VZCZCXRO9781
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3817/01 2810101
ZNR UUUUU ZZH
P 070101Z OCT 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 0275
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 04 BEIJING 003817 
 
SENSITIVE 
SIPDIS 
 
STATE FOR E HUGO YON 
STATE FOR EB/CBA MERMOUD/THOMPSON 
STATE FOR EAP/CM PARK 
STATE PASS USTR STRATFORD/WINTER/MAIN 
USDOC FOR ITA/MAS/GUZMAN/ECHEGARAY/FOWLER 
STATE PASS US HUD 
TREASURY FOR TAIYA SMITH 
 
E.O. 12958: N/A 
TAGS: ETRD EINV PREL ENRG EFIN BTIO CH
SUBJECT: MERMOUD VISIT: SINOSURE WELCOMES THIRD 
COUNTRY COOPERATION; HOUSING MINNISTRY PLANS FOR NEXT 
CONSTRUCTION EXCHANGE 
 
THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE 
HANDLE ACCORDINGLY.  NOT FOR DISTRIBUTION OUTSIDE USG 
CHANNELS. 
 
¶1. (SBU) Summary.  China's Sinosure told State 
Department Special Representative for Commercial and 
Business Affairs J. Frank Mermoud on September 18 that 
it would welcome third country cooperation with Ex-Im 
Bank on a joint project.  In meetings with Ministry of 
Housing and Urban-Rural Development (MHURD) officials 
and foreign construction sector companies, Mermoud 
heard strong support for continuing the Best Practices 
Exchange (under the US-China Architecture, 
Construction, and Engineering (ACE) Services Dialogue) 
and for featuring green building and earthquake- 
resistant construction at the next BPE meeting 
(tentatively scheduled by MHURD for April/May 2009.) 
Companies however did not support MHURD's concept of 
transferring leadership of the BPE from government to 
the private sector.  Representatives of private equity 
(PE) and venture capital (VC) firms also told Mermoud 
new regulations on IPO's were overly restrictive.  End 
Summary. 
 
SINOSURE WELCOMES THIRD-COUNTRY COOPERATION WITH EX-IM 
--------------------------------------------- --------- 
 
¶2. (SBU) In a September 18 meeting with China Export 
and Credit Insurance Corporation (SINOSURE) Executive 
Vice President Liang Zhi Dong, Mermoud raised the 
possibility of EXIM-SINOSURE joint cooperation in 
third countries, particularly in the clean/efficient 
energy and environment sectors.  Liang welcomed such 
cooperation on third country projects, especially in 
Latin America and, to a lesser extent, in Africa.  He 
rattled off a list of countries in which Sinosure was 
considering funding major projects, including Mexico, 
Colombia, Chile, Argentina, Venezuela and Cuba.  China 
would be open to working with Ex-Im anywhere.  As for 
sectors, he said Sinosure generally focused on 
infrastructure and energy, noting Chinese 
construction/engineering companies do more traditional 
construction projects.  While Sinosure is not involved 
in any specific environmental project, he said one 
Chinese company is involved in building 
ethanol/thermal power stations in Columbia.  (Note: 
Liang did not rule out co-financing an environmental 
project with Ex-Im.  End Note.)  Liang asked what 
channels Sinosure should work through to explore 
cooperation, noting they have had little interaction 
with Ex-Im recently. 
 
Political Risk Insurance Competition? "Bring it On" 
--------------------------------------------- ------ 
 
¶3. (SBU) As for opening up the Political Risk 
Insurance (PRI) market for U.S. firms, Liang said 
specific issues would have to be discussed at a higher 
level (i.e., Vice Premier Wang Qianshan).  However, he 
said, Sinosure would ?welcome the competition."  He 
opined that it was "just a matter of time" before more 
foreign companies entered the PRI market, and noted 
that China AIG was the only U.S. company doing PRI 
business in China today.  In addition, Tradia (Dutch), 
Allianz (German), and Coface (French) were also in 
this field.  Liang said the reason no Chinese bank 
offered PRI products was the perception that it was 
too risky.  He explained that Sinosure offered several 
PRI products, including:  PRI only, PRI and commercial 
risk combined, buyer's credit, seller's credit, and 
full-term products covering non-delivery risks. 
 
¶4. (SBU) On surety bonds, Liang said Sinosure would be 
interested in attending any future meetings on this 
subject under the ACE BPE umbrella or another smaller 
working group.  He asked the USG to recommend a U.S. 
bank with which Sinosure could work.  Mermoud 
explained USG policy did not allow us to identify a 
particular U.S. bank, but that if Sinosure itself 
 
BEIJING 00003817  002 OF 004 
 
 
identified a bank with which it would like to partner, 
the USG could facilitate their contact. 
 
--------------------------------------------- --- 
MHURD: REORGANIZATION EMPHASIZES HOUSING; FOCUS ON 
EARTHQUAKE RESISTANCE IN DIALOGUE WITH U.S. 
--------------------------------------------- --- 
 
¶5. (SBU) On September 18, Mermoud met with MHURD 
Department of Market Administration Director General 
Wang Suqing to discuss topics for discussion at the 
next United States-China Architecture, Construction, 
and Engineering (ACE) Services Dialogue "Best 
Practices Exchange" (BPE) in China.  Wang thought an 
April/May 2009 timeframe would be optimal for the next 
BPE.  She said the past two BPE's were successful, but 
she did not think they necessarily should be an annual 
event.  She wanted to see future discussions go into 
more depth on the topics of:  insurance, surety bonds, 
licensing for engineering services companies and 
development of the engineering consultancy industry. 
She welcomed Mermoud's suggestion that topics of 
discussion include earthquake resistant building and 
green building, and took on board the request that the 
discussions last two days (vice one) and include a 
site visit.  Wang suggested that industry 
associations/private sector host future events with 
governments in the background, something which she 
said would save the government "time and resources" 
and allow the private sector more of a say in the 
process.  Wang also supported Mermoud's suggestion 
that U.S. nanotech firms be included in future BPE's. 
 
¶6. (SBU) Wang said the ministry was interested in 
learning more about USG disaster relief methods and 
financing for post-disaster reconstruction.  She 
welcomed Mermoud's suggestion that perhaps someone 
from FEMA could meet with MHURD on disaster management. 
 
¶7. (SBU) DDG Wang said recent restructuring at MHURD 
emphasized the rising importance of the housing sector. 
Updated State Council guidelines (called "San Ding 
Fang An") issued on July 10 mandated that MHURD have 
four housing departments, as opposed to one previously: 
Housing Policy and Development (macro); Low Income 
Housing; Housing Provident Fund; and Overall 
Supervision of Real Estate Department.  She said the 
name change from Ministry of Construction to Ministry 
of Housing and Urban Reconstruction Department 
emphasized the importance the State Council places on 
balancing construction/development between the urban 
and rural areas.  The ministry's mandate on 
construction remains the same, despite the name change. 
She also noted that the former Office of Rural 
Development was upgraded to a full Department, and the 
former Science and Technology Department was renamed 
the Science, Energy and Technology Department to 
emphasize a focus on energy efficient building 
projects.  This department will handle new 
technologies. 
 
¶8. (SBU) Mermoud encouraged rapid and transparent 
MHURD consideration of license applications.  DG Wang 
said MHURD is in "constant contact" with both Fluor 
and Bechtel regarding their license applications.  She 
said Fluor's application had made encouraging progress, 
passing the preliminary application process in 
Shanghai.  (Note:  Wang offered nothing more on 
Bechtel, but Bechtel reps have told us that they are 
handling the licensing issues on their own and do not 
need USG assistance at this time.  End Note.) 
 
Industry on BPE: Keep Government in Lead 
---------------------------------------- 
 
¶9. (SBU) In a September 18 roundtable with Mermoud, 
industry members of the BPE said they did not want to 
see leadership of the BPE switched to the private 
sector.  (Note: Companies represented on September 18 
 
BEIJING 00003817  003 OF 004 
 
 
were:  JonesLangLasalle; Leo Daly; CBRE Research; 
Jones Day; and HOK.  End Note.)  They feared such a 
move would turn the meeting into a run-of-the-mill 
industry conference that would neither attract heavy 
hitters among Chinese developers nor prove an 
effective forum for the airing of their concerns to 
the Chinese government.  The consensus, however, was 
that if limited financial resources lay behind MHURD's 
suggestion, it might be feasible to charge a 
participation fee to U.S. companies. 
 
¶10. (SBU) Companies present were open to an emphasis 
on green building and earthquake resistant-building at 
the next BPE.  They broached the concept of breaking 
the discussions down into industry areas such as: 
healthcare/hospital construction; aviation/airport 
construction; transportation hubs; science and 
technology/industrial construction for high tech 
industries; and master planning.  Companies did not 
want to drop the issue of licensing and surety bonds, 
but did want the USG to soft-pedal it.  They were 
supportive of a site visit, suggesting Tianjin's 
EcoCity.  Lastly, they noted their willingness to 
continue alternating meetings between Beijing and the 
United States, according to MHURD's inclination. 
 
Real Estate Research Entrepreneur:  Mixed Forecast 
--------------------------------------------- ----- 
 
¶11. (SBU) On September 19, Mermoud met with Vincent Mo, 
who runs the real estate portal and research group 
Soufun.com, which dominates the Chinese real estate 
information and brokerage market.  Mo was reluctant to 
predict the short-term direction of China's real 
estate market.  He thought government monetary policy 
would stay tight, which would control residential 
housing prices, and thought the U.S. mortgage 
situation had served as an object lesson for Chinese 
policy makers.  However, he said, Chinese property 
development is still highly profitable.  Mo observed 
that the Chinese housing market was still immature: 
prices were set not by market fundamentals, but by 
expectations on the part of both buyers and sellers of 
continually rising prices.  Prices are now under 
pressure, with transaction volumes halved and prices 
in a few markets falling.  Mo thought demand from 
first-time homebuyers was still stable, but those 
looking to trade up or invest were taking a wait-and- 
see attitude.  He saw strong demand for commercial 
real estate. 
 
¶12. (SBU) Mo thought Chinese buyers, despite the 
earthquake, were not especially interested in 
questions of construction quality.  He said buyers 
rarely ask about such issues, and it was difficult to 
spark their interest.  He was interested in 
potentially participating in a construction best 
practices dialogue. 
 
P/E VC Market Roundtable: New Regs Chafe 
---------------------------------------- 
 
¶13. (SBU) In a roundtable with Mermoud on September 19, 
representatives of Chinese private equity/venture 
capital companies discussed recent changes in China's 
regulatory environment.  They noted the National 
Development and Reform Commission (NDRC) had taken the 
lead in shaping the regulatory environment, and that 
the China Securities Regulatory Commission and (CSRC) 
the China Bank Regulatory Commission (CBRC) also 
played roles in areas that cut across their mandates. 
Zhang Fan of Sequoia Capital said that the new 
Circular 10 had put an end to the "Red Chip" model, 
under which existing profitable companies could set up 
an offshore shell structure, after which they would 
transfer the company's China-based assets to the shell 
company for a possible overseas listing.  Zhang said 
China viewed this practice as a loss of high-quality 
IPO-ready resources and as a loss of potential tax 
 
BEIJING 00003817  004 OF 004 
 
 
revenue.  The new Circular 75 permits only newly 
established companies (with no assets or sales, as yet) 
to use the "Red Chip" model. 
 
¶14. (SBU) Furthermore, Zhang thought the China A-share 
IPO route is too cumbersome a process, as CSRC set up 
artificial barriers that prevented private companies 
from raising capital in China's securities market.  He 
believed the government still favors State-owned 
Enterprises (SOE's) over private companies during the 
approval process.  He noted the change from a three- 
year lock-up period for financial investors to a one- 
year period was positive, but said that strategic 
investors still had to stay in for three years. 
Another ball in play is the Partnership Law for 
Foreign Investors, now being drafted.  Interlocutors 
noted some regional variations in this area.  For 
example, Tianjin's government was more flexible about 
providing tax incentives to partnership PE firms, 
which was attracting them to establish operations 
there. 
 
¶15. (SBU)  On labor issues, lawyer Jun Hu, partner in 
Han Yi Law offices, said the new Labor Law was 
favorable to employers in that it had expanded to 14 
the number of clauses under which employers might 
terminate employee contracts.  However, Wang Jiansheng, 
Managing Director of Cerberus Beijing Advisors Ltd., 
thought the new Labor Law had increased the operation 
costs of enterprises, especially in the coastal 
provinces. 
 
Mergers and Acquisitions: Rising Government Interest 
--------------------------------------------- ------- 
 
¶16. (SBU) Mr. Wei Wang, Chairman of the China M&A 
Group, observed a trend in which international mergers 
and acquisitions (M&A) cases were being evaluated more 
and more formally.  Wang noted that in the Xugong- 
Carlyle deal, the Chinese government had initially 
stayed on the sidelines.  In the later Wahaha-Danone 
deal, the government required both parties to pass 
through a regulatory review.  By the time Coca-Cola's 
proposed acquisition of Huiyuan had come about, China 
had instituted a full, formal review procedure.  Wang 
also noted the top 10 M&A deals in 2007 primarily 
involved SOE's.  Signs of government involvement in 
these deals were clearly visible.  Wang assessed that 
the new structures put in place to evaluate foreign 
M&A may transactions reflected increased government 
sensitivity to populist criticism of foreign 
acquisitions. 
 
¶17. (SBU) Mr. Kainan Tang, Executive Director of Hina 
Group, told Mermoud that VC firms' focus was evolving. 
When VC groups first appeared in China, they were 
mostly foreign, and focused on technology, media and 
telecoms and early-stage projects.  As more and larger 
foreign PE firms entered the market, more traditional 
business projects drew their attention.  Now, Chinese 
domestic VC and PE firms were becoming quite active, 
and were real competitors to foreign companies.  Tang 
pointed to green energy as a particularly hot sector. 
 
Economy Diagnosis: SMEs Suffering 
--------------------------------- 
 
¶18. (SBU) Jiansheng Wang of Cerberus observed that 
SMEs are experiencing hard times, especially those in 
Zhejiang and Guangdong provinces.  He named familiar 
factors -- soft overseas demand, rising labor costs, 
RMB appreciation and a cut in the VAT rebate.  However, 
Wang shared his belief that a big chunk of PE 
investors in China still viewed economic fundamentals 
as basically unchanged and sound. 
 
Piccuta