Seattle International Film Festival

Join us for the world premier of the documentary film of the life of Washington’s own legendary “China Hand” – Sidney Rittenberg.  Sidney and Yulin plan on hosting a Q&A at the screenings so if you’re in the Seattle area please try to attend. And please forward this email to friends! For more information or to purchase tickets click on the appropriate link in the announcement below.

VENUES

SUNDAY
MAY 27
5:30PM
HARVARD EXIT

BUY TICKETS

THURSDAY
MAY 31
4:30PM
PACIFIC PLACE CINEMAS

BUY TICKETS

Click HERE to Register.

“Yr. humble and obedient, etc…” undertook his first 2012 sojourn to China in the latter half of March, going first to Seattle’s sister city, Chongqing, with a delegation of 50+ led by Seattle’s Mayor Mike McGinn. It was the first visit to Chongqing by a Seattle mayor since Charlie Royer went there in the mid-‘80s. After five days in Chongqing, I proceeded to Beijing where I joined a clean tech delegation from the Seattle area and accompanied them to various sites and meetings in Beijing, Tianjin and Shanghai.

CHONGQING

The city of Chongqing had changed considerably since I last visited nearly ten years ago. Although the total population of the municipality (an area roughly the size of South Carolina) now topped 32 million, the core urban area had a population of “only” 6.5 million. That said, urbanization was proceeding rapidly in Chongqing and it now claims to be the most rapidly growing urban center in China. This was certainly evident from all the buildings, highways, bridges across Chongqing’s two rivers and rapid transit projects (including both subways and monorails) under construction. Also being rapidly developed is Chongqing’s Two Rivers New Area, a special zone to attract new foreign and domestic business based on the same model as Tianjin’s Economic Development Area and Shanghai’s Pudong. Like its two predecessors, Two Rivers will offer special inducements such as duty free importation, tax concessions and “one stop” administrative services to help companies get established there.

Driving Chongqing’s growth and development is partly its geographic location – the main gateway to China’s western (and still comparatively undeveloped) regions. Chongqing’s elevation to a province-level municipality (joining Beijing, Tianjin and Shanghai as the only province-level municipalities) occurred in 1997, at about the same time that the Three Gorges dam project was wrapping up and the central government announced a new policy to make modernization of China’s western regions its top development priority.

Another feature of Chongqing’s economy that is becoming increasingly important is its focus on making producer and consumer goods for the domestic market. Although both domestic and foreign companies located in Chongqing engage in some foreign trade, its leading industries – autos and motorcycles, metals, heavy machinery and electronics – are primarily for Chinese customers. This feature of Chongqing’s economy raises the city’s importance to the national economy as the central government pursues restructuring away from the growth drivers of fixed asset investment and exports and more toward domestic consumption. This factor, together with the quantum improvements in transportation and communications serving Chongqing and the surrounding area strongly indicate that the city may well become China’s inland Shanghai.

Our visit to Chongqing coincided with some political turmoil there. Chongqing Party Secretary and political rising star Bo Xilai had been fired from his position and denounced at the National People’s Congress by Premier Wen Jiabao just days before our arrival. One of Chongqing’s vice mayors, Wang Lijun, had been arrested after having apparently fled to the U.S. Consulate General in nearby Chengdu shortly before that. Right up to the time of our arrival in Chongqing on March 21 we weren’t sure what was going on there, or who was left in the city to host our delegation. Our fears were allayed by the Chongqing Foreign Affairs Office which assured us that everything was back to normal and that Chongqing’s Mayor, Huang Qifan, would indeed meet with our mayor and several members of our delegation (he did, but did not host the follow-on banquet, which was instead hosted by the Foreign Affairs Office Director General Zhu Xiyan).

Our delegation of over 50 persons was divided into several components. One subgroup was focused on green construction and sustainable cities; another represented the Seattle Chinese garden, work on which thus far has been strongly supported by the Chongqing Municipal Garden Bureau; a third represented the Seattle school system and the local organization affiliated with the Obama administration’s “100,000 Strong” initiative; a fourth group consisted of representatives of the Seattle-Chongqing Sister City Association; and the final group consisted of representatives of area businesses seeking to familiarize themselves with the Chongqing business environment and possible business opportunities. It does not stretch credulity to say that all groups left with good takeaways.

• The greenbuild/sustainable cities group had a morning-long meeting and lunch with counterpart organizations and businesses and secured a memorandum of understanding pledging both sides to work cooperatively and exchange information on environmental protection, sustainable development, intelligent buildings, energy efficient building codes and to explore together the best approaches to green buildings and development. The two sides also pledged to promote cooperation among corporations and organizations in the two cities including staging regular seminars and exchanges of missions. The two sides agreed to try to stage at least one event each year to showcase services, products and energy efficient and sustainable technologies.
• The garden group commemorated the grand opening of the Seattle garden in Chongqing, and secured the cooperation of the Municipal Garden Bureau on further development of the Seattle Chinese garden, including a pledge to press the central government for its assistance as well.
• The education group also signed a memorandum of understanding with the Chongqing Municipal Education Commission that included a pledge of up to sixty scholarships for Seattle high school students to study in Chongqing. With Mayor McGinn they also visited Seattle’s sister schools in Chongqing – Renren Elementary School and Nankai High School (the latter said it is planning to send some if its students to Seattle later this spring).
• The Sister City Committee developed plans with its counterpart in Chongqing to engage in further exchanges, including special events in the coming year to mark the 30th anniversary of the sister city agreement.
• The business delegation received highly informative briefings from municipal government and U.S. Consulate General officials, were able to engage in candid conversations with foreign companies already doing business there on the business environment there, and visited Chongqing’s Two Rivers New Area where they were briefed on the opportunities there.

The past year has seen a number of events that have helped strengthen and enrich the relationship between Seattle and Chongqing. One of Chongqing’s vice mayors was part of a delegation of Chinese municipal officials that came to Seattle in April 2011 to participate in the U.S. National League of Cities’ conference here. In May 2011, another of Chongqing’s vice mayors visited Seattle to attend the formal opening of the Seattle Chinese Garden, much of the construction for which had been undertaken by Chongqing artisans using materials from Chongqing. In November 2011, Seattle Deputy Mayor Darryl Green led a delegation to Chongqing to attend the grand opening of Chongqing’s International Garden Exposition, which included in its overall scope a plot with typical Seattle vegetation designed by the Seattle landscaping firm Jones and Jones. Chongqing responded with a delegation to Seattle in February this year led by Chongqing Municipal Secretary General Chen Heping, which included visits to Microsoft and Amazon in pursuit of Chongqing’s overall plan to incorporate cloud technology in its IT platform. Capping the exchanges, then, was the Mayor McGinn-led delegation to Chongqing in March, which was considered important enough, we were told, to attract the attention and approval of “China’s highest authorities.”

The exchanges over the past year have clearly reinvigorated the relationship between the two cities and have opened up opportunities for both cities. The Chongqing Economic and Technological Development Zone has just announced it is sending a high level delegation to the Seattle area, and will hold detailed discussions with Microsoft while here. This is but one indication of the pull that Seattle holds for Chongqing as it ramps up its IT infrastructure and begins to meld it with far reaching plans to re-set the city on an environmentally sustainable footing. Here it is clearly prepared to look to Seattle as a model, and has committed under the MOU signed during Mayor McGinn’s visit to work with our city government, academic institutions and businesses as it goes forward. Spin-offs from this will open doors for a wide array of area companies. As well, the recent exchange of visits has helped Seattle position itself as a leader among American cities in terms of educational and cultural collaboration with China. Our dream of a showcase Chinese garden has come a step or two closer while Chongqing’s tender of scholarship for Seattle students may well be a first for the “100,000 Strong” initiative anywhere in the U.S.

For a state and city that looks to the international marketplace for its economic well being as much we do, China has emerged over the past ten years as our leading partner and leading market. We are fortunate to have as our sister city in this market a municipality of the size and importance of Chongqing. Exchanges over the past year have clearly reestablished momentum in this relationship and we should work to keep it moving forward – for the benefit of both sides.

BEIJING, TIANJIN AND SHANGHAI

Following the visit to Chongqing my next stop was Beijing where I joined a Seattle area clean tech delegation jointly organized by the Washington State China Relations Council, the Trade Development Alliance of Greater Seattle, the Washington Clean Tech Alliance and the Northwest Energy Angels. Washington State has become a global leader in clean technology including for alternative energy sources, energy and water efficient building construction, smart grid and smart city technology and biotechnology. The purpose of this mission was to give clean tech practitioners and investors from our area a look at China and what it’s doing in the clean tech area, as well as to examine opportunities for cooperation and investment.

Our delegation met with the U.S. Embassy, the State Council’s Development Research Center (the Chinese government’s top economic think tank and responsible for the inputs to the five year plans), energy and clean tech consulting firms, China’s State Grid (its principal power company with over one billion customers), wind, solar and battery companies and several clean tech-focused venture capital firms.

At the 30,000 foot level we learned that American businesses operating in China are for the most part optimistic about their near-to-mid term prospects. 54 percent of those polled by the American Chamber of Commerce are already expanding, or plan to expand, to second- and third-tier cities in China. Basic optimism aside, American businesses remain concerned about inadequate protection for their intellectual property (including brands, patents and proprietary technologies); the availability of human resources and the rising cost of labor; obtaining necessary certifications and approvals; and the somewhat uncertain and oft-changing regulatory environment.
Among the significant economic trends currently present in China are a slowdown in GDP growth this year and next (although there seems to be little concern about a hard landing). Along with slowing growth, China’s foreign exchange reserves are also declining in part because of China’s shrinking global trade surplus and also because of a rising tide of outbound direct foreign investment by Chinese firms. Slowed growth is partly due to declining exports and slowing construction; but the central government’s renewed efforts to rebalance China’s economy is also likely a factor. By 2010, China’s top leadership had reached the conclusion that growth driven principally by fixed asset investment and exports was rapidly becoming unsustainable, a lesson driven home by the ripple effects of the global financial crisis of 2008-2009.

Rebalancing is intended to turn growth more in the direction of domestic consumption. This in turn requires that China invest more in items like health care, education assistance, social security/retirement and low cost housing, programs for which there are still relatively few beneficiaries in China. As a result, the propensity to save among Chinese is off the charts at over 40 percent of income, while the propensity to consume is very low (domestic consumption accounted for only 35 percent of China’s GDP last year – less than half the proportion of developed countries). The adjustments necessary to rebalance the economy, however, will slow growth at least in the short run, and also collide with the vested interests of huge state owned enterprises and conservative elements in the Chinese Communist Party who prefer strong central control of the economy and the political system. Although rebalancing is an integral part of the current five year plan (2011-2015) as it was the previous one, relatively little headway has been made so far.

Urbanization is another compelling trend in China today. For the past decade and for the next decade at least, average annual rural to urban migration has been and will continue to be around 20 million. In 2010 there were 171 cities in China with a population of one million or more; about 47 percent of the entire population lived in cities then. Plans call for an urban population constituting 51 percent of the total by 2015, but recent figures released by China indicate they may have hit that target already. This demographic trend has several important implications, not the least of which being that between now and 2030 China will have to expand its urban environment by roughly the equivalent of the population of the U.S. It also portends a dramatic increase in energy intensity since urban residents use far more energy than their rural counterparts.

Along with the pressures of urbanization and the need to rebalance the economy, China’s leadership is also facing growing discontent from the widening income gap (as one example of this rural residents’ incomes are only 1/5 of that of urban residents), the inequitable household registration system that disadvantages rural residents and those who have unofficially changed their residences to the cities (most rural-to-urban migrants fall into this category) and the cumulative effects (including those on health) of China’s badly damaged environment. Over the next 12 months, China’s leadership lineup will undergo a major change; the new lineup will be faced with the daunting task of effectively addressing these issues, and will likely have to do so sooner rather than later.

We learned about China’s current (12th) Five Year Plan from several sources. Of particular interest to our group were the presentations on the plan’s treatment of low carbon development. China now leads the world in petroleum importation – over 50 percent of the oil it sues today is imported. That figure will grow to 70 percent by 2020. Apart from the dollar cost to China of fossil fuel dependency, its use of fossil fuels is creating huge problems for China’s environment, including pollution based health problems and rising morbidity/mortality rates, and other problems like acid rain.

To try to address these problems, China has adopted some ambitious goals, including:

• Reducing carbon emissions per unit of GDP by 40-45 percent by 2020, compared to 2005;
• Boosting non-fossil fuel energy sources to 15 percent of all energy by 2020; and
• Substantially increasing forestation in China.

What does “low carbon development” mean in China?

The 12th Five Year Plan specifies by 2015:

• Reducing carbon intensity by 17 percent;
• Substantially reducing energy consumption in industry, in particular in such high energy consumers as the steel industry (government subsidies will be employed to help meet this goal);
• Improve building construction and consumer energy use;
• Boost wind power as an energy source from 40 GW in 2010 to 100 GW;
• Increase the use of solar energy from 0.3 GW in 2010 to 15 GW;
• Carry out energy pricing reforms for electricity and gas;
• Deploy some form of carbon trading, although what system exactly will be used – e.g., cap and trade – is still much disputed as is the use of a carbon tax.

A special emphasis will be placed on relevant industries (including, presumably subsidies, tax incentives and other government tools for promoting rapid development): new energy; the environment; autos (especially EVs); modern knowledge technologies; bio tech; and high speed transportation. In all these favored sectors will constitute 8 percent of GDP by 2015 and 15 percent by 2020.

Building energy efficiency standards are currently good, but are not well enforced. This is changing for the better even as stricter standards are being adopted. Also energy pricing is being further rationalized and carbon trading is being gradually introduced. The government has set the goal of one million EVs on China’s roads by 2015, though this goal is probably too ambitious.

China has long maintained an industrial policy, attempting to pick winners and losers among various industries and within industries, among competing state owned enterprises. The 12th Five Year Plan identifies seven strategic industries that will enjoy government patronage:

• Energy conservation and the environment
• New energy
• Electric vehicles
• Biotech
• Medical technology
• Next generation IT, and
• New materials

State Grid, China’s largest power company covering 88 percent of the country’s area, is the largest utility in the world and last year distributed over 2700 terawatt hours of electricity. The company is concentrating is efforts on overall construction of a smart grid by 2015. Important elements of State Grid’s smart grid plan include integrating wind, solar and other non-fossil fuel energy sources and incorporating ultra high voltage transmission. 287 UHV pilot projects are now underway in 26 cities operating 1000 KV lines and they are working quite well. Demonstration projects are also underway integrating 100 MW of wind, 40 MW of solar and 14 MW of energy storage into the grid. China currently has the most advanced system in the world for using UHV transmission and non-fossil fuel energy sources (and is way ahead of the U.S.). State Grid is also building a fiber optic network form smart gird information/dispatch that will also be used eventually to carry telephone, cable TV and other signals a well.

China is also doing very advanced work with battery technology, both for energy storage and for commercial use in consumer items and EVs. Prudent Energy Company, for example, has developed a storage battery based on use of a vanadium electrolyte. This type of battery poses little or no environmental risk and is nearly 100 percent recyclable. Each battery has a lifespan of 15-20 years, or more than 100,000 charge/discharge cycles. The technology is ideally suited for storing and stabilizing wind and solar power.

Lishen Battery Company is using improved lithium ion technology to make batteries for electronics manufacturers (including Foxconn and Dell) as well as EV batteries. Lishen batteries currently power a vehicle for up to 200 KM (125 miles) between charges, but new technology the company will soon be incorporating into its batteries will double the distance between charges. Lishen has been cooperating with Washington State’s Demand Energy for the past two years on smart grid and energy storage to develop distributive energy systems.
Among the venture capital firms we met there are differing investment strategies. Chrysalix, a clean tech-focused, ten-year old investment fund, looks for returning Chinese students and academics that are bringing back with them new technology ideas with commercial possibilities. In addition to providing startup capital, Chrysalix also helps nurture and manage the startups in which they invest focusing in particular on protection of proprietary technology.

Tsing Capital, on the other hand, invests predominantly in early growth state companies where the technology has already been commercialized with some initial product sales. They are not interested in basic technology still under development, such as Chrysalix is. Moreover, virtually all of their investments are in foreign origin/owned technology (although frequently with some Chinese modifications). This also distinguishes their investment model from Chrysalix’ whose technologies are predominantly Chinese owned albeit by returning Chinese students.

And finally, some random thoughts from the consulting firms with which we also visited.

• Although energy – and in particular, clean energy – grabs most of the attention focused on China these days, the most critical issue facing China by far in the decades ahead is water. With only 2100 cubic meters of water per person, China’s available water is only ¼ the global average and is not evenly distributed.
• Over the next 20 years, China will add 50 new cities of over one million people; fifty thousand more skyscrapers; and 170 more mass transit systems. In that time one of every two new buildings constructed in the entire world will be in China.
• As a talent pool base Shanghai has become China’s Silicone Valley. Students along with overseas Chinese academic “A” players returning from abroad are being offered incubators for their new ideas, high salaries and generous allowances. Academics are also given high status and recognition and the opportunity to run their own labs staffed with top graduate students. Despite this influx of returning “sea turtles,” qualitative improvements in Chinese innovation and creativity are likely to be made only gradually over time.

The clean tech mission participants – most of whom had not been to China before – were uniformly impressed by what they found there. For all the progress that China has made over the past 30 years – and no country in history has ever experienced more growth and development in such a short period of time – there is still a very long way to go, as we also discovered. But, in the area of most interest to our group, clean technology, China is on the way to becoming a world leader. For us this presents both opportunities and challenges.

Click “more” for details and trip notes.

MARCH 2012 TRIP NOTES

3/22 Chongqing with Vice Mayor Wu Gang

Chongqing’s urban population was about 2 million 30 years ago; now it is 6 million. In 8 more years it will be over 10 million. In recent years 100 million square meters of new housing has been added; there is currently 200 million square meters under construction.

Seattle’s “living buildings” concept is very much in line with Chongqing’s goal of achieving “harmony between man and nature” in construction. Chongqing is excited about Seattle’s living building technology and wants to partner with us in development and deployment.

Meeting with Mayor Huang Qifan

Mayor Huang made welcoming comments.

Mayor McGinn noted the purpose of his and his delegation’s visit to Chongqing was to mark the upcoming 30th anniversary of the sister city relationship between Seattle and Chongqing, to attend the dedication ceremony planned for Chongqing’s Seattle garden, to expand cooperation between the two cities in education and to seek a cooperation agreement with Chongqing on green building and sustainable cities.

On the last point he noted that Seattle is already one of the world’s greenest cities with a high percentage of buildings already exceeding the LEED standard. He added that the world’s “greenest” building, the Bullitt Center, is now under construction in Seattle. When completed it will be carbon neutral for energy and net zero for water.

Mayor Huang welcomed Seattle’s interest in cooperating on sustainable cities technology. He then launched a 30-minute soliloquy on Buddhism and Christianity. Although he is obviously well versed in both religions and drew a number of comparisons of the two in terms of values and teaching, it wasn’t clear to us where that discussion was headed; perhaps he was seeking to illustrate that Chinese and Americans are more alike than not. At the end of his dissertation he again welcomed us to Chongqing, there was an exchange of gifts between the two mayors, group photos were taken and then our delegation went off to dinner hosted by the Secretary General of the Foreign Affairs Office, Mr. Zhu Xiyan.

Welcoming Banquet with Secretary General of the Foreign Affairs Office, Mr. Zhu Xiyan.

In his toast at the banquet with SecGen Zhu, Mayor McGinn cited the comments made earlier by Mayor Huang and added that we should respect both Buddhism’s and Christianity’s respect for cultural diversity.

At Greenbuild Conference 3/23

VM Wu Gang: Energy conservation is a major focal point of Chongqing’s new building construction. Green building will account for 4.5 million square meters of construction between now and 2015. Seattle’s state of the art technology would be an excellent model to help meet Chongqing’s own greenbuild, low carbon construction goals.

Mayor McGinn: Seattle City Light was the first carbon neutral utility in the U.S. Seattle took the lead and got more than 100 cities to pledge carbon reduction. Seattle has been cited by President Obama as one of the leading cities in green construction. The “living building” standard: electricity 100 percent from sunlight striking the building; water 100 percent from rain falling on the building.

At the conclusion of the opening comments, representatives of Seattle and Chongqing signed a memorandum of understanding. The MOU called for the two sides to work cooperatively to increase mutual understanding of issues related to environmental protection, sustainable development, intelligent buildings, to share experiences in promoting green buildings, to share information regarding energy efficient building codes and to explore together the best approaches to green buildings and development. The two sides also pledged to promote cooperation among corporations and organizations in the two cities including staging regular seminars and exchanges of missions. The two sides agreed to try to stage at least one event each year to showcase services, products and energy efficient and sustainable technologies.

With Education Commission Secretary General Zhao Weiliang

Chongqing has had many mayors from foreign countries visit Chongqing, but Mayor McGinn is the first to visit the Education Commission. Seattle has big name companies and a world-class port. Chongqing is also a leader in several fields. For example, Chongqing manufacture of motorcycles and autos is becoming the largest in Asia. It is also becoming the world leader in computer manufacturing with Acer, Foxconn and HP. By 2013 (?) Chongqing computer factories will be making 100 million laptops per year, and will be the world leader. We are also developing robust biotech and other high tech industries.

Chongqing is also rapidly becoming a major transportation hub for China and all Asia. For example there is now a direct rail link from Chongqing across Asia to Europe. Given our similarities and complementarities there are great opportunities between Seattle and Chongqing.

Chongqing’s education system: there are a total of 6.4 million students, faculty and administrators in the Chongqing education system. This is nearly one-fifth of the entire population. 800,000 of them are in higher education.

There have been several recent breakthroughs in the Chongqing education system. In 2008, the city went to 9 years’ compulsory education. 95 percent of junior high graduates go on the senior high. Within the next several years compulsory education will be raised to 12 years. Chongqing expects to catch up with Beijing and Shanghai soon on the education front. Already 92 percent of senior high graduates go on to some higher education, at least. During his 8 years in office Mayor Huang Qifan has become known as the “education mayor” because of the heavy emphasis he has placed on strengthening the city’s education system.

On international cooperation in education, SecGen Zhao said CQ has cooperation with over 200 education institutions in 60 countries. There are 6000 international students in CQ, tops in western China. There are also 2000 foreign teachers in C Q. Each year the municipal government sends about 500 scholars abroad. UW, Seattle U and Seattle pacific University have education exchange programs with SW University and CQ University. There are currently 120 SPU students at CQ SW University. More than 100 Nankai Middle School students have studied at Nankai’s Seattle sister school, Chief Sealth.

Zhao identified five areas for cooperation with Seattle on education:

• Fully implement Obama’s 100,000-Strong initiative;
• Support more student/faculty exchanges between the sister schools of each city (he noted, though, that given the population disparity between the two cities, there should probably be 2-3 CQ students going to Seattle for each Seattle student going to CQ);
• Stage Chinese language competitions for Seattle students and English competitions for CQ students;
• More voc ed programs focused on teaching tech skills in high demand by employers; and
• Establishing joint S&T research programs.

In reply Mayor McGinn the connection between 100,000-Strong and Seattle-Strong, operated by Seattle’s One World Now, emphasizing that Seattle-Strong had become one of a handful of programs nation-wide to be recognized by the Obama administration as a leader on 100K strong. He noted, however, that until now One World Now had not sent any students to CQ and he said that we hope to change that soon. He said one of our mission objectives was to engage the CQ Ed Commission to consider providing scholarships that would enable OWN to send Seattle students to CQ.

Zhao replied that CQ was prepared to provide scholarships for Seattle primary and secondary (only) students to study in CQ. He mentioned that CQ has a special scholarship program for students from CQ’s sister cities called the “Mayor’s Scholarships.” Approximately 40-60 of these scholarships could be set aside for Seattle students including those in the OWN program. The scholarships include free tuition and subsidized or free living expenses in CQ.

Zhao noted the municipality’s “12+2 strategic industries” plan and added that the city was in great need of qualified engineers and technicians to carry out this development plan. One of the strategic industries is computer manufacturing. Zhao said that most of the major manufacturers (he specifically mentioned HP, Dell, Foxconn/Apple and Acer) were now making computers in CQ and that by 2015, CQ would be making 100 million laptops will be made in CQ each year – 1/3 of the world’s total production.

Turning to air transportation Zhao said that CQ’s is currently the 8th largest airport in China by number of pax (20 million) per year. CQ’s emergence as one of the country’s major air transport hubs is creating a need for training in aircraft maintenance and repair, a training specialization he noted for which the Seattle area is famous.

Other potential areas for training cooperation cited by Zhao included “smart city” energy use and conservation, for which Microsoft was becoming a leader in relevant software. He saw Starbucks as a model source of training for CQ’s emerging service/retail industry. He hoped the two cities could cooperate to develop jointly recognized vocational training and certification programs.

At Renren Primary School

Renren is sister schooled with Beacon Hill International School. It is considered one of China’s model schools and has several campuses in Qhongqing. Altogether there are over 5000 students, faculty and staff.

When our delegation arrived at Chongqing, a troupe of students performed a 30-minute skit in English (and, I might add, very good English) to welcome Mayor McGinn and the Seattle delegation. They had obviously done their homework before our arrival because the skit featured many precise references to Seattle, including a clever allusion to our mayor’s wife’s bicycle having been recently stolen.

At Nankai Secondary School

Nankai has over 5000 students and 400 teachers. It is one of China’s top high schools academically and also does well in national high school athletics. For example, the girls’ basketball team finished 5th nationally last year. The school has an advance placement program and also features many extra curricular activities such as a business and finance club and a baseball club.

Nankai has long had a sister school relationship with Seattle’s Chief Sealth High. Nankai used to receive funds from the U.S. State Department for student exchanges with Chief Sealth, but the money ran out in 2006 and so no student exchanges between the two schools have occurred since then. Recently the For Foundation has stepped in with funds so a Chief Sealth group will come to Nankai in April.

End of Chongqing visit

3/26 in Beijing with the Clean Tech mission

China Green Tech briefing led by Ellen Carbury

Noting McGinn’s just concluded visit to CQ, Carbury said that the CQ Two Rivers New Development Area was the third nationally mandated development area in China after Shanghai’s Pudong and Tianjin’s TEDA. Two Rivers, though, is being developed with environmental protection and energy and water conservation as drivers in addition to promoting economic development. She added that this is creating numerous opportunities for greenbuild and clean tech, both domestic and foreign.

China Green Tech is the only recognized China-international collaboration seeking solutions to China’s energy and environmental problems. Green tech markets in China cover over 300 solutions categories and present opportunities valued at RMB 6 trillion annually.

China Green Tech Report 2012 will be out shortly.

Water will be the single most important issue for China (and much of the rest of the developing world) for the next 50 years (in China’s case the problem is already here and nearly full blown). Groundwater remediation is critical and the central government has voiced a strong commitment to it. Last year the State Council allocated RMB 4 trillion for investment in the water sector.

Carbury noted that the drive for adequate, clean water might have significant consequences for various industries and even individual companies. She cited a local Coca Cola exec who worries constantly about how to keep Coke relevant in China – “Coke needs China, but China doesn’t need Coke.” It takes 70 percent more water than is contained in the finished product to make Coke. Another industry that may conflict with China’s drive to secure and sustain water is shale gas and oil. Although there are significant deposits of oil/gas bearing shale formations in SW China the huge amounts of water required for extraction and the resulting pollution may limit the extent to which China pursues this resource. Similarly a number of industries are coming under much closer scrutiny and sanctions because of the water pollution they create, especially heavy metal pollution.

With 2100 cubic meters of water per person, China’s available water is only ¼ the global average and it is not evenly distributed. Water conservancy is now a top priority in the national development context, but implementation at the local level is very uneven. Sustained, high economic growth is still the principal driver for most local governments.

On the energy side China is entering a period of more sustainable and diverse growth. Specific energy targets are spelled out in the 12th FYP and one target is particularly significant (if it can be met): by 2014 11.4 percent of China’s energy will come from non-fossil fuel sources.

At the offices of State Grid – briefing by Mr. Shen Jiang, Deputy Director General of the Smart Grid Department

State Grid’s smart grid is still in its early development state but covers 1.56 million persons. State Grid’s grid covers 88 percent of China’s area. Its total assets are valued at over two trillion RMB (about $300 billion) and annually sells nearly 2700 terawatt hours of electricity. It is the largest utility in the world. Last year’s income was greater than 1 trillion RMB (about $150 billion).

For the current (5th) FYP, State Grid’s priority is to concentrate on overall construction of a smart grid by 2015. The key to the success of the plan will be overall standardization of smart grid technology for system construction. Standards have already been set for more than 470 industrial and system categories including adoption of 12 IEC/IEEE standards. These standards are being used, inter alia, to guide equipment manufacturers and systems providers. A key component of the emerging smart grid will be demand side management and a national conference was recently convened in Nanjing to discuss this subject. System testing is currently focused on integrating wind, solar and other non-fossil fuel sources with the grid. Tests are also being run on ultra high voltage transmission, another key element of the emerging smart grid.

On the UHV transmission side, 287 pilot projects are now being tested in 26 cities operating 1000 KV systems and they are working quite well. These systems are unique in all the world. Demonstration projects are also underway integrating 100 megawatts of wind, 40 megawatts of solar and 14 megawatts of energy storage – the most advanced and largest scale demonstration projects for clean energy ever.

There are currently 65 smart substations in operation transmitting 110-750 KV. Smart distribution projects can be found in 23 cities. There are also 28 smart neighborhoods (“shequ”) operating in Beijing and Shanghai, serving a total of 40,000 households. The Shanghai to Hangzhou corridor will be the first electric vehicle charging/swap system for privately owned vehicles.

Smart grid information/dispatch will be built on a fiber optic network that will also carry telephone, TV and other signals. The first phase of this network is already operating in Shanghai and serves 140,000 customers. The plan is to install this network in the largest cities first and gradually expand outward to create a national net.

State Grid is seeking international cooperation on wind and solar power. Specifically, they are seeking help with installation of wind and solar facilities, integration of wind and solar-generated power into the grid, and with analysis and tuning of wind and solar performance (they have had some problems with the performance of wind lately). They are also seeking international cooperation with long distance high voltage transmission.
There are no basic technical problems meeting wind and solar targets, but there are related policy and management issues. For example, deploying individual household solar energy equipment becomes problematic when well over 90 percent of urban households are in high-rise apartment buildings.

Mayor McGinn: For the past several decades our local utilities have tried to support economic growth within existing electric generating capacities. Adopting smart grid technologies and practices will become increasingly essential to continuing this development model. Seattle has been nationally recognized as a leader in the adoption of smart grid technology use. We already have the first carbon neutral utility.

Our chief problem has been integrating hydro/wind/solar generated electricity into the grid. Sometimes generation from renewable sources exceeds grid capacity; other times including during peak demand there is insufficient wind and sunlight to meet the excess.

Shen expressed optimism that State Grid can incorporate large-scale power storage. The technology is there but the cost of it and the equipment containing it is too expensive to be commercially viable. Going forward much will depend on the development and deployment of relevant new materials.

Steve Reynolds observed that China is way ahead of the U.S. in the development/deployment of smart grid. America’s adoption of smart grid technology is complicated immensely by the fact that our grid is a patchwork of many local grids making it very difficult to standardize. China’s smart grid research is very advanced and will benefit the world.

Shen concluded by noting that the U.S. had done most of the work on formulating smart grid international standards and added that State Grid is seeking more cooperation with local U.S. utilities. There is more information available on State Grid in the WSCRC office for those who might be interested.

At Guodian

Guodian began as a JV with Westinghouse and Siemans, but Guodian bought out its foreign partners and is now independent. Headquartered in Beijing, Guodian has an R&D center, a national laboratory, six wholly owned subsidiaries and three holding companies. A Guodian subsidiary is the eighth largest wind power turbine manufacturer globally and the third largest in China. It has six 1.5 MW generators installed in the U.S. and feeding the grid. It has also designed or co-designed 2.0 and 3.0 MW double-fed turbines, a 3 MW permanent magnet direct drive turbine and a 6 MW turbine (most turbine units worldwide generate no more than 2 MW). It has just received an order for wind turbines in South Africa. Guodian makes its own turbine blades.

At Tsing Capital – Shelby Chen

Tsing is located on the campus of Tsinghua University and originally tried to call itself “Tsinghua Capital,” but the university authorities objected to this expropriation of the university’s name and so they shortened it to Tsing Capital. Tsing established China’s first environmental investment fund in 2002 initial subscriptions totaling $13 million. A second round of fundraising in 2004 generated $30 million. A third round in 2008 raised the total to $228 million and a fourth in 2011 to $350 million. There have also been two rounds of RMB fundraising: 400 million in 2008 and 1.5 billion in 2011.

The Kadoori family and the ADB raised the first round of funding and the ADB was also involved in rounds 2-4. Most of the other investors have been foreign (including the nearly 50 percent total contributed by foreign governments), but round 4 also have some Chinese high net worth individual investors. Round 4 also had some pension fund investment; government money is gradually drying up.

China’s energy consumption per unit of GDP is 3 times that of the U.S. and 6 times that of Japan. There is enormous room for efficiency gains. China’s investment in clean energy was $55 billion in 2010, far larger than such investment in the U.S. and other developed countries. Most of this investment, however, went to SOEs and not to private firms.

70 percent of Tsing’s investment portfolio is in the early growth stage, where the technology has already been commercialized and there have been some sales, and not in basic technology development stages. Virtually all of their investments are in foreign origin technology, often with some Chinese modification. The business models for their investments, however, are 100 percent Chinese domestic.

3/27 at China New Energy Chamber of Commerce

Maggie Wu (Wu Dan or Fan), initial briefer; Li Hujun, Chair; Zeng Shaojun, SecGen; Shi Limin, DepSecGen (and principal briefer).

CNECC members include virtually all of the leading alternate energy equipment companies in China such as Suntech and Prudent Energy.

China’s current solar cell generating capacity is 40 GW. 23 GW was actually generated in 2011. In 2011, China produced and deployed 217 million square meters of solar cells, equal to 80 percent of global production/deployment.

At Prudent Energy Company, Mr. Yu Ping, briefer.

China’s annual capacity for electric storage battery production is 30 mw/200 mwh. Chinese electric storage battery manufacturers realized sales equal to 20 mwh in the past 12 months. Yu estimated the total global market for electric storage batteries at $200 billion; he added that at least 10 percent of all wind and solar generating capacity will require battery storage.

Prudent’s storage batteries utilize VRB technology based on vanadium electrolyte. There is little or no environmental risk – battery components are nearly 100 percent recyclable. Each battery has a lifespan of 15-20 years, or more than 100,000 charge/discharge cycles.

At Lishen Battery in Tianjin. Qing Xinguai, President; Richard Liang, ExecVP.

Lishen, using lithium ion technology, is the battery supplier to Apple/Foxconn, HP, Dell and other electronics manufacturers. It is now among the top five worldwide in supplying LI ion batteries for portable devices. They are also among the leading suppliers in China of electric vehicle (EV) batteries and electric storage batteries. The Tianjin Municipal Government has committed to converting 7000 of its buses to electric power. The first 500 will be converted this year. Lishen has the contract to supply the batteries.

Lishen batteries will power a vehicle for up to 200 KM (125 miles) between charges. New technology which Lishen is incorporating will enable vehicles to travel up to 400 KM between charges. Its car batteries have a lifespan of up to 100,000 miles.

Lishen has been cooperating with Washington State’s Demand Energy for the past two years on smart grid and energy storage. Mr. Qin asked if the federal and/or state governments would subsidize the development/deployment of distributive energy systems such as that which Lishen and Demand Energy are currently co-developing. The answer is probably not in the near term. Political controversy in the U.S. over subsidies aside, the grid in the U.S. is actually a welter of local fiefdoms each with its own priorities and regulations that defies macro-scale solutions.

The safety and performance of lithium ion battery technology is well established.
The cost of production is the main issue. A secondary issue for Lishen is ramping up the speed of production to meet the rapidly growing demand. Increasing production will drive down the cost of materials, which, in turn, will help lower production costs. Because production costs are currently high, the Chinese government must subsidize EVs, but eventually declining battery production costs and the rising price of petroleum will obviate the need for EV subsidies.

The lithium Lishen is currently using is source exclusively to Chinese mines; none of it is being imported.

The next big breakthrough in battery technology will come from new materials. Next generation batteries should first be applied to small-scale batteries (e.g., for electronic devices) where the embedded technology can be tested and proven, before use in large-scale applications like EVs and power storage.

3/28 at U.S. Embassy-Beijing. Senior Commercial Officer Rosemary Gallant, briefer

59 percent of U.S. businesses currently operating in China are optimistic about the five-year business outlook. 54 percent of them are expanding, or plan to expand, to second- and third-tier cities during that time. Among their chief concerns are:

• Inadequate protection of their intellectual property;
• Availability of human resources and the rising cost of labor;
• The often opaque process for gaining necessary certifications and approvals; and
• The uncertain and frequently changing regulatory environment.

China’s GDP expanded by 10.3 percent in 2011 and is forecast to grow by 7.5 percent in 2012. (Note: anticipating that the impact of economic rebalancing which the central government had pledged to pursue vigorously in 2011 as a core feature of the 12th Five Year Plan, it had forecast growth for last year at 7.5 percent. That the actual growth exceeded forecast growth by nearly three percentage points is an indicator that rebalancing plans last year probably made little headway. The projected growth for this year is predicated in part on renewed efforts to launch economic rebalancing measures, and in part on lowered expectations for export growth whether rebalancing moves ahead or not. See also the 6th bullet in the paragraph below.)

U.S. exports to China topped $100 billion for the first time ever, but our trade deficit with China continued to grow as Chinese exports to the U.S. reached approximately $300 billion.

China economic trends:

• Foreign exchange holdings are declining for the first time ever. China’s global trade surplus is also declining and has even been in deficit some months. Longer term, China is destined to become a net importer with a global trade deficit.
• The decline in FX reserves is due in part to weakening exports.
• It is also due to increasing outbound foreign direct investment (Chinese FDI in the U.S. totaled $3.2 billion in 2010 and grew by 60 percent annually on average between 2006 ands 2010).
• Inflation has steadied, but is likely to remain in the 4-5 percent per year range for the foreseeable future.
• There are 513 million “netizens”; 250 million micro-bloggers (most using Sina Weibo, China’s answer to Facebook); and 356 million cell phone users. (Note: these numbers are somewhat dated and by now almost certainly understated. The actual number in each category could be as much as 50 percent higher than those provided in the briefing.)
• Rebalancing the economy has become the highest priority for the Hu/Wen administration during their last year in office. “Rebalancing” in this case means less dependence on fixed asset investment and trade to drive growth and more on domestic consumption. In 2010 domestic consumption accounted for only 35 percent of GDP (about half of that of the U.S. and other developed countries); according to the goals of the 12th Five Year plan domestic consumption should account for about 50 percent of GDP by 2015. The main reason why rebalancing has made so little progress so far is that it directly challenges the vested interests of China’s huge state owned enterprises and conservative party members who favor strong central control of the economy and the political system.
• Urbanization is another compelling trend in China today. In 2010 there were 171 cities in China with a population of one million or more; about 47 percent of the entire population lived in cities then. Plans call for an urban population constituting 51 percent of the total by 2015, but recent figures released by China indicate they may have hit that target already.

Follow on briefing by the Embassy Political Section’s Noah Zurich.

Income inequality in China is breeding increasing frustration and even local unrest. China’s top leadership now admits that this situation is not sustainable, but there is serious debate (and even struggle) within the leadership ranks on how best to deal with this situation. Leftists are pushing for traditional solutions loosely based on the Maoist model (e.g., the programs of recently disgraced Chongqing Party Secretary Bo Xilai), while centrists such as Secretary General Hu Jintao seek to make improvements in the current system under the rubric of “harmonious society.” The centrists are meeting sharp resistance from entrenched interests (see penultimate bullet in paragraph above).

Then, there are the “liberals” (probably including Premier Wen Jiabao) who favor the “Guangdong model” featuring more experimentation with political reform and greater transparency/public participation in governance. The recent events in a village in Guangdong {Province, Wukang, and their resolution is an example. Still, no one among the leaders, no matter how reformist, is advocating that the Communist Party share power, or adopt western style democracy.

By this time in 2013 China will have undergone a major leadership turnover, first at the 18th Party Congress to be held in the fall of this year, and then at the National People’s Congress to be held in march 2013. By then, China will have a new Party Secretary General and President, a new Premier, and a largely new lineup in the Party’s top ruling body, the Standing Committee of the Politburo. The new leadership will face some daunting challenges for which it must find solutions. Real change and reform, however, will occur incrementally over time. There will not be an initial “100 days” honeymoon for the new lineup during which it will have a relatively free hand to implement change, as is generally true for a new administration in the U.S.

Among the more neuralgic issues for hundreds of millions of Chinese that begs sweeping reform is the household registration (“hukou”) system that denies peasants migrating to China’s cities the full rights of residency there, and thus blocking them from access to government subsidized health care, education, housing and retirement benefits. Arrayed against reform of the hukou system are entrenched municipal government interests that see the current, broken system as all upside for them. They get the unskilled labor that populates certain industries, services and construction projects without incurring the social costs of education, health care, housing and retirement benefits.

Nevertheless, the inequalities represented by the hukou system and income distribution (rural incomes are only 1/5 of urban incomes, for example) may be reaching a tipping point in China and the next leadership lineup taking over during the following 10 months may be faced with the choice of reform – or else.

The principal goals of the 12th Five Year Plan include rebalancing the economy, more equitable income distribution and protecting the environment. The plan identifies seven strategic industries that will enjoy government patronage:

• Energy conservation and the environment
• New energy
• Electric vehicles
• Biotech
• Medical technology
• Next generation IT, and
• New materials

At the Development Research Center of the State Council (DRC) – Mr. Cui Xin and Dr. Wang Jinzhao (presenter).

Cui Xin opened the meeting with a brief description of his organization, the Development Research Foundation (DRF). The DRF is a non-governmental organization founded by the DRC to promote international exchanges (including the China Development Forum – the 13th iteration of which was held in mid-March) and to conduct international training for high-level government officials and state owned enterprise executives. For government officials the DRF has an annual five-week program with Harvard University; for SEO executives it conducts a training program with Cambridge University in England. In addition to these two activities the DRF also conducts research on economic and social issues in China for the DRC and the State Council.

The subject of Dr. Wang’s briefing was China’s 12th Five Year Plan, in particular, the plan’s treatment of low carbon development. Why the focus on low carbon development, Wang asked rhetorically? China now leads the world in petroleum importation – over 50 percent of the oil it sues today is imported. That figure will grow to 70 percent by 2020.

Use of fossil fuels is creating huge problems for China’s environment, including pollution based health problems and rising morbidity/mortality rates, and other problems like acid rain.

To try to address these problems, China has adopted some ambitious goals, including:

• Reducing carbon emissions per unit of GDP by 40-45 percent by 2020, compared to 2005;
• Boosting non-fossil fuel energy sources to 15 percent of all energy by 2020; and (among other goals not discussed)
• Substantially increasing forestation in China.

What does “low carbon development” mean in China?

The 12th Five Year Plan specifies by 2015:

• Reducing carbon intensity by 17 percent;
• Increasing the use of non-fossil fuels to 15 percent of all sources of energy;
• Substantially reducing energy consumption in industry, in particular in such high energy consumers as the steel industry (government subsidies will be employed to help meet this goal);
• Improve building construction and consumer energy use;
• Boost wind power as an energy source from 40 GW in 2010 to 100 GW;
• Increase the use of solar energy from 0.3 GW in 2010 to 15 GW;
• Carry out energy pricing reforms for electricity and gas;
• Deploy some form of carbon trading, although what system exactly will be used – e.g., cap and trade – is still much disputed as is the use of a carbon tax.

A special emphasis will be placed on relevant industries (including, presumably subsidies, tax incentives and other government tools for promoting rapid development): new energy; the environment; autos (especially EVs); modern knowledge technologies; bio tech; and high speed transportation. In all these favored sectors will constitute 8 percent of GDP by 2015 and 15 percent by 2020.

Building energy efficiency standards are currently good, but are not well enforced. This is changing for the better even as stricter standards are being adopted. Also energy pricing is being further rationalized and carbon trading is being gradually introduced.

The government has set the goal of one million EVs on China’s roads by 2015, though Wang conceded that this goal is probably too ambitious.

Shale gas/oil development is underway in China. There are large deposits in certain areas of Western China but they are not likely to be fully exploited in the near term due to concerns over the intense use of water in water-scarce China and also resulting water pollution.

There is more information on the Development Research Center at the WSCRC office.

3/29 in the Shanghai offices of Dorsey & Whitney – Chrysalix with Fred Chang and D & W’s Peter Corne

Chrysalix is a clean tech-focused investment fund based in Vancouver and launched about 10 years ago. They are currently forming a combined RMB 100 million China fund with Chinese LP investors including Bao Steel, CNOOC and the National Development and Reform Commission – the Chinese government’s top economic agency.

In the next 18-20 years, China will double its energy use, double its fleet of cars and trucks and double its total of residential and commercial floor space.

China’s stimulus package to revive its economy after the 2007-2008 global financial meltdown totaled the equivalent of $618 billion, more than 1/3 of which helped finance “green” projects. China is already the world’s largest market for clean tech products and services. Under the 12th Five year Plan the government will commit the equivalent of $77 billion per year (for the next ten years) to clean tech investment.

Chang identified Chinese students returning from overseas study and work as a major source of innovation in China. The Chinese government is willing to incubate then and the new ideas they bring with them by offering high salaries and high expense and housing allowances.

As a talent pool base Shanghai has become China’s Silicone Valley.

Chryslix’ role is helping to identify new tech ideas with commercial possibilities that returning students are bringing back with them and providing start up capital. There is some robust indigenous technology among Chinese companies and labs, but Chrysalix’ target market for the most part is helping launch innovative technologies being brought back from the U.S. and EU.

Chrysalix is more than just a provider of start up capital; they also help nurture and manage the companies in which they invest. For example they will help preserve a start up’s “family jewels” technology from IP predators compartmentalizing it so that no component manufacturer or product distributor has all the pieces.

Overseas Chinese academic “A” players are beginning to come back to China as well because they have become “empty nesters” as their children go off to college and because the Chinese government is offering powerful inducements for their return. Among these inducements are excellent salaries and benefits; high recognition and status; and the opportunity to operate their own labs staffed with top graduate students.

Returning students and academicians are having some impact on the academic and research environment in China, but qualitative improvements in innovation and creativity will likely be a long and very gradual process. Thus, major scientific breakthroughs (the next “internet,” for example) are unlikely in China for the foreseeable future. But, China is likely to become a leader in “engineering breakthroughs” – i.e., the modification and improvement of existing science.

At APCO – Reggie Lai

Development of new energy in China is guided by a government development roadmap, policy framework, a geographic focus and grid integration considerations. Different types of new energy have different backers in the government. For example, wind and solar power are championed by the National Energy Administration and the Ministry of Science and Technology; bio fuel energy is supported by the Ministry of Agriculture and the Forestry Administration. Biofuels are still considered somewhat apart from mainstream research and development since this sector is still subject to the competing interest of feeding China’s population vs. making bio fuels.

New energy technology – one of the seven strategic industries favored by the 12th Five Year Plan – is already near world standards in China. Government sponsorship of development and deployment of new energy technologies is not just to help meet China’s burgeoning need for clean energy; it is also aimed at making Chinese equipment producers globally competitive (or dominant).

The U.S. government recently made a finding that Chinese solar equipment exporters were dumping their products in the U.S. market. But, the countervailing duties (CVDs) assessed against these products were at the extreme low end – less than five percent. Although the Chinese government protested the imposition of CVDs, the protests were pro forma and mainly because the Chinese government got called out on the issue. In reality the CVDs will have little impact on trade and might even be a net positive for China since they will probably drive out the weakest players in a crowded China market for such products.

There is a considerable gap in China between solar and wind installed capacity and utilized capacity. Power companies are mandated by the Chinese government to install a certain minimum of their generating capacity in the form of non-fossil fuel energy, but they are not yet required to utilize such alternate source generation. The power companies are reluctant to integrate non-fossil fuel power sources to the grid because of stability/security issues. However, they will be forced to utilize non-fossil fuel sources before the end of the 12th Five Year Plan (2015).

Is China using government subsidies and incentives for non-fossil fuel energy?

Subsidies and other incentives are not being directed and equipment producers (which helps explain why USG CVDs against manufacturers/exporters were so low). But, there are incentives/subsidies for project developers utilizing non-fossil fuel energy. End users of solar and wind generated electricity pay a surcharge of RMB 0.8/KWH. The collected surcharge is paid, in turn, to “project developers” – the grid companies – to incentivize their use of renewable energy. So, incentives are applied to sustainable energy distributors, but not to equipment manufacturers.

3/30 at JUCCE with Peggy Liu

In the next 20 years, China will add 50 new cities each with over one million population; fifty thousand more skyscrapers; and 170 more mass transit systems. JUCCE was a non-profit – a non-profit “convener” of Chinese and foreign companies, NGOs, educational institutions and government organizations focused on China/clean energy. JUCCE programs thus far have provided training for 233 Chinese mayors and XXX SOE executives.

Although JUCCE began as a Sino-U.S. collaboration, its programs are no longer limited to U.S. participation. JUCCE is now reaching out globally. She said that more than 170 cities in China are now working on eco-development. The American dream, based on high consumption, is not (yet?) the Chinese dream, which gives China a certain advantage in promoting environmentally sustainable development, at least for the time being.

Liu introduced Ping _____? Who has been working in China since 1998 on various World Bank and Asian Development Bank projects including waste water, solid waste and infrastructure projects. He cited one project in Guizhou Province that combined heritage protection in 17 communities with eco-tourism to protect the local ecology while creating a new source of income for inhabitants.

He cited another example of his work – Enguna, a city of 85,000 in Inner Mongolia. Enguna has been selected by the World Bank as one of 100 “world eco low carbon cities” – a sustainable green city. Enguna is located in a major wetland ecosystem, but it is also sitting on major deposits of coal and copper. The World Bank has been working (successfully, so far) with the local population to develop a significant cash flow from eco-tourism instead of their cashing in on the potential wealth from developing extractive industries. The project is currently looking for low-cost technology to help convert waste into energy.

Liu introduced Gao Xueming, Vice Mayor of Haimen City in northern Jiangsu Province (near Nantong and the mouth of the Yangtse River).

VM Gao had just finished a year at Harvard’s Kennedy School; he graduated from Beijing University. His responsibilities at Haimen include overall city planning and development and construction.

Haimen is a third tier city of one million people with GDP of RMB 80 billion ($12 billion, approximately). The principal issue faced by VM Gao is that growth in Haimen is outstripping city planning efforts. Pollution has become a major problem because environmental protection is still secondary to GDP growth and factory construction is proceeding without regard to green construction. Haimen’s problems in this regard are complicated by the fact that it sits at the mouth of the Yangtse, and thus catches all the upstream pollution in addition to that which the city itself generates. Gao said Haimen’s urban planning model is out of date and needs to be revised to build in more protection for the environment and regard for sustainable construction.

Haimen’s principal economic drivers are light industry (particularly textiles and fabrics); construction; and chemicals. New energy and materials are on the rise in Haimen. Despite a favorable location at the mouth of the Yangtse, Haimen still does not have its own port and thus has not been able to cash in on the area’s vibrant transportation sector. He said that construction of a port will begin soon.

In this issue of “China Update,” we report on early returns from the current meeting of China’s National People’s Congress, now underway in Beijing. Much of what has transpired so far is a rehash of last year’s NPC and 12th Five Year Plan goals. Don’t expect major initiatives this year as Beijing braces for major leadership change coming this fall.

We also report on impending travels to China with missions to Seattle’s sister city, Chongqing, and with a clean tech mission to Beining, Tianjin and Shanghai.

National People’s Congress

The annual convening of China’s legislature – the National People’s Congress (NPC) – occurred on March 5. Opening the congress, Premier Wen Jiabao gave the annual work report, China’s version of the State of the Union address.

In his report to the 3000 delegates to the NPC Wen offered a generally positive assessment of China’s current situation and reiterated several policy themes going forward. He set the growth target for 2012 at 7.5 percent. This target is below the 8+ percent rate by which China’s economy has been growing over the past year, but slightly higher than the target of 7.0 percent set at last year’s NPC by Wen. Wen also said that China would aim for an average annual growth rate of 7.0 percent over the balance of the 12th Five Year Plan (through 2015), and also forecast easing in the growth rates for imports and exports.

Part of the basis for lowering the projected growth rate for the economy and trade, in particular, is the continuing sluggishness of developed countries’ economies and concomitant reduced demand for Chinese exports. The ongoing European debt crisis and mounting trade protectionism globally are also likely to dampen China’s economic growth and its exports.

At the same time, though, Wen promised that China would press ahead with restructuring its economy away from dependence for growth on fixed asset investment and exports, and more toward domestic consumer demand. To meet its restructuring goals, Beijing will have to invest much more in low income housing, national health insurance, social security including pensions, and increased minimum wages. These improvements are necessary to increase consumer confidence that must occur if China’s economy is to become more dependent for growth and development on domestic consumption. In that regard, another vitally needed reform is to allow migrant workers to change their official residence to their actual places of employment and residence. Without that change, the several hundred million migrant workers are not eligible for such government benefits as health care and education for their children. However, to the extent Beijing can bring about these changes, the initial impact will likely exert downward pressure on growth rates, too.

Economic restructuring of the sort mentioned in the paragraph above was also a major goal of the 11th Five Year Plan, and a feature of the 2011 NPC work report. There is little evidence that much headway was made on that goal in the year since. There are strong vested interests among China’s politicians and state owned enterprises that are pushing back against rebalancing China’s economy. Politically, careers rise as local economies grow and fixed asset investment is still the fastest way to show economic growth. Rebalancing also entails more resources directed toward the private sector and services, and away from large state owned enterprises and industry, a move fiercely resisted by China’s powerful SOEs that want to protect their currently favored fiefdoms.

Wen also reiterated other 12th FYP goals of emphasizing the rapid development of high tech and green industries, greater environmental protection and remediation, improving education, attacking corruption and product safety

It remains questionable how much progress on economic rebalancing and other initiatives Beijing can make (or even try to make) this year. The highest priority through the remainder of this year will be to effect a major leadership transition this fall, and it should not be surprising if bold policy initiatives give way to the exigencies of leadership change management.

When the 18th Communist party Congress convenes in late October or early November this year, a new leadership lineup will be unveiled. There is no serious doubt that the new Party Secretary will be China’s current Vice President, Xi Jinping (who just completed a tour of the U.S. and met with President Obama), nor that current Vice Premier Li Keqiang will be given a senior party position commensurate with his expected elevation to the premiership when the NPC meets again in March 2013 (Xi will almost certainly be selected as China’s president at the 2013 NPC meeting as well).

At the same time, there is considerable room for speculation over who will occupy the other seven seats of the party’s nine-man Politburo Standing Committee, the top policy making body in the political hierarchy. Half or more of the current standing committee members are at or near the age of mandatory retirement, which will leave room for some of the younger group of well educated, internationally experienced technocrats.

While there is an age dimension to the impending leadership turnover, there is also a factional dimension and considerable jockeying can me expected among representatives of the three principal factions. The first of these share a common background with China’s current president and party secretary, Hu Jintao, that being service early in their careers in the Communist Youth League. The second is the so called “Shanghai Faction,” and are colleagues or protégés of China’s former leader (and before that, Party Secretary of Shanghai) Jiang Zemin. The third faction is commonly referred to as the “Princelings,” the offspring of China’s original revolutionary leaders such as Chongqing’s current Party Secretary Bo Xilai.

There has been an undercurrent of tension running through Chinese politics over the past two years over how the leadership spoils will be apportioned among these factions. While the rules of succession set by Deng Xiaoping 20 years ago are firmly in place and have already been successfully tested, there could be some significant surprises ahead as we approach the 18th Party Congress later this year.
Wanderings

“Yr. humble and obedient, etc…” is about to hit the road again. On March 19 I will be accompanying Seattle Mayor Mike McGinn and a mixed business, cultural and academic delegation to visit our sister city in China, Chongqing. The goals of this mission are several:

• Celebrate the upcoming 30th anniversary of the Seattle-Chongqing sister city relationship;
• Thank the city of Chongqing for its generous support of Seattle’s Chinese garden project and celebrate the opening of Chongqing’s Seattle Garden;
• Conclude several sister-school agreements between our two cities and announce the provision of scholarships to assist with student and faculty exchanges;
• Deepen business connections between our two cities; and
• Conclude a memorandum of understanding between the two cities to cooperate on projects designed to promote “green” construction and sustainable cities.

Immediately following the conclusion of that mission I will be joining another Seattle mission in Beijing focused on clean technology. The purpose of that mission is to provide private-sector delegates with an opportunity to assess and explore specific business opportunities in China in the clean tech sector. Business representatives from Washington and the Greater Seattle region will have the opportunity to establish relationships and facilitate closer commercial ties with business and government leaders in three cities – Beijing, Tianjin and Shanghai – to be visited in China. More specific objectives of the mission include:
 To enhance knowledge of the current economic conditions and business / investment opportunities with Chinese cities in the clean tech and renewable energy sectors;
 To enable business delegates to meet specific objectives, ranging from exposure to market opportunities to making individual contacts; and
 To develop and expand relationships among the business, government and multiplier organizations in China.
I’ll be taking copious notes throughout both missions and will report the results in April.

*******

Wen: Your first run for Bellevue City Council was in 1991, and you lost. You ran again in 1993 and won, and kept winning every four years since. What was your motivation to run in 1991 and what is your goal now?
Mayor Lee: I ran to be in a position of influence, to make a difference. One has to learn the game, get into the game in order to change the rules of the game if need be to improve it for the common good. My goal remains the same – how to improve the world starting with our own and by ourselves for our own good. We have yet a long way to go.
Wen: Now you are mayor of Bellevue, second largest city and the most diverse in Washington State, with 40% of its population as ethnic minorities. And of course, we had Gary Locke, a Chinese-American, as our governor for two terms. So is there still racial discrimination?
Mayor Lee: Discrimination is subtle and comes in many forms. Use of race is one way to gain advantage. Differences are emphasized to gain advantage. Differences always exist. As long as people compete, there will be discrimination used as a tool to gain advantage. There are now laws to prohibit discrimination. Therefore, it has become more sophisticated and subtler to get around the law.
Part 3. On U.S.-China relations
Wen: Bellevue has a number of sister cities. But its relations with Dalian of Liaoning Province and Qingdao of Shandong province of China was described as based on economics and trade, for the similarities in business and culture with those cities. Why not sister cities if there were similarities in business and culture?
Mayor Lee: The goal of sister cities or business and trade agreements is to build relationships. It can be through culture or business. Sister cities’ efforts are largely through volunteers who have no economic incentive. It has become apparent to me that they are hard to sustain without commitment from government and its support. A business and trade relationship has the built-in potential of economic incentive. The goal is to build relationships whether through culture or business and trade. I believe economic viability equals sustainability.
Wen: When you deal with China, Chinese cities, or Chinese officials, do you ever think about some of the problem areas that the U.S. has with China, such as human rights, dissidents, etc. and why?
Mayor Lee: It’s unavoidable. When you develop good and honest relationships, like in a family, you have frank conversations. We have our values; they have theirs. We may often disagree. But we share our opinions. As long as we have good intentions to help, we will grow in the relationship and mutually benefit when we learn from each other.
Wen: You know there is a Chinese saying: 衣锦还乡, yi jin huan xiang or returning to one’s homeland in glory. That’s you, you can now return to Kunming in glory. Do you want to see Bellevue, your hometown for most of your life, and Kunming, your childhood home, establish a relationship someday?
Mayor Lee: I’d love to see that. There are many similarities, climate, people, and scenery. But it’s not yet time. There are many low-hanging fruits yet to be picked before the plum is ripe to pick. Someday!
Wen: A bonus question: After living in the United States for more than 50 years, much longer than you lived in China, including Hong Kong, do you feel you are more American than Chinese?
Mayor Lee: Absolutely! Although I will always have the handsome, trustworthy, and diligent Chinese look, the good, warm and honest Chinese heart and the wise, smart and intelligent Chinese mind, I am an American through and through, by choice, and proud to be one! America is a land of immigrants. What is an American? It is exactly someone like me who came before and after seeking the American Dream and found it! After being stateless for so many years, I finally found a country I can call home where I and many find what we all look for – freedom, liberty and justice for all! That all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. May God Bless America!
Wen: Thank you very much, Mayor Lee.

For Immediate Release

U.S. Media Contact: (206) 453-0276

Hainan Airlines Announces More Nonstops to China

Airline to Increase Service to Daily from Seattle to Beijing June 8

Seattle, WA – February 22, 2012 – Almost four years to the day it began service to Seattle, Hainan Airlines has announced it will increase frequency to daily on June 8, offering nearly 1500 seats each way per week. Currently the airline serves the market four times a week, and will increase service to five times on May 15. The daily service will continue throughout the peak summer season, until the winter schedule takes effect in November. Current service is operated with two-class Airbus A330-200 aircraft. Hainan Airlines is also one of the launch customers for the Boeing 787 Dreamliner.

Hainan Airlines is a Skytrax® certified five-star airline recognized for providing outstanding service in both its Premium Business class and Economy Class, with departures from Seattle at 2:00pm, arriving in Beijing at 4:00pm. Connections can be made to Shanghai, Guangzhou and other points in China plus Mongolia, Eastern Russia and elsewhere in Asia. The airline also operates numerous flights between the island of Taiwan and the Chinese Mainland.

“Our customers have been asking for more frequency for a long time”, said Joel Chusid, Managing Director for Hainan Airlines in North America, “So we’re pleased to be able to accommodate their request. This provides both our loyal, regular customers as well as infrequent travelers with increased flexibility in being able to travel any day of the week. We hope that people who have not flown us before will give us a try to experience our five-star service. Cargo shippers will also benefit from the added frequency.”

Hainan Airlines Premium Business Class features priority check-in and access to the business class lounge. Welcomed aboard by Hainan’s cabin manager, service is exquisite starting with pre-departure beverages. Once aloft, guests enjoy 180 degree flat seats, gourmet dining on fine china with a choice of Chinese or Western cuisine, fine wines and beverages and even freshly brewed espresso! Premium passengers are offered complimentary pajamas, slippers, fluffy pillows and luxurious bedding to maximize rest. Amenity kits feature world-famous Bulgari® cosmetics. A state of the art entertainment system offers fifty movies, audio selections and ten games on demand. A wide range of reading materials is also available. At Beijing, with advance reservations, premium passengers are treated to complimentary limousine service both on arrival and departure.

Economy class passengers are also entitled to complimentary beverages, meals, snacks and enjoy the same state-of-the-art entertainment system on individual seat back screens. And Hainan’s gracious flight attendants provide, with a smile, hospitality and warmth to every passenger. Attractive economy and business class fares are available from Seattle and other cities across the United States and Canada, in conjunction with airline partners.

Hainan Airlines and American Airlines have recently announced plans to code share on each other’s flights and also develop a reciprocal arrangement for their frequent flyer programs. Details will be released shortly.

Hainan Airlines can be booked through travel agencies, online at www.hainanair.us or via its call center at 1-888-688-8813.

About Hainan Airlines

As the largest non-government airline in China, Hainan Airlines is a well known brand with an extensive route system. Having started operations in 1993, the airline has collected numerous awards for service, punctuality and operational excellence. This year it achieved a rare and prestigious five- star Skytrax rating, the first for a Mainland Chinese airline. It has also earned the Best Airline in China award from the readers of Global Traveler magazine twice, including this past year.

The airline carries about 15 million passengers annually and serves more than 60 domestic Chinese cities as well as Toronto, Berlin, Brussels, Zurich, Dubai, Luanda, Moscow, St. Petersburg, Bangkok and Taipei.

#END#

Taiwan’s president Ma Ying-jeou won reelection January 14 with nearly 52 percent of the vote.  The KMT standard bearer comfortably beat his closest rival, DPP candidate Tsai Ing-wen who had about 45 percent of the vote.  A third candidate, People First Party nominee James Soong, received less than three percent of the nearly thirteen and a half million votes cast (over 74 percent of all registered voters).  Although the KMT lost some seats in the legislature, it hung on to an absolute majority claiming 64 of the 113 seats.  The DPP secured forty seats and the rest were claimed by smaller parties.

 Ma staked his reelection on his policy of rapprochement with the Mainland, launched soon after his landslide victory in 2008.  Tsai’s campaign targeted voter nervousness that Ma’s policies were undercuttingTaiwan’s sovereignty and reducing Taiwan’s future options.  Although she generally refrained from the stridently pro-Taiwan independence rhetoric that marked former DPP President Chen Shui-bian’s eight years in office, she was hoping to play on that underlying sentiment in her campaign. 

 Still, Ma’s support has eroded somewhat over the past four years.  There is certainly a general feeling in Taiwan that Ma’s performance so far has not lived up to the expectations he raised in 2008, despite the plethora of agreements – including the far-reaching Economic Cooperation Framework Agreement (ECFA) – that Taiwan has signed with Beijing since Ma took office.  To some extent Taiwan’s anemic economic performance of late has been due to the lingering results of the global financial crisis.  Business leadership inTaiwan has been a clear winner from Ma’s Mainland policies, but the benefits have not been widely distributed and unemployment remains high by traditional Taiwan standards.

 However, Ma is also widely viewed inTaiwan as a somewhat inept administrator, a view that probably helped cut into the landslide majority he won in 2008.  Specifically, he has been accused of governing by opinion polls, of relying too much on a small inner circle of officials who are not much liked by, and out of touch with, voters and for being insensitive to the downside impact of some of his policies.

 In the end, though, the election was about the KMT’s “1992 Consensus” vs. the DPP’s pursuit of Taiwan independence.  In the 1992 Consensus, Taipei and Beijing agreed there is only one China, but also agreed to disagree on what that meant.  It was this consensus that opened the way for cross-Strait talks in the early 1990s, talks that were suspended when Taiwan’s political leadership adopted an aggressive policy of pursuing Taiwan independence.  Ma revived the consensus in his 2008 campaign and defended it vigorously in the current campaign.  For this he had the full support of Taiwan’s business community, which may have been the deciding factor.

 Beijing offered no comment on the election results and kept a very low profile during the campaign, having learned from earlier presidential election results that its efforts to influence voters would most likely backfire.  In recent conversations with U.S.-based Chinese diplomats, however, “Yr. humble and obedient, etc…” heard unalloyed glee expressed with the outcome.  Although a victory by Tsai would not likely have been as unsettling for cross-Strait relations as Chen Shui-bian’s eight-year administration was, there is no question that Beijing vastly preferred another term by Ma.  As one Chinese analyst described it, in reelecting Ma Taiwan’s voters chose the status quo and stability, and placed their bets on the 1992 Consensus and a better future with Ma’s policies.

 With four more years in office now secured, what is next for Taiwan and cross-Strait relations?

 What is not likely to happen is initiation of political dialog between Taipei and Beijing.  While there are many political issues that remain unresolved (not the least of which would be a formal end to the civil war between the KMT and the Chinese Communist Party), Ma made clear in his post-election press conference that he would put “pressing matters before less pressing ones, easily resolved issues before difficult ones, and economics before politics.”  That said, it is not beyond the realm of possibility that Beijing may grow impatient over the next four years with Ma’s reluctance to engage in political dialog and seek to force the issue by threatening to curtail some of the economic exchanges that have benefited Taiwan over the past four years.

 On the economic side, here are some things to watch for:

• An early resumption of follow-up talks to expand the reach of the Economic Cooperation Framework Agreement (ECFA) concluded in 2010.  The “early harvest” provision of ECFA permitting special treatment on a limited number of tradable goods and services is already underway.  However, further negotiations are required to expand the market opening in goods and services to reach the free trade goal set by the agreement.
• An agreement on customs cooperation and also one on settling trade disputes are likely to be quickly taken up.
• Both sides will also focus soon on a long-stalled investment protection agreement and an easing by Taiwan on current restrictions on Mainland investment inTaiwan.

 Concluding comment:  Although Taiwan’s elections this month garnered little media attention in the U.S., they were very significant in terms of U.S. foreign policy and our interests in the Asia-Pacific region.  Officially Washington had no dog in that fight;  indeed, our cross-Strait policy is simply to favor peace in the Taiwan Strait, oppose any actions by either side that could be destabilizing, and to support any long-term political resolution achieved peacefully and agreed to by both Taipei and Beijing.  While our interests are closely aligned with Taiwan’s vibrant democracy and market economy, there are clearly limits on our willingness to get entangled in a Taiwan Strait war that ill-conceived actions or policies by either side could launch.

 Within the context of that broad policy, it is clear that Ma Ying-jeou’s policies and actions over the past four years have contributed greatly to stability in the Taiwan Strait unmatched in the past 63 years.  His reelection should enable continuation of that stability for the next four years, at least, and therefore accords with U.S. national interests and policy.  Although it is unlikely that Tsai Ing-wen, had she been elected, would have pursued the brinkmanship Chen Shui-bian did for eight years, it would have touched off a perhaps lengthy period of uncertainty, at least.

 Ma’s reelection by no means charts a certain path to eventual political accord between Taipei and Beijing.  The very heart of the 1992 Consensus was an agreement by both sides that their respective views of “one China” were miles apart, and that distance has not diminished appreciably despite the growing web of economic agreements.  Unification with Mainland China is not an option for the vast majority of voters inTaiwan, and something less than political unification is not on the table as far as Beijing is concerned.  As the range and intensity of economic ties increases across the Strait, the door may eventually open for discussion of confidence-building measures that could pave the way someday for an overall political agreement.  But, as Ma made clear after his reelection, the time for political discussions of any sort is not yet at hand.

*******

Offices of Davis Wright Tremaine LLP

1201 Third Avenue, Suite 2200 (downtown Seattle)

Thursday, February 2^nd, 8:00 to 9:30AM

This forum will present the business rationale and travel details for attending Seattle Week in Chongqing, to be held the week of March 18^th.  Seattle Mayor McGinn has been invited to lead the delegation that is being jointly organized by the; Seattle Chinese Garden, City of Seattle, Seattle Chongqing Sister City Association and Washington State China Relations Council.

Our official host for this mission will be the Mayor of Chongqing, Huang Qifan.  Mayor Huang is an important figure in Chinese politics.  In his previous position as Vice Mayor of Shanghai, he was one of the key architects behind the building the Pudong New Area.  As Mayor of Chongqing, he is responsible for the construction of the Liangjiang New Area.  It is through Mayor Huang’s office that we will learn about the Liangjiang economic zone, only the third such State-level zone in China, after Shanghai’s Pudong and Tianjin’s Binhai New Area.

The city is of strategic importance to China’s Western Development Policy and is taking the lead in the rural to urban migration.  A policy that is heavily dependent on building the infrastructure necessary to absorb the migrating population.  Chongqing represents a growing consumer class, is the gateway to southwest China and the perfect location for U.S. companies to have direct access to China’s interior economy.

The convergence of these various assets in one city makes Chongqing a unique place to do business in China.  The Liangjiang New Area and the Port’s Bonded Free Trade Area complement the domestic/international sales, distribution and manufacturing zone.  One example of the value that the zone extends to Washington State exporters is found in their bonded wine distribution center, managed by the Port of Chongqing.  Washington exporters are able to import and store wine duty free in the zone.  Sales of wine from inside the zone are not taxed to the seller.  The buyer in this case acts as the importer and submits a Customs entry, only for the portion of the shipment that they are buying.  The balance of the exporter inventory remains in the zone until sold.  As a tenant of the Bonded Free Trade Area, the process to establish an office in Chongqing is significantly streamlined.

To learn more about Seattle Week in Chongqing and review the program overview, itinerary, registration form and terms and conditions, please refer to the Seattle Chinese Garden web page at http://www.seattlechinesegarden.org.  Our thanks to Davis Wright Tremaine and Fraser Mendel for making their conference room available for this program.

Given the nature and timing of the forum, we expect the space to fill quickly.  If you are interested in attending the February 2^nd forum, we recommend that you register online immediately  - or by contacting Scott Heinlein, via email at: heinlein@wscrc.org or phone at 206-229-8587.  Please note that registrations will close as soon as the room is full or by 5:00 PM, January 31^st. There will be no refund for “no-shows”.  Coffee and pastries will be served, but parking is not included or validated.

Lunch provided by Davis Wright Tremaine

Register online at
www.wscrc.org.

Please join the Washington State China Relations Council, Davis Wright Tremaine, and Landesa for a primer on land property rights in China — recent reforms, legal uncertainties, and due diligence considerations for businesses and their advisors.

Approved for 1.25 General CLE credits in CA, NY, and WA.

Landesa attorney Zhu Keliang will discuss:

• Historical development of land property rights in China
• Current legal regime on land property rights
• Insecurity and marketability of land rights
• Due diligence considerations concerning land rights for any party investing in China (with case examples)