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PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0570/01 0640600
ZNR UUUUU ZZH
P 050600Z MAR 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 2684
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHIN/AIT TAIPEI 7172
RUEHKO/AMEMBASSY TOKYO 2405
RUEHUL/AMEMBASSY SEOUL 1078
RUEHMO/AMEMBASSY MOSCOW 9212
RUEHGV/USMISSION GENEVA 2392
RUEAHLC/DHS WASHDC
RUCPDOC/USDOC WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RHMCSUU/FBI WASHINGTON DC

UNCLAS SECTION 01 OF 12 BEIJING 000570 
 
SENSITIVE 
SIPDIS 
 
State for EAP/CM - SFlatt, PPark 
State for EEB/IPE - RWatts, JUrban, TMcGowan 
State for EEB/CIP - SFlynn, FSaeed 
USTR for China Office - TStratford, TWineland, AWinter 
USTR for IPR Office - JRagland, SMcCoy 
Commerce for National Coordinator for IPR Enforcement 
Commerce for MAC NMelcher, JWu, ESzymanski 
Commerce for MAS RLayton, SMathews 
LOC/Copyright Office - STepp 
USPTO for International Affairs - LBoland, EWu, STong 
DOJ for CCIPS - MDubose and SChembtob 
FTC for Blumenthal 
FBI for LBryant 
DHS/ICE for IPR Center - DFaulconer, TRandazzo 
DHS/CBP for IPR Rights Branch - GMacray, PPizzeck 
ITC for LLevine, LSchlitt 
 
E.O. 12958: N/A 
TAGS: ETRD EIND KIPR ECON CH
 
SUBJECT: CHINA MISSION 2009 SPECIAL 301 RECOMMENDATION 
 
This cable is sensitive but unclassified and is not for Internet 
distribution. 
 
Ref A: State 8410 
Ref B: 2009 Guangzhou 0043 
Ref C: 2008 Beijing 4527 
Ref D: 2009 Chengdu 0030 
Ref E: 2009 Shanghai 0059 
Ref F: 2008 Shanghai 0232 
Ref G: 2008 Shanghai 0233 
Ref H: 2008 Shanghai 0546 
REF I: 2008 Guangzhou 0720 
REF J: 2008 Guangzhou 0438 
 
¶1. (U) This cable responds to Ref A seeking Post input for the 
annual 2009 Special 301 Review. 
 
¶2. (SBU) Post recommends that China continue to be placed on the 
Priority Watch List with Section 306 monitoring.  A World Trade 
Organization (WTO) dispute settlement panel on January 26, 2009 
found that China was deficient in important aspects of its 
intellectual property rights (IPR) regime under the WTO Agreement 
on Trade-Related Aspects of Intellectual Property Rights (TRIPS). 
China's notorious markets, optical media piracy, online piracy, 
and production and export of counterfeit goods and counterfeit 
pharmaceuticals all remained serious problems.  While there were 
some positive developments, including robust enforcement 
activities surrounding China's hosting of the 2008 Olympic Games, 
China's IPR enforcement regime is still widely regarded as 
ineffective and non-deterrent.  Several U.S. businesses and 
industry associations reported that China's IPR environment did 
not deteriorate markedly in the past year and was more or less 
"the same."  However, recent reports that suggest the global 
economic downturn may lead in China to judicial policies that 
could reflect the selective enforcement of IPR laws.  If such 
reports are confirmed, rights holders could face serious 
challenges in China in the coming year. 
 
WTO Dispute Settlement 
---------------------- 
 
¶3. (SBU) Following the April 2007 request by the United States for 
WTO dispute settlement consultations with China over deficiencies 
in China's legal regime for protecting and enforcing IPR, the 
Chinese government suspended most bilateral discussions with the 
United States on IPR matters and cancelled a large number of 
previously planned collaborative IPR activities.  Despite this 
suspension, however, some agencies and municipalities continued 
cooperation with the United States despite the central government 
suspension.  In addition, the Chinese government continued to work 
on IPR programs, such as the EU's IPR2 initiative, that did not 
involve the United States.  Following a more than 18-month 
suspension, the Chinese agreed (after a mandate by Vice Premier 
Wang Qishan) to resume the bilateral dialogue on September 4-5, 
2008 for the IPR Working Group under the Joint Commission on 
Commerce and Trade (JCCT).  On October 15, 2008 the WTO dispute 
settlement panel unofficially ruled that China was TRIPS- 
inconsistent in its denial of copyright protection to works 
undergoing content review, as well as in the improper disposal of 
infringing goods by China Customs.  On a third point, however, the 
panel found it had insufficient evidence to support the U.S. claim 
that criminal thresholds for prosecution in China's criminal law 
are so high as to allow commercial-scale counterfeiting and piracy 
to occur without the possibility of criminal prosecution.  The 
 
BEIJING 00000570  002 OF 012 
 
 
panel made its official decision on January 26, 2009. 
 
IPR Working Group and JCCT 
-------------------------- 
 
¶4. (SBU) On September 4 and 5, the U.S.-China bilateral dialogue 
on IPR was officially resumed under the auspices of the JCCT IPR 
Working Group in Beijing (see Ref B).  In preparatory meetings and 
throughout the event itself, the Chinese side emphasized that the 
session should focus on rebuilding confidence in the IPR dialogue 
rather than seek overly ambitious outcomes.  Nevertheless, both 
sides agreed during the event on a substantial list of cooperative 
activities, including a concrete objective to move ahead with MOUs 
on trademark, copyright, and patent cooperation before the end of 
the year.  At the September 16 JCCT plenary meeting in California, 
China and the United States agreed to continue meetings of the IPR 
Working Group and pursue cooperative activities on issues such as 
IPR and innovation; copyright and internet piracy; counterfeit 
goods at wholesale and retail markets; and other issues of mutual 
interest.  Both sides also agreed to further discuss China's 
patent law amendments; pharmaceutical data protection; and the 
bilateral customs Memorandum of Cooperation. 
 
MOUs Signed with SAIC, NCAC, SIPO 
--------------------------------- 
 
¶5. (SBU) On October 24, the United States and China signed three 
memoranda of understanding related to IPR.  First, USPTO and the 
State Administration for Industry and Commerce (SAIC) established 
a general framework for bilateral cooperation between the two 
agencies on trademarks and unfair competition.  A second with the 
National Copyright Administration of China (NCAC) outlined 
cooperation on issues related to copyright administration and 
enforcement.  Finally, a third MOU with SIPO will continue to 
deepen the cooperation between the two agencies, which USPTO 
officials describe as increasingly extensive and generally strong. 
 
In early 2009, counterpart agencies were drafting respective work 
plans for each MOU.  These are expected to include bilateral and 
multilateral technical level exchanges, and cooperation 
initiatives such as "how to file" programs, which directly benefit 
Chinese and U.S. patent applicants.  In addition, USPTO will in 
2009 again host at least one Chinese patent examiner from SIPO at 
its Foreign Examiners in Residence program, in which foreign 
examiners travel to the United States to participate in the same 
eight-month training program as new U.S. patent examiners. 
 
Developments in IP Legislation 
------------------------------ 
 
¶6. (SBU) On December 27, 2008 the National People's Congress 
passed the third major revision to China's Patent Law, which will 
go into effect on October 1, 2009.  The new law contains some 
provisions, including those related to data protection and 
compulsory licensing, that are of concern to foreign rights 
holders.  However, the State Council Legislative Affairs Office 
conducted the revision process in a relatively transparent manner, 
making the law available several times for public comment periods, 
and making some changes to the draft that reflected input received 
from public comments.  China's Trademark Law and Copyright Law are 
similarly undergoing review for possible amendment. 
 
Ambassador's IPR Roundtable 
--------------------------- 
 
BEIJING 00000570  003 OF 012 
 
 
 
¶7. (SBU) On November 6-7, Embassy Beijing hosted the seventh 
annual Ambassador's Roundtable Discussion on IPR in China. 
Whereas in 2007 Chinese government officials refused to 
participate because of the pending WTO case, in 2008 five Chinese 
IP officials attended.  The event included a keynote address by 
Assistant Minister of Commerce Chong Quan and presentations by 
SIPO National IP Strategy Office Deputy Secretary General Wu 
Xiaoming; State Council Legislative Affairs Office (SCLAO) 
Director General Zhang Jianhua; NCAC Copyright Department Deputy 
Director Xu Chao; and China Trademark Office (CTMO) Deputy 
Director General Lu Zhihua.  While the speakers' comments did not 
reveal major developments in China's IPR policies, their presence 
at the event marked a positive step toward renewed bilateral 
cooperation on IPR. 
 
¶8. (SBU) Ambassador's Roundtable participants, mostly U.S. 
businesses, were surveyed during the event for their views on the 
IPR environment in China.  With only 27 respondents, the findings 
are not conclusive, but are as follows: one-third said IPR 
protection in China was better than the year before; more than 
one-half said IPR protection in China was the same as the year 
before; nearly two-thirds said the IPR challenges they face in 
China were the same as the year before; more than two-thirds said 
Chinese IPR protection/enforcement was ineffective. 
 
Innovation Conference 
--------------------- 
 
¶9. (SBU) The "China-United States Innovation and Commercialization 
Conference" was held in Beijing on December 2, two days prior to 
the fifth Strategic Economic Dialogue (SED).  Co-sponsored by the 
Chinese Ministry of Science and Technology (MOST) and the U.S. 
Departments of State and Commerce, the conference launched the 
innovation component of SED V and was a follow-up to the December 
2007 innovation conference convened in conjunction with SED III. 
Participants, half of whom represented Chinese government and 
industry, underscored the need for more bilateral collaboration in 
exploring innovation.  The U.S. side in particular stressed the 
virtues of open innovation in contrast to indigenous, or "self- 
reliant," development policies, and most speakers emphasized that 
the current economic crisis provides an opportunity to enhance 
global innovation.  Business, academic, and government speakers 
from both countries explored a variety of themes, including the 
importance of standardization, IPR protection, government policies 
and support, and the conditions and measures that produce a 
"culture of innovation." 
 
Data Protection 
--------------- 
 
¶10. (SBU) According to the Pharmaceutical Research and 
Manufacturers of America (PhRMA), China in 2008 did not provide 
meaningful data protection to multinational pharmaceutical 
companies that brought pharmaceutical products with new chemical 
entities into China.  A recent independent study focused on the 
period January 1, 2003 to June 30, 2008 demonstrated the 
inadequacy of data protection in China.  The study showed that, 
since 2003, shortly after Chinese law incorporated the data 
protection provision of TRIPS, 49 pharmaceutical products 
containing new chemical entities (NCE) have been introduced in 
China by 21 multinational pharmaceutical companies.  As many as 18 
of these NCE products are severely affected by domestically 
manufactured products, which are essentially the same as the 
 
BEIJING 00000570  004 OF 012 
 
 
original NCE product but were nevertheless all approved as "new 
drugs" in China.  There are a significant number of non-original 
manufacturers in China making NCE products whose equivalent 
generic drug was approved either before or shortly the NCE product. 
 
These facts, said PhRMA, show that China has yet to provide 
meaningful data protection to NCE originator companies. 
 
Enforcement 
----------- 
 
¶11. (SBU) Microsoft reported to Emboffs in February 2009 that a 
number of cases conducted in 2008 represented milestones in 
enforcement of the company's IPR by Chinese authorities.  However, 
the company said the cases are not significant in the broader 
context of Microsoft's experience in China, where the company's 
revenues are vastly smaller than would be expected given the size 
of the computer market. 
 
¶12. (SBU) On April 14, 2008, the Qingdao Intermediate People's 
Court ruled that defendant Qingdao Ultimate Transportation 
Equipment Co., Ltd., a Sino-U.S. joint venture, must pay 1.72 
million RMB (USD 250,000) in damages to three plaintiffs, 
including Microsoft.  In 2006, BSA filed a civil suit with Qingdao 
Intermediate People's Court after failing to reach a settlement 
with Ultimate.  The case was built on evidence obtained through a 
raid by Qingdao's Copyright Administration against Ultimate.  The 
defendant appealed to the Shandong Province High People's court 
and the court reaffirmed the decision in October, 2008.  The case 
is significant because it was the first winning end user civil 
court case brought by Microsoft in China, as well as the highest 
damage awarded by the China court to foreign software rights 
holders. 
 
¶13. (SBU) On July 14, 2008, Shanghai Pudong People's Court 
sentenced two criminal defendants to serve 2-3 years for making 
and selling altered volume discount agreements under the Microsoft 
Open License Program.  The case, brought to the Pudong PSB by 
Microsoft, was significant because it was the first ever case 
involving a fake license, as opposed to counterfeits disks.  The 
Supreme People's Court recognized the significance of the case by 
naming it one of its Top 10 Criminal Cases in the past 30 years. 
 
¶14. (SBU) On August 15, 2008, Suzhou Public Security Bureau 
detained and froze the assets of Hong Lei, the founder of 
TomatoLei.com, a website offering free downloads of pirated 
Microsoft Windows, Office, and popular software from Adobe, 
Symantec, Autodesk, and other companies.  The case, which was made 
possible by effective coordination between the Microsoft, NCAC, 
and the MPS, had a significant impact on the Chinese software 
market and led to the closure by Suzhou PSB of a number of similar 
websites.  The case was transferred to the Procuratorate in 
November 2008. 
 
¶15. (SBU) On December 31, the Shenzhen Futian District People's 
Court convicted 11 defendants in China's largest-ever copyright 
counterfeiting case.  Sentences ranged from 1.5 to 6.5 years, the 
longest ever handed down by China's courts for a software 
copyright crime.  The decision ended a 17-month prosecution and 
involved the largest group of pirates punished by the court in a 
single case.  The convictions were a result of milestone 
collaboration between the FBI and China's Ministry of Public 
Security (MPS), and disrupted a criminal syndicate believed to be 
the largest software counterfeiting group in the world, 
 
BEIJING 00000570  005 OF 012 
 
 
responsible for manufacturing and distributing 13 different 
counterfeit Microsoft software products in 11 languages to 36 
global markets.  Li Shunde, a legal scholar who heads the Chinese 
Academy of Social Sciences Intellectual Property Research Center, 
told China's Xinhua news agency "This [case] shows China's 
sincerity in implementing intellectual property law enforcement." 
 
¶16. (SBU) Dahon Technologies, Ltd., a U.S. bicycle maker with 
extensive retail and manufacturing activities in mainland China, 
reported that local courts in Shenzhen awarded monetary damages to 
the company in seven separate patent infringement cases against 
Chinese firms in 2008.  Despite these successes, company 
representatives said they faced continuing IPR infringement risk 
due to lax enforcement of IPR regulations at trade fairs 
throughout China.  Several other Guangzhou-based rights holders 
and law firms have separately described trade fair-related IPR 
concerns as an area that did not significantly improve in 2008, 
even as trade fair organizers and local government Intellectual 
Property Offices established complaint desks and assigned full- 
time officials to settle IPR-related disputes during most major 
fairs (see Ref I).  One rights holder described officials ignoring 
repeated IPR infringement complaints for three consecutive years 
as the company escalated its complaints and repeatedly sued fair 
organizers, local government officials, and companies that 
allegedly violated the firm's IP during the fairs.  The rights 
holder said fair organizers eventually implemented new procedures 
and stepped up enforcement in time for the 2008 annual fair in 
order to prevent the company from filing additional law suits. 
 
¶17. (SBU) Shanghai continues to be a bright spot in East China's 
IPR enforcement.  The city's IPR white paper, published in 2008, 
highlights Shanghai's efforts.  Shanghai has particularly boosted 
transparency through such efforts as posting its IP strategy on- 
line for public comment and live broadcasts of IP case trials via 
the Internet.  Shanghai PSB has also begun a new initiative to 
more proactively investigate IP cases based on credible leads 
rather than waiting for the criminal threshold to be met before 
beginning an investigation.  However, counterfeit retail markets 
continue to be a problem in the city (see Ref G). 
 
¶18. (SBU) Shanghai courts, which receive high marks from the U.S. 
business community for their professionalism and fairness, are 
attracting large numbers of both foreign and domestic 
litigants.  Shanghai has taken a number of measures since October 
2008 to highlight and strengthen its judicial capabilities.  On 
October 29, Shanghai established the Shanghai Intellectual 
Property Arbitration Court with the support of the Shanghai IP 
Administration and the Shanghai Arbitration Commission (SAC).  By 
establishing a special IP Arbitration Court, Shanghai hopes to 
gain a similar reputation for its arbitration abilities (see Ref 
H). 
 
¶19. (SBU) The Jiangsu High Court is likewise gaining recognition 
in the U.S. business community for its progress and increasing 
capacity for dealing with IP cases.  The Jiangsu High Court 
emphasizes compelling the infringer to disclose all infringement 
information and imposes civil sanctions in addition to damages 
under certain circumstances. 
 
¶20. (SBU) Guangdong Provincial and Local courts, especially in 
Guangzhou and Shenzhen, resumed IP-related cooperation and 
exchanges with the United States in 2008 after a hiatus of almost 
two years.  Court officials met with U.S. officials and described 
continuing efforts to improve the handling and enforcement of IPR 
 
BEIJING 00000570  006 OF 012 
 
 
cases.  Guangdong High Court also welcomed visiting U.S. federal 
judges and prosecutors in conjunction with exchange programs 
cosponsored by USPTO and Guangdong IPO (see Ref J).  Guangdong 
Customs and Guangdong Administration of Industry and Commerce (AIC) 
 
also resumed cooperative product identification training for each 
agency's front-line inspectors by inviting U.S. officials and 
rights holders to directly participate. 
 
¶21. (SBU) However, rights holders continued to report challenges 
in inter-agency cooperation on IPR-related cases among China's 
different administrative and law enforcement agencies.  Although 
rights holders said cooperation with individual agencies generally 
improved in 2008, they repeatedly complained about situations in 
which successful investigations and enforcement actions failed to 
be effectively transferred from one agency to another for 
continued action or the next step in the enforcement process.  For 
example, cases successfully investigated by a local AIC reportedly 
languished and remained incomplete after transfer to the Public 
Security Bureau for further criminal investigation.  More 
frequently, rights holders reported that Public Security Bureau 
criminal cases were inexplicably refused or simply disappeared 
after being referred to Procuratorates for trial, meaning that the 
results of the administrative and criminal investigations were 
never considered by a Chinese court.  Lack of an effective 
evidence discovery process and prohibitively high enforcement 
thresholds remain major problems for rights holders when 
attempting to enforce their IPR rights in China (see Ref J). 
 
¶22. (SBU) NCAC reported that, from April 1 to May 31, 2008, it 
launched a nationwide special action to combat the preloading of 
infringing software on new computers by manufacturers and 
resellers.  By strengthening the supervision and inspection of 
computer manufacturers and large-scale computer markets, NCAC said 
the rate of preloaded genuine operating system software increased 
to 85 percent.  However, Microsoft estimates that only 35 percent 
of such software is genuine, up from 15 percent in 2005. 
 
¶23. (SBU) Chinese authorities in 2008 received positive attention 
in the media for making IPR enforcement a national priority, 
especially against unlicensed goods bearing the Olympics logo. 
The campaign implemented broad efforts to protect Olympic Sponsors 
and China's image as the host, and included a propaganda campaign 
to place monthly news stories about protecting the Olympics logo. 
Many of the largest sponsors of the Games praised the government's 
efforts to protect their brands in some of the most public Olympic 
venues.  However, there were many reports that unlicensed products 
in Beijing's notorious markets were simply driven underground in 
the cat-and-mouse game with law enforcement officials that is so 
familiar to Beijing's vendors. 
 
Notorious Markets 
----------------- 
 
¶24. (SBU) Baidu.com has in previous years been identified by 
industry as the largest China-based "MP3 search engine" with deep 
links to unauthorized downloads of copyright-protected files.  In 
February 2008, International Federation of the Phonographic 
Industries (IFPI), representing Sony BMG Music, Warner Music, 
Universal Music, and Gold Label Entertainment, filed a $9 million 
music copyright infringement suit in a Beijing court against Baidu 
and a $7.5 million suit against Sohu.com.  Baidu officials 
continue to deny responsibility for the content hosted by other 
websites, but told Emboffs in February 2009 that the company does 
 
BEIJING 00000570  007 OF 012 
 
 
provide a mechanism for rights holders to request the removal of 
links to infringing content.  Domestic rights holders are also 
suing Baidu.  In March 2008, the Music Copyright Society of China 
(MCSC) and R2G, a leading music distributor, announced anti-piracy 
action against the company, citing infringement of material 
including Olympics-themed songs.  The MCSC and R2G said they 
turned to the courts after failing to reach a private settlement 
with the search engine giant, charging Baidu with stonewalling, 
delaying tactics, and using distorted interpretations of the law. 
 
¶25. (SBU) At physical markets in China, the widespread 
availability of counterfeit goods in and around Beijing's markets 
continued to be a problem.  Widespread infringement continued at 
long-time hotspot markets such as Jiayi, Yuexiu, and Yaxiu. 
Unofficial visits to Jiayi after 5:00 p.m., when police and 
copyright officials leave for the evening, reveal dedicated vendor 
stalls, closed during daylight hours, that sell exclusively Louis 
Vuitton and Coach products.  Both of those brands, along with 
dozens of others, have been prohibited for sale in all Chinese 
wholesale markets since 2004.  Problems at the notorious Silk 
Street Market and Hongqiao Market also remained severe. A January 
2008 report from industry claimed that the situation remains 
"horrid," with a survey of the market revealing piracy levels that 
increased in most categories from 2007 to 2008. 
 
¶26. (SBU) In December 2008, a coalition of brands including 
Burberry, Chanel, Gucci, Louis Vuitton, and Prada reached a 
settlement agreement with Silk Street Market management.  Under 
the terms of the deal, the market's management company agreed to 
suspend vendors caught selling infringing goods.  While the 
settlement has been enforced and some stalls shut down, such 
actions in February 2009 elicited angry responses from vendors, 
who protested and threatened employees of the agency in Beijing 
that represents the brands.  As a result, suspensions were delayed 
and notarized purchases, the process by which transactions 
involving counterfeit goods are recorded for use as evidence in 
court, were disrupted.  The law firm representing the brands in 
the settlement agreement is investigating whether Beijing 
government and Silk Street authorities have capitulated to demands 
of the vendors in order to avoid conflict.  Threats to social 
stability, particularly during the current economic downturn, have 
been rumored in some cases to be hindering authorities' 
willingness to enforce laws (see para 43). 
 
¶27. (SBU) In 2008, while Beijing played host to the Summer Olympic 
Games, Silk Street market management reported more than 1.6 
million visitors to the market, its highest numbers in three 
decades.  Wang Zili, general manager of Beijing Silk Street Co., 
Ltd., which manages the market, was repeatedly quoted in the local 
media during the Olympics touting the surge in visitors.  In a 
September 2008 meeting with USTR officials, the Chaoyang District 
Government's Commerce Bureau, which oversees the market, cited 
visits to Silk Street by former U.S. President George H. W. Bush 
and other dignitaries as a validation of, and support for, the 
market's legitimacy. 
 
¶28. (SBU) In Shanghai, while production of IPR infringing goods is 
reportedly decreasing, purveyors of infringing goods, both on the 
streets and with small retail establishments, remain largely 
unchecked.  In July 2006, Shanghai closed its premier counterfeit 
market, Xiangyang.  However, several other markets have sprung up 
and thrived in its place, and many Xiangyang merchants simply 
moved to these other locations throughout the city, including the 
Shanghai Yatai Shenhui Recreational Shopping Center, Fengxiang 
 
BEIJING 00000570  008 OF 012 
 
 
Fashion and Gift Market (located in the same building as the 
Shanghai IP Service Center), and the Shanghai Longhua Fashion and 
Gift Market. 
 
¶29. (SBU) In Guangdong Province, notorious markets in Shenzhen and 
Guangzhou have shown signs of increased attention to IPR 
protection, but the total volume of infringing goods at such 
markets has not seen a major decline.  At Shenzhen's Luohu Market, 
signs have been posted at most entrances and exits reminding 
visitors that the sale of infringing goods is prohibited, and 
notices are occasionally posted on closed stalls indicating that 
those stalls were shut down for violating IPR regulations. 
However, sales of infringing goods continue to openly take place 
in other stalls in the same markets, and the increased attention 
to IPR enforcement appears to have forced the sellers of higher 
quality counterfeits further underground.  Sellers of high quality 
fakes, including brand name purses, clothing, and accessories, as 
well as DVDs, CDs, and other digital media, increasingly escort 
customers to hidden back rooms within the market or to apartments 
in adjacent buildings where the better quality fakes are stored 
and transactions take place. 
 
Internet Piracy 
--------------- 
 
¶30. (SBU) China has the world's largest and fastest-growing 
Internet population, which increased more than 41 percent to 
nearly 300 million users from 2007 to 2008.  The United States, 
with the second largest number of Internet users, had 
approximately 223 million during the same period.  However, 
China's rate of Internet penetration is only 23 percent, still 
relatively low compared with 71 percent in the United States. 
More than 90 percent of Chinese Internet users, approximately 270 
million people, were estimated to use a high-speed Internet 
connection, allowing them to download larger files including 
movies, television shows, and video games.  The launch in 2009 of 
China's third-generation mobile phone services, which support 
wireless Web surfing, is expected to cause a further surge in 
Internet usage in coming years.  According to statistics from the 
China Internet Network Information Center (CNNIC), there were more 
than 13 million websites with a .cn domain name in December 2008. 
The Internet environment in China has created opportunities for 
widespread piracy and challenges for law enforcement. 
 
¶31. (SBU) In addition, China's internet population is increasingly 
watching streaming video of foreign television programs and movies 
rather than waiting to buy DVD or VCD discs, with the video 
content available on a burgeoning number of domestic and 
international websites featuring new and old television programs 
that often become available for viewing within hours of their 
initial broadcast.  Hobbyist groups have also formed in China with 
television and computer enthusiasts volunteering to compile 
translations of foreign programs and upload home-made subtitles to 
the new programs as soon as new videos become available on Chinese 
streaming video websites, making the content more accessible to an 
even broader Chinese audience. 
 
¶32. (SBU) Chinese officials reported campaigns to crack down on 
online piracy at various times throughout 2008 with varying 
degrees of success, and hundreds of infringers were reportedly 
ordered shut down.  In March 2008, China's National Anti- 
Pornography and Anti-Piracy Office, under the General 
Administration of Press and Publication (GAPP) announced that it 
had shut down and unspecified number of domestic websites in a 
 
BEIJING 00000570  009 OF 012 
 
 
crackdown on pornography and piracy.  The office at the time also 
reported that a number of cases in Guangdong, Anhui, and Hubei 
provinces had resulted in arrests.  Amendments to China's 
copyright law, which for many years has been under review for 
revision, are expected to better address issues of online piracy. 
 
¶33. (SBU) From June 1 to September 30, 2008, the Chinese 
government went to great lengths to launch a broadly coordinated 
crackdown on the unauthorized retransmission of sporting events 
and other activities related to the Beijing 2008 Olympic Games.  A 
working group composed of NCAC, MPS, MIIT, and the State 
Administration of Radio, Film and Television (SARFT) initiated 24- 
hour monitoring of video websites.  The nationwide enforcement 
efforts reportedly resulted in 453 online infringement cases, of 
which 192 sites were shut down, 173 sites were required to remove 
infringing content, 88 sites received administrative punishment, 
usually fines, and 10 sites were transferred to the Procuratorate 
for prosecution.  According to monitoring by the International 
Olympic Committee, the vast majority of illegal retransmissions 
subsequently happened outside of China, indicating a successful 
campaign. 
 
Production, Import, and Export of Counterfeit Goods 
--------------------------------------------- ------ 
 
¶34. (SBU) Statistics released by United States Customs and Border 
Protection (CBP) in January 2009 revealed that China was again the 
United States' top trading partner for IPR seizures, accounting 
for 81 percent of the total value of counterfeit products seized 
at United States borders for full year 2008.  Hong Kong (five 
percent) and Taiwan (one percent) were in third and fourth place, 
respectively.  While the proportion of seizures from China 
increased slightly from 80 percent in 2007, the total value of 
goods seized jumped more than 40 percent in the same period to 
$221 million from $158 million.  (Note: Globally, CBP reported 
that the total value of all IPR seizures in 2008 increased nearly 
39 percent from 2007. End note.)  More than 96 percent of footwear, 
 
the top commodity seized in 2008, originated in China.  More 
troubling, perhaps, is that China, India, and Hong Kong, the top 
three trading partners for IPR seizures overall, accounted for 94 
percent of all seizures of products posing potential safety or 
security risks. 
 
¶35. (SBU) In December 2007, U.S. Customs and Border Protection 
entered into a non-binding memorandum of understanding (MOU) with 
the General Administration of Customs of the People's Republic of 
China (GACC) to better exchange information on border seizures of 
counterfeit goods.  While technical and internal challenges on 
both sides have reportedly slowed the responsiveness, data sharing 
between the customs agencies has been generally useful, and led to 
some successful seizures in 2008. 
 
Optical Media Piracy 
-------------------- 
 
¶36. (SBU) The massive problem of Internet piracy has overshadowed 
optical disc piracy because of its scale and efficiency.  However, 
the music and movie industries continue to be plagued by optical 
disc piracy in China and by China-made pirated optical discs 
across Asia.  These discs fuel the pirated DVD sellers that seem 
to be ubiquitous in Chinese cities (see Ref D).  Industry reports 
that little seems to be done about infringing optical disc plants 
in China, and notes in particular a lack of criminal 
 
BEIJING 00000570  010 OF 012 
 
 
investigations.  Industry finds especially problematic the 
inability to send suspicious optical discs directly to forensic 
testing centers such as the one in Shenzhen.  Although they 
regularly exchange information with the facility, the current 
requirement is that discs be submitted via local law enforcement 
or publishing companies, a burden that complicates investigations. 
 
Changing this policy requires approval by the Ministry of Public 
Security. 
 
¶37. (SBU) At a November 21, 2008 roundtable with U.S. business 
representatives in Shanghai, and at a separate roundtable event in 
Guangzhou on December 2, USG officials discussed Internet-related 
IP enforcement in China.  Business representatives outlined some 
of the hurdles they face on IP protection, most notably the 
verification of pirated DVDs and CDs.  Businesses confirmed their 
difficulty finding an agent to verify pirated copies despite the 
presence of the government lab in Shenzhen that has testing 
capabilities.  In even the most obvious cases of pirated DVDs, 
they said, Chinese enforcement authorities insist on a report from 
a neutral agent. 
 
Use/Procurement of Government Software 
-------------------------------------- 
 
¶38. (SBU) In its fifth annual survey of packaged PC software 
piracy, released in May 2008, the Business Software Alliance (BSA) 
showed that, accounting for new information on China's PC market, 
the real piracy rate in 2007 dropped two points to 80 percent. 
BSA credited new vendor agreements with OEMs that took effect in 
2007, and said that more China-based companies becoming 
multinational enterprises added incentive to comply with 
international IPR standards.  BSA reported that the number of PCs 
shipped to homes and small businesses, a group with higher 
infringement levels, grew faster than the market as a whole, 
especially in second- and third-tier cities, but not enough to 
offset progress made to date legalizing larger customer segments, 
such as government and enterprise.  However, BSA also explains in 
its report that previous studies had underestimated the number of 
China's non-brand name vendors, a group with a higher rate of 
piracy than other vendors.  This discovery increased the overall 
estimate of China's PC market by 25%, and also raised the piracy 
rate.  Therefore, BSA's official 2007 ranking shows that China's 
piracy rate remained at 82 percent for a second consecutive year, 
with the acknowledgement that China is demonstrating progress in 
fighting PC software piracy in the government, large enterprises, 
and even consumer and small business markets, which represent two- 
thirds of the country's software market.  BSA's preliminary 
estimates show China's 2008 piracy rate at 79 percent, continuing 
a downward trend. 
 
¶39. (SBU) As in previous years, the Chinese Government objected to 
BSA's methodology, which it said is flawed because it accounts 
only for packaged software, which they argue represents only a 
portion of China's software market.  Instead, China relies on its 
own study, conducted by Chinese research firm Chinalabs.  In June 
2008, Chinalabs released its annual report on software piracy, 
announcing that China's software piracy rate was in fact only 41 
percent in 2007 - half the 82 percent piracy rate reported by BSA. 
 
The study indicated that the general software piracy rate had 
dropped 10 percentage points from 2006 to 2007, while the piracy 
rate in operating systems had declined 29 points from 2006 to 39 
percent in 2007. 
 
BEIJING 00000570  011 OF 012 
 
 
 
¶40. (SBU) On January 12, 2009, Zhejiang Copyright Department 
Director Wang Shaojie said that the financial crisis has made 
their work more difficult as companies are more tempted to cut 
corners by using pirated software.  Nevertheless, Wang vowed that 
the Copyright Bureau would continue to urge companies that are 
still in operation to buy legitimate software.  He said the 
Zhejiang Copyright Bureau plans to assist Zhejiang companies to 
buy software worth RMB 100 million (USD 15 million) from Microsoft, 
 
though it is unclear how this will be funded (see Ref E). 
 
Treaties 
-------- 
 
¶41. (SBU) China acceded to the 1996 WIPO Copyright Treaty (WCT) 
and WIPO Performances and Phonograms Treaty (WPPT), known as the 
"Internet Treaties," in June 2007.  Since then, China's 
legislature has not promulgated any laws or regulations to 
implement these two treaties, because China's current Copyright 
Law, revised in 2001, meets all the requirements provided in the 
WIPO treaties.  As a result, the Chinese government can use the 
Copyright Law to implement the two treaties without drafting a new 
implementing law or regulation. 
 
¶42. (SBU) The Chinese government on September 1, 2008 notified 
WIPO that it would extend the application of the Internet Treaties 
to Hong Kong effective October 1, 2008.  The notification 
superseded China's statement in 2007 that, unless otherwise 
notified, the Internet Treaties would not apply to Hong Kong or 
Macao. 
 
Recent Developments 
------------------- 
 
¶43. (SBU) Since December 2008, there have been a number of 
developments in China that appear to indicate a potentially 
troubling trend toward protectionism and nationalism and selective 
application of the rule of law.  In a December 10 press interview 
with a local reporter, Supreme People's Court (SPC) Third Division 
Court Vice President Judge Kong Xiangjun reportedly said the SPC 
would study "how to adjust IP judicial policies" to mitigate the 
effect of the global financial crisis on China's economy.  Reports 
said Kong suggested that if infringing activity did not "violate 
public interest," the infringer would be allowed to continue the 
infringing activity, but be required to pay damages to the rights 
holder.  China's 21st Century Business Herald quoted an SPC source 
saying that the SPC had already distributed the new guidelines 
internally even as the policy deliberations continue.  The SPC and 
SIPO at the time denied knowledge of the issue.  A Xinhua media 
report from the same day, however, credited Judge Kong with 
telling local courts to apply a stricter compensation rule in the 
case of infringements, and to set up more IPR tribunals - 
statements more in line with China's current legal requirements to 
cease all infringing activities (see Ref C). 
 
¶44. (SBU) In January 2009, SPC President Wang Shenjun stressed to 
local deputies in Henan province that Chinese courts must serve 
the overall situation of the country, with a focus on better 
servicing the nation's top priority: stable and fast growth. 
Reinforcing those statements, the SPC's Third Division (the IPR 
division) published on its website its 2009 "Focuses of Work," 
which include "taking full advantage of the functional role of IP 
trials to provide judicial support to enterprises in enhancing 
 
BEIJING 00000570  012 OF 012 
 
 
indigenous innovation capabilities, market competition 
capabilities, and risk resistance capabilities." 
 
¶45. (SBU) Reports from Guangdong confirm that the policy is being 
put into practice.  Local media reports announced that the 
Guangdong Communist Party's (CPC) Disciplinary Inspection 
Committee and the Guangdong Procuratorate have each announced 
measures to ease law enforcement efforts in cases where punishment 
might impact the ability of a major firm to maintain economic 
growth.  Business and legal contacts in the province have warned 
that legal resolution of commercial disputes, especially IPR civil 
cases, has measurably weakened as court officials express doubts 
about upholding judgments that might cause defendant companies to 
go out of business or shed local workers. 
 
¶46. (SBU) China IP expert Danny Friedman suggested to Econoff that 
"the Chinese ministers might feel that their hands are tied. On 
the one hand, they want to enforce intellectual property rights, 
but on the other they do not want to increase unemployment and 
cause soQnrest by putting whole villages out of work that are 
sustained by manufacturing counterfeit products. This is a 
fortiori so, because of the economic downturn." 
 
Comment 
------- 
 
¶47. (SBU) Reports from industry suggest that the IPR environment 
in China continues to receive increased awareness and benefited 
from sufficient enforcement actions to prevent significant 
deterioration in the past year.  During the Olympics, China's 
government launched a highly visible campaign to protect certain 
aspects of IPR.  However, progress has not been sufficiently 
consistent or sustained to change the widespread perception of 
China's enforcement regime as largely ineffective and non- 
deterrent.  The suspension of the bilateral IPR dialogue continued 
for much of 2008 as a result of China's petulant response to the 
United States' 2007 WTO filing.  While some gains appear to have 
been made following the resumption of bilateral talks in September 
2008, the cooperation to which both sides agreed will not result 
in concrete action until later in 2009.  The long-awaited third 
revision of China's Patent Law included many provisions, such as 
compulsory licensing, that are troubling to the foreign IPR 
community.  Furthermore, the rumored selective enforcement of IPR 
laws, motivated by the economic downturn, suggests we need 
continued pressure on the Chinese Government to cooperate in 
bilateral and multilateral fora, and to take measurable action to 
improve the IPR environment in China.  In this context, Post 
recommends that China continue to be placed on the Priority Watch 
List with Section 306 monitoring.  End Comment. 
 
PICCUTA