LITIGATORS AND MEDIATORS AND ARBITRATORS - OH, MY!

by Alexandra Damsker

You are coasting along, manufacturing products in China, beginning product development there, as well as opening up your European and Asian markets when - something goes disastrously awry. Despite the best of intentions between you and your Chinese suppliers, a shipment is missed, a major contract term goes unfulfilled, and negotiations are getting you nowhere. “But I have a contract!” you say? As our friends at www.chinalawblog.com have explained so well, Chinese contract law is far from clear(see, for example, http://www.chinalawblog.com/2009/06/china_gets_all_new_on_contract.html, discussing the Explanations of Contract Law released by the PRC Supreme Court, effective May 13, 2009).

What are your options? Well, as in the US, you have the courts, mediation, and arbitration.

The benefit of the court system is that all decisions, including mediation and arbitration,are subject to the ruling of the courts. In that respect, if you start with the courts, youare more likely to get a final ruling. However, as Chinese law is based on Civil Law rather than common law, there is no system of stare decisis (“like cases are determined alike”)-therefore, there is little to no predictability in ruling. Determinations can only besurmised by hints from the Supreme Court, and most would wish just a bit more to on which to base the outcome of their business. Without the principle of predictability to buoy up one sideʼs argument - and thus speed up negotiations and settlement – the odds that a dispute will end up in the fickle and byzantine Chinese court system is discouragingly high.

Mediation is an alternative, and may work better for those who merely need assistance negotiating the relationship or one or two issues. As a less adversarial and often cheaper process, disputes can be resolved quicker and with relationships more likely to remain intact. However, mediations are non-binding, and issues may end up in the courts and/or arbitration in the end - with additional costs, delay, and possible antagonism. If, however, you merely require “lubrication” in your relationship to restart your negotiations, “conciliation centers,” as they are know, are not uncommon, and your legal counsel can refer you to a good source of knowledgeable, independent mediators.

Arbitration, on the other hand, is legally binding, and is gaining prestige and steam in both the PRC and Hong Kong. Local disputes in the PRC usually go through the China International Economic and Trade Arbitration Commission and China Maritime Arbitration Commission. However, most disputes with any international aspect, including those involving US companies, go through Hong Kong which, unlike the PRC, is subject to principles of common law, and, along with Singapore, is the main venue of arbitration in the region. The primary arbitration center is the Hong Kong International Arbitration Center (HKIAC), which announced that it resolved 605 disputes in 2008,compared to 448 in 2007 and 394 in 2006. The increase is no doubt due, in part, to the declining economy, as the decreased cost and increased speed both serve to facilitate the speed and profitability of business. Arbitration is expanding as a method of dispute resolution, and will be discussed further in our next blog entry.

So, what to do? Regardless of which path you choose - make sure you clearly indicate your chosen venue (litigation, mediation, arbitration) and body IN YOUR CONTRACTS. This cannot be overstated - an ounce of forethought will keep you from pounds of medication for your ulcers and heart...and isn’t that what good lawyers are for? Good health comes with good counsel - so keep your counsel informed of events in your company, and let them protect you. The attorneys at the USA China Law Group have years of experience in keeping you protected, so contact us at your earliest opportunity.

You’ve gone through a thorough analysis to determine that outsourcing works for you, and China is the place to go (our team can help you out with this). Now you need to know how to get started - and, unlike many of our blogging friends, we’ll just put this up front. You need really good business and legal advice for this. China’s economic and legal dealings have changed a great deal in the past year, and you don’t want to leave your company’s future at risk because you didn’t plan well enough. So, what’s in the plan? There are five main issues to consider.

First, how much work are you going to do in China?

Second, if you are farming out cost-heavy functions, such as manufacturing (as many are), are you able to get financing? According to David Drayton, author of the wonderful Silk Road International blog (Steps for Effective Sourcing) and this excellent article on Chinese outsourcing, (New Opportunities) financing is a hit-or-miss enterprise these days.

Technically insolvent Chinese banks are cash-rich due to government funded injections, and they’re loaning out money like your favorite grandmother,yet they seem to be targeted towards specific industries, such as technology, education, logistics, green tech, health care, infrastructure, and transportation. In addition to these sectors, local governments and connected entities are getting cash. It may be difficult for an unconnected factory to get access to those funds. Factoring is an option in the short term, but long term will eat away your profits. Otherwise, China is littered with unused inventory, cancelled product and cheap labor. Cash flow, orders, deposits, guarantees and creativity in your terms will get you far. And understand their wariness - foreign cancellations completely changed the industry, so they are a bit more circumspect on foreign orders. Whatever you do, make sure you’re steering clear of the Foreign Corrupt Practices Act - Asia tends to be a red flag for this law. More on the FCPA can be found here: at the Justice Department's official web site.

Third, are you protecting your intellectual property? We can’t emphasize enough good use of counsel familiar with Chinese courts on this one. The intricacies of the Chinese legal system moves us on to our next point.

Fourth, have you considered product liability issues? In addition to US liability issues, China doesn’t have a network of national insurance providers for product liability, and factories end up going bankrupt in the wake of liability issues (e.g., the Sanlu milk issue). The ongoing Epic Kayak case will give us a glimpse of the Chinese court position on outsourced product liability - look for US product liability insurers to keep a close eye on the outcome of this case, too. You may also want to consider a product test service to keep quality assurance as high as possible.

Finally, you’ll want a local agent to oversee the process and provide onsite troubleshooting. Our affiliate attorneys in the USA China Law Group have offices in Hong Kong, Guangzhou, Shanghai, Beijing and Nanjing.

The engine of China is huge, and you may be able to harness China’s energy to power your company’s bottom line, thriving in the midst of recession. But failing to plan is planning to fail - so be smart and plan wisely!

S0 - You want to Outsource to China...Part 1

by: Alexandra Damsker

Costs are high, profits are dropping, and you’re considering outsourcing some or all of your business production to China. Is this a good idea for you? While the outsourcing party used to be more of a free-for-all fête to pare down costs, it’s now more of a selective affair. Trends are changing, particularly with China, though it remains a massive global economic engine, powering the bottom line of companies both in the US and abroad. Labor is cheap, but getting more expensive - the 2008 labor law ending termination “at will” has increased both costs and risk - and product liability risk and quality control have yet to have a fully restored reputation from recent setbacks. Global economics and the value of the dollar have been making the US and other countries, such as India and the Philippines, more viable alternatives. However, costs in China are still comparatively low, and China has a well-established outsourcing system and infrastructure that’s relatively “turn-key” for companies operating with knowledgeable advisors. What’s more, the economy is now opening China up to companies it’s never been open to before, including smaller companies and reduced orders.

So how does this shake out in terms of shipping your goods or services off to China? Well, some industries are growing wary. In BDO Seidman’s excellent 2009 Technology Outlook Survey, for example, 62% of CFOs at leading US technology businesses reported that the US would be their primary outsourcing destination in 2009 (16% reported China as leading destination in 2009, 13% reported India, and 19% reported no interest in additional outsourcing - reflecting a likely decline in international outsourcing). The study also reported that outsourcing to China is down from 46% in 2008 to 19% in 2009. (Get a better look at the survey here: http://www.bdo.com/news/pr/1016.)

However, while technology and IT, including call centers, are coming out of China, industries and company functions with high capital costs are moving to and remaining in China. Examples of both include the pharmaceutical industry and manufacturing functions, both of which are expected to maintain current levels or rise in the upcoming year. In addition, China is rising as the new head of clinical trials in Asia. (Check out this great article on pharmaceutical trending for more information on that topic: http://trendsniff.com/2008/11/06/china-numberone-destination-in-asia-for-pharmaceutical-outsourcing/.)

Our next blog will look at the complicated process of outsourcing, to give you a better idea of what to expect. Our experts at the USA China Law Group are happy to discuss whether outsourcing is a good fit for your company, and if China is a good partner country for you.

China Wants to Globalize the Yuan

05/01/2009 by Edythe Huang

Just over one week before President Barack Obama and other world leaders met in London for a summit focusing on the global recession, China was making clear it wants a greater say in managing economic policies worldwide.

The latest blast from Beijing in March: a call by China's top central banker, Zhou Xiaochuan, to replace the U.S. dollar with a new global currency.

Zhou: reserve currencies based on a single issuing country just doesn’t work:

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies. On the one hand the monetary authorities can not simply focus on domestic goals without carrying out their international responsibilities. On the other hand–they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they tries to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand.

The goal, Zhou writes in a paper released on the website of the People’s Bank of China on March 23, is to "create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run."

Zhou suggested the IMF's Special Drawing Rights, or SDR, could serve as a super-sovereign reserve currency.

The idea of an international currency is worth considering. We have a global economy. To facilitate trade, we need an international currency. Zhou’s argument is basically how can we have a truly global economy without a global currency.

Notwithstanding the apparent logic of this argument, the global consensus is the U.S. dollar will not be replaced by an international currency or any other currency including the renminbi in the near future. Here’s why:



First, the U.S. will not give up the U.S dollar’s status as the dominant global currency without a fight. Speaking on March 24 at a congressional hearing in Washington, Treasury Secretary Timothy Geitner and Federal Reserve Chairman Ben Bernanke both stated on the record they categorically oppose any change in the status quo. Later that day President Obama in responding to Zhou’s “suggestion” to replace the U.S. dollar with a SDR stated, “I don’t believe there is the need for a global currency.”

Second, the U.S. dollar is already established as a the global medium of exchange. Any unseating of the U.S. dollar would signal the end of the U.S.’s stature as the world’s supreme economic power. It would also destabilize the world’s economy given the trillions of dollars of foreign investment in U.S. government securities, the largest current investor in those securities being China.

Third, the most likely successor to the title of global currency is the renminbi. However, the consensus of both Western and Chinese analysts the renminbi is significantly undervalued and China’s financial markets and banking system will not be sufficiently “mature” for the renminbi to be a viable contender for this title for at least another decade.

Notwithstanding these facts the Chinese are uncomfortable holding U.S. dollar denominated foreign reserves and debt. Taxi drivers in big cities such as Beijing and Guangzhou no longer accept U.S. dollars as they did only a year ago. Many Chinese people are looking for alternatives. Maybe they will learn from Jim Rogers, who walks around with gold coins in his pocket (see Bloomberg.com Jim Rogers video with Bernard Lo) in case the whole financial system collapses.

Life in China is Back to Normal

May, 2009 - By Julia Zhu

No matter what you read in local or international newspapers and magazines or see on TV you will inevitably find economists stating that the “leading indicators” reflect the direction of the world’s markets.

Some economists state the world economy is getting better, while others opine it is going to get worse before it gets better. The data relied on by the economists for these diverse opinions are: the GDP of the world and the component nations, consumer price indexes, commodity prices, foreign exchange rates, etc. No matter what their opinion is at this time they are all anxiously anticipating the upswing.

China remains optimistic. U.S. Secretary of State Hillary Clinton was in China in February of 2009 on the last leg of a four country tour of Asia focused on the global economic crisis. Gallup Polls conducted throughout 2008 reveal the Chinese were more optimistic about their economy than the other three nations she visited. Earlier this month, Wen Jiabao, the Premier of China publicly stated China’s economy is doing better than expected. Zhou Xiaochuan, the governor of the People's Bank of China, said last week there have been positive changes in the Chinese economy in the first quarter of 2009.

However, given concerns about the accuracy of economic data in China I have a personal economic indicator which is similar to The Economist’s “Big Mac” index.

I am currently staying in Guangzhou on business. Guangzhou is a sleepless city where construction cranes have been the predominant feature of the skyline for years. However, the city was oddly quite around the Chinese New Year in late January when I happened to be in the same area of the same city, and it seemed it had been like that for a while. I saw blue sky. I didn’t see many people or cars out during the night. What was wrong with that? Dust, dirt, noise and crowds are good –they are signs that things are happening!

Over the past a few weeks, things seemed to be changing whichresulted in my discovery of the perfect indicators we are on the upswing in China which I call the weekday bed time and weekend wake-up time. The louder the noise from construction, crowds and cars is around me, the earlier it starts and the later it ends, the earlier I wake up and the later I go to bed. It works really well. I have become an early bird even if I still stay up late. I am happy more often than I am sad. It just means that life is returning to the normal bustling status we have become accustomed to in China in the past twenty years.

I have determined we do not need complicated economic indexes and financial data to determine how the economy around us is doing. We just need to be aware of what is happening around us.

It’s the Time to Care About Our People’s Health.

by Julia Zhu

Millions of uninsured, inadequate medical resources, unequal access to care, expensive and unaffordable health care — China knows all about it.

Health infrastructure in the poor countryside is especially creaky. In 2005, 25% of public-health resources were devoted to rural residents, even though they made up roughly 60% of the population, the Wall Street Journal notes.

Most Chinese normally need to spend over 100 RMB out of their own pockets (about 14 USD) on the treatment for cold in hospitals in China. You may want to pause for a second before you say it is not that bad. For many rural Chinese, that amount of money may be 1/5 of their whole month income. I hear many people say “I am just too poor to get sick.”

China’s official Xinhua news agency framed the problems in pretty stark terms:

The health care sector is one of the weak links in China’s social welfare system. Soaring medical fees, a lack of access to affordable medical services, poor doctor-patient relations and low medical insurance coverage compelled the government to launch the new round of reforms.

China announced plans Wednesday to build thousands of new hospitals and put a clinic in every village in the next three years, the first steps in a decade-long reform plan to provide universal health care coverage.

"By 2011, we will remarkably improve the accessibility of basic medical care and health care services and alleviate the burden of the general public for medical costs," Vice Health Minister Zhang Mao said at a briefing for reporters.

The reforms also include plans to build 29,000 new township hospitals, and 2,000 at the county level.

We're worried China will be the first country that will become old and sick before it becomes rich.

Health reform, a good move!

A Few Thoughts on Currency

by Edythe Huang

Lately, I’ve been a bit obsessed over a comment that Geitner made about China’s currency manipulation. Yes, I know it’s old news, and yes, I know that I’ve already blogged about it. But, I can’t seem to get past the accusation.

During a recent trip to China I got in the habit of asking people I met there what they thought of Chinese currency. I was starting to get a better picture of the big picture. Essentially I came to the conclusion that everyone manipulates their currency by indirectly buying and selling in the market, China is just an easy target because they do it a bit more than everyone else. I was just beginning to understand a small part of the very large and complex market that is Chinese currency. . . and then, China called for alternative currency. When I first watched the announcement on CCTV, I was a bit shocked.

Why in the world would China call for an alternative currency? After all, they are the largest holder of United States hard currency. Their incredible power created through holding so much hard currency reserve would essentially vanish . . . unless they used their hard currency reserve to buy the alternative currency. Their current account balance is much higher than any other country (by $100 trillion) and they aren’t burdened with the level of debt which saddle most western countries. It completely makes sense why China would want an alternative currency: they would have more of it than anyone else.

As for me, I was even more shocked in the hour when Geitner was agreeing with China. Thank goodness he changed his mind fast. Why would the United States want the rest of the world to lose confidence in the dollar? I do not know much about the intricacies of currency exchange and rates, but I do know that the only thing the dollar rests on is the confidence that the world places in the currency. Why would our finance guy say that we want a competitor? I have the upmost respect for Geitner’s intelligence and ability, but that short-term agreement with China did make me step back and wonder about his judgment for a moment.

China Wants to Divorce the Dollar

by Julia Zhu

Just over one week before President Barack Obama and other world leaders met in London for a summit focusing on the global recession, China was making clear it wants a greater say in managing economic policies worldwide. The latest blast from Beijing: a call by China's top central banker, Zhou Xiaochuan, to dump the U.S. dollar as the world's most important currency.

Zhou: reserve currencies based on a single issuing country just doesn’t work:

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies. On the one hand–the monetary authorities can not simply focus on domestic goals without carrying out their international responsibilities. On the other hand–they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they tries to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand.

The goal, Zhou writes in a paper released on the website of People’s Bank of China on Mar. 23, is to "create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run."

Zhou suggested the IMF's Special Drawing Rights, or SDR, could serve as a super-sovereign reserve currency.

The idea of an international currency is worth considering. We do have a global economy. To facilitate trade, we need an international currency. I mean, how can we have a global economy unless we also have a global currency?

However, pretty much everyone agrees replacement of U.S. dollars with an international currency is not going to happen any soon. Here’s why:

First, the U.S. isn’t welcoming the idea and will fight against it. Speaking on Mar. 24 at a congressional hearing in Washington, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke both said they categorically oppose the change. Obama came out with support of the US Dollar and to reply to the Chinese he stated, “I don’t believe there is the need for a global currency.”

Second, the U.S. dollar is already established as a medium of exchange. To replace US dollars, the new currency would have to be adopted worldwide by private companies for international trade transactions, a tremendous challenge.

No matter what, Chinese are now nervous holding U.S. dollars. Taxi drivers in big cities such as Beijing and Guangzhou don’t take U.S. dollars as they did before. I think many of us are nervous holding dollars and maybe rightfully so. Maybe we should learn from Jim Rogers, who walk around with gold coins in his pocket (see Bloomberg.com Jim Rogers video with Bernard Lo) in case the whole financial system collapses.

A Good Week for Chinese-Americans and Chinese-American relations

The Obama administration was off to a shaky start in US-Chinese relations when Treasury Secretary Timothy Geithner directly called China a currency manipulator. The Administration seems to have switched directions this week after that gaff when it named its second Chinese American, Gary Locke, to lead the Commerce Department. (The first to be named was Steven Chu, Secretary of Energy.) The decision to name Secretary-designate Locke after two failed nominations marks a move toward positive Chinese-American relations.
Gary Locke was a partner of Seattle-based law firm Davis Wright Tremaine, where he worked on issues involving China, energy and governmental relations. He then became the first Chinese-American to hold the position of U.S. Governor when he became governor of Washington State in 1997. While Governor, Locke became known as a pragmatist who focused on international opportunities. After he stepped down in 2005, Locke worked on Chinese President Hu Jintao’s visit to Seattle in 2006.
Locke’s history of a close relationship with China (and his comparatively scandal-free resume) no doubt put Locke on Obama’s radar for Commerce Secretary. But what does it mean for the future for the future of the commerce department?
When Locke accepted the nomination, he said “Our nation's economic success is tied directly to America continuing to lead in technology and innovation and in exporting those products, services and ideas to markets around the globe. The Department of Commerce can and will help create jobs and the economic vitality our country needs.”
Although these seem to be words for words sake, there is something more in the nomination. The Commerce Secretary works toward increasing jobs at home; opening global markets for US companies and eliminates trade barriers, and expands export opportunities. Locke already has a good relationship with Chinese officials. It has not been any secret that the US has had a large trade deficit with China. Perhaps I’m being a bit optimistic, but it seems like Locke has been nominated because he may be one of the few people who have the ear of China and the ability to talk to them about “increasing their domestic consumption” and balancing trade in a way that they may be willing to listen. Obama may be trying to bait China with honey by having a person they trust go to talk to them. There’s nothing wrong with a bit of good diplomacy and negotiation.

Chinese Spending…or Lack Thereof

The World Bank’s Quarterly Report, published last Tuesday called for China to boost its domestic demand. This is not the first time the World Bank has urged the Chinese government to encourage its people to consume. The World Bank has made the same recommendation in just about every other quarterly report on China. And yet, this time, it’s a bit more striking because it begs the question, what more can China do?
First, let’s go to the 800 pound gorilla in the room. There’s been an economic crisis that has rocked the world since Sept. 15, 2008. For the first time, China’s government is not the only government that must urge its people to spend money and consume products, especially at a time when unemployment has risen, 67,000 small businesses in China fell into bankruptcy, and economic growth has slowed.
Second, the Chinese government just launched a Rmb4,000bn ($586 billion) stimulus plan aimed at upgrading infrastructure, expanding social welfare, and reforming rural land. About $123 billion of the $586 billion will be spent on a universal health insurance for the next three years. Some experts say a universal health care plan will create the foundation of a broad Chinese middle class who will have more of an appetite for world goods. However, it will take time for the wealth to accumulate.
Third, the Chinese government wants people to consume. It just wants to make sure that exports continue at a higher rate than imports. Unfortunately for the Chinese, export growth is shrinking. The only way for China to keep up the extraordinary economic growth rate it has enjoyed is to increase domestic demand. The Chinese government understands this and has put in much effort to restore consumer confidence to this country of savers through, let’s face it, economic propaganda.
I took the opportunity to look at quarterly reports of other countries to see if those countries were admonished the same way or to see what other countries do to deter the recommendation. What I found was pretty surprising. . . or not. Mongolia (it’s the only other quarterly report that came out in Feb. 2009 which discusses domestic demand) was praised for their domestic demand. The reason? Mongolia’s imports are greater than their exports. Therefore, one desired equation is imports > exports = good domestic demand.
China’s solution if they want to satisfy the World Bank (and the rest of the world): start importing more than they export. Not to state the obvious, or actually, to state the obvious, I do not see the Chinese government being so thrilled about the strategy.