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December 2013

Winding Road to Reform China unveils an ambitious reform agenda after the Third Plenum that looks to reenergize the economy, improve confidence in the Party and liberalize the financial sector PLUS: The urbanization question

YEAR IN REVIEW • Top Ten Lists • 2013 Pictures


INSIGHT DECEMBER 2013

The Journal of the American Chamber of Commerce in Shanghai

amcham shanghai President

Kenneth Jarrett VP OF PROGRAMS & Services

Scott Williams

F e atu r e s

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12 Age Old Dilemma INDUSTRY UPDATE

By Sheryl Jacobson and River Huang

A surging elderly population will create both opportunities and challenges for foreign companies.

VP of Administration & Finance

Helen Ren Directors Business development & Marketing

Patsy Li Committees

Stefanie Myers Events

18 Our Top Ten Lists and Photos

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2013 IN REVIEW

By Insight staff

See the Top Ten China stories you may have missed along with pictures from the past year.

Jessica Wu Government Relations & CSR

Steven Chan Membership & CVP

Linda X. Wang

INSIGHT EDITOR-IN-CHIEF

Bryan Virasami

26 A Road Map for Reform

By Sam Dreiman and Wang Yuan

China is looking to reenergize economic growth, improve confidence in the Party and liberalize the financial sector, according to an analysis of the Third Plenum document.

Senior Associate Editor

Erika Wang senior communications associate

Ryan Balis

Design

Alicia Beebe

33 ‘Field of Dreams’

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ANALYSIS

By William Antholis

As China’s new leaders embark on a new wave of urbanization, they must deal with four major issues.

Printing

Mickey Zhou Snap Printing, Inc.

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Intern

Beverly Chan

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COVER STORY

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

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5 News Briefs

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11 Deal of the Month

MONTH IN PICTURES

Highlights from Recent Events

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Editor's note

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Bryan Virasami editor-in-chief

his is the second time since December 2012 that we printed a photograph of China’s president on the cover of Insight. It’s not an instinctive decision to put political leaders on the cover of a business magazine but executives in all corners of the globe are watching what China’s leaders are doing. The reform agenda that President Xi Jinping wants to advance will have repercussions for all foreign companies in one way or the other, and our analysis by Sam Dreiman and Wang Yuan of APCO Worldwide should offer some insight into the decisions announced after the Third Plenary Session. William Antholis of the Brookings Institution adds a sober analysis of what it takes to implement an urbanization plan that will impact millions in China. It wouldn’t be the end of the year without our Top Ten lists of business stories you may have overlooked, along with the top Shanghai

stories and top quotes of the year. For the record, these lists are far from scientific and they’re purely the subjective opinions of our editorial team. At Insight, it’s been a year of hard hitting issues, at least when it come to our cover stories. We took on a story about the venture capital climate in China, the green industry, food safety, air pollution in Beijing, FDI into the U.S., social media and the pilot Free Trade Zone in Shanghai. Not to forget Christie’s, the first international fine art auction company to obtain permission to operate on mainland China, without a domestic partner. The company’s first auction in mainland China was held at the Jing An Shangri-La – just steps away from AmCham Shanghai. We hope you’ve had a successful year. Check out our Year of the Horse preview next month and stay tuned for other insightful stories in months to come. Happy holidays!

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News

n n ew ew s s b br r ii e ef fs s

CHINA BUSINESS

Singles’ Day sales net RMB35b This year’s 24-hour shopping extravaganza on November 11, known in China as “Singles’ Day,” set new records of sales and deliveries among major e-commerce companies and delivery businesses. Alibaba recorded sales of RMB35 billion (US$6 billion) at an 83% increase from a year ago. The e-commerce giant exceeded last year’s sales record just after 13 hours into the holiday. According to the State Post Bureau, 60 million pieces of express delivery were ordered, nearly doubling last year’s amount. The big four express delivery giants – Shentong, Yuantong, Yunda and Zhontong – each reported all-time highs of more than 10 million orders. In total, express enterprises recorded more than 144 million delivery orders, twice the amount of last year’s.

China’s business travel market to be No. 1 China’s ballooning travel market is expected to replace the United States’ as the world’s largest by 2016, according to the Global Business Travel Association (GBTA). GBTA estimates that business travel spending in China will increase by 14% in 2013 to US$224 billion, with Beijing Capital International Airport expected to become the world’s busiest airport by 2014. About 95% of China business travel traffic will stay in Asia. Top destinations for China business travelers will be South Korea, Singapore and Hong Kong, while the U.S. will rank No. 8, according to GBTA estimates. In response to growing demand for air travel, China plans to build 100 airports over the next decade.

Coca-Cola to pour US$4b into China Coca-Cola Co., the world’s largest beverage company, said it plans to invest more than US$4 billion in China from 2015–2017. The Atlanta-based company plans to open as many as two facilities each year in China over the next decade, with a new pulp-blending factory in Shanghai and a plant in southwestern Guizhou province planned in the next two years, company officials said. The company inaugurated its 43rd plant in China, located in Shijiazhuang, northern Hebei province, in late October. Coca-Cola is China’s largest soft-drink maker, with a 15.7% share in the country’s soft-drink market in 2012, according to industry researcher Euromonitor International. It is investing US$4 billion from 2012–2014 in China, where it faces competition from companies including Taiwan’s Ting Hsin International Group which partly owns Tingyi, Hangzhou’s Wahaha Group and PepsiCo Inc. According to Bloomberg, last year Coca-Cola earned about 79% of its operating income outside North America.

IMAX to build high-end home theaters IMAX Corp. signed a 50-50 joint venture agreement with TCL Multimedia Technology Holdings Ltd. to design, develop and produce private home theaters with a price tag of US$250,000. The joint venture will manage the business

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on the Chinese mainland and in Hong Kong. The high-end system is scheduled to be launched in China in 2015 and then rolled out to other markets across the world. China is IMAX’s second largest market with 131 IMAX screens in the country and contributing 16% of the company’s total revenue. Shenzhen-based TCL Multimedia predicts at least a 20%

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increase in annual growth for private home theaters within the next five years. CORPORATE NEWS

Tesla Motors opens showroom American electric carmaker Tesla Motors opened a showroom in Beijing where they are displaying a pair of Tesla Model S sport cars. Though official approval for Tesla business to enter the Chinese market is still pending, there’s already a waitlist for Tesla models. Intererested buyers of the electric cars were required to put down a deposit of US$40,000 after they signed a pre-order contract. According to the carmaker, the price range for the cars that are planned to be sold in China is between US$146, 000 and US$195,500.

Shunfeng buys Suntech assets for US$492m Hong Kong solar company Shunfeng Photovoltaic won a bid to buy the main unit of Suntech Power Holdings Co., once the world’s largest solar making supplier, for US$492 million. Due to falling prices and around US$2.3 billion in debt, Wuxibased Suntech Power defaulted on US$541 million earlier this year. According to Shunfeng, the company paid an initial RMB500 million deposit for Suntech and will pay another US$25 million to an investment company that is supervising Suntech’s restructuring. Additionally, Shunfeng agreed to take in Suntech’s monthly losses of up to RMB20 million between next March and October.

Lenovo to tap into new markets China’s top personal computer and smart device maker, Lenovo Group Ltd., announced plans to open sales in new emerging markets within the next few quarters after seeing a record high of US$219.7 million quarterly net profit at the end of October. The technology giant also saw a 13% rise in revenue in the quarter which increased its annual revenue to a

record high of US$9.8 billion from last year’s US$8.7 billion. Already operating in more than 160 countries, Lenovo said it intends to expand smartphone and tablet sales into 20 new markets, including the Philippines, Vietnam and Indonesia.

Suning, Hony Capital to invest US$420m in PPTV Suning Commerce Group Co. and Hony Capital of Lenovo Group agreed on a US$420 million joint investment in PPTV, the largest video website service in China. Making its largest single investment of US$250 million, Suning will become PPTV’s largest shareholder, with 44% of the entertainment media platform. Merging with a major Internet service that reaches 30.9 million views a day will give Suning a larger online presence, allowing the entertainment retailer to expand into the e-commerce and Internet industry and target Internet shoppers, the company said.

China sets policy for shale gas China’s National Energy Administration (NEA) unveiled the country’s first policy for the shale gas industry. The policy, effective immediately, includes designating the unconventional energy source among the nation’s strategic emerging industries and providing subsidies for shale gas producers, tax reductions or exemptions for producers and customs tariff exemptions for imported equipment. It also encourages development, innovation and Chineseowned brands in shale gas exploration and extraction technologies. China has one of the world’s largest shale gas reserves at an estimated 134 trillion cubic meters, of which 25 trillion is extractable, according to the country’s Ministry of Land and Resources. Since 2011, China has launched two shale gas tenders to attract developers into the shale gas industry. MACROECONOMICS

China property investment hits 19.2% China’s total real estate investment hit

19.2% to RMB6.87 trillion (US$ 1.13 billion) over the first 10 months of 2013 year-on-year, while revenue from residential and commercial property sales rose 32.3% to RMB6.12 trillion, according to figures by the National Bureau of Statistics. The figures were slightly lower compared with those for the January– September period, when real estate investment climbed 19.7% to RMB6.11 trillion and property sales revenue grew 33.9% to RMB5.40 trillion. Construction starts by area for the January–October period rose 6.5% to 1.56 billion square meters; those for the January–September period rose 7.3% to 1.45 billion square meters. Despite China’s economic slowdown and the government’s policies to curb prices, real estate, a key driver of the economy, continues to rise.

CPI reaches 8-month high The Consumer Price Index (CPI), the main gauge of inflation, reached an eightmonth high of 3.2% in October, according to China’s National Bureau of Statistics. The bureau attributed the inflation growth mainly to rising food prices, which jumped 6.5% in October year-onyear, compared with a 6.1% increase in September. Still, the increase was slight compared with September’s 3.1% and below the official target of 3.5% for 2013. CPI for the first 10 months averaged 2.6%. China’s economy grew steadily in October, adding to signs the economy is stabilizing. Data showed exports rebounded by more than expected in October, growing 5.6% from a year earlier and recovering from a 0.3% fall in September.

Non-manufacturing PMI reaches 56.3% China’s Purchasing Managers Index (PMI) expanded to 56.3% in October, its highest level in 14 months. An index reading above 50% indicates growth in non-manufacturing industries such as service, construction, software, real estate, railway and air transportation. October’s PMI rose 0.9% from September’s as the

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construction and service sectors are expanding. According to the National Bureau of Statistics, non-manufacturing companies are expecting an increase in business in the next few months. The figures showed that growth in the business service sector has contributed more to the overall economy. U.S.-CHINA

University of Illinois to open China office The University of Illinois (UI) said it will open an office in Shanghai this month to promote connections with China. The primary purpose of the office is to connect with prospective students and UI alumni in China, assist with recruitment efforts and strengthen corporate relations and interactions with academic institutions, UI officials said. The new Shanghai office will be part of the existing Illinois state office, which is part of a U.S. Chamber of Commerce location. UI has 65 academic partnerships with Chinese institutions and more than 20,000 UI alumni living in China. According to UI figures, 4,512 students from China are studying at the Urbana campus this year at a 17% growth over last year and representing more than half of UI’s 4,990 total international undergraduates.

PGA Tour to kick off in China The PGA Tour has partnered with the China Golf Association (CGA) and the China Olympic Sports Industry to kick off the China Tour-PGA Tour China Series, which will start next March with 12 events, giving Chinese players a circuit of their own. The model has been compared with that of the PGA Tour’s in Canada and Latin America, where the tour owns those two circuits. The CGA said that the partnership aims to develop the sport in China to provide an opportunity for Chinese golfers to compete in much higher-level tournaments at home. Golf has been added to the Olympic program in 2016 after more than a century’s absence.

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Soybean imports fall as U.S. supply declines China’s soybean imports declined to the lowest level in six months as China’s biggest supplier, the U.S., experienced a seasonal shortage in September and October. Shipments to the world’s biggest buyer totaled 4.2 million metric tons in October, down from 4.7 million tons the previous month, according to data by Beijing customs. Soybeans on the Chicago Board of Trade dropped 10% this year. But imports are expected to pick up for the rest of the year as demand from China for soybean meal increases. The U.S. Department of Agriculture forecasts China’s imports for the marketing year that started October 1 to hit 67.5 million tons, up from 60 million tons a year ago. GOVERNMENT & POLICY

Beijing to slash new car registration quota The Beijing Municipal Government will slash its new car registration quota by 37.5% starting from 2014, from the current figure of 240,000 each year to 150,000 by 2017, Xinhua reported. Use of new energy vehicles will be encouraged as part of its efforts to curb air pollution. Of the 600,000 vehicles allowed to register in the next four years, 170,000 will be allotted for new energy vehicles, including battery electric, plug-in hybrid and fuel cell vehicles. In 2014, 20,000 new car registrations will be given to new energy vehicles, 30,000 in 2015 and 60,000 in 2016. The total number of vehicles in the city will be restricted to about 6 million by the end of 2017. According to the Beijing Traffic Management Bureau, the city had 5.4 million vehicles at the end of October.

China’s FDA to remove animal testing China’s Food and Drug Administration said it plans to scrap mandatory animal testing requirements for certain categories of cosmetic products manufactured in

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the country. The new rule, which is to go into effect after June 2014, allows Chinese companies to substantiate the product safety of “non-special use cosmetics,” including shampoo or perfume, with existing safety data for raw ingredients or European Union-validated nonanimal tests instead of having to submit product samples based on tests conducted on rabbits, mice and rats. According to estimates by The Humane Society International, as many as 300,000 animals are subject to cosmetics chemical testing annually in China.

State Council eases company registration China’s State Council announced that minimum registered capital requirements will be scrapped for limited liability companies, one-person limited liability companies and joint-stock companies with limited liability. Minimum registered capital for limited liability companies is RMB30,000 (US$4,900), for oneperson limited liability companies it’s RMB100,000 and RMB5 million for joint-stock companies. New measures also include loosening control over sites registered for business operations and replacing annual inspections on companies with annual reports open to public inquiry. Due to its strict company law, China has only 12 enterprises for every 1,000 Chinese, compared with 50 in Japan and South Korea and 30 in most emerging markets, reported the official Xinhua News Agency.

Floor price for airfares scrapped China eliminated a rule that required airlines to have a minimum domestic ticket price in a bid to spur demand. According to the rule, which was published in 2004, Chinese airlines were required to set their fares not higher than 1.25 times and not lower than 60% of a base price. China has been gradually easing aviation regulations and boosting infrastructure spending, with a planned second airport in Beijing,


as domestic carriers are forecast to require more than 5,000 planes in the next 20 years. Budget carriers account for only 6% of China’s total seats and Shanghaibased Spring Airlines is the only low-cost operator in China. SHANGHAI BUSINESS

DuPont expands R&D center DuPont announced the second phase of its China Research and Development Center, which will add 17,500 square meters of space and house 150 more researchers. The expansion will focus on new material applications in solar energy, bio-based materials and automotive materials and testing capabilities, according to DuPont. One of the company’s major R&D facilities outside the U.S., the DuPont China R&D Center is located in Shanghai’s Zhangjiang Hi-Tech Park. Since its opening in 2005, the center has provided technical expertise, research, application development, training, technology transfer, sales, as well

as promoted technological exchanges and research collaborations between DuPont and local and regional universities and research institutions.

Deutsche Bank approved for Shanghai FTZ Deutsche Bank (China) said it has received approval to set up a sub-branch in the Shanghai pilot Free Trade Zone that will serve corporate and financial institution clients and offer corporate banking services focused on cross-border transactions. Deutsche Bank joins the ranks of foreign banks Citibank, DBS, Hang Seng Bank, HSBC and Bank of East Asia, which have also been approved to operate in the zone. The Frankfurt-based bank did not specify when the sub-branch would open. Launched in September, the zone covers 29 square kilometers and is located on the eastern outskirts of the city. The zone is intended as a test bed for financial reforms, including RMB convertibility and interest

rate liberalization.

Oriental Pearl to get new look The operator of Shanghai’s iconic Oriental Pearl TV Tower has begun a seven-month renovation project to give the 468-meter tall structure a fresh new look for the first time since it was inaugurated to the public in 1994. The renovation, carried out by Shanghai Construction Group, will mainly cover the exterior below 254 meters and will not affect the normal operation of the tower, according to the operator, Oriental Pearl Radio and TV Tower Co. Located in Pudong New Area’s Lujiazui financial hub opposite The Bund on the Huangpu River, the tower features 11 spheres, with the three largest ones measuring 50, 45 and 14 meters in diameter. The entire structure is supported by three columns. It was the tallest structure in China from 1994 to 2007, when it was surpassed by the Shanghai World Financial Center.


CHINA & THE WORLD

ASIA-PACIFIC SIA PACIFIC SOUTH AMERICA

AUSTRALIA: China Southern upgrades Sydney–Guangzhou service China Southern has started daily Airbus A380 flights between Sydney and Guangzhou, the airline’s headquarters. The 502-seater superjumbo increases the airline’s capacity by 40% compared with the previous A380 service. China Southern joins Qantas, Emirates and Singapore Airlines in providing Sydney with superjumbo service. According to the airline, the route is part of an expansion strategy in the Australian market, including upgrades to Melbourne, Brisbane and Perth routes, which now use the airline’s newest Airbus A330s. Sydney Airport estimates that the upgraded service will generate 5,000 jobs and contribute about US$390 million annually to the Australian economy.

MIDDLE EAST

ZIMBABWE: US$319m loan to expand hydropower station State-owned China ExIm Bank signed a deal with Zimbabwe’s finance ministry to lend the southern African nation US$319 million to ease an electricity shortage by expanding its Kariba hydropower station’s capacity by 300 megawatts (MW). Expected to take four years to complete, the expansion project aims to reduce power outages that have hampered economic growth, according to ministry officials. While Zimbabwe currently produces about 1,200 MW of electricity, peak electricity demand can reach as high as 2,200 MW. The deal enforces Zimbabwe’s “Look East” policy, which it adopted after the European Union and the United States imposed sanctions in response to what they said to be human rights abuses and political violence under President Robert Mugabe’s administration.

AFRICA

EUROPE ASIA-PACIFIC SIA PACIFIC

NORTH AMERICA

FRANCE: Moutai to invest in Paris real estate Kweichow Moutai, China’s biggest liquor producer by market value, said it will invest 8.79 million euros (US$11.76 million) in real estate in Paris, the first overseas location that the high-end baijiu (white liquor) producer invests in, to help expand its business in Europe. Moutai’s profits outside the Chinese mainland remains small, with revenue from overseas markets for the first half of 2013 reaching RMB382 million (US$62.72 million), which accounts for only 2.71% of its total revenue, according to the company. Moutai exported 1,000 tons of baijiu last year, accounting for only 4% of the total output. China’s liquor market, particularly the high-end sector, has slowed since the government this year launched an anti-extravagance campaign.

EUROPE MIDDLE EAST

MIDDLE EAST

SOUTH AMERICA MIDDLE EAST AFRICA

UNITED ARAB EMIRATES: Huawei signs strategic alliance with DSI Huawei Technologies Co. Ltd., China’s biggest information and communication technology (ICT) firm, signed an agreement with Dubai-listed Drake and Scull International (DSI) – among the region’s biggest provider in construction, property maintenance and water and power supply – to collaborate on ICT development projects to help organizations across the Middle East and North African (MENA) region build up data center technology. The cooperation will combine Shenzhenbased Huawei’s expertise in enterprise ICT infrastructure with DSI’s operational capabilities in data center development, the companies said. The Middle East is one of the fastest growing markets for Huawei, which last year made US$2 billion in revenue in the region at an 18% increase over 2011.

AFRICA

ASIA-PACIFIC SIA PACIFIC AFRICA UNITED STATES: American Film Institute offers China scholarships NORTH AMERICA The American Film Institute (AFI) announced a joint scholarship scheme with venture capital NORTH AMERICA

group IDG Greater China aimed at fostering greater understanding of Chinese history, culture and literature. The AFI/IDG China Story Fellowship provides nine students the opportunity to travel to China for cultural research and to write a feature-length screenplay. The fellows will also receive a full scholarship for their second year at AFI to further develop their work. China imposes strict quotas on foreign films and launching joint ventures to produce films in China, which represents a potentially huge market for Hollywood blockbusters.

PERU: PetroChina to buy Petrobras assets for US$2.6b Beijing-based PetroChina Co., the country’s biggest oil and gas producer, and its parent, China National Petroleum Corp. (CNPC), said they will buy the assets of Brazilian state-run oil company Petroleo Brasileiro SA (Petrobras) in Peru for US$2.6 billion. The deal comprises three blocks of oil and gas fields located in Peru’s Amazon jungle. Petrobras owns two of the blocks and holds a 46% state in the third. The fields currently produce about 800,000 metric tons of oil equivalent a year, PetroChina said. Based in Rio de Janeiro, Petrobras has been selling assets to help finance projects in Brazil’s deep waters and to offset its debt, which stands at about 35% of the company’s equity.

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EUROPE NORTH SOUTHAMERICA AMERICA

SOUTH AMERICA ASIA-PACIFIC SIA PACIFIC


deal of the month B y B eve r ly C h a n

Chiswick Park Ltd

China Investment Corporation (CIC) is reportedly in talks to purchase west London’s Chiswick Park from Blackstone for US$1.3 billion

C

hina Investment Corporation (CIC), China’s sovereign fund based in Beijing, is in the advanced stages of finalizing a US$1.3 billion deal with U.S. private equity group Blackstone Group for the purchase of Chiswick Park, one of London’s largest office developments, The Financial Times reported. The purchase of the 32-acre development would not only be CIC’s second investment in the UK real-estate market but also the most expensive. CIC already spent US$400 million last year in the acquisition of Deutsche Bank’s City of London headquarters. Blackstone bought Chiswick Park in 2011 from Aberdeen Asset Management, Schroders and Stanhope for US$773 million, at 67 percent less than the current selling price. The equity group decreased vacancies from 9 percent to 1 percent while adding another office building in the business park. With 12 buildings and 140,000 square meters of office space, the office park leases

CIC nears US$1.3b deal for London Office Park

to companies like Walt Disney Co., Pepsi Co. Inc., QVC, Tullow Oil and Swarovski. Rent is about US$72 per square feet. The negotiation marks China’s growing investments into the UK. According to reports f rom T h e He r it a g e Fo u n d at i on , C h i n a’s investments in Britain totaled about US$17.8 billion over the past eight years. CIC already owns 10 percent of London’s Heathrow Airport and 8.68 percent of Thames Water Utilities Ltd. New York-based research group Rhodium Group said it expects Chinese investment into Europe to exceed US$1 trillion by 2020. Headquar tered in Ne w York City with international offices in major cities in Asia including Beijing and Shanghai, Blackstone Group L.P. is the world’s fifth largest private equity firm with US$166 billion in assets. The firm has already sold properties worth billions of U.S. dollars since the beginning of this year. CIC currently owns 9.6 percent in Blackstone with a US$3 billion investment.

Clarification The October cover story on China’s art auction market said Christie’s was the first foreign auction house to get permission to operate independently in China. The article failed to make the distinction that Christie’s was the first “international fine art” auction house. In fact, iPai (Shanghai) Co., Ltd., an affiliate of the U.S.-based Auction Systems Auctioneers & Appraisers Inc., was the first foreign auction company to register as a Wholly Foreign Owned Enterprise in China, according to the China Association of Auctioneers. They registered in March 2012.

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i n du s t ry i n s i g h t B Y SH E R Y L J A C O B S O N A N D R I V E R H U A NG

China’s Age-old Dilemma Sheryl Jacobson

River Huang

A surging elderly population will create both opportunities and challenges for foreign companies, service providers and the Chinese government

A

s China makes rapid progress in various industries, healthcare must be a priority, especially s e n i or c are, w h i ch n e e d s a massive overhaul to address serious gaps. Many foreign companies – from phar maceut ic a l comp anies to re a l est ate developers to traditional senior care service providers – are now asking themselves: is it time to make that leap into the Chinese senior care market? Last year, there were 121 million people 65 and older in China, which is larger than the elderly population of the U.S., Japan, Germany and the UK combined, and it is only expected to grow. Furthermore, by 2020, the number is expected to reach at least 171 million by 2020 and at least 400 million by 2040, according to the Economist Intelligence Unit. In addition to a growing population, the proportion of government healthcare spending that seniors represent is expected to reach nearly 50 percent of total spending in 2020, as on average an elderly person spends or consumes three to five times more healthcare dollars than a young person. Seniors require a very different kind of care than the rest of the population, as their healthcare needs tend to be chronic rather than acute, with diseases like hypertension, diabetes, heart disease, arthritis and dementia being the most common afflictions for those 65 and older. A rapidly growing population, the strain placed on healthcare spending and changes in the type and nature of care required will create both new opportunities and challenges for delivering care to seniors in China over the next 20 years. The national and local government is acutely

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aware of these challenges. Senior care is one of the key priorities set out in China’s 12th Five-Year Plan (FYP), with policies and incentives targeting 30 senior care facility beds per every 1,000 people, which represents a supply of 6.6 million total and 3.4 million new facility beds by 2015. These beds can be in dedicated senior care facilities or in hospital units dedicated to senior care. “Second Life,” an euphemism for life after retirement, is also a major part of the 12th FYP, which includes learning and entertainment programs for seniors, fostering integration into society so that all benefit from their knowledge and experience. Addressing widespread deficiency in senior care funding, the State Council recently issued a decree that, starting next year, allows the elderly to extract equity by reverse-mortgaging their property in an effort to increase financing for the daunting senior care needs of Chinese households.

Cultural challenges According to the Ministry of Civil Affairs, the government body that oversees senior care, by 2015, the market size of senior services will be more than RMB450 billion, generating more than five million jobs. S o is now the right time for foreign companies to enter the market? The answer is not an automatic yes. Despite the large size and critical government focus, the market is still in its infancy and there are major cultural challenges and uncertainties to consider. Attitudes towards non-filial care: Research shows that more than half of Chinese seniors would not consider living outside of their home,


which would not conform to Chinese tradition. Wealth and ability-to-pay: The growth of China’s elderly population is rapidly outpacing the accumulation of wealth – in essence, the majority of the Chinese population is becoming old before growing rich. In developed countries, the supply of care has closely matched the demand, and as the ability to pay and number of seniors have grown, so too has the supply. The recent government decree of reverse mortgage seems promising, but China’s 70-year validity of property right, concerns of a housing bubble, traditional mentality that children should be the primary source of senior care, etc., are all impeding factors to reverse mortgage. Scarce land and rising construction costs: There is currently no land use category for senior living in China, and finding a viable senior living

project site is no easy task. The scarcity of land in first-tier cities results in land and construction costs that are prohibitively costly and would price projects out of the reach of most families. In contrast, second-tier cities lack the resources such as transportation, healthcare and other infrastructure necessary to make them attractive to most seniors. Talent to operate facilities: Given that senior care is a new industry, senior care providers must train and develop their own talent for operating the facilities – ever ything from executives to physicians to day-to-day caregivers. The government is aware of these challenges, and in October the State Council reduced taxes and offered subsidies for personnel training, but there will continue to be acute shortages. Unclear regulation and policies: While

The proportion of government healthcare spending that seniors represent is expected to reach nearly 50 percent of total spending in 2020…” imaginechina

China’s elderly population is expected to reach 171 million by 2020

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INSIGHT The Journal of the American Chamber of Commerce in Shanghai

THE APP IS HERE The Insight magazine iPad app is now available in the App Store. The brand-new app from AmCham Shanghai includes the same in-depth articles and news plus special content found only on the app. Visit the App Store and download the Insight app today.

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istockphoto

Healthcare costs for seniors is a major concern

foreign investment is encouraged in senior care ser vices, it is restricted for real estate development and repatriation of profit will be scrutinized heavily by the foreign exchange authority. Taxation policies for developing and operating senior care facilities are favorable but the implementation specifics are not clear or consistent across localities.

Opportunities The evolution of these uncertainties will determine the future senior care environment in China and help shape the care models that are right for China. For example, if the government were to roll out detailed supporting policies such as creating special “senior care” land use zones with subsidized pricing and tax incentives, and the remote sensing and monitoring technologies were to advance rapidly, then we could envision multi-generational, at-home senior living becoming the most popular model in China, thereby reducing the demand for the institutional model of care. Despite these uncertainties and challenges,

the economic opportunity i s c l e a r. T h e m o s t promising sectors will be senior housing – either dedicated or integrated into traditional family developments, home care and nursing services for those seniors who do not want to live outside the home, and healthcare – both pharmaceuticals and devices focused on treating chronic diseases for the elderly. A number of companies, both foreign and local, have entered the market. Shanghai-based SinoOcean Land and the healthcare arm of Columbia Pacific (U.S.) is opening a 110-bed facility in Beijing called Senior Living L’Amore Kaijian. Another 575 room facility has recently been opened by China Vanke Co., the nation’s biggest property company by revenue. Real-estate developer Related Cos. and senior-housing operator Merrill Gardens formed U.S. Merrill Gardens Related, and is building facilities for the elderly in Shanghai, Harbin and Suzhou. Taikang – one of China’s leading insurers – has built a 300,000 square meter Taikang Senior Community, pioneering China’s senior living real estate using insurance funds. Companies that do choose to take the leap and enter the Chinese senior care market face an interesting and dynamic market that will grow and develop more quickly than expected.

Sheryl Jacobson is Monitor Deloitte Senior Partner and head of Deloitte consulting’s Life Sciences Healthcare Practice. River Huang is Associate Director and leads the Regional Economic Competitiveness and Real Estate practice of Monitor Deloitte China.

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Despite these uncertainties and challenges, the economic opportunity is clear.”


CSR

Huaying Zhang, vice president of sustainability at Coca-Cola Greater China and Korea, speaks during a panel on CSR strategy

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he move toward more liberalization in the China market opens the door to more business opportunities, but it a l s o m a ke s it i n c re a s i ng ly important for companies to practice responsible business, said Simon Zadek, visiting s chol ar at t he S cho ol of E c onom i c s and Management of Tsinghua University, during AmCham Shanghai’s 2013 CSR Conference held on November 1 at The Portman Ritz-Carlton. “It’s clear that government regulatory policies are exercising a greater impact on how companies operate in China and deal with social and environmental issues,” said Zadek. “Policy innovations that support responsible business should be encouraged by the business community.” With the theme “CSR and the China Dream,” this year’s conference brought together more than 200 attendees, including leading experts from business, NGOs and academia to discuss the intersection of CSR and Chinese government policies and priorities, as well as opportunities for business to address social and economic needs by creating shared value in China. “Creating shared value is about innovation in the nexus of business opportunity, corporate capability and social needs,” said Mark Kramer,

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CSR Experts Call for More Responsible Business founder and managing director of FSG, a leading U.S. non-profit organization management consultancy. Shared value motivates businesses to seek profit by addressing social problems, he noted. “It is about grabbing hold of the one or two key social problems that matter most to the success of the company, and finding ways to address those problems that enable the company to make more profit.” On the role of business in China’s CSR development, Cindy Tian, vice chair for Asia Pacific, Middle East and Africa at Edelman, noted that companies have evolved from a reactionary to a more proactive or tactical offensive level where they attempt to bring stakeholders together. She noted that MNCs have moved to a “broad engagement” that usually involves embracing a particular idea and building messaging and branding around it. The next level of engagement is brand commitment, followed by full integration, which she said she views as the highest level of CSR involvement. Senior executives from Abbott, Coca-Cola, Edelman, ERM, Foundation Strategy Group (FSG), General Motors, InnoCSR, Intel, PwC China, SynTao and ZTE Corporation participated


in two panels, on how companies approach CSR while attempting to implement their CSR strategies, and how MNCs apply their global CSR strategies in the China context and develop CSR metrics to measure impact in China. Also joining the event were 13 CSR fellows Am C ham Shang hai s ele c te d f rom a ve r y

competitive pool of applicants across China, Europe and the United States to participate in the conference. Established last year as part of the Chamber’s Business Council for Sustainability and Responsibility (BCSR), the fellowship program aims to inspire and develop young professionals in a CSR career.

Conference Sponsors

as & m t s i r h C Mer ry ear! Y w e N y p Hap

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AmCham Shanghai President Kenneth Jarrett, front left, signs a MOU with U.S. Trade and Development Agency Director Lee Zak during the 2013 Washington, D.C. Doorknock

President Kenneth Jarrett, left, with Sun Yan Yan, vice director of the Suzhou Industrial Park Administrat ive Committee (SIPAC), at the Yangtze River Delta Center Suzhou Office Ribbon-cutting Ceremony on October 15

Then President Brenda Foster cheers on the crowd during her roast on June 4

Guests at 2013 Charity Gala on April 13

Chris Wingo, founder and managing director of China Sage Consultants, speaks at the 2013 Orientation China on June 5 18 insig h t DGuidebook E C E M B E R 2 0launch 13


2013 in Pictures Timothy Stratford, Partner, Covington and Burling, with then President Brenda Foster at the 2013 AmCham Shanghai Chinese Investment to the United States Conference on June 21

2012–2013 China Business Report launch event on February 21

Xu Dinghuan, Counselor of the State Council and Chairman of the Chinese Renewable Energy Society, speaks during a launch event of the 2013 Forbes China Rich List on October 16

U.S. Consul General in Shanghai Robert Griffiths at the Suzhou Government Appreciation Dinner on April 24

2013 Indepedence Day Celebration in Shanghai

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2 0 1 3 Spec i al

TOP TEN CHINA STORIES Here is a list of China-related stories that our readers may have missed in 2013 compiled by the staff at Insight

No.1

VISIT MOM: A national law enacted in July makes it illegal for children to neglect their parents who are 60 and older. The amendment calls for “frequent” visits and enables parents to take legal action against their children to ensure compliance. Children are not allowed to bypass the law by giving up any inheritance and they must provide an allowance if they fail to provide proper care.

GOOD MANNERS: The nation’s first tourism law took effect in October, aimed at keeping outbound Chinese tourists safe and getting them to improve behavior . The 112-article law touches on safety, unfair competition and forced shopping trips. But Chinese tourists are also told to “respect local customs, cultural traditions and religious beliefs, care for tourism resources, protect the ecological environment, and abide by the norms of civilized tourist behaviors.”

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BOX OFFICE HERO: Chinese fans love a hero, especially “Iron Man 3,” which broke 2013 domestic box-office records on its opening day, May 3, with US$21.5 million. Previously, the record was held by “Transformers: Dark of the Moon,” with US$18 million on opening day. China screened an extended version that included extra footage filmed in Beijing and featuring China’s top actress, Fan Bingbing. The film went on to make more than US$1.2 billion worldwide to become the year’s highest-grossing film and fifthhighest-grossing of all time.

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B ON VOYAG E : China’s first luxury c r u i s e l i n e r, t h e “ H e n n a ,” l e f t t h e southern resor t island province of Hainan on Jan. 26 for a three-day maiden voyage from Sanya Phoenix Island International Port to Halong Bay in Vietnam. The voyage marks the first liner from mainland China to formally enter the cruise tourism market. About 1,200 passengers were on board for the maiden voyage.

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SLAM DUNK: Chinese NBA fans were thrilled to see the Los Angeles Lakers play a team in China for the first time in October. The popular team played two exhibition games as part of the NBA Global Games. But fans did not get to see two-time Finals MVP Kobe Bryant in action due to an Achilles’ tendon injury he sustained in April. Bryant watched from the sidelines as the Lakers played the Golden State Warriors in Beijing on Oct. 15 and then again in Shanghai on Oct. 18.

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S K I P P ING CLASS: Students in Harbin got a day off on Oct. 21 simply because the air was too dangerous. State media reported a PM 2.5 reading (which measures the level of harmful particulate matter in the air) over 500. Reuters put the figure at 1,000, or 40 times higher than the level deemed safe by the World Health Organization. Visibility was reportedly limited to 10 meters in places as classes were canceled, roads closed and planes grounded.

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IMPORTED: Suzhou residents are now able to buy imported chocolates and other products at the British retailer Marks & Spencer which opened its first Suzhou store in November, bringing the company’s total number of stores in China to 16. The 2,900-square-meters three-story shop is on Guanqian Street.

PLEASE FLUSH: China’s Ministry of Health in February proposed hygiene standards for public restrooms, including requiring twice the number of stalls in women’s washrooms than men’s washrooms in service areas used equally by both genders. The draft rules also call for standards for design, layout, odors, cleaning, equipment and disinfection. Under the plan, toilets attached to buildings should have no more than one fly per square meter and freestanding restrooms no more than three flies a square meter.

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ACTION!: Dalian Wanda Group announced plans to build the world’s largest film studio in Qingdao. The RMB30 billion (US$5 billion) 540-hectare Qingdao Oriental Movie Metropolis should be completed in 2017 and will comprise 20 studios, an underwater stage, film museums, a movie theater, a yacht club and other cultural and tourist facilities.

LET’S CHAT: The number of WeChat users outside of China has reached 100 million. Launched in October 2011, the free app, known also as “Weixin,” is growing faster than some people can type. In July, it was the most downloaded app of its type in Apple’s App Store in Argentina, Brazil, Italy, Mexico, Philippines, Singapore, Spain, South Africa, Thailand and Turkey.

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2 0 1 3 Spec i al

TOP TEN SHANGHAI STORIES Here’s our selection of Shanghai-related stories from the previous year that may be worth talking about at holiday parties over the next few weeks

No.1

FOOD SCARE: Reusing hotpot broth, selling industrial salt as edible salt and selling diseased pigs were among the violations Shanghai food safety official said were used to blacklist food industry executives from the business in June. One hotpot operator’s license was revoked and was slapped with hefty fines plus a 42-month prison sentence.

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TOO HOT: It may be a distant memory but August 7 made history as the hottest day in Shanghai in some 140 years when the mercury reached 40.8 C, just breaking the earlier record in July when it hit 40.6 C. It wasn’t a fluke: the high temps stayed high for 33 days and it hovered above 37 degrees for 19 days.

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TAXI!: Shanghai announced a new regulation in October that will prohibit taxi drivers from asking about a passenger’s destination before they enter the vehicle.The rule, set to take effect next April, is meant to stop drivers from refusing fares based on destination. Another regulation is aimed at discouraging drivers from eating “smelly food” before their shift.


TOWER: Shanghai Tower is now China’s tallest skyscraper and the world’s second – at least for the time being. At 2,073 feet or 632 meters, the tower in Luzjiazui received its last beam in April but it won’t be officially completed until late next year when it will be Asia’s tallest building. The current tallest building in the world is the Burj Khalifa in Dubai at 2,716.5.

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METAL HEADS: Heavy metal fans in China finally got a chance to see the legendary band Metallica perform at the Mercedes-Benz Arena in Pudong for two nights in August. It was the band’s first appearance in China and tickets for the first show were sold out in minutes.

SOLD: Christie’s conducted its first auction in Shanghai in late September where they sold works from Pablo Picasso and Andy Warhol, plus fancy wine and jewelry. It was the first time for the New York-based company to conduct an auction in mainland China without a local partner. Christie’s said its three days of events including a private sale and auction that netted RMB154 million (US$25 million).

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PIGS: After stories about dirty hot pot eateries and dirty air, Shanghai residents had to worry about their drinking water after 16,000 pigs ended up in the Huangpu River in the spring. Some reports say farmers throw dead pigs into the river because it’s cheaper than incineration. FAST LANE: Celebrities were on hand for the grand opening of Lane Crawford’s RMB400 million, 150,000 sq ft flagship store on Huahai Road in October. The Hong Kongbased retailer said it’s the company’s largest store today and twice the size of its branch in the IFC Mall. It occupies four stories and offers products from 500 international brands including clothes and jewelry.

WELCOME: Pudong International Airport may be far from the city but returning home has one advantage: the visa check was ranked the fastest in the world, according to the Airports Council International which tested 100 major airports. Terminal 2 can accommodate up to 90 passengers a minute with 47 booths, reports say.

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NEXT STOP: In November, General Motors Co. said it will shift most of its non-Chinese international headquarters next year from Shanghai to Singapore but added the Shanghai office will remain open with about 250 employees to serve its largest car market. The Singapore office oversees the Asean market, Africa, India, South Korea and the Middle East.

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2 0 1 3 Spec i al

TOP TEN QUOTES Here’s a list of our Top 10 quotes from 2013 that touch on issues related to China or the United States

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the political impact – Dai Qing, environmental activist on of poor air quality, Forbes, Jan. 19, 2013

Guangxi province, – Wei Tianguang, 30, village of Tanzhen, hometown, BBC his in en wom ble on the lack of marriagea News, Sept. 28, 2013

“Wh at both Pres iden t Xi and I recog nize is that becau se of these incredible advances in technology, that the issue of cybe rsecu rity and the need for rules and common approaches to cybersecurity are going to be increasingly important as part of bilateral relationships and multilateral relationships.”

“People in smaller cities and villages tend to prefer local humor and productions as oppo sed to Holly wood block buste rs where you have to read subtitles.”

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p, – Dong Yu, CEO of Bona Film Grou Beijing, on movie fans outside of large s, c i t i e s p re f e r ri n g d o m e s t i c f i l m 2013 24, Oct. k, sswee usine BloombergB

rks after bilat eral – Pres iden t Bara ck Obam a’s rema ehouse transcript, Whit g, Jinpin Xi dent Presi with ing meet June 8, 2013

still shuffling “As U.S. politicians of both political parties are Capitol Hill the and e back and forth between the White Hous the body to ality norm without striking a viable deal to bring for the time good a politi c they brag abou t, it is perhaps a deing build befu ddle d worl d to star t cons ideri ng

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Americanized world.”

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stion fees, “If the roads are still jammed after I pay the conge d?” refun a me will the transportation authorities promise proposal intended – Beijing resident Cao Lei on the city’s ua, Sept. 12, 2013 Xinh ions, emiss cut and c traffi e reduc to

U.S. gove rnme nt – Xinh ua write r Liu Chan g, on the 2013 13, Oct. own, shutd

“It is a good time to be in a small - or medi um-s ized busin ess in Chin a. Chin a’s shift to internal growth and its urbanization process, which will make at least 60 percent of its population live in cities in the next few years, are bringing about huge business

“The missi on’s mem bers carry a space dream of the Chinese nation, and represent the lofty aspirations of the Chinese people to explore space.”

– China’s President Xi Jinping on Shen zhou -10 spac ecraf t launc h, Chin a’s fifth mann ed space craft into space, Xinhua, June 11, 2013

se will have “I believe that during the next 30 years the Chine know they no desire to enter into a conflict with the U.S. They aware of how will continue to grow stronger, but they are also re continued far behind they are technologically. They requi learn how to access to American schools so their students can reinvent themselves.”

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tellin g the “For years , we envir onme ntalis ts have been ke.” mista a is authorities that GDP growth at any cost

red to live “No requirements. I would marry any woman prepa here with me. Anyone at all.”

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minister, Forbe – Lee Kuan Yew, former Singaporean prime column, Oct. 7, 2013

opportunities.”

durin g his visit to – Form er U.S. Presi dent Bill Clint on China, China Daily, Nov. 11, 2013

and the South “The disputed islands in the East China Sea and have been ory territ ’s China China Sea are both part of ver, some howe rs, facto ical since ancient times. Due to histor of the rship owne ’s China ted of China’s neighbors have dispu islands.”

Hua Chun-ying on – China Foreign Ministry spokeswoman about China’s role a U.S. Senate resolution raising concerns 2, 2013 Aug. , Daily China Sea, China South in the

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President Xi Jinping, center, and other members of the Politburo Standing Committee

A Road Map for

The ambitious reform agenda unveiled after the Third Plenum looks to reenergize China’s economic growth, improve confidence in the Party and signals a momentum to liberalize the financial sector

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B Y S A M D R E I M A N A N D wa n g Y U A N

ight after the conclusion of the Third Plenum, many observers thought China’s road to reform lacked a clear direction. That changed a few days later with the release of a comprehensive road map of proposed economic, financial, legal and administrative reforms that suggest the new leadership not only wants to strengthen confidence in the Party but decided to take a sober and realistic look at the problems facing the country. The 20,000 character document, released three days after the Third Plenary Session wrapped up, was widely seen as considerably more interesting than the initial communiqué, and a surprising blueprint for reform. The document, titled The Decision Concerning Some Major Issues in Comprehensively Deepening Reform, was endorsed by the Party’s top 373 officials. To be clear, political reform is nowhere to be found in the Decision. But the changes outlined in it are aimed squarely at reinforcing the Party’s role as the unassailable and unquestioned authority. This was achieved by increasing central control in the hands of the Party’s top leaders to make way for necessary,

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market-based economic reforms. The ambitious reform agenda aims to reenergize economic growth and create a more sustainable economic and financial system. While the Decision used the phrase “consultative democracy” numerous times, this signaled the Party’s desire to make government decision-making more responsive to public concerns, not a shift towards Western-style representative democracy. The Plenum’s true significance, however, will become clearer in the coming months and years when we discover whether or not President Xi Jinping has the political capital necessary to see reforms through. The signs from this meeting and the run-up to it suggest that he does.

New institutions The most important changes to emerge from the Plenum were aimed at bolstering the Party leadership’s authority vis-àvis the government. These moves are likely aimed at


c o v e R s to ry

Reform streamlining decision-making and ending what many see as the policymaking gridlock in key areas of reform for the last decade. Xi chose to achieve this by centralizing power in two major areas. First, the Plenum created a “Leading Small Group” to be responsible for “general planning” and implementation of reform. While there was no mention of the group’s members or the specific issues this group will oversee, the decision to create the group follows a familiar format for the Party. When issues are deemed too sensitive or too complex to be coordinated purely at a government level, they can be elevated to a small, top-level and Party-led group capable of making and implementing tough decisions. It is likely the Party leadership created this group to circumvent vested interests which have held back reforms in China’s government and ensure that policy outcomes fit closely with the political objectives of China’s top leadership. Second, the Plenum established a new “National Security Committee” to be tasked with overseeing domestic security

Sam Dreiman

Wang Yuan

Sam Dreiman is a Project Consultant at APCO Worldwide, a public affairs and communications consultancy headquartered in Washington, DC, and Wang Yuan is an Associate Consultant at the firm. Both are based in Beijing.

issues as well as foreign policy. While details on the exact functions of the body remain unclear, many speculate that the group’s formation was aimed at providing the central leadership with greater oversight of all domestic security issues, as well as streamlining the previously haphazard foreign policy decisionmaking process. Any politically complicated issue the administration needs to address can be placed under the rubric of “security.” Once security is attached to any issue in China, people know they need to get out of the way. Thus, this group is likely to have a wide ranging remit.

Basic to decisive

Many are comparing the proposed reforms to the sweeping economic changes initiated by Deng Xiaoping, waving, that were sustained by Jiang Zemin, left

The Plenum stated that markets should play a “decisive” role in allocating resources, moving away from previous terminology which described this role as “basic.” This language shift is noteworthy, stating the leadership’s determination to “greatly reduce the direct allocation of resources by government.” A reduced role for government interference in the market has the potential to present a more level playing field for MNCs in China. As well as signalling a greater shift towards the use of markets, the Decision noted that China will enact a unified market entry system on the basis of a “negative list,” providing equal market access to foreign companies in sectors not

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including childcare, eldercare, architecture, accounting and auditing, logistics, e-commerce and manufacturing. The precise details of what “opening” will mean in each of this sectors is not yet clear. After recent disappointment at the scope of reforms enacted by the Shanghai Free Trade Zone (FTZ), the Decision confirmed that FTZs will be an important tool for further opening up new sectors of the economy. Indeed, the Decision explicitly indicated that new FTZs will be established in other locations in the future. Yang Weimin, Vice Minister of the Office of Central Leading Group on Finance and Economic Affairs, holds up the Decision document from the Third Plenum

included on the list. The leadership had hinted at accepting the use of a negative list for investment when it agreed to re-start negotiations for a bilateral investment treaty (BIT) with the United States on this basis. The Decision identified several key sectors as targets to be opened up for foreign investment in an “orderly” manner, explicitly naming finance, education, culture and healthcare. It also spoke about lifting limits on foreign investment in areas

State at the core Those looking for fundamental reform of state-owned enterprises may be disappointed. Despite its assertion that market forces will play a “decisive” role in China’s economic future, the Plenum demonstrated the Party’s continued commitment to SOEs’ central role in China’s economy. Reaffirmed was the principle that “public ownership” should be the “core” of China’s economic system, a concept elaborated in plenum documents since the late 1980s. As such, continued marketization will likely take place around the existing SOE system. This should not be interpreted as suggesting that SOE

FOOD AND CONSUMER PRODUCTS The Decision says little about the FCP sector specifically, and includes no sector-specific plans or timelines. However, the general policy direction laid out by the Decision will impact the business environment in which companies in the FCP sector operate. More customers with more purchasing power: The top leadership clearly plans to continue meeting GDP targets, which will grow the middle class and increase its purchasing power. In addition, the ongoing economic rebalancing aims to greatly increase domestic consumption, although so far it has had limited success. More customers outside tier-one cities: The

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Decision emphasizes more measures to improve urban-rural equality and loosen household re g i s t r a t i o n re s t r i c t i o n s o n c i t i z e n s m ov i n g permanently to cities, albeit outside the “largest cities.” All this means an increasingly affluent, urban and consumption-oriented Chinese population, nationwide. Risks remain for high-profile companies: Foreign, luxury goods and high-profile companies will continue to face a risky environment, as the reform in past months has often meant making a public example out of these types of companies. Monopoly busting in the private sphere will continue, and will affect foreign FCP companies disproportionately if current trends


c o v e R s to ry

The most important changes to emerge from the Plenum were aimed at bolstering the Party leadership’s authority vis-à-vis the government.”

reform will not happen. Instead, the focus will likely be on making them leaner and more competitive. The Decision seeks to modernize SOEs’ corporate structure, decision making, hiring process, and incentivize employees for efficiency and competency. SOEs also will contribute up to 30 percent of profits to the government by 2020, which will likely fund social safety net programs. Though this target aims to ensure that SOEs benefit the people, it may end up unraveling many of the SOE reform measures, as the government now has added incentive to ensure that SOEs earn high profits.

President Xi Jinping is getting positive reviews for his sweeping reform ideas

continue. The government also plans to reform tax collection and allocation; the Decision specifically mentions taxing luxury goods, as well as reforming VAT. Although there are few details on the tax plan, this may lead to increased prices for certain products. In addition, corruption and austerity measures will continue, and w i l l c o n t i nu e t o d a m p e n consumption of travel, leisure and luxury products.

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Under the proposed changes, doctors will get higher wages not tied to prescriptions

China will also gradually open up sectors previously monopolized by SOEs to private companies, but this process may depend on how prepared the SOEs are to compete in each sector. Meanwhile, private investment will be permitted in certain public sector projects. In the next stage of SOE evolution, the Decision notes that private investors will be able to invest in some SOEs; state-owned capital investment companies will also be created as well, perhaps modeled on the Temasek stateholding company model employed in Singapore.

Part of the pattern Taking a broad view, what we do know is that by the Party’s own admission in a variety of reports and studies in recent years the current state-enterprise dominated economy is running out of steam. They know the Party’s ability to sustain power comes from economic growth and improved living standards for a citizenry with high expectations fueled by past decades of high growth and exponential lifestyle improvements. The outcomes

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of the Plenum reflect the pattern of the Xi administration’s symbolism and policy objectives laid out to achieve these goals. From the outset, the administration set expectations for economic reform. Xi’s first trip outside of Beijing was to Shenzhen, raising memories of Deng Xiaoping’s “southern tour” which reignited reforms in the early 1990s. Xi and Li’s public speeches since entering office have also focused strongly on the need to pursue economic reform in the face of vested interests. These reformist aspirations were set against the backdrop of a nationalist campaign which focused on “the great rejuvenation of the Chinese nation” and the realization of the “Chinese dream.” Consolidation of power at the upper levels of the Chinese Party-state has also been a theme since day one of the Xi administration. Chosen to head up a streamlined, sevenmember Politburo Standing Committee (PSC), Xi immediately assumed control of China’s powerful Central Militar y Commission (CMC). Hu Jintao, in contrast, presided over a divided, nine-member PSC and had to wait two years for Jiang Zemin to release control of the CMC. The new leading group for


Finance

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“ The Plenum document endorses the pilot Free Trade Zone

Financial reform emerged as one of the key elements of China’s reform package, although the direction taken is largely consistent with prior commitments from the Chinese government. The success of these reform, as well as the sequence in which they are enacted will be critical to the success of the overall reform package. Further liberalization of interest rates and convertibility of capital accounts: The Decision aims to further liberalize interest rates and increase convertibility of capital accounts and improve the mechanism for setting exchange rates. Cautious opening of the financial sector: The Decision aims for liberalization of the financial sector in an orderly and gradual manner. Specifically, private investors will be able to set up small- and mediumsized banks, with the exception of foreign investors. China will also convert the approval-based system of initial public offerings into a registration-based one. Increasing accountability: The Decision also calls for the establishment of deposit insurance and improving the bankruptcy system for financial institutions Shanghai Free Trade Zone as a testing ground for reforms: The Decision endorses the China (Shanghai) Pilot Free Trade Zone as a testing ground for nationwide reforms. However, many are still unsure of how the FTZ will operate, what benefits it will offer to foreign investors and how it will interact with the rest of China; the Decision offered no guidance on these questions.

Xi has used this Plenum, just like his first year in office, as a means of differentiating his administration from that of his predecessors and to begin laying out his vision for China’s future.”

reform and national security committee outlined above fit closely with this streamlining of decision-making at the top. Xi’s government has also sent a powerful set of messages to business and government alike about where authority ultimately lies in China. Foreign and Chinese companies have found themselves targeted by allegations of corruption, most notably in the cases of British pharmaceutical giant GlaxoSmithKline (GSK) and China National Petroleum Corporation (CNPC). This has been accompanied by a dramatic upsurge in the enforcement of China’s anti-monopoly law, with high-profile investigations into dair y companies (including Abbott Laboratories, Mead Johnson Nutrition and Danone), LCDmakers (including Samsung and LG), as well as Chinese Baijiu liquor manufacturers (such as Kweichow Moutai and Wuliangye). These efforts, alongside a major crackdown on corruption, were all aimed at demonstrating the authority of the new administration, as well as its ability to address the interests of China’s citizenry.

A clear break Xi has used this Plenum, just like his first year in office, as a means of differentiating his administration from that of his predecessors and to begin laying out his vision for China’s future. The principles which emerged from the 2013 Plenum the centralization of decision-making and economic lib era lizat ion – may wel l come to def ine X i’s w hole administration, just as the principles outlined in the Third Plenum communiqués of 1978, 1993 and 2003 laid out the ideological parameters within which the policies of the second, third and fourth generations of the PRC’s political leadership would unfold.

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Healthcare After the release of the Decision, healthcare stocks were up due to a variety of positive reforms and measures announced in the Decision. At the same time, no implementation plans or timelines were announced and, as such, it is difficult to predict exactly how reform will play out. More hospitals, more foreign investment: China plans to increase access to healthcare by building more hospitals and enrolling more citizens in insurance programs. To do so, it will allow more foreign investment in hospitals. Critically, private hospitals will now be covered by public health insurance, opening up a huge new user base for private hospitals. Greater flexibility for doctors will allow services will become more rules-based: Doctors will now be allowed to work at more than one hospital, which will increase their pay and reduce their reliance on prescriptions as a

Deng Xiaoping used the Third Plenum of the 11th Central Committee in 1978 as a means of creating political space for economic reform under the guise of “socialism with Chinese characteristics.” Jiang Zemin, still very much under Deng’s influence, used the plenum as a means of legitimizing and sustaining momentum for a renewed liberalization effort already initiated by Deng Xiaoping’s 1992 “Southern Tour” under the oxymoronic rubric of the “socialist market economy.” Hu Jintao and Wen Jiabao, in contrast, used their Third Plenum as a means of emphasizing the differences between themselves and their predecessors. Their 2003 plenum called for “comprehensive economic, social and human development,” forming the basis of what would become known as the “scientific development concept,” the notion that rational state-planning (as opposed to Maoist excess) could play a role in rectifying the imbalances created by market-driven growth. While this opened up the political space for the social reforms of the Hu-Wen era, it also shifted the focus of political attention from the Marxistpackaged marketization of the Deng and Jiang eras and made a resurgence of the state-owned economy possible.

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way to supplement their income. Growth in geriatric and mother/infant care: China is concerned about its aging population, and improved healthcare is a key part of the solution to this problem. The Decision allows foreign investment in eldercare services, and raises the retirement age, which will increase opportunities in the childcare, eldercare and geriatric medicine sectors. Changes to the one-child policy: In addition, to combat the problem of China’s ageing society, the Decision allows couples in which either partner is an only-child to have a second child. This will lead to an increase in obstetrics, infant care and related products.

Whether this Plenum can prove as decisive as its 1978 and 1993 predecessors will depend on the ability of the Party leadership to employ the new institutional measures to corral bureaucratic opposition and coordinate a complex web of necessary economic reforms. The true test of the Plenum’s significance, however, will lie in the ability of the regime to actually implement the reforms it has announced. At this stage, the only deadline laid down by the leadership is that “decisive results” will be achieved by 2020. The coming months will see government leaders and organizations unveil detailed policies aimed at implementing the measures announced in November. As once academic remarked, to be successful, President Xi and Premier Li Keqiang will not only have to break down existing vested interests, they will have to create a whole new set of vested interests in support of reform.

A version of this report first appeared on APCO Worldwide’s website in November.


c o v e R s to ry

The ‘Field of Dreams’ As China’s new leaders embark on a new wave of urbanization, they must deal with four major issues William Antholis

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William Antholis is managing director of the Brookings Institution and previously served at the White House and State Department. He is author of the new book Inside Out India and China: Local Politics Go Global and the recent Brookings Essay “New Players on the World Stage.”

B Y WI L L I A M A NTHO L IS

hina’s march toward modernity is not one phenomena, but rather many intertwined developments. One of the biggest is the move from a rural and agricultural society to a modern urban one. Only recently did China pass the threshold of having half of its people live in cities. China’s leaders know that that trend is critical to the country’s future – but exactly how it will evolve is still ver y much to be determined. In November, Xi Jinping and Li Keqiang began to lay out one path forward at the Third Plenum of the 18th Party Congress. The meeting’s communique stressed the need for “ne w t y p e s of i ndust r y - ag r i c u ltu re and u r b an - r u r a l relationships.” The road map that followed gave indications of what that might look like in a number of domains. Both documents are starting to pull back a veil on how China sees its cities developing – including the role that public policy will play in guiding that trend. As a broad matter, China’s leaders aggressively embrace urbanization – almost as an elixir that will solve many ills. Urban living brings greater incomes, higher levels of education and achievement, greater productivity and better access to healthcare. About 700 million Chinese live in cities. If economic growth continues even modestly, that number could grow by close to 250 million over the next decade – about 2 million per month. Broadly speaking, China has taken the “Field of Dreams” approach to urbanization: “Build it, and they will come.” In China’s first 30 years of liberalization, coastal provinces grew through major public investment combined with liberalization to help lure export-oriented manufacturing. That strategy is now being adopted inland. As inland urbanization continues, however, the question is

not whether urban physical and human investments need to take place. Rather, urban places succeed and fail based on the sequence in which these resources come together, and whether they are adapted to the distinct resources, needs and aspirations of various localities. As Xi Jinping and Li Keqiang embark on a new wave of urbanization, they face a set of related questions.

Infrastructure When Chinese planners think of urbanization, they think of infrastructure – roads and bridges; airports and train stations; universities, schools and hospitals; and systems to deliver water, waste and electricity. That has led to enormous gains in construction related businesses, with considerable employment gains. Investing in infrastructure also adds to a city or province’s GDP, which remains the top benchmark against which local officials are judged when considered for promotion. That emphasis is likely to continue, despite concern about its sustainability. Infrastructure construction places great demands on natural resources like water, energ y and land. China’s environmental crises are real. Even in rural areas, rapid urbanization requires high output from steel, chemical and coal-fired electricity plants, leading to unhealthy levels of air pollution now synonymous with Chinese-style development. The government has placed great emphasis on cleaning up local particulate pollution and building a low-carbon economy. In the next five years, the environment minister has announced that air pollution measures will amount to US$280 billion. One question moving forward is whether sustainability metrics will factor into promotions for local leaders, alongside GDP growth.

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The Third Plenum communique stressed the need for ‘a balanced allocation of public resources.’”

Land acquisition Local leaders struggle with a new land rush. Companies are trying to acquire land for factories, offices and housing. The population density in China’s heartland approaches that of the northeast U.S. outside New York or Boston, yet stretches across a larger territory with more people and fewer urbanites. Many farmers near growing cities still live on ancestral lands and are reluctant to move.

Local governments and developers often remove residents to make way for pr ivate fac tor ies, housing or of f ice construction. This is a highly combustible formula, leading to thousands of contentious protests, albeit usually isolated ones. When that happens, property rights and civil liberties often collide with investment capital and newer notions of economic progress. Internal instability arising from public anger remains Chinese leaders’ greatest concern. Li Chuncheng, the deputy party secretary of Sichuan province, was recently arrested on corruption for his brazenness of confiscating farmers’ land. He was known as Li Chaicheng – or “Li destroys the city” – for being quick to confiscate farmland or to destroy homes to facilitate new construction. A similar story occurred a thousand miles away in Shanxi province, where the mayor of Datong, Geng Yanbo, has been nicknamed “Geng Chaichai” – “Geng destroys and destroys” – and also “Geng Yizhi” – “Geng points his finger and it disappears.” An outcome of the Third Plenum is the decision that farmers should receive a fair share of the profits from landvalue appreciation, granting rights to transfer land or use it as collateral or guarantee. Future policy could allow sales directly

imaginechina

In China, urbanization usually means new roads and other infrastructure projects

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c o v e R s to ry

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Hukou reform will come gradually in larger cities

to developers, rather than via local governments. According to Vincent Chan of Credit Suisse, Chengdu and Chongqing have had experience with such reforms and will likely lead in implementation. Direct transactions mean fairer compensation, but also less revenue for local governments to spend on construction.

Migration The last three decades of massive internal migration was to Guangdong, Zhejiang, Jiangsu and Shanghai on the coast. Export-oriented factories drove growth, pulling along construction and other service oriented jobs. Much of global poverty reduction in the last 30 years came from this enormous movement in China – just as the industrial revolution reshaped Europe, the U.S. and Japan. These migrants fueled the global economy. They also strained the capacities of local governments to finance and provide adequate housing, healthcare and education for migrants and their children. The “hardware” of infrastructure

The ‘hardware’ of infrastructure needs to be matched with the ‘software’ of human services.”

needs to be matched with the “software” of human services. The Third Plenum’s detailed road map was most explicit when addressing hukou reforms – the system of residential registration which restricts social services for rural migrants to their hometown. Under the new plan, rural migrants settling in smaller towns and cities will gain access to benefits such as health and education. In the future, the government will gradually relax restrictions for hukou in medium-sized cities.

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purposes, they have turned to real estate development to generate revenue: creating elaborate credit systems (“Local Government Financing Vehicles”) to underwrite infrastructure or property development. In both cases, these can undermine more sustainable borrowing and lending, not to mention the balance sheet of local and national state-owned banks. Across China, local governments have amassed about US$2.5 trillion to US$4.9 trillion in debt, roughly 30 percent to 60 percent of GDP, mainly for infrastructure projects. The Chinese government itself estimates that as much as one-third of those loans will not be repaid, forcing the central government to cover the costs. A variety of projects, from roads to subways to sewer systems, do not appear to have sufficient user fees or other revenue streams to sustain their long-term operating costs. To tackle local debt, the Third Plenum prescriptions include streamlining the central-local revenue division, providing greater transfer payments to localities and allowing local governments to issue municipal bonds independently. The idea is to make local government borrowing more transparent and accountable. The challenge, of course, is implementation.

Migrants will enjoy some new benefits when they move to new towns and cities

Larger cities like Beijing and Shanghai are overwhelmed with migrants; leaders hope the next wave of migration will involve workers moving from farm to smaller, inland cities. Sichuan and Chengdu have been leaders in dismantling the standard hukou. Chengdu already extends all social security programs to all migrant workers. In 2012 the province and city began to eliminate the division between rural and urban hukou . T he bi g ge st qu e st i on for c it i e s ma k i ng su ch experimental reforms is whether rural residents give up rights to ancestral homes, particularly in districts on the outskirts of major cities which are more easily converted for urban real estate development.

Fiscal federalism How local authorities pay for infrastructure and human services is a major issue. The Third Plenum communique stressed the need for “a balanced allocation of public resources.” Localities today foot most of the bill. Since few local governments have the authority to tax for their own

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Investing in infrastructure also adds to a city or province’s GDP, which remains the top benchmark against which local officials are judged when considered for promotion.”

Big decisions These questions are only the beginning. As Ketan Patel pointed out in November’s Sign of the Times newsletter, there are a number of strategic decisions still facing policymakers: Are leaders focused on increasing population versus increasing quality of life, emphasizing the coast versus nationwide clusters and building an industrial versus a knowledge economy? It is highly likely that this new phase of urbanization will yield diverse results across the provinces and regions. How leaders handle the four issues listed above will help to determine the sustainability of the extraordinary and rapid growth ahead.


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BOG election B Y R YA N B A L IS

New Board Elected

Robert Theleen, third from left, AmCham Shanghai’s 2013 Chair, who was reelected as 2014 Chair, with some members of the 2014 Board of Governors after the Annual General Meeting at the Four Seasons Hotel on November 7

A summary of the Chamber’s 2014 Board of Governors Election

A

mC ham Shang hai memb ers elected the 2014 Chair along with 11 members of the Board of Governors during an election cycle that attracted a record 22 candidates. Five new faces will serve on the board next year. Andrew Au, chair of the Nomination and Election Committee, along with President Kenneth Jarrett, announced the results at this year’s Annual General Meeting (AGM) on November 7 at the Four Seasons Hotel in Shanghai. “O n b e h a l f o f A m C h a m S h a n g h a i , I congratulate the newly elected 2014 AmCham Shanghai Board of Governors,” said Jarrett. Newly elected board members will take office on January 1, 2014.

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Robert Theleen, chairman & CEO of ChinaVest Ltd., was reelected 2014 Chair and spoke about key priorities for the year ahead. “For me, 2014 will be focused on helping our new president and the board to deepen our members’ access to the China market, building the strongest relationship with the new Shanghai Free Trade Zone’s management and attracting the best and brightest of our newest members to become active participants in our various committees and programs,” said Theleen. The following governors were reelected to the 2014 Board: Jimmy Hsin-Hsiao Chen, regional vice president, China domestic service, FedEx Express; Sherman Chu, general counsel, Cisco Systems (China) Networking Technology; Keith N. Cole, vice president, government relations and public policy, General Motors Consolidated


International Operations; Curtis Hutchins, president, Asia Pacif ic, E aton (China) Investments Co., Ltd.; and Eric Zheng, president & CEO, AIG Insurance Company China Limited. Rounding out the 11-member board, members voted in five new governors: Jeremy Burks, president, Greater China, Dow Corning Corporation; Michael Crotty, president, MKT & Associates, Ltd.; Jun Ge, managing director, Intel China Ltd.; Ker Gibbs, investment partner, BW Ve n t u r e s ; a n d C e c i l i a H o , p r e s i d e n t , International Paper Asia. Following the election, Insight caught up with the newly elected governors to learn more about their priorities and what they hope to achieve while on the board. Several governors mentioned the growing uncertainty and challenges ahead for U.S. companies in China. “AmCham has provided a great platform for insight exchange, and this would be extremely important in the next couple of years,” said Burks of Dow Corning in a statement. “The situation in China is changing rapidly right now. We are going to figure out how to ensure the AmCham membership [is] timely informed of the changes and the implications of these changes on business.” International Paper Asia’s Ho also addressed this theme. “I am honored to be elected and I am excite d ab out hav ing t he opp or tunit y to contribute. Doing business in China is not easy, and 2014 is certainly going to bring challenges,” she said. “I look forward to contributing to AmCham Shanghai and its members to help all of us to be as successful as possible.” Other governors said they will focus on the recently launched pilot Shanghai Free Trade Zone (FTZ) and economic goals for the city and China as a whole. “I think it’s an exciting time right now with the FTZ coming online and Shanghai fast appro aching its go a l of b e coming a t r ue International Financial Center,” said Gibbs of BW Ventures, who also serves as chair of the Financial Services Committee. “I’ll do my best to

contribute.” Intel’s Ge added, “We are all in a ver y promising environment with China (Shanghai) Free Trade Zone being piloted and the new reforms expected from the 3rd Plenary Session of China’s 18th Party Congress. I will work with AmCham Shanghai for the best interest of our members.” Another governor mentioned the need to strengthen support for U.S. SMEs doing business in China and to build off the resources and services provided by the SME Center and virtual platform. Leveraging a small business background, Crotty of MKT & Associates said, “It will be an honor to serve AmCham Shanghai and all of you and your businesses during 2014. Please do not hesitate to contact me and I will do my best to assist you.” At the event, Jarrett also announced the 2013 Sponsors of the Year: Air Canada, CIGNA & CMC, Cornerstone International Group, Eagle Ottawa, GAP, Lend Lease, Nu Skin, United Family Healthcare and Washington UniversityFudan University EMBA.

The 2014 Board of Governors Chair: Robert A. Theleen, Chairman & CEO, ChinaVest, Ltd.* Governors: Jeremy Burks, President, Greater China, Dow Corning Corporation Jimmy Hsin-Hsiao Chen, Regional Vice President, China Domestic Service, FedEx Express* Sherman Chu, General Counsel, Cisco Systems (China) Networking Technology* Keith N. Cole, Vice President, Government Relations and Public Policy, General Motors Consolidated International Operations* Michael Crotty, President, MKT & Associates, Ltd. Jun Ge, Managing Director, Intel China Ltd. Ker Gibbs, Investment Partner, BW Ventures Cecilia Ho, President, International Paper Asia Curtis Hutchins, President, Asia Pacific, Eaton (China) Investments Co., Ltd.* Eric Zheng, President & CEO, AIG Insurance Company China Limited* * Reelected

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inside amcham f ro m t h e c h a i r

A Historical Milestone The World Bank recently published its extensive report on world poverty, measured over a 30 period from 1981 to the present. It found that the world’s poor have been reduced from approximately 1.9 billion in 1981 to a dramatically lower 700 million in 2012. However, to me, the most amazing feature of their study is that an astounding 95 percent, or roughly 700 million people, who have moved from below the poverty line to the beginning of middle class incomes are all from China. Simply put, the rest of the world has largely stood still in eradicating poverty, while China has done all of the heavy lifting in the past three decades. Now let’s turn to the role of American business in this historical economic milestone. How many of the companies t h at you re pre s e nt , w h e t h e r l arge multinationals or SMEs, have contributed to this story? While I do not possess any specific studies that link American business to the rise of China’s middle class, I know that as a group American industry deserves an Academy Award for best supporting actor in the creation of the world’s largest middle-class economy. It is reflected in many ways-in our annual Business Climate Survey, in the growing number of members in AmCham Shanghai and in the products and services that contribute daily to the lives of the Chinese people. Lest I be accused of chauvinism, I do not ignore our friends from Europe, Japan or other countries. It is simply that I have witnessed, over 30 years, the work that Americans and Chinese have performed successfully in building a great economy. Turning to other topics, it is always a sad moment to say farewell to someone we respect. Having received the news of

Robert Theleen Chair of the Board of Governors

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Ambassador Gary Locke’s stepping down from this important post, and on behalf of everyone at AmCham, we appreciate his considerable efforts to support AmCham Shanghai in many ways. In addition to his attendance at our annual Shanghai G over nment Appreciat ion Dinner, Ambassador Locke reached out to so many important organizations and individuals in support of AmCham Shanghai’s new SME Center website. His enthusiasm for American business was demonstrated in his leverage of his knowledge, as Secretary of Commerce, in assisting American exporters and investors during his years here. On behalf of AmCham Shanghai and the Board of Governors, we wish Ambassador Locke and his family our best wishes and we hope that he will continue to be an outstanding friend of AmCham in the future. It is also the season to reflect on the past year and to thank all of you who have contributed to the success of AmCham. We had a record number of members voting for our new Board of Governors with 22 candidates who took the time and effort to run for election. Congratulations to the winners and thanks to those of you who did not win, and we hope you will run again next year. The American business community in China has contributed greatly to the lives of so many people in this great country in the form of great products, services and technology. It is also a tradition of our members who, both as corporations as well as through individual effort, contribute in t ime and in mone y to t he lo ca l communities in which they operate. Wishing you, your families and friends a Merry Christmas, Happy Hanukah and a happy holiday season.


inside amcham B O A R D o f g o v e r n or s br i e f i n g

Highlights from the November 2013 Board of Governors Meeting Welcome to Joel Fischl Robert Theleen (Chair) kicked off the meeting by formally welcoming new honorary Board of Governors member Joel Fischl. Fischl is the newly appointed Principal Commercial Officer at the U.S. Consulate General in Shanghai, replacing William Brekke. Previously, he served at the U.S. Embassy in Beijing. Fischl has substantial experience in Asia with many years of service with the U.S. Foreign Commercial Service. Board of Governors Election Andrew Au, chair of the 2014 Nomination & Election Committee (NEC), provided an update on the results of the 2014 Board of Governors Election. The necessary quorum for a valid election was achieved before the November 7 Annual General Meeting. Board members and AmCham Shanghai management discussed ideas on how to improve the election process next year.

Shanghai Free Trade Zone Stefanie Myers, director of Committees, provided a brief report regarding plans for the pilot Shanghai Free Trade Zone (FTZ) initiatives and AmCham Shanghai’s FTZ information page. Visitors to the page may learn more about upcoming events on the FTZ, access key documents such as the “negative list” and follow links to media reports. Myers reported that AmCham Shanghai’s October 29 FTZ event format received many positive evaluations from attendees. In Attendance Governors: Andrew Au, Jimmy Chen, Keith Cole, Sherman Chu, William Duff, Joel Fischl, Curtis Hutchins, Robert Theleen (Chair), Peter Sykes, Eric Zheng Apologies: Lienjing Chen, Pilar Dieter Attendees: Kenneth Jarrett (President), Patsy Li, Stefanie Myers, Linda Wang, Scott Williams, Jessica Wu

The AmCham Shanghai 2013 Board of Governors Governors

Chair

Robert Theleen ChinaVest

Andrew Au Citibank China

Jimmy Chen FedEx Express

Sherman Chu Cisco Systems

Keith Cole General Motors

Pilar M. Dieter Solidiance

Chen Lienjing Pratt & Whitney

Peter Sykes Dow Chemical

Eric Zheng AIG Insurance

Vice Chair

Curtis Hutchins Eaton (China) Investments

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AmCham Shanghai

President Kenneth Jarrett speaks at the 2013 Corporate Social Responsibility (CSR) Conference on November 1

CSR Conference participants enjoy a break organized by WoW by Touch Media

Speakers and attendees pose for a group photo at the “Women in Leadership: Food Services Sector� event on November 12

Maureen O. Hurley, executive vice president and chief administrative officer at Rich Products Corporation, moderates a panel discussion on women in leadership


Month in Pictures

AmCham Shanghai’s “Perspectives on the China (Shanghai) Pilot Free Trade Zone” event on October 29 draws a record turnout

Shao Yu, chief economist at Orient Securities, shares insights on Shanghai’s pilot FTZ

Iowa Lieutenant Governor Kim Reynolds during a visit to AmCham Shanghai on November 13

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AmCham Shanghai New Members U.S. Associated Corporate Membership

Duke Consulting (Kunshan) Co., Ltd. ZHU Jingqiu

American Appraisal China Ltd. LAM Neville

Entropic Communications (Shanghai) Co., Ltd. GENG Yi

CEVA Freight Shanghai Limited STRAIN Robert Perfection Auto Part (Shanghai) Co., Ltd. WANG Jiajie Shanghai Root Medical Research & Development Company KRANZ Elaine TIG (Shanghai) Ltd. XU Jack

HealthTrust Purchasing Group L.P., Shanghai Rep. Office LU Xiaoli InterContinental Hotels Group (Shanghai) Ltd. GLOVER Michael TAO Sharona ZHAO Katherine

Corporate Int’l Affiliate Membership

Jones Day, Shanghai Rep. Office KEENE Ross LING Jerry XU Yang YUAN Liming

AIA Company Limited Shanghai Branch ZHU Xuesong

Regent Advisors Co., Ltd. WU Ray

Bund270 Property Management (Shanghai) Inc. YU Jeanne

Sealed Air (China) Co., Ltd. ZHANG Lijun

Elders Fine Foods (Shanghai) Company ALDOUS Craig Swissotel Grand Shanghai HUSBAND Tate

Tekni-Plex Technologies (Suzhou) Co., Ltd. CHEN Jie ZHOU Ling Textron Trading (Shanghai) Co., Ltd. ZHAN Roger

Associate Membership

The Martec Group HOENIG Magan

Asia Association Of Conference Interpreters Limited TUNG Shenying

URS Consulting (Shanghai), Ltd. CHEN Hongjian

Capvision Partners (Shanghai) Co., Ltd. SHAO Ethan Deloitte Consulting (Shanghai) Co., Ltd. JACOBSON Shery L

Individual U.S. Citizen Membership

HU Megan HUANG Chaoyun JOHNSON Cameron Richard LAW Noel MCMAHON Caleb PRATT Sean Jordan RICHARDS Drew YEN Ann

Individual Int’l Citizen Membership COMACCHIO Michele STEINAU Nils Christian YEE Tuck Meng

Special Membership Charitable Organization Children’s Medical Foundation Limited MCCOMBE Kristi United Way Worldwide CHEN Xi

Non-Resident Corporate Membership Asia Association Of Conference Interpreters Limited MA Wendy Hollywood International Regional Center LLC KING Grant

APPLE Ben

Honorary Membership

Donaldson (Wuxi) Filters Co., Ltd. WU Eugene Xiaogang

CONNER Andrea

Dow Chemical (China) Investment Co., Ltd. CHU Selena

DAVISON Curtis Wayne

U.S. Consulate Shanghai, Commercial Service FISCHL Joel

DAI Anna

ELLIOTT Ronald HENDRICKSON Alexandra

Do you want to share more information about your company? Contact Patsy Li at (86 21) 6279-7119 ext. 8966 or patsy.li@amcham-shanghai.org for a “Standout Listing” opportunity in the New Members Section.


Government Relations Iowa Lieutenant Governor Visits Chamber On November 13, AmCham Shanghai hosted Iowa Lieutenant Governor Kim Reynolds for a briefing on the business climate in China along with AmCham Shanghai members with Iowa ties and the U.S. Foreign Commercial Service. Lieutenant Governor Reynolds highlighted the investment climate and opportunities available in Iowa, as well as its strong ties to Chinese President Xi Jinping. AmCham Shanghai’s Vice President of Programs and Services Scott Williams and Director of Government Relations Steven Chan provided a brief overview of the Chamber and the SME Center and introduced opportunities for collaboration. AmCham Shanghai members discussed opportunities and challenges of doing business in China.

around the world. The research papers featured will be sourced from peer-reviewed journals and internationally recognized research institutions and universities. The IP Index ranks countries’ IPR regimes based on patent filing systems, adherence to international agreements and enforcement, among other criteria. The last edition of the IP Index, Measuring Momentum-The GIPC International IP Index, was released in January 2013 and ranked 11 countries (the U.S. ranked No. 1 and China ranked No. 10). The 2014 IP Index to be released in January will include 15 more countries. Szymanski noted that one of the GIPC’s main goals is to champion IPR as vital to creating jobs, saving lives, advancing global economic growth and generating breakthrough solutions to global challenges. The GIPC also seeks to promote innovation and creativity globally by advocating for strong IP rights and norms, as well as raising awareness and increasing support among key audiences for the value of strong IP rights as a driver of innovation and creativity.

CSR Briefing for Chinese Students

Iowa Lieutenant Governor Kim Reynolds, fifth from left, with AmCham Shanghai staff and members during a recent visit to Shanghai

Intellectual Property Rights Briefing

AmCham Shanghai Government Relations and CSR Director Steven Chan recently briefed more than 60 Chinese students from various universities in China on the role of business in China’s CSR development. Noting the evolution of China’s CSR landscape, Chan said that business has shifted its CSR focus from traditional charity and philanthropy to a more strategic role that creates shared social and economic values for the country. Students asked about the Chamber’s role in promoting CSR in Shanghai and the Yangtze River Delta region, the connections between business and CSR and financial sustainability for non-profit organizations.

AmCham Shanghai hosted an IPR briefing on November 15 with Ellen Szymanski, director of International Intellectual Property at the U.S. Chamber of Commerce’s Global Intellectual Property Center (GIPC), who highlighted key IPR initiatives. In November, the GIPC issued Approaches for Implementing China’s New Trademark Law, which provides recommendations to Chinese policymakers as they move forward during the implementation process on the most recent trademark legislation. In December, Szymanski noted that GIPC will launch two new IP tools – the IP Research Database and the IP Index. The IP database will contain 75 different research papers about how IPR is affecting the economy both in the United States and

AmCham Shanghai Government Relations and CSR Director Steven Chan briefs a group of Chinese university students on the role of business in China’s CSR development

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Event highlights

insi d e amcham

Record Crowd for Free Trade Zone Event On October 29, AmCham Shanghai hosted the first of a series of events centered around the Shanghai Pilot Free Trade Zone (FTZ), “Perspectives on the China (Shanghai) Free Trade Zone,” which attracted a record of more than 300 guests. AmCham Shanghai President Kenneth Jarrett noted in his opening remarks that the FTZ is part of the ongoing reforms Shanghai is pursuing to become an International Financial Center by 2020. Brice Yong Zhang, deputy director general of the Financial Services Bureau in the Pudong New Area; Shao Yu, chief economist and chief strategist for Orient Securities Company; and Andrew Au, CEO of Citi China, shared their thoughts on the Shanghai FTZ and what it means not only for China, but for international companies and future negotiations for China regarding the Bilateral Investment Treaty (BIT) with the United States and the Trans-Pacific Partnership (TPP). The speakers said that allowing the flow of China’s currency, the renminbi, in the offshore market back into the onshore market will be a key piece of the FTZ and broader financial reforms. Another topic discussed was the move to a “negative list” approach, which speakers agreed was an overall positive development. Previously, China used a “positive list” and a Foreign Investment Catalog to limit foreign investment to defined sectors and industries. If an industry did not appear on the list, it was forbidden for investment by foreign firms. With the move to a negative list, if an industry does not appear on the list, it is open to foreign investment. Noting that Shanghai is hoping to reach a five-year target for the services sector to account for 65 percent of GDP by 2015, the FTZ offers opportunities for those international companies – particularly in global auditing and accounting, shipping and logistics, and finance – to take advantage of interest rate liberalization and other financial reforms by providing various financial products, they said. For more information about the China (Shanghai) Pilot Free Trade Zone, visit AmCham Shanghai’s information page: www.amcham-shanghai.org/ftz.

Brice Yong Zhang, deputy director general of the Financial Services Bureau in the Pudong New Area, speaks during an event on the Shanghai Pilot Free Trade Zone

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Event highlights

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Rise of private sector most important trend in China: Andy Rothman The single most important trend in China is the rise of the private sector, said Andy Rothman, China macro strategist at CLSA, at AmCham Shanghai’s Annual General Business Meeting on November 7. Rothman, who delivered the event’s keynote speech on China’s short- and long-term macroeconomic trends, noted that 80 percent of urban employment in China is private, 90 percent of net new job creation is private companies, two-thirds of investment is from private companies and large private companies are more profitable than state-owned enterprises.

Andy Rothman, China macro strategist at CLSA, delivers the keynote speech at AmCham Shanghai’s Annual General Business Meeting on November 7

He said that the rise of China’s entrepreneur is important because the private sector is generating the country’s new middle class, which in turn is creating new demands on the government and putting pressure on a set of issues, including financial reform, rule of law and civil society, governance, environmental protection, quality and availability of healthcare and education.

In the short term, China’s economy will see stable growth, with freight traffic picking up, strong residential property and retail sectors, and blue-collar wages continuing to rise by more than 10 percent a year, according to Rothman. Inflation is not going to be a problem, he added, noting that over the last five years the inflation rate in China has averaged 3.3 percent, which is notable given that there has been almost 10 percent income growth and almost 10 percent GDP growth. In the long term, however, growth will decelerate, due to reasons including a peak within the next few years in new home construction and infrastructure spending by the government, and slowdown across sectors such as exports and manufacturing. But despite the slowdown, Rothman noted, a hard or crash landing is unlikely because of trends including entrepreneurship, consumption, services, financial sector reform, wage growth, innovation, household registration (hukou) reform, education and healthcare and low household debt.

U.S. Consul General Robert Griffiths Briefs Members On November 5, AmCham Shanghai hosted U.S. Consul General in Shanghai Robert Griffiths and other consulate officials at a Monthly Member Briefing held at the Four Seasons Hotel. AmCham Shanghai’s members-only Monthly Member Briefing is an exclusive opportunity to hear from top government officials and issue-area experts who will highlight current events and politicaleconomic trends impacting business in China. Griffiths addressed the impact in Shanghai of the U.S. federal government shutdown and spoke about the recently launched pilot Free Trade Zone (FTZ) in Shanghai. He also informed members about the Consulate’s role in the APEC 2014 symposium in December in Beijing. Members also heard from the leadership of different consular departments, including Principal Commercial Officer Joel Fischl, Political and Economic Chief Bill Duff, Consular Chief Jewell Evans, Public Affairs Chief Dale Largent, Regional Security Officer Miguel Eversley and Agricultural Trade Office Director Keith Schneller. Highlights included strong growth in U.S. agricultural exports to China and new partnership opportunities with e-commerce platforms like Wobai.com, a website launched by the China National Cereals, Oils, and Foodstuffs Co. to build a safe online food source for China. Additionally, members learned that the Consulate processed 400,000 visas last year, including more than 15,500 visas through the AmCham Shanghai Corporate Visa Program (CVP).

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Committee highlights

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Design & Construction Committee Industry Roundtable on Shanghai Tower AmCham Shanghai’s Design & Construction Committee held an industry roundtable and status briefing on the Shanghai Tower on October 29 led by Jun Xia, principal and regional design director Asia Pacific, and Xiaomei Lee, principal and managing director, both of Gensler Architecture in Shanghai. Gensler is responsible for the unique design of the 632-meter Shanghai Tower Project – slated to be China’s tallest building upon its expected completion in 2015.

Xiaomei Lee, second from right, and Jun Xia, right, both of Gensler, provide a status briefing on the Shanghai Tower

Crucial to the design of Shanghai Tower was the use of BIM modeling and tools to realize the concept of a “vertical city,” with performance-based design considerations related to energy, structure, life and safety and building skin, Xia noted. He explained that in his search for the perfect exterior shape, the resulting design exceeded even Gensler’s initial expectations, reducing wind loads by 24 percent, equivalent to US$50 million in construction savings. Another unique feature of the Shanghai Tower is the building’s “double skin,” which acts as an insulating blanket, keeping the sun’s heat out in the summer and the building’s heat in during the winter, while at the same time letting the maximum amount of light in to reduce the need for artificial lighting during the day.

Marketing & Media Committee 2014 Marketing & Media Trends in China AmCham Shanghai’s Marketing & Media Committee recently hosted a presentation on 2014 marketing and media trends by Karl Cluck, chief strategy officer for North Asia at Mindshare. Cluck explained that although GDP growth is slowing, advertising investments continue to accelerate. Digital investment is growing at double digit increases year-on-year and is estimated to expand by 36 percent in 2013. While China leads the world with 564 million Internet users as of 2012, the current 41 percent penetration rate leaves further room for growth. At the same time, Chinese are among the heaviest Internet users globally, with 76 percent surfing the Internet many times a day compared with only 56 percent in the U.S. This, in turn, is leading to the Internet taking more time away from traditional media in China, with statistics indicating Chinese citizens now spend more minutes per day (170+) on the Internet than they do watching TV. This is a huge shift from just five years ago, when the average Chinese person spent 199 minutes on television and only 148 minutes online. End users are increasingly accessing video content through mobile devices (463 million Chinese access the Internet via mobile phones daily). With leading online activities in China over the past month – including social networks and blogs (72 percent), streamed music (72 percent), downloaded music (68 percent) and streamed films (67 percent) – the two leading social platforms in China (WeChat and Weibo) are beginning to seriously consider the monetization of their networks. As Chinese rely heavily on social platforms to research brands (23 percent in China versus just 8 percent in the U.S.), branding opportunities here abound. Cluck closed his presentation by discussing China’s enormously successful e-commerce market, with 50 percent revenue growth this year. Although projected to slow to 32 percent in 2014, it will be more than enough to surpass the U.S. to lead the world in e-commerce transaction volume and gross sales, he said.

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Committee highlights

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Legal Committee Managing Anti-Trust Risk AmCham Shanghai’s Legal Committee hosted an event on October 24 on managing anti-trust risk. Those in attendance were eligible to obtain 2.0 general CLE credits courtesy of Jones Day. CLEs stands for Continuing Legal Education which takes place after admission to the bar and is administered on a state by state basis whereby each state has its own rules and regulations indicating what qualifies for CLE credit and how many credits are needed. Peter Wang, partner at Jones Day, discusses antitrust risk management during an event at the AmCham Shanghai Conference Center

Peter Wang, partner, and Sebastien J. Evrard, partner, both of Jones Day, presented an interactive educational session on managing anti-trust risk in the current enforcement environment, how to prevent and detect violations in your organization and how to react if you have discovered anticompetitive conduct and other issues. Anti Money Laundering (AML) fines have been increasing in China since 2012 and indicate that enforcement procedures are in place for non-compliance and fines could be up to 1 percent of turnover. Notable cases in China where fines have been paid include the LCD cartel, Wulangye and Maotai and milk producers. The session included a discussion on particular practices in China compared to the U.S. market and how internal company procedures and policies can help minimize risk. Participants also discussed best practices for handling investigations.

IT and Education & Training Committees Smart Cities: Education The IT and Education & Training committees hosted a joint event, the third in AmCham’s Smart City series, on “Smart Cities: Education” on October 23.The event featured presentations by Smart Community Group Vice Director of Shanghai Telecom Dai Ying, who discussed Shanghai Telecom’s Smart Community Strategy in education programs, and Gary Sun, senior director of Microsoft Asia R&D Group, on Microsoft’s smart city initiatives in China. Describing the open integrated information platform that was launched this year to kick start smart cities awareness, Dai emphasized the goals of Shanghai Telecom to cooperate with 14 district governments in Shanghai and 2,019 smart communities and establish an overarching, top-down design that is scalable and beneficial to government, businesses and citizens. Shanghai Telecom provides high speed fiber optic Internet coverage for four million users in Shanghai and smart terminals such as IPTV for two million people. Minghang, Changning and Baoshan districts have the closest working relationships with Shanghai Telecom, which provides them access to educational portals that allow high school students to see their college entrance exam results through IPTV and other smart platforms, noted Dai. Sun explained that from Microsoft’s perspective, “big data” or “volume, velocity and variety” is crucial. Microsoft’s system relies on data ingestion (device and user generated) feeding into city artifacts management (models used to aggregate data into data sets), moving to city analytics (predictions and business intelligence, real-time processing), aggregating to city services management (publication, brokering, life-cycle management) and information dissemination (push, notification and alerts) under their Yangtze platform (big data platform for cities). The platform was used recently to collect six months of Beijing taxi traffic data to predict pollution and optimal traffic routes. Sun also described Microsoft’s efforts at personalized education, noting as example E-Schoolbag, which provides a multi-user e-platform for homework completion rates, test score averages and more. Following the presentations, speakers were joined by panelists Tu Tran, senior Asia & Europe Employee, Management and Leadership Development Lead at Freescale, and Robert Abbanat, CEO and co-founder of Ivy League English, for a discussion on business opportunities and integration of smart technology in the education and training sectors. For more information on AmCham Shanghai’s 22 industry-specific committees, please contact committees@amcham-shanghai.org.

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EXECUTIVE READING ROOM We asked selected executives to share with us their preferred source for China-focused business news and/or information. Here is what they said. Michael N. Piergrossi, President, Grace China Ltd. Preference: Asia Wall Street Journal, The Economist,

Shanghai Daily Remarks: “The Wall Street Journal and The Economist recommended for reliable, unbiased reporting. Shanghai Daily recommended for often humorous, often startling, anecdotes about living in our glorious city.”

Patricia Zinkowski, President, Private Jet Journeys (China) and University Air Charters/USA Preference: The Wall Street Journal Asian editions and AmCham email and seminars Remarks: “Our company is one year young in China and I’m always trying to understand the business landscape here. I fall back on truly trusted sources while always remembering to read between the lines.”

Ken Wilcox, President and Chairman, Silicon Valley Bank Preference: International New York Times Remarks: “Read it cover to cover every day. I believe that its reporting is relatively objective and thorough. Of course, I supplement it with hours and hours of conversations with key sources all the time.”

Tom Liu, CEO, ChinaScope Financial Limited Preference: Tophold.com Remarks: “My top China-focused news portal is a young web platform called Tophold.com. It not only captures key topical economic news, it also allows you to rank the news on a bull-bear spectrum and see where your view falls compared to others’. You can also link news to useful data and analytics and connect with your friends through their social network portal. It is a truly innovative way to bring China’s economic and financial information together.”

Luke Wardle, Senior Partner, Human Capital Group Ltd. Preference: Weber Shandwick China News Remarks: “Weber Shandwick sends highlights every evening describing the China happenings of the day. It usually contains four to six stories … each starts with a headline followed by a short descriptive paragraph. It is a great way to see what is going on at a glance and if any of the stories look worth a deeper read I search the content on the web.”

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Insight Magazine December 2013