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To Get Rich Is Glorious, Yet Tricky: Doing Business in China

Presenters

James Feinerman Georgetown University Law Center

David Liu Bank of Communications Co., Ltd., New York Branch

Lanier Saperstein Dorsey & Whitney LLP (212) 415-9385 ▪ saperstein.lanier@dorsey.com

Carl Hinze Dorsey & Whitney LLP (86-21) 6135-6139 ▪ hinze.carl@dorsey.com

Bill Perry Dorsey & Whitney LLP (206) 903-8894 ▪ perry.william@dorsey.com

CD-Rom Contents

PowerPoint

China’s Industrial Policy and Foreign Investment, Carl Hinze, Dorsey & Whitney LLP (April 2012)

To Get Rich Is Glorious, Yet Tricky: Doing Business in ChinaJames Feinerman

Georgetown University Law Center

David LiuBank of Communications Co., Ltd., New York Branch

Lanier SapersteinCarl HinzeBill Perry

Dorsey & Whitney LLP

Cracking Open the Chinese Market: Understanding China’s New Foreign Investment Guidelines

Carl HinzeDorsey & Whitney LLP

3

Foreign Direct Investment in China

Foreign direct investment (US$ bn)

100120140160180200220240

2007 2008 2009 2010 2011

Year

US$

bn

Share of world inward direct investment flows (%)

5

10

15

20

25

2007 2008 2009 2010 2011

Year%

Source: The Economist Intelligence Unit Source: The Economist Intelligence Unit

4

China’s Foreign Investment Policy Mix -Key Instruments of Industrial Policy

唇齿相依 - “As close as lips and teeth”

• 12th Five-Year Plan – NPC

• Opinions on Improving Foreign Investment –State Council

• Foreign Investment Guidance Catalogue –NDRC and MOC

5

New Foreign Investment Guidance Catalogue –• Effective as of January 30, 2012

• Replaces 2007 version

• Demonstrates state planning and control of economy

• Divides industries into four categories for foreign investment:– Encouraged– Restricted– Prohibited– Permitted

6

Three Key Developments1. Shift from traditional to high-end manufacturing2. Fostering of new strategic industries

• Energy efficiency• New generation IT• Bio-tech• Clean energy• New materials

3. Promotion of modern service industries

7

Main Takeaways• Industrial policy focused on high and new

technology

• Foreign investment to support modernization

• Foreign investors should tailor investments to this focus

RMB Internationalization and Its ImplicationsDavid Liu

Bank of Communications Co., Ltd., New York Branch

9

RMB Internationalization and its Implications• Overview on the Development of RMB Policy

• Growth of Offshore RMB Deposits, Settlement and RMB Bond Securities

• Opportunities for U.S. Companies

• Brief Introduction of Bank of Communications

10

Overview of the Development of RMB Policy

2007 2009 2010 2011RMB bond market

July: Kick start RMB bond issuance

July: Allow overseas corporate to issue RMB bond

Aug: Allow Mainland corporate to issue RMB bond

RMB tradesettlement

July: Pilot scheme for RMB trade settlementCoverage:China: 5 provinces and citiesOutside China: HK, Macau and ASEAN countries

July: Expanded coverage of pilot schemeCoverageChina: 20 provinces and citiesOutside China: all countries

Aug: Converted to full schemeCoverageChina: all provinces and citiesOutside China: all countries

RMBinvestment

Jan: Promulgation of rules on RMB ODI

Nov: Promulgation of rules on RMB FDI

11

Growth of Offshore RMB Deposits and Settlement

RMB Deposit & RMB Trade Settlement

0

100

200

300

400

500

600

700

2007/12007/42007/72007/1

02008/12008/42008/72008/1

02009/12009/42009/72009/1

02010/12010/42010/72010/1

02011/12011/42011/72011/1

02012/1

Year

Billi

on Y

uan

RMB Trade SettlementRMB Deposit

Source: HK Monetary Authority

RMB: 566 bn

RMB: 187 bn

12

RMB bond issuance

0

20

40

60

80

100

120

2007 2008 2009 2010 2011Year

RM

B B

illio

n

RMB bond issuance

Growth of Offshore RMB Bond Securities

Source: HK Monetary Authority

107.9

35.8

161210

13

RMB Payment Opportunities

Source: SWIFT

14

Underrepresentation of RMB in FX

Source: SWIFT

15

Opportunities for US Companies

16

RMB Arbitrage Example• Current Market

RMB Spot Rate - 6.301 RMB NDF Rate - 6.400 Implied depreciation - 1.57%RMB 1 year CD rate - 3.5% USD 1 year loan rate -1.5% Rate difference - 2.00%

• Arbitrage transactionExecute the following three transactions today1. Borrow 1,000,000 USD at 1.5% annual rate2. Purchase 6,301,000 Yuan RMB with 6.301 spot rate3. Deposit 6,301,000 Yuan RMB for a 3.5% one year CD4. Sell 6,521,535 Yuan RMB one year NDF contract to lock the FX rate

Execute the following three transactions one year later1. Redeem the CD and obtain 6,521,535 Yuan RMB principle and interest2. Purchase USD 1,018,990 with the NDF rate3. Payoff USD 1,015,000 bank loan with one year interest

Net risk free profit will be $3,990, which is about 0.4% of the original $1,000,000 investment, which is a combination of 2% from rate difference and 1.57% from expected RMB depreciation.

17

• Founded in 1908 during the Qing Dynasty, Bank of Communications is a bank with the longest history in China.

• Listed on the Hong Kong Stock Exchange on June 23, 2005, Bank of Communications is the first public traded state-owned bank in China.

• With total asset of $739 billion at 2011 year end, Bank of Communications is one of the top five banks in China

• Bank of Communications is ranked 35th in 2011 by The Banker magazine among 1000 banks worldwide according to its tier one capital.

18

• Bank of Communications, New York branch is a federal licensed branch offering wholesale banking services and products to commercial and industrial businesses in U.S.

• The branch was established in 1991, and is the second Chinese bank doing business in U.S.

• Bank of Communications established its San Francisco branch November 2011.

19

Three takeaways• RMB is becoming an international currency for

trade settlement, investment and financing• Even though Hong Kong is currently the center

of the offshore RMB market, RMB could bring some real business opportunities to U.S. companies

• Please contact Bank of Communications, New York branch if you want to learn more about what RMB internationalization means to your company

U.S. Trade War With China—Impact on U.S. Companies

Bill Perry worked in the Office of General Counsel, U.S. International Trade Commission and Office of Chief Counsel and Office of Antidumping Investigations, U.S. Commerce Department.

21

U.S. Actions• The U.S. has conducted many antidumping /

countervailing duty investigations against Chinese products including: – Clean tech, such as solar cells and wind towers– Chemicals and Metals– Consumer products, such as ironing boards, folding

chairs, furniture, wheels, wire, wood flooring, nails, paper, pencils, etc.

– Food, such as crawfish, garlic, and honey, etc. – Over 100 Outstanding AD and CVD Orders Against

Chinese Products

22

U.S. Actions– Petitioners have filed numerous 337 patent and IP

cases at the ITC relating to mobile phones, semiconductor chips, beds, magnets, birthing simulators, cars, tires, biotech products, fireplaces, tractors, etc.

– There are 10 to 20 337 cases for every antidumping case

– 91 Ongoing cases and more than 100 orders– Petitioners have also brought antitrust cases relating

to vitamin C and magnesium

23

U.S. Actions• Bi-partisan bill sailed through Congress:

– GPX legislation—passed in 3 months to make CVDlaws applicable to China

– CAFC decision, December 19, 2011– President Obama signed the GPX legislation on

March 13, 2012• Trade Enforcement Unit—President Obama $26

Million to Enforce U.S. Trade Laws• Romney will be tough on China

24

U.S. Actions Hurt U.S. Companies• U.S. trade policies are a problem for Chinese

companies, but the real impact is on U.S. Companies:– U.S. importers are the target of U.S. Trade Laws, not

the Chinese– China can and will retaliate against U.S. exporters

25

Impact on U.S. Importers• Antidumping and countervailing duties• U.S. Importers are liable for duties not Chinese

companies• Retroactive liability• Solar Cells—Critical Circumstances• Wooden Bedroom Furniture—U.S. Importers’

Liability $500 million to $1 billion• China treated worse than Iran • Non-market economy Chinese companies cannot

know whether they are dumping

26

U.S. 337 Cases• One Year to 16 Month IP Litigation at U.S.

International Trade Commission• Exclusion Order—Infringing Products Out at the

Border• Cease and Desist Order• Ninestar $11 million dollar Penalty

27

Customs and False Claims Act • Customs liability—reasonable care—rule of origin,

classification • Transshipment Problems• False Claims Act-Qui Tam• Triple Damages plus Attorney’s fees• Relator entitled to 15 to 25%--can be a competitor, a

clerk, secretary, unhappy employee • One clerk got a $6 million payout• Over $100 million criminal

28

U.S. Antitrust Cases• Vitamin C—September 11, 2011—Sovereign

Compulsion not proved by Chinese companies• Trial going to damages• $200 million in legal fees• MOFCOM and Chamber of Commerce set the

price floor to deter antidumping cases• Magnesium

29

China’s Retaliation—U.S. Exporters• Retaliation--What is Sauce for the Goose is Sauce

for Gander• Chinese trade cases against U.S.: automobiles,

caprolactam, chicken, folding board, distillers’ grains, electrical steel, optical fiber, photographic paper, lysine, PVC, Phenol, and other chemicals

• Chinese Renewable Energy Subsidy Case against Federal Government, States of California, Washington, Massachusetts, New Jersey and Ohio

• Polysilicon--potential case against U.S. $2 Billion exports to China to Produce Solar Cells

30

USTR Worried About Retaliation• February 29th USTR Kirk in House Ways and Means

Committee:• “We must also address what seems to be the Chinese

government’s reflexive resort to trade actions in response to legitimate actions taken by the United States… The Administration is currently challenging China’s apparent improper imposition of duties on American broiler chicken products as well as China’s anti-dumping and countervailing duties on hundreds of millions of dollars worth of American steel exports to China.”

• Similar USTR Statement at WTO• China “We Too Can Play This Game”—MOFCOM Statement• Trade and Antitrust

© Dorsey & Whitney LLP. All Rights Reserved.

China’s Industrial Policy and Foreign Investment Carl Hinze

Dorsey & Whitney LLP April 2012

Promoting New Strategic Industries

China’s 12th Five Year Plan, the new Foreign Investment Guidance Catalog and many other new policies and regulations issued by the Chinese Government are aimed at moving from a reliance on traditional manufacturing to a focus on strategic new industries. The following seven strategic industries have been identified:

• alternative energy/fuel vehicles: hybrid vehicles and electric vehicles as well as better fuel-cell batteries;

• biotechnology: biomedicines, new vaccines, and advanced medical equipment;

• environmental and energy-saving technologies: energy efficiency, pollution control, clean coal, waste-matter and recycling and seawater usage;

• alternative energy: next-generation nuclear power plants, solar power, wind power, smart grid and bioenergy;

• advanced materials: rare earths, special-usage glass, high-performance steel, high-performance fibers and composites, engineering plastic, nano and superconducting materials;

• new-generation information technology: cloud computing technology, high-end software, virtual technology and new display systems; and

• high-end equipment manufacturing: aircraft, high-speed rail, satellites and offshore oil/gas equipment.

“Encouraged” Category

The following investment projects are key examples of encouraged items under the new Foreign Investment Guidance Catalog:

Environmental Sustainability and New-Energy Vehicles

• construction waste recycling;

• water purifying, recycling facilities and water quality monitoring devices;

• waste textile recycling and treatment facilities;

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• recovery and recycling of electric products, automobiles and electromechanical equipment;

• technology for marine oil spill treatment, control and clean-up and related ecological restoration;

• manufacturing of batteries, engines and key components for new-energy vehicles;

• construction and operation of electric and hybrid vehicle fueling, recharging and replacement stations

High and New Technology

• new products and technologies for the production of textiles, chemicals, machinery and equipment;

• manufacturing of super capacitor and passive integrated components;

• production of high-megapixel digital cameras and touch-screen components;

• production of sixth (or higher) generation LCD panels

Finance

• venture capital enterprises

Modern services

• vocational education and training;

• intellectual property service entities (e.g. patent and trademark agents and consulting firms);

• household/family care services;

• refrigerated transport of agricultural products and rural distribution chains;

• logistics consultation services

Aerospace / aviation

• development and production of eco-friendly component materials;

• manufacturing of bearings for engines, landing gear and flight transmission

Medical services

• manufacturing of new vaccines, such as cervical carcinoma vaccine, malaria vaccine, and hand-foot-mouth disease vaccine

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Mining and Natural Resources

• foreign investment in the exploration and exploitation of unconventional natural oil and gas resources (must be in the form of a Sino-foreign joint venture)

“Permitted” Category

The following investment projects are key examples of permitted items under the new Foreign Investment Guidance Catalog:

Automotive

• manufacturing of automobiles (downgraded from the “encouraged” category under the 2007 Catalog and still subject to a foreign investment cap of 50%);

• establishment of automotive research and development institutions (downgraded from the “encouraged” category under the 2007 Catalog)

High-energy manufacturing

• polycrystalline silicon (PSC) production (downgraded from the “encouraged” category under the 2007 Catalog);

• coal chemical processing (downgraded from the “encouraged” category under the 2007 Catalog)

Medical services

• medical service institutions (removed from “restricted” category under the 2007 Catalog);

• production of certain medical devices, such as disposable injectors, blood transfusion instruments and blood bags (removed from “restricted” category under the 2007 Catalog)

Financial and related services

• financial leasing companies (removed from “restricted” category under the 2007 Catalog);

• commercial companies engaging in franchising, commission business and business management and consulting;

• commodity auctions (removed from “restricted” category under the 2007 Catalog)

Carbonated soft-drinks

• carbonated soft-drink production (removed from “restricted” category under the 2007 Catalog)

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Telecommunications

• foreign investment ceiling in certain basic telecommunications services sectors (including domestic and international services) has been raised from 35% to 49%, in line with China’s WTO commitment

Audio-video products

• companies engaged in the distribution of audio/video products are no longer required to be controlled by Chinese parties, but they still must take the form of a Sino-foreign joint venture

Media

• Import and general distribution of books, newspapers and magazines and the import and production of electronic publications (publishing remains “prohibited”)

“Restricted” Category

Industries and activities that apply outdated technologies that are harmful to the environment or that relate to certain social and/or public services remain restricted to foreign investment.

“Prohibited” Category

The following investment projects are key examples of prohibited items under the new Foreign Investment Guidance Catalog:

Real estate

• construction and operation of golf courses and villas (downgraded from “restricted” category in 2007 Catalog)

Postal services

• delivery of letters by domestic courier services