January/February 2015

JANUARY/FEBRUARY 2015

INThe Journal of theS AmericanIG Chamber of CommerceHT in Shanghai amcham shanghai Features 9 PRESIDENT’S REPORT President Kenneth Jarrett 9 A New Year and a New Century By Kenneth Jarrett

VP OF PROGRAMS & Services Chamber President writes about plans to mark the 100th Scott Williams anniversary of AmCham Shanghai

VP of Administration & Finance Helen Ren 10 Directors EVENT SPOTLIGHT Business development & Marketing 10 Government Appreciation Dinner Patsy Li U.S. Ambassador Max Baucus and Shanghai’s Vice Mayor Committees join the Chamber to celebrate the relationship Stefanie Myers

Events Jessica Wu 12 government relations & csr LEGAL UPDATE Veomayoury "Titi" Baccam 12 Understanding the New Visa Rules By Silvia Feng Membership & CVP Consulate official talks about the 10-year visa and other Linda X. Wang issues

INSIGHT EDITOR-IN-CHIEF

Bryan Virasami 19 COVER STORY Senior Associate Editor The ‘New Normal’ Era Silvia Feng 19 A team of highly regarded China experts talk about the INTERNS Veronica Hernandez Year of the Sheep and what to expect Alison Wallach

Design Alicia Beebe

Printing Insight standards Mickey Zhou 5 Movers & Shakers 7 FTZ Digest Snap Printing, Inc.

celebrating 100 EXECUTIVE reading ROOM INSIGHT Sponsors hip (86-21) 6279-7119 ext. 5667 The Dollar Family 2015 Reading List Story ideas, questions or 36 50 comments on Insight: Please contact Bryan Virasami (86-21) 6279-7119 ext. 5668 [email protected] INSIDE AmCham Insight is a free monthly publication for the members of The American Chamber of 40 From the Chair Commerce in Shanghai. Editorial content and sponsors' announcements are independent and do 41 Board of Governors Meeting not necessarily reflect the views of the governors, 45 Deal of the Month officers, members or staff of the Chamber. No part of this publication may be reproduced without 46 Government Relations written consent of the copyright holder.

Cover design by Tian CHI

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

s we bid farewell to the Year of the Horse captivating pieces include one about the Singer and enter the Year of the Sheep, should sewing machine company stitching its way we expect the pace of newsworthy through China. These articles will appear on eventsA in China to transition from a gallop to a the Chamber’s website and on insight.amcham- crawl? The past year has been an eventful one in shanghai.org. China with a number of dramatic developments In this first issue of the year, we hope our six – some controversial and disappointing – while China experts offer you something to think about others were groundbreaking. It certainly makes whether it’s James McGregor’s essay on Chinese an editor’s job easier with so much going on. politics, Derek Scissors’ analysis of U.S.-China It’s hard to say what will happen this year. economic ties or Kunal Sinha’s insightful piece But 2015 should be filled with interesting on how Chinese consumers are changing year by developments, at least for AmCham Shanghai, year. For the first time, Shen Jianguang of Mizuho as the Chamber prepares to mark its 100th Securities shed some light on China’s economy anniversary with a number of events starting and explains why the renminbi is poised for new with the annual charity gala. See the President’s changes in the international arena. This special Report on page 9 for a glimpse of what to expect. preview begins on page 19. Bryan Virasami One of the ways you can learn more is to We hope you enjoy this issue and please visit editor-in-chief check out some of the articles about American our website regularly for updates on events and companies and entrepreneurs who launched for all our special features. We hope all of our businesses in Shanghai around 1915. These readers have a great year ahead. Movers and Shakers

compiled by Junling cui

Movers and Shakers highlights major personnel changes within the Chinese government at various levels and senior management-level movements within multinational companies in China.

DISNEY Philippe Gas was named general manager of Shanghai Disney Resort. Gas joined Disney in 1991 and headed the French park since 2008. As a 24-year Disney veteran, Philippe has extensive experience with both Euro Disney and Walt Disney Parks & Resorts worldwide. He started as a finance controller in Paris and quickly moved up. In 1997, he became director of corporate compensation in the Walt Disney Company headquarters in Burbank, California. In 2000, he served as Regional Vice President of Human Resources in Disney Asia-Pacific, overseeing the HR strategy in 13 countries in Asia. In 2004, he returned to Disneyland Resort Paris as senior vice president and got promoted to CEO of Euro Disney four years later.

Gas has a law degree from the University of Paris Assas. Philippe Gas

Private Sector LinkedIn Yu Zhiwei recently joined LinkedIn as INTEL marketing vice president. He will report to Intel announced the appointment of Shen Boyang, LinkedIn global vice Rupal Shah Hollenbeck as vice president president and China president. Before of the sales and marketing group (SMG) joining LinkedIn, Yu was China HP vice Yu Zhiwei and general manager for Intel China Ltd. president and general manager of HP She is responsible for selling, marketing Rupal Shah Greater China software group, leading strategy making and and service support relating to products business expansion in the Greater China region. Yu has an and solutions in the region. Shah joined Intel in the United EMBA from Guanghua School of Management, Peking States in 1995 and has worked for the company for 19 years. University. Shah was previously vice president of SMG and director of the company’s Lenovo global account. From 2010 to 2012, she was government managing director of Asia-Pacific sales and business development, based in Singapore. Wang Xiaohong was promoted to vice governor of Henan province. He became the Federal-Mogul Motorparts assistant to the governor of Henan province Federal-Mogul Motorparts recently in August 2013. Prior to that, he served as named Keith Power president for the Asia vice mayor of Xiamen city of Fujian province. Pacific region. Before joining Federal- Wang Xiaohong He also ran public security departments in Mogul, Keith Power was Managing Henan and Fujian provinces. Keith Power Director of the Automotive and Aerospace Coatings Business Unit of AkzoNobel’s Yu Xiaoming was named vice governor of Asia Pacific region. Prior to that, he held various senior sales Shandong province. He served as the and marketing positions with Bridgestone and SHV Gas. Power secretary of Heze municipal party holds a Postgraduate Certificate in Management from the committee since February of 2013. Yu is University of Glamorgan. He also completed the International from Shandong and held various positions Management Program jointly delivered by Stanford University in the provincial government from 1988 Yu Xiaoming and the National University of Singapore. to 2013.

If your company has executive personnel changes, please contact Junling Cui at [email protected].

january/february 2015 insight 5 INTRODUCING OUR 2015 GLOBAL BOARD MEMBERS When only the Best Recruiter will do - Cornerstone International Group

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Chair of Quality and Chair of Member Developmint Compliance Committee EuroME & Asia, Ian Day (London) Alan Kneale (Liverpool)

Chair of North and South Asia Chair of Pacific & Asean Vijay Karkare (Mumbai) David Ealson (Auckland)

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New MNCs Eye FTZ The past month saw the addition, and expansion in some cases, of a few notable multinational businesses to the list of companies registered in the FTZ. For instance, Grant Thornton, the global audit firm and consultancy, recently announced that it will soon be opening an Chairman & CEO President Simon Wan (Shanghai) Larry Shoemaker (Atlanta) office in the zone. It said in its statement that it intends to provide [email protected] [email protected] a full range of services to its clients in the FTZ, including auditing, customs, tax, finance and accounting, and consultancy. Westpac, the Australian Bank, recently opened its first sub-branch in the zone. The move highlights the recently signed free-trade agreement between China and Australia, in which China committed to providing new and improved commercial access for Australian financial firms in the Chinese economy, including banking, insurance, fund management, and securities. Chinese, Foreign Law Firms Get Nod Chair of Quality and Chair of Member Developmint Finally, expanding on its existing FTZ foot print, BNP In a step to further liberalize the legal services industry in Compliance Committee EuroME & Asia, Paribas has opened its second branch in the zone, in the China, the Shanghai FTZ Administration launched a pilot plan Ian Day (London) Alan Kneale (Liverpool) Waigaoqiao area. BNP was one of the first banks to establish a last month that will allow Chinese and foreign law firms in the presence in the zone. Its first foray was with BNP Paribas FTZ to operate jointly via cooperative arrangements. The plan Commodities Trading (Shanghai), which it opened last year. requires that both Chinese and foreign law firms meet certain According to Peter Kwok, the bank’s acting chief executive eligibility requirements. Once met, however, law firms from the officer, the second branch will help the bank “seize the both sides may mutually dispatch lawyers to serve as legal affairs opportunities arising from interest rate liberalization, yuan advisers at their partner company to consult on cross-border internationalization and other offshore businesses.” and international legal issues. The firms may share office space, equipment and support staff, such as secretaries. Each firm, Chair of North and South Asia Chair of Pacific & Asean Rules for Spot Trading however, must maintain its own independent legal status, name, Vijay Karkare (Mumbai) David Ealson (Auckland) In November, the Shanghai FTZ Administration finalized its and financial management. Joint ventures are still not permitted regulations for the spot trading of commodities in the FTZ. The between Chinese and foreign law firms. rules seek to “further accelerate the construction of the This type of cooperation is not unprecedented. Previously, internationally-oriented spot markets for bulk commodities in law firms based in Hong Kong and Macao were allowed to [the FTZ], improve the system for joint administration, regulate cooperate with their mainland counterparts. This was done trading activities, strengthen interim and ex post supervision, under the Closer Economic Partnership Arrangement. protect the legitimate rights and interest of all trading parties, and promote the sound growth of spot markets for bulk Insurance Exchange commodities.” The rules set forth the various requirements Last month, the Shanghai Municipal Government rolled out a regarding the eligibility of market participants, transaction and set of measures in the FTZ, including easing cross-border takes pride in its 25 years in executive search and as trusted settlement method, fund management, product delivery, and financial controls, with an aim to build an international insurance Cornerstone International Group risk control measures. 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With some 70 offices in key cities around the world, Cornerstone is big enough commodity warehousing, in order to minimize risk. to the plan, an insurance exchange will be launched in the to support our clients worldwide while being entrepreneurial enough to provide flexible solutions to our This regulation is the latest step in the FTZ Administrations’ Shanghai FTZ, and re-insurance, maritime insurance, and clients’ unique corporate needs. efforts to advance Shanghai’s plans to become an international insurance asset management will become the focus of growth. In trading hub. Under the plan, eight international platforms addition, to boost the offshore insurance businesses, the FTZ A global member of the Association of Executive Search Consultants (AESC). Cornerstone supporting trade in oil, gas, iron ore, cotton, liquid chemical, Administration will reportedly push forward with reforms in tax applies the Code of Ethics and Professional Practice Guidelines of the AESC which are recognized as silver, bulk commodities and nonferrous metals will be and financial policies, thus encouraging cross-border investment representing the highest level of service in the Executive Search industry. operational in the FTZ by the end of 2015. and fundraising for insurance assets.

In China and with seven offices since 1995, we have in-depth knowledge of the China market. Awards received in China by Cornerstone include “China Recruitment Firm of the Year” and “Trustworthy HR Service Unit” Program Partners supporting organization Visit us at www.cornerstone-group.com to see why you can 'Achieve More With Cornerstone'™

Contact Us: Simon Wan (Shanghai), Chief Executive, [email protected] Eric Li (Shanghai), Senior Consultant, [email protected] James Ng (Shanghai), Managing Partner, [email protected] january/february 2015 insight 7 Laurie O'Donnell (Beijing) , Managing Director, [email protected] Nancy Chu (Hong Kong), Managing Partner, [email protected] China Set to Drop Caps on Drugs audience and counter the pirated video market. However, under new regulations released in September, China’s government must According to a report from the official Securities Times, the first approve all foreign television content before the show can National Development and Reform Commission, China’s air. With the tightening of media restrictions and recent ban on planning agency, has drafted a law that would rid the retail price the online streaming of “The Big Bang Theory,” “The Good Wife” caps on all drugs as early as January 1. If enacted, the law would and other American shows, the place for HBO’s risqué content in allow market competition to play a more significant role in the China remains to be seen. Tencent Video competes in China’s drug industry and would rework the current system of online and mobile entertainment market against Youku Tudou government-set price controls that has led to supply shortages. Inc., in which Alibaba holds a 16.5% stake. While Xi Jinping has promoted affordable, accessible healthcare and recently cracked down on high-priced drugs, the removal of price caps would decrease price pressures on domestic and UnionPay Now on Apple store international pharmaceutical companies. Still, China’s hospitals sell two-thirds of drugs – a segment that will remain unaffected Apple customers in China can now link their UnionPay debit or as a tendering system will keep drug prices low. With estimates credit cards to their Apple IDs for one-tap purchases in the App from McKinsey & Co. placing China’s healthcare market at US$1 Store. Before UnionPay and Apple struck the deal towards a more trillion in 2020, changes in the pricing system could open new convenient online shopping experience, App Store users in China opportunities for pharmaceutical companies. made payments through their telecom operator, with credit cards or through prepayment. UnionPay is China’s only domestic bank card provider, issuing 4.5 billion in China and thus securing a near-monopoly on processing bank and credit card payments made using Chinese currency. With China’s market generating sh u tt er stoc k 16 percent of Apple’s net sales in 2014, the deal between Apple and UnionPay could open the door for continued growth. Reports of a potential partnership between Apple and Alibaba Group’s payment system, Alipay, have also surfaced. Meanwhile, Apple Pay, Apple’s recently introduced payment system, remains unavailable on the Chinese market.

Best Buy Selling China Stores

Best Buy Co Inc, a U.S. retailer and the world’s largest consumer electronics chain, will sell its 184-store network in China to domestic real estate firm Zhejiang Jiayuan Group. Best Buy entered the Chinese market through the purchase of a majority stake in Five Star for about $180 million in 2006. Increasing competition from Chinese rival companies has since put Tencent to Distribute HBO content pressure on Five Star, which most recently represented about 4 percent of Best Buy’s sales. Hubert Joly, Best Buy’s president China’s Tencent Holdings Ltd. signed a deal with Time Warner and chief executive officer, explains the sale as part of the Inc.’s HBO that will allow the Chinese Internet company’s online company’s shifting focus to the U.S. market, which contributes video site to stream HBO’s TV dramas and movies like “Game of about 85 percent of Best Buy’s sales. After the sale of Five Star Thrones” and “True Detective”. The deal makes Tencent the and last year’s exit from the European market, Best Buy will exclusive online platform for distributing HBO shows in China. have 1,800 locations, with just 280 stores outside of the U.S. in HBO representatives see the deal as a way to expand its Chinese Mexico and Canada.

8 insight january/february 2015 PRESIDENT ’S Report A New Year and a New Century

Our January edition of Insight traditionally offers a range of Sammons, the U.S. Consul General in Shanghai in 1915. articles from experts who share their outlook on economic Sammons was a native of New York and had been in the and political issues that will shape the business environment publishing business before embarking on a diplomatic for our members. This year is no exception and I hope you career that included service in the Far East from 1905 to enjoy the articles gathered in this issue. 1923. The Chamber grew out of a series of informal tiffins Sammons held for the U.S. business community, which As for me, rather than write about a new year, I have a much was trying to cope with the disruption to trade caused by more ambitious goal – I’d like to write about a new century, the outbreak of World War I. namely the second century of AmCham Shanghai. As we In 1922, the Chamber sent a delegation to Washington, welcome the New Year, we also mark the 100th anniversary of DC, to lobby for amendments to the China Trade Act, such the founding of our Chamber and the start of our second as reducing taxes imposed under the Act which made it hundred years. This is quite an achievement. We were the difficult for American firms to compete with other foreign third AmCham established outside of the United States, and firms. This might be considered AmCham Shanghai’s first over the past hundred years – despite a brief absence from Washington, DC doorknock! Shanghai following 1949 – we have grown into a large, vibrant By 1922, the Chamber had 88 corporate members, 85 and influential business association. We stand poised for the individual members, and 34 non-resident members. Also next chapter of our development. that year, AmCham Shanghai created the “Associated American Chambers of Commerce in China,” which As we look toward the future during this anniversary year, we included the participation of new AmChams in Peking, also want to uncover and celebrate our past. What was it that Tientsin and Hankow, under the leadership of AmCham motivated a group of American business leaders to establish Shanghai. In 1925, the Chamber went one step further, a business chamber in 1915 in Shanghai? Who were the establishing an American Far Eastern Chamber of leaders? What was the Chamber’s focus? What happened to Commerce with headquarters in Manila, with the purpose the Chamber during World War II and what prompted the of representing American interests in this part of the reestablishment of the Chamber in 1987? What impact did world to Washington, DC. the American business presence have on Shanghai and China during those hundred years? Those are just some of the Those are just some examples from our rich history. As these questions we hope to address during the months ahead. It vignettes suggest, there is considerable continuity between will be a fun and exciting year and we welcome your ideas the concerns of our Chamber forefathers and our priorities and suggestions on how to make the year more meaningful. today. While we have come a long way in terms of size, the And to give you just a taste of what’s in store, allow me to core missions of the Chamber remain focused on access, share some vignettes from our colorful past. influence and providing value to our members, just as they were during our early years. We won’t waver from those The Chamber’s establishment was triggered by both the objectives during our second century. increased number of Americans in Shanghai (1,000 by 1910) and anger by the British about America’s reluctance to enter World War I. Americans felt less welcome at the existing British institutions in Shanghai and decided to establish their own: AmCham Shanghai in June 1915, the American Club in 1917 and the Shanghai American Women’s Club around the same time. Kenneth Jarrett The Chamber’s first honorary president was Thomas President

january/february 2015 insight 9 EVENT SPOTLIGHT

BY SILVIA FENG

U.S. Ambassador Max Baucus speaks at the Chamber’s Shanghai Appreciation Dinner in Shanghai.

A Night of Appreciation

U.S. ore than 350 AmCham trade and investment, border inspection, taxation, Shanghai members and health care showed up to meet guests and discuss Ambassador, special guests joined the latest industrial news. Academics and Shanghai Vice AmCham Shanghai in early specialists from Jiaotong University and Huashan December to celebrate the Hospital also joined the night to share their Mayor and long-standing partnership between the Shanghai professional views in what’s essential for a more MMunicipal Government, the U.S. business prosperous Shanghai. other high community, and the U.S. government with U.S. AmCham Shanghai Chair Robert Theleen, on level officials Ambassador to China Max Baucus, Shanghai Vice behalf of the American business community, join Chamber Mayor Zhou Bo and U.S. Consul General expressed thanks and appreciation to the to mark Hanscom Smith. government. AmCham Shanghai members were joined by partnership at at least 90 high-level government officials from Ambassador addresses crowd annual dinner Shanghai Municipality and governors from neighboring provinces and cities including Anhui, Amb. Baucus emphasized the importance of Nantong, Ningbo, Nanjing and Hangzhou. the U.S.-China relationship and auspiciously Shanghai Municipal People’s Government Foreign envisaged a better future. “I do have a vision for Affairs Office, Shanghai Development and Reform both of our countries. I want to see a strong, Commission and Shanghai Municipal confident and prosperous China that welcomes Commission of Commerce all sent their foreign investments. I want to see the United delegations to catch up with the business States and China working together on any communities who were present last night. problem, no matter how large or small,” he said. Government heads from a variety of sectors Mayor Zhou Bo expressed appreciation for including agriculture, economic and information, AmCham Shanghai’s contribution. “I want to

10 insight january/february 2015 thank AmCham Shanghai for your support to the work of Shanghai municipal government and for helping us improve the business environment,” said Zhou. “AmCham played a huge role in expressing the views and opinions on behalf of the U.S. business community.” The event highlighted the ongoing cooperation between the United States and China. Participants exchanged views on promoting two-way investment, the Shanghai Free Trade Zone, intellectual property rights, visas and environmental issues. Chamber President Kenneth Jarrett reminded guests that AmCham Shanghai is planning a number of events next year in celebration of its 100th anniversary. The dinner was sponsored by several longtime AmCham Shanghai members including Platinum Guests at the dinner sponsors Coca Cola, Dow Chemical, Exxon Mobile, FedEx, GAP, Honeywell, Nu Skin and PPG Industries.

Platinum Sponsors

Corporate Sponsors

january/february 2015 insight 1 1 legal update

BY Silvia Feng

Understanding the New Visa Rules

U.S. consulate’s mCham Shanghai held an event “We expect that in the next one to three years, in late November about the latest there will be a large number of people who will be Jewell Evans U.S. visa policy with a U.S. applying for visas or renewing the visas that they breaks down Consulate official who fielded have,” said Jewell. “The Corporate Visa Program questions and concerns from remains very important to both AmCham and the the new AmCham Shanghai members. The discussion U.S. Consulate here.” Acovered questions about how changes to the The discussion, mainly composed of a Q&A, visa rules policy might affect their business and personal kicked off with Jewell briefing the audience with announced in trips ahead. general updates about the extended visa November

Jewell Evans, the Consular Section Chief of the U.S. Consulate in Shanghai during the AmCham Shanghai event

Jewell Evans, the Consular Section Chief of the arrangement. Here are highlights from that U.S. Consulate in Shanghai spoke at the event that session. – Silvia Feng attracted more than 100 members and employees from member corporations. Jewell also Q: Is there any change to the procedure or length emphasized the importance of AmCham for me to get a U.S. visa? How long do I have to Shanghai’s Corporate Visa Program, which is an wait for an appointment to apply for my new exclusive benefit that AmCham provides to its visa? members and member companies. Jewell Evans: “No. The process won’t get any

12 insight january/february 2015 easier or harder. The exact same standards of Q: Can I hold two different types of visas at the eligibility will apply as before the extension in same time? Understanding the New Visa Rules validity. JE: “An applicant cannot hold two valid visas of “ “We started issuing the visas on November 12. the same type in his or her passport. However, it Wherever The Department of State has worked very hard to is possible for an applicant to apply for and be give us sufficient resources to help us keep the issued another type of visa even if they hold a Chinese processing time down to two weeks or even one valid visa of different type in their passport” citizens apply week if possible. To help keep waiting times down, we recommend that the public apply four to eight Q: What if my passport expires before my U.S. for a U.S. visa, weeks in advance of their trips. Students who will visa does? they are going be on break soon in the U.S. are expected to apply JE: “Bring your new passport and the passport for a visa during their home visit to China, which with your valid U.S. visa together when you enter to be eligible falls into our expectation that December and the border. The US Customs will check both of January will be very busy. Unless applicants need your documents and they don’t have to be for the 10- to travel during January, we recommend that they physically stuck together. It is not suggested to do year visa.” wait until mid-January or later to apply for their a visa transfer, as it brings extra cost.” tourist or business visas. This program is here to stay. Applicants will all have a chance to be given Q: As a Chinese citizen, can I get a 10-year U.S. a full validity regardless of the time of applying.” visa in countries other than China? JE: “Yes. The agreement is between China and the Q: Can I get a 10-year visa through the interview U.S. Wherever Chinese citizens apply for a U.S. waiver program as I’m applying for the same visa, they are going to be eligible for the 10-year type of visa that just expired? visa. JE: “Definitely yes. We encourage applicants to use the interview waiver program. Since there will Q: Who decides how long I am eligible to stay in be an increase in demand in the next year or two, the States for each entry? by simply sending in documents, applicants will JE: “U.S. Customs and Border Protection (CBP) save a great amount of time and work.” makes this determination. Again, being a U.S. visa

The Numbers

During the fiscal year that ended Sept 30, 2014, Mission China processed more than 1.84 million nonimmigrant visa (NIV) applications, more than any other country in the world. This represents a 21 percent increase over the previous year. Shanghai processed more than 450,000 visas during the same time period. Since FY2010, NIV applications in China have increased over 247 percent.

Source: U.S. Consulate Shanghai

january/february 2015 insight 1 3 FOUNDED IN 2004

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Automotive CEO & Top Management Placements and Succession in China/Asia holder does not guarantee your entry into the U.S. types of U.S. visa? The maximum duration of stay for travelers who JE: “As for now the government decided to only visit the U.S. with a business visa remains at six extend the validity for student, business and travel months, but can be shorter depending on CBP’s visas. Other types of visa (such as H1B) are not determination at the border.” affected by this round of change. The governments from both sides will continue their talks on all Q: Will there be a new type of visa that gives types of visa categories and validities, but now we longer duration of stay or easier applications for focus on categories that represent the majority of Chinese who are looking to invest (real estate, for travelers, as they are making the biggest impact to example) in the United States? our communities.” JE: “No. Investors who plan to live in China should continue to apply for B1/B2 visas, which Q: Talking about student visas, will dependent do not permit longer duration of stay regardless family members, such as a wife and children who of the purpose of visit. Investors may also apply are traveling with the student visa holder be for EB-5 visas, which permit lawful immigration entitled to a 5-year visa as well? to the U.S. for qualified investors.” JE: “Yes. Dependant family members going to the U.S. to live with the student during the course of 13 Q: The policy change touched upon how many study will also be eligible for the 5-year visa.” offices in China

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14 insight january/february 2015 FOUNDED IN 2004

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GERMANY · USA · CHINA · UK · MEXICO · INDIA · JAPAN · UAE· FINLAND · BRAZIL · RUSSIA · FRANCE · ITALY · KOREA · THAILAND · CZECH REPUBLIC healthcare

BY SANDY JOHNSTON, JIA XU AND JOHN LIN

The Doctor is Not Available

What can umultuous changes in the past year ongoing commitment to expand the nation’s have greatly impacted China’s healthcare system – from increasing coverage and pharmaceutical pharmaceutical market, and in turn, affordability for patients to improving service quality do when the activities of both domestic and and operations efficiency. However, physicians multinational companies in the remain overwhelmingly underpaid and overworked. physicians refuse country. Events include the release of the latest As civil servants with a capped salary, physicians in essentialT drug list, or EDL, in 2013, new GSP (good China only take home an average of RMB5,000 to to meet sales supply practice) standards, a pricing review of 8,000 each month despite typically caring for dozens representatives? approximately 60 pharmaceutical manufacturers, upon dozens of patients each day. Meanwhile, we this time including domestics, and anti-bribery observe that an increasing number of MNCs are investigations of various pharmaceutical companies. entering the Chinese market; the government is Of these, the anti-bribery investigations have broadening healthcare coverage through the creation proved the most high-profile and the most alarming of a multi-tiered system, whereby patients are area of concern for pharmaceutical manufacturers. triaged to different levels of hospitals; and the This is because the behavior of China’s physicians interaction time between the patient and doctor is has significantly shifted, complicating their steadily declining. willingness to work with corporate players. Triggered partly by the anti-bribery Issues for MNCs investigations, medical practitioners have showed a Sandy Johnston growing reluctance to meet with sales personnel. In light of these trends, the questions companies Similarly, they are also less willing to participate in must ask themselves are: meetings, seminars and conferences, to accept How do you change your operating model to lecture fees and to give out any personal meet these changes? information. What are you doing to meet the evolving In response, many of the largest MNC players are demands of physicians? evaluating their physician interaction model in How do you adapt to decreasing interaction time China. Significant changes include an end to between the patient and the doctor? physician speaker fee payment and sponsorship of physicians for academic meeting participation, the Macrotrends Jia Xu removal of revenue target-related KPIs for sales personnel, and the restructuring of compensation With the government’s push towards expanded and benefits with less weight on the achievement of healthcare coverage for the country, several effects revenue targets. are coming into place: It’s too early to determine if and how the MNCs’ Hospital groups are forming, and significant changes in practice will affect sales volumes. Recent activities around public hospital restructuring results suggest that for some, the impact has been and privatization are taking place. With private significant, while for others, less so. What is certain investment pouring into hospitals and the is that merely amending KPIs and incentives are public’s improved perception of these private insufficient methods of coping with China’s healthcare institutions, the question becomes: changing pharmaceutical market. how can MNCs take advantage of this shift? John Lin The Chinese government has demonstrated an Does the solution lie in matching premium

16 insight january/february 2015 The Doctor is Not Available

Pharmaceutical companies must change the way they interact with doctors

private hospitals’ value proposition with MNC from the number of patients they treat to the product offerings? What does more investment quality of care and service they provide, as well as mean for physicians at these hospitals? What are the academic research and publications they the implications for pharmaceutical MNCs’ produce. In other words, medical practitioners strategy? In the short-term, for instance, these must meet a diversifying set of key performance hospitals may serve as a gateway for patients with indicators to advance. more money to spend on insurance coverage and higher-end treatments. Physicians’ needs Another key trend is the transformation of reimbursement, with the Chinese government We have observed in China a shift in piloting various schemes to control healthcare physicians’ clinical needs from product-centric spending. Take for example the pay-per-disease to solution-centric, similar to the mature approach, whereby medical insurance does not markets. The latter model concentrates on how cover any payments beyond a pre-defined level to provide therapies to diseases instead of merely per disease. A related initiative involves focusing on how to treat their symptoms. More reimbursement pre-payment in which medical specifically, physicians practicing in big city big insurance bureaus pre-pay the allocated total hospitals are requesting information beyond reimbursement budget to the hospitals. The product efficacy and are looking to acquire allocation amount is calculated based on knowledge on providing better therapy solutions schemes, such as using per capita medical to patients. expenses as a calculation basis. The hospital Physicians’ new needs cannot be fulfilled by a absorbs any expenses beyond the pre-payment sales force alone. Pharmaceutical companies budget and any savings may be kept by the must consider all facets from the physician to hospitals. multichannel approaches, marketing and Physicians are rated against a number of factors medical affairs. How are corporations supporting for salary and promotion consideration, ranging physicians? Can they help to offer broader

january/february 2015 insight 1 7 Better patient affordability Broader healthcare coverage Greater hospital operation efficiency Improved healthcare service quality

Effects / Implications

Healthcare institutions Payors Physicians

Hospital groups DRG (diagnosis-related Clinical practices Privatization and private group) payment - Number of patients treated investment of hospitals Reimbursement budget cap - Quality of treatment Tiered healthcare system pre-payment Academic research Primary vs. Advanced care Drug ratio budgeting / - Publications system allocation Source: PwC

research support or improvements in operation towards face-to-face product retailing. Spending efficiencies, etc.? continues to rise, along with the rise of the total sales force. Other channel investments remain stubbornly Interaction time low and are frequently considered additive rather than genuine alternatives. As face-to-face interactions between big city, big So when will the tipping point be reached? When hospital physician and pharma sales reps decline, it will alternative channels (e.g. call center, web and becomes worthwhile to consider mixed channels for social media) actually replace face-to-face selling communication. Invest in how digital solutions – the and meetings? use of web, mobile, social networks, wireless devices, The evolution towards multi-channel approaches and physician portals – can play a role in liaising in many other markets has been slow with mixed with technology-savvy physicians and potentially results, but the China market has characteristics with other key stakeholders. At the same time, suggesting potential for a more rapid evolution. pharma companies should tailor the traditional sales These characteristics include increasing time and forces face to face approach for interacting with compliance presence, experience, and trust in other physicians in the broader market. channels – most notable, digital. Equally, there is potentially greater scope for product and service The future bundling and outcomes/value payments. These will take time, but they are likely to play an increasingly Physicians’ needs are clearly evolving, driven by important role. changes to the healthcare system’s performance measures and promotion criteria and in response to higher levels of public scrutiny. Sandy Johnston is Partner at PwC in Shanghai, Jia In contrast, pharmaceutical companies’ sales and Xu is a Partner in Beijing and John Lin is Senior marketing spending remains steadfastly oriented Manager in Shanghai

18 insight january/february 2015 cover story

SPECIAL 2015 PREVIEW THE WRITERS Editor’s Note: We are pleased once CHINA’S ‘NEW NORMAL’ again to offer six 20 By James McGregor insightful essays that James McGregor is Greater China Chairman for APCO Worldwide in China examine crucial and author of two books: No Ancient Wisdom, No Followers: The Challenges issues likely to of Chinese Authoritarian Capitalism, and One Billion Customers: Lessons from the Front Lines of Doing Business in China. develop in unpredictable ways EXPANDING THE ZONE OF COOPERATION over the course of 22 By David Shambaugh the coming year. David Shambaugh is a Professor of International Affairs and Director of the Several of our China Policy Program at George Washington University, as well as a writers discuss the nonresident Senior Fellow in the John L. Thornton China Center and Center agreements that for East Asian Policy Studies at the Brookings Institution in Washington, DC. President Obama and President Xi A TRANSITIONING ECONOMY signed in November 25 By Shen Jianguang and what should Shen Jianguang is Managing Director and Chief Economist of Mizuho Securities Asia Limited. His research area includes China and Asia Macro- come next. The economics and financial markets. He’s an adjunct professor at the School of Chinese economy is Economics at Fudan University and previously served as a senior economist changing in ways at the European Central Bank. that prompted Xi to use the term “new INVESTMENT TREATY? GUESS AGAIN normal” in referring 28 By Derek Scissors to lowered Derek M. Scissors is a resident scholar at the American Enterprise Institute expectations for where he studies Asian economic issues and trends. He focuses on the Chinese growth. Shen and Indian economies and U.S. economic relations with China and India. Jianguang of Mizuho Securities WEATHERING THE UNCERTAINTY By Kunal Sinha looks at the changes 30 Kunal Sinha has over 25 years of experience unearthing and commenting on and the renminbi. consumer and cultural trends, and helping companies profit from them. Based See his essay and in Shanghai for 9 years, he is the author of two books about creativity and others written by business, and has taught at some of the world’s leading business schools. some of the most distinguished The Sphere of Influence thinkers around. 33 By Paul Haenle Paul Haenle is director of the Carnegie–Tsinghua Center at Tsinghua University in Beijing and an adjunct professor at Tsinghua where he teaches international relations and global governance courses.

january/february 2015 insight 1 9 China’s ‘New Normal’ Details of policy initiatives are James McGregor

likely to come is Greater China Chairman for APCO Worldwide in China slice-by-slice and and author of two books: No Ancient Wisdom, No Followers: depend on several The Challenges of Chinese Authoritarian Capitalism, and One Billion Customers: Lessons from the Front Lines of Doing factors Business in China. He’s also a former bureau chief for The Wall Street Journal and CEO of Dow Jones China.

BY JAMES MCGREGOR

oreign and local business people in China more than ever before should be paying closer attention to Fthe details of government policy as we move through 2015. Don’t expect guidance from blaring headlines or clear levels of the bureaucracy that their world and their role has pathways from government publicity campaigns. Instead, we changed. One immediate byproduct has been the number of can expect the Xi Jingping and Li Keqiang administration to investigations into foreign and local companies, from anti- unveil the drafts and details of the policy initiatives outlined in monopoly cases to tax evasion probes, instituted by a Chinese the Communist Party’s Third and Fourth Plenums step-by- bureaucracy seeking to carve out its new role as the regulator step, slice-by-slice. of a freer economic system instead of serving as an overlord We all know the broad outlines of the blueprints for economic planner and decision maker. revamping the economy and remodeling China’s system of governance. The old economic model is out of gas. China has Policy archaeologist to transition from an export and investment-driven economy to one that depends on cultivating consumption and None of this is going away. The investigations and increased engendering innovation. To do so, the government needs the enforcement are as much the “new normal” as is the confidence of the people, since the spending decisions of willingness of the Party and government to accept annual GDP individuals and the risk-taking appetite of entrepreneurs will growth below 8 percent in order to switch from an investment- act as the bedrock for reforms. Planned legal and court reforms driven to a consumption-driven economy. go hand-in-hand with these objectives. In the past, foreign companies in China could maintain The legal system built during the first 30 years of reform regular communications with the major ministries and was focused on protecting investments and private property. agencies that oversee their sector and sift through the Five- The revamped court system and professionalized judiciary Year plans to try to discern a roadmap of the policies that envisioned in the Fourth Plenum decision are aimed at could affect their businesses and present new opportunities. furthering protections for the consumer, entrepreneur and That is still important, of course, but we now all live in a fast- general citizenry. changing and unpredictable world. As a result, business needs For much of the past two years, the Party’s focus has been to act like a policy archaeologist. We must gather shards of on changing attitudes and behaviors. The anti-extravagance information from many locations and from many levels to and anti-corruption campaigns have been a form of “shock obtain a holistic view. and awe” aimed at telling Party and government leaders and all This is because the Chinese leadership is also making this

20 insight january/february 2015 cover story China’s ‘New Normal’ up as they go along. President Xi is pushing fundamental Other key moves include a new grading system for civil servants, reforms at so many levels throughout the Party and the which will likely bring their first pay raise in eight years and government that the sequencing will be as opportunistic as it institute a system for regular salary increases to support the will be systematic. Some of this will be determined by which anti-graft ethos; and court transparency guidelines that will key moves can trigger a series of follow-up reforms. But much educate people about the legal system and make case filings, of what the future holds is likely to be determined by the court procedures and judicial decisions more transparent. outcome of wrangling among and between ministries and We are also seeing the potential for new business agencies, which seek to maintain their power as reforms opportunities. In recent weeks, the government has indicated radically change their roles. that future sectors open for “social capital” will include state We are already seeing some key moves. One is in the financial grid, pipelines, clean energy, mineral resources, food, water, sector with the recently announced draft proposal for bank transport and elder care. What role foreign business can have in deposit insurance. The proposal, which insures deposits up to these sectors and others is unclear. Only by digging into the RMB500,000 will be a precursor to freeing up bank deposit details, and using that information to advocate for yourself while rates, thereby opening the door for some lenders to fail and for the government forms its policies, will businesses be able to stay the dismantling of the more risky aspects of shadow banking. ahead in the “new normal” of Xi Jinping’s China.

President Xi Jinping and Premier Li Keqiang greet government workers

january/february 2015 insight 2 1 President Xi Jinping and President Barack Obama will have to build on their momentum of cooperation this year

Expanding the Zone of Cooperation

Recent bilateral agreements offer hope but political and diplomatic differences between China and the U.S. will not disappear anytime soon

BY DAVID SHAMBAUGH

ino-American relations closed 2014 on a high note. President Obama’s one-day bilateral summit with SPresident Xi Jinping in mid-November, coming after the APEC multilateral gathering of Asia-Pacific leaders in Beijing, was quite successful. The personal interactions between the two presidents were reportedly relaxed and constructive, and much of substance was accomplished in a short time.

The two presidents reached a number of important The White House also put out two separate “Fact Sheets” agreements during their summit, including a Joint Agreement detailing other areas of commonality and agreement – including on Climate Change and Clean Energy Cooperation; an cooperation in fighting the Ebola pandemic in West Africa, agreement to drop tariffs on a wide range of technology cooperation in several specific areas against the Islamic State products and to expand the Information Technology Agreement, (ISIS), an agreement to work together to enhance Afghanistan’s which will now go to the World Trade Organization for stability and development, cooperation in combatting the illegal ratification; a memorandum of understanding (MOU) on “Rules trade in wildlife products, expanded law enforcement of Behavior for Safety of Air and Maritime Encounters;” and a cooperation and new initiatives in export credits and food second MOU concerning “Notification of Major Military security. Both sides took the noteworthy step of agreeing to Activities and Confidence Building Measures Mechanism.” reciprocally extend the validity of business and student visas for These latter two agreements were real breakthroughs and will go ten years. Finally, and of great importance to members of far towards lessening the possibility that accidental naval or air AmCham Shanghai, the two sides pledged to continue their incidents near China’s coast could dangerously escalate into full- forward momentum towards concluding a Bilateral Investment blown military crises. Treaty (BIT) in 2015. These were the formal agreements reached at the summit. All in all, this is an impressive list of outcomes from the

22 insight january/february 2015 cover story

David Shambaugh

is a Professor of International Affairs and Director of the China Policy Program at George Washington University, as well as a nonresident Senior Fellow in the John L. Thornton China Center and Center for East Asian Policy Studies at the Brookings Institution in Washington, DC. He is a longtime China-watcher and author. His most recent book is China Goes Global: The Partial Power (2013), which was recognized as one of the “Best Books of the Year” by The Economist, Foreign Affairs, Expanding the Zone Bloomberg News and the Asia Society.

summit. They are tangible, specific and achievable. While the previous two years. The stabilization was both welcomed and of Cooperation two sides did not issue a lengthy Joint Statement detailing the sorely needed – but it lasted only about six months before a new two sides’ respective positions on dozens of international issues set of challenges buffeted the relationship and sent it into as had been customary at past summits, this time it was another period of general decline. determined to be more modest but practical in their aspirations From this perspective, we should be hopeful, but not too and achievements. quick in jumping to conclusions, that the recent Obama-Xi summit fundamentally turned things around. It did not, as a Into 2015 wide variety of deep systemic problems and competition remain in the strategic, security, diplomatic, economic, political and The main task for both governments going into 2015 is to even ideological realms. These are not going away anytime soon. build on 2014’s momentum in bilateral relations. While this may In fact, they are very likely now indefinite features of the seem obvious, I note it for two reasons. relationship – the “new normal.” America and China, as well as First, the relationship between the United States and China other nations in Asia and Europe, need to adjust to the reality over the past several years has been battered by a wide array of that the competitive element is now at least as prominent in disagreements and deepening mistrust across-the-board. Both U.S.-China relations as is the cooperative element. The trick – the reality and psychology of competition has become deeply indeed the responsibility of both nations – will be to effectively embedded at both the governmental and societal levels. Recent manage such competition and limit the competitive elements Pew surveys indicate that growing majorities in each society from becoming fully adversarial while expanding the zone of view the other as a “competitor” and “do not trust” the other. cooperation. Media reporting has grown increasingly negative on each side. Those who work in the commercial world on the ground in In China, pervasive perceptions exist that the U.S. is trying to China may not have such a sense that the “commanding heights” both subvert the Communist Party-led political system to of the Sino-American relationship are so stressed, but indeed “contain” it regionally and to harass it globally. Meanwhile, an they are. And, as Harvard Professor Joseph Nye has observed, it increasing number of experts view the nearly 100 official is the geostrategic realm of U.S.-China relations that provides bilateral inter-governmental dialogues as achieving little of the “oxygen” for the existence and growth of commerce. substance. The list of disagreements between the two sides now Members of AmCham and readers of this magazine need to far exceeds the list of commonalities and areas of agreement. For see this bigger picture. Stresses in the geostrategic sphere will these reasons, the Obama-Xi summit successes represent a inevitably and negatively impact U.S. business operations in and much-needed boost at a sensitive time when the relationship is with China. However, such commercial linkages and inter- increasingly viewed as being in trouble. societal interactions at the people-to-people level are precisely The second reason that new momentum needs to be built is the best buffer against the geostrategic factors hemorrhaging because momentum will not occur by osmosis. Recall that the and infecting the broader relationship. U.S.-China relationship had been in a similar nosedive during So, while we hope that the new stabilization and momentum 2009-2010 until then-President Hu Jintao paid a state visit to coming out of the Obama-Xi summit is not temporary, as was Washington in February 2011. That visit, and the agreements it the case following the Obama-Hu Jintao 2011 summit, it will generated, stabilized the steep decline in ties witnessed over the require hard work and consistent efforts on both sides to

january/february 2015 insight 2 3 ima g inechina

President Obama arrives in Beijing for the APEC Summit in November

capitalize on the new gains made in Beijing in November. “mil-mil” exchanges in 25 years, and this new investment needs Perhaps the most immediate opportunity – and one that to be built upon. This will require, on the American side, would give an enormous boost to the relationship – would be an revision or retraction of the 2000 Defense Authorization Act, early conclusion of the Bilateral Investment Treaty. Early in the which places a range of restrictions on what the Pentagon can New Year the two governments are due to exchange draft do and not do in its exchanges with the People’s Liberation “negative lists” of sectors, which would be off-limits to Army. The U.S. and Chinese militaries are at the heart of investment from the other country. The fact that there will be strategic interactions between the two nations, and all efforts such sectors is inevitable – the operative questions are in which must thus be made to deepen the interactions and sectors will they appear and can they be harmonized? This is communications between the two military establishments. likely to produce some of the toughest negotiations in the U.S.- A third set of issues high on the agenda will be to forge practical China relationship since China’s WTO entry negotiations nearly cooperation on a number of so-called “global governance” issues – two decades ago. But they need not be as protracted as the WTO including counter-terrorism, anti-piracy, climate change, maritime negotiations, and can hopefully be brought to fruition quickly security, economic stability, energy security, food security and the and efficiently. Both nations stand to benefit a great deal from setting of global rules for cyber activity. further opening to bilateral investment. Finally, as President Obama enters his last two years in Also on the agenda in the year ahead will be TPP (the Trans- office and faces a Republican majority in both houses of Pacific Partnership). Of course, China is not a party to those Congress, the Chinese government and other nations will negotiations but if they are concluded successfully and if the increasingly perceive him as a “lame duck.” This may be a fact, TPP comes into being, China will have significant incentives to but it would be a mistake not to work with his administration conform and comply with the standards set, even as it pursues in building on the momentum established in Beijing in its own vision of a Free Trade Area of the Asia-Pacific – an November 2014 and in expanding the “zone of cooperation” in initiative Xi Jinping announced at APEC. Sino-American relations. President Obama’s successor will be The deepening of military exchanges is also high on the far better served if he/she inherits a relationship that is stable agenda. 2013-2014 witnessed the broadest and deepest set of and as cooperative as possible.

24 insight january/february 2015 cover story A Transitioning Economy Slower growth, SHEN Jianguang need to boost

is Managing Director and Chief Economist of Mizuho consumption, and Securities Asia Limited. His research area includes fallout from 2008 China and Asia Macro-economics and financial markets. stimulus will shape He’s an adjunct professor at the School of Economics at Fudan University and previously served as a senior the new economic economist at the European Central Bank. climate in China

BY SHEN JIANGUANG

he PBoC announced an interest rate cut in late November, and I believe these moves marked the PBoC’s return to conventional monetary policy tools such as cutting interest rate and required Treserve ratio (RRR), which will be more effective in stabilizing the economy. ima g inechina

Renminbi internationalization is making progress, author says

january/february 2015 insight 2 5 ima g inechina The structure of the economy is in transition: Economic growth, which had until now, been driven by investment and manufacturing, needs to be driven increasingly by consumption and services. Negative impact from massive stimulus of 2008-2009: At the same time that growth is slowing and the economy is in transition, the economy is also suffering negatively from the consequences of the massive stimulus the government undertook in 2008-2009, for example the excess capacity and significant debt. The task of policymakers will become more complex in 2015 with the need to balance China’s need for structural reforms and prevent a hard landing for the economy. On the upside, I believe that more efficient job creation through tertiary sector development and low inflation have expanded the window for policy easing in 2015. On the other hand, I am becoming more cautious on our external outlook of China’s merchandise in 2015, after strong growth in the second half of 2014. Both the number of orders and visitor turnout declined at the autumn Canton Fair in Guangzhou, consistent with the downbeat global economic outlook especially in Japan and Europe. Rising production costs, following the end of the labor dividend in China, may also pressure overseas buyers. Zhou Xiaochuan, Governor of the People’s Bank of China, Further, the vulnerability in the shadow banking system has China’s central bank, at the China-U.S. Strategic and been prevented from collapsing in 2014 due to sustained effort Economic Dialogue in Beijing in July 2014. in deleveraging and the government’s implicit guarantee to stop shadow banking instruments from defaulting. Nevertheless, I believe the issues with shadow banking are related to corporate The cut was announced at a time with broad-based economic governance issues in China’s financial sector and these issues slowdown. Fixed asset investment growth slowed to its weakest could exacerbate due to a slowing economy. The official non- in more than a decade, with key components such as performing loan figure has increased for 11 consecutive quarters manufacturing investment dampened by excess capacity, as of the third quarter last year. property investment dragged by market downturn, and Under this new norm, China’s potential growth rate likely infrastructure investment by tightened fiscal budgetary has peaked, as it faces diminishing returns on investment and condition. Industrial production and retail sales growth also misallocation of resources. In 2014, the government’s growth slowed to its weakest in recent years. I believe the government target at 7.5 percent year-on-year was difficult to beat, reflecting will continue to work towards providing an accommodative the need for the government to lower its objective to 7.0 percent policy environment to stabilize China’s economic growth. As year-on-year in 2015. President Xi Jinping noted in the Politburo meeting on December 5, we are entering a “new normal” in the economy. Sustainable track The notable features of this new norm include the merging of three main trends. I consider monetary easing measures to be short-term A shift to medium-high speed growth: I witnessed the solutions in order to prevent the risk of a hard landing for the economy shift gears to medium-to-high-speed growth following economy as the government remains in a “crisis prevention more than three decades of non-stop high-speed growth. As mode.” The economy still relies on infrastructure investment. To well, for the first time, the government found it challenging to put China on a fundamentally more sustainable track, the meet its growth target of 7.5 percent. government needs to accelerate the pace of structural upgrade,

26 insight january/february 2015 cover story shutterstock

Boosting consumption is a top goal for the government this year

including the reform of SOEs, the fiscal budget and the financial with completed outgoing and repatriation channel for offshore system. renminbi. Fiscal reform: After a revamp of the country’s fiscal system, In July, PBoC Governor Zhou Xiaochuan said that full local governments will need to seek financing through means interest-rate liberalization might be completed in two years if such as municipal bonds with upper level government approval. conditions are “good”, at which time, the PBoC would look to While the measure would increase market transparency, it reduce its intervention in the renminbi exchange rate. Since the would also make local governments more conservative in terms floating band of the renminbi was expanded to plus or minus 2 of fiscal budgeting. percent in March, I observed that China’s exchange rate volatility SOE reform: The inefficiency of SOEs has been a drag on has generally been rising. Nevertheless, this is not to suggest that China’s growth outlook and reform is crucial. The government, the PBoC will not intervene in FX markets to meet its policy however, will continue to be burdened by resistance from vested goals and maintain market order. Instead, I expect a more interests, the difficulty of asset valuation and negotiating the flexible exchange rate to spur the PBoC to return to the full use shareholding structure, as well as the issue of redundant of monetary policy tools. workers, resources and production capacity. The PBoC also revealed that it will launch the long-awaited Financial reform: Back in 2011, I argued that China would deposit-insurance scheme as early as the beginning of 2015. reach basic renminbi convertibility by 2015, and I believe the This is the biggest milestone in interest rate liberalization since progress in RMB internationalization has been in line with our the floor for lending rates was removed in July 2013. So far, the expectation. The Shanghai-Hong Kong Stock Connect Scheme, banking sector has been protected by the ceiling in deposit launched on November 17, provides a new channel in capital rate, the removal of which would lead to higher cost in the account liberalization. In addition to the channels for capital banking sector, threatening the survival of smaller lenders. flow introduced in the past few years, such as RQFII, RQDII, I With the last obstacle cleared, I expect the ceiling in deposit to believe the capital account has become quite porous in China be removed in 2015.

january/february 2015 insight 2 7 Investment Treaty? Guess Again

U.S. Secretary of State John Kerry at a Trans-Pacific Partnership (TPP) meeting in 2013 in Bali.

The economic bilateral relationship in 2015 rests on how negotiations progress on the TPP and BIT

BY DEREK SCISSORS

ay you live in uninteresting times. There is no compelling story for U.S.-China economic relations in 2015, and any major development would probably be an unwelcome surprise. The main bilateral issues will focus on investment, though it is more likely I will be the Republican nominee forM President than a bilateral investment treaty becomes law.

There is, however, a compelling U.S. story in 2015 that matters a The first possible outcome would not only challenge China good deal to China: the conclusion of the seemingly endless saga of directly with regard to the partnership, but also render a bilateral the Trans-Pacific Partnership (TPP). TPP is potentially the biggest investment treaty (BIT) more urgent from Beijing’s perspective and global economic event of 2015, and its implications for China are as less from Washington’s. A strong TPP would boost reformers at the extensive as for any country not party to current negotiations. There People’s Bank and elsewhere and might be positive for China in the are three possible outcomes: longer term. However, in the short-term, a strong TPP would prove challenging, as countries such as Korea and Thailand look to join A strong TPP that alters the world trade regime and makes Japan, Australia and others as TPP members while Beijing struggles accession a difficult policy choice for Beijing; with intellectual property and competitive neutrality provisions. A weak TPP concluded for political reasons that has minor The second possible outcome would drop TPP into the same bin effects on world trade and makes accession a diplomatic as APEC, the East Asia Summit, and the Regional Comprehensive exercise; and Economic Partnership - diplomatic events with only minor No TPP commercial content. TPP would be continuously discussed by

28 insight january/february 2015 cover story Investment Treaty? Guess Again

China, the U.S., and others but have little impact on the bilateral economic relationship. Derek M. Scissors The third possible outcome would degrade the American position in East Asia, economically and politically. It would is a resident scholar at the American therefore elevate China’s relative political position, even while being Enterprise Institute where he perhaps a lost opportunity for China economically. China’s interest in a BIT could be dulled and Beijing may be emboldened to studies Asian economic issues and challenge the American presence in the region in a variety of ways. trends. He focuses on the Chinese Last year in these pages I incorrectly predicted that Trade and Indian economies and U.S. Promotion Authority (TPA) was soon to be introduced for a economic relations with China and Congressional vote. Instead, the Democratic-controlled Senate India. Scissors is also an adjunct ignored President Obama and refused to consider the issue. Only professor at George Washington now are Congressional Democrats discussing what they want to see University, where he teaches a in TPA legislation, having thrown away 10 months. course on the Chinese economy. This does not augur well for the TPA or a strong TPP, as time works against both. Has the U.S., despite lacking the TPA and its own loud domestic opposition, been able to broker bold employees arrested on the basis of questionable charges and opaque liberalization? Can any sort of TPP – sound or unsound – be passed investigations. This contrasts sharply with the legal options available before Presidential election politics, which are starting early due to to Chinese firms in the U.S, which include suing the President. a wide-open Republican field, make trade toxic? Though China is Unless treatment of American firms in China improves, large not directly involved, these are the biggest issues for Sino-American Chinese transactions in the U.S. will face greater scrutiny. economic relations next year. The bilateral climate agreement and claims that China has The multiple delays in the TPA and TPP leave no time for the surpassed the U.S. in economic size, both of which should be two Congress to consider a China-U.S. BIT. After a bruising trade battle minor issues, could, unfortunately, become politically prominent that is unlikely to occur before late spring and which may be near the end of the year. delayed until after summer recess, neither Democrats nor China’s commitment in the climate deal was greeted with Republicans will have any interest in championing an economic excessively sharp criticism by Republican leaders. While vague and agreement with the People’s Republic heading into 2016. voluntary, the commitment is credible due to a weakening Chinese economy. The true Republican objection is to the President’s use of ‘China is beating us’ the Environmental Protection Agency, an ongoing issue into which China policy might be dragged. Nonetheless, two-way investment flows will be an important The topic of the U.S. falling to number two economically is one topic. The National Development and Reform Commission’s attacks the media and some political candidates will find irresistible. The on rich country multinationals for anti-trust violations seem to adjustment of Chinese GDP using the assumption of purchasing have faded somewhat, perhaps because Beijing is aggressively power parity (PPP) is entirely unjustified, for example PPP assumes seeking to decrease competition in trains, rare earths, the existence of the competitive markets the Third Plenum aimed at semiconductors and elsewhere. The spotlight may, however, merely creating. But “China is beating us, whose fault is it?” could become switch to tax avoidance. a campaign theme. On the eastern side of the Pacific, Chinese investment in the A clear TPP success or failure will overshadow the rest of Sino- U.S. is seeing another strong year and controversies have been few. American economic relations in 2015. If the TPP result is But reciprocity is reemerging as a political factor. Some American inconclusive, then reciprocal treatment of investment and domestic companies have seen their businesses heavily damaged and China U.S. political maneuvering may become important.

january/february 2015 insight 2 9 Weathering the Uncertainty

Obsession with food safety, acceptance of wearable technology and opening up of the LGBT market set to develop in 2015

Kunal Sinha

has over 25 years of experience unearthing and commenting on consumer and cultural trends, and helping companies profit from them. Based in Shanghai for nine years, he is the author of two books about creativity and business, and has taught at some of the world’s leading business schools.

BY KUNAL SINHA

hen dawn broke on January 1, 2015, the good times were officially over. For consumers and businesses alike, this year will be remembered as the year of the survivor. Those who make it through will do so through a judicious mix of being Wcareful, being prudent and making the most of the little windows of opportunity.

In many ways, 2014 was the year of the hard knock. The anti-corruption drive also meant that luxury brands were no property market – where millions of middle class and wealthy longer in great demand, as buyers chose to shun display and Chinese invested their earnings, went into a nosedive. As they gifting was frowned upon. tightened their wallets, companies like Unilever and Tesco Suddenly, the Chinese consumer lost faith in the very reported 20 percent decline in sales, and some retailers international brands they had counted on, to provide them reported carrying up to 600 days of inventory. The with great quality, reliability and brand value. The government’s anti-trust investigation buffeted the technology pharmaceuticals industry is yet to recover from the GSK and automotive industries, with Qualcomm reporting that crisis, just as QSR chains Yum and McDonald’s struggle to they might have to pay up to US$1 billion in fines in 2015. The recover trust lost due to the Shanghai Husi expired chicken

30 insight january/february 2015 cover story

Obsession with the environment and food safety

There is a clear and present danger that Chinese consumers feel – and this is leading to a desperate search for solutions to protect themselves and their families. On the back of PM2.5 levels routinely crossing 500 in many parts of north China, sales of home air purifiers increased by 1,431 percent between January 2013 and January 2014. The International School of Beijing installed domes over their playgrounds; but Beijing still can’t stop residents leaving the city. If the sales of organic food products grew by 100 percent last year, expect that growth to double. But along with that, innovative products that help consumers minimize the effect of pollution, and warn them of the danger, will find a huge market. Baidu’s smart chopsticks, which not only inform diners about their meal’s salt and calorific content, but also about the quality of the oil it has been cooked in, if there are any chemicals, and origin of the fruits and vegetables.

Mainstreaming of wearable technology

Wearables will no longer be just for the geeks. Even as companies talk about big data and figure out ways to use that data more smartly, the mainstream consumer’s reliance on data for decision making is increasing by leaps and bounds. Their online shopping choices are heavily influenced by the number of people who have previously bought an item they are interested in. The biggest driver for wearable technology will all be about how information is delivered and used, in order to help Wearables will be cool and common this year. Here, a model displays consumers make decisions. Health monitoring through wearable technology at a show in Shanghai in June wearable bands, and healthcare apps, such as those that inform you about waiting times at a hospital – are fast gaining in popularity. Nearly 40 percent of doctors believe that mobile health will lead to better quality of care and health outcomes, scandal. because patients (as well as those who are not yet sick) are But simultaneously, trust in the government has also monitoring their own physical condition round-the-clock. declined: a consumer attitudes study done by The Futures With a decline in public safety, parents will keep track of Company showed a sharp 18 percent decline in trust in the their young children through wearable bands. Those in the government between 2013 and 2014. service industries – from courier delivery persons to restaurant In these challenging times, which consumer and market waiters, will adopt the Google Glass or Baidu Eye kind of trends should business leaders be taking note of, in order to technology to feed them information while they are on the future-proof their business in 2015? move.

january/february 2015 insight 3 1 China is showing no signs of slowing down – Alibaba’s IPO just created a large number of millionaires in Hangzhou. As the crackdown from the government continues, the wealthy will spend more on experiences rather than on products. Even though Virgin Galactic’s experimental suborbital space flight ended in tragedy, Daxo Travel, an agency in Beijing that is booking seats for XCOR Aerospace’s flights starting in the end of 2015 has reported no cancellations. Horse riding tours in Mongolia, having dinner while being suspended from cables Screenshot of L’Oreal’s Makeup Genius from the Ritz Carlton, meeting fashion designers in Paris – the more unique the experience, the more the wealthy Chinese will be willing to indulge themselves.

Personalized content

As technology enables companies to collect masses of information about their customers, those who are able to use that information to customize content, products and services …the 70 million strong LGBT will gain over those who still believe in mass production. L’Oreal’s Makeup Genius, an app that inspires women through community in China will finally celebrity makeup styles, and then allows them to try out emerge as a market force in 2015.” different styles has been downloaded by more than 200,000. Based on the look that they create by using the app, they can then order the same mix of products from L’Oreal’s online store, and receive recommendations about new styles and LGBT market gains legitimacy products thereafter. As a response to counter the trend of people watching video and film content on their handheld Traditionally under wraps, the 70 million strong LGBT devices, IMAX and TCL have created a home entertainment community in China will finally emerge as a market force in center that delivers personalized content, not on the large 2015. With more people coming out into the open with their screen, but at home. It’s a perfect product for those young sexuality, such as Apple’s CEO Tim Cook, they are now people and families who are spending more time indoors, at confident about being part of China’s social mainstream. At home – because dealing with the traffic and pollution outside China’s first ever Annual LGBT Diversity and Inclusion is too stressful, and the waiting time outside a multiplex too conference, held in 2014, as many as 50 Fortune 500 companies long. Dianping, the very popular restaurant review app, is now participated. looking to reward its users through coupons and offers when It is estimated that the LGBT market is worth US$470 they make recommendations. billion, and travel operators such as Spring Tours are already Companies that are able to use data to identify the offering packages targeted at them. Beijing-based China Star motivations of the consumer, and then create offers which are LGBT Travel organized trips to San Francisco Pride last year. customized to their desires will be able to forge deep Expect more restaurants and fashion brands to embrace this relationships and gain their recommendations. openness in 2015, and hopefully this will be fuelled by a greater representation in the entertainment industry. Luxury goes experiential To bring back the familiar adage, every cloud has a silver lining. It’s up to firms to keep their antennae up for that We have already seen the slowdown in consumption in opportunity, rather than hunker down and hope that the storm ostentatious luxury. But the number of wealthy people in blows over.

32 insight january/february 2015 cover story

China is taking steps to forge stronger relationships with its neighbors. Here, Australia's Prime Minister Tony Abbott greets President Xi Jinping in Brisbane.

The Sphere of Influence China dual-track approach is designed to win friends and take territory but how will its neighbors react?

BY PAUL HAENLE

n his first two years in power, Xi Jinping has made two distinct shifts in China’s foreign policy in order to adapt the country’s diplomatic efforts to its new domestic and regional realities. The Chinese president has reordered the country’s priorities, placing regional diplomacy ahead of great power or developingI country diplomacy, and taken a more proactive approach when it comes to diplomatic work. Yet, while Xi has developed bold and ambitious objectives to match the country’s growing economic clout, expanding overseas interests, and rising domestic and international expectations, his efforts to foster a stable peripheral environment that is more receptive to China’s continued rise have developed a sort of frustrated rhythm.

january/february 2015 insight 3 3 Paul Haenle

is director of the Carnegie–Tsinghua Center at Tsinghua University in Beijing and an adjunct professor at Tsinghua where he teaches international relations and global governance courses. He previously served as director for China, Taiwan, and Mongolian Affairs on the National Security Council staffs of former president George W. Bush and President Barack Obama. He also served in the Pentagon as a China political-military advisor to the Chairman of the Joint Chiefs of Staff.

Xi’s heightened focus on improving relations with China’s highlight that China’s contributions to the Asia-Pacific region go neighbors is not only driven by geopolitics; Xi sees a more beyond economic influence and power. The Silk Road land and welcoming external environment as necessary to achieving the sea routes, for example, have been promoted concurrently as Chinese dream and China’s great rejuvenation. Thus, Xi has opportunities to enhance cultural and people to people exchanges embarked on charm offensives in the autumn months of 2013 and and advance efforts to reform the global governance system. At 2014 in order to demonstrate the benefits of China’s economic the Shanghai Cooperation Organization meeting in September growth available to the region. During multi-stop visits to Central 2013 and the Conference on Interaction and Confidence Building and Southeast Asia in September and October 2013, Xi launched in Asia (CICA) in May 2014, Xi emphasized the importance of the 21st Century Silk Road and Maritime Silk Road projects China’s role in building new regional security architectures to intended to connect the economies of Asia, Africa and Europe ensure common security and a “peaceful, stable and cooperative and bring development and investment to China’s sensitive border new Asia.” And at the annual APEC and East Asia summits, Xi regions. One year later, in October 2014, he unveiled a $40 billion made reassuring statements about handling territorial disputes in Silk Road Fund and an Asian Infrastructure Investment Bank to a peaceful manner and proposed building inclusive regional trade finance infrastructure along these vast land and sea corridors and architectures. Ultimately, Xi aims to unite China’s neighborhood help China orchestrate a shift from absorbing huge amounts of in what he has called a “community of common destiny” within foreign investment over the past three decades to exporting which all can feel secure and prosper under China’s leadership. Chinese capital to the region. Each year following his round of regional diplomacy, Xi has Throughout his regional outreach efforts, Xi has attempted to convened an important Central Committee work conference to ima g inechina

A view of the disputed Paracel Islands off the coast of Vietnam

34 insight january/february 2015 cover story ima

assess China’s diplomatic work. In his speeches in 2013 and 2014, g inechina Xi pointed to failures of China’s foreign policy efforts that not only damaged China’s interests, but also enhanced the risk of unintentional conflict at its borders. He has followed these critiques with policy guidance to improve China’s diplomatic performance to better fit China’s needs and circumstances.

Mollifying concerns

In 2013, Xi suggested that Beijing’s more aggressive use of military and economic might had caused backlash and hedging China has announced the 21st Century Silk Road and Maritime behavior among China’s neighbors. In an attempt to mollify Silk Road projects to improve cooperation with neighbors regional concerns, he outlined a new approach that emphasized the political, cultural, and security aspects of China’s diplomacy view, a rising China believes it can assert strongly its claims even intended to further demonstrate China’s sincerity and goodwill if it causes frictions because ultimately, China’s economic lure will toward its neighbors. The following year, Xi acknowledged in a force countries to relent. speech to the Australian parliament following the G20 Summit in This approach may work in the short term, but in the long run, November that anxieties remained over how China will use its it will foster rivalries, enhance strategic competition, and grow growing power and influence. At the Central Conference on Work instabilities that will be damaging for both China and the region. Relating to Foreign Affairs in Beijing one week later, Xi said the Indeed, instances of the failure of China’s dual-track approach country should more “creatively” pursue its diplomacy, implying until this point abound. In 2014, following the most serious that Chinese diplomats should make better use of their soft-power military standoff between Chinese and Indian border forces in 25 policy instruments. In pursuit of China’s interests, Xi suggested years, Japan and India agreed to build military cooperation China work to contribute more to public goods, advance between their air forces and strengthen cooperation on maritime multilateral diplomacy, and reform the global governance system. security and anti-piracy operations. Shortly after China’s state- A new “diplomacy with Chinese characteristics,” Xi said, would owned CNOOC moved its deep sea oil rig and nearly 80 Chinese ensure common security, value friendship, and pursue win-win vessels, unprovoked, to waters near the disputed Paracel Islands cooperation. off Vietnam’s coast, the U.S. announced in October 2014 it would Yet despite Xi’s repeated efforts, greater confidence in a benign begin allowing weapon sales to Vietnam for maritime defense and even beneficial Chinese leadership role remains elusive. In purposes, ending its decades-long ban with its former foe. As 2013, the announcement of the East China Sea air defense China sets its sights on greater influence and presence in Central identification zone (ADIZ) and its refusal to participate in the Asia via its 21st Century Silk Road, it should expect adverse Philippines’ international arbitration over disputed claims in the reactions from Russia, as its traditional sphere of influence is South China Sea rattled the region. In late 2014, China’s freezing encroached upon. of financing for existing energy projects in Vietnam and the An alternative approach that Xi should consider if he is serious Philippines and its reclamation work in the disputed Spratly about addressing regional narratives of anxiety and suspicion will Islands has led neighbors to be less and less assured that China require that China’s leaders abide by their own purported will uphold the growing consensus of governing principles that principles of win-win cooperation, equal treatment, and rule of they claim to support. While Asia-Pacific nations want China to law, while they continue to be introspective and sensitive to continue to prosper and feel secure, they continue to be nervous regional concerns. As the balance of power in the Asia-Pacific that China will use its economic heft to push sovereignty claims region shifts, China’s sheer size and bid for greater influence will and expand its influence at the detriment of other’s security and make advancing stable and cooperative relations with other Asia- prosperity. Pacific players, including the United States, intrinsically more Noting the apparent contradictions in China’s foreign policy difficult. China, Xi noted in Canberra this year, “is like a big man strategies, some say the Chinese believe that they can both win in the crowd. Other people will undoubtedly watch how the big friends and territory, by following two disaggregated tracks: one man walks and moves, and be concerned about whether the big that embarks on charm offensives using economic, trade, and man will bump into them, block their way or seize their territory.” development assistance; and one that employs military and law Successfully allaying these fears will require that China’s leaders enforcement means to push hard on territorial claims. In this match their actions to their words.

january/february 2015 insight 3 5 Celebrating 100 Years

BY junling cui

The Dollar Family: Founding Members of AmCham Shanghai

Robert Dollar building (Da Lai Da Lou) on 51 Guangdong Road, AmCham Shanghai’s office during the early 1920’s

As the American Chamber of Commerce in Company, one of the largest and most successful Shanghai prepares to celebrate 100 years in China American shipping firms in the 1920s. His father, as of June 2015, we take a look back to highlight Robert Dollar, had great success in China and his some American products, people and companies word alone was enough to close a multi-million that changed daily life in China, bridged cultural dollar deal in China. gaps, and paved the way for decades of American- Robert Dollar was born in Scotland and Chinese trade. immigrated to Canada in 1857, where he took a job as a “chore boy” for a cook in a lumber camp. ne of the early presidents of the In 1872, he started his own lumber business. He American Chamber of established operations first in Canada, then in Commerce in Shanghai was John Michigan, and finally in northern California Harold Dollar, the vice president where he settled in 1888 at San Rafael. While Oof the Dollar Steamship Dollar was seeking more logging sites, he began 36 insight january/february 2015 to investigate the prospect of getting into the Wellington Koo, then the Chinese Ambassador to shipping business. In 1885 he bought his first the United States, called on Edward N. Hurley, steamship, the Newsboy, a small ship of 300-tons. President of the United States Shipping Board, The investment was a huge success. By the end of and said to him: “You can turn the money over to the century, Dollar owned four ships. The Robert Captain Dollar as our depositary. When we Dollar Company was incorporated on December complete the contracts, he will then turn the 10, 1903. money over to the Chinese Government.” “Very Dollar was instrumental in opening up trade well,” replied Mr. Hurley, “but US$30 million – with China. He had become acquainted with the how about Captain Dollar’s bond?” “Bond!” leaders of the new Republic of China after the exclaimed Ambassador Koo, “he doesn’t need any collapse of the Qing Dynasty in 1911. Among his bond or agreement so far as the Government of Robert Dollar contacts was Li Yuanhong, a military leader who China is concerned. I have a cable from the served as vice president of China from 1912 to President of China instructing me to take neither 1914, and then served three short periods as bond or contract.” That cable was attached to the President during the chaotic period of 1916 to contract and Captain Dollar handled the US$30 1923. Robert Dollar and his son traveled in China million without a bond being required by either during the civil war and were always shown the Government. best hospitality and accommodations. In 1918, Robert Dollar’s interest in China went beyond the U. S. Government contracted with the Chinese just his business. He left behind a legacy of Government to have four 10,000 ton ships built institutions in China. He helped to build a by the Kiangnan Dock & Engineering Works, in Y.M.C.A. building, an orphanage, a school for the Shanghai. All the material used in these ships was blind and a village school. As for his son Harold, purchased in the United States and shipped to his sense of civic responsibility was equally strong China. The Robert Dollar Company was in charge as demonstrated by his leadership role in the early of the shipment. years of AmCham Shanghai. And the Robert One story from that period demonstrates the Dollar building (Da Lai Da lou) on 51 Guangdong political reach of the Dollar family. When the Road, which still stands today, was AmCham contract for these four ships was being negotiated, Shanghai’s office in the early 1920s.

One of Robert Dollar’s company ships

january/february 2015 insight 3 7 yangtze river delta

Chamber Hosts Suzhou Government Events

Suzhou Vice Mayor Xu Min with Consul General Hanscom Smith and Kenneth Jarrett

mCham Shanghai hosted Suzhou Development & Reform Commission (NDRC), Vice Mayor Xu Min and more Customs, Commerce and Labor & Social Security than 15 other Suzhou officials at a bureaus. Suzhou municipal government Following the Suzhou Municipal Government luncheon at the Shangri-La Executive Luncheon, AmCham Shanghai hosted Suzhou on October 22. Suzhou Industrial Park (SIP) Administrative AAmCham Shanghai President Kenneth Jarrett, Committee Director General Yang Zhi Ping, Vice Board of Governor Eric Zheng, U.S. Consul Director Sun Yan Yan and more than 30 other SIP General Hanscom Smith, Principal Commercial officials at a recognition dinner of SIP’s 20th year Officer of the U.S. Consulate in Shanghai Eric anniversary at the InterContinental Suzhou on Wolff, Suzhou Committee Vice Chairs Blair Cook November 18. and Aiying Wang, and 40 AmCham Shanghai 2014 AmCham Shanghai Chairman Robert member companies were in attendance to learn Theleen, Jarrett, Principal Commercial Officer of about the 2015 development plans and initiatives the U.S. Consulate in Shanghai Eric Wolff, Suzhou for Suzhou Municipality. Committee Chairs Robert Kong and Strom Kong, During the luncheon, Jarrett moderated an Committee Vice Chair Blair Cook and 80 executive panel featuring representatives from the AmCham Shanghai member companies joined in Suzhou Municipal Government National celebrating SIP’s partnership with American

38 insight january/february 2015 SIP Administrative Committee Vice Chair Sun Yan Guests at the dinner Yan greets Robert Theleen businesses since its founding 20 years ago. Network Suzhou Center serves as a business AmCham Shanghai has established a strong center to host the more than 60 annual programs presence in Suzhou, with the chamber launching which are held in Suzhou, including monthly the Yangtze River Delta (YRD) Network in 2012 roundtables for general managers, finance and HR to expand programs and services for YRD directors, as well as government workshops and members and American business interests in training sessions for member companies. The Anhui, Jiangsu, and Zhejiang provinces. On office plays a central role in AmCham Shanghai’s October 2013, AmCham Shanghai opened the strategy to expand its footprint in the fast- Suzhou Center office in the SIP. The YRD growing Yangtze River Delta.

Suzhou Executive Luncheon Platinum Sponsors

Suzhou Industrial Park Recognition Dinner Platinum Sponsors

Suzhou Industrial Park Recognition Dinner Corporate Sponsors

january/february 2015 insight 3 9 inside amcham from the chair

High-Speed Train to Opportunity

Loudi is a city located about a have to deliver opportunities and a two hour drive from Changsha, willingness to respond to your ideas. the provincial capital of Hunan In other words, technology, Province, with a vibrant population innovation and brand value, the of approximately four million things, which our members bring to residents (that’s about twice the China, comes at a price. The price is size of my hometown of Chicago). I market access, more transparency was there to visit a client company and equal treatment under the laws and to call on the Mayor to talk of China – no more, and certainly about AmCham. Loudi is about to no less. The point is that there are go through what many tier III and so many cities and provinces where tier IV cities have experienced – the AmCham and our members should opening up of China’s new economy. be; we need to try to be as innovative Famed for its minerals, and therefore an organization as your companies a center for mining and mining are in your respective lines of equipment, the city is beginning to business. take on the look and feel of more So, I have invited the mayor, and modern coastal cities. In addition, his team to come to Shanghai and to Robert Theleen it is about to experience a major visit AmCham and present his city Chair of the Board of Governors facelift: high-speed rail service will to our members. Ken and I and our begin this week. The city’s leadership team will be doing much more like knows that it will do wonders for that in 2015. Just like the mayor, we them, but they do not exactly know need to be riding AmCham’s high- how or when. speed train to market opportunity. To my surprise, in this age of As this exciting lunar year closes, austerity, I was invited to dinner by as we wait for the Year of the Sheep, the Party Secretary and his senior I wish to thank all of you for your members of Government in order participation and support, for electing to provide me with a briefing of why a fabulous new Board of Governors American companies should set with five women Governors and, up operations there. Professional, finally, for giving me the honor and passionate, with the usual impeccable privilege to serve you, again, as your courtesies of government hosts, the Chairman. One final word – please Party Secretary kept me overtime to remember that 2015 will be our speak about possible projects for our 100th Anniversary as your American members. He knows he is competing Chamber Commerce in Shanghai. I for your attention with dozens or would like your thoughts and input even hundreds of cities, for your on how we celebrate this historical investment dollars. He knows he will watershed.

40 insight january/february 2015 inside amcham

BOARD of governors briefing Board Gets Briefing on Shanghai Government Appreciation Dinner and 100th Anniversary Preparations Highlights from the December 2014 Board of Governors Meeting High-Speed Train Government Appreciation Dinner Other Items to Opportunity President Kenneth Jarrett briefed the board about December’s As the December meeting was the last one for the 2014 Board, Government Appreciation Dinner and informed governors that Chairman Robert Theleen thanked board members for their this year’s dinner was deemed a success as it included a good involvement and support for AmCham Shanghai. He also number of government officials. In fact, more government briefed the governors on the World Internet Conference that officials attended this year and the number of RSVPs surpassed took place in Wuzhen, Zhejiang, in November, and which 2013 partly due to higher participation from YRD region attracted the top internet companies from America and Asia. officials. AmCham Shanghai was one of the only business organizations invited to the conference. CEOs at the conference were very 100th Anniversary optimistic about the role the Internet will play in the future. Jarrett also briefed the governors on AmCham Shanghai’s 100th Anniversary program. The Chamber is currently focused on developing a visual identity for the 100th Meeting Attendance Present: Jeremy Burks, William Duff, LJ Chen, Mike Crotty, Jun Ge, Ker Anniversary and has started marketing a sponsorship package Gibbs, Curt Hutchins, Robert Theleen (Chair), Eric Wolf, Eric Zheng for the anniversary year. The program will kick-off with the Charity Gala in April and end with a Gala dinner and forum Apologies: Sherman Chu, Cecilia Ho, Jimmy Chen in late October. The traditional GA dinner will be folded into Attendees: Veomayoury Baccam, Kenneth Jarrett (President), the Gala dinner. Scott Williams, Jessica Wu

The AmCham Shanghai 2015 Board of Governors

Chair Governors

Jeremy Burks Jun Ge Ker Gibbs Cecilia Ho Curtis Hutchins Dow Corning Apple BW Ventures International Eaton (China) Paper Asia Investments Robert Theleen ChinaVest

Aina E. Konold Ning Lei Glen Walter Helen Ching- Shirley Zhao GAP Inc. Navistar Coca-Cola Hsien Yang Allergan DuPont AmCham Shanghai Month in Pictures

Guests at the dinner

Amb. Max Baucus Kenneth Jarrett and Robert Theleen before the Shanghai Appreciation Dinner

The ambassador and a guest

SME seminar on Nantong Automation tsunami event

42 insight january/february 2015 AmCham Shanghai Month in Pictures

Author Series event

Guests at the dinner

Wine tasting at the ASC Wine Residence

Automation tsunami event Impact of the recent elections with Cliff Stearns

january/february 2015 insight 4 3 event highlight

Chamber Hosts Sponsor Appreciation Night

Norbert Meyring, Partner at KMPG

mCham Shanghai extended its as President’s Circle sponsors, advertise in Insight gratitude to corporate sponsors Magazine, on the Website, sponsor Spotlight and partners during the Annual Sessions, industry conferences and events such as Sponsor Appreciation Night held the Charity Gala, the Independence Day November 20 at ASC Wine Celebration, Shanghai Appreciation Dinner and Gallery. The sponsors provided generous support many others. Akey to the Chamber’s platforms, programs, events Top 10 Sponsor Awards were selected during and many other activities. Some 80 guests took the Annual General Meeting on November 6: Air part in wine tasting at the Wine Residence where Canada, American Medical Center, Cigna & AmCham Shanghai President Kenneth Jarrett CMB, Delta Air Lines, Dow Chemical, PPG mentioned next year’s 100th year anniversary Industries, Shanghai United Family Hospital, The celebration program and sponsorship Washington University-Fudan University EMBA opportunities. Program, Yew Chung International School of The sponsors played a key role. Some take part Shanghai and Tyco Electronics.

44 insight january/february 2015 deal of the month

BY VERONICA HERNANDEZ

Misfit WearablesTeam Up with Xiaomi and JD.com

itness tracker manufacturer and Silicon Valley start-up, Misfit Wearables, has dipped its toes in Chinese waters. During its 2014 fundraising round, the company raised US$40 million with the help of two major Fcontributors, Xiaomi and JD.com. This marks the first time both of these Chinese companies invest in a wearables manufacturer and is a significant increase of their investments into American start- ups. Although Misfit already has leftover cash from previous investors, the results of this most recent fundraising round indicate new partnerships and new avenues of expansion for the company. Misfit has indicated they are working on creating “smart- home” products. With Xiaomi and JD.com’s support they plan also to switch their manufacturing centers from South Korea to China, and expand more of their sales to China. Misfit Wearables was founded in 2009, by the former CEO of Apple, John Scully and his partners: Sonny Vu and Sridhar Iyengar. They currently only sell two types of minimalist-style fitness trackers. In China, Xiaomi competes with Misfit. While the Beijing-based company primarily produces smart-phones, it also sells a A model displays a Misfit product $13 fitness tracker named “Mi Band.” The company claims their product does not compete Vogue China, and will be available for sale after with $100 Misfit given the huge price discrepancy Chinese New Year. Still, Misfit’s new connections between both products. may help the company get ahead of their Currently, Misfit’s Shine tracker is the top seller competition in China. in the fitness wearables category on JD.com, an The Chinese wearable market is still an online mall platform that earns 85 percent of its emerging one and has potential for massive growth. revenue from consumer electronics. However, According to the technology market research firm, Misfit’s could lose its edge soon given that the Juniper Research, the wearables market grew over Apple Watch is soon to be released in Mainland 300 percent in China in 2013 and is expected to China. The device was featured on the cover of grow even faster in 2014 and 2015.

january/february 2015 insight 4 5 Government Relations

Ex-Im Bank Director Discusses Trade to the future demand of China, who is bending over backwards Expansion to grow sustainably, while also confronting with pressing challenges rising from rapid urbanization.

Freyre specifically highlighted the burgeoning Export-Import Private Sector International Buyer Financing program, which is the third primary focus of the Bank’s engagement in China. All private sector trade transactions that fall out of the previous two dimensions all belong to this program. Though facing challenges posed by foreign currency and regulation of securities, Freyre believes this section is emerging with great potential.

Patricia M. Loui, second right, talks with guests at the “It is very promising and this means we will be able to engage in event significant volumes of transactions in the private sector in China,” said Freyre. Patricia M. Loui, a member of the Board of Directors from U.S. Export-Import Bank (Ex-Im Bank) addressed a group of AmCham Shanghai members in early December about the Guangzhou Vice Mayor Highlights bank’s efforts to expand trade between China and the United Investment Incentives States. Angela Mariana Freyre, the General Counsel and Senior Vice President of the Export-Import Bank, also joined the event. Luo Weifeng, Vice Mayor of Guangzhou Municipal People’s Government, visited AmCham Shanghai in early December to brief Loui kicked off the discussion with a brief look into the China members on the business advantages of investing in Guangzhou. portfolio that the Ex-Im Bank has been developing. Dubbed the Vice Mayor Luo emphasized Guangzhou’s closeness to Southeast “3-legged stool,” the three financing instruments provide great Asia and said that it could serve as a good hub for companies support and facilitation to Chinese buyers who are interested in interested in exporting to Southeast and South Asia. He also noted US products, services and technologies. Guanzhou’s cooperation with Singapore as one of the ways it is trying to strengthen its ties with cities in Southeast Asia. The Framework Agreement signed between the U.S. Ex-Im Bank and China’s Ministry of Finance (MOF) in 2005 also saw Although Guangzhou already has a significant amount of tangible improvements after years of cooperation and investment from the United States and Europe, it is eager to negotiation. By providing loans while making China MOF the attract even more investment and is offering very favorable guarantor, the Export-Import Bank has funded Chinese buyers incentives. He also told members that Guangzhou plans on with US$400 million for buying U.S. goods and services since having its own Free Trade Zone (FTZ). Unlike the Shanghai FTZ 2007. On top of that, both sides have diligently worked towards which acts as an incubator for reforms, the Guangzhou FTZ will more transparency in the deal by clearing vague terms and set focus on developing closer ties with South East Asia countries, forth guidelines in multiple aspects based on previous Hong Kong and Macau. experience. In addition to Vice Mayor Luo, the session also featured presentations from other Guangzhou city leaders including Xiao Loui believes the encouraging climate change deal signed Zhenyu, Director General of the Bureau of Foreign Trade & between Presidents Obama and Xi during the APEC summit Economic Cooperation, Qin Hong, Director General of this year has had a great impact on the expansion of sectors International Investment Promotion Center of Guangzhou, Pan covered by the Framework. Aside from the already-popular Weizhi, Deputy Director General of Finance Bureau of medical and agricultural equipment sectors that took up a big Guangzhou Municipality, Huang Ka, Deputy District Governor of proportion of the Framework activities, the environmental Nansha District, and Chen Peijin, President of Sino-Singapore protection and energy industries also show great potential to Guangzhou Knowledge City. Their presentations provided details become top choices for Chinese importers. on the incentives that Guangzhou offers for investors.

Loui brought up programs including clean power generation, After the session, the group toured AmCham Shanghai’s SME green construction materials, waste water management, and center to discuss ways that AmCham Shanghai and Guanghzou other programs where U.S. technological strengths lie. She Municipal government could cooperate to support Small and believes these well-developed projects can be perfect answers Medium Enterprises in China.

46 insight january/february 2015 Event highlightsinside amcham

Wearing Technology is a Business Reality

The unprecedented computing power on tap today, combined with the proliferation of sensors, extensive personalization and analytics available to consumers and increasing rates of communication and social collaboration have created a perfect storm for consumer goods like smart watches and wristbands. Digital megatrends are also paving the way for more immersive experiences like Oculus Rift, Project Morpheus, and other virtual reality headsets in sectors including gaming, property management, healthcare, and beyond.

On November 27, AmCham Shanghai’s Information Technology Committee held a Digital Business Series roundtable on augmented reality and wearable technologies in China with Wentao Chan, Digital Consulting Leader for China at PricewaterhouseCoopers and Xavier Bernasconi, Digital Supervisor at Oriental Dreamworks. Digital megatrends driving the environment for wearable technologies were discussed as having the potential to disrupt various industries while creating new business opportunities.

According to PWC’s 2014 “The Wearable Future” survey, adoption rates of wearables in the U.S. parallels that of tablets, with 76 percent saying newer smart devices don’t have to replace their existing technology to justify new purchases. In the U.S. millennials are more than two times more likely than adults 35 and older to be willing to adapt smart watches, fitness bands, or smart glasses. Awareness of this technology trend however is still much higher in the United States (80 percent) versus China (37 percent).

Wearable technologies are the latest drivers of business growth, from integrated mobile payment platforms to new ways of advertising. This means more integrated shopping experiences, faster payments, and improved customer service options. In the field of healthcare, it means more accurate diagnostics and higher clinical trial participation. When it comes to entertainment and media, technology is increasing advertising inventory.

Spending on mobile advertising campaigns in China this year is forecast to jump 276 percent to US$7.11 billion from last year according to estimates by research company EMarketer, making China the world’s second-largest mobile internet advertising market just behind the US.

Chinese consumers are primarily interested in health & fitness, entertainment, smart applications, medical apps, and remote access. This appetite for wearables is being accelerated by already high levels of digital engagement in China. For example, 24 percent of Chinese consumers “checked in” at store via a social media platform versus just 11 percent globally, while 24 percent have received recommendations based on previous purchases versus the 12 percent global average, according to PwC’s Total Retail Survey.

Undeniable appetite

The Chinese consumer’s appetite for integrated and immersive experiences is undeniable. Wearable products in China are forecast to reach 40 million units in 2015 and exceed 75 million units shipped by 2016. China’s wearable device market, valued at US$1.26 billion

january/february 2015 insight 4 7 inside amcEventham highlights

in 2012 has already grown to $5.17 billion this year and is forecast to reach US$9 billion by 2016. This compares to the U.S. which lags behind China, with just 17 million wearable units shipped in 2014, valued at approximately US$4 billion, according to Statista.

Chinese consumers today are also more likely to engage using mobile phones, with 17 percent paying through an app versus just 11 percent in the United States, and 32 percent using in-store Wi-Fi versus just 25 percent in the U.S. and 24 percent globally. As mobile payments in China replace cash, greater China consumers show a high degree of trust in mobile as a payment method, including a greater willingness to store payment and delivery information in apps on their mobile phone and receive offers and coupons, compared to the U.S.

Although opportunities abound, the mass market for wearable technology and enhanced virtual reality technologies in the near term faces challenges to widespread adaption, including imperfections in new technologies and a preference for human interaction. A survey last year by Chinet found 62 percent of respondents said they wish to reduce the use of technology in favor of spending more time with family and friends, citing an inability to spend time together in a meaningful manner as the number one reason. This may limit near term market opportunities to certain niche markets such as exercise and healthcare or gaming, with B2B applications showing promise for immediate growth.

Emerging applications run the gamut from using tools like Google Glass for insurance claim assets reporting and audio/video recording of damages in real time, to using wearable devices for property management. By using smart glass technology, real time data on building temperature, water, and air quality can be used to optimize facility systems.

These technologies are also saving sectors like the film production industry at Oriental Dreamworks time and money by shortening the number of drawings needed to create 3-D imagery. This, in turn, is allowing multidimensional visualization tools and virtual reality headsets to play a role in imaging worlds that become hit 3-D cartoons months quicker than previously.

The future of augmented reality and wearable technologies is sure to disrupt established business patterns in China, even as the fundamentally human desire for face to face contact and imperfections in exciting devices mean virtual reality is no match for the real world.

Members Blend at Wine Tasting

AmCham Shanghai’s Food, Agriculture, and Beverage Committee hosted a wine tasting and industry social at the luxurious ASC Wine Residences in Shanghai. The December event was led by the wine world’s leading hostess Sophia Shen. This event allowed many of the chairs and vice chairs from several of the AmCham committees to talk about their plans for next year in a relaxed environment.

The welcome remarks were given by the host Committee’s Chair Nor Coquillard which was followed by a brief lecture of the regions where the wines originated. The featured wines consisted of one red and one white wine that were both of the Cotes du Rhone varieties. Each wine had a combination blend Wine tasting event of three different grape varieties. Both wines were from the Cotes du Rhone region in Southeastern France.

The attendees that braved the cold weather were able to enjoy their wine tasting in the relaxed, warm, and cozy ambience of the residence’s private lounge and cigar bar of the French architect inspired, neauveau classical designed building. A break in-between the wine tasting and the socializing allowed attendees to enjoy a private all access tour of the residence which included many of the areas that were not available to the public such as the residence’s private reserves in the cellars. Many of the members said that this event was perfect for reflecting on this past year and looking ahead to 2015.

48 insight january/february 2015 Committee highlightsinside amcham

Chamber Staff Fund Gift Bags for Needy Children

AmCham Shanghai’s Jennifer Kwong, left, and other staff prepare gift bags for children

In the spirit of the holiday season, AmCham Shanghai staff participated in different volunteer programs from November to December 2014 including a fundraiser, gift bag packing party, and clothing donation drive. The month long campaign encouraged staff members to think about the community and give to others in need.

With guidance from Community Roots China (CRC), an organization that bridges corporations to voluntary rural support projects, AmCham staff was able to raise RMB 6,430 to purchase items for 29 children, and package and deliver all gift bags to Yunnan. Each gift bag contained warm clothes, boots, gloves, books, fashion accessories, and stationary for boys and girls in Kunming. AmCham member Jessica Gleeson also greatly supported the drive by donating three boxes of fashion accessories for young girls, which was distributed among the gift bags.

The One Heart Gift Program calls for a leadership team to form and come up with ways of marketing and fundraising. After funds are collected, items are purchased and packed into gift bags for children in a rural village. Finally, packed bags are delivered to its destination through China Post. Along each step of the way, staff members are able to participate in different positions and contribute however much they like whether it’s donating money, purchasing items online or in stores, or packing the gift bags.

Aside from the One Heart Gift Program, AmCham staff collected over five donation boxes of clothes, toys, backpacks, and shoes to donate to Soho-Ku, an organization aimed to sustain the livelihood of physically and mentally disabled individuals and families. A designated area in the office allowed contributors to donate their lightly-used items into boxes that were later brought to the Soho-Ku center.

For an organization on a small scale like AmCham Shanghai, it can still contribute what it can to charity and organize employee engagement programs. These types of charitable programs are not only possible with large companies, but any organization’s contribution can go a long way.

For more information on AmCham Shanghai’s 23 industry-specific committees, please contact [email protected].

january/february 2015 insight 4 9 EXECUTIVE reading ROOM

In this issue, executives tell us about the books they’re reading now and what’s on their 2015 reading list.

Peter Corne, Managing Partner, Dorsey & David Basmajian, Head of Policy, Whitney LLP, Shanghai Office Baxter APAC Area Book: Single White Female in Book: Age of Ambition: Hanoi by Carolyn Shine Chasing Fortune, Truth and Remarks: “Quirky, insightful about Faith in the New China by cultural differences, lots of fun anecdotes Evan Osnos and very well written. I am sure the Remarks: “Osnos captures the author would have been famous had she changing attitudes of China’s younger not died of cancer some years ago.” generation, many born after reform and opening up. He asks whether “chasing fortune” is giving way to a greater desire for truth and a longing for faith. In stories about the lives of regular Bob Dodds, Founder and Managing Director, people in China today, he provides a sobering perspective on DRP Capital Limited how these changes challenge the Party’s grip on power, and its Book: Far from the Tree by Andrew response.” Solomon Remarks: “This book was a real eye-opener which was recommended to me by a friend Sandeep Bahl, RGM Asia, Air New and which I have been recommending to Zealand others. The subject matter sounds like it Book: Smart Tribes by Christine could be depressing, but it is actually a very inspirational book Comaford about the power of the human spirit and the love between parents Remarks: “The book gives you sense of and children in families facing huge challenges.” what as a leader you have to do to get Also reading: How Google Works by Eric Schmidt & your people unstuck and fully engaged, Jonathan Rosenberg replacing their old, limiting patterns with new patterns that foster optimal performance. You can identity when you and your team are reaching into ‘critter state’ Frank William Rocco, Principal, Frank Rocco and then act to get into the ‘smart state’. & Associates Also reading: Fail Better – Design Smart Mistakes Book: Benjamin Franklin: An and Succeed Sooner by Anjali Sastry and Kara Penn American Life by Walter Isaacson Remarks: “A timely read during holidays in New York of a man of many hats who lived Tony Tala, President, Power Transmission, by principles of tolerance, pragmatism and Rexnord China entrepreneurialism.” Book: Thinking, Fast and Slow by Also reading: Scaling Up: How a Few Companies Make Daniel Kahneman It...and Why the Rest Don't by Verne Harnish Remarks: “If you are curious about why Book: Sapiens: A Brief History of Human Kind by Yuval people make irrational decisions regularly, Noah Harari this book tells you why by explaining the Remarks: “Insightful and provocative questions and observations inner workings of human brain through about human history combined with wonderfully vivid word imagery.” interesting stories.”

50 insight january/february 2015 We’ve Done Some Remodeling

Find all of Insight at our new address: http://insight.amcham-shanghai.org

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