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Cablegate: Senator Nelson Hears Upbeat Assessment of China Economic

VZCZCXRO6842
PP RUEHCN RUEHVC
DE RUEHGH #0365/01 2320824
ZNR UUUUU ZZH
P R 200824Z AUG 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC PRIORITY 8221
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHIN/AIT TAIPEI 1953
RUCPDOC/USDOC WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8872

UNCLAS SECTION 01 OF 04 SHANGHAI 000365

CODEL
SENSITIVE
SIPDIS

STATE FOR EAP/CM AND EEB

E.O. 12958: N/A
TAGS: ECON EIND ETRD ETTC OVIP CH
SUBJECT: SENATOR NELSON HEARS UPBEAT ASSESSMENT OF CHINA ECONOMIC
OPPORTUNITIES FROM U.S. BUSINESS, SHANGHAI PEOPLE'S CONGRESS

SHANGHAI 00000365 001.2 OF 004


(U) This message is sensitive but unclassified and for official
use only. Not for distribution outside of USG channels.

1. (SBU) Summary: In an August 10 roundtable discussion with
Senator Bill Nelson, representatives of 20 American Chamber of
Commerce in Shanghai (AmCham) member companies responded to
Senator Bill Nelson's (D-FL) queries regarding opportunities for
U.S. businesses, technology transfer, corruption, and product
quality. AmCham members indicated American companies doing
business in China can overcome the ongoing risks and defeat
bureaucratic obstacles by developing knowledge of the market,
staying ahead of the innovation curve, and maintaining oversight
of local partnerships. AmCham members also concurred with
Senator Nelson's opinion that AmCham needed to do more to
overcome negative perceptions in the U.S. of China's current
business environment and lack of American confidence in China's
oversight of consumer product safety. During an August 11
meeting with an official of Shanghai Municipal People's
Congress, Senator Nelson heard a reassuring message on
Shanghai's prospects for economic recovery. End Summary.

-----------------------------------------

OPPORTUNITY, FOR THOSE WILLING TO TAKE IT

-----------------------------------------

2. (SBU) During an August 10 roundtable discussion with visiting
Florida Senator Bill Nelson, Shanghai AmCham members described a
challenging business environment, but one still laden with
opportunity. One representative of a U.S. law firm explained
that despite massive amounts of Chinese state funds supporting
the roll-out of green technology, foreign companies face market
penetration obstacles. He described how foreign involvement in
green-technology projects can be restricted through hard limits,
such as manufacturing quotas requiring the majority of parts be
made in China, and also through soft limits, such as guided
selection of bidders for large projects. Nevertheless, the law
firm representative stated that foreign firms still make the
highest quality products in the green-technology sector, and
Chinese developers remain attracted to quality, especially for
high-visibility projects. The managing director of a logistics
company cited the success of Westinghouse in the nuclear energy
sector as an example of the potential benefits of investing in
China. Westinghouse's multi-billion-dollar contract to build
nuclear power plants in China has created thousands of jobs in
the U.S., he claimed.

3. (SBU) A trading company representative described emerging
opportunities for U.S. small and medium enterprises (SMEs) as
the next frontier of U.S.-China business relations. He
explained that while larger companies have already established a
presence in China, the potential for small cap companies to
supply second and third tier Chinese companies with quality
products remained. To encourage the entrance of SMEs into the
Chinese market, he also cited the importance of generating
support for legislation such as the Kirk-Larsen Bill, which is
designed to help American businesses access the Chinese market
and maintain competitiveness through export promotion,
diplomatic expansion, energy cooperation, and language training.
AmCham members concurred that this type of legislation will
allow U.S. businesses to overcome the initial barriers to entry
in the Chinese market and establish a presence in the world's
largest growth market.

4. (SBU) Two AmCham officers described the diverse opportunities
available for U.S. companies with regards to the 2010 Shanghai
World Expo. They cited a recent survey which indicated that the
U.S. pavilion is number two on the list Chinese people most want
to visit, second only to the Chinese pavilion. With a projected
Expo attendance of 70 million, this guaranteed audience would
make the Expo an ideal forum for companies to display products
and introduce themselves to China's growing market, they said,
adding that U.S. cities and states would be able to promote

SHANGHAI 00000365 002.2 OF 004


themselves as investment and tourism destinations.

--------------------------------------

STAYING AHEAD OF THE INNOVATION CURVE

SOLVES THE TECHNOLOGY TRANSFER PROBLEM

--------------------------------------

5. (SBU) Senator Nelson expressed concern about cultivating
future Chinese competitors as a byproduct of current U.S.- China
private sector technology-sharing partnerships. AmCham members
concurred that this was indeed a concern, but that the
alternative was to hand over business to current global
competitors from European and Asian countries. Several business
representatives cited the aviation sector to describe current
technological partnership opportunities for U.S. businesses.
They explained that although China has clearly stated its intent
to eventually compete with Boeing and Airbus on a global scale,
their airplanes currently under development contain a
significant percentage of U.S and foreign multinational content.
China's first generation regional aircraft contains almost 40
percent U.S. content, and a planned second-generation and
slightly larger regional aircraft is predicted to contain an
even higher percentage of U.S. content. This arrangement
translates directly into substantial U.S. jobs and revenue for
U.S. companies.

6. (SBU) The representative of a major U.S. manufacturing firm
cited his company's experience with locomotives as an example of
how U.S. companies can succeed even in industries where Chinese
competitors have used tech-transfer projects to develop their
own national industry. He explained that since his firm entered
the locomotive market in China 20 years ago, Chinese companies
have used tech-transfer partnerships to acquire and develop
advanced locomotive technology. Despite the maturation of the
Chinese locomotive industry, today that company sells more
locomotives to China than ever before, he added. The
manufacturing firm's representative attributed this success to
his company's continuing innovation and reputation for
high-quality and anticipated similar market development in other
sectors such as aviation.

--------------------------------------------- -

CORRUPTION LESS PREVALENT IN DEVELOPED REGIONS

--------------------------------------------- -

7. (SBU) Senator Nelson inquired as to the effect of corruption
and bribery on U.S. business interests in China. AmCham members
stated that corruption remains an important problem when doing
business in China. However, as the Chinese government increases
its anti-corruption efforts, as U.S. companies educate
themselves on the issue, and as Chinese companies globalize,
corruption is becoming less of a hindrance and is starting to
retreat to certain geographic regions and sectors of the
economy, members claimed. For example, the logistics firm
representative cited results of a recent survey of AmCham
companies that found corruption was no longer a top concern for
many companies operating in the developed coastal regions of
China. However, for companies operating in the less-developed
inland regions, corruption remained a significant problem, he
added. A consulting company representative also noted that
bribery and corruption are becoming more industry specific, with
continued concerns in industries deemed sensitive by the Chinese
government. Another participant in the discussion explained
that U.S. companies' compliance with the U.S. Foreign Corrupt
Practices Act is typically determined by the leadership of the
company and how it educates its expatriate and foreign national
employees with regard to local and U.S. anti-corruption laws.

SHANGHAI 00000365 003.2 OF 004

--------------------------------------------- ------------

PRODUCT QUALITY AND COUNTERFEIT GOODS: "A TWO-WAY STREET"

--------------------------------------------- ------------

8. (SBU) Senator Nelson raised the issue of Chinese product
safety and quality control, and the protection of intellectual
property rights. The Senator described the toxic effects of
tainted Chinese drywall used in the construction of homes in
Florida and elsewhere in the U.S., as well as his involvement
with the Chinese toxic-toy scandal, and asked AmCham members how
these types of product quality issues could be avoided in the
future. AmCham members acknowledged the fault of Chinese
producers in manufacturing faulty or unhealthy products, but
also described product quality disputes as a "two-way street"
and pointed a finger at U.S. importers. The representative of
an engineering firm emphasized that companies ordering products
from China need to ensure that their suppliers are meeting the
specifications set out in the terms of their contracts, which
would require "on-the-ground" presence by U.S. companies and a
more rigorous inspection regime. A representative of a risk
management and business intelligence firm noted that U.S. firms
typically perform more due diligence on their partnerships with
other U.S. firms than they do with their Chinese partners. He
maintained that U.S. companies conducting simple reputational
due diligence and background checks on Chinese partners could
reduce product quality problems and render the Chinese
manufacturing market more efficient.

9. (SBU) On the issue of counterfeit products, AmCham members
were unanimous in acknowledging recent efforts by the Chinese
central government to reduce the production of counterfeit
goods. However, they also agreed that the central government's
ability to enforce new regulations is limited and often is faced
with diverging interests at the local government level. The
representative of an express delivery firm described his
successful cooperation with the central government on
identifying shipments of certain counterfeit goods. However, he
said, since local officials keep one eye closed to counterfeit
production in order to protect local industries, ample room for
improvement remains.

--------------------------------------------- ------

CHINA BUSINESS ENVIRONMENT: IMAGE PROBLEM CONTINUES

--------------------------------------------- ------

10. (SBU) AmCham officials asked Senator Nelson about the
perception in the U.S. of doing business in China. The senator
highlighted varying perceptions on the ease of doing business in
China. AmCham acknowledged it needed to tackle this problem with
greater veracity since the majority of members present clearly
viewed China as an indispensible market with latent potential,
notwithstanding certain difficulties of doing business.

-------------------

NO TAX REVENUE HERE

-------------------

11. (SBU) Senator Nelson challenged AmCham members to suggest
ways the U.S. government could generate more tax revenue as the
U.S. economy begins to recover and major domestic programs such
as healthcare will need to be funded. One AmCham official
stated that the U.S. Government should not generate tax revenue
by raising taxes on U.S. citizens living abroad, and that
allowances under Section 911 of the tax code, which permits U.S.
expatriates to protect some income from taxation, should be

SHANGHAI 00000365 004.2 OF 004


expanded. Another company representative suggested that the USG
should focus on providing incentives to attract more foreign
companies and FDI to the U.S., which would have the combined
effect of creating more jobs, generating tax revenue, and
maintaining the U.S.'s position as the number one location in
the world for FDI.

----------------------------------------

REASSURING MESSAGE ON SHANGHAI'S ECONOMY

----------------------------------------

12. (SBU) Yuan Yixing, Chair of the Finance and Economy
Committee of the Shanghai Municipal People's Congress (SMPC),
told Senator Nelson during an August 11 meeting that Shanghai is
facing some tough challenges as a result of the global financial
crisis, but that the people of Shanghai are confident things
will improve. For now, Shanghai's situation is worse than
elsewhere in China, because Shanghai is highly dependent on
overseas markets. The recovery will take time -- perhaps as
long as several years -- because Shanghai must shift towards
higher-technology and services industries for new growth, said
Yuan. In the end, though, one of Shanghai's strengths is its
openness to the outside world, as shown in the international
architectural styles prevalent in the city. Yuan said it
reminded him of a quote from Confucius, "How pleasant it is to
have friends come from afar."

13. (U) Senator Nelson's delegation has cleared this message.
CAMP

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