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Cablegate: Ambassador Meets with Shanghai Entrepreneurs

VZCZCXRO0641
RR RUEHCN RUEHGH
DE RUEHGH #0581/01 2500759
ZNR UUUUU ZZH
R 070759Z SEP 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6238
INFO RUEHBJ/AMEMBASSY BEIJING 1393
RUEHCN/AMCONSUL CHENGDU 0872
RUEHGZ/AMCONSUL GUANGZHOU 0852
RUEHHK/AMCONSUL HONG KONG 0996
RUEHSH/AMCONSUL SHENYANG 0874
RUEHIN/AIT TAIPEI 0695
RUEHUL/AMEMBASSY SEOUL 0114
RUEHGP/AMEMBASSY SINGAPORE 0079
RUEHKO/AMEMBASSY TOKYO 0193
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 6698

UNCLAS SECTION 01 OF 04 SHANGHAI 000581

SIPDIS

SENSITIVE
SIPDIS

STATE ALSO FOR INR/B
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK
STATE PASS CEA FOR BLOCK
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/ALTBACH/READE
USDOC FOR 4420
USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND MCQUEEN
TREASURY FOR EXEC - TSMITH, OASIA/ISA -DOHNER/BAKER/CUSHMAN
TREASURY FOR WRIGHT AND AMB HOLMER
NSC FOR MCCORMICK AND TONG

E.O. 12958: N/A
TAGS: ETRD EAIR CVIS SENV KIPR PINR CH
SUBJECT: AMBASSADOR MEETS WITH SHANGHAI ENTREPRENEURS

(U) This cable is sensitive but unclassified and for official
use only. Not for distribution outside of USG channels or via
the internet.

1. (SBU) Summary: Shanghai-based Chinese entrepreneurs told the
Ambassador that China is looking to U.S. leadership on
addressing the problems of global climate change. Ongoing RMB
appreciation hurts their export businesses and because China
feels it needs to continue to control the flow of capital to
avoid a future Asian Financial Crisis, China will be very
"cautious" in opening up its financial services sector to
further international competition. As China moves upwards on
the technology ladder, it increasingly has a stake in protecting
intellectual property rights from theft and piracy. China's
stock and real estate markets are overheated and this, when
combined with inflation and the possible impact of the sub-prime
mortgage problem in the United States, has the potential to
affect the economies of both the United States and China, the
entrepreneurs commented. End summary.

2. (SBU) The Ambassador discussed the importance of making
progress on resolving our bilateral trade and economic issues,
intellectual property (IP) protections, the United States-China
Strategic Economic Dialogue (SED), and climate change with
Shanghai-based entrepreneurs on September 6. The entrepreneurs
addressed the challenges facing Chinese businesses. The meeting
was attended by Fosun Group Chairman Guo Guangchang, Suntech
Power Chairman Shi Zhengrong, VeriSilicon Holdings CEO Wayne
Dai, Grace Semiconductor President Dong Yeshun, and JuneYao
Group Chairman Wang Junjin. (Note: Biographic information
below. End note.)

--------------------------------------------- -
U.S. Leadership on Climate Change is Important
--------------------------------------------- -

3. (SBU) Suntech's Shi said that his company sold USD 1.5
billion worth of photovoltaic (PV) cells in 2006, making it the
second largest producer in the world. Suntech is now the second
or third largest supplier of PV cells to the United States.
Based on its business growth in the United States, Shi said that
Suntech plans to open a headquarters in San Francisco later this
year.

4. (SBU) Shi said that China and the rest of the world are
waiting on the United States for leadership on climate change
issues. The United States is the global leader and if it does
not appear to be concerned about climate change, then the rest
of the world will not be convinced of the urgency of the
problem. The Ambassador informed Shi about important steps the
United States is taking on climate change and environmental
protection issues, including the President's initiatives and
Secretary Rice's upcoming September meeting in Washington with

SIPDIS
the countries that together account for some 90 percent of
global greenhouse gas emissions.

-------------------------------------
"Panicked" Over Currency Appreciation
-------------------------------------

6. (SBU) Grace Semiconductor's Dong asked the Ambassador what
the United States hopes for in terms of RMB appreciation. The
Ambassador said that the United States looks for greater
currency flexibility based on market forces in order to correct
the undervaluation of the RMB. Problems surrounding the safety
of food and manufactured goods exported from China to the United
States and additional recent media stories casting China in a

SHANGHAI 00000581 002 OF 004


negative light make it much more likely that the United States
Congress would pass China-related legislation in the near future.

7. (SBU) The Ambassador in turn asked Dong and the other
entrepreneurs for their views on the currency situation. Dong
admitted that he was "panicked" by the appreciation of the RMB.
Since 90 percent of his business is export-based (with 50
percent going to the United States), RMB appreciation affected
his bottom line. The unpredictable nature of the appreciation
and the fact that his company sourced its raw materials in Japan
contributes to the impact of RMB revaluation. Suntech's Shi, on
the other hand, said that he had benefited from signing a
ten-year USD 6 billion raw materials sourcing contract that
stipulated fixed prices in United States dollars.

--------------------------------------------- --------
"China Is Very Cautious" In Opening Up to Competition
--------------------------------------------- --------

8. (SBU) Continuing discussions on the Strategic Economic
Dialogue, the Ambassador inquired as to what is the underlying
cause to resistance by the Chinese financial services sector to
opening up further to international competition. Suntech's Shi
said that China is very cautious when opening up to foreign
competition. As long as the Chinese Government feels that
China's banks can not compete with foreign banks, Chinese
officials will "lack comfort" in allowing the foreign banks
freer rein. Grace Semiconductor's Dong agreed and added that
another underlying issue is control. Chinese officials feel
that China survived the Asian Financial Crisis because they had
control over the banks and the flow of capital. The Chinese
Government did not have confidence in the "competence" of the
market to function as a market or in the Chinese financial
regulatory regime, and so feel they have to continue controlling
the banking sector and the flow of capital in and out of China.

--------------------------------------------- ---------
Intellectual Protections "Vital" to High-Tech Industry
--------------------------------------------- ---------

9. (SBU) VeriSilicon's Dai said that China is becoming an
important industry center for the design of
information-technology silicon chips. Where in the past
companies like Intel and Samsung had designed the chips
themselves and relied on Chinese foundries to manufacture them,
they are now starting to outsource chip design to companies like
his. He said that his company offered "United States technology
at a China price." Dai said that his customers' number-one
concern was the protection of their intellectual property (IP).
Dai noted that other Chinese entrepreneurs are also increasingly
concerned about protecting IP as they themselves develop their
own name brands and technologies.

10. (SBU) In response to a question from the Ambassador on how
VeriSilicon addressed the perennial Chinese problem of
protecting itself from technology theft by its own employees,
Dai said that hiring the right people is important.
Furthermore, VeriSilicon reserves part of its engineers'
salaries every year in "IP behavior accounts." The money in
these accounts is paid to the employees based on how well they
perform in protecting intellectual property, by not leaving
proprietary papers out on a desk, for example, he said.

11. (SBU) Dai said that VeriSilicon has never caused the loss of
any of its customers' IP. Pointing to the rigorous protections
at his company, he said that Freescale Semiconductor had sent a
two-person "red team" that spent two days attempting to break

SHANGHAI 00000581 003 OF 004


into the company. They did not find any vulnerabilities, he
said. Concerning the protection of intellectual property, Dai
said that the bottom line is: "If no one trusts us, they won't
give us any business."

--------------------------------------
China's Economy: "A Little Overheated"
--------------------------------------

12. (SBU) Fosun's Guo expressed concern that the Chinese economy
"is a little overheated." He based his concerns on the bubbles
in the stock and real-estate markets combined with ongoing
inflation and high GDP growth. He was particularly concerned
about the effects that the sub-prime mortgage problems in the
United States could have on China. The United States and
Chinese economies are so strongly linked that whatever happens
to one affects the other, he said.

--------------------------------------------- --
Visa Processing Time: Improving But Problematic
--------------------------------------------- --

13. (SBU) While noting that things have gotten better over the
past year, Grace Semiconductor's Dong said that visa processing
delays are a factor limiting United States-China business. He,
and others at the meeting, expressed support for a mechanism
that rewarded a company's good track record on travel to the
United States with an expedited visa interview and issuance
process. The Ambassador and Consul General agreed that
facilitating legitimate travel to the United States is among our
highest priorities and discussed the increased resources that
are being deployed to address the increasing demand for visas in
China. (Note: From September 2006 through August 2007, Shanghai
conoffs adjudicated over 144,000 non-immigrant visa (NIV)
applications, making Shanghai the 12th busiest NIV-issuing post
in the world. End note.)

-------------------------------------
JuneYao Airlines Hopes To Buy Boeings
-------------------------------------

14. (SBU) JuneYao's Wang told the Ambassador that the biggest
challenge his company faces as China's first private airline is
working through China's regulatory process. Started in 2005,
the airline began flying in September 2006. While currently
flying four Airbus-produced planes on its 15 domestic-only
routes, Wang told the Ambassador that Boeing 787s would be ideal
for JuneYao's hoped for expansion into international routes.
JuneYao plans to purchase 30 new planes by 2010.

------------------------
Biographies of Attendees
------------------------

15. (SBU) Dr. Shi Zhengrong, Chief Executive Officer, Suntech
Power Holdings. Suntech specializes in the design, development,
manufacture and sale of photovoltaic (PV) cells, modules and
systems. Dr. Shi is a distinguished PV technology scientist who
founded Suntech in 2001. Since then it has developed into a
leading solar energy company. In less than three years, Suntech
increased its manufacturing capacity twelve-fold, becoming one
of the world's top 10 manufacturers of PV cells based on
production output according to Photon International, a magazine
covering the international PV industry. Suntech was listed on
the NYSE at the end of 2005. Shi is said to be the 5th richest
man in China with personal wealth valued over USD 2 billion,
according to the latest Hurun Survey.

SHANGHAI 00000581 004 OF 004

16. (SBU) Guo Guangchang, Chairman and President of Fosun Group.
Shanghai-based Fosun is a diversified holding company focusing
on real estate, pharmaceuticals, steel and retail properties.
Fosun controls more than 100 subsidiaries and 200 affiliates,
employing more than 60,000 employees nationwide. Fosun got its
start in 1992 when Guo, the son of a stonemason, together with
former Fudan classmates, sold a hepatitis testing kit. The
39-year old Guo, according to Forbes Magazine 2005 survey, was
the 7th richest individual in China, with assets over USD 1
billion. Guo also has served as a deputy to the National
People's Congress and as an advisor to the Shanghai Municipal
Government. Guo has been the Chairman of the Zhejiang Chamber
of Commerce Shanghai office since 2005.

17. (SBU) Wang Junjin, Chairman of Juneyao Group. Wang Junjin
was born in 1968 in Zhejiang. After his brother Wang Junjing
passed away, Wang Junjin became the Chairman of Juneyao Group.
Juneyao was the first private company to invest in the aviation
industry. Juneyao Group also has investments in the retail and
dairy industries. Its annual sales in 2005 were over USD 500
million.

18. (SBU) Dong Yeshun, CEO of Grace Semiconductor.
Shanghai-based Grace Semiconductor Manufacturing Corporation
produces integrated circuits. Grace Semiconductor is a
politically well-connected firm, founded by Jiang Mianheng, the
son of former President Jiang Zemin and the son of Y.C. Wang,
chairman of Taiwan's largest business group, Formosa Plastics
Corp. These connections helped Grace raise significant amounts
of startup capital at favorable interest rates. Mr. Dong also
serves as Chairman of Shanghai MSN and is on the Board of
Metlife China.

19. (SBU) Dr. Wayne (Weimin) Dai, Chairman, President and CEO of
VeriSilicon Holdings. Founded in 2001, Shanghai-based
VeriSilicon Holdings is an ASIC (Application Specific Integrated
Circuit) design foundry that provides semiconductor IP, design
and manufacturing services to customers worldwide. In July
2007, VeriSilicon raised USD 14.8 million in Series C financing
co-led by Austin Ventures and Sierra Ventures. It used the
financing to purchase the assets of the ZSP Digital Signal
Processor business unit of NYSE-listed Silicon Valley Company
LSI Logics for USD 13 million. Dai has a PhD in Electrical
Engineering from Berkeley and formerly taught at UC-Santa Cruz.
JARRETT

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