EURObiz 10th Issue Sept Octo[996]

8/13/2019 EURObiz 10th Issue Sept Octo[996]

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POSITION PAPERThe Chamber's Annual Publication

PATENT STUDYHow Patent Policies and Practices Hamper Innovation

COACHINGSecond Study Shows Mentoring on the Rise

GOING GLOCAL

The Hybrid of International and Local Marketing

THE EXECUTIVE INTERVIEW

Piter De JongING Bank N.V. Shanghai

www.europeanchamber.com.cnSeptember/October 2012

Water in China:

Everywhere andNowhere


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BUSINESS FEATURES

22POSITION PAPERTe European Business in China

Position Paper /.

26PATENT STUDYDulling the Cutting Edge: HowPatent-Related Policies and Prac-tices Hamper Innovation.

28INDUSTRY FOCUSGovernment investment acceleratesgrowth of water use industries.

30IPRPatent protection in China:know before you go.

32MACROECONOMICSWhen Sisyphus met Icarus: EU-Chinarelations in the Eurozone crisis.

36HR

Te Second ComprehensiveCoaching Survey in China.

38INVESTMENTChina investing, at home and abroad.

41CITY FOCUS

Guangzhou still a centerfor innovation.

COVER STORY

11WATER IN CHINA:EVERYWHERE ANDNOWHERE

Chinas need for water as an essen-tial element for sustaining life, alongwith its uses in agriculture andindustry, has never been greater.

17HOW CHINA'S HYDRO-HEGEMONY AFFECTSITS ASIAN NEIGHBOURSWater becomes an internationalissue when waterways originat-ing in one country but flow intoone or more others downstream.

20DRYING UP: WHAT TODO ABOUT DROUGHTSIN THE PEOPLE'S REPUBLICOF CHINA

Although traditionally a plague ofthe north, has now expanded toareas in southern China, includingthe Yangtze River and Poyang Lake,Chinas largest freshwater lake.

21NEWLY-FORMEDWORKING GROUP FOCUSESON WATER

Te European Chamber officially es-tablished its Water Working Groupon th July, .

ABLE OF CONENS

11 3822

43MARKETINGChina and the glocal mix.

45BOOKSTe Boston Consulting Group'sTe rillion Prize.

47BOOKSoxic Capitalismby GilbertVan Kerchkove.

50INSIGHT CHINA

China's consumption challenge:rebalancing China's economy.

58THE EXECUTIVEINTERVIEWPiter De Jong, Managing DirectorING Bank N.V., Shanghai Branch.

REGULARS

07PRESIDENTSFOREWORD08LOBBYINGREPORT49CALENDAR

52EVENTS GALLERY

54CHAMBER BOARD

56ADVISORY COUNCIL

On the coverWith demand forwater in China fordomestic, industrialand agricultural use atan all-time high, everydrop counts. See p. 11.

4 EURObiz September/October 2012


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The Executive Interview EURObiz

BeijingBeijing Lufthansa

Center, Office C412,50 Liangmaqiao Road,

Beijing, 100125, P.R. China

C-412Tel: +86 (10) 6462 2066Fax: +86 (10) 6462 2067

[email protected]

Chengdu04-A, F16, Tower 1,

Central Plaza, No.8ShunCheng Avenue,

Jinjiang District, Chengdu8

11604-ATel: +86 (28) 6155 7184Fax: +86 (28) 6155 7194

[email protected]

Guangzhou -Pearl River Delta (PRD)

Unit 2817, 28/F, TowerA, China Shine Plaza,No.9 Linhe Xi Road,

Tianhe District,Guangzhou, 510613,

P.R.China9

A2817Tel: +86 (20) 3801 0269Fax: +86 (20) 3801 0275prd@europeanchamber.

com.cnShenzhen -

Pearl River Delta (PRD)Rm 308, 3/F ChineseOverseas Scholars

Venture Bld,South District, Shenzhen

Hi-tech Industry Park,Shenzhen, 518057,

P.R. China3308

Tel: +86 (755) 8632 9042Fax: +86 (755) 8632 9785prd@europeanchamber.

com.cn

NanjingZhujiang No.1 Building,

30/F, E11 Zhujiang Road,

Nanjing, 210008, P.R.China1

130E1Tel: +86 (25) 8362

7330 / 8362 7331Fax: +86 (25) 8362 7332

[email protected]

ShanghaiUnit 2204, Shui On Plaza,333 Huai Hai Zhong Road,

Shanghai, 200021,P.R. China

3332204

Tel: +86 (21) 6385 2023Fax: +86 (21) 6385 2381

[email protected]

ShenyangRoom 20-10.

Office Tower 1, ShenyangRich Gate Plaza,

No. 7-1 Tuanjie Road,Shenhe District

Shenyang 110001,P.R. China

7-1

20-10Tel: +86 (24) 2334 2428Fax: +86 (24) 2334 2428

[email protected]

TianjinMagnetic Plaza, Building

17, Room 15A17,Junction of Binshui West& Shuishang East Road,

Nankai district, Tianjin,300381, P.R. China

1715A17Tel: +86 (22) 2374 1122Fax: +86 (22) 2374 1122

[email protected]

EURObiz is published bimonthly

by the European Union

Chamber of Commerce in

China, and is distributed free

to all Chamber members.

All material is copyright2011 by

the European Union Chamber of

Commerce in China. No part of

this publication may be reproduced

without the publishers prior

permission. While every effort has

been made to ensure accuracy,

the publisher is not responsible

for any errors. Views expressed

are not necessarily those of

the European Union Chamber

of Commerce in China.

Chief EditorSteven Schwankert

Art DirectorVincent Ding

Contributing WriterJack Perkowski

Contributing WriterDavid Wolf

For European ChamberMembership and

Advertising inEURObiz:

National MembershipManager

Remei Lluch PontTel: +86 (21) 6385 2023

ext. 106rlluch@europeanchamber.

com.cn

Advertising &Sponsorship Coordinator

Betty YinTel: +86 (10) 6462 2066

ext. 23

[email protected]

JOIN THE EUROPEANBUSINESS CONVERSATION

IN CHINAAdvertise in EURObiz

Reach , seniorEuropean and Chinese

business executives,government officials and

over ,member companiesof the EU Chamber nationwide

with the only publicationdedicated to covering

European business in China.

To place your ad,please contact:

Remei Lluch PontNational Membership Manager

el: + () ext. [email protected]

Betty YinAdvertising and Sponsorship Coordinator

el: + () ext. [email protected]

European Chamber Chapters:


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We are eager to include you in our 15th anniversary celebrations. If you have BJU stories, photosand/or videos you would like to share with us, please send them [email protected].

15

[email protected]

When people ask me why I chose to work at BJU,

I tell them, I gave birth at BJU. I had confidence

in BJU from the very beginning and still do.

Jenifer Sullivan

To Dr. Khanjani and Dr. Na: I am indebted

to you for helping me through some

difficult times.

Jim Fidler

Thank you, Roger, for helping me with

the pain in my hip. Im amazed at how

much the little adjustments can do.

Maria Vemdal

Hi Dr. Chen Haohui, many thanks to you and the

BJU team who demonstrated an ethic of care

that empowered me to get well after my surgery.

Stephannie Tebow


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Earlier this month, as President of the European Union Chamber of Commercein China I was honoured to present the European Business in China Position Paper2012/2013to a record number of our member companies and the media in Beijing.Tis annual publication has been produced since 2000 and has grown in importanceand stature over the years to receive a correspondingly high level of attention in bothChina and the European Union.

TePosition Paperis written by the Working Groups and Fora of the European Cham-ber over a six-month consultation and drafting period. Tis process involves the con-

tributions of hundreds of European businesses operating in China with the intentionof providing a relevant and up-do-date overview of the current conditions in varioussectors in the country. Most importantly, it provides detailed and constructive rec-ommendations to the Chinese government that it is hoped are of assistance to thevarious departments and regulatory bodies in their everyday work.

he Position Paper is also intended to be a source of information for the EuropeanUnion and European Member State governments to be of assistance in their engage-ments with Chinese policy makers. In addition, it should be of use for all with aninterest in the Chinese economy including business, media and academia.

As a part of this process, I will travel with other executives and representatives of theEuropean Chamber to Brussels and 10 other capital cities in Europe, to deliver ourmessage directly to policymakers there. While in Brussels, we will also participate in

the Eighth EU-China Business Summit. his joint initiative by BUSINESSEUROPEand the China Council for the Promotion of International rade (CCPI), togetherwith the European Union Chamber of Commerce in China, the EU-China Business

Association (EUCBA) and EUROCHAMBRES, aims tocontribute to and maintainingthe dialogue between these two critical trading partners.

Tis European exercise by the European Chamber will also be done with the objec-tive of reinforcing the recommendations to Europe by speaking with a single voice.

Immediately after returning from the European our we will be then engaged in pre-senting the Position Paperto relevant Chinese officials who have attached very highimportance to our message in past years

Along with the Position Paper, the European Chamber has recently issued two new

publications: Dulling the Cutting Edge: How Patent-Related Policies and Practices Ham-per Innovation,a look at the state of patent quality in China. Tis important study ex-amines how quantitative targets are preventing China from reaching its full potentialin true invention as it moves up the value chain. Also released in September was theSecond Comprehensive Coaching Study in China, on the level of corporate instructionand mentoring currently available here.

I hope these efforts will contribute to and provide you with continued success in yourbusiness and all your ventures.

Mr. Davide CucinoPresident of The European UnionChamber of Commerce in China

Sustainable Growth

Demands Open Markets

September/October 2012 EURObiz 7


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Meeting with President Davide Cucino and Vice Mayorof Beijing Chen Gang to discuss Urbanisation in China

On th June, the President of the European Chamber, Davide Cucino, met with Vice-Mayor of Beijing, Chen Gang,Lord Mayor of Copenhagen, Frank Jensen, and the EU Ambassador to China, Dr. Markus Ederer. During the meet-ing, the respective parties discussed the opportunities and challenges in the urbanisation sector and the contributionthat European Business in China can make to ensure this urbanisation is sustainable. Te discussion was focused on thewater and energy sectors and the demand that the rural to urban migration place on these systems. Mr. Cucino high-lighted that European business has know-how and experience in these areas and that the EU can make an even greatercontribution to alleviating the pressures of the added demand from this massive population influx. hese discussiontopics were subsequently spoken to during the keynote session of the European Chamber organised China Goes Urbanevent at the Wanda Hotel in Beijing.

Working Level Highlights

Te European Chamber has taken the opportunity to usethe typically slow moving summer months to engage inmore technical and working level discussions with relevantgovernment departments.

On June th, the Carbon Market, Aerospace and Avia-tion working groups met with the Director of Europeanand International Carbon Markets from DG Climate Ac-tion (DG CLIMA), Ms. Mary Veronica ovsak Pleterski,to discuss the inclusion of aviation in the EU Emissionsrading Scheme (ES). his meeting was a follow-up toa mid-October meeting with Director-General of

DG CLIMA, Mr. Jos Delbeke, in order to further brief theworking groups on the recent developments in the EU-China dialogue on the EU ES. his meeting was thenfurther followed-up on a more technical level with a visitfrom Mr. Marco Loprieno, Policy Officer of DG CLIMA,where the Chinese ES pilot projects were discussed on atechnical level. Tese meetings were attended by both theCarbon Market Working Group as well as the members ofthe Energy, Smart Grid, Renewable Energy, Aerospace andConstruction working groups who also may be affected bythe Chinese ES pilot projects.

EURObiz Lobbying Report

European Chamber President Davide Cucino (left) met with the Lord Mayor of Copenhagen on th June.



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Lobbying Report EURObiz

On th June, European Chamber President Davide Cucino (left) met with Mr. Chen Gang (center),Vice-Mayor of Beijing.

On th July, representatives of the European ChamberSCA Working Group met with Mr. Guo Chen Guang, Direc-tor of International Cooperation Department of SAC. Temeeting was held to share specific views on the SAC: thFive Year Plan for Standardization. During the meeting,Mr. Guo addressed the quality concern on standardizationand expressed the awareness towards related issues. Inthe future, SAC will have further cooperation with differ-ent ministries to seek out corresponding solutions. It was

agreed that the European Chamber and SAC will look formore cooperation opportunities on common issues.

Members of the Renewable Energy and Smart Grid work-ing groups participated as industry experts in an EUCPhosted workshop with the State Electricity RegulatoryCommission (SERC) on the topic of Integration of Renew-able Energy into the Grid on July th. his was a dis-covery workshop where SERC explained various concernsthat they have in the standards making process related tointegrating renewable energy. Tese questions were notedby the European counterparts and will be brought to the re-spective R&D departments of the participating members ofthe European Chamber, as well as other European experts,to prepare a document to highlight the European experi-ence related to these concerns. Tis document will then berelayed to SERC for follow-up in an ongoing dialogue.

In continuing with the focus on energy efficiency and elec-tricity market reform, on th July, representatives fromthe Energy, Smart Grid, Renewable Energy, Constructionand Environment Working Groups met with Ms. Paula

Abreu Marques, Head of Unit of International Relations atDG Energy. Te key topics of the upcoming position paperwere discussed as well as the three partnerships signedbetween EU and China on May rd on Sustainable Urbani-sation, Electricity Market Reform and Energy Security. As

these three EU-China joint statements will be a focal point

of DG Energy in the foreseeable future, the related workinggroups have been continuously working towards leveragingthis political attention to push for further market accessinto China.On th August, the Cosmetics Advisory Council (CAC/P)had a meeting with Shanghai China Entry-Exit Inspectionand Quarantine Board (CIQ). Te meeting was held at theEuropean Chamber Shanghai and Beijing Offices, linkedthrough video-conference. he SH CIQ officials Mr. Guo

Xiaodong and Ms. Wang Zhenyu introduced the implemen-tation of Order as well as particular practices of the SHCIQ and answered members questions in order to clarifythe implementation of Order .

On th August the Aerospace Working Group wasbriefed by officials from DG Enterprise (DG ENR) aboutthe new dialogue on space policy between EU and China.Mr. Gonzales and Mr. Bosco were visiting China togetherwith Dr. Paul Weissenberg, the Deputy Director-Generalof DG ENR. Te purpose of the delegations visit was toinitiate a new dialogue on space policy with China. Te fo-cus of this dialogue will be space-related topics other thansatellite navigation, such as earth observation, land surveysand weather satellites. Tis dialogue is an attempt to findadditional areas of cooperation between China and the EU.

A delegation from the PRD Chapter of European Chamberled by Mr. Alberto Vettoretti, Vice-Chair of PRD Board on

August th, met with Ms. Yao Xuan, Deputy Director ofthe FIE Approval Department, Shenzhen Science & ech-nology, Industry, rade and Information Committee. hepurpose of the meeting was to communicate the concernson the approval process of European companies establish-ing Foreign Investment Enterprises (FIE) in China. heconcerns outlined were to clearly communicate the specificrequirements concerning the FIE approval process.



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SPECIAL AUTUMN EDITIONCHINAS INFLUENTIAL ECONOMIC MINDS

INSIGHT CHINA BEIJING SPONSOR :

Speaker: Speaker:

BEIJING SHANGHAI

To Be Confirmed, ShanghaiWestin Chaoyang, Beijing

For further information about the European Chamber national events and sponsorship opportunitiesplease contact Mr. Fernando Cutanda at [email protected]

th October ,, : pmth October, , : pm

Members: RMB Non Members: RMB Registration: [email protected]

Members: RMB Non Members: RMB Registration: [email protected]

Mao Yushi

Mao Yushi is Chairman of the Unirule Institute of Economics,an independent free-market think-tank he co-founded in Bei-

jing. He is a pioneer of micro-finance and poverty alleviationprogrammes in the Chinese mainland and serves as the Co-Founder and Chairman of the Fuping Development Institute.

Liu Mingkang

Liu Mingkang served as the first Chairman of the ChinaBanking Regulatory Commission (CBRC) from to and was a member of the Monetary Policy Commit-tee of the Peoples Bank of China. Previously, Mr Liu wasChairman and President of the Bank of China (-)and Chairman of China Everbright Group (-).


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WaterEverywhere and NowhereIn contemporary parlance, water resource management has

always been an issue for China. The Great Flood, a flooding eventthat occurred in about 3000 BCE, shaped the development ofearly Chinese culture as it was developing in the Yellow RiverValley. One of Chinas first legendary heroes, Yu the Great, wascelebrated for his flood control efforts, which were deemed sosuccessful that Yu became the first emperor of the Xia Dynasty,beginning almost 5000 years of dynastic rule

Chinas need for water as an essential element forsustaining life, along with its uses in agricultureand industry, has never been greater, and while

flooding still torments millions each spring and summer,it is a lack of water, especially in northeastern China, thatpresents a significant threat.

China also leads the world in water mega-projects, namelythe construction of the worlds largest dam the TreeGorges Dam and the worlds largest water movementfacility, the South-North Water ransfer Project. Bothbegan as concepts so large that they were not thoughtpossible when first suggested: damming Chinas largest

river, and moving billion cubic meters of water peryear , kilometres from southern China to northern,respectively. Te former is already operational; the lattergoes into use in .

Tis summer was no exception. Record rainfall, especiallyin Beijing and other areas of northern China, led to unex-pected flooding and the deaths of people. Swollenrivers in Guizhou, Jiangxi and Yunnan displaced many,interrupting life and business.

Prior to that, a three-year drought had gripped parts ofsouthwestern China, also affecting millions, and leading insome places to a lack of even drinking water. At the begin-

ning of the year, Chinas largest freshwater lake, Poyang

lake in Jiangxi province, which previously covered ,square kilometers, had been reduced to just sq. km,a contraction blamed in part on the worst local droughtin years, and partially on water storage in the TreeGorges Dam reservoir, which reduces the flow of waterinto Poyang Lake.

Even if all supplies were viable, not all of Chinas waterresources are currently potable, due to contamination byagricultural, industrial or residential use. A Chinesegovernment survey on water pollution indicated that theextent of water pollution in the country was twice as badas previously indicated when agricultural waste was fac-

tored in, measured chemical oxygen demand, as oxygenuse in waterways can starve plants and animals of thedissolved oxygen necessary for life.

Also, Chinas water resources and its ability and willing-ness to build dams provide a source of clean energy fromhydropower. However, energy needs must be balancedagainst the environmental impact of those dams.

In this special report, EURObizs Steven Schwankertlooks at water issues facing China from government, man-agement and business perspectives, looking at the oppor-tunities for both European technology and enterprise toadvise and assist with Chinas tremendous water needs.

Cover Story EURObiz



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China and Water:

Every

DropCountsWater policy is generally affectedby forces from four sides:government; NGOs; industry; andend-users and consumers. Each

exerts a different kind of influenceupon policy, through use, throughlaws and regulation and throughpublic awareness efforts andeducation. Water is at the forefrontof policy now not only because2012 being the European Year ofWater, but also with the YellowRiver Commission set to be held24-25 September in Zhengzhou,Henan province, on whichEuropean representatives serves.

As part of this special look at waterissues in China, EURObizs StevenSchwankert wades into the issuewith representatives from three ofthese four sectors about the stateof water in China today, and the rolethat European business can play.


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Water could not likely be a moredifficult issue for China. Teclimate of China is difficult

in terms of a water management per-spective, said Simon Spooner, Prin-cipal Consultant, at Atkins Water &

Environment in China, who serves asa water pollution specialist for boththe EU-China dialogue platform andfor Yellow River Integrated WaterResources Protection.

With the worlds largest population,only of Chinas total land isarable, and China has access to lessthan of the worlds total freshwater.

Because of this, as an environmentalissue, water has no equal in impor-tance. For me, water scarcity is thenumber one priority. Human civilisa-tion is written in water and erased insand, according to Jonathan Watts,environmental correspondent for theBritish newspaper Te Guardian, andauthor of When a Billion Chinese Jump.

One academic sees the water supplysituation as being so serious that headvised the government to reducefood production in northern Chinaor aquifers underground water sup-

plies -- will diminish to a dire levelin years, Watts quoted ZhengChunmiao of the Water ResearchCentre at Peking University, in a June report.

Although Watts believes there is slowprogress, he believes more needs tobe done. Is China addressing its waterresources effectively now?

Absolutely not. Tere has been toomuch of an emphasis on expensive,top-down, engineered, supply-side

projects (water diversion and desali-nation projects) and not enough focuson demand-side solutions to improveefficiency through education and cul-ture to reduce waste, he said.

Despite this potential doomsdayview of water use in China, Europeanorganisations, enterprises and indi-viduals are at work to bring Europeantechnology and know-how to assist inaddressing the issues.

The China EuropeWater PlatformIn March , China and Europeagreed to establish a platform fordialogue, joint research and privatesector cooperation on better man-

agement of water resources. ChenLei, Minister of Water Resources ofChina and the European Union, rep-resented by the Danish Minister ofthe Environment, Ida Auken, signed ajoint statement to establish the ChinaEurope Water Platform. Tis state-ment, signed at the th World WaterForum in Marseilles, France, recog-nises that China and Europe facesimilar challenges in managing waterresources, and that water resourcesare expected to become increasinglystrained due to socio-economic devel-opment and climate change.

Te Platform is lead jointly by the Chi-nese Ministry of Water Resources andDenmark and Portugal on behalf ofthe European Union.

Henrik Dissing, Chief Advisor of theChina Europe Water Platform, seesthe issue as being of critical impor-tance to both sides.

Water in its many shapes and chal-

lenges includes drinking water andwater provision for industrial use,flood management and waste watertreatment; it is a crucial issue in bothChina and Europe. Te implicationsfor a lack of appropriate handling andlack of appropriate water services arequite significant in terms of socialcosts and economic cost. Te esti-mated economic loss for the grossdomestic product (GDP) incurredby various problems for China couldtotal - per year, Dissing said.

Te importance of this of social andeconomic development of Chinais immense. Terefore it is crucialfor China to recognise -- and it isreflected in the current five-year plan

the strategic water document andthe investments that are set aside andthe political attention in the Chinesesystem all the way from President HuJintao down is something they wouldhave to deal with. Terefore its veryimportant for them to get insidestate of the art solutions in Europe,

which is recognized as leading in

water technology, to get this knowl-edge and water management systems,and to incorporate these into Chi-nese management systems. Chinais very interested in these, throughdialogue, through research projects,

and through business cooperation,he said.

Dissing sees a range of issues in Chinathat need to be addressed, in termsof supply, distribution, use and treat-ment. Particularly in the northeastthere is a substantial lack of adequatewater resources, and in parallel withthis, we see inefficient use of scarceresources. Tey dont have very muchwater, but the way it is use is alsoinefficient on top of that. In someplaces, the pricing system may not

be adequate for creating incentivesfor resource-efficient use, he said,adding You will see other placesin China where resources are abun-dant, but wastewater treatment isproblematic.

Te recognition of waters impor-tance led to the creation of the WaterPlatform.

As water is high on the internationalagenda, we saw from the European

side that the last five-year program,which ended this summer, and whichwas interpreted by both sides as beinga platform for policy dialogue andpolitical contact already one or twoyears before the end of this, andtalks began on how to continue this.Te China Europe Water Platformwas established as a result, saidHenrik Dissing, Chief Advisor of theprogramme.

However, the Platform is more thanjust a continuation of an earlier

scheme. Te previous project had million Euros per year to initiateconferences, studies, study tours. TeChina Europe Water Platform is verydifferent in its modality. China is nota country eligible for European aid, sonow we have cooperation on an equalbasis for mutual benefit. Tat meansthat we do not, as a programme, havea single euro to spend to initiate activ-ities. We do have strong political sup-port from both sides. We also have avery good situation to approach posi-tive kinds of European and Chinese

Cover Story EURObiz



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funding programmes, Dissing said.

One of the first events that the Plat-

form is supporting is the Yellow RiverForum. What we have to do is have afew but important annual events. Tefirst of these is a high-level meetingin Zhengzhou, in conjunction withthe Yellow River Forum, on -September. Tis annual meeting issupposed to be the meeting opportu-nity for Chinese and European poli-ticians, high level officials, as well asbusiness leaders, and this is sort ofthe place where the political dialogueon water management takes place,Dissing said.

He is also looking for greater partici-pating from other European coun-tries. We will also build up more the-matic cooperation. Te secretariat forthe Platform is led by the Ministerof Water Resources in China and theDanish Ministry of Environment onbehalf of the EU Member States. Butits intended that over the next fewyears, will see a range of EU MemberStates, and international and Chineseorganisations take a co-lead within a

given topic or area, he said.

Tese will be the kind of centrally-planned and conducted events that

can finally get down to the compa-nies, so that if they wish to use theplatform to meet partners or searchfor information or make importantgovernment contacts, these eventsshould be a very good opportunity forthem. Tere are also plans to establisha website where companies seekinga partner, seeking financing, seek-ing facilitation of a programme, canapproach and we can manage whatwill be put forward, Dissing said.

Dissing sees the European role asbeing both advisory and commer-cial. A range of direct partnershipshave been established from Chineseand European companies, between,researchers and public partners, sothat the number of direct coopera-tion has taken place. I would also liketo see that the actual companies areexpressing that access to the Chinesemarket has been easier. I hope it willbe more easy and efficient to get intouch with customers, or that someof the market barriers and transpar-

ency will be eased. And of course I

would like to see the attention to theevents and platforms we are estab-lishing have increased in numbers as

well, he said.

Over the five years, how will Dissingjudge whether or not the Platformreached its goals? At the end of theday, the success criteria are that wesupported the appropriate solutionsbrought to appropriate problems andchallenges, at a higher speed than wesee today.

River HealthOne industry figure sees progress,but also room for improvement inhandling water resources issues, espe-cially in handling water pollution.

argets are coming, environmentaltargets, for government officials.However, there still is not a coordi-nated plan to address the issue, said

Atkins Spooner. Spooner will chairthe water quality management ses-sions at the upcoming conference.

Water falls under the management oftwo separate ministries: the Ministryof Water Resources (MWR), which,

as Spooner explained, oversees the

One issue that rises repeatedly when discussing water management is the price of water. Observers includingAtkins Spooner and the China Europe Water Platforms Dissing both discussed that the water is not necessar-

ily priced properly.

Tere are several factors affecting water pricing, beyond normal supply and demand, as there are three major usergroups for water in China: agriculture, industry and residential/individuals. Because the quality and quantitydemands of agriculture and industry for water are different than those of residential customers, water pricingfor the former two categories remains extremely low.

Domestic and home water pricing is controlled by a local pricing bureau, under the auspices of the local branchof the National Development and Reform Commission (NDRC). Prices are often artificially low, as pricing isdesigned more to remain in line with consumer expectations than to address any water management concerns.

Industrial pricing is handled by the same offices, and in most places is not high enough to be a consideration.

Agricultural water is even less expensive, many times less than city water, and accounts for about of total

water use in China. While most agriculture in Europe is non-irrigated, the opposite is true for the raising ofcrops and livestock in China.

Whats wrong with inexpensive water? It does not exert any kind of behavioural control and does not generateenough revenue to allow investment in better infrastructure, Spooner said. o use a parallel example, whenfuel prices for items such as petrol increase, eventually the cost results in the alteration of behaviour, like usingpublic transportation, carpooling, and bicycling, or simply choosing not to go to some places. However, givenpresent water pricing levels in China, the price level does not act as a deterrent to improper use the cost inducesfew if any to address leaks, inefficient delivery, waste, or to seek improved or reduced methods of consumption.

How Much Should Water Cost?

EURObiz Cover Story



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Commercial InterestGiven the size of the opportunity toimplement state-of-the-art solutionsin China, European companies arekeen to play a larger role in Chinas

water industry, especially in the areasof water treatment, waste and sludge.

Belgiums Waterleau is one of thosecompanies. With just two yearsexperience in China, the companyis looking to extend its operationsin Hong Kong and Macau, where itparticipates in the delivery of munici-pal water supplies, and in other partsof China, where its joint venture,Golden Sources, provides industrialwater treatment services to custom-ers including breweries such as San

Miguel and Diageo.

For industrial water users, outflowfrom a plant must meet certaineffluent, or waste, quality standards.

Processed water can be treated andthen returned to the waterways fromwhich they are sourced, if they aretreated properly, and can even later beused in homes for domestic use. For-eign companies, which often see local

environmental regulations enforceagainst them more stringently thanlocal firms, are more willing to a turnto a firm such as Waterleau that canguarantee water treatment standardsin order to avoid potential hassle withregulators.

Proper water treatment offers otheropportunities. As water treatment,especially at the municipal level, isoften combined with activities suchas waste management, opportunitiesemerge for waste to energy process-

ing, including biogas. Simply put, askitchen waste degrades, through con-trolled anaerobic processing, gassescan be produced. Tose gasses canthen be converted into energy sources,

rather than simply just be wasted. Atpresent, European technology in thisarea is one of the global leaders.

Chinas water issues remain one of thenations greatest challenges, both in

terms of supplying its people and alsoin having a sufficient supply to main-tain the countrys growth. Supply willstruggle to keep pace with demand,and different sectors industrial,agricultural and domestic will com-pete with each other to satisfy theirown areas. Chinas own demand willalso be pitted against that of neigh-bouring countries that receive watersupplies from major rivers that origi-nate in China but flow beyond its bor-ders. As China strives to manage all ofits limited resources, water and water

policy will remain at the forefront ofconcerns for its new leadership.

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How Chinas Hydro-HegemonyAffects its Asian Neighbours

Water supply is normally a domestic matterfor any nation, as it attempts to manage itsresources to meet local demand. However,water becomes an international issue whenwaterways originating in one country butflow into one or more others downstream.

China is one such nation, with giant rivers includingthe Mekong passing its borders into SoutheastAsia. As such, a countrys hydro-behaviourbecomes not only a local and environmentalissue, but potentially an international andpolitical one. EURObizs Steven Schwankertspoke with Swedish water policy scholarJesperSvenssonabout China and its hydro-behaviour.

EURObiz (Eb): You use twogreat phrases, hydro-hegemony and hydro-behaviour, in your paperManaging the Rise of aHydro-Hegemon in Asia:Chinas Strategic Interestsin the Yarlung-TsangpoRiver. Please tell us more

are these phenomena weshould expect to see more offrom all countries, not justChina? What are the stand-ards for hydro-behaviour?

Jesper Svensson (JS):Chinais not only Asias strongest economic,political and military power, but thisis reinforced by its hydro-hegemony:it sits at the headwaters of almostall of Asias most important riverswhere they have the incentive tounilaterally develop the rivers to

meet its domestic needs and export

all negative externalities to weakerdownstream riparians. If water stressis not to become Asias defining crisisof the st century, Asian states haveto find a common political platformto back their economic integrationand address their biggest securityconcerns.

Given the secretive as well as strictlyuncooperative manner with whichChina treats its water managementof international rivers, that will nothappen overnight. Te argumentinvolved in upstream-downstreamrelationships in Asia is only environ-mental on the surface. Downstreamstates may employ environmental orscientific language to protest againstupstream dams; however, once theysit upstream on another river, theenvironmental concerns are forgot-ten altogether and they build dams

themselves. For instance, India

criticises China for building damson the Yarlung-sangpo/Brahma-putra, but India is not better, givenits complicated river arrangementswith its other neighbours such asPakistan and Bangladesh. All coun-tries regard their rivers as nationalresources that end at the border,making interstate water sharing

increasingly challenging. It becomescouched in security terms (national,economic), which legitimise their eco-nomic exploitation.

In the international context, theSino-Indian relations are particularlyunique: no other inter-state relation-ship shares three trans-boundaryriver systems as India and China dowith the Yarlung-sangpo, the Indusand the Sutlej. As described by Indiansecurity expert Brahma Chellaney,China and India together constitute

of the worlds population but

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have to make do with . of itswater.

Given the current state of water stressand that these two giants togetheraccount for . of the worlds rice

production and . of wheat, itraises a key question: What happensif India and China become major foodimporters? Te severe droughts thatgripped southwest China in , the

Yangtze River Basin in and therecent drought in India are a harbin-ger of what is to come. Looking ahead,I believe there is little indication thatChina is willing to cede water rightsto downstream states like India andBangladesh.

However, I think we can achieve muchby improving internal water man-agement within nations by movingbeyond state-actors to unlock andunleash the resources of corporationsand NGOs. By adopting cross-secto-ral, cross-agency approaches to watermanagement, India and China couldjoin hands to improve water infra-structure and coordinate adoption oftechnologies in order to improve theefficiency of water use for agriculture.For instance, right now, Im involvedin forging a dialogue between Chinese

and Indian environmental NGOs.

Eb: Should countriesdownstream from Chinabe concerned about itshydro-behaviour, namely,its propensity for dambuilding?

JS: Both yes and no. First, those ana-lysts that have suggested that Chinawants to divert rivers that emanatefrom the ibetan Plateau and chan-nel it into the Yellow river in the

Northern China Plain dont knowChina very well. Launching largewater division projects is not techni-cally or economically feasible and hasnever been included in governmentplans. Second, energy independenceis the key priority and the past twoor so Chinese Five-Year Plans havestressed hydropower as a strategicenergy source. Right now, the focusis on tapping the hydroelectric poten-tial of the Jinshajiang ( GW), theLancanjiang (Mekong) (. GW),the Nujiang (Salween) (. GW)

and the Yarlung-sangpo ( GW).oday, China has more than half ofthe worlds , large dams, sobuilding dams in difficult locationswhere it is also expensive has not ledChinese companies to shy away from

building them nor Chinese banksfrom lending money to Chinese com-panies undertaking such endeavours.Consequently, a disputed and heav-ily militarised border with India willnot deter China from building a GW dam on the Great Bend of the

Yarlung-sangpo/Brahmaputra.

But today, on the other hand, theongoing war of words between schol-ars, NGOs and officials on the JinshaRiver shows, I think, the most severestruggle between hydropower andenvironmental protection in China.More broadly, the environmentalprotest we have seen this summerin Qidong, Jiangsu province and theSichuan town of Shifang and in thecities of Dalian last year cast lighton state-society relations. Te Chi-nese government has a more posi-tive attitude towards environmentalissues. Downstream states shouldengage China and reach out to thosegreen voices that are opposed tolarge-scale, supply-side projects. Yet

the case of the Mekong River showsthat only major environmental criseswill induce China into cooperation.It must perceive water to be threat-ening Chinas image as a peacefullyrising power, meaning institutional-ised river basin cooperation is trig-gered by the fact that China is sens-ing some sort of crisis situation orintense regional pressure.

Eb: Water in China is almostalways drought or flood.How does that affect Chinas

overall water policy?JS:China has throughout its historyalways had droughts and floods sothis is not a new phenomenon. How-ever, the scale of Chinas water prob-lems and the fact that climate changeis resulting in more unpredictableweather patterns make things morecomplicated. Te new Asian Develop-ment Bank report, Drying Up: Whatto Do About Droughts in the PeoplesRepublic of China urges Chinese plan-ners to apply its engineering and

technical strengths to saving waterand strengthening its risk manage-ment by preparing for droughts, notjust reacting to them during a scar-city event.

Eb: On the list of environ-mental issues that Chinafaces, where does waterplace?

JS:In the water-food-energy-nexus,water plays a key role because its aresource that cannot be obtained byinternational trade deals. China isscouring the world for oil and gasbut the painful fact is that water isa limited resource that is unevenlydistributed: the Northern China Plainhas nearly of Chinas populationand almost of its arable land buthave to make do with less than ofits water resources.

o make things worse, we have a waterscarcity versus energy demand con-frontation: coal which provides of the nations energy is responsi-ble for a fifth of the national waterconsumption, but the coal reservesare concentrated in the dry northernprovinces. So now there are peoplearguing for going to the Bohai Sea to

transfer water from there to InnerMongolia to help the mining of coal,but seawater desalination is an expen-sive solution.

Moreover, the drought we saw in theYangtze River Basin in whichis supposed to transfer water north-ward along three routes raises a keyquestion: What if the south and thenorth of China suffer drought at thesame time? We would probably see aconflict between energy and water:Te Yangtze delta needs hydroelec-

tricity from its dams while the northneeds water to be transferred fromthe Yangtze River.

Svenssons paper, Managing the Riseof a Hydro-Hegemon in Asia: Chi-nas Strategic Interests in the Yar-

lung-Tsangpo River, may be down-loaded for free from the Institutefor Defence and Analyses website:www.idsa.in/system/files/OP_China-YarlungRiver.pdf.

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Drying Up:

What to Doabout Droughtsin the PeoplesRepublic of China

he PRC has a long history ofsupply-side management. Withthe natural imbalance between

prime agricultural soil in the Northand overly abundant water resourcesin the South, the PRC has depended

for more than a millennium on itsexpert technocrats, engineeringprowess, and abundance of labour.It has always been a hydrauliccivilization.

Now, the PRC must apply its engi-neering and technical strengths tosaving water. Managing consumptionnot only requires technical solutionsbut also strong institutions and plan-ning. Given the national challenges,which are illustrated at the local levelthrough a case study of Guiyang,demand management is a technicaland economically rational and reliableoption for addressing constant watershortages and drought situations.

Te countrys growing water deficitas a result of human demands hasrendered the engineering, supply-side paradigm as increasingly inad-equate. Integrated Water ResourceManagement (IWRM) and a balancebetween supply and demand are nec-essary. Local governments, as demon-

strated in the efforts of the Guiyang

Municipality case study, must bedeliberate in their reforms and bal-ance their water ledgers. Studies arevalidating conservation as a viableinvestment and technically reliableoption for closing the supplydemandgap and de-stressing the waterresources upon which ecosystems,economies, and people have alwaysand will always depend.

Now, the PRC must apply its engi-neering and technical strengths tosaving water. Managing consump-tion not only requires technical solu-tions but also strong institutions andplanning.

Drought and ShortageA NewNormal or a Wake-Up Call? Te scale

of the challenges faces the PRCs gen-eral economic and social developmentbecause of constant water short-ages in many places, the reoccurringmenace of droughts, and a wideninggap between what nature and engi-neering can supply versus defineswhat users from all sectors require.We propose demand management asa pathway to increased resilience todroughts and ecological conservation.We examine three tracks to gettingon that pathway: risk management,

optimal infrastructure, and

ecosystem-based management.

Te pressure of development on natu-ral resources and general ecosystemsin the PRC has been more evident inthe recent successive years of severedrought and a growing scarcity ofavailable freshwater resources.

Demand management would helpaddress the constant water shortagein some areas, while creating reservesfor droughts and supporting the eco-logical flows necessary for the reha-bilitation and conservation of waterresources.

Key Message : Natural droughtsmay be a new normal for the PRC, butunnatural water shortages are making

matters worse. Regions of the PRChave a natural proclivity to dry condi-tions and droughts, but water short-ages caused by economic developmentand unconstrained water consump-tion are exacerbating the effects ofdry periods and droughts. Te PRChas committed extraordinary financ-ing to complete what it considers tobe essential water infrastructure.

A more cost-effective and environ-mentally sustainable approach wouldinvolve three tracks: First, priori-

tise risk assessment and reduction

This excerpt from the Asian Development Banksnew reportDrying Up: What to Do about Droughtsin the Peoples Republic of China looks at the

ongoing problem of drought in China, whichalthough traditionally a plague of the north,has now expanded to areas in southern China,including the Yangtze River and Poyang Lake,Chinas largest freshwater lake.

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plans, of which demand managementis essential. Second, make optimaluse of infrastructure by includingnon-structural technical optionsand non-traditional infrastructureto bring demand levels down to sus-

tainable levels. Tird, reform watermanagement is required at the locallevel in order to achieve the healthyecosystemsthe long-term benefitof demand management.

Key Message : A risk reduc-tion approach to droughts wouldspare the PRC much of the unneces-sary hardships currently experienced.Droughts cannot be prevented, butthe severity of their effects can bereduced through better systems and

demand management. Te PRC hasthe national systems for monitor-ing and forecasting droughts, but itsearly warning system must be fur-ther developed so that subnationalgovernments can respond early andquickly. Provinces and cities shouldassess the risks associated with cur-rent water resource extraction ratesand demand levels. Unsustainableconsumption rates put populations,industries, and economies at greaterrisk during a drought. Tis is unnec-essary risk. More conservative con-sumption in normal times can createwater savings in reservoirs and natu-ral ecosystems, which will be usefulin droughts and for long-term eco-system rehabilitation. Billions of dol-lars have been repeatedly lost in dam-ages and relief efforts from droughts,which can be saved with better moni-toring, forecasting, and early warningsystems.

Key Message :Use an optimalmix of infrastructure for saving water

instead of just spending it. Te cur-rent infrastructure path in the PRCis still navigating toward increasingwater supply when opportunitiesfor saving water are vastly underex-plored. Provinces, cities, and indus-tries can invest in technologies andsystems that can increase supply bysaving water and with greater costeffectiveness than building storage.Water-saving fixtures and appliancesfor domestic users, increased waterproductivity systems in industry,

and more efficient irrigation offer

the same reliability that planners arecounting on when they build reser-voirs and diversions.

Key Message :Demand man-agement offers short-term gains

in increased supply and long-termgains in more productive ecosystems.Strategic management is the key toachieving specific results, whetherthey are near-term results (such aswater savings) or long-term results(healthier and more productive eco-systems). Te traditional way of man-aging water resources is a large part ofthe problemtoo many agencies aremanaging a shared, crucial resourcesand sometimes with contradictoryinterests. Water resources need a

reliable system of user rights andallocations that consider the needsthroughout a watershed despite juris-dictional boundaries. Tese systemsneed focused management, and PRCsreform trend toward a single wateraffairs bureau is on the right track.

Cities need greater national supportin their reform and capacity build-ing efforts to ensure water resourcesare managed for resultsbalancedwater supply and demand, water sav-ings, and ecosystem protection. Teparticular needs of a risk manage-ment approach require more forwardthinking and (short- and longer-term)actions than disaster response. A pro-active approach encompasses earlywarning, monitoring, forecasting,risk assessment, risk mapping, anddrought risk management plans thatcan better address drought for themore vulnerable groups. Tis high-lights the need for a different fundingmechanism to address water secu-rity needs in vulnerable areas and

different operating and manage-ment arrangements from the Officeof State Flood Control and DroughtRelief Headquarters and the Ministryof Water Resources to support betterpreparedness for drought. Ultimately,this approach can save considerablemoney in relief and averted lossesand damages from droughts.

An entirely new system is not neededto adopt a risk reduction and manage-ment approach. Many of the elements

necessary to implement this approach

nationally already exist within thegovernments effective administra-tive system for disaster response.Te PRC has an existing institu-tional structure, policy and regula-tory framework, and an emergency

response network in place. Demandmanagement has been proven as apathway that can propel the coun-try to greater resilience. Embodiedin demand management is the soundmonitoring of flows and the alloca-tion system. It significantly contrib-utes to closing the supplydemandgap, which cannot be done by newinfrastructure alone. It has directpositive impacts on the environment,returning or maintaining water thatthe environment demands for its own

ecosystem functions and services.

Demand management is also essen-tial in managing the risks associatedwith droughts. Given the nationalchallenges, which were illustrated atthe local level through a case studyin Guiyang, demand management isa technical and economically rationaland reliable option for addressingconstant water shortages and droughtsituations. Te countrys growingwater deficit as a result of humandemands has rendered the engineer-ing, supply-side paradigm as increas-ingly inadequate. A disaster responsesystem is also insufficient and missesopportunities to reduce the costs andpersonal impacts of droughts. Anintegrated water resources manage-ment and a balance between supplyand demand are necessary.

All things considered then, local gov-ernments must be deliberate in theirreforms and in balancing their waterledgers. Studies are validating water

conservation as a viable investmentand technically reliable option forclosing the supplydemand gap and

de-stressing the water resources thatecosystems, economies, and peoplehave always and will always dependuponnot just for their survival, butalso for their prosperity.

Download the e-book Drying Up: Whatto Do about Droughts in the Peo-

ples Republic of China for free at:www.adb.org/sites/default/files/

pub//drying-up-prc.pdf.

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Newly-FormedWorking GroupFocuses on Water

he extraction, distribution, man-agement and treatment of waterand waste water are priorities

of the Chinese Government. Tis ishighlighted in Chinas No. Document Accelerating Water Con-servancy Reform and Development.On a political cooperation level,China and the European Union haveengaged in various initiatives relatedto the water industry in China, withthe most recent being the China EUWater Platform that was launchedat the th World Water Forum inMarseille in March . Tis ini-

tiative follows the conclusion of theChineEU River Basin ManagementProgramme, which has concluded afive-year study with the publication ofa report highlighting the policies andregulations that need to be improved

in order to address the water situa-tion in China. Te European business

in China had not, until now, organ-ised on an industry level to engagewith the relevant Chinese officialsto leverage this important politicaltopic and address the market accessconcerns of the water sector.

As the independent voice of businessin China, the European Chamber wasencouraged by European business toinvestigate this industry further, andon th July, , the Water Work-ing Group was officially established.

Te Working Group has already begunthe process of identifying and devel-oping key concerns in the waterindustry including the investmentbarriers, water efficiency, energy

efficiency in water related operations,pollution and permit control, waste

water treatment, flood control andstandards. Te Working Group willbe expanding these concerns intoviable key recommendations to bringto the relevant Chinese ministries inorder to illustrate the benefits whichfurther market access for Europeancompanies would bring to China inthe water sector.

If you are interested in joining theWater Working Group at the EuropeanChamber or would like more informa-

tion concerning the working group,please contact the Business Manager,Mr. Sam Passafiume at [email protected].

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TheEuropeanBusiness

inChinaPositionPaper

2012/201322 EURObiz September/October 2012


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The European Business in China Position Paper is the European Union Chamber ofCommerce in Chinas most important publication of the year. With input from hundredsof member companies and formulated by the Chambers Working Groups and fora, thePosition Paper allows the Chamber to communicate its position on the critical issuesfacing the EU-China business relationship with a single voice, in order to offer clearand comprehensive recommendations to policy-makers in both China and the EU.

On the eve of a generationalleadership transition, Chinaholds a historic opportunity

to raise its economy to a new level.o do so, a prompt and fundamentalshift is required to carry out neces-sary economic rebalancing. Chinasstate-led investment development

model has supported growth overthe last years, but is by designunequal and no longer sustainable.Te last decade of stalled and piece-meal reform during prevailing advan-tageous economic conditions main-tained strong growth but failed tocreate the supporting institutionalframework required to sustain Chi-nas development.

China possesses the necessary ingre-dients, including the technology andphysical infrastructure bases, aswell as the human capital, to makethis shift. However, reforms to

substantively reduce state involve-ment in the business environmentand to give full play to market princi-ples are needed to unleash the entre-preneurial potential of Chinas pri-vate industry.

Te th Five-Year Plan recognised

this need for change, but meaning-ful implementation has been lacking.With signs of over-investment andpoor productivity returns alreadyperceptible and with Chinas demo-graphic dividend coming to an end,these changes are now urgentlyrequired not only for China, but alsofor global economic growth. As thenext five years will be critical, Chi-nas leadership transition providesan ideal opportunity for these boldsteps to be taken.

At its core, this process must serveto create the conditions whereby

the drivers of innovation, produc-tivity and efficiency will prevail.Rebalancing the economic growthmodel requires equal access for allcompanies, whether private or state-owned or whether Chinese or foreign-invested, not only to markets, butalso to procurement, technology

innovation, treatment under the lawand to finance and subsidies.

Te Position Paperaims to contrib-ute by providing constructive recom-mendations on some of the requiredchanges to bring about this process ofeconomic rebalancing and the upgrad-ing of Chinas business and regulatoryenvironment.

Chinas unequal state-led growthmodel led to a prolonged period ofsustained growth

Chinas state-led economic growth


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model has been well-suited to sus-tain massive growth and catch up inthe transition from a low to middle-income economy. China has becomethe worlds second-largest economyjust years after opening up. Its

development has lifted hundredsof millions of people out of poverty,raised life expectancy, increased realwages, boosted the value of the ren-minbi and raised vast foreign reserves.However, this model is unequal bydesign, favouring large-scale state-owned enterprises (SOEs) over mostprivate domestic companies and for-eign-invested enterprises (FIEs).

Te state-led economic model is pred-icated on growth driven mainly bythe manufacture of low-end exports,investment and by the technologyupgrading that comes mainly fromthe absorption of foreign investment.So long as China enjoyed a sizeabletrade surplus, attracted significantamounts of foreign direct invest-ment (FDI), maintained a closedcapital account and retained a highsavings rate, funds were available tobe injected into investment projects.It was possible for the state to guideand control this development as state-owned banks channelled investment

largely to SOEs to carry out state-identified projects. Te availabilityof physical infrastructure and tech-nology upgrading projects with easyproductivity returns on investmentgave huge impetus to growth, but hasled to an over-reliance upon the con-tribution of fixed capital formation togross domestic product (GDP) growth.

As a result of the structure of Chi-nas economy, an interests systemhas developed that leads to furtherinequality and favourable treatment.SOEs receive regulatory and procure-

ment advantages, abundant suppliesof cheap energy and raw materials,as well as favourable administra-tive price controls. Along with thetechnology transfer that has beendemanded for foreign enterprisesaccess to the market, these conditionshave allowed for large-scale state-leddevelopment and the formation ofcompanies with giant economiesof scale that can compete with lowprices. At the same time, a financialsystem has developed to both supportand prop up this model, in particular

through controlled interest rates ondeposits and loans that have effec-tively allowed household savings tofund SOEs through cheap financingand other forms of subsidies to thedetriment of domestic demand and

consumption.

Most private-owned enterprises -- inparticular small and medium-sizedenterprises (SMEs) -- are providedless access than SOEs and discrimi-nated against in the Chinese mar-ketplace. Tis is most marked inrestricted or outright closed marketaccess conditions in various sec-tors, most notably in administrativemonopoly public goods sectors and instrategic or pillar industries; and bya lack of access to financing that hasled to evidence of large-scale riskyshadow banking with capital oftenprovided by SOEs.

Foreign-invested enterprises sufferfrom the same examples of unequaltreatment as private domestic com-panies, but are additionally restrictedmarket access in an even greaternumber of sectors owing to jointventure and licensing requirementsas well as claims to national security,causing massive asymmetry in market

access conditions for FIEs betweenthe EU and China. Recent Chinesegovernment pronouncements aim toencourage more private investmentin sectors currently dominated bystate-owned entities, but concernspersist that the governments defi-nition of private capital only coverscapital from domestic private enter-prises, not capital from partly orwholly foreign-invested companies.Foreign-invested enterprises are alsofrequently forced to transfer technol-ogy in return for market access, are

less able to qualify for subsidies, R&Dfunds and public procurement con-tracts, and are frequently unable toeven take part in standards-draftingprocesses.

The state-led modelcan no longer support asecond prolonged periodof sustained growth

Te underlying factors that allowedthis model to function are quicklydiminishing. Te supply of cheap and

young labour is declining as China isquickly losing its demographic divi-dend and calls for a better distributionof the fruits of its years of impres-sive growth are driving increases inthe wages of Chinas workers. Tere is

steep downward pressure on Chinastrade surplus due to thinning exter-nal demand from the downturn in theworlds major markets and increasinginternal consumption. Te global eco-nomic crisis has also contributed to adecline in foreign direct investmentas greater caution is being exercisedin weighing up returns on investmentin a speedily maturing marketplacethat lacks a corresponding matura-tion of the regulatory and marketaccess environment for private andforeign enterprises.

As these supporting factors disappear,the current economic growth modelhas begun to show its deficiencies.Te inequality which served growthso well during catch up is leading toinefficiency, low-productivity and alack of innovation.

Due to an over-reliance on the con-tribution of state-controlled invest-ment to GDP, many sectors favouredunder the current model are exhibit-

ing over-capacity and signs of bub-bles. Inefficient utilisation of capitalhas led to significant debt and con-tingent liabilities both at the locallevel and of SOEs and it is question-able whether the favourable treat-ment that many SOEs have enjoyed,in particular those in administrativemonopoly sectors, has prepared themto speedily adapt and innovate in par-allel to the maturation of the market-place. Industrial and manufacturinggrowth is also slowing. Following thestimulus package of that was

heavily channelled to SOEs, China isno longer ready to face risks of highinflation and to sustain waste and riskvastly increasing debt and the ratioof non-performing loans through acontinued reliance upon state-ledinvestment.

Some consolidated SOEs, in particu-lar those in sectors more open to com-petition, have developed strong cor-porate management structures andmodern business approaches and arethus able to compete globally in terms

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of quality and branding. Nevertheless,once favourably provided costs andsubsidies are factored into estima-tions, Chinese central-level SOEs arestill on average estimated to producenegative returns on equity; and total

factor profitability growth of SOEshas been just a fraction of privateindustry since opening up . As fur-ther pressures on total factor produc-tivity will result from overcapitali-sation and reaching the technologyfrontier, a continued over-relianceon fixed-asset investment will leadto slowed growth and will thus jeop-ardise Chinas opportunity to avoidthe middle-income trap and attaindeveloped market status.

A speedy rebalancing and a new model

suited to prevailing macro-economicconditions that puts economic effi-ciency ahead of growth is required.

The growth model for asecond period of sustainedgrowth has been identified

China still has great resources tostimulate growth. Tere is massivepotential for new growth to comefrom further productivity gains fromindustrial upgrading, relocation of

manufacturing to central and west-ern regions, stimulating domesticconsumption, developing the ter-tiary sector and advanced technol-ogy manufacturing, as well as fromcompeting in global marketplacesthrough overseas investment. At thesame time, there is a continued needfor investment projects, including insocial housing, the development ofhealthcare and education facilities, aswell as urbanisation and correspond-ing infrastructure development thatposes both great opportunities and

challenges for Chinas development.Reform and opening up was identifiedas the driving force of the th Five-

Year Plan to rebalance the economymore towards domestic consump-tion, industrial upgrading and moreservices-led value-added and sustain-able growth.

China in many important regardsis well-positioned to realise thisnew economic growth model thatis needed to transition into a high-income society. Te many years ofinvestment spending have led to the

development of high-quality physi-cal infrastructure and strong indus-trial technology. Most important ishuman capital. China has improvedits educational base, including in sci-ences and engineering, during the

process of development. Given theright conditions, Chinas privateindustry would be well able to fullyunleash its entrepreneurial and inno-vative potential.

Necessary reforms are not happeningIncremental and piecemeal reformsmust give way to urgent and compre-hensive reform. Tis requires alteringthe status quo and must thereforetouch upon the vested interests ofthose that benefit most from thestate-led investment model and

address the structural conditions thatlead to the favourable treatment thatSOEs have long enjoyed. As Vice Pre-mier Li Keqiang stated, reform andopening up must continue to leadthe way in removing the institutionalobstacles that hamper the shift of thegrowth model. Te state must retreat,and the private must advance.

o rebalance the economy, risingcosts need to be offset to driveincome and consumption growth. As

deindustrialisation is needed at thelowest-end of the value chain due toincreased labour costs, there mustbe an accompanying generation ofhigh value-added products and ser-vices. Innovation is the key to thisprocess and competition is criticalto innovation.

ime is of the essence and Europeancompanies can be a catalyst to accel-erate this process. European industryhas committed to China and is will-ing to further invest, but in times of

economic difficulty and constrainedmarkets, the need for equitable treat-ment that provides fair opportunityfor sustainable returns on invest-ment becomes a much greater con-sideration when weighing up invest-ments. Te advanced, high-tech andgreen technologies and services ofEuropean companies not only pro-vide better choice and value for Chi-nese consumers, European industryinvestment also leads to a willingtransfer of skills, technologies andprocesses to Chinese companies.Most importantly, however, is the

enhancement of international com-petition in the Chinese marketplace.Equal access is required.

China needs to create the conditionswhereby the most innovative, pro-

ductive and efficient companies willprevail. At its core, this requires pro-viding equal conditions to all actors,whether state-owned or private, orwhether Chinese or foreign-invested.In order to rebalance the economyand bring about the new growthmodel, China should provide equalaccess to:

. Markets. Procurement. Treatment

Under the Law

. Financing and Subsidies. Technology Innovation

Going forward, Europe and Chinahave both recently issued medium-term development strategies. Tesetwo strategies are very similar. Atthe core of both the EUs Strat-egy and Chinas th Five-Year Planis the drive for green and sustain-able growth based on an innovativeeconomy. As China aims to rebal-ance its economy through increasingdomestic consumption, relying less

on exports and opening its economy,this process will bring the economiesof the EU and China closer togetherand will bring greater synergies andopportunities for cooperation in thebusiness relationship, for example injoint R&D projects.

Te EU and China should togetheridentify opportunities for coopera-tion where the EU can assist Chinasdevelopment path through impart-ing experience from the lessons of itsown development process. Te EU-China Partnership on Urbanisation

is one such example where coopera-tion could be massively beneficial forthe overall sustainability of Chinasurbanisation course, while also pro-viding opportunities for EU businessin the process. Such partnerships arenot only important for their directbenefits to both parties, they can alsoassist in moulding a more positiveimage of the EU-China relationshipin the eyes of the public.

Download the Position Paper for free at:http://www.europeanchamber.com.cn/en/chamber-publications.

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Dulling the Cutting-Edge:

How Patent-Related Policies

and Practices HamperInnovation in China

Chinas ability to innovate is becoming an increasinglyimportant global issue, whereas without stronginnovation as the next stage in the countrys

development process, its economic growth, whileimpressive to date, will stagnate and thus create dramaticconsequences not just in China but also abroad. o besure, innovation, which can be defined as the collectiveact of inventing (creating something considered new)and exploiting that invention, is touted in an array of

economic literature as an important tool for countriesto build competitiveness and thus in the long-term drivetheir economies. Not only will Chinas future ability toinnovate decide its future, but it deeply impacts foreigncountries, many of who heavily rely on both demand andsupply from China. In short, the future direction of theworld economy inclusive of many businesses, consumers,and governments to a notable extent hinges on Chinasability to innovate.

In assessing Chinas innovation capabilities, Dulling theCutting Edgelooks into a variety of innovation metricsyet focuses on one often overlooked area: patent quality.Patents, which are legal rights to exclude others fromexploiting (i.e. making, using, or selling) inventions, aredirectly linked to innovation as, while by no means anideal single indicator, they can be used as an intermediatemeasure of innovation, i.e. an invention output upon

which innovation is built. Unfortunately, absolutenumbers of patents are often solely used or otherwiseoveremphasised as a measure of innovation. In fact,

patent quality provides far more insight into innovationcapacity as it measures actual application of inventions ina way that impacts society. Definitions for patent qualityand innovation used throughout Dulling the Cutting Edgeare found in Box below.

Dulling the Cutting Edgerefers to two main recognised categories of innovation: breakthrough innovation, crea-tion of brand new/cutting-edge innovations; and incremental innovation, exploitation of existing innovations in a

way that improves upon them, but less dramatically than via breakthrough innovation. While both forms of innovationhave value, breakthrough innovation typically affords a higher level of competiveness than incremental innovation.In terms of application, innovation is manifested through exploitation of inventions in goods, services, processes,

organisation, or marketing.

The definitions for different thresholds of patent quality used in the study are as follows: Quality patents must () meet or exceed the statutory requirements for patentability in China, and () have rea-sonable prospects of (i) ultimately being commercialised or (ii) otherwise being transformed to contribute to social,economic and/or environmental progress in China; Highest-quality patents must ()-() meet or exceed the two criteria for quality patents (see aforementioneddefinition); and () best advance Chinese government objectives of sustainably increasing breakthrough research

and innovation led by domestic entities and foreign-invested enterprises (FIEs) in China); and

Low-quality patents are those that do not meet the aforementioned standard for quality (or highest-quality) patents.

In 2011, China overtook the US and Japan to become the worlds top filer of domestic patentapplications. Some have pointed to this statistic to argue that China is a global leader ininnovation; however, according to the European Chambers recently published study entitledDulling the Cutting Edge: How Patent-Related Policies and Practices Hamper Innovationin China, there are several reasons why this assertion is in fact a myth. The over-200-pagestudy, authored by Dan Prudhomme, Manager of the European Chambers IntellectualProperty Rights (IPR) Working Group and R&D Forum, not only debunks this myth, but the

core of the study discusses how a variety of Chinese patent-related policies and practicesdeserve reform in an effort to boost the quality of patents in China and to, more generally,boost the nations innovation abilities. Below is an adapted excerpt from the study.

Box : Definitions of types of innovation and thresholds of patent quality

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Statistical analysis in Dulling the Cutting Edge findsthat while patents are exploding in China and certaininnovation is also on the rise, patent quality has notproportionately kept up and in fact the overall strengthof Chinas actual innovation appears overhyped. And theanalysis not only reveals concerning trends in the quality

of Chinas patents at present, but suggests that whilepatent filings in China will likely continue to notablygrow in the future, patent quality may continue to lagthese numbers. In fact, projections in this study indicatethere might be over . million less-than-highest-qualitypatents filed in China in alone, which is substantiallymore than estimated highest-quality patents filings inthat year. With this in mind, and objectively consideringits performance on additional innovation metrics, it isclear that Chinas innovation ecosystem deserves a newtype of scrutiny.

Te core of Dulling the Cutting Edgeis devoted to inves-tigating, through in-depth on-the-ground research andanalysis, significant reasons for Chinas patent qualityand related innovation shortcomings. In an effort to honethis investigation, the study focuses on key unaddressedinstitutional and regulatory issues that can be practicallyremedied in the near future. Although given their inter-twined nature it is not always possible to clearly separatetheir impacts on patent quality as distinct from thoseon innovation at large, these dulling devices collectivelycreate a vicious cycle: they hamper patent quality whichthen hampers innovation and vice versa, i.e. hampercomponents of innovation which then hampers patentquality, which then again further hampers innovation.

By way of specific examples of these dulling devices, Chinaappears to have overemphasised a range of quantitativepatent targets, which while ambitious may not encouragequality let alone highest-quality patents and innovationat large as efficiently and effectively as envisaged. In fact,they may actually discourage highest-quality patents andat worst may sometimes actually encourage developmentand filing of low-quality patents. Similarly, a range ofpatent indicators in performance evaluation systemsdeserve scrutiny to determine their impact on patentquality and innovation at large.

Also, China has a wide-range of other patent-specific, andotherwise patent-related, policies and other measures in

place meant to encourage quality patents and highest-quality patents in particular; however, some of these canactually discourage such patents and innovation at large.

Additionally, there are concerns specifically surroundingrules and procedures for patent application review andthose for adjudication of disputes that discourage buildingof quality patents and related innovation in China.

Conclusion

Dulling the Cutting Edgefinds that Chinese governmentclearly desires to stimulate innovation in China and hasalready undertaken many commendable initiatives to try

and improve the countrys innovation system, inclusive

of its patent quality situation. Still, it is essential torealise that Chinas patent quality problem is systemic:it goes far beyond the often cited reasons of patent filingsubsidies and occasional tax incentives, having roots ina wide range of policies and other measures, as well asadministrative and enforcement approaches, that do

not seem to be effectively addressed at present, nor oncourse to be effectively addressed, and in some cases arenot even discussed at all. Individually, and much more socollectively, these dulling devices create a vicious cyclewhich inhibits patent quality and innovation at large inChina. Only when these effects are recognised to be aproduct of a large network of patent-related issues canChinas institutional and regulatory environment forinnovation be understood and systematically improved.

Dulling the Cutting Edge is intended as a discussionpiece about certain practical ways to in the near futuremaximise Chinas innovation and related patent qualitypotential (although changes, likely only realisable inthe long-term, to the educational system and creditsystem are also fundamentally needed). o be sure, it isclear that China possesses great innovation potential;however, overall, China still lags behind many developedcountries in terms of innovation at large and qualitypatents in particular, let alone breakthrough innovationand highest-quality patents.

While China may indeed be able to largely sustain itseconomy in the mid-term, i.e. the next five to years,through incremental innovation, the efficiency andeffectiveness of certain policies, other measures, andpractices meant to stimulate such innovation and the

quality of patents produced therein deserve notableimprovement. Moreover, it is clear that regulators wantto increasingly build breakthrough innovation capacityas distinct from incremental innovation, realising that inthe long-term this type of innovation is essential to growthe economy. However, the efficiency and effectivenessof a variety of Chinese policies, other measures, andpractices intended to stimulate breakthrough innovationand the highest-quality patents produced therein deserveserious improvement. Tis study attempts to flag manyof these areas needing improvement and provides over practical recommendations for doing so, which will beused as a basis for relevant European Chamber lobbying .

Dulling the Cutting Edge is not just an important readfor IPR professionals, academics, business leaders, andgovernment officials, but also anyone interested inunderstanding both the nuances within and importantimpacts of Chinas regulatory and institutionalenvironment for innovation. In fact, it provides insightsinto arguably one of the most important legal andeconomic questions determining Chinas future, and, asa consequence, the future of the world economy.

Download the study for free at:http://www.europeanchamber.com.cn/en/chamber-publications

Patent Study EURObiz



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Government Investment AcceleratesGrowth of Water Use IndustriesThe total quantity of water resources in China ranks sixth in the world. According to the2010 statistic bulletin on China water activities, the total quantity of water resources in2010 was 2965.8 billion cubic metres. Water is mainly used in supplying water for life,manufacturing and ecological environment, agricultural irrigation and generating power.

Rising Irrigation and Water Conservancy

From to , the Chinese central governmentinvested . billion in irrigation and water conservancy.In , this investment fund was . billion. During the

th Five-Year period, the Chinese government plans tomake the construction of irrigation and water conservancyprojects top priority among all water projects. Moreover,the investment fund will be about billion.

With the promotion of large government investment,effective agricultural irrigation areas and water-savingirrigation areas in China are expected to grow at annualised

rates of . and ., respectively, from to . InChinas th Five-Year plan, . billion square metres ofeffective agricultural irrigation area and . billion squaremetres of water-saving irrigation area will be increased.

Growth of Hydroelectric Power Generation

Mainly due to water being a kind of clean energy resourcein China, Chinese government has been stimulating theconstruction of hydroelectric power generation. From to , the investment in hydroelectric power projects andthe installed capacity of hydroelectric power generationare forecast to increase at annualised rates of . and

., respectively. From to , mainly due toenvironmental and migration disputes, growth trend ofinstalled capacity of hydroelectric power generation slowed.

With the decline of hydroelectric output in and

(owing to lack of rain), the annualized growth rateof hydroelectric output from to shows muchlower, being ..

According to Chinas th Five-Year Plan, hydroelectricpower generation will be receive top priority among allpower generation. Te installed capacity of hydroelectricpower generation will grow to about GW in and GW in .

By Tracy Li, Industry Research Dept., ACMR

Agricultural Effective Irrigation Area in China, -* (Billion m)

Water-saving Irrigation Area in China, -*(Billion m)

EURObiz Industry Focus

Source: Ministry of Water Resources of China, ACMRNote: 2011 and 2012 data are ACMR estimates




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All China Marketing Research Co. Ltd. (ACMR) is a leading provider of business information and market research,

focusing on collecting, studying and analyzing data and information on the macro economy, industrial sectors,

enterprises and business markets in China.

www.acmr.com.cn

Industry Focus EURObiz

Steady Development of Rural Hydroelectric Power Generation

Rural hydroelectric power stations refer to hydroelectricpower stations with installed capacity of MW or below.Rural hydroelectric power stations are mainly locatedin the southwest and central China areas. By the end of, there had been rural hydroelectric powerstations. Te installed capacity of rural hydroelectric powergeneration was . GW, accounting for . of totalsof hydroelectric power generation. In , the Chinesegovernment plans to increase three GW, with steady growthof central-government investment.

Overall, rural hydroelectric output shows an increasingtrend from to , with expected annual growthof .. Also, mainly due to the lack of rain in and, rural hydroelectric output decreased . and .,respectively.

During the th Five-Year Period, for rural hydroelectricpower, the Chinese government plans to add GW ofnew capacity.

Investment in Hydroelectric Power Projects in China,-*(Million Euros)

Installed Capacity of Hydroelectric Power Generationin China, -* (GW)

Installed Capacity of Rural Hydroelectric Power inChina, -* (GW)

Rural Hydroelectric Output in China, -*(Billion KWh)


Source: Power Yearbook in China, ACMRNote: 2012 data are ACMR estimates

Source: Ministry of Water Resources of China, ACMRNote: 2012 data are ACMR estimates

Source: Ministry of Water Resources of China, ACMRNote: 2012 data are ACMR estimates



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Patent Protection in China:Know Before You GoEvery company producing innovative products in China isstrongly advised to use the Chinese patent system. It isabsolutely crucial to apply for patent protection in China foreach and every innovation, even if a launch of the respectiveproduct in the Chinese market is not yet on the horizon. TheChina IPR SME Helpdesklooks at how to take the next step.

EURObiz IPR

Markets change rapidly andpatent protection has to berequested before the respec-

tive product is introduced anywherein the world. In particular, a Euro-pean registered patent has no legaleffect in China. Intellectual Property(IP) protection measures should notbe limited to fili

EURObiz 10th Issue Sept Octo[996]

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