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Cablegate: Mermoud Visit: Sinosure Welcomes Third

VZCZCXRO9781
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3817/01 2810101
ZNR UUUUU ZZH
P 070101Z OCT 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 0275
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 04 BEIJING 003817

SENSITIVE
SIPDIS

STATE FOR E HUGO YON
STATE FOR EB/CBA MERMOUD/THOMPSON
STATE FOR EAP/CM PARK
STATE PASS USTR STRATFORD/WINTER/MAIN
USDOC FOR ITA/MAS/GUZMAN/ECHEGARAY/FOWLER
STATE PASS US HUD
TREASURY FOR TAIYA SMITH

E.O. 12958: N/A
TAGS: ETRD EINV PREL ENRG EFIN BTIO CH
SUBJECT: MERMOUD VISIT: SINOSURE WELCOMES THIRD
COUNTRY COOPERATION; HOUSING MINNISTRY PLANS FOR NEXT
CONSTRUCTION EXCHANGE

THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED. PLEASE
HANDLE ACCORDINGLY. NOT FOR DISTRIBUTION OUTSIDE USG
CHANNELS.

1. (SBU) Summary. China's Sinosure told State
Department Special Representative for Commercial and
Business Affairs J. Frank Mermoud on September 18 that
it would welcome third country cooperation with Ex-Im
Bank on a joint project. In meetings with Ministry of
Housing and Urban-Rural Development (MHURD) officials
and foreign construction sector companies, Mermoud
heard strong support for continuing the Best Practices
Exchange (under the US-China Architecture,
Construction, and Engineering (ACE) Services Dialogue)
and for featuring green building and earthquake-
resistant construction at the next BPE meeting
(tentatively scheduled by MHURD for April/May 2009.)
Companies however did not support MHURD's concept of
transferring leadership of the BPE from government to
the private sector. Representatives of private equity
(PE) and venture capital (VC) firms also told Mermoud
new regulations on IPO's were overly restrictive. End
Summary.

SINOSURE WELCOMES THIRD-COUNTRY COOPERATION WITH EX-IM
--------------------------------------------- ---------

2. (SBU) In a September 18 meeting with China Export
and Credit Insurance Corporation (SINOSURE) Executive
Vice President Liang Zhi Dong, Mermoud raised the
possibility of EXIM-SINOSURE joint cooperation in
third countries, particularly in the clean/efficient
energy and environment sectors. Liang welcomed such
cooperation on third country projects, especially in
Latin America and, to a lesser extent, in Africa. He
rattled off a list of countries in which Sinosure was
considering funding major projects, including Mexico,
Colombia, Chile, Argentina, Venezuela and Cuba. China
would be open to working with Ex-Im anywhere. As for
sectors, he said Sinosure generally focused on
infrastructure and energy, noting Chinese
construction/engineering companies do more traditional
construction projects. While Sinosure is not involved
in any specific environmental project, he said one
Chinese company is involved in building
ethanol/thermal power stations in Columbia. (Note:
Liang did not rule out co-financing an environmental
project with Ex-Im. End Note.) Liang asked what
channels Sinosure should work through to explore
cooperation, noting they have had little interaction
with Ex-Im recently.

Political Risk Insurance Competition? "Bring it On"
--------------------------------------------- ------

3. (SBU) As for opening up the Political Risk
Insurance (PRI) market for U.S. firms, Liang said
specific issues would have to be discussed at a higher
level (i.e., Vice Premier Wang Qianshan). However, he
said, Sinosure would ?welcome the competition." He
opined that it was "just a matter of time" before more
foreign companies entered the PRI market, and noted
that China AIG was the only U.S. company doing PRI
business in China today. In addition, Tradia (Dutch),
Allianz (German), and Coface (French) were also in
this field. Liang said the reason no Chinese bank
offered PRI products was the perception that it was
too risky. He explained that Sinosure offered several
PRI products, including: PRI only, PRI and commercial
risk combined, buyer's credit, seller's credit, and
full-term products covering non-delivery risks.

4. (SBU) On surety bonds, Liang said Sinosure would be
interested in attending any future meetings on this
subject under the ACE BPE umbrella or another smaller
working group. He asked the USG to recommend a U.S.
bank with which Sinosure could work. Mermoud
explained USG policy did not allow us to identify a
particular U.S. bank, but that if Sinosure itself

BEIJING 00003817 002 OF 004


identified a bank with which it would like to partner,
the USG could facilitate their contact.

--------------------------------------------- ---
MHURD: REORGANIZATION EMPHASIZES HOUSING; FOCUS ON
EARTHQUAKE RESISTANCE IN DIALOGUE WITH U.S.
--------------------------------------------- ---

5. (SBU) On September 18, Mermoud met with MHURD
Department of Market Administration Director General
Wang Suqing to discuss topics for discussion at the
next United States-China Architecture, Construction,
and Engineering (ACE) Services Dialogue "Best
Practices Exchange" (BPE) in China. Wang thought an
April/May 2009 timeframe would be optimal for the next
BPE. She said the past two BPE's were successful, but
she did not think they necessarily should be an annual
event. She wanted to see future discussions go into
more depth on the topics of: insurance, surety bonds,
licensing for engineering services companies and
development of the engineering consultancy industry.
She welcomed Mermoud's suggestion that topics of
discussion include earthquake resistant building and
green building, and took on board the request that the
discussions last two days (vice one) and include a
site visit. Wang suggested that industry
associations/private sector host future events with
governments in the background, something which she
said would save the government "time and resources"
and allow the private sector more of a say in the
process. Wang also supported Mermoud's suggestion
that U.S. nanotech firms be included in future BPE's.

6. (SBU) Wang said the ministry was interested in
learning more about USG disaster relief methods and
financing for post-disaster reconstruction. She
welcomed Mermoud's suggestion that perhaps someone
from FEMA could meet with MHURD on disaster management.

7. (SBU) DDG Wang said recent restructuring at MHURD
emphasized the rising importance of the housing sector.
Updated State Council guidelines (called "San Ding
Fang An") issued on July 10 mandated that MHURD have
four housing departments, as opposed to one previously:
Housing Policy and Development (macro); Low Income
Housing; Housing Provident Fund; and Overall
Supervision of Real Estate Department. She said the
name change from Ministry of Construction to Ministry
of Housing and Urban Reconstruction Department
emphasized the importance the State Council places on
balancing construction/development between the urban
and rural areas. The ministry's mandate on
construction remains the same, despite the name change.
She also noted that the former Office of Rural
Development was upgraded to a full Department, and the
former Science and Technology Department was renamed
the Science, Energy and Technology Department to
emphasize a focus on energy efficient building
projects. This department will handle new
technologies.

8. (SBU) Mermoud encouraged rapid and transparent
MHURD consideration of license applications. DG Wang
said MHURD is in "constant contact" with both Fluor
and Bechtel regarding their license applications. She
said Fluor's application had made encouraging progress,
passing the preliminary application process in
Shanghai. (Note: Wang offered nothing more on
Bechtel, but Bechtel reps have told us that they are
handling the licensing issues on their own and do not
need USG assistance at this time. End Note.)

Industry on BPE: Keep Government in Lead
----------------------------------------

9. (SBU) In a September 18 roundtable with Mermoud,
industry members of the BPE said they did not want to
see leadership of the BPE switched to the private
sector. (Note: Companies represented on September 18

BEIJING 00003817 003 OF 004


were: JonesLangLasalle; Leo Daly; CBRE Research;
Jones Day; and HOK. End Note.) They feared such a
move would turn the meeting into a run-of-the-mill
industry conference that would neither attract heavy
hitters among Chinese developers nor prove an
effective forum for the airing of their concerns to
the Chinese government. The consensus, however, was
that if limited financial resources lay behind MHURD's
suggestion, it might be feasible to charge a
participation fee to U.S. companies.

10. (SBU) Companies present were open to an emphasis
on green building and earthquake resistant-building at
the next BPE. They broached the concept of breaking
the discussions down into industry areas such as:
healthcare/hospital construction; aviation/airport
construction; transportation hubs; science and
technology/industrial construction for high tech
industries; and master planning. Companies did not
want to drop the issue of licensing and surety bonds,
but did want the USG to soft-pedal it. They were
supportive of a site visit, suggesting Tianjin's
EcoCity. Lastly, they noted their willingness to
continue alternating meetings between Beijing and the
United States, according to MHURD's inclination.

Real Estate Research Entrepreneur: Mixed Forecast
--------------------------------------------- -----

11. (SBU) On September 19, Mermoud met with Vincent Mo,
who runs the real estate portal and research group
Soufun.com, which dominates the Chinese real estate
information and brokerage market. Mo was reluctant to
predict the short-term direction of China's real
estate market. He thought government monetary policy
would stay tight, which would control residential
housing prices, and thought the U.S. mortgage
situation had served as an object lesson for Chinese
policy makers. However, he said, Chinese property
development is still highly profitable. Mo observed
that the Chinese housing market was still immature:
prices were set not by market fundamentals, but by
expectations on the part of both buyers and sellers of
continually rising prices. Prices are now under
pressure, with transaction volumes halved and prices
in a few markets falling. Mo thought demand from
first-time homebuyers was still stable, but those
looking to trade up or invest were taking a wait-and-
see attitude. He saw strong demand for commercial
real estate.

12. (SBU) Mo thought Chinese buyers, despite the
earthquake, were not especially interested in
questions of construction quality. He said buyers
rarely ask about such issues, and it was difficult to
spark their interest. He was interested in
potentially participating in a construction best
practices dialogue.

P/E VC Market Roundtable: New Regs Chafe
----------------------------------------

13. (SBU) In a roundtable with Mermoud on September 19,
representatives of Chinese private equity/venture
capital companies discussed recent changes in China's
regulatory environment. They noted the National
Development and Reform Commission (NDRC) had taken the
lead in shaping the regulatory environment, and that
the China Securities Regulatory Commission and (CSRC)
the China Bank Regulatory Commission (CBRC) also
played roles in areas that cut across their mandates.
Zhang Fan of Sequoia Capital said that the new
Circular 10 had put an end to the "Red Chip" model,
under which existing profitable companies could set up
an offshore shell structure, after which they would
transfer the company's China-based assets to the shell
company for a possible overseas listing. Zhang said
China viewed this practice as a loss of high-quality
IPO-ready resources and as a loss of potential tax

BEIJING 00003817 004 OF 004


revenue. The new Circular 75 permits only newly
established companies (with no assets or sales, as yet)
to use the "Red Chip" model.

14. (SBU) Furthermore, Zhang thought the China A-share
IPO route is too cumbersome a process, as CSRC set up
artificial barriers that prevented private companies
from raising capital in China's securities market. He
believed the government still favors State-owned
Enterprises (SOE's) over private companies during the
approval process. He noted the change from a three-
year lock-up period for financial investors to a one-
year period was positive, but said that strategic
investors still had to stay in for three years.
Another ball in play is the Partnership Law for
Foreign Investors, now being drafted. Interlocutors
noted some regional variations in this area. For
example, Tianjin's government was more flexible about
providing tax incentives to partnership PE firms,
which was attracting them to establish operations
there.

15. (SBU) On labor issues, lawyer Jun Hu, partner in
Han Yi Law offices, said the new Labor Law was
favorable to employers in that it had expanded to 14
the number of clauses under which employers might
terminate employee contracts. However, Wang Jiansheng,
Managing Director of Cerberus Beijing Advisors Ltd.,
thought the new Labor Law had increased the operation
costs of enterprises, especially in the coastal
provinces.

Mergers and Acquisitions: Rising Government Interest
--------------------------------------------- -------

16. (SBU) Mr. Wei Wang, Chairman of the China M&A
Group, observed a trend in which international mergers
and acquisitions (M&A) cases were being evaluated more
and more formally. Wang noted that in the Xugong-
Carlyle deal, the Chinese government had initially
stayed on the sidelines. In the later Wahaha-Danone
deal, the government required both parties to pass
through a regulatory review. By the time Coca-Cola's
proposed acquisition of Huiyuan had come about, China
had instituted a full, formal review procedure. Wang
also noted the top 10 M&A deals in 2007 primarily
involved SOE's. Signs of government involvement in
these deals were clearly visible. Wang assessed that
the new structures put in place to evaluate foreign
M&A may transactions reflected increased government
sensitivity to populist criticism of foreign
acquisitions.

17. (SBU) Mr. Kainan Tang, Executive Director of Hina
Group, told Mermoud that VC firms' focus was evolving.
When VC groups first appeared in China, they were
mostly foreign, and focused on technology, media and
telecoms and early-stage projects. As more and larger
foreign PE firms entered the market, more traditional
business projects drew their attention. Now, Chinese
domestic VC and PE firms were becoming quite active,
and were real competitors to foreign companies. Tang
pointed to green energy as a particularly hot sector.

Economy Diagnosis: SMEs Suffering
---------------------------------

18. (SBU) Jiansheng Wang of Cerberus observed that
SMEs are experiencing hard times, especially those in
Zhejiang and Guangdong provinces. He named familiar
factors -- soft overseas demand, rising labor costs,
RMB appreciation and a cut in the VAT rebate. However,
Wang shared his belief that a big chunk of PE
investors in China still viewed economic fundamentals
as basically unchanged and sound.

Piccuta

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