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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.
Join
our W
eCha
t:
The Journal of the American Chamber of Commerce in Shanghai - Insight May/June 2018
INSIGHT
May
/Jun
e 20
18
3
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
Trade & Investment Center leon tung
insight
Senior Editor ruoPing chen
Associate Editor Doug struB
Content Manager DeBorah tang
Design gaBriele corDioli
Printing
snaP Printing, inc.
insight sPonsorshiP
(86-21) 6279-7119story ideas, questions or
comments on insight: Please contact ruoping chen
(86-21) 6279-7119 ext. [email protected]
insight is a free monthly publication for the members of the american chamber of
commerce in shanghai. editorial content and sponsors' announcements are independent and do not necessarily reflect the views of the governors, officers, members or staff
of the chamber. no part of this publication may be reproduced without written consent
of the copyright holder.
shanghai centre, suite 568 1376 nanjing West road shanghai, 200040 china tel: (86-21) 6279-7119 fax: (86-21) 6279-7643
www.amcham-shanghai.org
special thanks to the 2016-2017 amcham shanghai President’s circle sponsors
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
May
/Jun
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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
May
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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.
May
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FEATURES
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
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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
May
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FEATURES
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)
May
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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
May
/Jun
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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 [email protected]
For ticket inquiries, contact [email protected]
For sponsorship, contact [email protected]