Economist Special: China in 2008

The Economist just recently published their annual compilation of predictions for the coming year, The World in 2008. Daniel Franklin, editor of The World, predicts that the two events that will "frame" 2008 are America's presidential election and the Olympics in Beijing. Mr. Franklin writes that America and China will be the prime players for 2008 in three areas: the world economy; global climate change; and geopolitical risk (Taiwan has elections in 2008 and Mr. Franklin thinks this might lead to crisis). With China looming so large in 2008, Mr. Franklin created a special section for China this year. Mr. Franklin does get a little carried away with one of his predictions, though: the summer games belong to the US, China needs more time to leverage its population into an athletic machine.

Charles Lee makes a very reasonable argument about "The global temptation for Chinese companies," in "Chery-Picking". Mr. Lee argues that 2008, and the Olympics will result in even greater exposure to several Chinese corporations: Lenovo, China Mobile, Yanjing Beer, Dayun Motorcycle, Air China, Li-Ning, Geely, Great Wall, and Chery. However, Mr. Lee predicts that none of these companies will join the "global A-list". Rather, these companies "will focus mainly on trying to expand in their booming home market," because they are not yet powerful enough at home to take on the world. Mr. Lee does note that Nine Dragons Paper "may become the world’s largest paper producer in 2008." He writes that Nine Dragons' status as a private firm allows greater innovation in business than is seen in state-owned enterprises and the large public corporations.

A pair of articles frame a debate about China's economy: Steven Sitao Xu in "Smelling a Rat" argues that worries about China's economy are overblown; and Thomas Easton in "Flashing Red" argues that the Shanghai market is on the verge of burning up. Mr. Xu writes that China faces two economic problems that it can easily overcome: inflation and faltering export markets.

Mr. Xu thinks that China can keep inflation down for two reasons. First, productivity in China is rising fast. "[I]n America the import-price index of Chinese goods has risen by only 3-4% in the past year, according to the United States Labour Department, and after stripping out the dollar’s mild depreciation against the renminbi the index has been more or less flat since 2003. Chinese products remain as cheap as ever despite higher input costs. The only logical conclusion is that the economy is undergoing a marked productivity improvement." Second, if the government loosens the labor market by doing away with residential permits, then more people working should curb inflation.

Mr. Xu thinks that any decline in the export market can be shored up by an increase in the domestic market. He thinks that this can be achieved by cutting taxes and increasing state spending on health and education. This would free up more domestic capital for spending on domestic goods.

Mr. Easton criticizes China's stock market for too much regulation, not enough regulation, and limited disclosure. He writes that Beijing's limitations on investing abroad forces Chinese citizens to invest in the stock market because savings account pay less than inflation, and real estate is a questionable investment because of uncertain property rights. This puts more money into the stock market than is reasonable. This is compounded by the problem that the majority of shares are not freely tradable because they are held by the government, or the company itself, which makes the shares price based on the price of the shares that are freely traded. This allows only a few people to change the value of a share by selling or buying those shares. He says that this problem could be cured if China made it legal to short shares. Another problem is rampant insider trading which makes the market unfriendly to outsiders, especially if the market was opened to wider investment by foreigners. Another problem is a lack of transparency in information about listed companies.

In "E-Commerce With Chinese Characteristics", Jack Ma, CEO of Alibaba, makes a familiar prediction: in 2008 "A million internet entrepreneurs will bloom." It seems that someone in Silicon Valley made that same prediction 7 years ago. Mr. Ma's enthusiasm is understandable given that the internet is his playground, and encouraging the entrepreneurial spirit is good for competition and the market. But, surely Mr. Ma remembers that it is the big boys, the Ebay's and the Google's and the Yahoo's and the Amazon's, that survive these internet booms. E-commerce will surely grow in 2008, but let's be reasonable.


These articles make a fun read, and there many more in the China Special Section.

Vote China Law Blog

I think I might just have a few readers who don't read China Law Blog. Now, there doesn't appear to be a bright line rule on what makes a black letter law blog, but China Law Blog is the only beast that can crush Patently-O in the ABA's best law blog competition. So, head on over to the voting page and cast a vote for CLB.

Tools: Chinese Research & UW

Yesterday, I was searching for a Chinese regulation on CERs and I was not having much success. I headed downstairs to have a chat with our library's new, young international research librarian about suggestions for Chinese law sources. It just so happened she had such a suggestion.

She did her post-JD law librarian work at the University of Washington's Marian Gould Gallagher Law Library. UW's East Asian Law Department began in the 1930s with a "substantial donation of books by the Japanese Ministry of Justice." It has grown into one of the largest collections of East Asian Law materials in the United States. UW has a page devoted to Chinese Legal Research. Many of the reference materials that the page directs users to are physically located at UW, but there are several links to web resources. There are also helpful descriptions about holes in Chinese legal research. Our librarian suggested that if I ever had any questions, I should contact Bill McCloy, the director of UW's Chinese Legal Research. His contact info is on the pages above. I'm not sure how game he is for helping you curmudgeonly lawyers, but he is certainly game for helping us fresh faced students of the law.

Climate Change: CDM, CER & PRC

I have a hate-love relationship with acronyms. At first, I have no idea what they mean which results in a trail of Googling and Wikipediaing until I have a grasp of what some seemingly random stream of capitalized characters stands for. Then, I can express myself simply, clearly, precisely and more correctly, for it would be a tragedy if I confused China with the People's Republic of China (PRC) with the Republic of China, especially since at least two of the those are rumored not to exist. The tragedy is that once I understand the acronyms and commence with their use, no one else can understand what I'm saying.

The world of energy is rife with acronyms, CPUC, CAISO, CEC, EAP, RPS, RAR, QF, LSE, LDC... That list doesn't even get you out of California, let alone into the US federal energy world. The international energy world is full of acronyms. The important ones fall under the Kyoto Protocol: Clean Development Mechanism (CDM), Certified Emission Reduction credits (CERs), greenhouse gases (GHGs). Today we'll be taking a look at how these acronyms play out, and where the PRC fits in.

One of the most significant things that the Kyoto Protocol created was the Clean Development Mechanism (CDM). The CDM allows Annex B Countries to receive CERs for developing GHG reducing projects in non-Annex B countries, such as China. These CERs can then be used to lower the actual emissions of the Annex B country on paper in order to comply with the emission cap set by Kyoto. Call it, a legal fiction which has resulted in a fully functional commodities market with price largely determined by the validity of the CER according to the UN.

China is the largest producer of CERs in the world. In 2006, China produced 44% of the world's CERs, and India came in at number 2 with 16% of the world's CERs. China has been a prime target for CER production for two reasons: 1) the main source of energy in China is coal; 2) incentives for foreign direct investment (FDI). The size of the CER produced is the difference between the amount of GHG emitted per energy unit by the main source of energy in China, coal, and the amount of GHG emitted per energy unit by the source of energy constructed by a foreign firm in China. Wind farms and solar farms are the most popular energy sources constructed because they are the most successful at exploiting the two reasons above to their fullest. Wind and solar produce virtually zero GHG emissions which means that every kilo Watt produced is also converted into a CER using one of the dirtiest electric generation facilities, coal burning plants, as the baseline. Also, high-tech renewable energy should continue to see FDI tax incentives from both China's federal and local governments. Almost 90% of approved projects fell in the priority area of investment encouraged by the government, and this should largely continue.

Overseeing CERs in China is the National Development and Reform Commission (NDRC). Ther main task is approving CDM projects, and filing and recording CER production. The NDRC has also been instrumental in developing further incentives for the construction of CDM projects producing CERs. Through September 2006, 46% of the projects that have been approved are wind powered projects. Wind power costs about twice as much as coal to generate the same amount of energy. The revenue from CERs, which have increased in value in China from US$5/ton of CO2 in November 2004, to $9.90 in September of 2006, does not cover the difference in generation cost. The Chinese government, according to Gao Guangsheng and Li Liyan of the NDRC, has implemented preferential policies to further the goals of mitigating climate change. The preferential policy takes the form of charging the wind power projects lower fees for accessing and transmitting electricity across the grid which results in revenues from energy sales more in line with the coal producing plants.

One thing that those proposing CER projects in China should be aware of is that China has special provisions on CERs. The revenue from the transfer of CERs is owned jointly by the Chinese government and the energy project owner, and the government is paid a 2% royalty of that sales revenue.

Opinion on CERs

I think that those who developed the CDM genuinely developed it as a way to lower emissions and curb global climate change, while providing a market based financial incentive. The drafters of Kyoto say that they developed the CDM because the overall goal should be reducing global GHG emissions, period, not reducing global GHG emissions just in developed countries.

That said, this is a commodities market created by a legal fiction. A CER could cease to hold value next week if the UNFCCC conference does not go well. Also, there will be a time when the CDM is no longer the proper way to go about reducing emissions, and when all countries will be called on to reduce pollution.

The CDM will serve the valuable purpose of reducing emissions and creating wealth, but much like junk bonds and sub-prime mortgages, the winners are going to be those who get out earliest. Except for the CEOs of banks.



Special thanks to friend and Senior Project Manager at EcoSecurities Dubai, Nicholas Dreves.

Reading List:

Equal Exchange: Creating A Fair Price for Carbon by CD4CDM

Making Carbon Markets Work by David G. Victor and Danny Cullenward in Dec. '07 Scientific American

Climate Change: US Obligation, US Solutions

Depending on whose measurements you go by China either overtook the US as the leading producer of GHGs in July, or China will overtake the US as late as 2010. Neither of these countries have proven particularly receptive to emissions controls in the past. The US did not sign the Kyoto Protocol, purportedly regulating emissions through 2012, and China announced in June that despite perhaps being the world's largest emitter of GHGs it should still be allowed differentiated responsibility as a developingnation. Emerging from this is the question of whether the US is obligated by law to curb its own emissions and how to go about curbing emissions.

Over at Scientific American, Jeffrey Sachs has an article, "Climate Change and the Law", which discusses US obligations to combat climate in change in the context of an article at Financial Times by Eric Posner and Cass Sunstein, "Pay China to reduccut emissions". Mr. Sachs writes a fine description of the legal context, but he misses the point of Posner and Sunstein's article which is that the US should forget about compensation and should focus on compensating China, and Posner and Sunstein miss the point of the solution which is that CERs can serve as a valuable compensation tool and need not be cloaked in polarizing language such as payoffs to get member nations to abide by emissions controls.

The US has been in the business of taking unilateral action for a while now. When Bill Clinton passed the White House to George W. Bush, he suggested that Bush sign on to the Kyoto Protocol. The US would have been obligated to reduce emissions to 5% below the 1990 emission levels. The argument goes, the US did not sign Kyoto, thus it is under no obligation to reduce emission levels. This is simply not true. In 1992, the Senate ratified a treaty proposed by UNFCCC and signed by George H.W. Bush, which calls on developed countries to adopt national policies consistent with the objective of stabilizing GHGs at levels that prevent dangerous interference with the climate system. This binds the US to this goal through international law. International law can be difficult to enforce in and against the US, but domestic law is working against climate change, too.

California is the only state that can be granted a waiver by the Environmental Protection Agency (EPA), to make and enforce emissions laws that are stricter than those regulations set by the EPA. Once California has been granted a waiver, other states are allowed to amend their laws to be in line with California's laws. Recently, California was denied a waiver for the first time and several lawsuits by several states have been filed every which way against the EPA, against the states, against the Automotive Industry, all trying to figure out whether the EPA is obligated to regulate the emission of carbon dioxide under the Clean Air Act. On April 2, 2007, the US Supreme Court handed down a decision that the EPA is obligated to regulate carbon dioxide as a deleterious pollutant, and in dicta suggested that the EPA should try to mitigate the effects of climate change. This is a strong argument that the US is obligated by domestic law to take at least administrative action with respect to GHGs.

With a strong case for an international obligation and a domestic obligation under the law to deal with GHGs and climate change, the question is how to proceed. California, under the Global Warming Solutions Act signed by governor Schwarzenegger, is working on a cap and trade system similar to that adopted by most of the EU. Congress is also working on a cap and trade system that should preempt California's system under the Supremacy Clause. In cap and trade, a cap on carbon emissions is set and participants in an industry are not allowed to emit above that level. Those who are below the cap are allowed to sell the difference between the amount of carbon they emitted and the amount of carbon they are allowed to emit. Those who are above their level must purchase carbon offsets from those below the alloted level and/or purchase emissions rights in the form of permits from the government. Problems in the EU with the pricing and number of permits should probably result in an auction scheme for the purchase of permits which will make permits more costly and more in line with their market value under a system that is striving to reduce emissions.

Though there are flaws in this system, this is the most politically convenient solution and it has been somewhat proven as effective in the EU. The only other solution even on the table is a Carbon Tax, but no serious politician is backing this new tax. The way it would work is that emitters of carbon from power plants to individuals filling up their cars would be assessed a fee for their use of carbon. This would then be returned to taxpayers as a flat rebate. So, for example, if you spend $100 in tax for gasoline over the year and your neighbor spends $1000, then you'd each get $400 back at the end of the year resulting in a net loss for your neighbor of $600 in tax, and a net gain of $300 for you in the form of a rebate.

Later in the week we will see how China plays a role in cap and trade systems around the globe, and why neither China nor the US need worry about suffering financially from reducing global emissions because of help from Clean Development Mechanism (CDM) and CERs.

Climate Change: UNFCCC

Next Monday in Bali, the United Nations is holding the Framework Convention on Climate Change to negotiate an international agreement on the emission of greenhouse gases (GHGs) when the Kyoto Protocol expires in 2012. This week I will be posting on the legal issues and business strategies surrounding global climate change. Today, I will post on the legal issues involving the conspicuously absent from Kyoto, the United States. And, expect a post on extracting certified emission reduction credits (CERs) from China and the tax consequences.

For those who are still skeptics of the mainstream views on global climate change (which does not include us members of the Skeptics Society) here is/are:

• some science from the Intergovernmental Panel on Climate Change (IPCC), a panel of over 2,500 scientists and "experts", and co-recipient of this year's Nobel Peace Prize with Al Gore;
• some pictures from Scientific American;
• some solutions from SciAm;
• a map;
  
• a sort of Pascal's Wager, call it IPCC's Gambit; and
  
• some opportunities for cold hard cash (or at least pieces of paper, well, maybe in 'Olden Times, now probably a collection of 0's & 1's, allowing the holder of said pieces of paper to pollute a certain amount or trade said pieces of paper in a derivatives market) from Lehman Brothers.
  

There is a lot of money to be made in CERs, and they will do a lot of good in bringing GHG emissions under control, but they need to be implemented properly with proper incentives.

Feel free to give a voice to the other side in the comments.

DBCP, China, and Forum Non Conveniens

Following up on a previous post and a recent post at China Law Blog, here is what I have found out about liability for MNCs in US courts. As CLB notes, the DBCP cases involving Latin American banana workers exposure to the nematacide DBCP, which causes infertility in men, and their suits against Dole and Dow, the user and the producer of DBCP, serve as the only examples of this type of litigation. The main result of these cases is reform of the forum non conveniens (FNC) doctrine from a doctrine that had been looking for the most convenient court (despite conveniens being Latin for adequate) to a doctrine that is truly trying to determine the adequacy and availability of other forum for litigation than the US court the case was brought in. Forum non conveniens is the dismissal of the suit, sometimes accompanied by stipulations that the defendant will not challenge the suit's validity in the new forum. A brief history of the DBCP litigation:

The first case was brought under Texas law in Alfaro v. Dow in 1990. Texas was one of the only states with a statute abolishing FNC for personal injuries or wrongful death suits. After the Texas Supreme Court ruled that the statute did indeed abolish FNC under these suits, the plaintiffs settled. The two consequences of this suit were that 1) Texas amended their law to allow FNC in state courts, and 2) Dow, Dole and the other defendants got a lot trickier.

Federal courts apply FNC the most liberally, and Dow and Dole decided to get all of their suits into the federal courts by impleading Dead Sea Bromine Company. At one point Dead Sea had been wholly owned by a holding company which was mostly held by a holding company which was mostly owned by the State of Israel. Using the Foreign Sovereign Immunities Act of 1976 (FSIA), Dead Sea was determined to be an instrumentality of Israel and Dead Sea was allowed to remove the whole suit to federal court where the defendants were able to get an easy FNC dismissal. This would have potentially huge implications for suits involving Chinese companies because there are often SOEs involved and any SOE could invoke foreign sovereign immunity. This all changed with a US Supreme Court decision in 2003.

In Dole v. Patrickson, the Supreme Court was asked to decide what the word "ownership" meant in the FSIA statute. Previous holdings at the Circuit Court level had held that even a complicated share structure such as the one between Dead Sea and Israel constituted ownership. The Supreme Court held that Congress' intention was to use the word ownership as in basic corporate law, and ownership under the FSIA for determining whether foreign sovereign immunity could be invoked is to be interpreted as direct ownership of a company's shares at the time the suit is commenced. In addition, any element of control over the company does not matter because ownership and control are distinct.

A commentator has written that Patrickson and Martinez v. Dow are causing courts to look at FNC in a whole new light. Martinez is one of the first cases to critically examine the adequacy and availability of the alternative forums that FNC posits on the basis for dismissal. In Martinez the defendants said that Costa Rica, Honduras or the Philippines would serve as a more appropriate forum than the US courts because of the public and personal interests such as wasting juries' time, American courts as less adequate for dealing with questions of foreign law, and all of the relevant evidence being in foreign countries. The judge evaluated each of those countries court systems to see if they were actually adequate and appropriate. The judge found the following (with some points on China, following):

• Costa Rica used the civil law which does not have the common law doctrine of FNC which means the suit could probably not be brought in Costa Rica after being dismissed in the US.
  
• China has the civil law system. Although, Chinese judges have been convinced to find FNC in certain cases.

• Based on a State Department report, Honduras' civil law system was inefficient, opaque, infected with powerful special interests, and poorly staffed. And, the Martinez court held that the plaintiffs would be treated unfairly and deprived of adequate remedies.
  
• Wait for it...

• Based on a State Department report for the Philippines, the Court noted that their legal system was corrupt and characterized by personal ties, poorly paid judges susceptible to corruption and undue influence, overworked staff, long delay, a general failure to provide due process and equal justices, a history of bribing witnesses, and improper relationships between judges, parties and litigants. The court held that the plaintiffs would be deprived of remedies and/or treated unfairly in the Philippines court system.
• If a State Department report is adequate to show the inadequacy of a country's courts, then the chance of China being deemed adequate and available enough for FNC dismissal is small. China's judicial system may be improving, but here is a summary of the State Department's report on China issued on March 6, 2007:
• "Legal reforms continued to stall, as the party and state exercised strict political control of courts and judges, and maintained closed trials and administrative detention."
• "A lack of due process and new restrictions on lawyers further limited progress toward rule of law."
• "Serious social conditions that affected human rights included endemic corruption."
• And, some good: "The government continued to pursue some criminal and judicial reforms."

Federal and state courts, as evidenced by the recent verdict in Los Angeles, are following the Martinez type analysis of "available" and "adequate" for FNC dismissal. Until a case is appealed to the US Supreme Court for review of what the words "adequate" and "available" mean, then expect more inquiries into the state of the judicial system in foreign countries. This should be good for plaintiffs and bad for defendants. As for China, given the State Department's report and the current general public opinion of China in the US, I would expect that a US court would find it hard to dismiss a case for the reason that a Chinese court is more adequate and available than a US court.

Corruption in China

A policy brief by Minxin Pei at the Carnegie Endowment claims that corruption poses one of the greatest threats to China's economic expansion and political stability. Mr. Pei also calls on the United States to aid the Chinese government in combating corruption. Here is a summary of the key findings of the paper:

1. "The odds of a corrupt official going to jail are less than three percent, making corruption a high-return, low-risk activity."
2. "Corruption in China is concentrated in sectors with extensive state involvement, such as infrastructure projects, real estate, government procurement, and financial services. "
3. "The direct costs of corruption could be as much as $86 billion each year."
4. "Corruption both undermines social stability (sparking tens of thousands of protests each year), and contributes to China’s environmental degradation, deterioration of social services, and the rising cost of health care, housing, and education."
5. "China’s corruption also harms Western economic interests, particularly foreign investors who risk environmental, human rights, and financial liabilities, and must compete against rivals who engage in illegal practices to win business in China. "
6. "The U.S. government should devote resources to tracking reported cases of corruption in China, increase legal cooperation with China and insist on reforms to China’s law-enforcement practices and legal procedures."

Mr. Pei's paper is very informative and full of statistics which are as recent as 2006. All policy papers should be taken with a grain of salt, though. The Carnegie Endowment does put out a lot of good scholarship, but I sometimes question what their motives are. This leads me to try and derive the thesis hidden between the lines of their publications. Mr. Pei is the Director of the China Program at Carnegie, and most of his publications seem to be about the dangers posed by the CCP's autocratic control of China and its economy. This, combined with the Carnegie Endowment's sponsorship of a writer for the National Review drove me to the conclusion that the most important of the key findings from Mr. Pei's perspective is number 2.

Number 2 argues that the state's extensive involvement in these economic sectors, which largely belong to the private sector in the United States, makes corruption easier and more lucrative. Free up the market and corruption should decrease. I agree, but it becomes a catch-22 when juxtaposed with the China conservatives who claim that the opening of China in the '80s led to more corruption. Freeing markets brings corruption, and freeing markets lowers corruption?

For more on Mr. Pei, see All Roads Lead to China's insightful post.

Risk List

In the great blogging tradition of pointing readers to lists, here is a link to an Economist list rating the riskiness of the riskiest large economies in the world. Note: 1=least risky, 15=most risky. Economist says that their "crude gauge" is "based on the size of current-account balances, budget deficits, credit growth and inflation." China comes at 5th least risky after Thailand, Malaysia, South Korea, and Taiwan. Those three other major indicators of emerging markets, Russia, Brazil, and India are ranked in the most risky half at 8, 12, and 15. The riskiest economies are characterized by high inflation and credit growth, and large budget deficits which makes it hard for government policy to correct weaknesses in the economy.

The authors of the article also look to the stock market indicators to get a grasp of the economies of these countries. China's price/earnings ratio for A shares is 40, which is half that of Japan in the '80s and less than half of the NASDAQ's 90 in 2000. The p/e for B shares has dropped to 22 which is almost half of the high for B shares of 4o in 2000. China's stock market may be becoming less risky.

The article closes with the comment that the greatest immediate threat to emerging economies is an American recession. But, this threat is decreasing. America is increasingly a less important purchaser of the goods of emerging economies. Only 24% of China's exports go to America, which is down from 34% in 1999. The authors say that this is why America's weaker economy this past year has had little effect on the boom of emerging economies. Also, emerging economies have purchased over half of America's exports for the first time, which the authors say has helped "prop up the economy of the United States."

Emerging economies' stock markets may have one good thing decreasing their risk: their investors haven't been around long enough to cook up potentially dangerous things like security backed assets. Yet.

Dam Disagreement

Last summer, my boss took his family for a cruise on the Yangtze River. He said that it was pleasant, but that he wished he had gone sooner for the river had lost much of its aesthetic value with the rise in water level. In the US, the argument against dams for hydroelectric power usually stem from both aesthetic concerns and ecological concerns based in landslides and damage to fauna. In China, the Shanghai Daily and Xinhua just can't seem to agree on the ecological harm caused by the Three Gorges Dam.

First, the benefits of Three Gorges:

• reduction in downstream flooding
• generation of carbon-free energy (predicted to be the equivalent of 31 million tons of coal per year when fully operational)
• creation of a 660km navigable reservoir

To build the dam, ~1.4m people have been relocated and ~4m more might have to be relocated by 2020.

Xinhua has been reporting two major problems with the dam:

• major landslides that are only stand to increase in severity and number as the reservoir's depth is increased to its maximum next year
• ever increasing pollutants are collecting in the reservoir from the tributaries in the form of pesticides, fertilizers and sewage

These reports supposedly come from officials.

The Shanghai Daily printed a story originating with Xinhua which claims that the landslides are not any worse than predicted, and Wang Xiaofeng, director of the office of the Three Gorges Project Committee of the State Council, quickly covered the pollution by saying that the algae blooms were only temporary. Mr. Wang and the Shanghai Daily also focus on the good news by pointing out the dam survived its first flood season admirably.

Mr. Wang and the Shanghai Daily both have incentives to protect this dam's reputation. For Mr. Wang, well, this is his job. For the Shanghai Daily: Shanghai receives a substantial amount of the electricity generated by the dam.

Is this dam good? Or a dam travesty?

I'm of the opinion that it is impressive, but I find forced relocations terribly distasteful. China has far greater ecological concerns than landslides and their fauna, and anything that can cleanly replace 31m tons of coal from receives a thumbs up from me. The water pollution is of grave concern, though. There a lot of people in China who need clean water to drink, and the Yangtze carries a lot of what was at one time fresh water. A large reservoir will spread pollutants to a wider area and turn fresh water spoilt.

Yahoo Settles

Yahoo has settled a suit filed by the World Organization for Human Rights for confirming to the Chinese government the IP addresses of Shi Tao and Wang Xiaoning who were posting pro-democracy material online. The suit was based on the Alien Tort Claims Act. On NPR, reporters and commentators said that Yahoo was "shamed into settlement," and "urged to settle in a manner generous to the families," by the Congressional hearings that took place last week. To try and hide their shame, Yahoo is creating a human rights fund, in addition to the generous settlement.

My research tells me that ATCA suits are often settled, and for a much more important reason than preventing further shame to the culpable party. ATCA suits are settled to prevent case precedent from being established in how to proceed with ATCA litigation. The ATCA has been on the books since 1789, and it is only in the past three decades that it has been regularly invoked. Any company operating in a foreign country with a looser interpretation of human rights and a narrower view of what is tortious than in the US has incentive to prevent litigation of these issues or they might find themselves on the wrong end of many ATCA suits. If democracy is a human right, would it be tortious for internet search engines to block pro-democracy websites? Would a whole nation form a class if a suit such as this could be brought?

We might soon find out. Congress is considering a Global Online Freedom Act which would promote freedom of expression on the internet by protecting US business from coercion to cooperate with authoritarian regimes. Congress should be careful in crafting the remedies in this bill. Even with restrictions, any search engine is a powerful tool in promoting the freedom of expression and search engines controlled by US business should not be hamstrung from competing on a level playing field in the global search engine market.

Foreign Investment in its Death Throes?

In a word: no. In a few more words, foreign investment into China is in fine shape, and foreign investment from China should be on the rise.

On foreign investment into China:

The most recent piece of legislation, revision of the Catalog for the Guidance of Foreign Invested Enterprises, covered in an earlier post and covered extensively in a post by Steve Dickinson at China Law Blog, suggests that Beijing is becoming pickier about what sort of foreign investment will be allowed into China. And some of the provisions in the new catalog simply do not make sense: are they now teaching golf course design classes at Fudan University? Also: private equity firms are rolling back the scale of their investments in individual enterprises in China; the China Securities Regulatory Commission has submitted a draft to cap foreign brokerages at a 20% stake in publicly traded China brokerage houses, Goldman Sachs and UBS exempt because the law will not have retroactive effect. And, Michael Hartnett at Merrill Lynch in last week’s Economist, says that the investment action is shifting away from the emerging markets of China, Poland, India, Brazil and Pakistan, and towards the “emerging emerging markets,” such as Botswana and Kazakhstan.

Despite this, China still has a lot going for it for foreign investors:

1. The market potential is immense. Yes, China has a lot of very poor people. But, take a look at Intel: Intel sells 15m-20m chips per year in the US. To equal this in China, Intel only needs to sell chips to the equivalent of 1-2% of the population per year. The meaning behind the per capita GDP purchasing power of the Chinese consumer is misleading when there are ~1.3 billion capita.
2. Vast human capital. Skilled workers are on the increase and unskilled workers are plentiful. Even with the rise in the pool of skilled workers and the evaporation of unskilled workers, the supply and demand curve in employment on a global scale favors investing in China.
3. Despite tax law reform, breaks in the local income tax can still be negotiated, especially in more remote provinces.
4. Legal enforcement is on the rise, but damages are not yet comparable with the West.
5. For institutional investors, results are always in demand and results can be easy to come by in a market with a bubble. But please, could we see some restraint and foresight? As the head of a bank, you always get a nice severance package. Could you please preserve your dignity this time around?

On investment from China:

Now this is the big one. A lot of wealth has been built domestically in China over the past few years and the government is making it easier to get that wealth beyond the borders. Look at the other AML, the Anti-Money Laundering law. Less dramatic than THE AML, but getting your yuan out of China is going to become much easier than exchanging gold in the back room of a Macau casino. And, Chinese investors are eyeing foreign markets as destinations for their cash. I don't actually know the reasons why Chinese are seeking to invest elsewhere, but Chinese investors may be searching for less volatile markets than the Shanghai Index to diversify their wealth in to.

Attorneys and business should expect more and more money coming from China into the USA. Maybe they'll adjust accordingly.

Administrative Solutions to Patent Infringement in China

Under the TRIPS agreement, China is required to step up enforcement of IP rights. Enforcement must be effective, fair and equitable. Judicial and administrative decisions should be in writing and available for review, and decisions should provide ample compensation. Criminal charges must be able to be brought against large, commercial infringing organizations.

According to Mei Gechlik in a paper she wrote for the Carnegie Endowment, “Protecting Intellectual Property in Chinese Courts,” the most efficient and inexpensive enforcement mechanism for patent enforcement appears to be the Patent Reexamination Board (PRB) of China’s State Intellectual Property Office. In case you missed the paper in January of 2007, here’s a summary of her points:

Steps to Protect Inventions and Designs:

• US companies should use the PRB more often, and use Chinese legal representation when they do because Chinese lawyers correlate with a greater success rate. Even if the US party does not succeed in the cheap and easy PRB review, they can still appeal to the Chinese court system as Pfizer did with their Viagra patent.
• US companies should apply for Chinese patents with haste and apply for multiple types of patents. According to Ms. Gechlik, US companies are largely unaware that China has a first to file system rather than a first to use system, and there are plenty of Chinese companies that closely monitor inventions being filed in the US. Since invention patents take a while to process, Ms. Gechlik also suggests that US companies concurrently file for utility model and design patents.
• US companies should endeavor to understand Chinese patent protection, and if they are unsatisfied they should direct their complaints to the Chinese government. Two avenues are offered: for SMEs, China's intellectual property ombudsman in Washington; for all, the biannual Business Communication Session of China's SIPO.

Pressuring the Government

• US business and government should pressure China to publish all of their IP decisions as per TRIPS. It is unclear that all decisions are actually being published at www.ipr.chinacourt.org.
• US business and government should pressure China to improve efficiency and quality of the judicial process. They need more judges and more staff because too many errors are creeping into the decisions.

Ms. Gechlik's paper is a good read and the points she makes are important, and the wider the audience the more greater its effect.

At the very least, changes in US law should make US companies more aware of how to pursue patent strategy in China, and should decrease whining and excuses based in ignorance of China's laws.

Tort Liability for Injured Workers

The first draft of my comment for the San Diego International Law Journal is due in a couple of weeks. Until last night my work was going to focus on analyzing IP decisions from litigation in Beijing, Guangzhou and Jiangsu courts. An unnamed problem and too much time spent thinking about this post at China Law Blog have inspired me to write a comment on tort liability for US companies based on injuries sustained by Chinese workers in Chinese factories manufacturing products for the US company.

The main case I'll be working with is the Bhopal case arising out of a methyl isocyanate gas leak from Union Carbide's plant in Bhopal, India. That's really all I've got right now. That and the Alien Tort Claims Act (ATCA), which Bhopal was largely based on. Is an ATCA claim a bit of stretch? Maybe. I'll keep you posted. This first draft omits much of the analysis, but it will include background and intro information.

Tools: Pt. 1 Cases & Laws

While working in Shanghai, one thing I was always hungry for was new resources for Chinese legal research. It never seemed as if there was one place that I could I locate everything I needed. WestLaw and Lexis (I was unpaid and receiving academic credit), are mostly useless for Chinese law and commentary aside from a handful of law review articles. A lot of the best information is scattered across blogs and law firm's websites. Every so often, when the exigencies of the day have resulted in a deficit of time for proper posting, I'll be linking to a helpful tool and placing a permanent link to the information on the right of the page.


A very helpful site was setup by the Ministry of Commerce of the People's Republic of China, dubbed "Invest in China." The site contains English translation of laws related to foreign investment into China, news, statistics, suggestions, etc. The real jewel of the site is English translations of judicial decisions. They're old, they're anonymous, and they're predominantly from CIETAC Arbitration, but any sort of perspective into the Chinese judicial process is valuable.

Oil

In case you haven't heard, PetroChina's share price increased 163% by close on Monday on the Shanghai Stock Exchange. What does this mean? Well it depends what you're reading.

People's Daily announces that PetroChina is now the world's most valuable company with a market value over $1 trillion, more than double the $487.7 billion value of ExxonMobil, now the world's second most valuable company. Curiously, the article offers no explanation, just a mention, that the Shanghai Composite Index slid 2.48% on the same day. Could this be the result of the numerous day traders trying to get their hard earned yuan into PetroChina?

The Economist Online urges readers to take the news of the oil giant's value with a grain of salt. They ask readers to consider the actions of Warren Buffett who had Berkshire Hathaway invest $488 million in PetroChina four years ago, and pull out their investment just prior to PetroChina's public offering. The Economist suggests that PetroChina is floating on two bubbles which make the company a liability to investors:

• The oil bubble which is due to deflate as high oil prices depress economic activity. Also, PetroChina's domestic fields are in decline and their new resources are coming from troubled regions, such as Sudan.
• The stock bubble in China which is reflected in the price/earning ratios of Chinese companies. PetroChina itself is valued at 20x earnings in New York and Hong Kong.

Economist also points out that as of November 6, PetroChina surely hurt some day traders as share price had dropped 18% from the opening day's close. But, they also say that day trading is the only proper strategy in a stock bubble.

The Wall Street Journal regards all of this most valuable company in the world talk as a bunch of hogwash. They rely on a variety of numbers. Regarding market capitalization of $1.08 trillion, WSJ says that this figure was arrived at by apply the closing price of the shares on the Shanghai Index of 43.96RMB ($5.90) to every outstanding share of PetroChina. The problem is that only 2.2% of PetroChina's share capital was was sold in the IPO. The Shanghai Index is in a well-known bubble, so WSJ asks the reader to instead apply PetroChina's share price on the Hong Kong market, 18 Hong Kong dollars ($2.32), to the all outstanding shares which results in a market capitalization of $424 billion, about $60 billion less than Exxon Mobil.

WSJ reminds us that 86% of PetroChina's shares are still held by the SOE parent company, and are difficult to value because it is hard to guess what price they would fetch on the open market. WSJ says that in light of the limited market of Class A shares we could instead value PetroChina based on their freely traded shares, $72.5 billion.

Another option for comparing the value of the companies offered by WSJ is to compare oil production. PetroChina produced 1.06 billion barrels of oil last year and Exxon Mobil produced 1.56 billion barrels of oil.

WSJ's final method of valuing the companies is to compare income streams. PetroChina's revenue was $91.9 billion and their net income was $19 billion last year. Exxon Mobil's revenue was $365.5 billion and their net was $39.5 billion.

I think that the Shanghai Daily makes the best sense out of PetroChina's value, especially in comparison with Exxon Mobil, in a statement taken from Orient Securities analyst Wang Jin:

"The A-share market is a bit special, so the largest market cap doesn't necessarily mean anything," Orient Securities analyst Wang Jin said. "For mainland investors, it makes more sense to value PetroChina based on its profitability."

Reconsidering Chung Shan

Yesterday, the National Development and Reform Commission and the Ministry of Commerce released new guidelines on foreign investment in real estate in China which become effective December 1. In this article, Shanghai Daily suggests that overseas capital is being restricted to reduce the heat in the China housing and general real estate market, and to upgrade industrial structure. The salient points:

• Foreign investment in golf courses (no more Arnold Palmer planned Chung Shan's), gaming services, and ammunition manufacturing is banned.
• Capital flow into the development of large-scale land lots and the construction and operation of high-end hotels, villas, office towers and exhibition malls will be restricted.
• Life insurance companies, securities companies, and funds-management businesses specializing in stocks, will have the ratio of foreign funds capped at 50%, 33% and 49%, respectively.
  
• Foreign capital for prospecting rare and non-renewable mineral resources is banned.
• Polluters and high users of energy and resources will be embargoed(?).

Good idea? Bad idea? Will it be effective?

Implementing the "Essence"

On October 29, Li Changchun, senior Communist Party of China (CPC) official and member of the Standing Committee of the CPC Central Committee Political Bureau, asked the entire CPC to “study and faithfully implement the essence [emphasis added]” of the 17th CPC National Congress. The delegation charged with getting Party members around China to implement the essence gave its first lecture yesterday.*

I must admit, this talk of "essence" made me snicker. My cousins own cattle, so I've got a pretty good idea of the essence emanating from a body of work produced by politicians. But hey, this is China, a different country with different rules, right? Besides, their Congress members are not exactly politicians in the sense that our elected officials are politicians. I'll give their essence a fair whiff.

President Hu Jintao keys us into what the essence might be in his report delivered to the National Congress on October 15:

The theme of the congress is to hold high the great banner of socialism with Chinese characteristics, follow the guidance of Deng Xiaoping Theory and the important thought of Three Represents, thoroughly apply the Scientific Outlook on Development, continue to emancipate the mind, persist in reform and opening up, pursue development in a scientific way, promote social harmony, and strive for new victories in building a moderately prosperous society in all respects.*

Of these, President Hu lets us know further into the report that it is The Scientific Outlook on Development (SOD) that will form the cornerstone of the fourth generation of party leadership. I thought this was going to be an exercise in reading between the lines, but President Hu is candid in his discussion of SOD.

Us Americans tend to fall on one side of the following debate: democracy is the greatest thing since sliced bread; or, the Churchillian, democracy is the worst form of government save for all of the others. Naturally, we can't help but search for democratization in the reform plans of foreign nations, and we are shocked and awed when others do not come to the one of the above conclusions.

Hu's Scientific Development explicitly holds off on democracy for the sake of balanced development and stability because the CPC believes these issues need to be addressed before the people are given the right to vote. I like democracy; the chance to vote (or not vote) for the person or party to represent your interests is a special thing. But, the transition to democracy has always been a dramatic, traumatic and often violent event: American Revolution; French Revolution; US Civil War; Germany in the aftermath of WWI; Africa following decolonization up through today; The Fall of the Wall; and Russia's current confusion about democracy. I'd go back a bit further and toss in the English Civil War and the Netherlands' escape from Spain, but religion muddles those events up a bit.

If the CPC genuinely holds democracy as an eventual goal, then they are trying for something unprecedented in this world: a seamless, or as finely welded as possible, transition from an authoritarian regime to a democracy. The American Revolution and its important documents, the Declaration of Independence and the US Constitution, have served as the basis for revolutions throughout Latin America, and at least one Southeast Asian revolutionary, Ho Chi Minh, was fond of quoting Thomas Jefferson's words. The US demonstrated that it would not tolerate violent revolutions, particularly communist revolutions, no matter whether those communist revolutionaries were looking to the US for support. Likewise, the UN has adopted opposition to violent revolution. If China can eventually peacefully transition to democracy then they will have demonstrated how to transition in an agreeable manner to the form of government that we hold so dear.

But, if the CPC is blowing smoke about making democracy an eventual goal, then they are doing a disservice to their people. A grave disservice that has great potential to undermine the stability and balance they are trying to build.

Who Benefits from RMB Revaluation?

No really, who?

Yes, the RMB is undervalued. Any country where you can buy a 22oz bottle of beer in a restaurant for about 50 cents US, the currency is undervalued. And, according to the Big Mac Index, China has the most under-valued currency in the world with an average Big Mac price in May 2006 of 1.10 USD compared to the US average of 3.10 USD.

The undervaluation of the RMB is a favorite topic among China bashers and those who want to ignore other, more domestic, causes of economic woe in the US. There is no clear evidence that revaluing the RMB will solve any economic problems, and may even prove damaging to both the US and the China economies. Revaluation seems to be more of a punitive measure against China to decrease their exports and increase US exports, or at least curb further outsourcing from the US. But is there anywhere else in the world with industry geared to manufacture the goods that China currently exports? Might we be stuck purchasing the same goods at higher prices because we simply can't get the goods from any other source?

John Lee has a post at Resource Investor on the consequences of an appreciating RMB. A quick summary:

For a US family that spends $300 to $500 a month on Chinese goods, a further 40% appreciation of the RMB will translate into a $100 to $200 monthly cost increase. I spend at least $500 a month on Chinese goods, and to me, the logic of asking the Chinese to revalue their currency upwards is no different from asking the Saudi’s to jack up their oil price further, which is no logic at all for a US consumer.

$300 to $500 on Chinese goods is no stretch, and a $100 increase per month is a high cost for the average voter to bear for the potential of protecting

Some have concerns that China is hoarding US cash to use as an economic weapon against the US. Robert Graves' narrator in Count Belisarius has something interesting to say about conclusions such as this:

It is well known what happens on such occasions [when a group of people/senators meet to discuss a situation]. The simplest and most obvious conclusion is rejected as unworthy of such experts in wisdom as these ingenious hoary old men, and an obscure alternative is warmly debated and then rejected; finally a most far-fetched and marvelously improper conclusion is found and unanimously accepted.

China Hearsay provides us with the simplest and most obvious conclusion: the People's Bank of China (PBOC) has huge reserves of USD backed assets because they turn a profit on the difference in interest rates between US bonds and the bonds that the PBOC issued. China Hearsay says that two things are decreasing China's advantageous position: 1) decreasing US interest rates (to encourage investment) and increasing Chinese interest rates (to curb inflation) are converging thus reducing the profit margin of the PBOC; and 2) the RMB is appreciating against the dollar which is making PBOC's USD reserves less valuable. As the RMB appreciates against the dollar, China will have greater incentive to divest their dollar holdings. As China divests their dollar holdings, the value of the dollar will, seemingly, continue to slide. Surely, US exports will increase, at least marginally, with an even more devalued dollar, but the dollar can only undergo so much devaluing before there is trouble.

Higher priced goods combined with a further devalued dollar seems like it would be nothing but further trouble for an America that could do with a bit of stability. Usually I'm a big fan of free competition and globalization guided by free trade, and it is hard to predict the actual effects of revaluing a currency, but perhaps the CCP's policy of a gradual revaluation is sensible. Globalization guided by free trade is a sensible goal, but just because that is where the world should be headed does not mean that is where the world should now be.