONG, Jesson Ingersoll-Rand (China) Industrial Equipment Manufacturing Co., Ltd. WALMESLEY, Christopher ITW (China) Investment Co., Ltd. SHI, Peggy Novatel Wireless, Inc., Shanghai Rep. Office QIU, Ping NuVoSun (Shanghai) Co., Ltd LUO, Leroy ROTH Capital Partners, LLC Shanghai Rep. Office MA, John Shanghai Zhen-Li Engineering Machinery Equipment Co., Ltd WHITE, David Urban Science Applications (Beijing) Co., Ltd., Shanghai Branch GAYDEN, Hamilton Zinpro Animal Nutrition, Inc., Shanghai Rep. Office KELLER, Gerry

U.S. Associated Corporate Membership

Aavid (Shanghai) System Co., Ltd TREE, Yenho Kuo Anthony Technical Glass (Shanghai) Co., Ltd. CLARK, Jeffrey BorgWarner (China) Investment Co., Ltd. TAN, Yuesheng Changzhou Biomet Medical Devices Co. Ltd. SHAY, Susan Cooper Electric (Shanghai) Co., Ltd. LAW, Kim Lee Federal-Mogul (China) Co., Ltd. FRICKE, Cornelius Jacobs (Suzhou) Vehicle Systems Co., Ltd. JIA, Huazhong Lamb Weston (Shanghai) Commercial Co., Ltd. LIN, Enbin Mckesson (Shanghai) Trading Co., Ltd. ZHANG, Fang Minnesota Precision Products (Suzhou) Limited SWANBERG, Craig Navistar (Shanghai) Trading Co., Ltd. WU, Norris Ohaus Instruments (Shanghai) Co., Ltd., Changzhou Branch XIA, Ted Yan PMC-Sierra Technology (Shanghai), Ltd. ZHANG, Tony

Shanghai Schering-Plouch Pharmaceutical Co., Ltd. VOUNATSOS, Michel True Partner Consulting International (China) Co., Ltd. CHANG, James Tyco Electronics (Suzhou), Ltd. CHEN, Steven Yuchai Remanufacturing Services (Suzhou) Co., Ltd. YANG, Shiwei

Small Business Membership Elizabeth Premazzi Architecture & Interior Design Consulting (Shanghai) Co., Ltd. PREMAZZI, Elizabeth GCS China Co., Ltd. HU, Rose International Connections Consulting Solutions PINATO, Robert Scandic Trading Limited BOCK, Warren

Educational Membership University of Rhode Island BERKA, Sigrid

Corporate International Affiliate Membership Bacardi Asia Pacific Limited DYRVIK, Harold Hotel Reservation Service (Shanghai) Co., Ltd. ZHANG, Christine International Herald Tribune (HK), Ltd. PHUA, Pey Fei Helena Kingdee Software (China) Co., Ltd. LI, Jiaqi Langham Xintiandi, Shanghai, The CHRISTENSEN, Jorgen Madison (Shanghai) Limited ROOKER, Tyler NAI Communication Technology (Suzhou) Co., Ltd. HARRISON, Wayne John OPK Changzhou Co., Ltd. SHIN, Seong Chan Pacific Prime (China) Co., Ltd. XU, Sophie Ritz-Carlton Shanghai, Pudong, The BURKLE, Rainer Shanghai Toho Technology Co., Ltd. TOMITA, Hideyuki

Non-resident Corporate Membership VSP Global DE GUZMAN, Nina

Associate Membership A123 Systems (China) Materials Co., Ltd. DING, Chunyan Aavid (Shanghai) System Co., Ltd GU, Stanley Baker & McKenzie Shanghai Office YAP, Pett Becton Dickinson Medical Devices (Shanghai) Co., Ltd. HOPPS, Troy Bekaert Management (Shanghai) Co., Ltd. REYNDERS, Karl Bleum Software Development (Shanghai) Co., Ltd. TAN, Pearly Carlisle (Shanghai) Trading Co., Ltd. DISIMINO, Dane CH2M HILL Constructors (Shanghai) Co., Ltd ZHANG, Yanli Compuware Covisint (Shanghai) Software Services Co., Ltd. ZHANG, Yan

Dell Procurement (Xiamen) Co., Ltd., Shanghai Branch CHENG, Shi Dow Chemical (China) Investment Co., Ltd., Shanghai Branch LA ROZA, Jorge Dow Corning (Shanghai) Management Co., Ltd. SHI, Jun Duke Global, Inc. PAN, Jeff EVAPCO (Shanghai) Refrigeration Equipment Co., Ltd. TORRES, Nicholas Executive Centre (Shanghai), The LI, Maggie LIN, Annie WANG, Huiting Federal Express (China) Co., Ltd., Shanghai Branch SEAN, Kuan-Thye Federal-Mogul (China) Co., Ltd. REN, Xiaodong FMC Asia Pacific, Inc., Shanghai Rep. Office CHEN, James Gap (Shanghai) Commercial Co., Ltd. DEMILLE, Alison MORETTI, Lorenzo Genencor (China) Bio-Products Co., Ltd. GAO, Zhijiang General Electric (China) Co., Ltd. WANG, Jianhong General Motors (China) Investment Company Limited LEI, Dan Honeywell (China) Co., Ltd. CUI, Hawkins International Connections Consulting Solutions JIN, Irene ITW (China) Investment Co., Ltd. LI, Xinhua GE, Ming Jiangsu Linyang Solarfun Co., Ltd. XIE, Ping Peter Johnson Controls Automotive Interior Management (China) Co., Ltd. CHEN, Christine Jun He Law Offices (Shanghai) WILSON, Jeffrey WANG, Zhaohui KPMG WU, Regina Menlo Worldwide Logistics (Shanghai) Co., Ltd. SAM, Lek Mercer Consulting (Shanghai), Ltd. GUTENBERG, Rhonda MGBS (Shanghai) Management Consulting Co., Ltd. JORDANOV, Jordan LU, Qiong NBA Sports and Culture Development (Beijing) Co., Ltd. Shanghai Branch FITZMAURICE, Michael Nike Sports (China) Co., Ltd. HULL, Alan Scott Nixon Peabody LLP Shanghai Rep. Office USA KAUFMAN, David SUN, Xiaojia Nu Skin (China) Daily-Use & Health Products Co., Ltd. ZHOU, Jason Orrick, Herrington & Sutcliffe LLP, Shanghai Rep. Office LAW, Vincent PAC Project Advisors Shanghai Ltd. MALEK, Al PIM, Ltd., Shanghai Rep. Office HU, Yi SEPTEMBER 2010

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Polaris Industries Inc., Shanghai Rep. Office ZHOU, Yunfei PricewaterhouseCoopers LEE, Michele RadiSys Systems Equipment Trading (Shanghai) Co., Ltd. LI, Rick Randstad Consulting Shanghai Co., Ltd. ZHU, Freedom Rio Tinto Ltd., Shanghai Rep. Office CALVERT, Kristy SPX Corporation (China) Co., Ltd. SHAO, Aaron Starbucks (China) Company Limited EHRICH, Martin SunGard Kingstar Data System (China) Co., Ltd. AUSTIN, Roderick BERNARD, Wesley SHI, Xingmei Tyco Electronics (Shanghai) Co., Ltd. HELFRICH, Jacqueline A. YAN, Chunlin Unisys (Shanghai) Information and Technology Co., Ltd. LIU, Jacky VF Apparel (ShenZhen) Limited, Shanghai Branch PANG, Kaiyin Wanvog Furniture (Kunshan) Co., Ltd. SPANG, Charles Watlow Electric Manufacturing (Shanghai) Co., Ltd. XU, Jing Whole Brain Leadership Management (Shanghai) Inc. SHI, Ako

Individual U.S. Citizen Membership Marco Polo Hotel Management Group HAN, Diana Sigma International Group LIU, Iris Liya SOM Architectural Consultants (Shanghai) Co., Ltd CHIOW, Silas Wikborg Rein CONNELLY, James Daniel CAVOLO, Mario CHANG, Nadia H ROGERS, Joe SEMWANGU, Samuel HORN, John-Erik AZHAR, Ali WHITE, Lauren

Individual International Affiliate Membership America Asia Travel Center CHANG, Yu Hsin CSI Capital HK, Ltd. ZHANG, Rui Hampton Court Holdings, LLC LEE, Thong Yee Shanghai Prosperous Paper Co., Ltd. CHOU, Chunyi Shanghai Shengjie Medical Service Co., Ltd. HAYAKAWA, Sadao

Non-resident Individual Membership Birch International, Inc. CARLSTEDT, Robert Zalkin Training and Development ZALKIN, Mark

CASIC Corporate Membership Nevada Commission on Tourism, China Office CHEN, Karen 41

Do you want to share more information about your company?

Contact Sophia Chen at (86 21) 6279-7119 ext. 5667 or sophia.chen@amcham-shanghai.org for a “Standout Listing” opportunity in the New Members Section.

Ministry of Commerce of the People’s Republic of China

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China Auto Forum: Driving Success in the China Automotive Market Co-organized by AmCham Shanghai, the Ministry of Commerce (MOFCOM) Investment Promotion Agency and the Ningbo Municipal Government

Co-organized by AmCham Shanghai, the Ministry of Commerce (MOFCOM) Investment Promotion Agency and the Ningbo municipal government, China Auto Forum: Driving Success in the China Automotive Market was held in Ningbo, Zhejiang Province on August 18 and 19.

Policymakers and industry leaders convened in Ningbo to discuss the challenges and opportunities of China’s rapidly developing auto industry, how to strengthen international cooperation and ways to promote the sustainable development of the world’s fastest growing auto market.

“China’s auto market is increasingly critical to U.S. automakers,” said Brenda Foster, president of AmCham Shanghai. “We’re very pleased to have the opportunity to partner with the Ministry of Commerce and the City of Ningbo to host this important conference.”

“This forum provides an excellent platform that brings industry and government together to identify opportunities and to address challenges that are critical for the sustainable development of China’s auto industry,” said Zhang Yingxin, Deputy Director General of the Committee of Investment Promotion Agency.

Lu Shan, Director General of the China Electronic Information and Technology Institution of the Ministry of Industry and Information Technology, kicked off the forum with a policy update on the consolidation of China’s auto industry saying that government guidance will be vital to promote the New Energy Vehicle project in China. A panel discussion including David Chen of GM, Paul Lin of BYD and Shawn Li of BorgWarner shed light on what China needs to do for its New Electric Vehicle project to be successful.

Other topics discussed at the forum included growth projections of China’s auto industry, OEM procurement and the westward expansion of China’s automotive industry. The forum concluded with a tour of automobile factory sites in the Hangzhou Bay New District.

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Event Highlights

INSIDE AMCHAM

August U.S. Consulate General Briefing July U.S. Consulate General Briefing At the July CG briefing, Deputy Principal Officer Chris Beede detailed several officer changes, including the mid-July arrival of the new Consular Section Chief. He noted the previous month’s busy schedule, which included visits from the largest Presidential Delegation sent out by the Obama Administration. Headed by former Secretary of State Madeleine Albright, this high-level delegation represented the U.S. at the USA National Day celebration at the Expo on July 2. Beede noted that while the number of visa applications continues to increase, the waiting period to secure an application appointment for a nonimmigrant visa at the Shanghai consulate has decreased slightly. This improvement is the result of the consular section working weekends and processing a record 32,000 cases in June, a 94% increase compared to June 2009. He announced a new fee schedule that will increase prices for many American citizen consular services effective in July, including the imposition of fees for previously free services. (Jul 6)

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The August briefing featured Frank Lavin, Chairman of the Steering Committee of the USA Pavilion and former U.S. Ambassador to Singapore. Ambassador Lavin introduced the new commemorative book, “The USA Pavilion Expo 2010 Shanghai: Rising to the Challenge.” He noted that over 7 million visitors are expected to visit the USA Pavilion (L-R) David Turchetti, Christopher Beede, Frank Lavin during the six-month run of the Expo, and that about ten times more Chinese will visit the USA Pavilion than will visit the U.S. during all of 2010.

U.S. Consulate General Deputy Principal Officer Christopher Beede announced that Christopher Wurzel, current Political-Economic Section Chief, will become the Deputy Principal Officer upon Beede’s mid-August transfer to Washington. He also commended the service of Consulate Agricultural Trade Office Director Wayne Batwin and American Citizen Services Unit Chief John Junk, both of whom will also transfer in August. Mr. Keith Schneller will replace Mr. Batwin, while Ms. Dany Zadrozny will become the new American Citizen Services Unit Chief. Beede noted that despite a 50% turnover in consular officers this summer, the consulate was able to process 44% more visa applications this July compared to the same month last year. The Consulate’s Principal Commercial Officer of the last three years, David Gossack, will also transfer in August and be succeeded by William Brekke. (Aug 4)

PricewaterhouseCoopers’ Damon Paling

Customs Liaison Program: Bonded Zones in Shanghai

AmCham Shanghai’s Customs Liaison Program recently held a High Tea Mixer at the Four Seasons Hotel to provide more than 50 members with an overview of bonded zones in Shanghai. Damon Paling, a customs and trade partner with PricewaterhouseCoopers, reviewed the latest business trends and challenges in the usage of bonded zones and discussed a number of commonly asked questions.

Following the presentation, AmCham Shanghai members networked with a number of officials from Shanghai Customs, including the Shanghai Waigaoqiao Free Trade Zone, the Yangshan Customs House and the office of Processing Trade Supervision and Control. (Aug 17)

Thank you to the annual sponsor of the 2010 AmCham Shanghai Customs Liaison Program:

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Expo Provincial Government Forum:

Expo CEO Speaker Series: CEO of 3M George Buckley

Chongqing Mayor Huang Qifan Chongqing Mayor Huang Qifan recently spoke as part of the Expo Provincial Government Forum in August. Huang discussed Chongqing as a growing financial and manufacturing center that welcomes and supports foreign investment. Along with China’s “Go West” policy which provides national-level incentives for corporations operating in Chongqing, he described the city’s developed transportation lines and growing relationship to China’s coastal cities as further advantages to operating in Chongqing. Citing Hewlett-Packard’s Global Testing Service Center as a landmark case, Huang portrayed Chongqing as China’s next high-level manufacturing hub because of its reduced transportation and labor costs for technological goods. In June 2008, HP’s Global Testing Service Center established operations in Chongqing which has helped the city establish itself as the production center for notebook computers in China. (Aug 12)

As part of its ongoing Expo CEO Speaker Series, AmCham Shanghai was pleased to host George Buckley, chairman of the board, president and CEO of 3M, who spoke about innovation in the workplace. Buckley discussed the importance, needs and drivers of innovation as well as ways to foster company innovation.

According to Buckley, innovation is the best way a company can differentiate itself from its competitors and the greatest accelerant of longterm corporate prosperity. He explained that the root of innovation lies in imagining something better and a company looking to innovate needs a combination of people with brains and vision, financial support, a certain amount of freedom and a few radicals prepared to “buck the system.” He identified the most common barriers to innovation as an overreliance on benchmarking, a need for predictability and certainty and a focus on deadlines. Buckley also explained that companies can foster innovation by lowering interdivisional boundaries, promoting technology exchanges, leveraging best practices, as well as celebrating collective rather than individual achievement.

(Aug 17)

Chongqing Mayor Huang Qifan

U.S. Government Series: Assistant Secretary of Western Hemisphere Affairs Arturo Valenzuela

Assistant Secretary of Western Hemisphere Affairs Arturo Valenzuela

U.S. Department of State Assistant Secretary of Western Hemisphere Affairs Arturo Valenzuela recently joined AmCham Shanghai to discuss the U.S. perspective on China’s growing involvement in Latin America and possible opportunities resulting from the China-Latin America relationship. Valenzuela explained that the U.S. welcomes China’s interest in the Western Hemisphere and views China’s involvement in the region as a positive development. He noted that Latin America needs to increase its competitiveness and productivity while investing in infrastructure and establishing strong regulatory frameworks. He sees increased investment from China as beneficial to Latin America’s growth and innovation and noted that Chinese-Latin American trade has soared from US$12 billion in 2000 to over US$150 billion in 2009. Countries such as Chile, Peru and Costa Rica have already signed free trade agreements with China and others are expected to follow suit. Valenzuela suggested that areas for potential cooperation between the U.S. and China in Latin America could include joint-investment projects and involvement in multilateral institutions. (Aug 19)

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Committee Highlights

INSIDE AMCHAM

NEW IN COMMITTEES

Panelists discuss new technologies in the workplace at an IT Committee event.

Information Technology Committee

Social Media and the Workplace

AmCham Shanghai’s Information Technology (IT) Committee hosted Leanne Ward, Asia Pacific vice president and general manager for IT Outsourcing, Global Outsourcing and Infrastructure Services (GOIS) for Unisys, and Tony Chen, partner at Jones Day, for an informative discussion on social media and the workplace in July. Ward discussed the negative implications as well as positive opportunities that have grown from developing technology. With technology becoming more affordable and usable, it has begun to blend into work and personal life. The acceleration of technology, however, has caused a gap for companies. “IT support lags when new trends come along,” said Ward. Chen then illuminated the dangers of integrating personal technology in the workplace. A Unisys research study conducted in 10 different countries on both employers and employees found inconsistencies in the understanding of how personal technology was being integrated in the workplace. The study found that, on average, employees use four devices at work with no division between personal and business activities on the devices. Employees, for example, can email documents from work to their personal accounts and vice versa. Companies should be aware of this and protect themselves by implementing corporate policies on social media. (Jul 22)

Marketing Committee

JWT’s Tom Doctoroff

Tom Doctoroff on Marketing to China’s Seniors Opportunities Ahead AmCham Shanghai’s Marketing Committee hosted Tom Doctoroff, JWT’s North Asia area director and greater China CEO, to discuss key marketing strategies to China’s seniors. Doctoroff overviewed Chinese cultural imperatives behind seniors’ buying decisions, as well as addressed key elements marketers should employ in advertisements to capitalize on the growing senior market. “The senior market in China is the largest market in the 21st century,” Doctoroff said. As the number of seniors dramatically increases, by the end of 2025, more than 500 million Chinese senior consumers will be over 50, he explained. This means that almost 36% of the Chinese population will be over 50. According to the National Senior Bureau, however, only 10% of products or services are targeted towards the elderly market. This means there is a tremendous market potential for the undiscovered “gray” population, he said.

According to Doctoroff, marketers should alleviate the fear of displacement in an ever changing modern world by guiding seniors to discover the excitement of newfound freedoms. Since China’s 50+ population grew up during the Cultural Revolution, self-importance was built on sacrifice – both on a national and a family level, he explained. As modern society progresses with a new world of leisure and technological advancement, seniors can be given more dynamic choices to engage in newfound freedoms and hobbies. “Marketers could tailor their products or services by focusing on the functional benefits for seniors,” he suggested. Walmart’s new senior shopping section or C-Trip’s “gray” travel packages are good examples of how retailers attempt to target China’s growing seniors market. (Jul 29)

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Legal Committee

Current Developments on Unions, Strikes and Collective Bargaining in China AmCham Shanghai’s Legal Committee hosted Jonathan Isaacs of Baker & McKenzie and Jeffrey Wilson of Jun He in July to discuss labor law issues encompassing workplace unrest, unions and collective bargaining. Isaacs spoke about the All-China Federation of Trade Unions and gave an overview on unions and the unionization process in China. He detailed practical methods to legally navigate worker unrest and government policy. He advised, for example, that basic services which employees depend upon should not be discontinued during labor unrest. An additional outline was given on the steps for collective bargaining with employees. Wilson followed up with a discussion on strikes themselves. He emphasized that despite recent attention given to the issue, strikes are not uncommon in China. He then explained the definition, motivations and procedures of a strike in China, and closed with an introduction to the new draft regulations of the Labor Law in Guangdong province. (Jul 30) Panelists discuss collective bargaining in China.

Event and Committee Highlights are reported by Ashley Cahill, Sylvia Cheung, Jonathan Shyu, Tiffany Yajima and Esther Young.

Environmental Committee

Scott Siff presents on the increasingly prominent role of “green branding” in China AmCham Shanghai’s Environmental Committee hosted Scott Siff, executive vice president of the market research and consulting firm Penn Schoen Berland (PSB), who presented on PSB’s recently released 2010 Green Brands Survey. The survey addressed differences among consumers in China, the U.S., India, Australia, the U.K., Germany, France and Brazil in “buying green” and consumer perceptions of environmentally sustainable products and advertising.

Siff ’s presentation provided insight into the future of green marketing and purchasing behavior around the world. He used the survey results to explain the factors that most influence green purchasing decisions, noting that Chinese consumers are the most influenced by product certifications and word-ofmouth recommendations that create a possibility for the effective use of social media in green advertising.

Siff explained the differences between consumers’ purchasing attitudes and priorities. With a much higher percentage of Chinese than American consumers planning to spend more on green purchasing next year, the Chinese market presents a valuable opportunity for green brands. Siff explained that for Chinese consumers, the main barriers to “buying green” are a result of a market failure: consumers noted a limited selection of green products and frustration over confusing or untrustworthy product information and labeling. In contrast, consumers in the U.S. and the U.K. are the most concerned about price.

Moreover, Siff claims that Chinese consumers are incredibly receptive to advertising for green products compared to U.S. or U.K. consumers. According to him, the differences between developed and developing countries’ consumers’ green demands will have important implications in company strategy and market development in the future. (Aug 13)

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DEAL OF THE MONTH ISTOCKPHOTO

Harvard’s Real Estate Sale

CIC is in talks to buy Harvard University’s U.S. real estate portfolio.

T

he China Investment Corp. (CIC) is reportedly in advanced talks to buy Harvard University’s stakes in six re a l e st ate f u nds for rou g h ly US$500 million. The potential deal is timely because Harvard has been struggling with investments made before the recession.

According to the latest performance report by the Harvard Management Co., which oversees the university’s endowment, the portfolio lost over 50 percent of its value in June 2009.

Although the deal will not be finalized for at least a few months, the negotiations highlight growing Chinese interest in U.S. real estate. As the U.S. economy continues to struggle, acquisitions of U.S. real estate funds and enterprises may continue to rise, especially as Chinese entrepreneurs capitalize on depressed U.S. real estate market prices.

The lowered price tag of real estate might not be the only lure. Compared to the uncertainty of skyrocketing property prices in China, the established nature of the U.S. real estate market may be particularly attractive to Chinese investors. Real estate agents in the U.S., for one, are reporting an increase in the number of visits

by Chinese nationals on tour packages organized

by Chinese property agencies – though, so far, the strong interest from property market tourists has not resulted in many purchases.

The Chinese government is itself a prime investor in U.S. real estate as indicated by the Harvard deal.

As on of the world’s largest sovereign wealth funds, CIC manages US$332 billion in capital – and it is on a spending spree. The Harvard deal is just the latest

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of CIC’s reported U.S. real estate investments. CIC has already committed to invest US$1 billion each in funds managed by Brookfield Asset Management and Cornerstone Real Estate Advisers.

Chinese investments are not immune to political tensions in the U.S.-China relationship.

A joint bid by telecommunications equipment maker Huawei for American technology group 3Com was abandoned in 2008 after Congress cited national security concerns as a reason to potentially block the deal. Huawei’s ongoing effort to serve as a supplier to Sprint Nextel has also met resistance on Capitol Hill.

The focus on investments and real estate funds instead of physical assets may allow Chinese enterprises to keep Chinese investments under the radar. Still, questions remain as CIC continues to make waves in overseas capital markets. Future concerns might surround CIC as an investor. Given its enormous financial clout and government backing, some wonder whether private enterprises can ultimately compete with CIC. Others are more optimistic about Chinese investment, and support is coming from those who need it most. U.S. real estate agencies are pushing the government to invite overseas capital by implementing attractive tax incentives. The movement is a sharp change from the early 1980s when the government levied a heavy capital gains tax to discourage foreign investment.

On either side of the coin, given its purchasing power, CIC and other Chinese investors may help improve the health of the U.S. real estate market by offering much needed capital and support.

Esther Young

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Testing

Inspection

CertiďŹ cation

Auditing

Advisory

Outsourcing

Training

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Quality Assurance