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UNCLAS SECTION 01 OF 06 GUANGZHOU 029875 
 
SIPDIS 
 
USDOC FOR 4420/ITA/MAC/MCQUEEN, DAS LEVINE, RIGOLI 
STATE FOR EB/TPP MASSINGA, FELSING 
STATE PASS COPYRIGHT FOR TEPP 
STATE PASS USPTO FOR DUDAS, BROWNING, BOLAND, ANTHONY, NESS 
STATE PASS USTR FOR MENDENHALL, MCCOY, ESPINEL, WINTER, 
CELICO 
USDOJ FOR SUSSMAN 
DHS/CPP FOR PIZZECK 
USPACOM FOR FPA 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: KIPR ECON ETRD WTRO CH
SUBJECT: IPR Enforcement in South China: USTR-led 
Interagency Journey into the "Heart of Darkness" 
 
REFERENCE: A) Guangzhou 20753; B) Guangzhou 15230 
 
(U) This document is sensitive but unclassified.  Please 
protect accordingly. 
 
¶1. (SBU) Summary: Following JCCT IPR Working Group meetings 
in Beijing, a USTR-led delegation traveled to Fujian and 
Guangdong provinces in late August to engage local leaders 
on IPR issues and raise specific areas of concern.  The 
visits were part of the provincial review of China announced 
in the Special 301 Report issued on April 28, 2006.  Though 
most of the Chinese officials stuck to Beijing's talking 
points, the meetings revealed differences in emphasis. 
Shenzhen budgets specifically for software procurement and 
cooperates closely with optical disc industry associations. 
Dongguan is more concerned with holding seminars than 
developing criminal cases.  Fujian officials would like U.S. 
companies to more closely oversee their contractors and 
assist in counterfeit verification.  Guangdong acknowledges 
that administrative penalties are not a deterrent and 
encourages closer engagement with the U.S. Chamber of 
Commerce.  All of the Chinese enforcement agencies continue 
to rely on short-term campaigns and initiatives, such as the 
recently announced "100 Day Campaign" on copyrighted 
materials, despite facing increasingly organized 
counterfeiting rings.  Visits to local counterfeit markets 
and discussions with U.S. industry provided further evidence 
that only a sustained, long-term coordinated effort will be 
enough to reduce overall levels of piracy.  End summary. 
 
Background on the Interagency Visit 
----------------------------------- 
 
¶2. (SBU) In an effort to pinpoint the problems in China's 
IPR enforcement system and develop more effective solutions, 
USTR has focused on regional IPR enforcement this year.  The 
2006 Special 301 Report spotlights Guangdong, Fujian, and 
Zhejiang provinces and Beijing as IPR "hot spots" and 
recommends more sustained, deterrent enforcement.  The visit 
by USTR, Commerce, and Patent and Trademark officials to 
Fujian and Guangdong provided an opportunity for face-to- 
face discussion with local enforcement officials, U.S. 
business representatives, and first-hand glimpses of 
counterfeiting markets. 
 
¶3. (SBU) The Special 301 Report names Guangdong as the 
center of large-scale counterfeiting in China for goods 
ranging from low-cost consumer items to electronics.  As one- 
third of China's exports pass through Guangdong, it is a 
crucial link in the global piracy chain.  In Fujian, the 
report highlights widespread production of counterfeit 
athletic shoes, among other products.  Nike, Reebok, and New 
Balance are all engaged in long-running legal actions in 
Fujian (Nike representative Bill Wei asked the Consul 
General to raise Nike's concern during an upcoming trip to 
Putian the week of September 11).  Optical disc piracy is 
common throughout Guangdong and Fujian. 
 
¶4. (SBU) Attending on the Chinese side at most of the 
meetings were representatives from the Intellectual Property 
Office (IPO), Copyright Bureau, Culture Bureau, 
Administration for Industry and Commerce (AIC), and Foreign 
Affairs Office (FAO).  No representatives from the Public 
Security Bureau (PSB), Customs, or Procuratorate accepted 
invitations to meet.  Representing USTR were Stan McCoy, 
Chief Negotiator on IPR, and Audrey Winter, Deputy Assistant 
USTR for China.  Lisa Rigoli, International Trade Specialist 
represented the Department of Commerce; Tim Browning 
participated for the Patent and Trademark Office.  Guangzhou 
Econ/Pol officers and staff accompanied the delegation. 
 
Fujian Province: Shoe Central 
----------------------------- 
 
¶5. (U) Bai Jingzhao, Director of the Fujian Copyright 
Bureau, told the U.S delegation that Fujian has encouraged 
IP protection through progressive legislation and strong 
 
GUANGZHOU 00029875  002 OF 006 
 
 
enforcement.  Eighty percent of Fujian counties now have a 
Copyright Bureau.  All computer manufacturers in Fujian must 
preinstall legitimate software.  Copyright officials inspect 
government offices to verify the use of legitimate software 
and are just beginning to promote legal software use in 
large private enterprises.  Fujian has also implemented 
national police campaigns, including the "100 Days Campaign" 
against optical disk piracy, the "No Fakes" joint campaign 
with retailers, and the establishment of one-stop IPR 
Complaint Centers. 
 
¶6. (U) An official from the Fujian AIC told the team Fujian 
administrative authorities had transferred 26 trademark 
cases to the police in 2005, reportedly the second largest 
number in China (Note: this number did not match official 
statistics published by the central government, which 
indicated only 5 trademark referrals in 2005.  End note). 
Fujian officials reported that they had transferred 10 cases 
involving U.S. rights-holders since the end of 2004, one of 
which involved Nike.  In response to questions about how to 
improve enforcement against counterfeit athletic shoes, the 
official noted that the shoe industry is difficult to 
monitor because of the preponderance of OEM enterprises, 
usually Taiwan- or Hong Kong-owned, that manufacture for 
foreign companies.  He recommended that U.S. companies or 
industry groups more closely monitor their contractors and 
also set up verification teams in Fujian to assist officials 
in identifying counterfeit products. 
 
¶7. (U) To highlight Fujian's stake in an effective IP 
protection regime, Bai raised the example of Dehua, a Fujian 
county of 300,000 residents that has a long history of 
manufacturing ceramics and sculpture products.  Dehua 
enterprises hold numerous design patents and residents have 
per-capita incomes higher than the provincial average. 
Dehua enterprises have even sued Italian and Spanish 
manufacturers for infringing their patents and copyrights. 
 
¶8. (U) USTR McCoy encouraged Fujian officials to undertake 
more ex-officio actions on behalf of U.S. rights holders, 
particularly small and medium-sized enterprises, for example 
Wisconsin ginseng farmers.  He called attention to 
counterfeiting of the athletic shoe trademarks of companies 
such as New Balance.  He also noted that the U.S. 
delegation's visit coincided with the start of the fall 
school semester, and urged local officials to crack down on 
pirated textbooks.  The U.S. team encouraged Fujian 
officials -- and other officials in subsequent meetings -- 
to open a channel of communication through the U.S. 
Consulate in Guangzhou to provide useful data on enforcement 
and examples of successes. 
 
Guangdong Province: We Know There's a Problem 
--------------------------------------------- 
 
¶9. (U) Guangdong Deputy Secretary General Luo Ou noted that 
Guangdong IP officials have targeted specific cities for 
enforcement efforts during the past five years: Guangzhou, 
Shenzhen, Shantou, Jieyang, and Chaozhou.  Civil IPR courts 
in 21 municipalities and eight counties in Guangdong have 
accepted an accumulated total of 2,800 cases.  Luo noted 
that some lower-level courts in Guangzhou and Shenzhen have 
begun accepting IP cases in a pilot program to reduce case 
backlog and that the province established three IPR 
Complaint Centers.  In addition, Guangdong has increased 
budget funding for its court system. 
 
¶10. (U) USTR McCoy emphasized that U.S. industry remains 
concerned about a lack of counterfeiting and piracy cases 
transferred to the police for criminal investigation, due in 
large part to inconsistent standards of valuation for seized 
infringing products.  Luo acknowledged that in some cases 
penalties for infringement are not severe enough to deter 
counterfeiting, and agreed that the number of criminal cases 
needs to be increased.  With respect to copyright piracy, 
Luo mentioned that a total of 200 optical disc production 
lines have been confiscated by Guangdong officials since 
 
GUANGZHOU 00029875  003 OF 006 
 
 
copyright enforcement began in May 1996.  He added that many 
of the pirated CDs and DVDs sold in Guangdong are imported 
from nearby Asian countries, such as Vietnam.  McCoy called 
on the provincial government to help address this problem by 
encouraging the Shenzhen optical disc testing facility to 
share exemplars with the international library maintained by 
IFPI.  He also raised copyright industry concerns about book 
piracy and government use of software.  McCoy encouraged 
Guangdong officials to continue working with the U.S. 
Chamber of Commerce on training and benchmarking initiatives 
(see reftel A on a recent IP seminar co-hosted by the U.S. 
Chamber and Guangdong authorities). 
 
Shenzhen City: More Than Talk 
----------------------------- 
 
¶11. (U) Li Ping, Deputy Secretary General of Shenzhen, 
former head of the Shenzhen IPO, and current chairman of 
Shenzhen's leading group on IPR, acknowledged that 
Shenzhen's growing reliance on the high-tech sector meant 
that the city must create an effective IP protection 
environment.  He mentioned that he personally read USTR's 
Special 301 Report entry on China and was aware of foreign 
industry concerns.  Li noted that four of the nine heads of 
IP agencies present at the meeting were educated in the 
West, three in the United States.  Li explained that 
Shenzhen has unique legislative power because of its status 
as a special economic zone, and its leaders have put into 
place IP laws that are more stringent than national laws. 
This is particularly in the area of software and optical 
discs, which are the focus of enforcement in the city. 
 
¶12. (U) Li said Shenzhen has a specific budget of RMB 14 
million for the purchase of legitimate software in 
government offices.  (Note: This was the first time any of 
the U.S. participants had heard of a specific budget for the 
procurement of legitimate software.  End note).  He noted 
that IPO and MOFCOM officials will be at the upcoming 
Shenzhen High-Tech Fair to verify that all products are 
legitimate, then will issue certificates to those who pass 
inspection. 
 
¶13. (U) Li added that the number of cases transferred for 
criminal investigation in Shenzhen has increased each year. 
Su Huijian, director of Shenzhen's Culture Bureau, said his 
office has transferred 145 copyright-related cases to 
criminal authorities since 2004.  All of cases were charged 
under the illegal business law, because the Cultural Bureau 
itself does not have the authority to bring charges under 
IPR statues.  Su expressed hope that future cases could be 
charged under the copyright law if the Cultural Bureau's 
operating authorities were changed.  (Note: The illegal 
business law includes tougher penalties for infringers and 
is less burdensome in terms of evidence collection.  The 
Copyright Bureau is authorized to bring charges under the 
IPR statues.  End note). 
 
¶14. (U) USTR DAUSTR Winter said she looked forward to 
improved coordination between industry associations and the 
national optical disc forensics lab located in Shenzhen. 
The lab holds China's only complete exemplar library of 
optical discs produced in China; it is the only lab housing 
sound spectrogram and optical media "fingerprinting" 
equipment to conduct forensic analysis.  Though the lab did 
permit a USG visit on May 19 (reftel B), U.S. industry 
faulted the lab for a lack of transparency and its 
unwillingness to contribute exemplars to a global database. 
Li said the lab is under the authority of the central-level 
Ministry of Public Security, and the city of Shenzhen has 
minimal say in its operations, though he promised that the 
IPO and Copyright offices would raise with lab staff and the 
MPS in Beijing the issue of contributing to a global 
exemplar library. 
 
Dongguan City: Turning a Blind Eye 
---------------------------------- 
 
 
GUANGZHOU 00029875  004 OF 006 
 
 
¶15. (U) Liang Bing, Deputy Secretary General of Dongguan, 
commented that Dongguan's robust enforcement has meant 
relatively low piracy.  Since Dongguan intends to shift from 
being a center of low-cost manufacturing to a "city of 
innovation," it places great importance on IP protection. 
He noted that Dongguan, in accordance with national 
mandates, has set up an IPR Complaint Center and an 
experimental lower-level court for IP cases.  Lian Xibo, 
head of the Dongguan IPO, commented that foreign companies 
do not always follow correct procedures in filing 
administrative cases.  USTR McCoy responded that industry 
has expressed concern that different localities in China use 
different procedures for case filing, and a higher level of 
transparency would help both sides.  He also said that 
Dongguan can improve its IP enforcement reputation with U.S. 
industry by increasing the number of ex-oficio actions on 
behalf of U.S. companies. 
 
¶16. (U) The Dongguan authorities did not provide any data on 
case transfers, but claimed the number of such cases is 
increasing.  Lu Jingna, head of Dongguan AIC, said the 
number of criminal cases involving foreigners is "few," in 
part because such companies are better at protecting their 
own IPR by themselves.  Liang said that Japanese enterprises 
put together a catalog of major Japanese trademarks and 
provided copies to enforcement authorities, helping them to 
better protect Japanese marks.  Liang opined that the reason 
Dongguan sees few IP-related criminal cases is that few 
infringers operate in Dongguan and little piracy takes place 
there.  Regarding optical disc piracy, Liang said Dongguan 
does not produce any optical discs, legitimate or fake. 
 
Industry Views: An Increasingly Complex Problem 
--------------------------------------------- -- 
 
¶17. (SBU) In meetings with the U.S. delegation in Shenzhen 
and Guangzhou, U.S. companies voiced their frustrations with 
local IP enforcement authorities, whom they say routinely 
partner with IPR violators, are susceptible to corruption, 
are outmatched by increasingly sophisticated counterfeit 
rings, and attach little importance to trade secrets cases. 
Sam Ho, MPA's Director of Operations for Greater China, has 
successfully cooperated with the Shenzhen and Guangzhou 
Culture Bureau, but said Dongguan authorities are not 
completely honest in their claim to low piracy rates. 
(Note: Numerous industry contacts have told us that Dongguan 
officials are guilty of local protectionism and are 
notoriously corrupt.  End note).  Shenzhen in particular has 
shown great improvement in recent years, but Ho noted that 
optical disc warehouses have unfortunately begun to move 
from Shenzhen to Dongguan.  John Groves, Director of IP in 
Asia for Emerson, said the situation has "deteriorated" 
during that past two years, with counterfeiters moving up 
the value chain by copying high-end products such as USD 500- 
1000 petrochemical plant pressure valves.  He said 
authorities are generally cooperative, but lack resources 
and expertise to deal with the problem.  Emerson has applied 
for certification as a "famous trademark" in China in the 
hope that it will see improved responsiveness on IP issues. 
 
¶18. (SBU) Several U.S. companies said they have been the 
victim of employees who steal trade secrets or violate non- 
compete agreements.  A representative from HR management 
firm Hewitt Associates said China's draft labor contract law 
improves the situation somewhat, but does not provide 
deterrent remedies.  Moreover, few companies even try to sue 
employees who steal trade secrets because of the low rate of 
success in the court system.  In the case of a bicycle 
manufacturer (Dahon), police claiming  that no harm had 
occurred refused to get involved in a case in which a former 
senior engineer blackmailed the company by threatening to 
divulge data to competitors.  Emerson currently has a case 
pending in Shenzhen involving an employee who stole company 
secrets and set up a competing enterprise. 
 
SIPDIS 
 
¶19. (SBU) Harley Seyedin, President of AmCham-South China, 
said the emergence of large department stores in the area 
 
GUANGZHOU 00029875  005 OF 006 
 
 
has improved the IPR environment somewhat, as they have a 
stronger interest in controlling the products they sell in 
order to protect their own reputation.  Nevertheless, he 
said, "substantial underreporting" of IP infringement exists 
because U.S. companies do not always initially see it as a 
threat and because they fear damaging relations with 
government officials.  In addition, U.S. companies in the 
region are faced with a host of other challenges that are 
more pressing than IPR protection.  AmCham-South China 
recently released a survey of U.S. companies in the region 
that found regulatory issues, local competition, and skilled 
and unskilled labor shortages as greater challenges than IPR 
protection. 
 
Impressions from Market Visits: Business as Usual 
--------------------------------------------- ---- 
 
¶20. (U) The U.S. delegation visited a number of markets in 
Fuzhou, Shenzhen, and Guangzhou and found varying amounts of 
counterfeit products present.  Some of the markets 
prominently displayed blatantly counterfeit merchandise, 
others stored their fakes in back rooms but displayed non- 
infringing plastic models of branded goods or offered 
catalogs with the stock available within a few minutes. 
Other markets appeared largely absent of fakes.  Guangzhou's 
leather market -- which fills a number of large shopping- 
mall sized buildings on either side of a main thoroughfare - 
- did not have its usual abundance of fake purses, wallets, 
and bags on display.  It soon became apparent, however, that 
the vendors were expecting a raid by AIC that very day and 
had hidden counterfeit products from view. 
 
¶21. (U) Vendors at a nearby shoe market openly sold fake 
Nike, New Balance, and Reebok products as well as those 
sporting Disney and Sesame Street characters.  Some of the 
vendors were not interested in selling individual items, 
preferring instead to deal with large, wholesale orders. 
Fake Levi's, Polo, Guess, and Snoop Dogg clothes were widely 
available at a Guangzhou clothing market.  Some of the 
clothing, particularly winter coats, appeared to be high- 
quality, genuine products being sold at low prices.  This is 
likely the result of "third-shift" manufacturing, in which 
factories produce extras to sell on the side.  Also for sale 
was clothing, particularly jeans, without brand labels.  At 
a nearby building, however, numerous stores are willing to 
produce large quantities of counterfeit labels, buttons, 
tags, and bags for customers. 
 
¶22. (U) In addition, foreign buyers -- particularly 
Africans, Middle Easterners, and South Asians -- work in 
Guangzhou as wholesale purchasers and shippers for 
enterprises in their home countries.  This phenomenon has 
broadened the global reach of China's counterfeiting 
industry.  Indeed, at one of many booths at a Guangzhou 
watch market that openly sold fake Rolex watches, Mont Blanc 
pens, and Sony MP3 players, a buyer from South Asia was 
negotiating a purchase of watches numbering in the tens of 
thousands. 
 
Comment: It's a Regional Issue 
------------------------------ 
 
¶23. (SBU) This trip drove home the fact that IPR enforcement 
in China is as much a regional issue as a national issue. 
Even within provinces, particular cities and particular 
agencies are more effective and engaged than others in IPR 
protection.  Shenzhen is an example of a city that 
increasingly takes IPR enforcement seriously, for its own 
sake as much as for its foreign enterprises.  It faces well- 
organized opposition that tracks visitors, including the 
members of this interagency team, by photographing them and 
comparing their photos to databanks of known enforcement 
agents.  This practice extends to other cities as well. 
Shenzhen administrative enforcement agents have been 
physically threatened by vendors at retail markets. 
Dongguan, on the other hand, showed an unsettling degree of 
nonchalance about IPR enforcement that seems to signal 
 
GUANGZHOU 00029875  006 OF 006 
 
 
systemic problems.  Nevertheless, this visit by USTR, USDOC 
and PTO undoubtedly brought home the message to local 
officials in Fujian and Guangdong that the USG is closely 
watching their IPR enforcement actions and will duly note 
any improvements or failures. 
 
¶24. (SBU) Chinese officials continue to rely on short-term 
campaigns and initiatives to address what has become an 
ingrained problem.  An illustration of the challenge that 
Chinese IP officials face was seen during the visit to Luohu 
Market, in Shenzhen on the border with Hong Kong.  At Luohu 
-- which was specifically listed in the 2006 Special 301 
Report and which Shenzhen Deputy Secretary General Li termed 
"our headache" -- vendors do not openly display counterfeit 
products but rather lead you to hidden rooms in nearby 
buildings that are loaded with fake goods.  In one instance, 
a roaming vendor offered to lead the U.S. delegation to a 
hidden store but was chased off by a security guard.  Five 
minutes later, the same vendor was back in the same place, 
apologizing for the inconvenience and urging the group to 
accompany him. 
 
¶25. (U) USTR has cleared this cable. 
 
GOLDBERG