SBR Volume 13, Issue 2: February - March 2016 by Shanghai Business Review

February/March 2016 Volume 13, Issue 2 www.sbrchina.com

Pakistan Country Report US$46 Billion Silk Handshake Industry Report Delivering the Goods 2016 MICE Challenge International Schools

LIGHTS ... CAMERA ...

CHINAWOOD! Media Maverick Li Ruigang Scores in Hollywood

ISSN: 1813-310X

February/March 2016

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February/March 2016

CONTENTS

COVER STORY

EDITOR'S LETTER

Lights…Camera…Chinawood!

Karachi to Hollywood

For decades Hollywood has been the planet’s brightest entertainment star, eclipsing all others in the production of blockbuster films. Now, China is rising to the challenge on the back of a box office treasure chest.

The Monkey Year got off to a bang with China’s record movie box office and headway in the China-Pakistan Corridor

NEW YEAR MESSAGE

Happy New Year! The SBR community reaches out to discuss what happened in 2015 and what is ahead forv2016.

NEWS IN BRIEF

A Tale of Two Brothers

Labelled by Variety Magazine as the “China’s largest film conglomerate” the Huayi Brothers are not resting on their laurels.

SBR’s Catherine Musgrave summarizes all the news in brief that you need to know this month in the areas of finance, manufacturing, transport, hospitality, technology, media, trade, property, retail and much more

HOSPITALITY NEWS

2016 MICE Challenge China’s MICE industry is becoming more integrated in the global market bringing increased opportunities in a highly competitive arena.

Dealmaker Par Excellence When it comes to making spotlight deals in the Chinawood space no one does it better, no one has done it longer and no one is more respected than CMC’s Li Ruigang. 4

INDUSTRY REPORT

Delivering the Goods Fears about slowing trade at a time of over-capacity means these are difficult times for the air cargo industry in China. Yet with new developments on the horizon industry players remain positive. www.sbrchina.com

February/March 2016

INTERNATIONAL SCHOOLS

Educating Shanghai

COUNTRY REPORT

The US$46 Billion Silk Handshake

Shanghai has a diverse range of good international schools and the challenge for parents is finding the right school for their children.

The emerging Silk Road relationship between Pakistan and China is an Asian economic pact that is unprecedented in scope and impact.

REGULATORY UPDATE

Regulatory Update is a comprehensive overview of the latest legal and tax developments affecting foreign enterprises in Shanghai and across China.

OFFSHORE OVERVIEW

The ever-changing offshore market is a challenge for even the most tax savvy corporations and investors and the View Offshore provides the latest new on this complex global playing field.

MARKET INSIGHTS

Kurdistan Embraces the Silk Road

The World of Giant Loans

China paves the way in Pakistan with preferential loans to facilitate large-scale projects.

At a time when China promotes the One Belt, One Road, regions like Kurdistan open doors to new opportunities

Building the Impossible 60

LAKE’S LAMENT

FWO’s engineering feat on the Karakoram Highway straddles the world’s three highest mountain ranges and is the stuff of legends.

Can China Save the World? More and more foreign companies are looking to China as their Saviour in a world where growth is hard to find.

VIEW FROM THE TOP

China Makes US FDI Mark

Rhodium’s Thilo Hanemann discusses the dramatic shift from state-owned investment in energy to private sector FDI in services, high-tech and consumer goods.

All rights reserved. Shanghai Business Review (ISSN: 1813-310X) is published by Middle Kingdom Media Ltd. No reproduction of any articles or photographs in this publication may be made in whole or in part without the written permission of the copyright holder and/or the publisher. The publisher is not responsible for product claims and representations.

February/March 2016

www.sbrchina.com

EDITOR'S LETTER

Karachi to Hollywood The Monkey Year got off to a bang with China's record movie box office and headway in the China-Pakistan Corridor

Editor-in-Chief David Lake

n this Chinese New Year edition of Pakistan Economic Corridor (CPEC) is a collection of projects currently under construcShanghai Business Review we celebrate the amazing evolution of Chinawood tion at a cost of US$46 billion, which are in– the combination of China’s film industry tended to upgrade Pakistani infrastructure. with that of Hollywood – and continue our These projects will span Pakistan and link ongoing series on the Silk Road countries Gwadar Port to China’s Xinjiang region. with a feature on Pakistan. SBR Associate Editor Michael Bucher Chinawood kicked of the Year of Monpresents the exciting Pakistan-China opporkey with what can only be considered as an tunity from an economic perspective. From amazing performance. Hot off the US$3.5 his office in New York City, Bucher embraces billion purchase of Legendary Pictures by the Silk Road series from both a historical Dalian Wanda Group in January, a deal that and business view. Once again, this time in turned heads in the direction of Chinawood, Pakistan, Bucher finds the angles on one of New Year celebrators headed to the box ofChina’s most complex relationships. fice in droves. Racking up a record of nearly The road from Hollywood to Karachi is US$550 million of box office tickets sales certainly as long and hard as it gets from both over the holiday week, Chinawood showed a distance perspective and a cultural one. Yet, the world that it is ready to take the industry at SBR we are comfortable to embrace the Cliff-side parking on the Karakoram. to new heights. many different worlds that our readers dwell To provide SBR readers with a better understanding of the in. From making mega-hit films in Southern California with emerging relationship between China and Hollywood, we take the world’s most glamorous movie stars to building highways a look at the deals that drive the industry forward and look at across the world’s three highest mountain ranges, China has it the industry leaders. all. So, sit back, pull up a stool, watch a movie or two and enjoy The Silk Road series travels to Pakistan this issue. The China the SBR ride.

FEBRUARY/MARCH 2016 Volume 13, Issue 2

Publishing Group Chairman Publisher Government Relations Sales Director Administration Editorial Team Editor-in-Chief Associate Editor Contributors

Tommy Jiang Ryan Cai Shirley Gui Ryan Cai Cissy Gao David Lake Michael Bucher Douglas Betts Patrick Musgrave Catherine Musgrave Alun John

Webmaster Design Printing

John Denvers R&R Publishing Ltd. RR Donnelly

Cover Photo

Li Ruigang CMC Capital Partners

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February/March 2016

G R E E N S T O N E V I N E YA R D S

Select the best locations, grow the best grapes... The Greenstone winemaking philosophy is based on producing the highest quality grapes and crafting premium wines for sophisticated wine consumers worldwide. Greenstone boasts top of line vineyards across the southern Australian state of Victoria, known for a cool climate that delivers a variety of wines with character and intensity. Planted on a ridge of Cambrian soil, the Heathcote Vineyard dates back to 2003 and is proud of its dedicated winemaking team that produces outstanding Shiraz and Sangiovese wines year after year.

Discover our Heathcote Shiraz Enjoy the Heathcote Shiraz – precisely crafted, superior color and attention to detail marked by a spicy, pepper, polished leather, raspberry and blackberry taste that competes for space on the elegant, medium bodied palate. This is one cool Shiraz that ﬁnishes with mouth-watering ﬁne tannins. Rating: 96 points Aging potential: 20 years Halliday Wine Companion 2015

In addition, Greenstone’s 30-year old Yarra Valley Vineyard, nestled at the base of Christmas Hills, takes advantage of a cool climate to produce Chardonnay and Pinot Noir at the showcase Greenstone’s winery and cellar door.

JAMES HALLIDAY 5 RED STAR WINERY SEEKING DISTRIBUTION www.greenstonevineyards.com.au Contact Us Greenstone Yarra Valley Pty Ltd 179 Glenview Road Yarra Glen VIC 3775 Phone +61 3 9730 1022 Fax +61 3 9730 1131 info@greenstonevineyards.com.au

NEW YEAR'S MESSAGE

Happy New Year! The SBR community reaches out to discuss what happened in 2015 and what is ahead for 2016. Tan Lee Lee Director Business Advisory SBA Stone Forest Corporate Advisory In the era of ongoing economic growth and dynamic business evolution, outsourcing service providers must constantly keep up with unconventional business solutions. Faster response time without comprising service delivery standards and the ability to provide integrated solutions and comprehensive service coverage to cater for expansion nationwide is the new normal. As Chinaâ&#x20AC;&#x2122;s economic transformation continues, successful businesses will be those that can secure unique market position through innovation and an effective business model and customer oriented services.

Ramesh Babu Balan, General Manager Agility Distribution Services With Chinaâ&#x20AC;&#x2122;s economic climate and bold central government initiatives, such as the One Belt, One Road policy and the introduction of the new Asian Infrastructure Investment Bank, industries are expected to re-align priorities and re-engineer future strategies. The New Year will certainly be an exciting chapter in the ever-changing dynamic of doing business in the PRC.

Arthur Wang Managing Director Robert Walters China Companies were cautious adding headcount in 2015. A steady stream of hiring for replacements continued to drive demand for candidates. IT and Internet-related talent was sought after thanks to the Internet Plus strategy. The pharmaceuticals, medical devices and healthcare industries showed promising growth due to an aging population and a focus on wellbeing. As manufacturers focus on cost savings, product upgrade and business efficiency, they will continue to seek professionals with strong technical skills and expertise ro handle the work. 8

Dr. Richard Swann Co-Principal, Gubei Campus Yew Chung International School of Shanghai Shanghai International schools continue to grow in number, as parents select the learning opportunities and experiences they wish for their child. As they review options, parents need to ask questions about student learning and progress assessment. In addition to these factors, parents must choose the school due to the uniqueness of its curriculum and opportunities to engage with the culture of China. This year we expect strong enrolment while recognizing the challenges the international community faces in the current economic climate. www.sbrchina.com

February/March 2016

Ryan Metz China Director

Mark Dixon Founder & CEO Regus Serviced Offices The way we work is changing rapidly, driven by factors like technological change, globalization and changing workforce dynamics. There is a growing recognition that to effectively harness change organizations need to underpin productivity gains alongside lower capital and operating costs. In the epicenter of global flexible workspace growth, China is the fastest growing regional market. A significant proportion of that growth is driven by a growing awareness of serviced offices and the acceptance of the flexible workplace idea in line with the modernization of China. This is also in line with government policy to support innovation and entrepreneurship, which led people, especially the younger generation, to start businesses. The results are phenomenal. Last year, over 3.6 million companies were founded. That is an increase of nearly 50% compared to the previous year, or seven new registrations every minute, all of which need somewhere to operate. The boom in startups has seen demand for workspace rise dramatically, as firms search for ways to decrease costs to maximize profit.

Greg Findlay General Manager The Westin Bund Center On behalf of the staff and management of The Westin Bund Center I wish SBR and all the readers a safe, happy and peaceful festive season and extend our sincere thanks for your support this year!

February/March 2016

Crown World Mobility Last year was challenging. MNCs have scaled back investment plans and are more cost conscious as clients held the work force firm or reduced expatriates to implement localization plans. Our industry witnessed an uptick in outbound expatriates. This translated into a modest growth of services such as lease termination and deposit return facilitation, residence permit cancelation and household goods shipments. Conversely, we watched a decrease in inbound expatriate assignments. Supporting relocation services for incoming expatriates were flat or on the decline. 2016 will be challenging for relocation companies. There will be consolidation with companies merging to improve margins and market share. We expect companies to offer global solutions, as opposed to local and regional providers, to be best-suited long term. Clients are looking to reduce relocation vendors as well as provide a consistent level of support for international assignees. Thus global relocation providers will be positioned for changing client demand.

Gary Mak General Manager Fraser Residence Shanghai It was not an easy year for the services apartment industry, as demand from expatriates remained subdued due to the hesitation of MNCs to send expatriates to China. Only a few new serviced apartments were launched and the vacancy rate in the market continued to reduce. Most landlords kept rents unchanged to retain tenants, as leasing demand remained soft. As such, average rents stayed flat. In this environment, Fraser found opportunity â&#x20AC;&#x201C; and we expect the same for this year. www.sbrchina.com

NEWS BRIEFS

News in Brief SBR’s Catherine Musgrave summarizes all the news in brief that you need to know this month in the areas of finance, manufacturing, transport, hospitality, technology, media, trade, property, retail and much more IT & Telecoms Alibaba Looks for India Expansion Alibaba Group Holding Ltd. is looking to purchase a stake in Flipkart Ltd., India’s largest e-commerce company. Alibaba has already financed companies including Snapdeal and Paytm, and seeks a stronger presence in India’s e-commerce market. The deal between Flipkart and Alibaba will be based on whether Flipkart is prepared to offer a discounted price on its current valuation of US$15 billion. Jack Ma, Alibaba’s Founder, is not willing to pay such a high price. If the deal goes through, Alibaba will become one of India’s top three most important investors, along side names like Japan’s SoftBank Group and Tiger Global Management. Xiaoice Positive Feedback Microsoft Corp. is conducting what may be China’s “largest Turing test in history.” The test, “Xiaoice”, created by British scientist Alan Turing, can detect whether a computer or human is answering a question. The test has become a fixture in pop culture and is used by millions of people every day. Xiaoice provides human-like answers, tests and thoughts. If a topic is brought up that she is unfamiliar with, she will try to dodge around the topic. If that does not work, she will get frustrated and embarrassed, just like a real human. Xiaoice is extremely popular so far, and about 25% of its users (some 10 million people), have said “I love you” while communicating with her. Jack Ma’s Secret to Success Jack Ma, a Chinese business magnate, philanthropist, and Founder and Executive Chairman of Alibaba Group Holding Ltd., is often called “the Steve Jobs of China.” Ma, 51, is one of China’s richest men. He is particularly known for his strong communication skills, which distinguish him from other businesspeople. Ma was formerly an English teacher, and knows that lecturing only has a small impact on influencing others. Ma prefers to communicate in a way that will allow others to interpret what he is trying to get across. Like many entrepreneurs, Ma is extremely driven. After founding Alibaba in 1999, 10

he stated he wants to “win eBay, buy Yahoo and stop Google.” Now Ma wants China’s sense of purpose and culture to come back to life. iPhone 5se Set to Hit China Apple’s newest iPhone, the iPhone 5se, is expected to go on sale on 18 March 2016. People are waiting to see whether CEO Tim Cook will release the newest iPhone in India and China before other regions, as smartphone sales are slowing in these markets. “India’s is quickly becoming the fastest growing BRIC country. It’s the third largest smartphone market in the world, behind China and the US,” states Cook. Apple may not offer a pre-order option for the new device and the price has not yet been announced, although it will likely cost around US$500.

Mining, Energy & Environment Lunar Exploration Photos Released The Chinese Lunar Exploration Program has posted photos online of its first public moon landing. The trip took place in December 2013, when China sent “Yutu” down one of the moon’s largest craters, Mare Imbrium. Yutu holds the world record for operating longer than any other lunar rover in history (several months), and is the only rover China has ever landed on the moon. China is planning for a similar launch by the end of 2018, which is scheduled to land on the opposite side of the moon. New Wind Power Record High Due to increased efforts to boost environmentally friendly alternatives, China’s new wind power capacity reached a record high in 2015. New wind power capacity became 3.3% of China’s total electric energy production in 2015, and grew 32.97 GW, more than 60% higher than in 2014. The Chinese government hopes to increase the proportion of non-fossil fuelled energy consumption to 20% by 2030, up from the current 11%. Despite this seemingly positive growth, the National Energy Administration is concerned that wind farms in Inner Mongolia, Xinjiang and Jilin may be unreliable, due to the mismatching of new installation and local power grid.

www.sbrchina.com

February/March 2016

Beijing Reports 46 Days of Intense Pollution Beijing, whose air quality is gradually improving, reported 46 days of intense pollution in 2015. According to China’s Ministry of Environmental Protection, Beijing’s air was contaminated with extremely harmful particles between mid-November and late-December. PM2.5 rose nearly 76% during this period, compared to the same time frame in 2014. Many government officials blamed the poor air quality on Beijing’s “winter warming season.” Beijing often experiences harsh winters, but late 2015 marked the city’s coldest winter in decades. As a result, reliance on coal-based heating was unusually high, increasing carbon emissions overall.

Transport & Logistics

Uber China Struggles with Competition Despite the fact that Uber has raised over US$8 billion from Chinese investors, its business in China, a “key strategic hub,” is not growing as hoped. Uber is in intense competition with Didi Kuaidi, who claims about 90% of China’s ride-hailing market share. According to CEO Travis Kalanick, Uber is currently losing about US$1 billion annually in China. Kalanick is not fond of fundraising, but believes it may be necessary for Uber if it hopes to remain significant in China. As of August 2015, Didi Kuaidi gave around 7 million rides in China, while Uber only completed 1 million. Uber must continue to expand its China operations, as there is much growth potential in the region.

Mayor of Toronto Visits China John Tory, Mayor of Toronto, is inviting a range of businesspeople to join him on a 10-day trip to China in April to discuss trade. The group will visit the cities of Shanghai, Chongqing and Hong Kong. A website has been set up to invite businesses and entrepreneurs to join the group. Delegates who have already signed up include Councilor Michael Thompson and Janet De Silva, CEO of the Toronto Region Board of Trade. Tory hopes his visit to the Chinese mega-cities will result in not only a stronger economic relationship between China and Toronto, but improved financial services, infrastructure and higher quality technology and education for both Canada’s largest city and the Mainland. Green Card Policy More Lenient A Chinese green card is one of the world’s most difficult papers to obtain for those looking to work in a country other than their home country. This lengthy and strict policy is now changing, as China is welcoming more foreigners with the hopes of boosting investment and business opportunities. Demand for permanent residency in China is not extremely high, as its smoggy skies and volatile markets are not appealing. Now, as the economy slows, China is pledging to facilitate the process, and hand out more green cards. The process of obtaining a green card will now be easier for all, especially for foreign students, investors, entrepreneurs and scientists. Now, the question is how many people are ready to scoop these cards up. Jackie Chan Purchases Legacy 500 Actor Jackie Chan was the first customer to purchase the Embraer Legacy 500, a business jet developed by Embraer. The jet received approval in July 2015, after racking up multiple certifications from Brazil’s ANAC, the FAA and EASA. The jet features high quality technology and uses designs that maximize customer comfort and fuel efficiency. Chan is an Embraer brand ambassador and has owned a Chinese-registered Legacy 650 since 2012. “In the past few years, my Legacy 650 has brought me fantastic traveling experiences and great convenience... I’m sure that the performance of the new Legacy 500 will again exceed my expectations, and become a comfortable mobile home and office for me.”

Manufacturing & Auto Honda EV and Hybrids in China Honda Motor Co. Ltd. will begin manufacturing hybrid vehicles in China in late 2016. Honda is prepared to abide by China’s strict fuel regulations, and is optimistic for high sales, as China follows a trend toward more environmentally friendly alternatives in an effort to reduce pollution emmisions. Honda will manufacture its Accord sedan and Acura compact SUV in hybrid and electric versions in Guangzhou, which will reduce production costs. Ben Nakamura, Honda’s Tokyo-based representative, believes local production will be most beneficial, as it will allow Honda to better-comply with China’s ever changing strict automobile regulations. February/March 2016

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NEWS BRIEFS Toyota Boosts Profit Forecast Toyota Motor Corp. raised its forecasted annual net profit for China in 2016, due to improvements in Chinese operations and favorable exchange rates. Toyota is expecting a record net profit of US$19.4 billion this year, up slightly from the previous US$19.3 billion forecast. Toyota raised its sales forecast in North America from US$2.85 million to US$2.87 million, as demand is booming. North America is Toyota’s biggest market. The region had annual record sales last year, as an improving economy and lower gasoline prices boosted demand.

Pharma & Healthcare China’s Antibiotics Industry Thrives Research and Markets has announced the addition of “Antibiotics Companies in China.” The study is geared around China’s quickly growing antibiotics industry’s assessments and company profiles. The industry, particularly its manufacturing abilities, has transformed China’s economy and society. China is one of the world’s top producers of industrial products and consumes goods and services at a quicker rate than any other economy in the world. The antibiotics industry is thriving, but suffers from low investment and innovation in R&D and new product development. Cochlear Business Booms Cochlear Ltd., a global biotechnology company, has released earnings for the second half of 2015 that beat analyst expectations. Cochlear sold two-thirds of the world’s hearing implants and enjoyed a US$67 million net profit, marking a 32% increase year-over-year. Cochlear has revised its estimated earnings for 2016, from US$128 million to US$135 million. After releasing this news, Cochlear’s Sydney-listed shares jumped nearly 14%. Cochlear has experienced a 9% upswing in its stock price so far in 2016, which is impressive when it is compared to the overall market’s 9% slump.

ephant sales have already reached over US$1 million, although sales have been pegged as “cruel” and “inhumane” by multiple animal rights groups. Despite the criticism, the Convention on International Trade in Endangered Species of Wild Fauna and Flora has named the sale legal, subject to conditions. China-Mexico US$2.4 B Investment Mexico and China are looking to promote development by implementing a joint investment fund of US$2.4 billion. This represents a huge increase in China’s investment in Mexico, which was only 0.2% of all foreign investment in 2015. The funding will be put into the automotive industry and infrastructure construction – areas in which both countries can benefit. The Chinese government and Mexican state-run financial institutions will finance the agreement, but have not yet decided what percent each will contribute. This figure will be determined later this year.

Finance & Investment China Casts World-Wide Uncertainty Global markets have been volatile for the past month, following unpredictable market activity in China. Oil prices have tumbled 70% since mid 2014, controlling inflation and adding to the likelihood that central banks will have to ease monetary policies. The Bank of Japan took a plunge into negative interest rates in late January, while the US Federal Reserve is unsure when, and by how much interest rates will rise or fall. “While we don’t think that the world’s economy is set to fall off a cliff, the problem is that there is a sizeable output gap, with significant structural excesses in the emerging economies, particularly China, and in commodity-producing countries,” states Hiroshi Shiraishi an Analyst at BNP Paribas.

Bellamy Struggles Shares in Bellamy’s, a major Australian organic infant formula and baby food producer, are falling rapidly. Several days ago, shares were down 12.7% to US$12.15, although they are still way ahead of the US$2.13 share price at the start of February 2015. The infant formula market in China is booming, due to the removal of the one-child policy, and the fact that parents are increasingly quality and safety conscious. Bellamy expects to grow significantly this year in China, and believes full-year revenue will be in the US$240 million to US$260 million range.

International Trade Zimbabwe Exports Elephants Over the past few years, Zimbabwe has been exporting more young elephants to China, as it seeks to decrease its own elephant population. Zimbabwe currently has about 80,000 elephants, but can only handle about half of this number. El12

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February/March 2016

Apple Compatibility and Connectivity Issues Apple Inc. launched its Apple Pay service in China in mid-February and is already running into some difficulties. A large number of users have posted complaints on their social media pages, regarding compatibility and connectivity issues. Apple released a public message, ensuring the public that the issues were due to a massive sudden increase of users that will soon be resolved. Some 38 million new bank cards tried to register with Apple Pay on China’s launch day, with at least 10 million of these individuals registering within the first hour of the service going live. China Sets 2016 Growth Target China set a range for its economic growth target rather than a specific target for the first time in two decades this year. The target has been set at 6.5% to 7% for 2016, down from 6.9% in 2015. While China’s economy had a rough start to the year, it will achieve growth by curbing industrial capacity and shutting down “zombie” firms. This year’s growth target has been released a month earlier than usual, reassuring global investors. “It’s impractical to have a growth target being one number,” said Iris Pang, a Greater China economist at Natixis SA in Hong Kong, who forecasts 6.6% growth this year. “A range is more practical. It gives more room for policy makers to exercise their creativity to boost the economy.” Citigroup Sells Guangfa Stake Citigroup Inc. a multinational investment banking and financial services corporation, will sell its 20% stake in China Guangfa Bank to China Life Insurance Co. Ltd. Francisco Aristeguieta, CEO of Citigroup, claims his company is thankful for its decade-long relationship with Guangfa, but believes the investment is no longer practical, as Citigroup is looking to focus its resources on expanding its own core franchise. Citi has operated in China, its highest priority markets around the world, for more than 100 years. It employs more than 8,000 people in the region, and works with a lengthy list of clients in the consumer and institutional banking fields.

Media, Advertising & Entertainment Alibaba Buys SM Entertainment Stake Alibaba Group Holding Ltd. has acquired a 4% stake in SM Entertainment. These 870,000 shares cost some US$$30 million. Alibaba expressed interest to acquire SM back in 2014, but talks did not progress as hoped. Reports suggest that Alibaba was prepared to offer US$90 million at that time. Under the new agreement, SM can now use Alibaba’s online music platform to distribute, market and sell its products. This platform is relatively new and was introduced in mid-2015 to support Alibaba’s expansion into the music industry. Box Office Sales Hit Record Day High China’s box office sales hit a record high of US$100.5 million on 8 February, due to high demand on Chinese New Year. The week-long holiday is often celebrated at home with family, which was the leading reason behind the surge in sales. The list February/March 2016

of movies that helped China post its record was led by “The Mermaid”, a 2016 Chinese science fiction fantasy comedy directed by Stephen Chow. Although the record high is impressive, it pales in comparison to several US figures, such as “Star Wars: The Force Awakens”, which generated US$120.5 million on its opening day in December 2015. Kung Fu Panda China Hit Dreamworks’ Kung Fu Panda 3 (KFP3) had a successful opening weekend in China, generating US$58.3 million. Before the premiere, this figure was estimated at less than US$50 million. This marks China’s record for biggest three-day launch for an animated film, largely due to the fact that KFP3 is offered in two different versions in China: 3D and IMAX. China is expected to continue to see high ticket sales, and to hold about 40% of the box office share. KFP3 should easily beat KFP2’s US$92 million revenue from China. Shanghai Walt Disney Pricing Concerns Walt Disney Co. has released the most controversial aspect of its new theme park in Shanghai – the price. A standard ticket for Shanghai Disneyland will cost about US$56, and will be raised to US$76 during weekends, holidays and other peak periods. Although this ticket price is much lower than Hong Kong’s US$69, and Florida’s US$105, bloggers on China’s Sina Weibo believe it is too pricey. People are unhappy that Disney is raising the price during peak times, and not offering discounts to students. The Shanghai Park Operator replied with a statement claiming, “The twotiered pricing and date-specific tickets allow the park to manage the extraordinary anticipated demand for its attractions.”

Property & Construction Knight Frank Investment Arm Raises US$436 M Knight Frank, a residential and commercial property consultancy, has closed an open-end fund, which raised nearly US$436 million in equity. KFIM is a vehicle that will give investors a “low risk and consistent long term income return” that target assets with a strong foundation of underlying property fundamentals. “Launching our first fund is an important step in the ongoing development of the KFIM business. Coming so soon after passing £1bn of assets under management this fund continues the underlying momentum within the business,” states Kevin Aitchison, CEO of KFIM. Weak Yuan Boost Demand for AUS Property China’s yuan devaluation is fuelling capital outflows, which may worsen bubble conditions in Sydney and Melbourne’s housing markets and result in higher demand for Australian property, according to Tim Toohey, Goldman Sachs’s Chief Economist. Two years of surging, property prices in Sydney and Melbourne was just recently calmed as the Australian Prudential Regulatory Authority capped loans to investors. “Private sector capital outflows actually accelerated late last year. We’re just not sure what impact it has had on house prices, commercial property and other asset classes, or what happens next,” Toohey notes.

www.sbrchina.com

COVER STORY

Lights… Camera… Chinawood! For decades Hollywood has been the planet’s brightest entertainment star, eclipsing all others in the production of blockbuster films. Now, China is rising to the challenge on the back of a box office treasure chest. By David Lake

he film industry is all about box office. With blockbusters like Star Wars, Avatar and the Titanic all grossing over US$2 billion in ticket receipts, Hollywood remains the land where fortunes are made and stars are born overnight. Other nations have made their mark on the world of cinema. India’s Bollywood is widely considered to be the largest movie industry in terms of the number of films produced and people employed. However, no nation can replicate the ability of the Hollywood dream machine to produce films that transcend cultures, entertain billions and transform the way we think. The dominance of Hollywood – or at least the way Hollywood is ruled – may be in for a sea change as Chinawood takes center stage. A spate of landmark Hollywood deals, punctuated by the recent US$3.5 billion purchase of Legendary Pictures Inc. by Dalian Wanda Group, has captured the imagination. Waves of foreign cash have washed onto Californian shores before, in particular with the entrance of the cash-rich Japanese, led by the much-touted US$3.4 billion purchase of Columbia Pictures by Sony in 1989. The difference is the rise of Chinawood is accompanied by something else – all-important boffo box office in its home market. 14

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S t e p h e n C h o w â&#x20AC;&#x2122;s T h e M e r maid hit the h a lfbillion dollar mark on its way to the top of the alltime biggest box office earners in China.

February/March 2016

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COVER STORY

Chinawood vs Hollywood 3

4 2

China Box Office US$364.8 million China Box Office US$480.5 million

China Box Office US$297.3 million China Box Office US$366.7 million

“The trend was clear for us in early 2015. We knew last year was going to see a market change that would impact the whole movie world,” says Catherine Liu, Research Director at Beijing-based Ent Group, a top research company on the China entertainment sector. “That happened. Now we are looking at another 35% growth this year, at least up to US$10 billion. With the first two months passing US$1.5 billion we may see another surprise – China passing the US in total box office well ahead of predicted.” In February, China’s movie box office smashed the world’s seven-day revenue record for a single territory, racking up an amazing US$548 million in sales over the Chinese New Year holiday period, plus Valentine’s Day, according to LAbased Variety, the world’s leading entertainment inudstry publication. Considering China’s total box office reached US$327.5 million for all of 2006, this is an astounding achievement. Even more impressive,this record was achieved on the back of three nonHollywood productions that racked up a total over US$500 million in ticket sales. 16

The Mermaid, a comedy by Hong Kong hitmaker Stephen Chow, set the pace by grossing US$275 million, according to data from box office monitor Ent Group. Wong Jing and Andy Lau’s From Vegas to Macau III, featuring legend Chow Yun Fat, came in at close to US$120 million, and fantasy The Monkey King 2, with Aaron Kwok and Gong Li, passed US$115 million.

Boffo Box Office With more than 20 new cinema screens coming on-stream every day, analysts agree there is little doubt China will dominate the world’s film market soon. Perhaps that is one reason why China’s leading entertainment companies have made a spate of important Hollywood acquisitions as of late. In 2015, China’s theatrical box office grew by almost 50% to Rmb44 billion (US$6.8 billion), according to the nearly full year figures from the State Administration for Press, Publishing, Radio, Film & Television (SAPPRFT). Liu points out the film industry is pushed to ever new heights on the back of changing consumer purchasing powwww.sbrchina.com

er, a rapid increase in the number of new cinema screens, and, more importantly, a rising generation of film studios with deep pockets. “Big Internet companies and groups have the resources to invest heavily and they want to drive the industry to new heights,” Liu adds. “Cashrich powerhouses like Tencent, which invested in over 20 movies, have made it clear that they are entering the game. And, this is only the start.” After a stellar Chinese New Year performance, when Stephen Chow’s fantasy The Mermaid took more than one of every two dollars of a record week. Local action film Monster Hunt at Rmb2.4 billion (US$366.7 million) was surpassed as the all time top grossing film by The Mermaid Rmb3.2 billion (US$480.5 million), as of March 1, 2016, according to Ent Group. Admissions grew by over 50% from 830 million in 2014 to 1.26 billion in 2015, roughly one ticket per head of population. The number of cinema screens grew from 23,600 in 2014 to 31,627 at the end of 2015. Some 8,027 theater screens opened, an average of 22 new screens each and every day. February/March 2016

By the end of 2017, China may surpass North America – which took in a record US$11 billion in box office for 2015 – as the largest market in the world in terms of ticket sales. Bold predictions state that China may well double the US mark in 2028. That is not lost on Hollywood’s movie moguls. They are fully apprised of the situation. After all, Furious 7 ranks third in all-time China box office and Transformers: Age of Extinction fourth. The five Hollywood films in the top ten China ranking took in about Rmb8.6 billion, or a cool US$1.3 billion, in ticket sales, a nice payday for Hollywood from one foreign market.

Shopping Spree A booming domestic market has led China’s richest men and leading film companies to the doors of Hollywood’s best and brightest. The line is led by Wang Jianlin, China’s richest man and Chairman of Dalian Wanda Group, who

spent over US$6 billion building his cinema empire with the landmark 2016 purchase of a US$3.5 billion controlling interest in Legendary Pictures (producers of Jurassic World) and a 2012 US$2.6 billion acquisition of AMC Entertainment Holdings Inc., North America’s second largest cinema chain. Wanda plans to open an US$8.1 billion movie studio-tourism project in Qingdao in in mid-2017. Standing next in line is Jack Ma, Chairman of Alibaba Group and China’s second richest man. Ma is the controlling shareholder in Alibaba Pictures Group. Since Alibaba Pictures began operations over 18 months ago, and prior to making a single movie, the company watched the value of publicly traded shares rise from an initial valuation of HK$10.4 billion (US$1.3 billion) when Ma bought China Vision to more than four fold or a HK$44 billion (US$5.7 billion) market cap on the Hong Kong Exchange, though that

China All-Time Box Office Leaders Rank Title

Gross

Country

Year

480.5

China/HK

2016

(USD Million)

The Mermaid

Monster Hunt

366.7

China/HK

2015

Furious 7

364.8

USA

2015

Transformers: Age of Extinction

297.3

USA/China

2014

Mojin: The Lost Legend

252.9

China

2015

Lost in Hong Kong

242.6

China

2015

Avengers: Age of Ultron

220.2

USA

2015

Goodbye Mr. Loser

216.7

China

2015

Jurassic World

213.5

USA

2015

Avatar

201.5

USA

2009

Lost in Thailand

190.7

China

2012

187.5

China/HK

2013

Journey to the West: Conquering the Demons

Breakup Buddies

175.9

China

2014

The Monkey King 2

175.0

China/HK

2016

Jian Bing Man

174.4

China

2015

From Vegas to Macau III

164.5

China/HK

2016

Transformers: Dark of the Moon

161.2

USA

2011

The Monkey King

157.1

China/HK

2014

Kung Fu Panda 3

146.9

USA/China

2016

From Vegas to Macau II

146.5

China/HK

2015

Source: Ent Group as of March 1, 2016

February/March 2016

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market cap was down from a peak of HK$144 billion in mid-2015. Ma drove up the stock price with announcements like the hiring of former China Film Group executive Zhang Qiang as CEO and a US$400 million investment from his celebrity actress friend Zhao Wei. In December 2015, Ma spent US$86 million in cooperation with Tencent, another budding film powerhouse controlled by China’s third richest, Ma Wei, to buy Nasdaq-listed Bona Film Group, China’s leading independent distributor. Jack Ma has recently rubbed shoulders with the likes leading executives at Paramount Pictures, Sony Entertainment, Sony Pictures Entertainment, Fox Studio, Lionsgate and Relativity Media. Industry viewers expect the Alibaba Pictures Hollywood office to go into deal mode in the coming year.

Production Rules In terms of the Chinawood theme, Liu believes that Hollywood is inching into the relationship, allowing the China side to inject the capital and pushing for to open the China domestic market. “All the six big Hollywood studios have set up office here,” says Liu. “They see the trend and know that China is a major driver in terms of future revenues. They know this kind of fast growth could double returns on some movies. That is why they are more interested in pushing their own product now. Cooperating more on local productions is the next stage of cooperation.” Huayi Brothers Media Corp. is as close to that next stage as any. China’s largest private sector film producer and talent agency, led by Beijing brothers Wang Zhongjun and Wang Zhonglei, is a force to reckon with. In April 2015, Huayi closed a 18 picture co-production and co-financing deal with Hollywood’s STX Entertainment. The STX deal made Huayi Brothers the first Chinese company involved in the end-to-end production and distribution of movies produced by a US film and TV studio. STX/Huayi’s first release, The Gift, a psychological thriller, received rave reviews after its July 2015 global release. Jason Squire, professor of cinema at the University of Southern California, the world’s leading film school, and a 17

COVER STORY

A Tale of Two Brothers Labelled by Variety Magazine as the “China’s largest film conglomerate” the Huayi Brothers are not resting on their laurels.

erhaps the world of film and finance should have been put on alert when Huayi Brothers Media Corp. (Huayi Bros.) made global headlines in October 2009 when the Shenzhen Stock Exchange halted stock trading after its stock more than doubled in one day over the IPO price. Today, the Huayi Bros. brand is worth nearly US$5 billion, on a profit of close to a US$140 million last year, though this is well down from its all-time high of close to US$15 billion in market cap when the China stock market was firing on all cylinders. “ We stepped into China’s entertainment business quite early,” recalls Founder and Chairman Wang Zhongjun. “We explored many things before our peers and this gave us a first-mover advantage. We have been lucky that our decisions have always been in line with China’s macro policy and industry dynamics, and our IPO proved to be extremely timely.” Founded as a film production company in Beijing by entrepreneurial brothers

Wang Zhongjun and Wang Zhonglei in 1994, Huayi Bros. entered the Chinawood sweepstakes in April 2015 with a deal to produce 18-pictures with STX Entertainment by 2017. With a stated aim to become the Walt Disney of China and hit box office revenues of Rmb10 billion (US$1.54 billion) by the end of this year, Huayi is closing in on its mark. Already Huayi Bros. is looking forward to its share from the STX thriller The Gift. The first theatrical release for STX, The Gift placed an impressive third on its opening weekend in North America, behind first place Mission: Impossible – Rogue Nation. The movie beat expectations to gross nearly US$12 million from 2,500 screens. “Our collaboration hit the ground running,” says Wang Zhongjun, Chairman of Huayi Bros., pleased of the result of a film budgeted at US$5 million. “This success marks the beginning of our international expansion and is an important step in our global growth strategy to enter the US market.” Wang attributes his success to a three-

pronged strategy. “First, leverage the power of capital,” he notes. “We are the first in China’s entertainment industry to leverage capital to expand, the first to use bank loans to produce movies. We had two rounds of crucial financing before we went public. We attracted capital from Jack Ma and other well-known entrepreneurs. We successfully launched our IPO and Huayi became China’s first movie stock.” Wang notes that the second element is institutional innovation. “We have explored new models in every level of business,” he adds. “Finally, we actively moved into new businesses, including mobile games and location-based entertainment (LBE). This is in line with our vision for the next three to five years. Observers may think our growth was quite smooth. However, there were some projects that did not always go as planned.” STX was formed in 2014 by CEO Robert Simonds, whose over 30 Hollywood movies have generated in excess of US$6 billion in worldwide revenue, and TPG

Chairman and CEO Wang Zhongjun is one of China's richest media moguls.

President Wang Zhonglei established Huayi Bros. with his older sibling in 1994.

China's renowned director Feng Xiaogang shares the stage with Wang Zhongjun.

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visiting professor at renowned Beijing Film Academy, commented, “All people involved in entertainment enjoy the prosperity of other markets and they see how these markets are changing. There is a huge industry shift going on, with an emphasis on global entertainment and exporting Hollywood movies. This STX story is an example of the joining of hands and minds among two really smart groups.” Although only 34 Western films a year are now permitted to be shown in China, Chinawood partnerships such as those of Huayi, Wanda and others are the easiest way to work around the limits as coproductions are exempt from Beijing import quotas. With the rise in box office receipts, this quota issue is going to become ever more important.

CMC and Perfect World Thriller The Gift is the first success out of the recent STX-Huayi Bros. cooperation.

Group, one of the largest private equity firms in the US. At the time of formation, STX reported that its average film cost to release a film was US$40 million in production cost and US$35 million to market. Based on the US$75 million total, Huayi signed on for a production slate that could add up to US$1.35 billion over the next two years. Huayi is pleased with the closing of the STX cooperation. In 2014, Huayi Bros. agreed to invest as much as US$150 million in Studio 8, a respected production company launched by former Warner Bros. executive Jeff Robinov. The partnership never materialized and cash rich Shanghai-based conglomerate Fosun International took the Studio 8 deal. It was an important lesson learned in Hollywood deal making. As to the future, Chairman Wang is ready for more competition. “Wanda, Enlight Media, LeTV and others have entered the market at their own pace,” he adds. “This is an open industry with no resource monopoly. We were a leading player, but it will be hard to sustain this in the future. China will be like the US, with several top-class producers and no one leader. We have to move ahead and explore new models. That is why we are talking about straddling the entire entertainment value chain.” February/March 2016

One of the Chinawood’s most prolific dealmakers is Li Ruigang, Chairman of China Media Capital (CMC), a statebacked fund that invests in media and entertainment assets. Li’s biggest investment is a joint venture with allpowerful DreamWorks Animation SKG Ltd. Under a deal struck last year with CEO Jeffrey Katzenberg, DreamWorks agreed to co-produce animated films for local and global distribution. This venture, which includes Kung Fu Panda 3, has fuelled a US$3 billion project to build Dream Center. In another deal with a Hollywood giant, media mogul Li entered into a venture with Warner Brothers Entertainment Inc. in September 2015 to produce a slate of Mandarin and English language films for global distribution. The first titles under the new imprint could be released as early as 2016 and this venture meshes with the CMC-IMAX fund that plans to produce at least 10 Mandarinlanguage film projects. In February, Universal and Beijing multimedia company Perfect World Pictures Co. Ltd. entered into an agreement to raise US$500 million in equity and debt to finance films across the Universal slate. The partnership will last five years or cover co-financing of 50 features, making the video game and TV production company a major investor in one of Hollywood’s hottest studios with www.sbrchina.com

over US$1 billion at the box office last year. Perfect World is understood to be getting a 25% share of most, but not all of the films released by Universal, and a share of global TV and merchandise revenues. Though a new name to Hollywood, Perfect World has been active in film distribution and TV production. Perfect World was the China co-distributor on Lionsgate’s Divergent, Insurgent and Ender’s Game as well as Universal’s Rush. The company served as a producerdistributor on romantic comedy Sophie’s Revenge (2009), starring Zhang Ziyi and Fan Bingbing, and has a total market capitalization of over Rmb12.5 billion (US$1.9 billion).

China Card China arguably has as much to teach Hollywood in certain areas, as Hollywood has to teach China. Chinese animation, for instance, is thriving, buoyed by the success of Monkey King: Hero Is Back. This animated film directed by Tian Xiaopeng released in July 2015 became the highest-grossing Chinese animation with close to Rmb1 billion (US$150 million) in box office. Though legal deals struck long ago limit US filmmaker access to historic source material, China’s rich folklore written over thousands of years is virtually free of intellectual property restrictions. Later this year, two seasons of shows adapted from famous feng shui tomb raider books will begin streaming on the Internet. Certainly, China can teach Hollywood a thing or two about developing content for the world of social media. Still, it is not clear how much Hollywood is eager to learn at this stage. Since the 1920s, Hollywood has been a vertically integrated industry based in Los Angeles due to its clement weather and concentration of creative talent. However, in 2014, only 22 of the 105 films released were primarily produced in California. Currently, Hollywood’s long dominance of the sector is under challenge, as rival cinema cultures and industries emerge around the world. Though it is not yet clear what the Chinawood film partnerships will yield, one thing is all but assured – those that get it right will see legendary profits. 19

COVER STORY

Dealmaker Par Excellence When it comes to making spotlight deals in the Chinawood space no one does it better, no one has done it longer and no one is more respected than CMC’s Li Ruigang. By David Lake

ome call him the Rupert Murdoch of China, others simply refer to him as a media guru that is second to none. Whatever he happens to be, one thing is certain, Li Ruigang has the magic touch when it comes to negotiating face-to-face with the hardest players Hollywood has to offer. After all, when you have to compete (or partner) with money-men like Wanda’s Wang Jianlin and Alibaba’s Jack Ma for the attention of Hollywood dream spinners, you better know what you are talking about and how to deliver the goods. Yet, despite an array of global deals, Li may be best known inside China for his recent soccer league battle. In late 2015, Li signed a deal for the all-media exclusive global broadcast rights over the next five years of Chinese Super League, the country’s highest tier of professional soccer. The deal was sealed at US$1.3 billion, with Li outbidding China’s largest national broadcasting network CCTV and an array of other suitors, including an affiliate of Dalian Wanda, controlled by the country’s richest man. “The copyright of China’s sports games has long been undervalued. Compared to the price for the Premier League or the NBA, this is a low sum for China’s top soccer league’s exclusive rights,” Li Ruigang believes. “We have faith in China’s sports industry, and the money we pay can help our clubs purchase new equipment or improve coaching to create a better result. China is looking for experience in running a high-end or well20

operated league and we are interested in many sports assets globally.”

Heir to Chinawood It is almost like Li has been groomed for the task of leading Chinawood into a new age of mega-box office receipts and billion dollar entertainment deals. Currently, Li is the Founding Chairman of CMC Capital Partners and CMC Holdings, formed in partnership with prominent financial investors and global media and Internet leaders to become the country’s first major venture capital fund in media and entertainment. Up until early 2015, Li still held the Chairman’s helm at Shanghai Media Group (SMG), China’s second biggest stateowned TV and media conglomerate, an organization he ran for over a decade. “I come from the system,” says Li, 46, who travelled with President Xi Jiping on his UK trip and announced a major theme park deal prior to arrival. Two months after Li toured Manchester City’s football academy with Xi, a CMC ledconsortium paid US$400 million for 13% of City Football Group, the team’s Abu Dhabi-based owner. “The media sector is important for the government to boost service industries and domestic consumption. There is a need to expand soft power by building the country’s film and media industries for audiences at home and abroad. The government is putting a lot of effort and energy into it. However, in my humble view, business is the biggest consideration,” Li adds. www.sbrchina.com

Li has risen through the Shanghai government media ranks to become the face of China media. A graduate with a degree in journalism from Shanghai Fudan University, Li landed a job with a Shanghai TV station as a lifestyle reporter and documentary maker. By age 32 Li had risen to become president of SMG. During his tenure, Li’s stated goal was to turn SMG into China’s Viacom or Star TV. By 2006, Viacom billionaire Chairman Sumner Redstone’s first port of call was the downtown Shanghai office of Li. In 2011, CMC paid US$74 million for a 53% stake in Murdoch’s Star China Media in its first equity deal. The result was The Voice of China, a talent show mirroring American Idol that became a national hit.

Dreamworks Hug Li has taken Hollywood by storm. Perhaps one of his most important deals is a joint venture made with DreamWorks Animation SKG Ltd. in February 2012. Under a deal struck last year with DreamWorks CEO Jeffrey Katzenberg, former Chairman of The Walt Disney Co., CMC agreed to co-produce animated films for local and global distribution. A CMC-led investment group holds a 54.5% stake with an investment of US$150 million and US$30 million in non-cash assets in the Oriental DreamWorks venture. This venture has fuelled a separate US$3.1 billion project to build Dream Center, a Shanghai entertainment zone financed by CMC and China DevelopFebruary/March 2016

Li Ruigang shares the stage with his new best friend, Kung Fu Panda 3, a top grossing film by Oriental Dreamworks around the world.

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COVER STORY ment Bank. The CMC-DreamWorks deal and produce a major slate of Chinese with both partners. No stranger to big includes the third installment of Kung and English-language films for worlddeals, Li was enthused by the Warner wide distribution. cooperation, “With the proliferation of Fu Panda, which Katzenberg refers to as “a love letter to China.” Kung Fu Panda 3 Based in Hong Kong with offices in platforms available to consumers, premiearned US$52.2 million in its first three Beijing and LA, Flagship Entertainment um content is more valuable than ever. days in late January 2016, setting a new Group Ltd. will be 51% owned by CMC, This partnership with Hollywood’s most opening weekend record for a Chinesewith Hong Kong broadcaster TVB holdiconic studio will bring Warner Bros.’ made animation. The US$96.3-million ing 10% of the CMC consortium. Warner deep experience in creative storytelling haul for the second installment of Kung Bros. owns the other 49% but financial and unparalleled expertise in producing global titles to China’s film inFu Panda in 2011 still stands as one of the highest grosses ever dustry.” for an animated film in China. Li believes that the tie-up The third installments in with Warner Bros. will lead to even successful franchises are more than just China box ofoften far from sure box office fice success, intimating that success, but the studio broke CMC seeks a role as a global ground with two versions, in player. Li believes that the cowhich characters are animated operation - “will further our so that speech is in sync with commitment to building a both English and Mandarin. To premier platform for making create the Mandarin-language films that resonate with both version will take about 25% Chinese and worldwide audimore time, adding to the estiences, helping to enhance the mated US$140 million budget. cultural exchange between The China animation efChina and the rest of the fort was substantial by any cinema world.” measure. Though Director Where to Now Jennifer Yuh Nelson remains the driving creative force, 200 With a number of successes Oriental DreamWorks employunder his belt, Li is “bankable” ees provided authenticity and in the eyes of Chinawood. a second version of the film to As such, Li has plans to sigbe precisely coordinated into nifcantly increase the size of a Mandarin-language script funds under management from the Shanghai office. from the present US$5 billion. To supplement its Dream Working with a consortium Center project, CMC signed of partners ready to follow another deal in October 2015 to the CMC lead, one can expect open a Legoland amusement even greater things from Li in park in Shanghai with Britain’s the future as the Chinawood Merlin Entertainments Plc. sweepstakes grows in both Merlin, the world’s second bigsize and breadth. gest visitor attractions group In 2014, CMC raised US$350 International movie star Lucy Liu and Jeffrey Katzenberg, CEO of Dreamworks Animation and JV partner of CMC Capital. behind Walt Disney, watched million from overseas invesits popularity boost after the tors including Time Warner release of Lego Movie. terms were not disclosed. Plans are to Inc. (owner of Warner Bros.) and Pavildevelop, invest in and produce a range of ion Capital Pte. Ltd., a private equity arm Warner Shundi Chinese language films for distribution of Singapore’s state-owned investment More recently, Li entered into another throughout China and around the world. firm Temasek Holdings Pte. Chinawood deal of great importance The first titles under the new imprint “I’m not that savvy and not that agwith Warner Brothers Entertainment could be released as early as 2016. This gressive in tapping into the global film Inc. (Warner Bros.), one of the first Holventure meshes well with the CMC fund market,” Li concludes in his usual modlywood studios of note and the film and with IMAX for investment in a miniest manner. “In the past the Japanese entertainment arm of Time Warner, one mum of 10 Mandarin-language projects. have failed. People with big money from of the world’s leading media companies. The Warner Bros. project was welthe Middle East and Russia, they failed. Warner Bros. entered into a venture comed into Hong Kong by none other Can the Chinese succeed in the short with CMC in September 2015 to develop than Chief Executive CY Leung, who met term? No way!” 22

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Chinawood’s Power Broker

Wang Jianlin has spent billions of dollars positioning Dalian Wanda Group in the world of film and entertainment

fter the Legendary Pictures multi-billion dollar spending spree, all eyes in the film industry are firmly on Wang Jianlin, the 62 yearold Chairman of Dalian Wanda Group. Wang’s stated ambition is to “create a cultural platform that is in every sense Hollywood’s rival.” If the events of the last two years are any indication, Wang is well on his way to doing just that. US-China partnerships have long helped China acquire expertise in fields such as information technology and aircraft manufacturing. Wang seeks to follow much the same path in the arena of cinema. “Chinese filmmakers have a lot of work to do if they are going to master Hollywood storytelling, production and distribution tricks,” Wang, who believes that the China film industry is 30 to 50 years behind Hollywood, told China Daily. “American culture is still the dominant culture globally. I don’t think China is ‘cool’ enough yet.” Wang spent the first 16 years of his career climbing the ranks of the People’s Liberation Army before taking a government job in the northeast city of Dalian. Wang was named Chairman of a stateowned real estate company in 1989 and transformed that business into Dalian Wanda Group, one of the country’s first shareholding companies in 1992.

Qingdao Metropolis Wang decided to focus his ambitions on what he calls “cultural industries” in 2010, a move that mirrored the central government push to increase the nation’s cultural influence. Wang hit the business headlines with his US$2.6 billion purchase of AMC Entertainment Holdings Inc., which made him the world’s largest cinema owner. Since then the AMC stake has more than doubled in value. However, Wang February/March 2016

shocked the industry in 2013 when he committed a massive US$8.1 billion to build the Oriental Movie Metropolis in Qingdao, a 9 3 0 -a c r e s t u d io expected to open in June 2017. Qingdao looks a bit like Hollywood with its sunny dr y cl imate and a gigantic white “Eastern Cinema” Wanda Group is the world's largest owner of cinemas. sign perched on in post-production on its first movie a hill overlooking the Yellow Sea. The – The Great Wall. Directed by Zhang elite of Hollywood attended the lavish Yimou, the US$150 million picture is Movie Metropolis launch in 2013, includstraight out of the Legendary business ing the head of the Academy of Motion plan, targeting a global fan-boy audiPicture, Arts and Sciences, chairmen of ence with a fantasy pitch. To be released the world’s top four entertainment talent in November 2016, The Great Wall is the agencies and high profile movie stars most expensive Chinese movie to be dissuch as Leonardo DiCaprio, Nicole Kidtributed globally. man, Ewan McGregor, John Travolta and The 20,000 km long fortification was Catherine Zeta-Jones. built to keep out foreign invaders, but The grand plan for the Qingdao Movie The Great Wall film is all about reaching Metropolis is almost too big to believe. out to tell Chinese stories to a global auWanda Group stated that the complex dience. Perhaps more revealing is Wang’s would boast more than 20 film studios decision to choose Zhang Yimou. This when fully operational, including one of award-winning director was the Artistic the world’s largest and a fixed underwaDirector for the opening to the 2008 ter facility. Metropolis will house China’s Beijing Olympics, where he produced an largest film museum and celebrity wax awe-inspiring celebration of China’s hismuseum, an IMAX research lab and tory, size and power. theaters that can accommodate up to “The Great Wall,” Zhang stated, “is the 3,000 moviegoers. perfect production for a mainstream Great Wall Epic global audience” because its human story is neither East nor West. As Zhang With the purchase of Legendary Picputs it, “People see the Great Wall, they tures Wanda gains control of the financdon’t know the story behind it. As long as ing operation behind Hollywood blockyou have a good story, one people underbusters such as 300, The Dark Knight, The stand, about family, heroes, good against Hangover, Jurassic World and Godzilla. A evil, moviegoers will be interested.” Chinese offshoot, Legendary East, is now www.sbrchina.com

COVER STORY

Chinawood Pioneer Long before Chinese companies started to make the trek to Hollywood film producer Peter Shiao was paving the way for US-China creative partnerships.

ince film producer and entrepreneur Peter Shiao began chairing the US-China Film Summit six years ago, he has built a bridge between film industry leaders in Hollywood and China. This bridg is so formidable that it is being compared to the Silk Road, the trade route that helped Eastern and Western cultures learn from each for more than two thousand years. As producer of the 1998 film Restless, the first official US-China coproduction, Shiao is well versed on what it takes to negotiate the maze of Chinawood deals and productions. With his finger on the pulse of this blossoming cross-border relationship, Shiao is excited by what he sees driving the rapid evolution of the Chinese film industry. “The training wheels have come off,” comments Shiao of the bet Hollywood has made in working closer with Chinese partners. “Now it’s off to the races.” Now Chairman Emeritus of the USChina Film Summit he founded in 2010, Shiao has decided to focus on being an industry operator. Shiao has handed over the premier event that brings together Hollywood and Chinese f ilm executives to discuss business collaborations and the latest market trends. Today, this leading event is hosted by the California chapter of Asia Society, a renowned educational organization that promotes understanding and partnerships amongst the peoples, business and institutions of Asia and the US. As Chairman of the US-China Film Summit and CEO of his own Beijing and LA-based Orb Media Group, a film production and financing company focused on medium-budget English language films (US$15 million to US$50 million), 24

Shiao has had the opportunity to rub shoulders with the most powerful media moguls on both sides of the Pacific. In some cases, this has paid off in solid business relationships. Shiao is preparing to shoot a science fiction film under the Orb Media banner in the summer of 2016, with an eye to doing several more major Orb film projects the coming two years. The new sci-fi production will be a US$45 million coproduction with handpicked Chinese partners. The China lead in this film Orb consor- Peter Shiao, Chairman Emeritus of the US China Film tium is China Film Group Summit, predicts a new age in Chinawood productions. (CFG), the largest and most realm was more his calling than politics, influential state-owned film enterprise Shiao used his Sunshine State contacts and the monopoly responsible for foreign to reach out, first to California Senafilms imports. tor Dianne Feinstein and then to the Discussing why he chose this science Bill Clinton Administration. Shiao also fiction film project as the vehicle to herturned to Motion Picture of America ald his return to co-production, Shiao (MPA A) Head Jack Valenti to create remarks, “My dream is to make projects the first US-China Film Conference in that appeal equally to an international 1995. The success of that initial venture and Chinese audience. This is a very diflaunched Shiao as an entrepreneur foficult proposition in practice. My sense cused on cross-border film productions is that this task becomes much easier between China and the US. when we can deliver a cultural synergy “The big pull for me initially was the within the framework of established and desire to learn more about China and accepted genres such as science fiction, somehow play a role in bringing these action and thrillers.” two worlds of East and West together Crossborder Roots in a more meaningful manner,” recalls Shiao. “Making films seemed to be a Born in Taiwan and raised in America, natural extension of that. Back in those Shiao began his career as a policy adearly days, the Chinese market was a lot visor to California legislators. When more obscure when it came to the world reaching the realization that the culture www.sbrchina.com

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Peter Shiao rubs shoulders in Hollywood with renowned Director James Cameron, winner of an Academy Award for Titanic and Director of Avatar, a China top 10 all-time box office hit.

of co-productions. Chinese projects were certainly not on the radar screen for many people.” It was during those early, lean years that Shiao gained valuable experience in the co-production space and started to build his China portfolio of projects and relationships into the formidable platform that it is has now become. In addition to pulling together the first ever US-China co-production with Restless, Shiao also founded Ironpond, the first private equity film fund focused on US-China investment projects, in partnership with China Film Group and Hollywoodbased Endgame Entertainment.

arts novels in the East are what comic books are to the West. If Shiao is correct then there is an immense opportunity to deliver successful films from this large volume of historic work that can cross cultural boundaries. Shiao strongly believes that the door is open to achieve major successes as very few producers have properly been able to

Immortal Studios At the same time as steering the latest production slate at Orb Media, Shiao has embarked on an important new project in Hong Kong. This Shiao brainchild – Immortal Studios – is a venture focused on producing large-scale Chinese language “tent-pole” franchises based on known and beloved stories from Chinese fantasy, folklore and literature. Shiao believes that fantasy and martial February/March 2016

Peter Shiao’s Restless, produced back in 1998, is the first official US-China co-production. www.sbrchina.com

adapt these projects and highlight there exceptional message. “I loved the depth, wisdom and power of these special Chinese stories,” adds Shiao. “There is a vacuum in the world today because these stories are relatively unknown, even though they are at the very heart of a culture embraced by onequarter of the world’s population. This is one area that I would like to make a major contribution in.” Immortal Studios added value is its ability to bring together the best of Chinese stories in this area with Hollywood talent and know-how to deliver a film franchises on par with Hollywood in terms of quality and financial success. Furthermore, the new studio will leverage the magic of movies to access game, digital and Internet consumers across all media. Given that most successful films and games are within the fantasy action genre, a clear opportunity emerges to link films and games in a way that increases the chance of success and reduces risk. Shiao believes this brand of digital synergy in China will eventually drive new global models in the arena of media convergence. To kick off its operations, Immortal plans to produce a four-part film franchise based on the Immortals series of books written by Shiao’s father. A famous martial arts writer, Shiao Yi has sold over 10 million books, worked on some 20 movies and completed hundreds of hours of television adaptations. The Immortal film will be headed to production in Q3 2016 and will feature a talent production team culled from the Lord of the Rings and a visual effects team from China’s own Monster Hunt. “So much is happening that when you first land in China you want to write a book,” laughs Shiao. “Three years later you are ready to write an article. After three years you just don’t know what to say anymore. No one has a crystal ball on what will happen next in this sector, but it is quite clear that this is just the beginning of China’s commercialization of the film industry. Hopefully, Orb and Immortal Studios will have the opportunity to play an important part in the next chapter of this ongoing, exciting Chinawood success story.” 25

COUNTRY REPORT

Pakistan Prime Minister Nawaz Sharif escorts China President Xi Jinping in Islamabad in April 2015 to launch a new era in relations with the China-Pakistan Economic Corridor Silk Road initiative.

COUNTRY REPORT The UAE-donated HH Sheikh Zayed bin Sultan al Nahyan Bridge serves 500,000 people in Swat valley flood zone of Khyber Pakhtunkhwa Province.

The US$46 Billion Silk Handshake The emerging Silk Road relationship between Pakistan and China is an Asian economic pact that is unprecedented in scope and impact. By Michael Bucher

he importance of the China state visit to Pakistan in April 2015 was immediately apparent when the Air China flight carrying President Xi Jinping entered Pakistani airspace to be escorted by eight Pakistani Air Force JF-17 Thunder fighters. This jet escort to Islamabad’s Nur Khan Air Force Base, adjacent to Benazir Bhutto International Airport, was filled with meaning. After all, the JF-17 fighter jet is the result of a ChinaPakistan successful joint project and the trip officially announced a new phase of the China-Pakistan Economic Corridor (CPEC), underway as part of China’s Silk Road initiative, One Belt, One Road (OBOR). The result of this high level diplomatic venture was the signing of a staggering US$46 billion worth agreements and projects. It was a short two-day window for the OBOR Road Show, but the ramifications were major. With this landmark signing it was clear that Pakistan had cemented its role as the keystone hub where One Belt, One Road land and sea routes crisscross. In the event packed trip, Xi used valuable face-time with Pakistani President Mamnoon Hussain, Prime Minister Nawaz Sharif, other national leaders and business representatives to share views and fortify relations with China’s “iron friend.” In between the signing of 51 agreements, Xi and Nawaz attended groundbreaking ceremonies for five important energy projects. Luckily no travel time was required, these virtual visits by the OBOR team were conducted by video link. Before departing, President Xi became the first foreign dignitary to address the Pakistani parliament. The Chinese leader warmly summing up his visit, with a sugar coated comment, saying, “I feel as if I am going to visit the home of my own brother when coming to Pakistan.” Ghufran Memon, the Pakistan Consul General to Hong Kong, watches the situation develop with great interest. “Looking at the world map you see the value of Pakistan’s unique location,” remarks Memon, who joined the Pakistan civil service 30 years ago and served in various Pakistani ministries at the federal and provincial levels. “The CPEC forms one of the key OBOR corridors to link the land and sea routes. Pakistan is the only country that can connect China to the critical oil producing regions that surround our country.” 27

COUNTRY REPORT Memon is convinced that CPEC will bring prosperity to both nations on many fronts. “CPEC’s Gwadar to Kashgar route provides the benefit of additional energy security as China is able to avoid the hazards of a long sea route,” points out Memon. “Only the portion of the route from the oil producer to Gwadar is not absolutely secure for China. CPEC will bring socio-economic dividends to both western China and Pakistan soon. In the next four years, when the CPEC is 30% complete, the effect of improved energy and transportation systems will be noticeable and Pakistan will undergo positive change in many ways.”

Cemented Relations Pakistan has an enduring friendship with China since both countries emerged as new nations from tumultuous circumstances in the late 1940s. China is most appreciative of the proactive manner in which Pakistan has established ties. Pakistan was among the first countries to formally recognize China in 1950 and diplomatic relations were es-

tablished one year on. A decade later Pakistan voted to restore China’s UN seat and in 1963 Pakistan signed a boundary agreement to cede 2,050 square miles of the disputed Trans-Karakoram Tract to China, ending all border disputes with their northern neighbor. The underlying strength of this special relationship arose out of need in the geopolitical sphere. When China stood isolated, Pakistan remained on China’s side. Few people recall that it was Islamabad that helped write the script to a defining moment of 20th century history, arranging Henry Kissinger’s secret visit to Beijing in July 1971. This led to US President Nixon’s 1972 Beijing trip, marking the official opening of China to the world again. The Sino-Pak relationship enters a new era through CPEC. That was the keynote message of the OBOR Road Show. Already, trade figures show China as Pakistan’s largest partner. Trade exceeded US$16 billion in 2014, an annual 12.6% increase. At the same time, the CPEC initiative created jobs and new economic activity along corridor routes.

The result of this activity is expected to raise Pakistan’s GDP a projected 15% upon CPEC completion. No two countries have ever done something of this magnitude before. The amounts being invested in the CPEC framework are unprecedented. They are equal to 20% of the annual GDP for Pakistan, almost three times entire incoming foreign direct investment (FDI) since 2008 for Pakistan. The inf low of cash has overshadowed the US$7.5 billion of US security related aid provided back in 2009, funding that will not produce the same benefits of capital investment into CPEC planned power and transportation infrastructure projects. The OBOR Road Show PR team made sure the moment was not lost on the Pakistanis. President Xi now prefers the personal format of an op-ed piece to deliver his message, appearing in national newspapers before state visits. In this case, it was the Pakistan’s Daily Times. Pakistanis picked up the daily paper on the morning of the President’s arrival to read Xi’s op-ed quoting a famous Urdu poet. The cultural touch previewed his

Central to the ambitious CPEC initiative is the rapid improvement of the road infrastructure between Pakistan and Western China. 28

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COUNTRY REPORT agenda emphasizing major points. Xi views Pakistan leading another generation of “Asian Tigers”. He stressed the need “to form a ‘1+4’ cooperation structure” to address the new Sino-Pak relationship paradigm, with a “cooperation in security and economic fields that reinforce each other.”

The 1+4 It is worth looking deeper into Xi’s op-ed in Pakistan’s Daily Times for the direction this relationship is headed. “China and Pakistan need to align economic and trade strategies more closely to deepen economic interdependence,” as the CPEC project is crucial to the whole OBOR initiative. The Xi op-ed further declares, “We need to form a ‘1+4’ cooperation structure with the Economic Corridor at the center and the Gwadar Port, energy, infrastructure and industrial cooperation as the four key areas to drive development across Pakistan and deliver tangible benefits to its people.” The immediate CPEC focus is on energy-related and road/railway infrastructure projects, some geared for completion as early as 2017. Already US$33.8 billion is allocated toward power generation and US$11.8 for infrastructure as Pakistan aims to overcome two main economic growth obstacles: power shortages and poor infrastructure. By 2017, the national grid acquires 16,400 MW from natural gas, coal, solar, wind and hydropower projects reaching completion. Ahsan Iqbal, Minister for Planning and Development, indicates it will nearly double the current capacity and deliver badly need power. Infrastructure upgrades are only part of a general industrial upgrade to Pakistan. How the nation serves 67% of the national population living in rural areas remains to be seen. To keep complaints of being left out by Balochistan and Khyber-Pakhtunkhwa provinces from ringing true, CPEC power projects must include these rural areas in current plans. However, dealing with a large rural population in this country of 180 million is something that China understands well and specializes in. Javed Iqbal, President of Pakistan Chamber of Commerce Hong Kong, understands that China can support the February/March 2016

Hong Kong's Pakistan Consulate General Ghufran Memon believes the key to CPEC success is transparency from the Pakistan government in terms of the mission and timeline.

development of Pakistan in many ways. He remembers clearly the day two years ago when his Chamber of Commerce was inaugurated by Hong Kong Chief Executive CY Leung and President of the Legislative Council Jasper Tsang. CY Leung was clear in his desire to see the new Pakistan Chamber of Commerce promote business links between Hong Kong and Pakistan as well as act as an important financial bridge between Pakistan and the Mainland. “The most important challenge for Pakistan in the CPEC will be transparency,” states Iqbal. “Our government must openly tell everyone in a calm manner what is involved in the CPEC, how much time it will take and what will happen. Everyone must be made fully aware of the variables and the downside – if any. Only then, as the people see development of projects, will they trust the leaders and end divisions amongst themselves to make CPEC a success.” Iqbal believes that in due course new communities will develop all along the CPEC route to Western China and businesses focused on energy distribution and refinery will emerge to expand the local economy. “Complimentary benefits will come out of all these improvements,” adds Iqbal. “In time, people will assume a much more complimentary stance in moving CPEC policies forward as they see one success after another.” www.sbrchina.com

CPEC Security The China strategy expounds on another point – security. “Our cooperation in the security and economic fields reinforce each other, and they must be advanced simultaneously.” While security issues bind both countries, economic factors weigh in heavily. A successful CPEC brings Pakistan a stable economy under the wing of China’s economic juggernaut, facilitating vital economic goals for both. The advantages to aligning with the China economic miracle are viewed as the chance of a lifetime by many in Pakistan. Yet, how to balance contrasting sides of this equation becomes something Pakistan must consider in the near-term. “Pakistan, for China, is now of pivotal importance. This CPEC has to succeed and be seen to succeed,” stated Mushahid Hussain Sayed, Chairman of the Pakistani parliamentary Defense Committee. This point was echoed by President Xi during the state visit, “We will build the China-Pakistan community of common destiny and set a fine example for such efforts between China and its neighboring countries.” Plus, it seems clear that Pakistan will make sure no one interrupts the building of this Corridor. In a one-on-one exchange in Islamabad, President Hussain assured President Xi, “A special army se 29

COUNTRY REPORT

The World of Giant Loans China paves the way in Pakistan with preferential loans to facilitate large-scale projects.

Sardar Muhammad Ayaz Sadiq, Speaker National Assembly, Senate Chairman Mian Raza Rabbani, President Xi Jinping and Prime Minister Nawaz Sharif celebrate in Islamabad.

hen it comes to its US$46 billion handshake in the ChinaPakistan Economic Corridor (CPEC) Mainland money pools are putting money on the table, and doing so at concessionary lending rates that no one in the world can match. Up to US$11 billion in concessionary loans disbursed by Export-Import Bank of China (China Exim) at a bargain basement rate of 1.6% will finance infrastructure along the Corridor. In contrast, past World Bank infrastructure loans came in at 5% to 8.5%, sometimes as high as 12% on market loans. European Union reports indicate that of the billions needed for the Corridor, 80% is in private investment, while the remaining 20% is composed of soft loans. Still, parts of a CPEC highway projects will be 90% financed by China, while the Public Sector Development Program of the Pakistani government finances the remainder. The sum China contributes is from a variety of sources: 30

loans from government policy banks and investments from private companies involved in the projects. The central government intends to grant subsidies to Chinese companies working on CPEC infrastructure-related projects. China’s state banks provide loans to China companies working on CPEC projects to create a commercial venture that positively impacts China’s economy. China exim is the only bank to provide concessionary loans and its function is the issuance of export credits and loans to overseas projects. China Development Bank (CDB) is another policy bank that finances large infrastructure projects, and plays a role in the CPEC.

Where Money Goes How money is disbursed and at what rate is a variable for the CPEC. For instance, the Cross Border Optic Fiber Project, stretching 1,300 km from China to Islamabad, qualifies for a 2% concessionary loan. Another project that prewww.sbrchina.com

dates CPEC only qualifies for a 5% subsidized rate while the Lahore Metro 27 km Orange Line Project is financed for 2.4% instead of an initially planned 3.4%. Then there is the exception of the Gwadar’s US$757 million project. China converted Gwadar loans to a 0% rate in August 2015, from a previous 1.6% rate. Now, Pakistan only pays back principle. Gwadar loans include US$140 million for the Eastbay Expressway, US$130 million for breakwaters installation, a US$360 million coal power plant, a US$27 million harbor dredging operation and US$100 million 300-bed hospital. In the same month, Pakistan learned the US$230 million Gwadar Airport project is to be funded by China government grants. Another group of energy projects worth US$15.5 billion, to be constructed by joint Chinese-Pakistani firms, will qualify for 5% to 6% China Exim loan financing. The Pakistani government has contracted, at a pre-negotiated price, to purchase electricity from these firms as part of the off-take agreement. The 1.2 GW Balloki Power Plant is a private sector project, with Harbin Electric and Habib Rafiq Ltd. winning the big with the lowest levelized cost bid at a financing rate of 7.97%. A private consortium falls outside concessionary loan guidelines, however, the structure of energy projects often involve agreements to sell power back to government at a preagreed power rate resell rate. These examples are a good illustration of the finance game China plays in Pakistan. Since these countries have never done a project of this scale before, time is needed to understand if the CPEC model works as expected after all agreements are settled and contracts signed off. Still, in spite of comments made by skeptics, China does look to be honoring its US$46 billion handshake and the process is proceeding at full speed. February/March 2016

COUNTRY REPORT curity division will provide security for all Chinese involved with CPEC projects in Pakistan, taking effect immediately.” Major General Asim Bajwa confirmed later that the support would include elite Rangers and a 10,000-troop army unit specially trained and dedicated to this purpose, with a two-star senior military officer in charge, reporting directly to General Headquarters (GHQ).

CPEC Framework Pakistan is the crucial economic corridor linking the Arabian Sea part of the Maritime Silk Road on the one end to the land route silk road at Kashgar on the other end. It is designed to bring an economic lift to Western China, as energy and trade goods are funneled through the CPEC from warm water port Gwadar in Pakistan to Kashgar in Xinjiang Province. This entails a 3,000 km network of road, rail, oil and gas pipelines wired with fiber optic cables to connect both locations. Three routes – east, central and west – will all run the length of Pakistan to Islamabad, the start of the Karakoram Highway (KKH), the only road to Kashgar. A dry port is being built on the Karakoram Highway inside the Chinese border, as a receiving and trans-shipment location. To the west of the highway is the closest warm water port access for Central Asia and that may one day connect on to Eastern Europe if needed. To the east the highway connects to China’s east coast. On the opposite end of the route, Gwadar opens Central Asia and West China to trade with South Asia (from Burma to Iran), the Middle East, Africa and Europe. From a broad view, the CPEC will link some three billion people on three continents as a driver of economic growth. Though many projects will come on-stream in a few years, the entire CPEC plan will be fully operational by 2030 if all goes according to this ambitious plan.

Ties that Bind One of the primary goals of OBOR is the modernization and expansion of Western China’s economy. To that end, a state organized forum was organized in Urumqi, capital of Xinjiang Province, to create partnerships between Pakistani February/March 2016

and Chinese companies. An August 2015 two-day event brought more than 300 officials and company delegates, think tanks and social organizations together for the first CPEC Forum. The meeting was held in oil rich Karamay in north Xinjiang. That mini summit alone produced 20 cooperation agreements worth US$1.6 billion and a “Karamay Manifesto” calling for regular meetings. China is fully aware that fostering the

Investment Fair saw a total of US$90 billion signed in investment contracts. The fair serves to expand trade and investment with western China in line with OBOR, Yangtze River Economic Belt and western development strategy initiatives. More than 2,400 companies from 34 countries, and 16 Chinese provinces attended the fair last year. A more Pakistani thrust is expected to take the stage in the next iteration of this Fair.

KKH is called the eighth wonder of the world.

Pakistan relationship can result in much more trade, even in the short-term. For instance, trade figures of US$147 million for 2014 between Pakistan and Xinjiang were far less than activity being registered with other neighbors to Pakistan. For one, Kazakhstan racked up trade of US$12.2 billion for the same time period. However, China-Pakistan cross border trade can only grow when better road systems from CPEC projects reach completion between both countries. Chengdu is another critical point on the CPEC map. The starting point of the ancient Southern Silk Road, Chengdu has maintained economic and cultural ties through trade with Silk Road neighbors for centuries. Now, Chengdu is a sister city to Lahore, Pakistan. Friendship between Chengdu and Pakistan spans three decades of business cooperation and exchange in aviation, military industry, chemical engineering and machinery. It was in this city that Pakistan’s JF-17 jets were first developed. Last October, the Western China (Sichuan) Import Expo and International www.sbrchina.com

HK Pakistan Chamber of Commerce President Javed Iqbal sees a bright future if CPEC succeeds as planned.

Pakistan is indeed favorably placed to become a logistics hub for the huge trade volume expected to flow through CPEC. Business opportunities will be created within planned special economic zones while industrial parks and energy projects are being set up along the three routes threading across Pakistan. The service, infrastructure, industrial and transportation sectors are expected to get a boost as CPEC projects are implemented. In addition, Pakistan’s improved energy grid is primed for manufacturing and industrial sector operations China will set up soon. Other cooperation and planning is underway in the agriculture, finance and industrial sectors. These future developments are being anticipated to take full effect of CPEC with private sector companies leading the way. 31

COUNTRY REPORT

NEVER DULL ON THE KARAKORAM Karakoram Highway (KKH) is known as the eight wonder of the world. In 2010 a crisis team of excavators deepens the spillway after the KKH was inundated by glacial lake water that threatened to flood local villages. 32

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COUNTRY REPORT

Building the Impossible FWO’s engineering feat on the Karakoram Highway straddles the world’s three highest mountain ranges and is the stuff of legends. By Michael Bucher

s the CEO and Director General of the Frontier Works Organization (FWO), Pakistan’s renowned multifaceted construction and civil engineering firm, Major General Afzal may have one of the toughest jobs of any executive in the world. Over the years, FWO has risen to the challenge to build roads and infrastructure where few dare to venture. In the case of CPEC, Afzal and his 45,000 strong FWO army of workers are called to the forefront once again in one of the most ambitious construction projects ever. Afzal understands the historic significance of what CPEC can achieve, and the role FWO will be asked to play in building the essential links to China and Central Asia. “Pakistan lies at a unique geo-strategic location,” remarks Afzal. “For hundreds of centuries the caravans of traders, warriors and explorers passed through its legendary routes, which connect the Indian Subcontinent to Central Asia and Europe. The mythical Silk Road provided the only access to Kashgar and the far off lands of China, immortalized by travelers such as Ibn Battuta and Marco Polo.” Established in 1966 to construct the Karakoram Highway (KKH), FWO crews cut a path through an unforgiving terrain where three of the world’s highest mountain ranges meet – Karakoram, Hindu Kush and Himalayas. Today, FWO is a blend of public service and business organization, with civilian engineers and military officers working in unison to build infrastructure and form one of the world’s premier construction companies. As per government policy, FWO is a State Run Organization (SRO) that places more importance on the organization as a whole, even though its CEO is from the military. “Besides the strong intent of our leadership, CPEC planners must be realistic and mindful of the likely impediments and perils to institute a proper mechanism to make this awesome project possible,” remarks Afzal. “When assessing the challenges that impact CPEC implementation we must take an institutionalized approach at a national level. We must form a policy framework in coordination with all stakeholders and the Chinese government to harmonize all the various aspects of the Corridor, including planning, management and implementation.”

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Road Challenge When you run the organization that was set up to build the KKH, commonly known as the eighth wonder of the world, the standards are set high. There’s only one highway between Kashgar in Xinjiang and Islamabad, Pakistan’s capital, and the 1,300 km KKH is the highest paved international road in the world. Completed in 1978, this engineering feat took 12 years to build and is long overdue for a makeover to allow for increased CPEC trade levels. From the start, Pakistan planned to link its highway to China at the Khunjerab Pass, a plateau resting at 4,700 meters above sea level. By 1967, the Chinese participation in the project had begun with the building of a difficult 156 km stretch between Khunjerab to Hallelgush. This stretch of road was completed in 1970 and the remaining 650 km of the most difficult terrain was handled by FWO. Matched by the same number of Pakistani Army Engineer troops, some

10,000 Chinese workers participated in the KKH, though some put the number for Chinese workers as high as 40,000. Hundreds of construction workers lost their lives in the arduous construction work. By 1976, China formally started to work on the so-called “Friendship Highway” with Pakistan. FWO is on constant alert to keep the KKH open. In one of the most unusual disaster situations FWO has ever encountered, on January 4, 2010, a rockslide occurred engulfing two kilometers of KKH and blocking the Hunza River outlet of small Lake Attabad. All road travel was blocked, as Attabad Lake became a reservoir with a water depth of up to 200 meters over a 22km length, inundating the KKH under 100 meters of water. A potentially devastating dam burst scenario was imminent if the water build-up was allowed to continue. With villages, towns and bridges downhill endangered and civilians on the line, the FWO crisis management team went into action to control the situ-

ation. All available resources were quickly mobilized to deal with this disaster, constructing a spillway to curtail further storage of water in the lake, thus reducing the potential for a deadly deluge. This incident brought international attention to FWO, as no other engineering and construction company would take on the job to correct this problem, regardless of the amount of money offered. In between troubleshooting KKH problems and issues, Afzal is intent on making the CPEC project a landmark success. Before President Xi Jinping arrived in Islamabad, China needed a sign that the CPEC was moving along and that it could be all that Beijing intended. In the crucial 2014 period, while China and Pakistan negotiated a working vision for CPEC, Pakistan General Raheel Sharif acted decisively, setting out to show Beijing what was possible. Sharif asked the Engineer in Chief of the Pakistan Army Lt. Gen Khalid Asghar, also Head of FWO Project Board, to task FWO for the construction of CPEC megaprojects.

FWO's Muhammad Afzal has one of the world's toughest executive jobs.

(left to right) Army Chief of Staff Raheel Sharif, FWO's Muhammad Afzal and Prime Minister Nawaz Sharif survey road projects. 34

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COUNTRY REPORT To reassure China on its commitment, the Government of Pakistan needed to complete a road to traverse remote regions in a project that posed a serious security risk to all involved. In rugged mountainous terrain and highly inaccessible areas, a road was needed to cross 870 kilometers to connect deep sea Gwadar Port with the western route of the CPEC. FWO began moving equipment to the site in March 2014 and by July 2015 FWO had laid down 502 km in record time, moving Gwadar that much closer to Kashgar.

CPEC Economics Afzal is most knowledgeable about all aspects of the Corridor. He appreciates that the CPEC will reduce the sea land route distance between Europe and western China to less than half. According to a recently conducted trial for transportation of containers from Beijing to Gwadar and Karachi through the Khunjerab sea and land route, containers transported through the land route took almost half the time, producing a transportation saving of over US$10 billion per annum on the average. When it comes to the macro CPEC picture. “CPEC is a rare opportunity for Pakistan to realize its true strategic and economic potential,” notes Afzal. “It is regarded as a game changer for Pakistan and the region. The benefits of the project will materialize gradually and require determination from Pakistan and China to achieve the combined goals in the best possible manner. The FWO in its capacity is striving to play its part on the implementation front.”

Pakistan's political and military leaders come together at the Gwadar Road dedication.

No other international or domestic company has the same large footprint in CPEC projects as the FWO, which has a presence at both ends of the Corridor, in the northern mountains as well as at Gwadar. Afzal travels frequently around the country to inspect and manage the ongoing works. In many of these travels the topic often turns to the CPEC. On these occasions, the FWO CEO never fails to point out the importance of Gwadar, the pearl of South Asia and the Gateway to Southwest and Central Asia. Located at the mouth of Persian Gulf to the east of the Strait of Hormuz and on the Indian Ocean, Gwadar is of immense strategic significance. Some 17 million barrels of oil per day passes through the Strait of Hormuz and Gwadar bridges the gap by providing the shortest pos-

Camels still travel the highways of the new Silk Road as trade moves in all sorts of ways. February/March 2016

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sible route for transportation of this vital energy source. “As such, Gwadar Port retains a pivotal and fundamental role in the future economic prospect of about 20 countries across Central and South Asia,” notes Afzal. “Gwadar provides China with an economically viable, cost effective route that is the shortest distance for transit and supply. The development of the 2,400 km Corridor, the future Silk Road, and operationalization of Gwadar is more than a game changer. It is a fate changer for Pakistan and the prosperity of 3 billion people, thus presenting enormous prospects for investors.” CPEC is conceived as a lynchpin in the plans of the two countries to deepen their economic cooperation. Early implementation of CPEC would be transformational for Pakistan’s economy and dovetail perfectly with China’s strategy of developing its inland and western regions. The corridor will indeed provide an integrating platform for billions people in Central, West and South Asia, the Middle East and African regions. “China has committed US$46 billion for the infrastructure development of the Corridor,” concludes Afzal. “This is China’s largest commitment in economic development to any one country so far. This Corridor is being regarded as a win-win synergy for both Pakistan and China, it is a most comprehensive package of opportunities and initiatives that our country has ever seen.” 35

HOSPITALITY NEWS

2016 MICE Challenge China’s MICE industry is becoming more integrated in the global market bringing increased opportunities in a highly competitive market. By Griffith Williams

hen it became clear t hat China’s anti-corruption crackdown was hear to stay, many feared for the fortunes five star hotels in the country. Without the lucrative local government market, the concern was that there would not be enough business to go around. That has not proven to be the case. Contrary to expectations, in 2014, the most recent year for which statistics are available, the Global Business Travel Association (GBTA) estimates that a total of 138.5m domestic business trips were taken for MICE (Meeting, Incentive, Convention, Exhibition) purposes in Chi36

na. The total spend of the MICE travellers reached Rmb680bn (US$100 billion) roughly the size of Morocco’s economy. In a report published in October of last year, GBTA predicted that they expect this market will continue to grow further in coming years. One recent development is the growing integration of MICE activities in China with those of the international MICE market, both in terms of international organizations holding events in China, and China based organizations looking overseas. In this case official activities have been of benefit for China’s MICE practitioners. Chris Dexter, Vice www.sbrchina.com

President of Operations, Wyndham Grand Plaza Royale Hotels, and the General Manager of Wyndham Grand Plaza Royale Hangzhou, observes, “In recent years, many large and important international meetings have been held in China, as the Chinese government has focused on promoting the country as a high-end tourism destination.”

International Focus Large headline events have been held in Beijing and Shanghai for a number of years, but Dexter notes that even second tier cities too are now part of the international MICE environment. “If you take February/March 2016

February/March 2016

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HOSPITALITY NEWS

Wyndham's Chris Dexter sees government tourism promotions starting to pay off.

Hangzhou where I am based as an example, in 2016 the city will host the prestigious G20 Summit and in 2018 we will hold the Swimming World Championships. Looking back over the past couple

of years, the city has hosted global meetings for major corporations lik Mary Kay, IBM and the Bank of Paris.” China is certainly on the map when it comes to major global events. Dexter attributes part of the credit for this growth to official support. “For international hotels, we are very pleased that the Chinese government is playing an important role to spread city awareness and attract international events and visitors worldwide,” Dexter notes. “China is now definitely capable of organizing and holding any world class international event you care to mention.” The other side of China’s growing integration with international MICE activities is that local organizations are increasingly likely to hold events beyond China’s borders. According to a report by Renub Research in 2014, the country that attracted the highest overseas spending by Chinese MICE visitors is the US, followed by Macau, with Japan and Thailand in joint third place. In terms of overall visitor numbers, the two largest destinations from the Mainland were Hong Kong and Macau, followed by South Korea in third place.

Greater China Benefits In this it seems Chinese MICE organizers are following the trend of domestic Chinese tourists. In his recent book, The New Chinese Traveller: Business Opportunities from the Chinese Travel Revolution, China tourism expert (and once SBR editor) Gary Bowerman noted that Chinese tourists tend to look first to locations in Greater China, with subsequent trips planned for Asia, followed by sorties to major European or North American destinations. China MICE planners are following a similar trajectory. A recent survey of Chinese event planners by the China Incentive, Business Travel & Meetings (CIBTM) found that 15% of planners regularly organised events in Southeast Asia, as opposed to just 5% who organised events in Europe. This trend has proven most helpful to the Hong Kong hotel industry. In 2014, Hong Kong recorded the highest average revenue per available room (RevPAR) in the world with a value of US$354. Macau too is hoping to benefit from the boom in Mainland MICE activities, particularly given the recent slowdown in gaming revenues for the city, which

Cities like Chongqing are starting to win more MICE business from the long-time tourism powerhouses of Shanghai and Beijing. 38

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February/March 2016

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HOSPITALITY NEWS fell by almost 35%. Macau is investing heavily in its hospitality and meetings infrastructure and offers packages for the very largest groups. The Macao Trade & Investment Promotion Institute (IPIM) has announced that it will manage a series of support programs in an effort to boost the territoryâ&#x20AC;&#x2122;s conventions and trade show business. This government initiative includes supporting local associations in their bids for international conferences and even offers a range of incentives. In some cases, IPIM plans to cover the cost of accommodation, food and beverage in addition to keynote speaker participation and all-important support for promotion and marketing.

Competition Rising Competing for international events may be a challenge for MICE practitioners in China. Still, the overall internationalization of the sector is bringing benefits when it comes to training and boosting the abilities of key personnel. The growing internationalization of the sector is

creating good opportunities for MICE practitioners to get in touch with international MICE professionals and foster a group of high-quality talented people who have a high level of professionalism and strong organization skills. Chinese companies are also investing in hotels overseas, most famously perhaps in New York. Last year, Anbang Insurance Group paid US$1.95 billion for the iconic Waldorf Astoria Hotel in Manhattan, while the Sunshine Insurance Group snapped up the Baccart Hotel in the same district for US$230 million. These high profile acquisitions are merely the most striking examples of a trend that has been going on for a number of years, as estimates suggest that Chinese investors have spent about US$2.3 billion outside of their domestic market over the five years to 2014. Developments in China are supporting growth in other markets, yet the vast majority of investment in MICE sector in Asia Pacific remains in the Middle Kingdom. Consultancy firm Horwath HTL found that a staggering 82% of new hotel

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openings in Asia Pacific in Q3 of last year took place in China, and 70% in Q2. Many of these are in second and third tier cities, and while some are budget hotels targeting domestic travellers, even once these are excluded, the scale of new hotel openings in China remains very large. Hotel brands and property companies are certainly betting that the growth in domestic MICE travel in China will continue.

Big City Dominance The indications thus far remain mixed as to the best MICE strategy. While some MICE organizers are looking overseas to offer clients variety, others are trying to find new destinations within China. Myra Regner, Director of Convention Sales at Kerry Hotel Pudong, remarks, â&#x20AC;&#x153;Meeting organizers have looked to second or third tier cities as alternative destination for meeting and events.â&#x20AC;? Clearly high quality transport infrastructure is essential for smaller cities to lead major organizations to hold events, but the enormous infrastructure spending that has taken place in China over the past

February/March 2016

per trip, over twothirds of which were spent in the host city, primarily on accommodation, food & beverage, and trips to the local shops and malls. Despite growth in second and third tier cities, the primary centers for MICE in China remain Beijing and Shanghai. Each city has over Shanghai leads the MICE market with over 110,000 rooms. 100,000 rooms, Shanghai leading decade has meant that effectively all the way with 110,555, almost double the major cities are now connected to high figures of Guangzhou in third place with speed rail and most have international 56,382 and quadruple Sanya’s 26,508. airports nearby f lying to a number of This is reflected in the number of meetdifferent destinations. ings held. Certainly, the financial benefits for Between them Shanghai and Beijing cities of attracting MICE activities can be hosted over 50% of total MICE trips in sizeable. The GBTA found that business China in 2014 and last year Shanghai travellers attending MICE events in 2014 luxury hotels generated 13% of total revspent on average Rmb6700 (US$1,100) enues from MICE events. Other major

MICE markets in Greater China in terms of total trips registered included Guangzhou (24%), Hong Kong (11%), Macau (6%) and Lhasa (4%). The dominance of the major cities is not surprising as they remain well out in front in terms of exhibition and conference facilities as well as room numbers. Regner notes that, “Shanghai will always remain as a key destination for the international MICE market due to its integrated and modern infrastructure, sufficient supply of venues and air connections.” Regner sees this growth continuing as, “Shanghai has a new convention centre which is one of the largest such facilities in the world, so I anticipate a further migration of core exhibitions to the Shanghai market.” Regner is referring to the National Exhibition and Convention Centre in Hongqiao. By some estimates this facility is the largest exhibition complex in the world, providing 400,000 sq. m. of indoor exhibition space. Since its opening, events such as the Shanghai Auto Show have moved from the Shanghai 日出 Sunrise

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HOSPITALITY NEWS New International Expo Center in Pudong to the National Exhibition Center, providing a competitive advantage to those hotels located in Shanghai West. The on-going development of western Shanghai is more than just the launch of the new exhibition center. There has been a general economic resurgence that has emerged along with the opening of the exhibition center. In recent years, over 500 companies have opened or relocated to the Hongqiao new area and this has brought an added measure of prosperity to the district. The excitement surrounding developing hospitality infrastructure in Shanghai’s western districts is dwarfed by that of the major development in the eastern part of the city. In this district the long awaited Shanghai Disneyland is finally set to open its doors in June of this year. While it seems unlikely that the new Disneyland attraction will have a major impact on the MICE market directly, any boost to the city’s hospitality sector is welcome, and one never knows, maybe the G20 finance ministers who met in

More and more conference rooms of high quality are coming on stream in the MICE battle.

Shanghai in February 2016 would have enjoyed a trip to Disneyland had it been on offer.

Sustainable Growth? Concerns remain about whether all this growth is sustainable. Business travel spend is closely correlated to overall economic performance, and. as Dexter notes, “We are facing a number of chal-

lenges, including China’s slowing GDP, not to mention budget reductions at major global companies.” If companies need to cut costs, then business travel expense is an easy target. As far back as May 2014 GBTA President Donna Kelliher warned in these very pages that business travel was the companies’ second or third largest controllable expense, and that firms would

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February/March 2016

seek to manage this spend. Pressures on pricing have become increasingly strong in recent years. A survey of China MICE buyers found that 65% considered price to be important when deciding on where to hold an event, a far higher figure than was registered for any other consideration except location. Some industry players hoped that government spending would have returned to boost the sector in the face of slowing corporate budget growth. Regner believes that this is not the case: “The advancement of law-based governance and the ongoing strengthening of anti-corruption policies has meant that less meetings and conferences are taking place in five-star hotels.” The result of a massive increase in supply of hotel rooms, conference facilities and exhibition centres, at a time of slowing demand is that competition is increasingly more fierce. In Shanghai, Regner says, “Due to the rapid growth in business travel in China, all travel related sectors have taken steps to ensure that this ever growing demand will be met.

Consequently, there has been an increase in inventory in cities which translates into more competition.” Competition is perhaps even fiercer away from Shanghai and Beijing. Horwarth HTL identified Tianjin, Chengdu, Qingdao, Dalian and Xian as cities where over supply appears to be a particular concern. Even in Hangzhou Dexter notes with some disappointment that, “With new hotels opening, the competition for MICE business is becoming increasingly fierce.”

Second Tier Success The attraction of second tier cities is starting to become apparent in headline figures. Research by Savills Hotels suggested that fortunes of hotels in China’s first tier cities and those elsewhere are diverging. In first tier cities, 2015 witnessed a rise in occupancy rates for four and five star hotels on a year-on-year basis, contributing to a net increase in revenue per average room (RevPAR). The most notable improvements were in Shanghai and Shenzhen, where 12-month RevPAR figures were up some

9.6% and 6.2% respectively, compared to the previous thee years. In contrast, second tier cities watched revenue per available fall from Rmb400 at the end of 2012 to Rmb330 at the end of the Q3 of 2015. Developers are starting to respond to the trend. Angel Chen, Associate Director at Savills Hotels, noted in her recent report that “in recent months we have heard of a number of luxury hotel projects in lower tier cities having been put on hold due to the developer’s lack of funds.” This drop in development is not surprising given the vast amount of hotels that already exist in China. For the many providers already competing for the MICE segment of business the news that slightly fewer hotels are on the way may offer of some comfort. Nevertheless, the sheer scale of China’s MICE industry means that in the long run those hotels that offer a high quality service in the right place and at the right price will continue to be successful and lead the competition for what looks to be a growing market overall.

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INDUSTRY REPORT

he widely reported fall in Chinese trade figures last year is troubling for all of those whose businesses rely on bringing goods to and from China. In 2015, China’s total trade dropped by some 8%, and figures for the first two months of this year have offered a mixed view at best. Though some of the slack has been picked up by growth in the domestic market, lower trade figures has produced a more intense competitive environment in the air cargo marketplace. This is no surprise for Tony Tyler, CEO and Chairman at the International Air Transport Association, the trade association for the world’s airlines. Recently, Tyler provided a frank assessment of 44

the status quo for the air cargo industry. Speaking at the Singapore Airshow Aviation Summit in mid-February, Tyler remarked that business has never been “so tough” for cargo carriers in Asia Pacific, a region that accounts for some 40% of all global air cargo traffic. The challenges for players in the air cargo industry in China are made more difficult by the growing overcapacity in the sector. Huseyin Ceyhan, Regional Cargo Director of Turkish Air Cargo Asia Pacific, notes, “No one can deny that there is overcapacity in the China market at the moment. Even though there is a major drop in fuel prices, the huge competition between airlines for cargo www.sbrchina.com

market share has led to even bigger price reductions last year.”

Overcapacity Issues Qu Jingfeng, Cargo Manager of Emirates China, agrees with her Turkish Air Cargo counterpart. “One of the major challenges we face in the industry is the imbalance between demand and supply,” Qi adds. “The oversupply of air cargo services has led in turn to a subsequent decrease in shipping prices.” Should Chinese trade decline further this year, then the problems due to this over capacity will only increase. Certain air cargo industry watchers are less concerned about the drop in February/March 2016

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INDUSTRY REPORT freighter f lights and cargo in the belly of passenger planes can handle over 1,500 tons of cargo each week.” Despite the overcapacity issue faced by cargo carriers around the world, the numbers being generated in China on the whole suitably impress airline executives. O verall, cargo capacity is planned to reach over three million tonnes annually, while passenger capacity will grow to 70 million annually in the coming year. This is an impressive sum for any core market. This kind of freight volume has seen at least one cargo company expand on the Mainland, and other players do not seem to be backing off.

operations formally in 2017 and be based at the Cargolux Zhengzhou hub. Speaking to Shanghai Business Review last year, Dirk Reich, the Cargolux CEO, emphasised that the new joint venture was designed to add significantly to Cargolux’s existing capacity. “All aircraft foreseen to enter in to the new joint venture airline are in addition to the current Cargolux group and not at its expense,” Reich pointed out. Other shareholders in Cargolux China are Henan Civil Aviation Development and Investment Co. (HNCA), which will hold 49%, Xin Gang Investment & Development Co., Ltd. of Zhengzhou Airport Comprehensive Economic Experimental Zone with 8% and Henan Airport Group Co. Ltd., which holds the remaining 8%. million annually. Focused on transpacific and intra-Asian routes, the Cargolux China fleet is planned to grow to five 747 freighters within the first three years of operation alone. HNCA, which is also a 35% shareholder in Cargolux, is a state-owned Turkish Cargo's Huseyin Ceyhan has happily watched his China enterprise that concentrates on the debusiness grow by an impressive 80% in the last three years. velopment of the civil aviation industry. As such, HNCA has pursued a strategy to construct the Zhengzhou Airport demand than others. In many ways this Cargolux Expansion Economic Zone, and promote the transovercapacity is to be expected given the Cargolux took the plunge with an imformation and upgrading of the Central massive increase in the number of flights pressive US$77 million investment to China Economic Zone. HNCA does this and the introduction of new freight fakick off 2016. In January, Cargolux fiby actively participating in aviation incilities that has taken place in the last nalised an important joint venture deal frastructure construction and developdecade. “Turkish Cargo has grown more with Henan Civil Aviation to take 35% of ment of related industries. than 80% in the last three years in Chithe newly formed Cargolux China. The The new venture will be an important na,” adds Ceyhan. Meanwhile, Qu points air cargo joint venture will commence boost to the cargo plans of Zhengzhou, out that Emirates Sky Cargo “combined the capital of Henan Province in east central China. The city is ref lective of the oft-noted trend of diversifying Chinese manufacturing hubs, and hence logistics. This trend underlines the ongoing shift from manufacturing away from China’s eastern seaboard into other regions. Zhengzhou Airport is now the fastest growing cargo airport in China, with capacity planned to reach over three million tonnes annually. The Zhengzhou Master Plan through 2040 foresees five runways, one of which will be solely Emirates Sky Cargo's total air cargo shipments in and out of China reaches some 1,500 tons per week. dedicated to cargo flights. 46

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February/March 2016

Cargolux CEO Dirk Reich completed an important investment in Zhengzhou.

The continued development of inland manufacturing hubs is by no means a new development. The long lead-time for the construction of essential infrastructure means that to adjust to the development remains challenging for all cargo companies. “The shift of China’s manufacturing industry and the uneven development of logistics in different cities make it more challenging to efficiently place our cargo capacity,” explains Emirates’ Qu. Infrastructure developments are not limited merely to China’s inland areas. Huge airport construction projects are underway at present in larger centers, such as the work being done at Beijing’s second airport in Daxing, the new terminal in Guangzhou’s Baiyun and Chengdu’s new airport. Ceyhan notes, “Without doubt these developments will benefit the air freight industry.” Some industry insiders believe that the requirement to have a presence right across China may in itself be a major contributor to the industry’s overcapacity problems. Given this decentralization trend, there is a need for air cargo companies to develop close relationships with land-based players across China’s logistics industry. “As airports themselves increase capacity and capability, the February/March 2016

trucking networks have had to respond accordingly,” adds Reich. One recent disruptive development in the China air cargo segment is the rapid rise of e-commerce. This is particularly the case in terms of the country’s internal air cargo market, where express delivery companies have expanded with gusto into the air freight sector. Last September, YTO Express’ airline arm, known as YTS Express Airlines, made its maiden flight to enter the market. YTO became the third Chinese express delivery company to own and operate an airline, along with China Post and SF Express, which are also expanding air f leets substantially. SF Airlines, for example, took delivery of its first 767300 Boeing Converted Freighter (BCF) in December 2015, and another five are due this year, one of which has already arrived. When the new plan arrived, SF Airlines Vice President of Maintenance and Engineering Liang Xi stated that the larger aircraft was ordered to support the rapid e-commerce growth in China. International air cargo companies too have been looking to the e-commerce sector for more growth. However, the focus of this international field is more on the segment of cross-border e-commerce. “Recently, cross-border e-commerce has played an important part in Emirates business,” Qu acknowledges. “The major driving force is the enhancement of domestic purchasing power as well as foreign consumers that show great interest in China-made products.”

Red Tape Reduced Another trend to watch in the coming years is the program in place to greatly reduce government red tape, a development that the industry welcomes heartedly. Those engaged in China’s logistics industry often complain about problems with bureaucracy and red tape, but official efforts to overcome these problems are bearing fruit. “Air traffic management and airport infrastructure capacity versus traffic growth continues to challenge the air cargo industry,” comments Reich on the government bureaucracy trend. “All air traffic controls and airports are, however, managing to improve efficiencies in traffic management and increasing available www.sbrchina.com

airport facilities at an admirable rate.” This drive for improved efficiency is one area in which Shanghai is leading the way for the industry. Last year, an important Letter of Initiative was signed by IATA, Shanghai Customs, Shanghai Entry-Exit Inspection and Quarantine Bureau, Shanghai Airport Authority and China Eastern Airlines. The LOI declared the signatories would cooperate to enhance efficiency and reduce costs in existing processes by phasing out the need for a security check stamp on paper air waybills. The goal is to eliminate the need for paper air waybills and facilitate the implementation of paperless customs clearance at Shanghai Pudong Airport, thus optimising and streamlining data sharing between the parties. Speaking after the Shanghai signing ceremony, Zhang Baojian, IATA’s Regional Vice President for North Asia, remarked, “This agreement will bolster Shanghai’s position as a leading air freight hub in China and the world. China is the second largest market for international freight by air. With much of the world’s manufacturing taking place in China, it is essential that processes are kept as efficient as possible.” Few in the air cargo industry would disagree with him in this particular matter.

Glimmers of Hope Overcapacity will remain a major problem for all, one that will not go away any time soon given the expansion in airports, scheduled f lights and tonnage. Still, there are glimmers of hope for China’s air cargo industry. Domestic consumption figures are on the rise, and while the impact of this has not yet been seen on China’s import figures, they surely will be soon. If nothing else, the growth in domestic consumption promoted by the central government has truly helped to mitigate the downturn of volumes due to a costly and serious slump in commodities prices. Furthermore, with domestic and international e-commerce companies exploring new opportunities for cross-border e-commerce, the benefits that this has provided for local express delivery companies within China may well be soon mirrored in the financial results produced by international air freight firms. 47

INTERNATIONAL SCHOOLS

Educating Shanghai Shanghai has a diverse range of good international schools and the challenge for parents is finding the right school for their children. By Iorwerth Morgan

ecently announced changes to the China visa and immigration system that make it easier for foreigners to gain a “green card” suggest that we may be on the cusp of a charm offensive aimed at expatriates in China. However, for senior management at international companies deciding whether to remain in China, or indeed move here, many factors will influence their decision, and the quality of education their children receive in the Middle Kingdom is certainly an important factor. Thus far, international schools have had a positive inf luence on such decisions, and according to a report on expatriate life published by HSBC last year, 48

almost three-quarters of expat parents in China state that the education their children receive is as good or better than at home. That compares very well with the global average of almost 70%. Of course, different parents and families will judge what constitutes a good education in different ways. Nicholas Kent, High School Principal and Director of Advancement at Concordia International School in Shanghai, notes, “Children of expatriate workers in China all have different academic, cultural and social emotional backgrounds. So there is no one school that fits everyone.” Kent continues, “Schools do a disservice when they try to be all things to all families, www.sbrchina.com

and the definition of a good international school is one that is clear about how they can best meet the needs of the individual student.” This diversity in different schools in Shanghai causes something of a difficulty for parents, but of course this is a nice problem to have. “Shanghai parents are very blessed because there are many good schools in the city,” says David Goodwin, principal at Britannica School. “I have worked in other cities where parents have no choice. If they want a good education for their child, they have to send their child to the only good school in the city. This is not the case in Shanghai. In some sense this makes it more February/March 2016

February/March 2016

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INTERNATIONAL SCHOOLS

Damien Hehir of YCIS enjoys bringing the Eastern and Western cultures together.

difficult for the parents, as it involves more research, more visits and decisions to made.” Nevertheless there are certain things that all good school should provide, most of all a welcoming environment. “A good international school is one in which all families feel welcomed and valued regardless of their nationality, cultural background or beliefs,” says Damien Hehir, Early Childhood Education (ECE) and Primary Co-Principal, YCIS Regency Park and Century Park Campus. “A good international school provides a learning community for all, including the students, the staff, parents, and even extended family and caretakers.” In addition to this, a school must prepare students for adult life and LesleyAnne Wallace Principal, Nord Anglia International School, Shanghai, Pudong, observes that a good school “is one that opens students’ eyes to the opportunities available to them to succeed and to make a difference. It encourages ambition by providing a globally focused curriculum that delivers 21st century skills to develop students as collaborative, entrepreneurial and critical thinkers who understand their place as global citizens. It gives students the chance for learning beyond the classroom and develop as leaders through service and community activities.” A final aspect that almost schools agree is important is providing extracurricular activities for their pupils. This is particularly important for interna50

More students from outside China are staying for longer periods at international schools.

tional schools, as there are fewer such activities in Shanghai in which students can participate in than they could expect back in their home country. However, this a challenge that schools in the city have taken on with relish. They now offer a huge range of sports from cricket to gridiron as well as football and basketball, music and popular culture from both the western and Chinese classical cannon, as well as drama and a range of lectures and guest speakers that some universities would be proud of.

School Challenges Creating an institution that can fulfil these challenging requirements is not

Nord Anglia's Lesley Ann Wallace likes to see her graduates as global citizens. www.sbrchina.com

easy, particularly in a city as transient as Shanghai. “The challenges we face are really the same as those of our families here at NAIS Pudong,” comments Wallace. “The transience and uncertainty of the expatriate experience which, from an educational perspective, means we can never be sure that a student will stay with us and consolidate their learning so that they are fully prepared for future examinations can make things difficult for a school.” Kent makes a similar point, but notes that international schools are a part of the solution to this problem for their families. “Our students and families are in transition in and out of the community,” Kent says, but adds, “International schools tend to be the centre of the families’ experience in the host country, the school bears a great responsibility of helping not just the student but the entire family transition to a new country, culture and social situation.” Another oft-cited challenge, HR, is hardly unique to the international school sector in China, with schools around the globe and other enterprises all noting it as one of the major difficulties they constantly face. Goodwin states, “Securing good teachers that are committed to the ethos of the school and have a passion for what they are doing is a challenge for all schools world-wide and is no less so in Shanghai.” Nevertheless Goodwin notes, as do many international schools in the city that they have fairly high retention rates for staff given the circumstances. February/March 2016

SPONSORED STATEMENT

A CARING COMMUNITY

SCIS is proud of its multi-cultural environment that produces a well-rounded international student.

“O

ne of the special things about SCIS is that it feels as if we play the same role in our community as my school did back in my tight knit home-town in the USA,” reflects Daniel Eschtruth, Head of the Shanghai Community International School (SCIS) Early Childhood Education (ECE) Campus. “We really are a community. We do tend to go on about it, but that’s because it is at the heart of who we are as a school.” SCIS places such importance on its shared community due to its international nature, with students from over 65 different countries. “We have a broad mix of students from North and South America, from Europe, Africa, as well as from from Asia and Australasia.” As such, with no clear home culture tradition to guide the way, the staff and students at SCIS came together to create their own school culture, something they have done successfully

since SCIS was founded 20 years ago. When Eschtruth considers the situation SCIS students are in when they graduate, he is often staggered. Most of the students leave with friends and acquaintances from any number of different backgrounds and cultures, and then go on to continue their lives all over the world while still keeping in close contact with each other. “I really think we are doing something exciting in terms of the types of students we send out into the world,” he adds.

Cultural Gateway

SCIS may have 65 cultures within its campuses, but it is also very aware of the country these students inhabit beyond the gates. As such, a strong host culture program has evolved over the last decade, giving close attention to the Chinese language and local culture. There was a time when many students attended SCIS for just two years before moving onto another country. At that time, families did not see much value in engaging deeply with the culture and language of China. This has now changed as we see families staying with international schools for much longer periods. Last year, SCIS boasted graduates who had been with the school since early childhood. There is also a drive to have a greater connection with China as the country’s economic and political development has flourished. So, this connection between our host countr y of China and the school has been in ongoing development and enhancement over the past 20 years. One way in which SCIS suppor ts the conne c tion SCIS is proud of its impressive multicultural mix. February/March 2016

www.sbrchina.com

SCIS students are placed at top universities.

to China is by offering regular trips beyond the walls of the school itself. Upper school students often travel to various cities outside of Shanghai each year. “These trips are an important part of the students’ time with us,” notes Eschtruth. “I know they remember them fondly. At graduation, when the students reminisce about their times at SCIS, they almost always talk about the trips. Then, when they meet up again in five years time, they’ll probably still be talking about the adventures they shared on the trail.” Another result of the close community that SCIS provides is that students that graduate often progress to the next best institution for them. “We have students going on to top universities worldwide,” concludes Eschtruth, “but we are equally proud of the students who fall in love with dance at SCIS and go on to fine arts academies, or our athletes that go on to coach or our future chefs that attend elite culinary programs. Due to our community approach our students are happy being who they are, though we provide an education that nudges them further. We know that our students are developing themselves in a natural and meaningful way. When they graduate from us, they go on to the institution or organization that best suits the passion they have developed here at SCIS.” 51

INTERNATIONAL SCHOOLS

Graduation day is always a special moment of great expectations and excitement for students at home or abroad.

Differentiation Quest With all good schools in Shanghai committed to the same core values of creating a welcoming environment that prepares students well for adult life, the challenge comes for schools to differentiate themselves from their competition. Many schools do find areas where they can make themselves distinctive. Wallace, for example, believes that NAIS benefits from being part of the larger Nord Anglia educational group. “Being part of Nord Anglia Education provides a range of tangible benefits for NAIS Pudong students, parents and staff. Students are able to be part of the

Global Campus, which sees students from our campuses around the world come together online for debates, master classes and discussions both in the classroom and worldwide,” Wallace says. Goodwin remarks that Britannica, as can be seen from their name, has adopted a system based on the British education system, partly as a way of standing out from other schools. “Britannica continues to be different and to offer an alternative to that which everyone else offers in the city, as shown by our decision to offer A levels at Sixth Form.” Goodwin continues, “This was about us being responsive, seeing a need that was

Concordia's Nicholas Kent believes that an international school is critical for families to transition into a new living environment.

Sports is an important and growing part of the international school curriculum.

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not being met, feeling that the diversity of A levels would enable us to better offer a personalised education at Sixth Form and using our experience in delivering the ‘best of British education’ to follow this through.”

Local Dimension YCIS adopt a rather different strategy for self-differentiation, building close links with local Chinese culture. Heier comments, “It is worthwhile if an international school can fully embrace the local culture of the country where it is based,” and this is something that YCIS particularly focuses on. He continues,

February/March 2016

â&#x20AC;&#x153;At YCIS, the bringing together of the Eastern (Chinese) and Western cultures is our core philosophy and is permeated through every aspect of school life. We place equal value on Chinese and English language and culture learning, and this starts with the school leadership where we have a set of co-Principals â&#x20AC;&#x201C; one Chinese and one Western â&#x20AC;&#x201C; overseeing the running of the school.â&#x20AC;? Even for those schools that do not set out explicitly to do so, it seems likely that close links with Chinese culture will only become more important for international schools in the coming years. Kent observes, â&#x20AC;&#x153;The market is changing significantly in demographics, particularly in the lower grades with less Western expatriate families and more families of Chinese background.â&#x20AC;? This appears to be a natural market reaction and should change the longevity of families residing in China, as they are now more Shanghai based. Kent sees this a positive development, as â&#x20AC;&#x153;it is a great opportunity to develop stronger ties with our host country of China.â&#x20AC;? Kent also

notes that, â&#x20AC;&#x153;The challenge is going to be in the area of parent education, as there will be a growing number of parents who enrol their children in a Western international school, even though they did not experience that style of education themselves. So, managing parental expectations and being transparent with the growing demographic will be important for schools to recognize if they want to thrive in this market.â&#x20AC;? This is an exciting new development for international schools in Shanghai, and one that offers a future for the education leaders should the numbers and size of exBritannica's Principal David Goodwin bases his school's patriate packages continue curriculum on the British education system. to shrink. Regardless of the succeed in an ever more complex world. background of their students, a good It seems likely that those who have atinternational school will still need to protended an international school in Shangvide a secure and welcoming atmosphere hai will be well able to do so. while equipping their students well to

Am s Our internationally focused curriculum nurtures ambitious learners and global citizens for the 21st Century. Come and see us today.

February/March 2016

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LAW & TAX

Regulatory Update Regulatory Update is a comprehensive overview of the latest legal and tax developments affecting foreign enterprises in Shanghai and across China.

his edition of Regulatory Update looks at important developments on the legal and taxation front. As China enters a New Year, the central government continues to tighten regulation on everything from food and drug safety to stock market controls. On the taxation side of the equation, regulators have made headway on such areas as financial regulation, tax collection and tax refunds for exporters.

Legal News Shanghai Standards for Penalizing Infringement Shanghai’s recently released standards for penalizing trademark infringement came into force on February 1 and will remain valid until June 30, 2019. According to the standards, the Shanghai Municipal Administration for Industry & Commerce can impose fines of up to 5 times the illegal sales volume if the infringing sales exceed Rmb50,000, and up to Rmb250,000 for cases with less than Rmb50,000 of infringing sales. Parties who infringe upon trademark rights more than twice within five years, or who commit other serious legal offences, may be subject to heavier punishments under the new standards. These changes come amid an ongoing nationwide effort to improve intellectual property rights protection in order to foster domestic innovation. China Encourages Public to Report Food and Drug Violations China’s State Food and Drugs Administration released Measures for Administration of Food & Drugs Related Complaints & Reporting, which lays out standards for food and drug violation reporting. The main aim of the Measures, which will become effective as of March 1, 2016, is to implement incentives to encourage the public to report violations, allowing problems to be investigated and dealt with faster. The government department that accepts reports and complaints will streamline their investigation mechanisms, and deal with violations within 60 days. This timeline may be extended by 30 days to deal with complex cases. Concerns over food and product safety in China remain piqued, with periodic violations undermining the government’s efforts to shore up demand for domestic products. 54

CSRC Suspends Index Circuit Breaker The CSRC announced that it would suspend the implementation of the index circuit breaker on January 8. The move came after the breaker was triggered twice within one week. The breaker failed to deliver its intended calming effect on the market, and instead acted as a “magnet,” causing the threshold to be hit earlier than markets would have without the breaker as certain investors responded to the approaching limit. “The circuit breaker is a standard practice in a lot of Western markets, so we thought that perhaps it could work in China as well,” said CSRC Vice Chairman Fang Xinghai. However, it was quickly realized that the mechanism “was not an appropriate policy for China.” The CSRC’s decision to eliminate the circuit breaker may boost market confidence and help maintain stability. NDRC Fines Allopurinol Tablet Cartel China’s National Development and Reform Commission (NDRC) recently imposed an Rmb3,995,400 fine on five companies for monopolizing the market for allopurinol tablets, a common medicine for hyperuricemia and gout caused by excessive uric acid. In 2014 and 2015, the companies, which together control the majority of the allopurinol supply chain from production to sale, reached an agreement to raise the price of the medicine and exclude competitors from the market. The deal harmed patients suffering from hyperuricemia and gout. The five companies were Chongqing Qingyang Pharmaceutical Co., Ltd., Chongqing Datong Pharmaceutical Co., Ltd., Jiangsu Shimao Tianjie Pharmaceutical Co., Ltd., Shanghai Xinyi United Medicinal Herbs Co., Ltd., and Shangqiu Huajie Pharmaceutical Co., Ltd.

Tax & Finance News State Council Measures Support Industry Upgrade State Council executive meeting in early 2016 presided over by Premier Li Keqiang layed out five goals for financial regulation in support of the economy. The five goals are to encourage financial institutions to provide more credit to high-tech enterprises; encourage M&A, loans, and convertible stock and bond issues to speed bolster these portions of the financial sector; reduce or withdraw loans

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February/March 2016

made to enterprises that have long-run losses, are unable to comply with safety regulations, or need to cut excess capacity; boost direct financing and accounts receivable financing to enterprises; and, decrease financial industry charges to appropriate levels, and regulate arbitrary changes. Although the meeting did not set forth specific policy recommendations, the areas of focus are telling in terms of what the government deems to be appropriate for its regulation in the near future. SAT Announcement on Tax Collection The State Administration of Taxation (SAT) issued an announcement clarifying how the Multilateral Convention on Mutual Assistance in Tax Collection and Administration will be implemented. The Convention specifies taxation procedures for enterprise income tax, individual income tax, urban-rural land use tax, property tax, land value added tax, value added tax, business tax, consumer tax, tobacco leaf tax, vehicle purchase tax, vehicle and vessel tax, resource tax, urban maintenance/construction tax, farmland occupation tax, stamp tax and deed tax. The announcement clarifies that the implementation stage of the Convention will begin in January 2017, and that collaboration and information exchange between relevant tax authorities will be ramped up to support the process. CSRC Disclosure Requirements for Corporate Bonds The CSRC recently issued Rule No. 38, which lays out content and format requirements for information disclosure in corporate bond annual reports. Particular disclosure requirements for listed companies that publicly issue securities aim to level the playing field for investors in companies employing complex financial structures, and ensure that prices reflect companies’ true fundamentals. The additional “corporate bond related information” these listed companies must disclose will be included in a special chapter or section of their annual reports. SAT Streamlines Taxpayer Relocation As part of a push for the coordinated development of Beijing, Tianjin and Hebei Province, the State Administration of Taxation (SAT) recently issued a notice requiring the tax authorities of the three jurisdictions to streamline taxpayer relocation within the three regions. The scope of cooperation, timing requirements, business transition and business operational processes required to elevate the existing inter-regional barriers in tax collection administration were laid out. It is hoped that the initiative, reiterating many of the requirements of the Scheme for Deepening State Tax/Local Tax Collection Administration System Reform, will boost economic activity in the region by making it more convenient to relocate and scale as needed. Beijing Optimizes Tax Refund for Exporters Beijing’s State Tax Bureau introduced several new measures to encourage foreign commerce and export industry development in the region by streamlining tax refunds. The export tax refund process will be sped up, especially for enterprises with good credit standing; the review process will be made more convenient by simplifying the procedures that exporting enterFebruary/March 2016

prises must go through to apply; and a comprehensive fraudproofing will be undertaken to ensure that the streamlined systems do not introduce any loopholes. The improvements will alleviate lingering efficiency issues in the system set up to promote export competitiveness. HK and Russia Ink Double Taxation Avoidance Agreement in Historic Signing Chan Kar Keung, Hong Kong’s Secretary for Financial Services the Treasury Bureau, and a representative of the Russian government inked an agreement on the avoidance of double taxation. This is the 34th comprehensive double taxation avoidance agreement Hong Kong has entered into with its trade partners. Prior to the signing of the agreement, certain profits of companies operating across the two jurisdictions were subject to taxation in both Hong Kong and Russia. The signatories hope the agreement will encourage companies to make investments in each other’s regions, and boost economic development according to comparative advantage. Support and Accreditation for High-Tech Enterprises The State Council issued three measures to simplify the existing Measures for Administration of Accreditation of High-Tech Enterprises, with the aim of extending policy support for accredited innovative enterprises, prioritizing small and medium sized enterprises. The first measure relaxes requirements for accreditation. Whereas previously more than 30% of technological personnel had to have a college degree, the new requirement stipulates that no less than 10% of personnel engaged in R&D and relevant technological innovation activities should have a college degree. The requirement that a minimum of 6% of small enterprise expenses go toward R&D is slashed to 5%. And, the requirement that an enterprise must have acquired intellectual property during the past three years with at least a five years’ exclusive license is cancelled and replaced with a suggestion that enterprises carry out independent R&D or technology transfer. The second measure simplifies the accreditation processes and shorten disclosure time. If a high-tech enterprise relocates across administrative regions during the qualification period, their application for qualification shall remain valid. The third and final measure expands the list of high-tech sectors that will receive support. New areas to be supported include additive manufacturing and its applications in the manufacturing sector; technologies relating to inspection, testing and certification in the service sector; and, relevant technologies in cultural sectors, e-commerce and modern logistics.

Regulatory Update is provided monthly to SBR by CCH Ltd., a Beijing-based expert specialized in China taxation and legal matters .

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LAW & TAX

Offshore Overview The ever-changing offshore market is a challenge for even the most tax savvy corporations and investors and the View Offshore provides the latest new on this complex global playing field.

his Offshore Overview looks at an interesting serioes of rules and regulations impacting international business and expatriates around the world. The trend to tighten offshore taxation loopholes and exchanging information between jurisdictions remains a central focus of regulatory regimes.This overview takes a closer look at such development in Switzerland, the US, Hong Kong,Belgium and the UK.

US Completes Swiss Bank Program The US Department of Justice announced a non-prosecution agreement with Swiss bank HSZH Verwaltungs to pay a penalty of nearly US$50 million. The agreement concluded under Category 2 of the Swiss Bank Program follows 80 similar agreements since March 2015, with almost US$1.4 billion in penalties being imposed in total. Originally announced in late August 2013, the Program was described by US Attorney General Loretta Lynch as intending to uncover “those who help facilitate evasion schemes and those who hide funds in secret offshore accounts.” The Program provides a path for Swiss banks to resolve potential criminal liabilities with US authorities. In addition to penalties, Banks in the Program agree to cooperate with any relevant criminal or civil proceedings in the future, thus allowing “voluminous and detailed information” to be collected “regarding the illegal conduct of financial institutions, professionals and accountholders around the world,” according to the Department of Justice. IRS Criminal Investigation Chief Richard Weber notes that using the collected information, the IRS has “already begun to track those individuals who think they are above the law and continue to hide their money offshore.” More than 54,000 US taxpayers have also come forward so far and have collectively paid more than US$8 billion in taxes, interest and penalties. “We have improved our ability to return tax dollars to the United States. And we have pursued investigations into banks and individuals,” said Lynch, who thanked the Swiss government for their cooperation in the effort to “root out fraud and corruption wherever it is found.”

Tax Reporting Agreement Signed Some 31 countries have signed the Multilateral Competent Authority Agreement (MCAA), an OECD initiative to implement automatic exchange of country-by-country (CbC) tax reports 56

for multinational enterprises. “CbC Reporting will have an immediate impact in boosting international co-operation on tax issues,” said OECD Secretary General Angel Gurría. The MCAA signing ceremony on January 27 marks an important milestone in the Base Erosion and Profit Shifting (BEPS) project, and according to Gurría will be effective in “enhancing the transparency of multinational enterprises’ operations.” The BEPS package, endorsed in November 2015 by the G20 leaders, set 15 key actions to reform the international tax framework to ensure that profits are reported where economic activities are carried out and value is created. Focus has now shifted to the implementation of such measures, with the MCAA setting out specific rules and procedures to implement BEPS Action 13, predominantly concerning CbC reporting. Under the MCAA, jurisdictions will exchange annually-filed tax information prepared by the reporting entities of MNEs, sending CbC reports to all cooperating jurisdictions in which the MNE currently has operations. The tax administrations of each cooperating jurisdiction where an MNE operates will receive a global picture of the companies financies and tax paid, including information about the location and nature of economic activities within the company. The first exchange (of 2016 information) will take place in 2017-2018. The 31 countries that signed the MCAA were: Australia, Austria, Belgium, Chile, Costa Rica, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, Mexico, the Netherlands, Nigeria, Norway, Poland, Portugal, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland and the UK.

Belgian Excess Profit Tax Illegal The European Commission (EC) recently ruled that the Belgian “excess profit” tax scheme violates EU state aid rules. The program had given aggregate tax reductions of some €700 million to at least 35 multinational enterprises, mainly European. Belgium will be forced to recover the unpaid tax from the companies, which had been exempt from taxation of the portion of profits deemed to have arisen from “synergies or economies of scale”. Involved companies saw tax liabilities fall significantly, many paying tax on only 50%, or in some cases as little as 10%, of annual profit. The EC ruling contends that the “excess profit” scheme amounted to state aid, as Belgian tax authorities have given

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February/March 2016

subsidies in the form of specific tax rulings to qualifying multinationals. The preferential treatment of these companies conferred unfair advantages over competitors, who were liable for normal taxation under Belgian company tax rules. Multinationals reported to have benefited under the scheme include AB InBev, BP, BASF, Proximus, Atlas Copco, Wabco Holdings and Celio France. Belgium’s claim that the scheme is justified by the need to prevent double taxation was discounted by the EC, since the profits were not taxed elsewhere. Belgium’s scheme required no evidence of double taxation, or even the risk of double taxation. Instead, according to the EC, it gave the multinationals a “carte blanche” to take advantage of double non-taxation. The EC decision follows on the heels of similar rulings for Starbucks and Fiat tax deals in the Netherlands and Luxembourg respectively, where these companies’ tax bills had been “unduly reduced”. Similar investigations into McDonald’s, Apple and Amazon are now underway. European Commissioner for Competition Margrethe Vestager remarks that, “national tax authorities cannot give any company, however large or powerful, an unfair competitive advantage.” Yet, Belgian Finance Minister Johan Van Overtveldt claims the ruling will cause legal uncertainty for companies operating in his country. Belgium would “remain in close contact with the European authorities in the course of days and weeks ahead”. The Belgian government would like to appeal the decision, Overtveldt said, as has been the case in the Netherlands and Luxembourg.

Hong Kong CRS Tax Bill Gazetted Hong Kong’s Inland Revenue (Amendment) Bill 2016 was gazetted in January. The bill, which the government has committed to securing early passage for, and which was tabled at the Legislative Council on January 20, provides a legal framework for implementing automatic exchange of financial account information in tax matters (AEOI). The AEOI is part of the OECD initiative to develop Common Reporting Standards to stem tax evasion globally. Hong Kong committed to the OECD in September 2014 that, subject to the passage of local legislation, reciprocal AEOI would be implemented with partners meeting appropriate information privacy and confidentiality standards. The first exchanges of information were slated for the end of 2018, with necessary domestic legislation to be in place by 2017. “We intend to conduct AEOI only with our partners with which Hong Kong has signed comprehensive avoidance of double taxation agreements (CDTAs) or tax information exchange agreements (TIEAs), on a bilateral basis,” said a Hong Kong government spokesperson. “The safeguards for exchange of information under the respective CDTAs and TIEAs will be applicable to information exchanged under the AEOI mode, alongside safeguards under the AEOI Standard.” Under the new standard, financial institutions will need to identify accounts held by residents liable to tax by reason of jurisdiction. Reportable information of such accounts will be collected and sent to Hong Kong’s Inland Revenue DepartFebruary/March 2016

ment, which will conduct annual information exchanges with partner jurisdictions.

Foreign Buyers Additional Properties UK Surcharge The UK government confirmed in December 2015 that its increase to the top rate of stamp duty land tax (SDLT) for “additional” UK properties costing more than £1.5 million would apply to foreign buyers and people with non-domiciled status as well as UK residents. The 3 percentage point increase, bringing the SDLT rate to 15%, will apply only to “additional properties”, such as second homes and residential lets. “If purchasers own another property anywhere else in the world and are purchasing an additional property in England, Wales or Northern Ireland they will be charged under the new rates,” confirmed UK Treasury Minister David Gauke. “Foreign investors and people not domiciled in the UK will be treated in exactly the same way as UK residents under these new rates.” The higher rates will apply as of April 1, 2016, after their final design is confirmed and announced in the March 16 Budget.

“Seriously Delinquent” Tax Debt to Affect US Passports On December 4, 2015, US President Barack Obama signed into law a new Internal Revenue Code provision giving the US government the right to revoke or deny the passport of US persons with “seriously delinquent tax debt”. The new provision was slipped into highway funding bill HR 22 (the so-called FAST Act) as section 7345, and will authorize the Treasury Secretary to notify the Secretary of State of people owing more than the US$50,000 threshold of federal taxes, including penalties and interest. The Secretary of State can then deny, revoke or limit the taxpayer’s US passport. Taxpayers who have signed instalment agreements or offers-in-compromise, requested collection due process hearings or innocent spouse relief, or who need to travel for emergency or humanitarian purposes are exempt from the new provision. Tax lawyer Dennis Brager says the provision, which he considered too draconian, will have “an extraordinary impact”. Owing US$50,000 is not difficult to do, Brager says, since penalties and interest on overdue taxes can add up very quickly. However, since the provision only applies to those the IRS has filed a lien or levy against, and such filing usually takes around six months, delinquent taxpayers have some time to come forward to set up a repayment plan.

The View Offshore is provided by Sovereign Trust (Hong Kong) Ltd., a leading expert in offshore taxation matters.

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MARKET INSIGHTS

Kurdistan Embraces the Silk Road At a time when China promotes the One Belt, One Road, regions like Kurdistan open doors to new opportunities

Douglas Betts

Erbil is being billed as the next Dubai 58

ecently, I travelled to the Middle East to look at opportunities related to Chinese interests in such areas as infrastructure, agriculture and asset management in the region. Prior to heading into this complex arena, I was certainly aware of the growing inf luence of China in this area due to the Silk Road initiative and the desire to support development. But, what surprised me was the breadth and scope of China’s involvement and the opportunities that abound for the internationalization of China finance and business Take the Kurdistan Region as an example. While the Kurdish independence movements in Syria and Turkey are widely associated with violence and conflict, the territory of Iraqi Kurdistan is quite a different proposition. The Kurdish ethnic group occupies a land area that encompasses parts of Turkey, Syria and Iran in addition to Iraq. However, Iraqi Kurdistan, comprises of over 5.3 million people and is rich in resources. It is an emerging region whose evolution is often compared to that of Dubai and is largely free of the chaos that grips much of its neighbors. Formally known as the Kurdistan Region, Iraqi Kurdistan is located in the northern corner of Iraq and constitutes the country’s only autonomous region. Under the banner of the Kurdistan Regional Government (KRG), President Masoud Barzani has governed this parliamentary democracy since 2005 and is the leader of the Kurdistan Democratic Party (KDP) since 1979. President Barzani maintains solid relationships with a diverse group of countries, from the US to Israel, and, of course, China. “Despite the setbacks suffered by the Kurdistan Region and many parts of www.sbrchina.com

the Middle East, our strategic long-term goals remain still intact,” Nechirvan Barzani, Prime Minister of KRG, recently stated. “It is true that we have had to pause some larger projects and investments due to the emergency situation that we face, but our plans to develop key sectors throughout the region will continue to guide our fundamental policy.”

China’s New Friend Despites its tenuous location in the hottest geopolitical zone in the world, the Kurdish capital of Erbil is the center of one of the fastest growing emerging economies in the world, and is rapidly becoming a stop for foreign investors interested to tap new investment opportunities. With five star hotels springing up across the city, including a number financed by Chinese investors, this upwardly mobile metropolis boasts thousands of years of civilization and houses close to 2 million people. I am not saying that all is lavender and roses in this land. After all, plunging world oil prices, an unfriendly group of neighbors and a large public debt is considered to be a perfect storm for any country. Yet, this autonomous region is somehow rising to the challenge. One reason is that Kurdistan is blessed with the world’s sixth largest reserves of oil (45 billion barrels) and a host of other useful natural resources. When China opened its Consulate General in Erbil on December 31, 2014, it was a key step for China-Kurdish relations. The Consulate’s opening was most indicative of the growing importance of this country to China Inc. Vice Foreign Minister Zhang Ming stated at the time that, “The opening of our consulate expresses our strong support for the February/March 2016

leading economies, are ready and eager to travel. And, it is regions like Kurdistan and countries like Iraq that attract China more than others. In February, Iraq signed a deal with state-owned China Petroleum Pipeline (CPP) a nd ot her foreign companies to secure investment in its US$13 KRG President Masoud Barzani is leveraging one-sixth of the bi l l ion Com mon world's oil reserves to ensure more rapid economic growth. Seawater Supply political process in Iraq. It is a sign of Project (CSSP). CPP is a subsidiary of our strong desire to further deepen and China National Petroleum Corporation strengthen our bilateral ties with Iraq (CNPC) and specialises in engineering and the Kurdistan Region.” and construction. Under the deal, CPP China f irst entered Kurdistan in will form a consortium with other invesstrength back in 2009. Sinopec, China’s tors led by Jordan-based private firm largest oil and gas company, made the Mass Global. The two companies will first major move into the region after submit their large scale investment offer the US$7.3 billion acquisition of Addax to the Oil Ministry in March. Petroleum. Sinopec inherited a joint This deal came soon after the Decemventure with Genel Energy to develop ber 2015 Beijing summit in which China Taq Taq oil field as part of this deal. and Iraq issued a joint statement upDiscovered in 1978, Taq Taq is one of grading their relationship to a “strategic Addax’s most promising assets with partnership”. In a meeting with Iraq’s reserves that run as high as 500 million Prime Minister Haider al-Abadi, China’s barrels. Taq Taq generates substantial President Xi Jinping pledged assistance project cash flow, but remains subject to in “energy, electricity, communications challenges of working in a newly develand infrastructure” projects in Iraq.The oping economy. leaders signed a memorandum of unMeanwhile, another member of the derstanding on oil and gas, promising a China Club, Huawei, chose Erbil to “long-term and comprehensive strategic launch the Huawei P8 cell phone in a partnership on energy cooperation”. ceremony held at the ritzy Rotana HoDon’t get me wrong – China is not a tel in downtown Erbil. Iraq was one of glutton for punishment in markets that the five countries in the world which are considered to be high risk. China’s witnessed a significant increase in sales leading engineering, construction and as Huawei mobile devices ranked third design companies have made a name by overall in the country. This commitment entering markets across the Middle East to the retail market will likely be mirand Africa and professionally handling rored by telecom giant Huawei in the the work at hand. In markets from Sutelecom\infrastructure arena. dan to Algeria, Iraq to Libya, the Chinese engineering and construction industry Project Finance has a reputation for a fearless attitude, The China Silk Road business model is an ability to handle tough assignments based more on infrastructure and proand deliver projects in a timely manner. ject development than anything else. LeKurdistan is a solid market for the gions of Chinese construction workers, Chinese Silk Road model. Based on the armed with long experience in building Dubai model, a largely open and pluthe Mainland into one of the world’s ralistic economy focused on regional February/March 2016

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finance and good relations with neighbors, KRG is planning to expand the scope of the oil-based economy to tourism and services. The Minister for Tourism has outlined an ambitious plan for the construction of the tourism industry practically from scratch, focusing on intercity highways, airports and luxury hotels. Erbil’s citadel, recently awarded Unesco World Heritage status, is the recipient of a multi-million dollar restoration, and there are plans to construct a winter ski resort in the mountain town of Haj Omaran.

Preferred Partner Overall, China is ready and able to apply the Silk Road development model to Kurdistan. Times may be tough in the region now, but the general feeling is that this oil-rich territory will continue its quest for Dubai-like stardom. This combination of resource-based revenues and drive for expansion is the model that makes sense for Chinese constructors, engineers and financiers. Currently, Kurdistan is reaching out to China with the creation of a new China-Kurdistan Chamber of Commerce. With the rise of the newly formed Asian Infrastructure Investment Bank (AIIB), founded by China as an alternative to the World Bank and supported by donors like Russia, projects between this region and China will be on the upswing. With new airports, petrochemical plants, office towers and hotels in the works, Kurdistan is on the Chinese radar screen. The question now is how can these deals be best structured to facilitate a smooth f low of capital in Kurdistan. Well, if the commitment to China in other parts of the region is any indication, it will not be long before these details are worked out and the China-Kurdish relationship reaches new heights in the development of One Belt, One Road and another link in the Old Silk Road will be once again be rejuvenated.

Douglas Betts is a Director and Founder of a number of private equity funds and is the Executive Director of Sunwah International Ltd, and Senior Counsel at McMillan LLP. 59

LAKE'S LAMENT

Can China Save the World? More and more foreign companies are looking to China as their Saviour in a world where growth is hard to find.

David Lake

Starbucks sees its China sales surpassing that of the US 60

very day I review the latest China related news for the Shanghai Business Review web site news digest. I receive 12 to 15 news items of interest on the latest global deals, mergers, investments and marketing strategies that make headlines around the world and in the Mainland. In recent months, I have begun to notice an interesting trend in these reports. A trend that is so clear and consistent that it cannot be ignored. The dialogue is always the same. On one hand, the reports on the China economy, currency and stock market are consistently worrying for China and the world at large. Economic growth is falling, currency policy concerns world markets and the stock market remains in the doldrums. As such, many news digest items start with lines like, “Despite the economic downturn…” or “Given the latest stock market volatility…” or “The world is concerned with…” On the other hand, report after report speaks of renowned conglomerates and business leaders announcing new capital investment into China, expansion of activities, partnerships and a general increase in exposure across the board. Invariably, the report carries a line from the CEO that will say something like, “We are confident China can overcome its economic issues…” or “We are sure the market for our products will remain strong… or “Our view of China as a key growth market remains unchanged…” This view is echoed by many of the business leaders at the World Economic Forum. For one, John Rice, General Electric Co.’s (GE) Vice Chairman and Head of Global Operations, believes people have predicted a hard landing for a long time, but have always been wrong. “There will be turbulence and turmoil, but there’s nothing happening in China today that causes us to alter our long-term www.sbrchina.com

strategy for this country,” Rice said. In other words, the world’s leading companies, often faced with difficulties in home markets, count on China to secure their future. That is a long way from the days when they complained that, “no one ever makes money in China.” Today, executives are willing to stake bets that China is the great hope for their business and hope for the best. While China can and has delivered for many of these businesses, the question is does it have the capacity to absorb all the output that is coming onstream?

Placing Auto Bets On this point, I provide examples from sectors that count heavily on China for wealth and health – automobiles, travel and consumer goods. Let’s look at the auto market, a group that placed stakes in China growth in almost every case. In some cases optimism is warranted, in others misguided, but clearly it is unlikely there is room for all the world’s carmakers to strike it rich. Take a look at Buick, which just experienced it most successful year ever. An amazing 80% of Buicks, or nearly one million units in 2015 were sold in China. Buick hopes to use this success to rebuild its reputation in the US. This year, Buick will be the first American company to sell a Chinese-made vehicle, the Envision, in the US. French automobile giant Renault is so confident about growing demand in China that it plans to open its first assembly plant. The US$1 billion factory in Wuhan has the potential to triple Renault’s current output of 150,000 vehicles annually. “Entering a market that sells 20 million vehicles a year is no bad thing for an automobile manufacturer,” states Jacques Daniel, Head of Renault’s joint venture with Dongfeng. February/March 2016

Then there is the case of German behemoth Volkswagen. VW expects its sales to rise in line with China’s auto market through its cooperation with state-owned JAC Motors. Jochem Heizmann, Head of VW China, is confident sales will match or outpace China GDP, and believes there are opportunities in lower-tier cities, “These are cities with millions of inhabitants, but in a different development stages.” Hot on the track, General Motors (GM) just opened a US$1.2 billion plant in Shanghai to build 160,000 units of Cadillac in tandem with SAIC Motor Corp. annually. “Local production will enable us to satisfy growing demand for luxury vehicles through the introduction of Cadillac built in and for China,” claims Matt Tsien, President of GM China. GM believes China’s luxury car market has great potential and is confident its plant will increase market share. Tesla Motors, the green carmaker, considers China as its most important market for the debut of its Model X SUV and has set place expansion plans. Elon Musk, Tesla CEO, sees tremendous opportunity and looks to build upon Tesla’s

domestic consumer consumption.” China’s luxury car market is the first to suffer. Rolls Royce announced a 54% drop in 2015 sales compared to 2014. Similarly, Bentley sold 1,615 units in 2015, down from 2,560 in 2014. However, despite this gloomy outlook, Bentley is confident about the release of a new SUV in 2016. Perhaps the most sanguine about China is Korea’s Hyundai, which did not reach annual sales targets for the first time in 2015 due to a slump in China deliveries. Low sales sent Hyundai deliveries down 5% and if Hyundai cannot keep China sales steady, analysts predict it may face larger problems.

Luxury jet companies are not concerned about low demand, as they have “seen this time after time,” and are confident the “economy will recover”. Then there are those that focus on tourist f lows. Airbnb Inc. a US-based website for lodging, is conf ident its China success will continue to grow rapidly. Now the world’s largest outbound tourism market, China sent 120 million people overseas in 2015, up from 109 million in 2014. There seems to be little connection between China’s slowdown and outbound trips. The number of Chinese tourists who booked through Airbnb increased nearly 700% over the year.

Airline Bonanza

The retail market is driven by government policy and is considered as the key force to alter economic prospects. Still, China’s slow growth hurt global sales in Q4 2015 at Starbucks, which continues to invest heavily in its second largest market. CEO Howard Schultz believes “China will one day be larger than the US business for our company.” Procter & Gamble (P&G), a consumer goods leader, underestimated the influence of Chinese consumers and their demand for quality goods. Dave Taylor, President and CEO of P&G, called his China business “unacceptable”, and is disappointed that he missed an opportunity to invest in the region and allowed competitors to take market share. “We looked at China too much like a developing market as opposed to the most discerning market in the world,” states Taylor. P&G’s sales in China fell by a “high single digit” percent in Q4 2015, a painful result from an important market. The luxury goods makers have long hedged their bets on China sales, and now they too are worried. Italian luxury house Prada’s net income fell nearly 40% during August to October 2015, driven by plunging China sales. Now Prada is looking to open a boutique restaurant in China of all things to expand beyond the fashion business. As you can see by the above analysis, the world is indeed counting more and more on China to save the day. The tables have clearly turned from the age where China counted heavily on exports to build its economy.

Another sector driving foreign companies to distraction is the airline and travel area. It is predicted that China’s top two air carriers alone will need to spend nearly US$1 trillion to purchase 6,330 planes over the next two decades – 17% of global totals. In 2015, Chinese airlines spent over US$100 billion to order 780 planes. One of the central government’s initiatives is to encourage more air travel

China's top selling Buick will become the first American car company to sell a Chinese-made vehicle in to consumers in the US market.

China services. In addition to the Model X SUV, Tesla plans to offer a red version of the Model X P90D. Still, some carmakers are already feeling the pain. After releasing record earnings, Ford is concerned it may be near its peak and China’s current volatility may send revenue falling this year. Bob Shanks, Ford CFO, says China’s auto industry will grow modestly, as it is an “emerging market transitioning to more February/March 2016

by building 66 new airports. This movement is promising for China’s flourishing airlines. On the flip side, demand for business jets in China is slowing, as customers diversify from large aircraft during an economic downturn. China’s business jet fleet only grew 6% in 2015, marking its slowest growth in 10 years. In the past, customers purchased the best quality jet, but they now move to cheaper models. www.sbrchina.com

Consumer Market

VIEW FROM THE TOP

China Makes US FDI Mark Rhodium’s Thilo Hanemann discusses the dramatic shift from state-owned investment in energy to private sector FDI in services, high-tech and consumer assets.

Thilo Hanemann

n the first two weeks of 2016 alone, Chinese investors announced a flurry of headline grabbing US deals, including Haier’s US$5.4 billion acquisition of the GE appliances unit and Dalian Wanda’s US$3.5 billion investment in Hollywood producer Legendary Entertainment. These major transactions follow a stellar year for the flow of Chinese Foreign Direct Investment (FDI) into the US. The industry composition of Chinese US FDI was more diverse in 2015, spreading across a range of sectors. A strong Q4 pushed Chinese FDI to a new record level of US$15.7 billion in 2015, up some 30% from last year. Mergers and acquisitions (M&A) activity was strong with 103 deals worth US$14 billion. In addition, greenfield investment reached an all-time high of US$1.8 billion, as several projects with large capex broke ground or made significant progress The foremost industries to received FDI were real estate (Anbang acquisition of 717 Fifth Ave), financial services (Fosun 62

buy of Ironshore Insurance), ICT (acquisition of Integrated Silicon Solutions Inc. by a Chinese consortium), autos (AVIC’s buy of Henniges Automotive), health and biotech (Hepalink’s acquisition of Cytovance Biologics) and entertainment (Wanda’s acquisition of World Triathlon). Around two-thirds of FDI investment flowed into services, up from 14% in 2009. Another development is a small recovery of Chinese investment in upstream oil and gas after hitting a five-year low in 2014 (Yantai Xinchao purchase of Texas oil fields), highlighting that the private sector is looking for opportunities in the consolidation of US and global energy markets. Another dramatic shift occurred in the composition of investors, with private companies now accounting for 84% of investment, up from 19% five years ago. A second major trend is the increase of financial investors, including private equity firms, insurance companies, financial conglomerates, and real economy firms. Those entities accounted for 56% of total Chinese US FDI in 2015, up from virtually zero before 2010.

FDI 2016 Outlook A potential bid by Tsinghua Group for US chipmaker Micron triggered a debate about national security implications in the summer of 2015, but several highprofile deals successfully cleared CFIUS review, including in semiconductors (Integrated Silicon Solutions, Omnivision), upstream oil (Yantai Xinchao’s acquisition of oil fields in west Texas), hospitality (Waldorf Astoria) and aerospace (Aligned Aerospace, Danbury Aerospace). While Chinese investors are getting better in navigating hurdles at market entry, several cases in 2015 (AVIC’s arbitration with Tang Energy) have shown that recent US www.sbrchina.com

expansion exposes companies to new legal and regulatory risks.Going forward, the biggest political downside risks for Chinese US FDI investment are related to the economic environment. The volatility in China’s markets and downward pressure on the yuan currency have forced China to ratchet up capital controls to stop massive outflow of capital. There is anecdotal evidence that these measures impact the ability of companies to conduct cross-border FX transactions, including FDI. The other option that Chinese leaders have to resolve their dilemma – a oneoff depreciation of the CNY against the USD – could weigh on global deal making in 2016. Another risk, highlighted by the disappearance of Fosun Chairman Guo in December, is that anti-corruption policy could shift to private companies, impacting appetite for global deals. The deal pipeline is at an all-time high at the start of 2016. There are an estimated US$22 billion worth of pending acquisitions. Potential future capital expenditures related to announced greenfield projects add up to over US$10 billion, including Shandong Sun Paper’s pulp plant in Arkansas (US$1.36 billion), Faraday Future’s US$1 billion investment in an electric car plant in Nevada, a dairy plant in California by Feihe Dairy and several real estate developments. With this kind of pipeline one expects another record year in China FDI flows into the world’s largest economy.

Thilo Hanemann is an Economist at Rhodium Group, which analyzes disruptive global trends, focused on global trade and investment, and a Senior Policy Fellow at the Mercator Institute for China Studies, Europe’s biggest China think tank . February/March 2016

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