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POLICY P.19AmCham Shanghai releases Viewpoint on R&D

POLICY P.24Q&A with Stephen Roachon China’s economy

MEMBER NEWS P.32AmCham’s 2018 Charity Ball:over RMB 400,000 raised

How Chinese companies are chal-lenging Western MNCs for talent. Plus, legal analysis on company versus employee disputes, and why some companies fall short in turning strategy into action.

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The Journal of the American Chamber of Commerce in Shanghai - Insight May/June 2018

INSIGHT

May

/Jun

e 20

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FEATURES

amcham shanghai

PresidentKenneth Jarrett

VP of Administration & Finance helen ren

VP of Operations shilPi BisWas

Directors

Committees Jessica Wu

Communications & Publications ian Driscoll

Government Relations & CSRVeomayoury "titi" Baccam

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INSIGHTThe Journal of the American Chamber of Commerce in Shanghai - May/June 2018

FEATURES

The Talent Battle How Chinese companies are challenging Western MNCs in talent recruitment

Handling Labor Disputes in a Challenging MarketLegal experts explain “material change in actual conditions” claims in employee disputes

Business Benefits of Diversity and InclusionMichael Wong of EY on how D&I is applied in the Chinese context

Shanghai Disney Resort Provides Employment to Workers with DisabilitiesMurray King talks about Disney’s accessibility program, for employees and visitors

Turning Strategy into ActionL.E.K. Consulting on why many companies find this challenging

POLICY PERSPECTIVES

Chasing InnovationAmCham Shanghai’s latest Viewpoint report looks at China’s R&D environment

Legal Aspects and Best Practices for Retailers in ChinaKey legal challenges facing international businesses that want to open retail stores in China

Swimming UpstreamStephen Roach on the challenges ahead as China’s leaders remodel and rebalance the economy

Financial Regulatory Reform Update APCO outlines China’s new financial regulatory landscape and implications for business

Party Restructuring Q&A with Andrew Polk of Trivium on government restructuring

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MEMBER NEWS

Board of Governors BriefingNotes from March and April’s board meetings

2018 AmCham Ball Raises Over RMB 400,000 Highlights from this year’s charity ball

Event ReportRecap of selected events from the past two months

Month in Pictures Selected photos from the past two months’ AmCham events

EsotericaMembers reveal their favorite chengyu成

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Dealing with U.S.-ChinaTrade Frictions

There is one big question on the mind木s of

AmCham Shanghai members these days: can

the United States and China avert a trade war?

No one wants to see the damage such conflict

would bring. Many of our members are enjoy-

ing good business in China and do not want

that jeopardized, especially when the pros-

pects for continued business success look

strong. At the same time, many companies

suffer from market access restrictions or dis-

criminatory pressures from China’s industrial

policies, especially those aimed at develop-

ing domestic capabilities in key technologies.

Thus, our members also seek improvements

to China’s investment climate.

How tough should the Trump administra-

tion get with China? There is little support from

the American business community for retalia-

tory tariffs, but one must acknowledge that the

Administration’s approach has gotten China’s

attention. China’s leaders may feel uncertain

about the Administration’s bottom line – or so

they say – but they do realize the Trump ad-

ministration is taking a new approach to its

trade dealings with China and means business.

As a business chamber we should seek maxi-

mum benefit from this new dynamic even as

we caution against a trade war that threatens

the well-being of our members.

In looking at the current tensions, it is im-

portant that companies understand the larger

picture. This is not simply a dispute about in-

adequate protection of intellectual property

rights. Rather, the Administration’s Section

301 investigation reflects a growing feeling in

Washington that China is a strategic competi-

tor to the United States and that one battle-

front will be dominance of key emerging tech-

nologies, such as artificial intelligence and big

data, to give two examples. Thus, the roots of

the current situation go far deeper than just

the question of forced technology transfer or

even the belief that China does not play by the

rules. In Washington these days it is fashion-

able to dismiss four decades of “constructive

engagement” with China as a policy failure

that has harmed U.S. strategic interests. Some

would even argue that the two economies

should “disentangle.” The speed with which

this revisionist view has taken root is alarming.

This backdrop has important repercus-

sions for our members. It suggests that even

if the U.S. and Chinese governments reach

an agreement that avoids tariffs, we will not

be out of the woods. Rather, we may be in

for a period of sustained trade tensions as

the two governments continue to clash over

advanced technology. This could also mean

greater intervention by the U.S. government

in U.S.-China trade and investment. Draft leg-

islation before Congress to strengthen the

national security review of foreign investment

(CFIUS), which has broad bipartisan support,

is one indication of that trend. The proposed

bill would not just cover foreign investments

in the United States, but also looks to plug

gaps in the existing statute by including joint

ventures and non-passive minority-position

investments. And for those in the U.S. govern-

ment who favor economic “disentanglement,”

they might favor even tougher measures.

Even if the proposed CFIUS changes have

no direct impact on most of our members, I

highlight this example to illustrate that the

overall bilateral atmosphere is moving in a

negative direction and companies must be

alert. The recent U.S. government action

against ZTE, the Chinese telecommunica-

tions giant, is another example of the chal-

lenges we face. Even though ZTE is being

punished for its violation of Iran sanctions,

and this is solely a law enforcement action,

most Chinese reject that explanation. In Chi-

na, the U.S. penalties are commonly viewed

as part of a determined effort to restrain

China’s growth into a high-tech giant. This re-

flects an overall atmosphere that is becom-

ing increasingly poisonous.

What does this mean for AmCham Shang-

hai? We are an important bridge between

the world’s two largest economies. Our large

membership base on the front line of doing

business in China gives us special credibility.

Both governments want to hear from us and

to understand our priorities. Thus, we face an

important opportunity as well as a heavy re-

sponsibility. In order to fulfill our role well, we

need your views. Let us know how you view

the current situation so that we can best re-

flect the broad consensus of our members.

We realize companies have many different

experiences. Some enjoy fast growth and

open markets. Some face slowing growth,

shrinking markets, and the negative impact

of Chinese industrial policies. But there are

common threads and goals. We all want a

level playing field and continued access to

this important market. We want to avoid a

trade war. But we also want, and expect, Chi-

na to behave in a way more consistent with

its status as world’s second largest economy,

one that is emerging as a high-tech power-

house. Let us know what you think. I

PRESIDENT’SNOTE

KenneTh JArreTTPresident of The American Chamber of

Commerce in Shanghai

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FEATURES

Go back a decade, ask an am-

bitious Chinese professional

to describe their career

goals, and you will probably hear as-

pirations to work at a foreign-owned

multinational corporation (MNC).

Since the country opened up in the

late 1970s – and especially in the

wake of Deng Xiaoping’s 1992 South-

ern Tour, during which he advocated

welcoming foreign investment – em-

ployment at one of the many MNCs

that set up shop in China afforded

Chinese nationals prestigious oppor-

tunities to profit, learn and travel.

Foreign employees who trans-

ferred to the China offices of MNCs,

meanwhile, enjoyed exciting chal-

lenges and opportunities to develop

their cross-cultural leadership skills

in one of the world’s fastest growing

economies, usually from the comfort

of a cushy compensation package.

But homegrown Chinese busi-

nesses have risen with their country’s

economy and now pose a formidable

challenge to foreign MNCs. This has

become especially clear in attracting

talented staff. “As innovation and entre-

preneurship are becoming the main-

stream in China, career opportunities

with significant upside potential are

being made available to many young

people. MNCs are no longer the best

employment options,” writes Edward

Tse, founder and CEO of Gao Feng Ad-

visory Company.

This article looks at how the em-

ployment opportunities offered by

Chinese companies have improved

so much that they are now able to

challenge foreign MNCs in the battle

for talent.

Both China’s state-owned and pri-

vate enterprises are expanding their

efforts to attract talent, although it

is private companies that gain the

most attention. David Nagy, a Shang-

hai-based managing partner at

global executive search firm DHR In-

ternational, says that the fast-grow-

ing private companies are most ag-

gressive in their hiring practices, and

it is these companies which drive the

Chinese economy and account for

most employment in China.

On the back footBy the early 2000s, market reforms

and state-owned enterprise readjust-

ments had given rise to a new generation

of entrepreneurs who were developing

a slew of small but fast-growing busi-

nesses. The National Bureau of Statistics

reported in 2006 that the private sector

made up half of China’s GDP, and a 2007

Global Entrepreneurship Monitor report

found that 70% of surveyed Chinese

people thought that entrepreneurship

was a good career choice.

But if local businesses were suc-

ceeding and becoming a good place

to work, many of China’s most am-

bitious workers hadn’t apparently

caught on. CEB, a provider of busi-

ness research and analytics, found

that “in 2007, 41% of high-skill Chi-

nese professionals preferred working

for a Western multinational, while

9% preferred a job with a domestic

firm.” The benefits provided at foreign

MNCs – professional training, attrac-

tive salaries and benefits, the chance

of overseas posting – were decisive.

By 2010, however, the CEB survey

found that 28% of high-skilled Chi-

nese professionals preferred to work

with a domestic firm – a 19-point in-

crease from just three years earlier.

Goodyear’s Asia-Pacific President Pi-

erre Cohade received many nods of

agreement from consultancies and

HR executives when he told the Wall

Street Journal in 2011 that his biggest

challenge was “absolutely the fight

for talent.”

By David Hicks

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Becoming competitiveWhat did Chinese companies do

over the last decade to make them-

selves so much more appealing to

employees? In short: they grew. Tal-

ent management firm Korn/Ferry in-

terviewed 43 executives in 2011 and

found that, for nearly half of them,

belief in a Chinese company’s growth

potential was the main reason they

would join a Chinese enterprise.

While most of the world’s MNCs

laid off staff after the 2008 global fi-

nancial crisis, Chinese companies

began to distinguish themselves in

places where a talented individual

could “come in and be the number

one functional leader or business

unit leader – reporting directly to

the owner or founder,” said Mr. Nagy.

“They get to shape how that depart-

ment or division is structured. They

have an ability to create the whole

system, the whole function.”

Today, for many young Chinese

leaders who quite naturally assume

their career trajectory will reflect the

fast speed of their country’s economic

growth, quickly acquiring this kind of

influence is important. A foreign MNC

with predictable hiring practices can

therefore seem stale to people who

“are demonstrating a preference for

the steep learning curves and career

trajectories that local companies pro-

vide,” according to a report produced

by Bain and LinkedIn China.

Many multinationals have identi-

fied ‘localizing’ as a key objective for

their China operations – often repre-

senting a commitment to empower

local managers with real decision-

making power – while nevertheless

retaining foreigners in the most se-

nior roles. The CEB found that 40% of

Chinese employees at foreign MNCs

“thought that most senior positions

are, and will continue to be, held by

expatriates.” This perceived glass

ceiling to their career trajectory is

likely one of the forces that drive am-

bitious Chinese nationals from for-

eign MNCs to Chinese firms. The Bain

report found that 31% of leaders at

local firms had previously worked for

foreign MNCs (meanwhile, only 10%

of foreign MNC leaders had worked

for local firms).

This ‘push’ against the glass ceiling

is accompanied by the ‘pull’ of attrac-

tive compensation packages avail-

able to executives who transfer from

a foreign MNC to a Chinese company.

“They are offered significantly more at

a private company than at an MNC.

The cash can be significantly higher,

and they can be quite innovative with

the benefits. It’s not just a base salary

and bonus – there is also the possibility

of equity. If the company goes public,

their half percent or one percent stake

can be worth a lot of money,” said Mr.

Nagy. It is not uncommon to hear of

top employees at foreign MNCs being

offered salaries and benefits two or

three times greater at Chinese firms.

Korn/Ferry found that 45% of surveyed

managers would consider working

with a pre-IPO Chinese enterprise,

with willingness to make the move de-

clining to 30% once the enterprise was

publicly traded.

Going abroadThe competition for talent has

intensified as many Chinese com-

panies have grown and expanded

overseas. The change has made the

opportunity to work outside China, a

perk previously offered uniquely by

foreign MNCs, more attainable, erod-

ing the foreign MNC’s appeal.

It has also increased the value that

foreigners can bring to Chinese com-

panies, which can rely on their experi-

ence as the company tries to penetrate

the foreign employee’s home market.

Simon Wan, President of China opera-

tions for Cornerstone, an executive re-

cruiting firm, often finds himself work-

ing with clients who fit this description,

the “American or European who has

worked in China for many years and

now wants to return home, but they

want to work for a Chinese company

because they know both markets.” For

China’s new multinational companies,

hiring such foreign employees (or Chi-

nese employees with extensive expe-

rience abroad in foreign MNCs) can be

a real asset.

Andrew Ng’s experience could be

seen as representative. The Amer-

ican became a renowned artificial

intelligence expert after teaching at

Stanford University, helping found

Google’s machine learning system,

and co-founding Coursera, a leading

provider of open online courses. So

when Baidu, the internet company

that is helping champion the Chi-

nese government’s goal of being a

global leader in artificial intelligence

by 2030, needed a chief scientist for

their deep-learning research lab in

Silicon Valley, they recruited him to

much fanfare. But Mr. Ng’s tenure

was short; he left in 2017, after less

than three years at the company.

It is unclear why Mr. Ng left Baidu,

but his experience reflects the chal-

lenge that Chinese companies have

had with retaining foreign talent.

“There’s a whole lot of press when Chi-

nese companies hire talent from MNCs,

but there is little follow-up to hear how

they’re doing at retaining that talent,”

said Mr. nagy. he notes that while there

are good examples of MNC-trained

executives who successfully transition

into Chinese companies, the culture

shock can be intense, and it is not un-

common for some to return to an MNC

in less than a year.

When discussing retention of em-

Tertiary sector employment zone

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FEATURES

ployees at Chinese firms, Mr. Wan

reminds that “this trend [Chinese

firms hiring from foreign MNCs] is

only starting, so it is very hard to tell

whether the length of service [at lo-

cal Chinese firms] is comparable with

that at MnCs.”

Government’s roleWith hiring domestically, there

are limitations that no HR depart-

ment can counter. High-skilled im-

migrants can play an important role

in strengthening local companies

(for instance in Silicon Valley, where

71% of workers are foreign-born) but

restrictive and complex visa proce-

dures have long limited this possi-

bility. In 2010, the first year the Chi-

nese government began publishing

data on foreign residents, there were

600,000 foreign nationals living in

China, or 0.05% of the population. (In

2013, the latest year for which data is

available, foreign nationals in OECD

countries made up an average 9%

of the total population.) Bureaucratic

limitations on working visas have

long been a deterrent for foreigners

who want to live and work in China

and the companies – foreign- or lo-

cally-owned – that want to hire them.

Over the past decade, more se-

rious efforts have been made to

make the path to China easier for

high-skilled foreigners. In 2008, the

central government announced the

‘Thousand Talents Plan,’ an initiative

designed to attract talented Chinese

nationals who had settled abroad by

offering benefits such as stipends

and funds for research. By 2011, the

“Recruitment Program of Foreign

Experts” was added to the plan, an

implicit recognition of the need to

attract foreign talent – particularly

experts in the hard sciences.

Beijing’s Zhongguancun Science

Park (often called “China’s Silicon

Valley”) has been another high-pro-

file example of the government-led

efforts to pull in talent. Foreigners

hired to work at the $2.2-billion park

are potentially eligible to obtain a

permanent residence certificate and

offered generous visa terms. They

can also serve as legal representa-

tives for national projects.

But the response to the plan and

the park has been mixed and limited

in scope. To date, approximately 313

foreign experts and 5,000 Chinese

experts have accepted positions un-

der the plan, while Reuters reports

that Zhongguancun Science Park

has only hired 10,000 foreigners and

offered permanent residence to 258

of them. While Chinese firms have

undoubtedly begun to attract more

foreign talent, this data shows that

the change has been muted. Only

one in 10 regional roles in Chinese

firms are held by foreigners, accord-

ing to the Bain report.

Rising demographic pressures

have been fire at the feet of govern-

ment and business leaders as they try

to attract new talent. In 2012, China’s

working age population began to

contract for the first time. Within the

next decade, scholars estimate that

the number of Chinese people aged

20 to 29 will drop from 200 million

to 150 million, while those aged 30

to 34 will drop from 125 million to

68 million. And while more Chinese

are receiving higher education than

ever before – 7.5 million graduates

entered the job market in 2017 – em-

ployers in China have struggled to

find degree-holders with skills that

translate to the workplace. A 2013

McKinsey report predicted that by

2020, “Chinese employers will de-

mand 142 million more high-skilled

workers – those with university de-

grees or vocational training – or

about 24 million more than the coun-

try will likely supply.” Making sure

that there are local champions who

can develop talent and counter un-

employment pressures has become

a political imperative.

ConclusionThe increased opportunities to

earn good money and rapidly take on

more responsibility at Chinese firms,

coupled with the limiting processes

and systems that can be found at

some foreign MNCs, have helped

make Chinese enterprises a strong

challenger for top talent. Domesti-

cally, Chinese companies will ben-

efit as demographic pressures and

the desire to see their companies

become global leaders spur bureau-

crats to iron out inefficiencies and of-

fer incentives to high-skilled foreign-

ers and Chinese nationals returning

from abroad. And as their interests

overseas develop, these companies

will have more reasons to continue

recruiting employees with experi-

ence at foreign enterprises.

The ability of Chinese firms to

retain the talent they recruit from

foreign MNCs will be key to deter-

mining whether they pose a serious,

long-term threat in the tussle for tal-

ent. Perhaps the exciting promises

of IPO-fueled riches and extensive

authority made by some Chinese en-

terprises will not unfold as planned,

or perhaps the HR departments at

these Chinese firms will improve

their ability to acclimate employees

with foreign MNC experience into

their office culture. Regardless, for

foreign MNCs that have increasingly

watched their employees get re-

cruited away, it seems clear that the

playing field is far flatter now than it

was just a decade ago. I

Now let’s see what he posts on Weixin

By Bin Qi, Wilson Dong

Large organizations are no

strangers to ever-growing

competitive pressures, but

couple that with difficult and oc-

casionally volatile macroeconomic

conditions and they are forced to

adapt quickly. This often requires

them to adjust staffing and organi-

zational/operational structures and,

on occasion, even consider “closure,

suspension, merger or shift to differ-

ent lines of production”, particularly

in times of economic downturn. All of

these changes directly impact em-

ployees, more often than not result-

ing in transfers, layoffs and the disap-

pearance of management positions

etc. Such developments also involve

the risk of triggering labor disputes.

Based on our relevant experience

in connection with a certain labor

dispute involving a senior executive,

we discuss in this article whether an

“operational structure adjustment”

claimed by an employer can consti-

tute a “material change in actual con-

ditions” as defined under Article 40(3)

of the Labor Contract Law.

ABC Multinational Corporation

(“ABC Company”) decided to adjust

its global operational structure due

to the global economic downturn.

Part of this adjustment included the

removal of David, the CFO of the

China region, with immediate effect.

The company offered considerable

compensation as part of the labor

contract termination agreement with

David, but David refused to accept

the offer. Shortly thereafter, David

opted to take sick leave, which lasted

for an entire calendar year, during

which time the company discussed

with him, on several occasions, the

possibility of a job transfer, but he,

again, refused to agree. The Com-

pany took the view, with the assis-

tance of its legal counsel, that ter-

mination of the labor contract with

David on the grounds of material

change in actual conditions was a

necessary and appropriate way for-

ward. David then filed for arbitration,

claiming compensation for illegal

termination of the labor contract and

overtime pay totaling RMB 8 million.

The arbitration tribunal determined

that the termination of the labor con-

tract by the company was legal and

dismissed all David’s claims.

Objectivity and rationality1. Whether the operational structure

adjustment actually occurs

The actual situation of any op-

erational structure adjustment

shall be determined by taking into

account a number of factors, such

as management practices and the

actual operating conditions of the

company and even macro-eco-

nomic or industry sector factors,

and may not be solely based on the

decision of the corporate governing

body. In such a case, the evidence

used by the company proving “ma-

terial changes in actual conditions”

would include a public announce-

ment from the group company (the

parent company), a notice email

from the global CEO and a related

press release. In such a case, the

evidence would be clear and there-

fore difficult to exclude, and the

arbitration tribunal found that the

company did, in fact, adjust its op-

erational structure.

2. Whether the operational struc-

ture adjustment is reasonable

Adjusting the operational struc-ww

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Handling labor disputes in a challengingmarket

Bin Qi is a managing partner at Xin Bai Law Firm. From 1989 to 1992, after graduating from Peking University, Bin worked in the PRC Ministry of Labor’s Bureau of Policy and Regulations, where he participated substantively in the drafting of China’s first Labor Law. He is a member of the Labor and Social Security Committee of the All China Lawyers Association and the deputy director of the Labor Law Committee of the Shanghai Bar Association.

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ture is warranted provided the moti-

vation is deemed reasonable, such as

subjective changes or forced change

as a result of economic conditions.

The ABC Company was forced to

adjust its operational structure due

to a sharp decline in product pricing

and sales volumes resulting from the

global economy downturn, and the

changes made to its Chinese sub-

sidiary were a part of its global plan.

Therefore, the cancellation of David’s

post fell within the “material change

in actual conditions” as defined in Ar-

ticle 40 (3) of the Labor Contract Law.

However, if an operational struc-

ture adjustment is a strategic decision

based on a pre-judgment of market

conditions and is based on a desire to

raise profits, such an adjustment shall

be within the scope of the enterprise’s

autonomy; provided, however, that

where such an adjustment involves

termination of a labor contract or in-

fringement on any employee rights

and interests, for the sake of striking a

balance between the interests of em-

ployer and employee, adjudicators

may be inclined to hold that such an

adjustment is not “a major change in

actual conditions” because of inade-

quate proof of “actual”.

3. Whether the removal/resignation

of the employee concerned has any

impact on the company may also be

duly considered.

In some labor dispute cases, cer-

tain prior and post-termination facts

may also be taken into consideration

in adjudicating such cases.

David was not reinstated to his

original post (CFO) during the one-

year sick leave he took after he re-

fused to negotiate termination of his

employment with ABC Company,

and the relevant responsibilities were

provisionally performed by a princi-

pal of a department of ABC Compa-

ny’s Beijing branch. In this respect, it

could be seen that David’s removal

did not bring about any material ad-

verse effects on the operations of

ABC Company. Therefore, David’s

claim for returning to the original

post and compensation for illegal

termination of the employment rela-

tionship was unreasonable.

Effect on the performance of a labor contract

If a structure adjustment directly

results in the termination of certain

posts, which make the original la-

bor contracts obsolete, then such

adjustment shall be deemed to

have material effect. However, if the

structure adjustment does not relate

to the termination of the relevant

posts, but only involves re-allocation

of the functions, then the assertion

that such an adjustment constitutes

a “material change in actual condi-

tions” may not be supported by the

adjudicators.

In the above case, the company

decided to merge two of its de-

partments, and in doing so consol-

idated the two principal posts into

one, resulting in the loss of a job for

one principal. So with respect to the

principal subject to the adjustment,

it would be determined that the la-

bor contract to which he was a party

could no longer be carried out.

In another case, a company

adjusted its operational structure

following its acquisition of another

company, and as the adjustment

led to changes to its primary busi-

ness channels, the company ar-

ranged for the transfer of certain

employees in its marketing de-

partment. Brown, a marketing

officer, refused to accept the

transfer arrangement on

the grounds that the new

post was not suitable

for him. The company

then terminated the

employment re-

lationship with

Brown on the

basis of “ma-

terial change

in actual con-

ditions”. At the

arbitration hear-

ing, Brown stated

that the company had

abolished and merged

the departments arbi-

trarily, and except for chang-

ing the names of the resulting

departments, their functions

had not changed, and the company

was still recruiting marketing per-

sonnel. He also asserted that “ma-

terial change in actual conditions”

was only valid when the event was

unpredictable at the time of con-

cluding the labor contract and was

not attributable to either party. In

addition, Brown argued that sim-

ply changing the names of depart-

ments does not constitute a ma-

terial change in actual conditions.

The arbitration tribunal determined

that the company’s termination of

the labor contract with Brown was

illegal.

General applicabilityThe “adjustment” corresponding

to the “change” proposed by the

company shall be part of the overall

adjustment of the corporate oper-

ational structure, but is not specif-

ically made in relation to a specific

post. For example, in the case of

the abolition or merger of any cor-

porate departments, irrespective

of the number of employees of the

departments subject to the adjust-

ment, if the company claims “ma-

terial change in actual conditions”, it

must prove that the adjustment will

affect all or a substantial portion of

Objectivityof operational structure adjustment

Not solely based on the decision

of the governing body

Reasons for

operational structure adjustment

motivation and necessityG

ener

al a

pplic

abili

ty o

f the

oper

atio

nal s

truc

ture

adj

ustm

ent

Not

sol

ely

base

d on

the

num

ber

of e

mpl

oyee

s in

volv

ed

Whe

ther

the

rem

oval

of th

e em

ploy

ees

conc

erne

d

resu

lts

in a

ny m

ater

ial e

ffect

on th

e co

mpa

ny

Re-allocation of

functions but not

cancellation of posts

Materialchanges水in actual

conditions?

Structure adjustment relates to cancellation of posts, resulting in inability to apply labor contracts

10

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the employees of the department

concerned. However, it is not ap-

propriate to determine the legality

of any adjustment solely based on

the number of employees involved

in such an adjustment.

Evidentiary materials 1. Background materials

The company may submit materi-

als related to the cause of the op-

erational structure adjustments. For

instance, if the regulator restricts or

prohibits certain enterprises from en-

gaging in certain business (e.g. proj-

ects that may cause environmental

pollution), an operational structure

adjustment is necessary.

2. Decision-making documents and

announcements

The company’s decision-making

materials related to the operational

structure adjustments include: res-

olutions of shareholders’ meetings,

resolutions of the board of directors,

the minutes of meetings of the gen-

eral manager’s office and even an-

nouncements from overseas head-

quarters, public speeches by the

global CEO, notice emails to all em-

ployees, news coverage etc.

3. Procedural documents

Given the provision of Article 4 of

the Labor Contract Law, employers

may use written documents in rela-

tion to fair and open consultations

with regard to operational structure

issues as important evidence, but in

practice few employers choose to do

so. In any case, the performance of

fair and open procedures is not a key

consideration for the adjudicator.

4. Evidentiary materials for termina-

tion of labor contracts

In the case of individual labor dis-

pute cases, the company may also

submit to the adjudicator evidence in

relation to communications with em-

ployees where that communication

provides background information

about the adjustments to operational

structures, the means and effects of

implementation and any other rele-

vant exchanges with employees. A

company may need to preserve or

notarize such evidence where nec-

essary.

In conclusion, operational struc-

ture adjustment may be legally ac-

ceptable as described under Article

40(3) of the Labor Contract Law only

if it is objective and reasonable, in

which case employers may unilat-

erally terminate labor contracts with

their employees on the grounds of

“material changes in actual condi-

tions” if they fail to reach agreement

with respect to amendments to the

employment contracts. The “ma-

terials change of actual conditions”

method, which has been dubbed

the “magic bullet” for laying off em-

ployees, may not in practice always

benefit employers, and they should

be prudent in applying it. I

Wilson Dong, Attorney, Xin Bai

Law Firm, also contributed to this

article.

11

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for more, such as “D&I month”, which we hope

to hold again this year and have more people

involved and engaged as volunteers.

Can you please speak on the methods cor-

porations – and especially EY – employ to re-

cruit diverse employees, especially in China?

EY recruits over 5,000 employees in

Greater China every year. We educate our

recruiters on the importance of D&I when

they make hiring decisions. We are a profes-

sional services network and we don’t solely

hire business majors. For example, we have

been attracting many STeM students and our

brand among the STEM student population

has increased. We don’t have restrictions on

the students or candidates we hire, as long

as they meet our criteria and demonstrate a

keen interest in EY. I’d like to encourage more

companies in China to take a broader view of

accepting a variety of degrees rather than the

typical or traditional ones such as finance and

business – especially for the fresh graduates.

During the interview process, we focus on

candidates’ values, integrity and the experi-

ences they can contribute to the team. For

promotion and salary adjustment, we use data

analysis to achieve pay parity and evaluate our

promotion pipeline. In terms of development,

we maintain a representative balance in pro-

motions. We review employees who serve ma-

jor clients to gauge whether there is sufficient

female representation. In our daily operations,

What do the words diversity and inclusion

mean to you?

Diversity and inclusion (D&I) is inherent in

the EY (Ernst & Young) culture. We aspire to

develop the highest-performing teams which

we believe come from a diverse workforce. We

value people from different backgrounds, cul-

tures, education and perspectives. When you

have a diverse workforce, you need to build an

inclusive culture, which maximizes the power

of different opinions, perspectives and cultural

references to fuel innovation, foster collabora-

tion and strengthen relationships. Our focus on

diversity and inclusiveness in Greater China is

integral to how we serve our clients, develop

our people and play a leadership role in our

communities. As our global CEO Mark Wein-

berger says木, diversity is being invited to the

party and inclusion is being asked to dance.

Do you believe EY has been successful in

cultivating that inclusive atmosphere?

It’s not just a slogan or banner; we embed

D&I into our daily lives. We keep talking and

keep reminding ourselves about it. It starts from

recruitment木; all our newly promoted managers

and our interviewers have unconscious bias.

D&I week was first introduced in EY Greater

China in 2016, and we organized 25 activities

for a week, covering topics such as cross-gen-

eration communication, gender, LGBT ally,

flexibility and inclusive leadership. The event

was so well received that people were asking

Michael Wong is the partner, talent leader of EY Greater China. He joined EY as the national human resources director for China in June 2007 and was also the assurance and advisory people leader of the legacy Far East area. Before joining EY, Michael gained extensive HR experience working with other major professional service firms and multinational companies.

FEATURES

Business Benefits of Diversityand InclusionQ&A with Michael Wong, Partner, Greater China Talent Leader at EY

By Julia Peters

12

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we keep D&I in mind when determining em-

ployees’ development.

What programs are used to promote the

development and retention of these em-

ployees?

In terms of employee retention, over 75% of

our workforce are millennials; we are trying to

create a new work environment together with

them. One method is through performance

reviews where we have moved from a rating

system to a timely feedback dialogue as we

develop people, which is what the younger

generation seeks. We also have a FlexPro

toolkit, which offers employees three different

flexible work arrangements.

How useful are metrics to measure the success

of diversity and inclusion and how are they used

to positively affect change in the workplace?

Our annual Global People’s Survey is es-

sential. We have a full version of roughly sixty

questions biennially. According to our 2017

survey, we are on track to providing an inclu-

sive working environment for our employees:

91% have worked with other service lines

to meet clients’ needs

88% agree that EY has an inclusive work-

ing environment

83% think their teammates actively seek

out different ideas and perspectives

82% think manager(s) enables flexibility in

when and where people work.

One set of questions asks employees

whether they feel happy about our culture

and the inclusiveness of our leaders and

teams. It is an influential indicator providing

measurable and quantitative information as-

sessing how we are doing and what more we

can do. These kinds of metrics or analyses are

very important to human resources, the talent

teams and the organization’s leadership. We

also have an Asia-Pacific D&I maturity frame-

work that keeps track of our progress in D&I.

They both remind us of how we can continue

to progress.

Do you think other companies in China have

a similar culture?

There are too many companies to com-

ment on individually or generally, but I can

say it’s a journey. Fostering awareness is the

start. China is not particularly late in this. A

long time ago, Mao Zedong said that “women

hold up half the sky”. You could say China had

already started to focus on gender equity at

that time. As society grows or develops, some

elements move faster than others. I can’t say

that all companies are cultivating D&I at the

same pace, but I believe that every company

is doing something.

Most companies in China (local or inter-

national) are more focused on growth and

generating revenue, rather than on D&I. Will

the focus shift in the future?

I don’t see a conflict or that they are mu-

tually exclusive. In fact, I believe D&I and rev-

enue are mutually beneficial. Many studies

have shown that D&I is a business imperative

that has direct linkage to business revenue

(10% stronger in revenue growth and 45%

more likely to improve market share). At EY,

we are responsible to investors, sharehold-

ers and the community, so growth will be our

continued focus and we can’t do this without

harnessing the power of our people.

When you have a higher performing team,

you can build more innovative products to

provide better services for your clients. That

will lead to growth. So I think they’re not con-

tradictory. Having said that, there must be

and will be a greater focus on D&I as corpo-

rations increasingly actualize the desires of

the younger generation, which places greater

emphasis on D&I than the older one. As I said,

it is a journey. Some are moving faster than

others, but at least everyone is moving.

In the last ten years, China has seen rapid

changes which are impacting businesses and

the role of HR. For China to remain an eco-

nomic powerhouse, our leaders should find a

way to embrace differences and be confident

to move away from the traditional approaches

to people management. Only when we can

harness the different and new ways of thinking

of all our people will we reach our full poten-

tial. How each organization gets there will be

different but I believe that awareness is the

first important step.

What difficulties do Western companies

operating in a Chinese context encounter in

terms of promoting diversity and inclusion?

Based on your experience, are employees’

preexisting biases an obstacle in the Chi-

nese workplace?

I don’t see particular difficulties in imple-

menting D&I. When you introduce new con-

cepts to the local communities, it takes time

to digest. You can’t necessarily copy and paste

the practices employed by the global organi-

zation to the local one, because they do not

always work. Successful localization is rooted

in understanding priorities and customization.

What do you see as being prioritized in

China right now?

The current focus is more on gender, the

generation gap, different work styles and flex-

ible working, and we are talking about LGBT

more openly. The LGBT community received

little attention five to ten years ago, but now it

is increasingly discussed. I hope in the not too

distant future, we will be discussing the impor-

tance of understanding mental health and cre-

ating more wellbeing for employees.

You mentioned how D&I programs are in-

creasingly integrating LGBT members, do

you feel that there is a prejudice or bias

against members of the LGBT community?

Unfortunately, bias and discrimination

are universal obstacles. The LGBT commu-

nity was not a topic that the broader Chinese

population discussed in the past. Despite this,

dialogue is progressing positively. Creating

greater acceptance of LGBT is an evolution

not a revolution. If we are more aware that the

LGBT community is vital to the ongoing con-

versation, openness and inclusivity will result.

Given its size and scope, China cannot be

treated as a homogenous unit. In terms of a

workplace environment, are the regional dif-

ferences among employees a source of con-

flict or tension? As migration from rural to ur-

ban communities grows, will practices used to

accommodate regional differences change?

EY Shanghai office has 4,000 employees from

across China and globally. At Chinese New Year,

they return to their hometowns, which may be

miles apart. Despite disparate backgrounds and

experiences, when they work, have lunch and

travel together, you cannot see the difference.

They might have an accent when they speak Man-

darin, but that’s about it! I don’t see any tension or

any regional clique we need to pay attention to.

Internally, we have consistent policies and

procedures to protect our people from dis-

crimination and harassment. We should not

magnify regional differences through the lens

of judgment. Instead, we encourage our peo-

ple to leverage the differences to build strong

client connections across China.

When we talk about D&I, we should rec-

ognize that people are different. When talk-

ing about regional differences, we should

acknowledge that we have unconscious bias

and sometimes that is fine. We are humans,

but we should work together to mitigate bias.

People feel welcome in Shanghai, where

there is a mix of Chinese and expatriates.

Sometimes, there aren’t as many regional dif-

ferences as we imagine. I

What prompted your accessibility

program? Was it goodwill, precedent

at other Disney parks, or a need to

comply with local laws? Or all three?

The Walt Disney Company has al-

ways been about inclusion. Whether

that’s for an employee or for guests,

particularly in parks and resorts, to

ensure that we build facilities and

provide services that allow anybody,

whether handicapped or able-bod-

ied, to enjoy the facilities as a guest,

or be employed and integrate into

our employee community as one of

our Cast Members.

In China, we have brought our

global standard and tried to ensure

that it complies with local standards.

We’ve created a brand to help peo-

ple understand what accessibility

means for a Disney experience. That

brand, “MagicALL,” is outward-facing

towards our guests but also inward-

facing towards our Cast Members.

MagicALL combines four compo-

nents. First is full compliance with

Chinese law related to the protec-

tion and facilitation of facilities and

services for persons with disabilities.

Second, we incorporate where possi-

ble any local regulations or standards

or best practices. For example, there

are regulations on the employment

of persons with disabilities in Shang-

hai, and there are national standards,

and we incorporate those standards.

We incorporate our international

standards and for us the best global

standard is the Americans with Dis-

abilities Act standard for accessible

design. And we have our own best

practices that relate to our citizenship

practices and our own global approach

to guests and Cast with disabilities.

Can you describe some of the modi-

fications you make for the disabled?

The first thing we do with our

MagicALL standards is incorporate

them into the design and operations

of our resort. That includes ensuring

that we have both vehicles and the

physical infrastructure to support ac-

cessibility for people with handicaps.

We typically look at audio, visual or

physical handicaps, and we also sup-

port people who might have an intel-

lectual handicap.

Second is having tactile lanes

and ramps and handicap-accessible

toilet facilities throughout the resort.

Third we ensure that our restau-

rants and merchandise facilities are

equipped with the design and op-

erating features that support acces-

sibility. Next is in the attractions and

entertainment: for example, some-

one in a wheelchair can still enjoy

every attraction at Shanghai Disney-

land. That includes Tron, one of the

fastest rollercoasters that Disney has

operated, and it includes going into

one of our theaters to see the Fro-

zen show and being accommodated

even if you have a wheelchair. Or

even being accommodated with sign

language services.

Next is communications: we have

a wide-range of special support from

a guest communications perspec-

ShanghaiDisney Resortprovides employment to workers with disabilitiesBy Ian Driscoll

Murray King is the vice

president of

Public Affairs

at Shanghai

Disney Resort.

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14

tive to support people, particularly

if they have an audio or visual hand-

icap, including Braille guides to the

resort. We have wheelchair rentals

to support our guests, and we have

workplace accommodation facilities

including disabled Cast housing, el-

evated ramps for people to access

our shuttles, etc. We also have a dis-

abled Cast Advisory Council, known

as “MagicALL Cast Advisory Coun-

cil,” that provides a direct forum for

our employees with handicaps to

engage with leadership, share feed-

back, ideas, suggestions, and that

meets on a regular basis.

Disney makes a point of employing

people with disabilities. Can you

elaborate?

We have a policy to ensure that

anyone with the appropriate skills

can apply for any job ... so we have

created special job fairs and partic-

ipated in government-organized job

fairs that specifically target the hand-

icapped community. We reach out to

schools that may have a higher pop-

ulation of students with disabilities,

bringing recruiters out to meet with

them. As a part of that, we have fa-

cilities that allow people who have a

handicap to still work. I can give you

a couple examples.

Maria is a ticket seller in her late 20s

or early 30s, and confined to a wheel-

chair, so she has a wheelchair-friendly

accessible dormitory room, and all the

ramps that she needs to enter and

exit the public facilities like the Cast

canteen and public toilets. When she

comes to work at the ticket booth, the

counter is electronically controlled

and allows her to go up and down to

engage with regular guests but also

handicapped guests as well. And she’s

an active member of our MagicALL

Cast Advisory Council.

In food and beverage is Peter (his

last name is Pan; he wanted to be

called Peter Pan). He can walk but his

legs have some issues. He’s a chef

in one of our restaurants, and in the

restaurant we have some other dis-

abled Cast Members; some are deaf

and mute, and some have a physical

disability like Peter Pan. They work

together to serve food, and he might

use sign language to communicate

with his colleagues. Peter is also very

active in our MagicALL Cast Advisory

Council, providing advice on how to

enhance our disability facilities.

Was accessibility for employees

decided early in the planning of the

park or initiated once you became

more familiar with the local circum-

stances?

We were bringing a global prac-

tice to China. It was always going to

be part of the design, the operations,

and the services we were going to of-

fer to guests and Cast Members.

Was your partner Shendi easily per-

suaded by this approach?

Yes, I think not just Shendi but

also the Shanghai municipal govern-

ment welcomed the opportunity to

showcase accessibility facilities and

services, particularly the Shanghai

Disabled Persons Federation which

has been a great supporter through-

out the design, construction, and op-

erations of the resort. The National

China Disabled Persons Federation

is looking at how some of the stan-

dards that we brought in can be used

as a case study for a national stan-

dard for tourism facilities.

What could you have done better?

We’re quite pleased with every

phase of our MagicALL approach.

And we’re not finished, I look at it

as a cycle. The first part was a stan-

dard, which we’ve done and incor-

porated into our design and oper-

ations. We have recruited disabled

Cast Members to integrate them into

our broader Cast community. We are

starting to share the standard with

other partners in the business com-

munity as we are doing with you, but

also with stakeholders in the gov-

ernment and industry associations.

We’re actively engaging them to

come out and see the standard and

witness it, and for those that are dis-

abled members of the community, to

enjoy the facilities.

Now we’re really starting to ad-

vocate on how this standard could

be applied more broadly. Maybe not

the entire standard, everybody has

different resources and are in differ-

ent stages of their business cycle,

but we’re privileged to be able to

come in as a Sino-foreign joint ven-

ture and design and operate our own

small city. And to do so from a green

field perspective. That allowed us

to incorporate accessibility features

from the very beginning. To do that

in the Pudong New District which is a

showcase part of Shanghai, a labora-

tory for new standards and new best

practices for the whole country, to

showcase this accessibility-friendly

resort to regulators and to industry

and hopefully people will say it can

be done, it can be done in Shanghai

and across the rest of China.

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How accepting are other workers of

disabled employees?

Quite frankly, extremely support-

ive. There’s a lot of misperception

and stereotyping that exists in any

community anywhere in the world

until people have direct interaction

with people who have disabilities.

We’ve been extremely surprised

at how easily the integration has hap-

pened. Take Peter, for example, who

has a physical disability but is learn-

ing sign language to interact with an-

other Cast Member who is deaf and

mute, and how both are being sup-

ported by the able-bodied Cast.

We now have regular sign lan-

guage lessons and Cast Members

who never previously had any inter-

action with someone who is deaf and

mute are signing up so that they can

interact with their new colleagues

and interact with guests who might

have communication challenges.

If you are the standard-bearer of

this type of effort, how does one

encourage other MNCs to emulate

your efforts?

I wouldn’t say we’re the stan-

dard-bearer, but hopefully we’re one

of the standard bearers and hopefully

others will rise to the challenge. It’s

part of who we are as a company and

if you’ve been to a Disney resort any-

where in the world, you probably will

notice if you look at the guests around

you there’s a much higher percentage

of guests with disabilities or other

medical issues next to you in a line or

somewhere enjoying the park, who

might not otherwise get out of the

house. There’s a satisfaction and pride

in bringing that same standard here.

A second point of satisfaction is to

see how our other employees who

may not have had exposure to people

with disabilities, have reacted and how

much they feel empowered that they’re

part of doing something different and

more positive in the community.

The third point is the satisfaction

that our front-line Cast has from being

able to greet people to come and en-

joy the park that might not otherwise

have that experience. That’s a genuine

sense of satisfaction that they feel, that

they have disabilities and they deliver

the magic to people who otherwise

might not have that opportunity.

Companies that have similar citizen-

ship goals or values would see the same

value in being able to set a new standard

and share that standard, to help inspire

the communities around them.

For employee recruitment and

retention, even for regular employ-

ees, you can find ways to inspire

them and connect the brand and

the resources that the company has

with addressing community needs.

It creates a powerful sense of loyalty

to the company and its brand which

helps from a retention perspective. If

you have a seat at the table to help

provide input to government on new

regulations and new policies, I don’t

think that’s bad from a strategic per-

spective on how you grow your busi-

ness and your brand with the govern-

ment and the public here. I

AmCham Shanghai’s HR Conference

Next Practices in HR

June 6th | Shanghai

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16

Many companies find turning

strategy into action very

challenging, not because

of a weakness in the strategy itself,

but because the organization is not

aligned to, or focused on, its success.

The consequences can be sig-

nificant: divisions within senior

management, attrition of high-per-

forming staff, missed economic op-

portunities and ultimately a loss of

competitive advantage. Talent avail-

ability, especially at the senior ranks,

is often perceived to be a particu-

larly serious issue in China, due to a

lack of required capabilities among

candidates, according to a 2017 Hay

Group survey of human resources

professionals in China.

Organizations which struggle to

deliver on their strategy typically dis-

play three main symptoms: 1) lead-

ership and strategic misalignment,

such as a lack of commitment from

leaders on strategic direction; 2) be-

havioral limitations throughout the

organization, including a lack of trust

and empowerment to do things dif-

ferently; and 3) an inability to effect

change, often because of cultural

inertia. These symptoms are exac-

erbated for international companies

operating in China because distance,

language and cultural assumptions

can increase misunderstanding.

Weak measurement and commu-

nication systems further contribute

to the problem in many organiza-

tions, making it hard to understand

the status quo, the opportunities for

change and how well strategic pro-

grams are being implemented.

Leadership and strategy

Senior management teams with a

clear and compelling strategy often

assume that their plans will naturally

cascade down to divisional and func-

tional groups, resulting in a cohesive

approach that continually reinforces

top-level goals. Unfortunately, this

Tim McGrath is a partner

in L.E.K.

Consulting’s

Melbourne

office. McGrath

leads L.E.K.’s

Organization

& Performance

practice in

Australia. He

has a passion

for working with

management

teams to

activate change

and drive value

within their

businesses.

often does not happen.

It could be as simple as the China

strategy not being aligned with the

corporate strategy. The question of-

ten on executives’ minds is: what can

be expected of China? The answer is

now often that it is not simply a top-

line driven strategy anymore, and the

focus has switched somewhat to the

expectation of efficiency in China.

The leadership team may not

be tight enough or committed and

united in its desire to implement

change. This may be because, de-

spite paying lip service to the strat-

egy, not everyone agrees with it. Or,

they may have a different interpre-

tation of how they and their depart-

ments fit into the corporate plan.

Perhaps they are ineffective com-

municators, are indecisive decision-

makers or generally don’t model the

right leadership behavior.

In a business environment de-

manding constant innovation to re-

main competitive, leaders need to

Turning STraTegy inTo acTionWhy many organizations fall short

By Tim McGrath and Helen Chen, L.E.K. Consulting

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be fully committed to the company’s

strategy and highly collaborative

with each other to deliver it. So the

key priority at the start of a strategic

change initiative is to fix any issues in

this area.

The first step in turning strategy

into action is to conduct a 360-de-

gree analysis of leaders’ alignment

with the organization’s strategy to

ensure that everyone is on board

with the goals and the plans for

achieving them.

Illustrative example: an organi-

zation optimization to recommit

to executing existing China strat-

egy for a global pharmaceutical

company

A leading global pharma-

ceutical company would like

to streamline and optimize

its China operation model to

achieve operational goals and

execution efficiency. L.E.K. sup-

ported the company in assess-

ing its current operation model,

optimized the organizational

design, developed supporting

enablers, implemented the pro-

cess plan and activated the new

model.

The company’s China leader-

ship team demonstrated clear

and strong commitment to sup-

porting its China growth goals

and proposed “Interdependence

of the key functions” as the over-

all philosophy of the organiza-

tion set-up. Interdependence

means equal and collaborative

relationships among headquar-

ters, regional teams and support

functions, along with balanced

responsibility and accountabil-

ity. This interdependence theme

has since been mentioned in al-

most every meeting in both the

Shanghai home office and re-

gional offices and field forces.

Reviews conducted post-

launch continue to highlight the

leadership alignment. The clear

signal from the top adds credi-

bility to the strategy and leads

to the company acting as one

despite the multiple reporting

relationships for China vs re-

gion, corporate vs division and

function vs business.

Core and supporting capabilities

A successful strategy requires that

management teams know which ca-

pabilities are core to its delivery and

which create sustainable differentia-

tion from competitors. This also means

being honest about which capabilities

are less important. If you have a clear

view of the capabilities you need for

your strategy to be successful, you will

immediately create more focus.

In a vast country like China, the

key capabilities needed to be suc-

cessful in tier-1 cities might not be

the same as those for expansion into

tier-3 cities, nor are the resources

and investments the same. Pharmas

in China, for example, have mostly

stopped the incremental sales force

expansion to get incremental sales

into the next smaller city and next

smaller hospital. Depending on the

portfolio, entire regions or products

are now being partnered out, as

core skills required a change from

clinical promotions to hospital ac-

cess and margin maintenance.

The most valuable assessment

of this often comes from em-

ployees within the organization.

Their views often highlight any

major differences in perspective

between executives and middle

management, or across functions

and divisions, so careful and ob-

jective handling of the process is

required to get to a prioritization of

the organization’s capabilities that

everyone buys into.

Helen Chen

is a managing

director and

partner at L.E.K.

Consulting and

serves as the

head of L.E.K.’s

China practice

in Shanghai.

Chen has more

than 25 years

of consulting

and industry

experience in

the U.S. and Asia

markets, helping

companies

expand their

presence in China

and leveraging

China’s resources

to improve

their global

businesses.

Diagnostic analysis of capability development priorities

Prioritize for change

Limit to essentials Check for over-delivery

Imp

ort

an

ce

Performance

Monitor closely

New Customer Acquisition

IT Applications

HR Business Partnering

ContractorManagement

Supplier Cost Management

Non-Core ServicesTransactional HR

InternationalOperations

Cross-sell

Planning, Forecasting & Budgeting

CustomerService Key Account

Management

FacilitiesManagement

DigitalService Offering

Health & SafetyBrand Building

Pricing

Source: L.E.K. analysis

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18

Illustrative example: capability

assessment by a leading TV and

film company

A leading company in the

global film and television indus-

try had significant ambitions for

international growth. It wanted to

replicate its home market oper-

ating model, which it considered

best-in-class, in new territories.

An in-depth analysis of the com-

pany’s capabilities showed that

performance within several crit-

ical areas was poor, including

customer service, sourcing and IT

(see Figure: Diagnostic analysis of

capability development priorities).

As a result, the senior manage-

ment team agreed that there was

a need for significant investment

to develop a robust platform that

could be expanded internation-

ally, as well as a major review and

update of core processes and

functional tools.

Putting strategy into action

Those of us in China know that

despite all the headwinds men-

tioned by AmCham member sur-

veys and the whiffs of trade wars on

the horizon, expectations for growth

in China continue to be high and ex-

ecuting a growth strategy remains

top-of-mind. Starting with leader-

ship and strategy, and the core and

supporting capabilities are clearly

the right steps. The process doesn’t

stop there, however, and needs to

move on to addressing structure,

process and talent considerations.

The key to successfully deliv-

ering a strategy is addressing fric-

tion points within the organization

and establishing a baseline against

which progress can be measured

— and enthusing, engaging and

mobilizing the workforce. This is a

big task and many management

teams find it very tough to com-

plete, but it is incumbent upon

them to get it right if they are to

deliver on their commitments. I

The six steps required to transform strategy into action

Talent is deployed, developed, measured & rewarded to drive performance

Ability and desire to accept and implement change rapidly and

effectively

Effective organizational structure and functional interfaces

Organizational capabilities support strategy execution and value creation

Clear roles and decision rights drive efficient & effective business processes

Cohesive team empowers the organization & drives the right behaviors

2Core &

SupportingCapabilities

3StructuralFluency

4Process

Effectiveness

5Talent

Management & Development

6Change

Readiness 1Leadership& Strategy

Source: L.E.K. analysis

A successful

strategy requires

that management

teams know which

capabilities are

core to its delivery…

This also means

being honest about

which capabilities

are less important

19

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FEATURES

Please select the top two factors that would most influence you to expand your R&D operations in China

70605040302010

0Better IPR protection

Improved rule of law &

standardization of legal

processes

More government

incentives

Increased market access

Fewer regulatory

hurdles

Education reform

promoting creativity and

innovation

Free and open

internet

More responsive

bureaucracy

Improved data security

57.7%

28.8%23.1% 21.2% 21.2% 19.2% 15.4%

9.6%3.8%

POLICY PERSPECTIVES

China is eager to transform itself into

a modern, innovation-based econ-

omy with a strong research and

development (R&D) base. Both central and

local government bodies have rolled out

development plans and investment incen-

tives to encourage foreign companies to

expand and upgrade their R&D footprints

in China. Shanghai leads this trend and ac-

tively encourages foreign companies to in-

crease R&D investment in the city through

numerous incentives including tax breaks,

trade facilitation measures and subsidies.

While many companies have established

an R&D presence in China, most are reluc-

tant to bring their core technologies and

some companies have recently closed or

scaled back their R&D investment.

AmCham Shanghai’s latest report ex-

amines the policy environment, trends

and challenges facing foreign companies

doing R&D in China, and provides recom-

mendations for improving innovation and

attracting more high-level foreign R&D.

To understand the R&D environment, we

conducted a survey in January 2018 of 52

member companies with R&D facilities in

China. Additionally, we conducted in-depth

interviews with nearly 15 companies in late

2017 and early 2018, talking with heads of

R&D departments and government affairs

leaders to learn more about the chal-

lenges, opportunities and realities of con-

ducting R&D in China.

With 426 foreign-invested R&D cen-

ters, Shanghai ranks as the top location

for foreign R&D in China. However, R&D

conducted in Shanghai continues to be at

the low end and focused on product de-

velopment for the local market. The most

prohibitive barriers identified by companies

are a lack of IPR protection, market access

restrictions and an unlevel playing field,

with several companies noting that there

is no incentive to bring core technology

or high-end R&D to China unless their IPR

is protected. Some also noted the need

for closer integration among universities,

start-ups and foreign companies to foster a

more mature innovation ecosphere.

Key survey findings • 75% of respondents’ primary reason for

establishing R&D operations in China was

to meet the demands of the local market.

• Fewer than 4% of respondents indicated

that their China operations were their most

important global R&D center, while over

60% said they were just “one of many sup-

porting global R&D centers” or “of minimal

importance.”

• 30.8% replied that their main R&D focus

in China is adapting/redesigning global

products for the Chinese market. Only 11.5%

are conducting advanced/cutting-edge

research.

• Lack of IPR protection ranked as the

number one barrier to R&D.

• Nearly 60% ranked tax breaks as the

most beneficial incentive, and another 21%

ranked this as number two.

Survey recommendations

Many companies appreciate the Shang-

hai government’s R&D incentives and ef-

forts to support R&D, but the programs

have limited impact because they do not

ChasinginnovationChasinginnovation

AmCham Shanghai’s latest Viewpoint reportlooks at China’s R&D environment

By Doug Strub and Veomayoury Baccam

20

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align with the core needs of innovative

companies, namely improved IPR protec-

tion and market access. To help the Shang-

hai government achieve its goals, we urge

it to:

1. Improve market access: Western firms

conduct R&D because of market incentives

rather than government directives. If com-

panies cannot fairly access the market they

have little reason to pursue R&D. The Chi-

nese government should continue to elim-

inate barriers to foreign companies.

2. Improve IPR protection and rule of law:

Lack of IPR protection is the primary con-

cern of foreign companies conducting R&D

in China. Several companies interviewed

for this survey indicated this is a funda-

mental barrier and will not consider moving

core technologies to China until the prob-

lem is resolved.

3. Internet freedom: Many companies say

that internet restrictions are a barrier to at-

tracting top talent. Scientists are curious by

nature and need a work environment that

provides open access to information. Sev-

eral interviewees mentioned the inability to

access Google Scholar and other impor-

tant information hubs. While companies

address this problem with the use of VPNs,

tighter controls on the internet could di-

minish access to information.

4. Ensure a level playing field: To incen-

tivize MNCs to bring core R&D technologies

to China and contribute to cutting-edge in-

novation, create a level playing field. Indus-

trial policies such as Made in China 2025

provide many subsidies, incentives and

other programs that foreign companies can

rarely enjoy.

5. Improve the innovation ecosphere:

Shanghai’s innovation ecosphere lags be-

hind that of Boston, Silicon Valley or even

Beijing and Shenzhen. The government

should work to increase communication

among MNCs’ R&D operations, universities,

research institutions and start-ups.

The full report and a podcast with its

authors can be found at our website:

www.amcham-shanghai.org I

How important are your R&D operations in China compared to your global R&D footprint?

50

40

30

20

10

0Most important

global R&D center

2nd or 3rd most important global location

One of many supporting global R&D

centers

Of minimal importance

3.8%

34.6%

44.3%

17.3%

What is the main focus of your R&D operations in China?

30.8% 29% 19.2%11.5% 9.5%

Adapting/redesigning global products for the

Chinese market

Creating new products for the local (Chinese) market

Creating new products for the global market

Conducting advanced/cutting-edge research

Conducting lower-level research compared to our

other R&D facilities

What are the most significant barriers to

conducting R&D in China?

28.8% 19.2% 15.4% 13.5%Lack of

IPR protection Government policies that

favor local companies/ unlevel playing field

Lack of talent Unclear government policies and regulations/

lack of transparency

9.6% 7.7% 5.8%Data security/data localization issues

High costs Restricted access to information (internet and

other media)

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21

FEATURES

Legal Aspects and Best Practices for Retailers in ChinaBy Maarten Roos, Robin Tabbers & Simon Robertson

Maarten Roos

is founder and

managing

principal of R&P

China Lawyers,

co-head of the

retail practice,

and represents

leading

Western

grocers and

fashion retailers

that are rolling

out brick-and-

mortar stores

across China.

China has become the world’s

leading consumer market

and is predicted to grow

faster than the West – at 6% annually

over the next decade (World Eco-

nomic Forum). International brands

are taking advantage of this, despite

increased competition from local

competitors and from each other.

While e-commerce is now a firm part

of the landscape, most international

companies remain convinced of the

importance of developing a network

of brick-and-mortar stores. In this ar-

ticle, we summarize some of the key

legal challenges specific to interna-

tional businesses that plan to open

retail stores in China.

Corporate structuring: company set-up

The first step to establishing stores

is to incorporate a legal entity. Rules

for establishing entities have been lib-

eralized over the years, but it may still

take four to six months for a subsid-

iary to become fully operational. Key

issues to decide upon when estab-

lishing a retail business are:

• The registered address is the lo-

cation where the company is legally

registered and determines in which

district (and under the supervision

of which authorities) the company is

incorporated. For larger companies,

POLICY PERSPECTIVES

local governments may be able

to offer subsidies and tax benefits;

smaller retailers may be offered

a virtual address. The office lease

must be signed before the company

can be formally established.

• The business scope determines

the activities that the company may

engage in and must be approved by

the competent authorities. Certain

types of products (e.g. food, medical

products) may be subject to special

licensing. Also, some districts will

not allow the inclusion of “retail” in

the business scope until an office

has been leased for the first branch;

this requires a two-step process of

establishing the company first, and

then expanding its business scope

to include retail.

• The company name will be in Chi-

nese and should consist of a loca-

tion indicator, an industry indicator,

and the trade name. For retailers

in particular, a good Chinese trade

name (and its registration as a trade-

mark) is crucial. Different levels of

location (Shanghai vs. China) and

different industry indicators may re-

quire different levels of approval.

• The registered capital is the

amount of capital that the (foreign)

investor commits to the company.

There is no legal minimum, but

companies should consider actual

operational needs, since increas-

ing the registered capital later will

take three to six weeks. There is no

immediate deadline to contribute

the registered capital in full, and so

some investors prefer to set a higher

registered capital. Others prefer to

finance partially through foreign

debt, which is subject to strict rules.

• The Chinese entity will need to

have a board of directors or execu-

tive director, a legal representative,

one or more supervisors, and rules

on the authority of these positions

and the shareholder. These issues

of corporate governance are a major

part of the company’s Articles of As-

sociation, which is a legal document

and should be drafted with care.

Branch establishmentWhile technically the first branch

can be opened at the location of the

company, it is much more common

to keep the company’s address as an

office and establish the first store at

a retail location elsewhere. Subse-

quent stores will normally require the

registration of separate branches.

The most common model is

to have one company with many

branches across the country – there

is no limit to the number of branches

that a single company can have. An

alternative is to establish separate

companies in major cities / regions

(e.g. Shanghai, Beijing, Guangzhou /

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22

Shenzhen, Chengdu / Chongqing)

and structure local branches under

each of these companies. In that

case, an extra option would be to set

up a China Holding Company to con-

solidate all this business.

When establishing a branch and

to ensure that it is ready in time, your

legal team must coordinate closely

with the builder in charge of con-

struction and decoration of the store

on related approvals, including store

design and fire protection, as these

can take weeks or even months to

procure (especially where the lo-

cation is in a new mall). The store

should open for business only when

all licenses, permits and approvals

are in place.

For stores selling food or other

products that are subject to special

licensing, additional steps must be

completed. Examples are the Food

Business License (for catering and

non-catering), the Public Sanitations

Permit, and the Alcohol Retail Permit.

The timing and necessity of these li-

censes varies by location, so profes-

sional expertise is crucial.

Signing lease contracts

A good location is one of the key

components for the success of a

store, even more so for retailers who

are relatively new to China and less

well-known to Chinese consumers.

As in other competitive markets, the

best locations are difficult to secure,

which means that the landlord is in a

very strong position in negotiations

over the lease.

On the other hand, signing a very

one-sided lease can bring huge

risks. It is never advisable to directly

sign the landlord’s version. Where

the landlord refuses revisions and a

company still wants to sign, an anal-

ysis of the legal risks can at least

establish the tenant’s legal position,

especially when it comes to crucial

clauses such as term, termination

and renewal, competition and confi-

dentiality.

As the retailer’s reputation in

China develops, it will become in-

creasingly easy to negotiate more

favorable lease terms. This offers a

valuable opportunity, especially if

background knowledge can be ob-

tained on what the landlord has of-

fered to others and therefore may be

willing to accept.

Ensuring legal compliance

China has communicated a clear

focus on consumer health and safety

issues. These rules and standards

also differ significantly from other

jurisdictions, and so can have a ma-

jor impact on retail operations. To

give an example, a very successful

F&B retailer in Shanghai was closed

in 2017, and some of its staff impris-

oned, because it was using flour that

was past its formal expiration date

– while in the U.S. and Europe, flour

often has only a best-before date.

Product Quality and Local Standards

China has established extensive

standards for all kinds of consumer

products, not only for food but also

for clothing, electronics, etc. This

sometimes results in the ironic situ-

ation where products made in China

cannot be sold in China without ad-

justments. For food products, these

standards may extend to store orga-

nization and supplier management

systems.

Failure to meet legal standards

can be a serious offense and may

lead to large financial penalties and

even potential criminal liabilities. The

authorities dealing with such mat-

ters, especially the Administration for

Industry and Commerce, will investi-

gate individual complaints. Respond-

ing to an investigation correctly and

with the right amount of information

is a delicate matter, but it is worth

the extra attention, as an unfavorable

decision can have huge financial and

operational consequences.

Advertising and Pricing

A special compliance risk re-

lates to advertisement and pricing.

Areas that are regulated include

discounting and minimum pricing.

Violations of these rules are often

used by professional buyers to ex-

tort money from retailers and pro-

ducers. In the case of complaints,

companies must balance between

giving in too easily (encouraging

more professional buyers to target

them), and the cost of defending

claims and even lawsuits, whether

frivolous or not.

Labeling

Labeling is another sensitive area.

Besides expiration dates, the com-

position and type of ingredients /

materials should be accurately listed

on the label to adhere to the strin-

gent rules that apply in this field. La-

bels must be in Chinese, and meet

other specific standards. Violations

may result in fines, but also potential

lawsuits by professional buyers.

Data Privacy

Data privacy is a “hot” topic in

China. The legal framework for using

private data is still being developed

and is not yet as sophisticated as in

many Western jurisdictions, but the

recently-adopted PRC Cyber Secu-

rity Law (effective 2017) shows pur-

pose. The law puts the burden on

“network operators” (i.e. owners and

administrators of networks and net-

work service providers) to protect

“personal information” on information

networks. Moreover, certain kinds

of personal information and other

important data must only be stored

domestically (i.e. in China). Violations

of the law can result in high penalties

and even detention of those persons

responsible.

Employment

When operating stores, employ-

ees form an integral part of the com-

pany. Chinese labor laws are strict

and tend towards protecting the em-

ployee. Establishing strong employ-

ment contracts and official company

rules (in the form of a staff handbook),

and adopting these rules in a legal

manner, are key steps to lower incom-

pliance risk and create more leeway

to manage (and where necessary)

terminate employment contracts. A

retailer should also consider whether

to use standard working hours for em-

ployees, or alternative systems (flexi-

ble or comprehensive working hours)

subject to special approval.

Robin Tabbers is principal

of R&P China

Lawyers, co-

head of the

retail practice,

and represents

major fashion

retailers as well

as international

brands selling

offline and

online in China.

Simon Robertson is

director of R&P

China Lawyers

and longtime

AmCham

member and

contributor.

23

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FEATURESPOLICY PERSPECTIVES

ConclusionsChina is the land of opportunity for

many international retailers. The large,

growing and relatively sophisticated mar-

ket of consumers interested in high-qual-

ity international brands, which is increas-

ingly willing to pay for premium products,

is a dream for many. Not every retailer

that enters the China market is able to

take advantage of these factors, but suc-

cesses are easy to find.

There are plenty of factors that may

contribute to success in China, not all of

them under the company’s control. When

it comes to legal challenges, an interna-

tional company should be able to avoid

big surprises. Company structuring, lease

contracts, trademark protection and legal

compliance are all subjects that can be

managed effectively with timely invest-

ment in resources and the right external

support. I

Trademark Protection for RetailersThe protection of intellectual property (IP) such as trademarks is a key concern for

foreign businesses in China, because IP helps to determine their identity and distinguish

between other brands, in particular domestic ones. For retailers, this is arguably even

more important, because retailers are consumer-facing and because reputable land-

lords, advertisers and especially online platforms will require trademark ownership be-

fore beginning cooperation. Reviewing the trademark portfolio and making sure that all

relevant brand names are protected in the correct classes and subclasses is not only a

prerequisite to the start of China operations, but should be repeated on a regular basis.

For international companies that are new to the country, this can present a huge

problem. It is common to find that one’s international trademark has already been reg-

istered in China by another party, often a squatter. China’s trademark protection system

is first-to-file, and despite exceptions for well-known trademarks and trademarks reg-

istered in bad faith, it can be hugely complex and costly to get back a trademark once

it has been registered by a third party. Therefore, companies should always register

trademarks as quickly and as broadly as possible, preferably directly in China (instead

of using the international Madrid system). If too late, then a comprehensive strategy is

needed to get back the trademarks.

Another aspect particular to China: not all Chinese consumers speak or read En-

glish fluently, so it is important to come up with a good Chinese brand name that can

adequately represent the business. This brand name should also be registered in all

relevant classes and sub-classes.

C

M

Y

CM

MY

CY

CMY

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Insight-MayJune_190x130mm_20180417.pdf 1 2018/4/17 15:34:32

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As you look at the Chinese economy,

which issues most need to be addressed?

China’s biggest challenge is sustaining

the growth miracle that we’re now cele-

brating the 40th year of. It was driven by a

fixation on hyper growth and paid little or

no attention to the imbalances that came

into play in the real economy, specifically

the excess reliance on natural resources,

what that meant for the environment, the

implications for income inequality.

The government has been addressing

rebalancing in one form or another over the

last 10 years, but mainly from an analytical

perspective as the solution to a growth sus-

tainability problem. But now it is more of an

ideological focus on the principle contradic-

tion of “unbalanced and inadequate devel-

opment” that Xi Jinping stressed in the 19th

Party Congress. I think that seals the debate.

The government has bought into rebalanc-

ing from both analytical and ideological per-

spectives and is focused on addressing it.

How does China deleverage?

Number one, you make borrowing more

expensive, which tilts the policy bias with

the central bank toward firmer monetary

policy. The price of credit has a direct bear-

ing on the demand for borrowing. Number

two, you cast a wide regulatory net on the

unregulated financial institutions that were

contributing a lot to the debt build up. In

China it’s mainly the shadow banking sec-

tor which has grown by leaps and bounds.

Number three, you focus on the sectors in

the economy that are the most debt-inten-

sive, where growth has not been managed

well – especially the property sector and

debt-intensive state-owned enterprises.

Those are the areas that will absolutely be

critical to the deleveraging process.

Many Western and Chinese economists have

long pressed for SOE reform, yet the Chinese

government is now advocating a mixed-own-

ership model for certain SOEs. How serious is

the government about real SOE reform? Are

they out to create a dirigiste economy?

That is a very important question and one

where I find my own answers increasingly

disconcerting, because I’m not convinced

that the government is as serious about

SOE reforms as I would like them to be.

I think the so-called mixed-ownership

approach is an indication of their desire to

kick the can down the road on this issue. It

relies on sources of capital from other com-

panies and SOEs that basically creates an

interlocking web of cross-shareholding; that

is a worrisome analog to what the Japanese

keiretsus did, which, of course, led to unmiti-

gated disaster in the 1990s and 2000s. What

SOE reform ultimately must do is focus on

the shedding of non-core activities rather

than on the perpetuation of vast holdings

of far-flung ancillary activities. Do telecom

companies really need to be in the consumer

finance business? Do resource companies

need to own supermarkets? What is the best

strategy to maximize return from investor

or state capital? The mixed-ownership ap-

proach ducks this issue altogether.

Is this about state control, a reluctance

to let go? What is behind the govern-

ment’s intellectual reasoning for con-

tinuing with state ownership or the

mixed-ownership model?

It goes back to what I call the paradox

of the Third Plenum of 2013, where the

Stephen Roach on the challenges ahead as China’s leaders remodel and rebalance the economy

By Ian Driscoll

Stephen Roach is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He was formerly chairman of Morgan Stanley Asia and the firm’s chief economist for the bulk of his 30-year career. Roach has long been one of Wall Street’s most influential economists. His books include Unbalanced: The Codependency of America and China (2014).

25

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FEATURES

government stated that it is committed

to allowing the markets to play a decisive

role in resource allocation while almost in

the same breath, emphasizing unswerving

support for the role of the state in its own-

ership of assets. The intellectual commit-

ment that straddles this mixed-ownership,

blended growth model is ultimately incon-

sistent with the efficiency requirement of

the new era espoused by Xi Jinping. Xi has

stated repeatedly that the power blocs

need to be broken up, not just as part of

his anti-corruption campaign, but as part

of his vision for an efficient economy. To do

that, the state has got to let go. And yet it

may be either afraid or just unwilling to do

so – trapped in its own power issues.

One concern that is occasionally expressed

is that China’s talent pool at agencies re-

sponsible for financial regulation is neither

deep nor broad. Have you heard this?

I don’t know. It’s a big economy, and I

always meet the top talent. The people I

know very well are in strategic positions,

but it takes more than one or two people

to drive a function or a regulatory portfo-

lio. While the talent bench at the top of the

Chinese hierearchy is very impressive, you

raise a question of depth. Are they enough

to get the job done? The answer is, prob-

ably not.

In today’s talk you said that the U.S. doesn’t

need to fear Chinese industrial policy, but

is there any area of Chinese industrial pol-

icy that the U.S. should fear?

Fear and competition go hand in hand.

Competition works if you’re afraid you’re go-

ing to lose market share to somebody else.

We like to think we can dictate the rules by

which companies and countries compete for

market share, but nations go about this with

different systems and a different set of values.

To the extent that leading-edge industries

are going to be driven increasingly by ideas

and by talent that is well-equipped in math

and science and engineering, the U.S. has an

edge there, and we have to stay focused on

that edge and make sure that our talent pool is

pushing the envelope as effectively as knowl-

edge workers in China. Intellectual property

rights are crucial for fair and equitable knowl-

edge-based competition. Cheating is not

something that anybody accepts, and if we’re

going to accuse one country or another of

stealing our intellectual property we’ve got to

make sure that we have a clear understanding

of those charges and can validate the charges.

While in years past there were some very clear

cases of intellectual property theft, I think some

of those impressions need to be updated – es-

pecially the so-called forced technology trans-

fers that occur between joint-venture partners

under binding commercial contracts.

Could the U.S. using tariffs force China’s

hand in any way? Could they work to make

China make some concessions that would

placate Trump?

The Chinese are certainly getting the

message, not just from U.S. actions, but

from this overwhelming shift in the body of

thought coming from Western intellectuals

who are coming to the conclusion that the

West has blown its China strategy. We all

had great hope and aspirations when China

was coming out of the Cultural Revolution

and eventualy joined the WTO; there was

a lot of enthusiasm at the time that China

would conform to Western norms of a mod-

ern economy. Many have now given up on

this Western version of the China dream and

have reluctantly come around to the notion

that the China dream has more Chinese

characteristics than they were originally

willing to concede. I think the West is very

uncomfortable with that.

Could it have turned out any other way?

Implicit in your question is, will China

change, or will U.S. tariffs and other pressure

force some changes in China that conform

more closely with Western perceptions of

what we think China should be? At the mar-

gin, this debate may well be having an impact

on China’s own sense of self-perception. As

a result, it may prompt a pause for thought in

terms of the importance that China attaches

to the image that it has in the West. But, in the

end, I think we have to be careful in saying

that this is a classic example of Trump at his

best in the Art of the Deal – that he threatens

and eventually he gets what he wants. I think

there’s a real limit as to how far that can go

with a China that remains very focused on

its own dream and the path that dream pro-

vides to the New Era by 2050.

Observers say that lifting consumption

will aid China’s economic transition. Be-

yond creating a healthcare and savings

system that might reduce precautionary

saving, what else can China do to spur

consumption?

China, as a pre-eminent producer is lack-

ing in the DNA of a consumer society. Its strat-

egy rests on three key building blocks – more

job creation via services-led growth, higher

per capita incomes through rural-urban mi-

gration, and reduced levels of fear-driven pre-

cautionary saving by building a safe and se-

cure social safety net. Over the past 10 years,

China has made great progress on building

out its services sector and pushing ahead

aggressively on urbanization. But the safety

net objectives remain incomplete; China has

focused more on expanding enrollment in

national healthcare and social security and

has not put enough emphasis on the ben-

efits side of these programs. As a result, the

income generation brought about through

the combination of services- and urbaniza-

tion-led growth has largely been saved out of

fear and precaution rather than converted into

discretionary personal consumption. Private

consumption remains slightly less than 40% of

GDP – unacceptably low by most standards.

Injecting more capital into saftety net pro-

grams is essential to complete this next phase

of China’s development strategy. I

POLICY PERSPECTIVES

Scan the Qr code to see our video inter-view with Stephen roach on the U.S.-China trade war, what the Trump administra-tion gets wrong about the U.S. trade deficit,

and what he believes are better ways to ad-dress trade and economic issues with China

Paving the way for Prada

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FEATURES

Financial RegulatoryReform UpdateBy Yvonne Yu

The institutions, the personnel, and business implications

POLICY PERSPECTIVES

Yvonne Yu is a project consultant in APCO Worldwide’s Beijing office, specializing in researching government and regulatory policies. She works on corporate advisory and public affairs issues primarily with clients in the technology sector.

Executive summary• The new regulatory landscape borrows

features from the UK model, including a

more powerful central bank with policy-

making responsibilities, and a merged

banking and insurance commission

tasked with compliance enforcement.

• The restructuring aims firstly to tackle

financial risks by ceasing regulatory ar-

bitrage and ensuring better regulatory

coordination. Secondly, it aims to pre-

pare China for global financial integration

by modernizing the previously outdated

regulatory system.

• The newly inaugurated financial regu-

lators are all experienced reformers who

will likely work coherently to ensure ef-

fective financial oversight, as well as a

steady financial market opening.

• Foreign firms should take advantage

of the recently announced widening

of China’s financial market while being

aware of the tightened financial regula-

tions. Comprehensive government en-

gagement strategies should be devel-

oped for both central and local financial

regulators.

China has embarked on an overhaul

of its financial regulatory system since the

“Two Sessions” in March 2018, focusing on

enhancing coordination and establishing

a sound supervision system. On April 2nd,

2018, President Xi Jinping reemphasized the

importance of fighting the “three critical bat-

tles” during the first meeting of the Central

Financial and Economic Affairs Commission,

a powerful decision-making body which he

chairs. The first of these “battles” is the need

to safeguard against major financial risks.

Overall Oversight Committee

FSDC was officially established

in November 2017 with Liu He as its

Chairman. Its main role is to develop

strategies for financial sector devel-

opment and reform. In the short term,

it seeks to tackle risks in four areas:

shadow banking, asset management,

internet finance and financial holding

companies.

Strengthened Central Bank

PBOC’s role was elevated after the

restructuring plan announced during

the 2018 Two Sessions, as it absorbed

policy-making powers previously held

by the two banking and insurance reg-

ulators. It will also strengthen its ability

to provide macroprudential manage-

ment, allowing it to oversee all sys-

temically important financial institu-

tions and centralize the establishment

of a financial database.

Newly Merged Commission

The previous Banking and Insur-

ance regulators CBRC and CIRC have

been merged to form CBIRC. Its role is

limited to policy implementation and

compliance enforcement.

Remaining Regulator

CSRC remains intact as China is still

seeking to refine and open its secu-

rities and futures markets, which are

still relatively immature and undevel-

oped compared to China’s banking

and insurance sectors. The existence

of CSRC is also needed to continue to

generate more direct financing, which

China currently lacks.

Provincial Regulators

Some provinces including Shen-

zhen, Jiangsu, and Shandong, have set

up local Financial Supervision Bureaus

to enhance financial oversight through

clearer regulatory responsibilities per

financial company type. These include

oversight for private equity and small-

loan firms, as well as online lending

platforms. Financial supervision reform

from the top is trickling down to the lo-

cal level to prevent regulatory arbitrage.

Restructuring rationale The obvious rationale for institutional

restructuring is to safeguard against finan-

cial risks by ensuring better regulatory co-

ordination among the various government

agencies. Under the previous structure

the PBOC, CSRC, CIRC and CBRC each

worked largely independently, and sought

to expand their respective sectors. This

led to competition among the agencies

that led to a lax regulatory environment

and mounting risks. The lack of collabora-

tion was partially responsible for the stock

market crash in 2015, bond market crisis in

2016 and the severe debt crisis that befell

financial conglomerates in 2017, such as

Anbang, HNA Group and Fosun.

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The new structure borrows from the

UK’s “twin peaks” model, whereby the Pru-

dential Regulation Authority (PRA), a sub-

sidiary of the Bank of England, is tasked

with macroprudential regulations, and an

independent agent, the Financial Conduct

Authority (FCA), is tasked with policy im-

plementation and consumer rights protec-

tion. After the restructuring, the role of the

PBOC is now equivalent to that of the PRA,

and CBIrC together with CSrC assume the

role of the FCA.

Another less obvious motivation for

the restructuring was the need to pre-

pare China for global financial integra-

tion, by modernizing the previously

outdated regulatory system. The gov-

ernment leadership is highly motivated

to open the financial sector as it will

give China access to overseas capital

for its economic development, provide

more funding for the Belt and Road ini-

tiative, and import global standards and

expertise that will help domestic firms’

internal controls. The prerequisite to fi-

nancial opening, however, is to ensure

the regulatory system can properly reg-

ulate foreign financial firms and protect

against external shocks that come with

such opening.

The personnel Selecting a capable team is just as es-

sential as the institutional reforms. The

team selected to lead China’s financial reg-

ulation for at least the next five years looks

promising, consisting of both reformers

and experienced technocrats.

To ensure the smooth collaboration

between PBOC and CBIRC, PBOC techno-

crat Yi Gang was made its new governor,

with former CBRC head Guo Shuqing as

its party secretary. This is on the depar-

ture of Zhou Xiaochuan, who had been

both the bank’s governor and party chief

for 15 years. The arrangement gives Guo

the final say on strategic decisions, while

Yi will oversee the central bank’s day-to-

day operations. It is believed that Guo’s

strong political and financial background

will enable him to effectively coordinate

policy between the PBOC and CBIRC,

and Yi’s extensive PBOC experience will

ensure continuity of current monetary

policy.

Implications for foreign companies

Healthier Market Environment

The newly formed financial regulatory

landscape and appointed regulators are both

positive developments for foreign compa-

nies in China, as the new regulatory structure

will be better at detecting financial risks and

sustaining a healthy capital market. The new

personnel are also capable technocrats with

a deep understanding of Chinese and interna-

tional financial systems and will release regu-

lations that are calculative and within market

expectations. Monetary policies, for example,

are likely to be pragmatic and aligned with

central trends and market needs.

Wider Market Access

The recent changes show that China

is ready to deepen its integration with the

global financial market. At the time of writ-

ing, China has already announced the re-

moval of caps on foreign ownership of

banks and asset management companies,

as well as raising foreign ownership ceilings

to 51% for brokerages firms, fund manage-

ment, futures and life insurance companies.

China is also making incremental steps in

liberalizing its capital account, such as resum-

ing the Qualified Domestic Institutional Inves-

tor (QDII) and Qualified Domestic Investment

Enterprises (QDIE) schemes, as well as increas-

ing investment quotas under the Qualified Do-

mestic Limited Partnership (QDLP) program.

Foreign companies should closely monitor

government announcements of reform plans

to get a head start in terms of market entry.

Companies should nevertheless always

keep in mind that China’s financial opening

is more to serve its own agenda. Broader

financial market access does not guaran-

tee a level playing field, with protectionism

persisting in more subtle ways.

Regulation Tightening

Foreign companies should familiarize

themselves with the increasingly tightening

financial environment and develop robust

government engagement strategies with

not only central but also local financial bu-

reaus. The latter is especially important as

the regulatory system is messier at the local

level, and companies may experience sec-

torial stakeholder and regulator changes in

the coming months as local governments

enhance their financial scrutiny. Compa-

nies should keep abreast with regulatory

changes in cities they operate. I

Liu He:Vice Premierresponsible for economic and financial affairs

Inaugurated: March 19, 2018

• A close Xi ally, Liu is a reformer and a drafter of the five-year plans that underpin China’s economy. • The chief architect of supply-side reform, first mentioning the concept in October 2015 during a work inspection in Guangdong.• Often working behind the scenes, Liu was elected into the 25-member Polit-buro at the 19th Communist Party Congress.

Guo Shuqing: PBOC Party Secretary & Head of CBIRC

Inaugurated: March 19 & 26, 2018

• Guo has a reputation as a heavyweight reformer. • As a CBRC head, he started what was widely dubbed a “regulatory whirl-wind”, implementing a flurry of new measures to tackle the sector’s most complex problems, such as shadow banking and hidden bad debt.• During his 17 months as CSRC head from 2011 to 2013, Guo drew up 80 new policies, fought widespread insider trading, advocated reform of the initial public offerings system and boosted the participation of foreign investors.• Previously also served as a deputy central bank governor, top foreign exchange regulator, and a deputy governor of Guizhou province.

Yi Gang: PBOCGovernor

Inaugurated: March 19, 2018

• The right-hand man of former PBOC head Zhou Xiaochuan, Yi is fully com-mitted to policy priorities such as liberalizing the setting of interest rates, and the currency exchange rate.• Has effectively been running the PBOC’s day-to-day operations in recent years. • An impressively qualified technocrat, Yi went to Peking University when formal examinations were restarted in 1977, and later secured an economics Ph.D. from the University of Illinois. • After lecturing in both the U.S. and China, he joined the PBOC in 1997.

Liu Shiyu: CSRCGovernor

Inaugurated: Feb 2016

• Liu was made the trouble-shooting head of the CSRC head in 2016 when the stock market was mired in crisis.• Experienced in overseeing financial institutions, dealing with financial risk and regulating internet finance.• Graduated from the prestigious Tsinghua University and worked at the PBOC for 18 years, which will make it easier for future regulatory coordination with the central bank.• Also worked for Zhu Rongji, well-known for his financial reforms in the 1990s, when the former premier was mayor of Shanghai.

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One significant outcome of the Lianghui

meetings was the government restruc-

turing. Could you give a brief overview of

this and what you thought were the most

important developments?

It’s hard to give a brief overview, be-

cause the restructuring was so massive,

but it touched almost every state min-

istry that’s under the State Council. A lot

of ministries were restructured or beefed

up, and some new ones were created. The

most important were the National Super-

visory Commission, which is actually not

even a ministry but a brand new branch of

government. It sits alongside the national

People’s Congress and the People’s Polit-

ical Consultative Congress and the State

Council as an equal branch of government

now. It is meant to oversee public officials

in China. That effectively means that it’s an

institutionalization of the corruption crack-

down over the past five years. That’s prob-

ably the biggest piece.

The second would be the Market Super-

visory Administration. That is a new entity

that combines a lot of previously dispa-

rate market regulation functions. It’s qual-

ity control from AQSIQ [Administration of

Quality Supervision, Inspection and Quar-

antine], it’s food and drug safety functions

that were previously in the CFDA [China

Food and Drug Administration], it’s SAIC

[State Administration for Industry and Com-

merce] – so it’s business registration – all

shoved into one entity. That is probably the

second biggest thing in terms of impacting

day to day business.

Another major development was the per-

sonnel changes. Which were the most

significant and why?

The key takeaway from the personnel

side is that Xi Jinping’s people are every-

where now. He got his people in key gov-

ernment posts and Party posts. The big sur-

prise – or it wasn’t really a surprise, but we

weren’t sure it was going to happen – was

Wang Qishan becoming the vice president.

That’s key because it means Xi has decided

to keep him around to play an active role,

most likely in the U.S.-China relationship

but also probably on the financial side. We

view him as really a non-voting 8th member

of the Politburo Standing Committee – a

very powerful Chinese leader still.

Beyond that there weren’t a lot of sur-

prises. We think Liu He’s appointment as

vice premier was very important in terms

of economic policy. All economic policy

is going to go through him. He’s going to

be a very powerful vice premier and will

run the show in terms of coordinating, fa-

cilitating and articulating all economic pol-

icy. Another guy is Yang Xiaodu, the head

of the new Supervisory Commission that I

just spoke about. He’s going to be basically

overseeing every public official in China.

He’s going to take Wang Qishan’s work

from the past five years with the corruption

crackdown and make it institutionalized, so

he’s another key guy.

Andrew Polk is a founding partner of Trivium/China, a Beijing-based research firm. He was formerly director of China research at Medley Global Advisors and chief economist at the Conference Board’s China Center.

By Doug Strub

Interview with Trivium’s Andrew Polk

PARTYRESTRUCTURING

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The most attention-grabbing highlight of

the meetings was the removal of presiden-

tial term limits. What’s your take on this?

I think an interesting piece was the justifi-

cation they gave for it, which was that they

want to keep the tripartite system of lead-

ership intact. What that means is Xi Jinping

wears three hats – he’s the general secre-

tary, head of the military commission and

president. By saying they only changed the

state constitution to scrap term limits so that

they could keep those three hats together

is an implicit acknowledgement that Xi had

intended to stay on as head of the Party for

some time. They’re only doing this so Xi can

also wear the president hat. And that’s im-

portant especially for going abroad, for Xi

Jinping to not only be Party Secretary but to

also represent himself as head of state. But

overall the practical, immediate impact is

fairly low. It’s not going to change the policy

agenda. It doesn’t officially change anything

from the standpoint of Xi was always going

to be the president and the general secretary

and the head of the military commission for

these next five years. To some extent it re-

duces uncertainty, so that could be positive.

In the long term though I think it really

does go some way in undermining the rule

of law. He changed the constitution – this

law – to fit his political needs, and when

you do that it challenges the rule of law.

They’ve been saying they want to increase

and improve the rule of law, so while

they’re doing some things to improve it,

this fundamentally undermines that effort,

and I think in the long run it’s going to chal-

lenge China’s governance. It’s going to be a

destabilizing decision in the long run.

The other thing people need to keep in

mind is that Xi has effectively said “I’m go-

ing to stay on for more than two terms,” but

it doesn’t necessarily mean he’ll stay on for

the rest of his life. It’s not a choice between

giving up after two terms and emperor for life

– you can have a middle ground somewhere.

On the policy agenda, what was the most

important thing to emerge from the

meetings? Did anything surprise you?

No real surprises. They’ve been signal-

ing the policy agenda for a while now, and

most of the key policy objectives followed

on from Xi Jinping’s 19th Party Congress re-

port. You know they’re his priorities, and not

much has changed from when they had

the Party Congress to now.

The three keys are: they’re going to con-

tinue to use supply-side structural reform as

an overarching framework of policy – that

was the baby of Liu He, and he’s now in

power, so that’s going to stay in place; inno-

vation is still hugely important to them – be-

coming a technology superpower is going to

be where their efforts are placed, at least for

these next five years; and the third thing, on

a more immediate basis, is the “three tough

battles” that Xi Jinping outlined, which are

1) reducing financial risks, 2) environmental

protection and reducing pollution, and 3)

poverty alleviation. Those are the three areas

where policy will be most focused this year.

Given the restructuring, personnel

changes and policy agenda, how will this

impact foreign businesses in China and

what should they focus on?

Well, that’s a great question. Something I

forgot to mention at the outset is this govern-

ment restructuring that’s been announced is

going to take at the very least a year to come

to fruition. That’s going to mean a lot of regu-

latory uncertainty this year. As these ministries

are reconstituted, functions of government

and regulation are shifted from one place

to another. Ultimately the long-term goal is

to rationalize policymaking so that only one

ministry is in charge of one issue area. But to

get there is going to take a lot of churn, a lot

of personnel turnover, and so businesses are

going to have to be active in their government

relations, figuring out who’s going where. It

may be a period of regulatory uncertainty –

not unlike we always have in China – but it

may be ramped up over these next 12 months.

A lot of analysts are interpreting recent

events as a re-exertion of Party control

over the government. Do you agree with

this, and if so what impact will it have?

That’s right. Not only was the govern-

ment restructured, the Party was also re-

structured. They beefed up their ability to

control personnel and information. Their

power to control those things in govern-

ment ministries was officially written into

the Party restructuring. They also beefed

up some of these leading small groups in

the Party that used to play a role – have

played a role in these last five years – in

policymaking, and officially made them

commissions. They are sort of canoniz-

ing what’s been happening over the past

five years, which is the creep of the Party

over the state, and they’re saying “ok,

now we’re going to make that official.” To

some extent I think that is a positive de-

velopment from the standpoint of, if it was

happening anyway, why not bring into the

light and explain it. Then people can iden-

tify who they need to be talking to in the

Party and identify how the Party works and

what its relationship with the government

is. We have a tendency to think it’s a bad

thing, and from an ideological perspective

that’s an open question, but from a practi-

cal perspective it’s better for understand-

ing who your government and Party inter-

locutors are.

With the Party’s growing role there’s a

lot of pressure on it to make sure nothing

goes wrong, as it would likely bear the

brunt of the blame. What are the biggest

concerns or fears of the Party? What’s

keeping its leaders up at night?

I think it’s about improving people’s

livelihood. They’ve been quite clear that

now economic growth – quantitative ad-

ditions to GDP – is not enough. People

want more out of life: better healthcare,

better air, less poverty. Those things

are reflected in the policy agenda – im-

proving the quality of life for the aver-

age citizen in China. It’s a huge task, and

it’s going to be difficult. I don’t think the

leadership of the Party necessarily are a

bunch of bleeding hearts who stay up at

night because there are poor people in

China, but rather they see this as – if they

can create a better quality of life, it’s part

of rejuvenating a strong China. A China

with a lot of poverty is not a strong China.

They want to reduce that – give people

cleaner air, water, food, better healthcare.

I think those are the policy priorities that

probably keep them up at night, because

they know that now the population has

higher demands in terms of the quality of

the life they lead. I

How do you pronounce Mnuchin?

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FEATURESMEMBER NEWS

Board of Governors Briefing

The AmCham Shanghai 2018 Board of Governors

Eric ZhengAIG Insurance

Chairman of theBoard of Governors

Robert AbbanatILE

Grace XiaoUCB

Simon YangAptiv

Sarah KöchlingShanghai Blossom Consulting Co.

Helen HuInternational Paper

Eddy ChanFedEx Express

Christine Lam Citigroup

David A. BasmajianDisney

Stephen M. Shafer3M

HelenChing-Hsien YangDuPont

Board Vice Chair Board Vice Chair Treasurer

MEETING ATTENDANCE

Governors: Eric Zheng, Robert Abbanat, David Basmajian, Eddy Chan, Helen Hu, Sarah Köchling, Christine Lam (by phone), Nancy Leou, Stephen M. Shafer, Cameron Werker, Grace Xiao (by phone), Helen Yang, Simon Yang

Regrets: none

Attendees: Gentry Sayad, Ken Jarrett, Helen Ren, Shilpi Biswas, Ian Driscoll, Leon Tung, Titi Baccam

MEETING ATTENDANCE

Governors: Eric Zheng, Robert Abbanat, David Basmajian (by phone), Eddy Chan (by phone), Helen Hu, Sarah Köchling, Christine Lam, Stephen M. Shafer (by phone), Grace Xiao (by phone), Helen Yang (by phone)

Regrets: Nancy Leou, Simon Yang, Gentry Sayad, Cameron Werker

Attendees: Ken Jarrett, Helen Ren, Shilpi Biswas, Ian Driscoll, Jessica Wu, Titi Baccam

MISSION STATEMENT AND THREE-YEAR STRATEGY

The President provided an overview of the Chamber’s vision, mis-

sion statement and three-year strategy. he also welcomed com-

ments on the three-year strategy.

U.S.-CHINA TRADE ISSUE STANCE

The President shared options on how to respond to U.S. trade ac-

tions from the 301 investigation. Many governors supported taking

a high-level and strategic approach, with the Chamber using its

position as an important voice that spans both the U.S. and Chi-

nese economies to stress the need for the two economies to find

a way to co-exist. The President will seek input from a small group

of the board and the Chair on a statement once any trade action is

announced, although time will be limited.

TRADE AND INVESTMENT CENTER REVIEW

TIC Director Leon Tung provided an update on the center’s pro-

gramming and budget. In the past year, the number of TIC pro-

grams have increased while the staffing has decreased. Most of

the revenue comes from industrial park packages.

CEO AND GPS PROGRAMS

Vice President Shilpi Biswas reported that the CEO program was

doing well. There are nine companies in the program pipeline and

discussions underway with 30 others. Gr Director Titi Baccam said

that the GPS program was also gaining momentum, but off to a

slower start.

AMCHAM SHANGHAI BALL

The President reported positive member feedback and that the

Chamber raised at least RMB 400,000 for charities. He noted that

there was a problem with the casino part of the event.

U.S.-CHINA TRADE TENSIONS AND MESSAGING

The Chamber continues to closely follow U.S.-China trade ten-

sions, according to the President. It will submit comments on the

301 process and proposed tariffs to USTR. The President will also

travel to Washington, DC, in late April as part of the AmCham China

Doorknock.

SATISFACTION SURVEY

Vice President Shilpi Biswas presented the results of the 2018 sat-

isfaction survey which showed a satisfaction level on par with last

year. 81% of surveyed members are satisfied vs. 82% in 2017. Lack

of business opportunities continues to be the top reason for dis-

satisfaction. The Chair was pleased that the drop in the number of

events from 576 in 2016 to 471 in 2017 did not affect the participation

rate. In fact, the number of participants increased in the past year.

FINANCIAL REPORT

Vice President Helen Ren provided an overview of the Q1 Finan-

cial Report. According to Ren, the Chamber met its budget goals

for the first quarter. However, the second quarter will be critical as

most renewals will occur then. The CEO and GPS programs also

have very high goals for the quarter.

Highlights from the April 24th, 2018, meetingHighlights from the March 15th, 2018, meeting

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2018AmCham Ball Raises OverRMB 400,000

On a fun-filled evening, AmCham Shanghai

members raised over RMB 400,000 for local

organizations at the annual AmCham Shanghai

Ball on April 21st at the Shanghai Tower. At the sold-

out event, some 370 guests danced, dined on fine

foods and bid on exclusive items at the live and silent

auctions.

This year’s theme was “Shanghai 2048: A Night in the

Future,” a spectacle augmented by the Bladerunner-

like Lujiazui skyline that greeted guests on the

Shanghai Tower terrace. The evening’s entertainment

included live music from Studio 188, Gu Mengbei &

Sponsors

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FEATURESMEMBER NEWS

Fan Chenli performing a dance duet, violinist Xin Xin,

and two songs by Sevi Ettinger, rising musical star and

daughter of an AmCham Shanghai member.

As in previous years, the evening’s highlight was the

live auction as guests outbid each other for items such as

business class airplane tickets, hotel stays and gourmet

meals. This year’s ball also included a silent auction.

Proceeds from the ball will be donated to three

NGOs: China Zigen Rural Education and Development

Association, which supports people living in poverty

in rural China and provides health education for rural

adolescent girls; Mifan Mama, which provides eye

treatment for rural children and foster care for blind

and disabled orphans; and the Xiersen Children

Service Center, which supports children with special

needs and trains caregivers to support special

education instruction in China.

“We appreciate the generosity of our members.

Since 2004, the AmCham Shanghai ball has raised

nearly RMB 11 million for local organizations, a clear

sign of our members’ commitment to the communities

where they live and work,” said AmCham Shanghai

President Kenneth Jarrett.

AmCham Shanghai would like to thank our sponsors

for their generous support of this event. I

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Event Report

YALE ECONOMIST STEPHEN ROACH AT AMCHAM SHANGHAI

On March 23rd, AmCham Shanghai hosted a talk by Stephen Roach,

called America and China - Dreams, Contradictions, and Mounting

Tensions, at the Grand Kempinski Hotel Shanghai. Roach, a senior fel-

low at Yale University and former Chairman of Morgan Stanley Asia,

spoke on the “Clash of Dreams” between China and the United States.

Quoting President Xi, Roach affirmed the principal contradictions that

mark Chinese growth and how the pitfalls of “unbalanced and inade-

quate” development must be addressed if China is to succeed in im-

plementing the transformative rebalancing of its society and grow into

a modern, high income economy.

At present, argued Roach, the speed and scope of reform is in-

sufficient to fulfill China’s goal of becoming a leading world power

by 2050. Roach emphasized the need to address issues obstructing

China’s economic transition, including debt and inadequate SOE re-

form. The country’s industrial policy is also emulating the one pur-

sued by Japan in the 1970s and 80s, but which failed to produce the

anticipated results. Roach suggested that China’s route to economic

progress should be achieved through consumer-led rebalancing,

services-led job creation, lower precautionary saving, improving the

social safety net, supply side productivity enhancement and a focus

on stable growth through market-based financial reforms.

After laying this groundwork, Roach shifted his focus to how the

nationalistic visions of American and Chinese leaders contribute to

an increasingly precarious U.S.-China relationship. He highlighted the

tensions between the two countries through their leaders’ diamet-

rically different positions on globalization and trade policy. While Xi

Jinping was championing globalization in January 2017, Donald Trump

was endorsing protectionism to shield America from the ravages of

bad trade deals. Since Trump “has no understanding of where the

trade deficit comes from. Zero. Nor do his advisors,” the wave of pro-

tectionist policies since his inauguration is unsurprising, said Roach.

Trump’s advisors not understanding “the basic principles of mac-

roeconomics” contributes to the degenerating U.S.-China relationship

and heightens the risk of a trade war, added Roach. Although the

Trump administration accuses China of unfair trading practices, said

Roach, it is inimical to view the U.S. deficit in isolation from those it

runs with 101 other countries in 2017, or to forget the U.S.’s poor savings

record which contributes to these deficits.

To make America great again, Roach said that “export growth has

to be part of that renewal.” Protectionism against China, America’s

third largest export market and a primary provider of foreign capital,

portends a long road of deficit spending ahead. According to Roach,

“If [the United States] builds savings these trade deficits will reduce on

their own accord.”

A U.S.-China relationship that was once codependent may look

very different in the future. The outcome will be determined by

whether both sides address their own challenges and contradictions.

Roach believes that there is a greater than 50% chance that the U.S.

will place significant tariffs on China. If that occurs, “China will retaliate

and there could be further escalation.”

In the event of a trade war, Roach surmised that, among other

things, China may place restrictions on the supply chains of American

companies.

WHERE CHINA IS HEADED - KEY TAKEAWAYS FROM THE NATIONAL

PEOPLE’S CONGRESS (NPC)

On March 29th, AmCham Shanghai held a presentation and panel

discussion on the key takeaways from the recent NPC meetings,

which saw far more changes than usual. Andrew Polk, co-founder

and partner at Trivium/China, provided an in-depth overview of the

most important outcomes of the meetings. Following Polk’s presenta-

tion, he was joined onstage by Gary Liu, president of the China Finan-

cial Reform Institution, and Kent Kedl, senior partner at Control Risks

Greater China and north Asia region.

Polk’s presentation focused on personnel appointments, the re-

structuring of the Party-state, the NPC’s policy agenda, constitutional

amendments and legislative priorities. During the talk, he provided a

detailed breakdown of the new and restructured ministries, the new

National Supervisory Committee, and the most important figures to

emerge in the new leadership lineup. Following his presentation, the

panelists discussed issues of cybersecurity, the future of reform in

China, the impact of the U.S. on the NPC’s agenda, and what these

developments mean for foreign businesses in China.

TWO-WAY STREET: RHODIUM GROUP’S UPDATE ON U.S.-CHINA

DIRECT INVESTMENT TRENDS

Rhodium Group experts Daniel Rosen and Thilo Hanemann pre-

sented their most recent update on U.S.-China direct investment

Stephen Roach, a learned mind opines

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trends at the Le Meridien Hotel in Shanghai on Tuesday, April 17th.

Drawing from their report, Two-Way Street: 2018 Update, the pair

crafted a sobering picture of current U.S.-China cross-border invest-

ment flows. New restrictions on Chinese outbound investment flows

have been impactful, causing a sudden slowdown in outbound in-

vestment, especially compared to the heady days of 2016.

The report was produced in partnership with the National Commit-

tee on U.S.-China Relations, AmCham Shanghai, and the China Gen-

eral Chamber of Commerce USA.

Rosen and Hanemann were joined by National Committee on

U.S.-China Relations head Stephen Orlins, who in his opening words

encouraged business leaders to “make their voices heard” against the

noise of the current trade frictions between China and the U.S. Orlins

suggested that corporate quiescence could imperil the economic

and human gains that have accrued to both China and the U.S. over

the last 40 years of the two countries’ trading relationship.

While 2016 had been a bumper year for Chinese FDI into the U.S.,

2018 was shaping up to be particularly poor, said Hanemann. In the

first quarter of 2018, there had only been US$1.2bn of completed Chi-

nese investment into the U.S., versus $46bn in 2016 and $29bn in 2017.

In human terms, Rosen said that about 130,000-140,000 Americans

were employed by Chinese companies in the U.S., but only 7000 jobs

were added in 2017.

Hanemann cited three primary reasons for the precipitous drop in

Chinese outbound investment: 1) A broad pullback from China’s lib-

eral outbound investment policies; 2) A big crackdown on highly le-

veraged private investors, including Anbang, HNA and Wanda. (Five

Chinese companies accounted for one-third of all Chinese outbound

investment in 2016); 3) A more restrictive U.S. approach to proposed

inbound acquisitions, especially in the high-tech sector.

As for why U.S. FDI into China remained flat, Hanemann cited mar-

ket saturation in some sectors, restrictions on investment in areas like

finance, and policy barriers in industries such as healthcare services.

Without reform or opening in those sectors, he was not optimistic that

U.S. investment will continue to grow.

rosen argued that barriers to investment in China were high by

OECD standards. “Is this a good environment for global capital?” he

enquired rhetorically, before suggesting that the absence of “basic

economic reform” in China continued to discourage inbound invest-

ment.

Casting his eye toward Chinese outbound investment, Rosen said

that while CFIUS approvals were getting harder for Chinese firms, Bei-

jing’s “catalogue of guidance for outbound Investment” was a bigger

cause of slowing outbound Chinese investment.

Looking Ahead

Rosen’s view of the future of U.S. investment into China was not

rosy. “Until reciprocity is addressed, the winds will not change,” he

said. Likewise, he said that Chinese investment into the U.S. would be-

come increasingly difficult as CFIUS expands its reach. He noted that

draft legislation before Congress, such as the Export Reform Control

Act (ECRA) and Foreign Investment Risk Review Modernization Act

(FIRMMA), could add yet more layers of oversight to the technology

sector, both to U.S. exports and U.S. investments in joint ventures in

China.

Panel Discussion

Following their presentation, Rosen and Hanemann were joined

by Stephen Shafer, CEO of 3M Greater China, and James Liu, CEO of

Sailing Capital, to discuss the future of U.S. investment in China. Sha-

fer said that 3M saw plenty of opportunities for investment and sug-

gested that a company’s experience in China often depended on the

sector in which it operated.

Asked by Stephen Orlins whether the market or regulatory envi-

ronment has stymied American companies’ success in China, Liu said

that “regulatory policies are unpredictable, so its very hard for foreign-

ers.” He added that joint ventures in the financial sector had almost

universally ended poorly for foreign companies.

Hanemann proposed that in the absence of rule of law, China

would fail to attract the levels of inbound investment that its policy

makers would like to lure.

AMCHAM SHANGHAI BUSINESS DELEGATION TO SHAOxING AND

HANGzHOU

China’s national high technology and smart manufacturing strate-

gies have led to increased engagement and investment opportunities

in these areas. On April 12th, AmCham Shanghai led a 30-member del-

egation joined by world-leading member companies in manufactur-

ing, IT, and investment (advisory) to the International Investment Co-

operation Exchange on Smart Manufacturing in Shaoxing, Zhejiang.

The group gained insight into Zhejiang’s achievement and potential in

housing industrialization and new energy vehicles.

On the same day, the delegates attended a luncheon hosted

by the Zhejiang Provincial Department of Commerce, and enjoyed

connecting with officials from key provincial departments, including

Sheng Qiuping, the director general and Party secretary of Zhejiang

Provincial Department of Commerce.

On April 13th, the delegates were invited to the 2018 RoboCup

China, a preliminary contest for the world’s artificial intelligence com-

petition. As one of the most important contests of its kind, this year

marks its 20th edition, gathering more than 500 teams, and thousands

of robotics enthusiasts. In the afternoon, the group took exclusive site

tours to Baoye Dawa Housing Industrialization Manufacturing (Shaox-

ing), Yuhuang Shannan Fund Town and Wangjiang Financial Technol-

ogy Park in Hangzhou. Members were provided an overview of Zhe-

jiang’s industrial development and investment environment.

The two-day trip impressed AmCham Shanghai delegates with

Zhejiang province’s growing momentum in smart manufacturing and

modern service industries, and also provided them with a wealth of

networking opportunities with local and regional businesses and of-

ficials. I

The Rhodium view

MEMBER NEWS

AmCham Shanghai

AmCham Shanghai’s 2018 Auto Forum

A talk on U.S.-China trade relations under Trump

Chatting with Miguel McKelvey,

WeWork’s co-founder and chief culture officer

Launch of latest Viewpoint – Chasing Innovation:

R&D Barriers and Incentives in China

AmCham Shanghai Month in Pictures

Spring mingling

Connected and autonomous vehicles taking flight

We live for the applause, applause, applause…

Did you hear the one about...?

Three entrepreneurs on building businesses in China

Briefing on China International Import Expo

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MEMBER NEWS

Esoterica

Ｍ ＭMembers revealtheir favorite chengyu

My favorite is 塞翁失马 (sāi wēng shī mǎ) from the Han Dynasty. As the story

goes an old man’s horse runs away and his

neighbors pity him. He replies, “Is it so bad?”

A year later the horse returns with another

very fine horse. His neighbors praised him

for his good fortune, to which he replied, “Is

it so good?”

A bit later his son, a strong young man

who loved riding on the new horse, was

thrown off and broke his leg and became

a cripple. The old man’s neighbors pitied

him, to which he then replied, “Is it so bad?”

A year later the provincial army came

through to conscript young men to wage

war with a neighboring state. They did not

take the man’s son, as he was obviously

crippled. Most of those who were taken

were slaughtered in battle. Again, the

neighbors praised his good fortune, and he

simply said, “Is it so good?”

More simply put, as Shakespeare wrote

in Hamlet “There is nothing either good or

bad, but thinking makes it so.”

-Tom Ward, President, PIM China Ltd.

水滴石穿 (shuǐ dī shí chuān). I translate

it into English as “constant dripping wears

away a stone”.

I think it is very applicable to China, at least

the China I first knew when I entered back

in the early 1980s. Then, absolute patience

and endurance was a necessity to achieve

any level of success, no matter how great or

small. remembering this chengyu usually

inspires me, picks me up and re-energizes

me, especially at times when I feel the daily

grind of managing and building a business

in China is beginning to get the better of me.

I have a miniature zen garden beside my

desk which I can literally use to recreate

the visual of a water drop hitting the stones.

Those few seconds of chengyu repetition

and meditation are a powerful antidote to

the onset of China frustration and stress.

-Joanne Wood, Chairman, Capital Eight

虚怀若谷 (xū huái ruò gǔ). The mind wants

to be as broad as the valley light, the person

should be modest and can accommodate

and accept the opinion of others.

Given my Acting Country Head role, I’m

always trying to keep an open mind.

-Han Lin, Wells Fargo

Everything is on the move. Talent… Targets… Technology.Mobility has never been more mobileIt’s always been a challenge coordinating the services to support people, whether relocating or on assignment.

Keeping up with the needs of a diverse employee group, managing commercial priorities in difficult economic conditions, and ensuring full compliance together call for a capable and experienced partner.

With our people on the ground we can help meet the challenges of mobility here, there and everywhere.

Contact us

How the world works betterwww.crownworldmobility.com

CWM_AmCham ad_A4.indd 1 4/13/2018 11:44:20 AM

Fans of @Horse_ebooks

Stones, water

Also found on bank notes

While not a traditional four-character

idiom, one of my favorite Chinese sayings

is 羊毛出在羊身上 (yáng máo chū zài yáng

shēn shàng). The closest equivalent in

English is probably “there’s no free lunch,”

but I really like the easy visualization

coupled with profound meaning of this

Chinese phrase. The idea of these hidden

costs to surface-level benefits is important

to keep in mind when making business

decisions or even negotiating complex

bilateral trade agreements (or trade wars!).

－-Simon Robertson

Director of R&P China Lawyers I

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Everything is on the move. Talent… Targets… Technology.Mobility has never been more mobileIt’s always been a challenge coordinating the services to support people, whether relocating or on assignment.

Keeping up with the needs of a diverse employee group, managing commercial priorities in difficult economic conditions, and ensuring full compliance together call for a capable and experienced partner.

With our people on the ground we can help meet the challenges of mobility here, there and everywhere.

Contact us

How the world works betterwww.crownworldmobility.com

CWM_AmCham ad_A4.indd 1 4/13/2018 11:44:20 AM

AmCham Shanghai’s 8th AnnualFood, Agriculture & Beverage Conference

A Taste of Tomorrow: Innovation in a Changing Market

May 23rd, Jing’an Shangri-La Hotel

Scan the QR code below

For more information, contact jennifer.ng@amcham-shanghai.org

For ticket inquiries, contact kelly.deng@amcham-shanghai.org

For sponsorship, contact zoe.zhang@amcham-shanghai.org