VZCZCXYZ0003
OO RUEHWEB

DE RUEHBJ #2196/01 2150833
ZNR UUUUU ZZH (CCY AD9780FE MSI9099-695)
O 030833Z AUG 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5445
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE

UNCLAS BEIJING 002196 
 
SENSITIVE 
SIPDIS 
 
C O R R E C T E D COPY CAPTION 
 
STATE FOR EB/OIA - GOETHERT 
STATE FOR EAP/CM - PENG 
STATE FOR L/CID - MCDONALD 
STATE PASS USTR - BAHAR, KATZ, WINTER 
E.O. 12958: N/A 
TAGS: CASC EINV KIDE OPIC PGOV
SUBJECT: CHINA 2009 INVESTMENT DISPUTES AND EXPROPRIATION 
 
REF: A. A) STATE 049477 
     ¶B. B) BEIJING 03072 
 
¶1. (U) This telegram is sensitive but unclassified -- it 
contains business proprietary information and is not for 
distribution to the public. 
 
¶2. (SBU) In response to ref A, this cable provides updated 
information on investment and expropriation claims in China 
and includes input from the Economic Section as well as other 
mission elements, including Embassy Beijing USTR and FCS 
offices and Consulates in Shanghai, Guangzhou, Shenyang and 
Chengdu. 
 
3.(SBU) Begin Text: 
 
Expropriation 
---------------- 
 
Chinese law prohibits nationalization of foreign-invested 
enterprises, including investments from Hong Kong, Taiwan, 
and Macau, except under "special" circumstances.  Officials 
state that such circumstances would include national security 
considerations and when an investment includes real property 
or buildings that pose obstacles to large civil engineering 
projects. However, the law does not explicitly define the 
terms.  Chinese law requires compensation of expropriated 
foreign investments, but also does not specify how such 
compensation is calculated or determined.  The United States 
has not formally determined that China has expropriated any 
new investments since China's opening and reform policies 
were initiated in 1979.  However, the Department of State has 
in past annual reports highlighted to Congress several cases 
of concern. 
 
The Embassy is generally aware that many United States 
persons of Chinese descent, who were not United States 
citizens at the time their claims arose, have outstanding 
expropriation claims against the Government of the People's 
Republic of China (PRC).  The Act does not require a report 
on these claims.  The Department of State, however, does 
provide appropriate assistance to all United States persons 
with claims against the Government of the PRC. 
 
The Embassy is aware of fifteen outstanding disputes that 
involve United States persons and the Government of the 
People's Republic of China or entities under its control. 
These cases are outlined below. 
 
Commercial Disputes 
------------------- 
 
Besides expropriation, the Embassy is also aware that a 
number of United States nationals are engaged in commercial 
disputes in China, including disputes with commercial 
entities owned or controlled by the Government of the PRC. 
Many commercial disputes include breach of contract claims by 
United States persons against their Chinese joint venture 
partners. 
 
United States persons that become involved in commercial 
disputes in China may encounter significant obstacles that 
prevent a fair hearing of their claims.  These may include 
corruption, arbitrary enforcement of rules and regulations, 
failure of the judiciary to act independently, and inadequate 
domestic enforcement of foreign judgments against Chinese 
parties.  Chinese parties in commercial disputes may benefit 
from personal relationships with or favoritism on the part of 
law enforcement and the courts.  The Embassy is aware of some 
cases in which U.S. persons have lost control or ownership of 
property to Chinese entities that appear to have colluded 
with local authorities.  While not expropriation by a foreign 
government, these instances illustrate the risks to U.S. 
investors posed by corruption and the inadequate rule of law 
in China. 
 
Protectionism via Regulation 
---------------------------- 
 
In addition, Chinese agencies frequently adopt rules and 
regulations intended to limit the ability of foreign firms to 
compete with local companies.  These rules often are adopted 
primarily to protect local industry and promote China's 
immediate economic development.  While this activity does not 
meet the definition of expropriation, and the government 
rarely directly seizes assets, the result is a transfer of 
value from foreign firms to local companies by excluding the 
former from domestic market opportunities. Frequently such 
protectionist regulations benefit state-owned firms, even 
indirectly, or if they have been adopted at the prodding of 
well-connected Chinese state-owned enterprises (SOEs), which 
are closely linked to the government and may benefit from 
financial and personal ties with their regulators. 
 
These risks and obstacles are more fully outlined in the 
Country Commercial Guide for China, published online by the 
U.S. Department of Commerce. The Embassy regularly raises 
these matters at high levels with the PRC government. 
 
Despite these problems, the vast majority of U.S. individuals 
and firms remain keen on the Chinese market.  The 2008 
American Chamber of Commerce (Amcham) White Paper reports 
that 89 percent of its members who responded to an Amcham 
survey had an "optimistic" or "cautiously optimistic" 
five-year outlook. 
 
Dispute Resolution 
------------------ 
 
Commercial disputes are heard in China's civil courts, which 
include national "Supreme" courts and local courts at the 
provincial, city, and county or district levels.  These civil 
courts have jurisdiction over contract and commercial 
disputes involving foreign parties.  They do not adjudicate 
criminal offenses, like theft and tax evasion.  In many 
jurisdictions, a separate system of IP courts cover civil 
intellectual property disputes in lieu of civil courts. 
Foreign lawyers cannot act as attorneys in Chinese courts, 
but may observe proceedings.  China also maintains an 
extensive administrative legal system to adjudicate minor 
criminal offensives. 
 
Chinese officials typically urge firms to resolve disputes 
through informal conciliation.  If a formal mediation is 
necessary, Chinese parties and the authorities promote 
arbitration over litigation.  Most foreign investors consider 
arbitration a last resort, as they generally find it 
time-consuming and unreliable. 
 
Most contracts propose arbitration by the China International 
Economic and Trade Arbitration Commission (CIETAC).  Some 
foreign parties have obtained favorable rulings from CIETAC, 
but difficulties in other cases have led other participants 
and panelists to question CIETAC's procedures and 
effectiveness.  In CIETAC arbitration involving at least one 
purely foreign entity, a panel with a foreign arbitrator is 
possible.  (Foreign joint ventures established in China are 
considered Chinese legal persons.)  Provinces and 
municipalities also have their own arbitration institutions. 
For contracts involving at least one foreign party, offshore 
arbitration may be adopted.  Contracts stipulating foreign 
arbitration should name the arbitration body. 
 
While China is a member of the International Center for the 
Settlement of Investment Disputes (ICSID) and has ratified 
the United Nations Convention on the Recognition and 
Enforcement of Foreign Arbitral Awards (the "New York 
Convention"), in fact, United States persons have experienced 
difficulty in their efforts to have Chinese courts recognize 
and enforce arbitral awards rendered in their favor against 
Chinese parties. 
 
Case One 
-------- 
 
a. Claimant A 
 
b. 2009 
 
c. East Star Airlines had leased Claimant A-owned planes, ran 
into financial difficulties, and now reportedly owes the 
Baiyuan Airport Authority in Guangzhou, a State Owned 
Enterprise, unpaid fees and other money. The now-bankrupt 
East Star Airlines terminated its lease with Claimant A in 
accordance with PRC bankruptcy proceedings, but the airport 
authority has refused Claimant A access to claimant A's 
planes, which are still located at the airport. Claimant A 
needs to service the planes and retake possession of them, 
but the airport authority appears to be using the planes as 
leverage to recoup funds owed to them by the bankrupt 
airline, even though the court has ruled that the leased 
planes were not part of the East Star bankruptcy proceedings. 
The U.S. Consul General in Guangzhou, in concert with FCS 
offices in Guangzhou and Beijing, sent a letter on May 22 to 
the Baiyuan Air Authority urging swift resolution of this 
dispute in accordance with local law. 
 
Case Two 
-------- 
 
a. Claimant B 
 
b. 2006 
 
c. Guangzhou-area American legal firm has struggled to 
enforce an arbitration judgment in a Shenzhen court for 
more than three years. Claimant B asserts this lack of 
enforcement is in violation of the New York Convention on 
international enforcement of binding arbitration. U.S. 
Consulate General Guangzhou has regularly contacted the court 
to request status updates, which it occasionally provides, 
but the case remains unresolved.  (Note: The IPR community in 
Guangzhou, i.e., U.S. law firms, rights holders, and other 
interested parties, seems to suffer disproportionately from 
China's poor implementation of the New York Convention. 
Mission contacts frequently highlight how unattractive 
arbitration remains for U.S. firms involved in commercial 
disputes in South China. End Note.) 
 
Case Three 
---------- 
 
a. Claimant C 
 
b. 2007 
 
c. Claimant C, enmeshed in arbitral proceedings in Hong Kong 
against its joint venture Chinese partner, requested USG 
assistance in persuading the State Administration of Foreign 
Exchange (SAFE) to not penalize Claimant C for its alleged 
illegal USD to RMB conversions. While this case (described in 
following paras) remains unresolved, Claimant C places even 
higher priority on getting about $9 million of its investment 
out of China via a "capital reduction" that requires SAFE 
approval. 
 
The potential assessment of a fine of 1.76 million RMB by 
Shenyang's SAFE branch would be for allegedly illegal USD to 
RMB conversions related to Claimant C's Shenyang investment. 
Claimant C asserts the allegations are wholly baseless, and 
notes that about a year ago, national-level SAFE officials in 
Beijing had ordered SAFE/Shenyang to put a hold on issuance 
of any penalties. However, after Claimant C lifted its "stay" 
on the Hong Kong arbitration process against its Chinese JV 
partner on April 1, Shenyang SAFE reportedly re-started the 
process of assessing the fine. Shenyang SAFE was poised to 
make a decision on the issue on June 19. We have not yet 
determined whether a decision has been forthcoming. 
 
In early 2008 Consulate General Shenyang wrote a letter and 
made phone calls to Shenyang government officials on behalf 
of Claimant C. A meeting was organized between Claimant C and 
the Bureau of Foreign Trade and Economic Cooperation, which 
has regulatory oversight of the investment activities of the 
Shenbei Economic Development Zone. At the meeting, Claimant 
C's CEO argued that Claimant C was innocent and had been 
assured by local parties that all its currency conversions 
were legal. 
 
About one week later, Claimant C advised the Consulate 
General that Shenyang SAFE would indeed rule that Claimant C 
was in violation of foreign exchange regulations and would 
recommend to Beijing SAFE that it impose a penalty fine of 30 
percent of total conversions.  Claimant C said it would not 
accept that decision, and wrote appeals to the 
then-Ambassador, U.S. Members of Congress, and China's 
Ambassador in Washington. 
 
In October 2008, the Shenyang government foreign affairs 
office requested a meeting with U.S. Foreign Commercial 
Service (FCS) officers to emphasize that (1) Mayor Li Yingjie 
and Deputy Mayor Yang Yazhou were committed to a fair and 
quick resolution of this case; (2) the mayor's office had 
conducted its own investigation of the events leading up to 
the alleged forex violation and found that all local parties 
involved were operating within guidelines; (3) Deputy Mayor 
Yang Yazhou had called a mediation meeting a few years 
earlier attended by Claimant C, SAFE, Shenbei Development 
Zone and China Merchant Bank; and (4) Shenyang government 
mediation led to SAFE's decision to decrease Claimant C's 
fine to 2 percent of total conversions. 
 
FCS communicated the above to the CEO of Claimant C, who 
replied that the 2 percent proposal was not new,  that 
Claimant C could not accept being cast as a scapegoat for the 
behavior of certain Shenyang officials, and that Claimant C 
would not accept the penalty. 
 
In November 2008, the U.S. Consul General in Shenyang and FCS 
met with Deputy Mayor Yang Yazhou to discuss Claimant C's 
case. Present were representatives from Shenyang SAFE, China 
Merchant Bank, and Shenbei Economic Development Zone. Mayor 
Yang reiterated the points made to FCS officers the month 
before and urged the Consul General to persuade Claimant C to 
bring this case to a speedy closure. The Consul General 
replied that he was not in a position to advise Claimant C on 
this matter. 
 
(Note: Over the past 2-3 years, there has been a small but 
growing number of reports about U.S. companies invested in 
China alleging improper China or unfair treatment in an 
administrative review process or denial of a fair hearing in 
court. End Note.) 
 
Case Four (ref B) 
--------- 
 
a. Claimant D 
 
b. 2001 
 
c. Claimant D learned from a January 2002 newspaper report 
that the area in Tianjin where its construction materials 
joint venture factory was located was slated for a new 
university campus. The claimant had signed a 50-year land use 
agreement with the city when it established its JV in 1997; 
the Claimant owns 79 percent of the roughly $8.5 million 
project. The claimant requested compensation of more than $6 
million, based on its assessment of the value of the plant. 
 
Upon inquiring through its JV partner (the Tianjin Building 
Material Group, a city-level state-owned enterprise (SOE)), 
the Claimant was told that it was expected to vacate by the 
end of May. However, at that point it had received neither a 
formal notice-to-quit nor an offer of compensation. The 
claimant sought meetings directly with municipal officials, 
who responded with a letter deputizing the Claimant JV 
partner to negotiate for the municipality. 
 
Embassy Beijing's Economic Minister-Counselor sent a letter 
to the Tianjin Government in late January 2002 urging fair 
treatment. The Embassy's Deputy Senior Commercial Officer 
also contacted Tianjin trade officials repeatedly over the 
succeeding months. 
 
On April 29, 2005, the claimant sent a letter, through the 
Chairman of the U.S.-China Business Council, to the Mayor of 
Tianjin proposing a new solution. In the letter, claimant D 
sought the Mayor's assistance and approval to merge with an 
existing plant in Tianjin and receive USD 8 million in 
compensation. Embassy Beijing's Senior Commercial Officer met 
with Tianjin officials regarding this case in the fall of 
¶2006. Since late 2005, following encouragement from then- 
Speaker of the House Dennis Hastert, Chinese Ambassador to 
the United States Zhou Wenzhong told the Department of State 
that he has engaged the Tianjin municipal government to press 
for a satisfactory resolution. 
 
In June 2006, China's Ambassador to the U.S. said he raised 
the case with the Mayor of Tianjin, who said the claimant had 
agreed to vacate, and the only remaining issue was the amount 
of compensation. The Mayor said compensation should be based 
on the value of the land before construction, which had 
raised the value of the land substantially. The Mayor 
appointed his Secretary General to coordinate among municipal 
agencies to resolve the case. 
 
In February 2008, the claimant told Embassy officials that it 
had accepted an offer by the city of Tianjin to reimburse 
costs to move to a new location and re-install its equipment. 
 
As of August 2008, the claimant said it was operating in the 
new location. The city of Tianjin had paid many, but not yet 
all, of the claimant's moving expenses. Tianjin had also 
established a fund to compensate the claimant for other 
losses, like the value of its original leases. That fund is 
controlled by the claimant's JV partner and no money has yet 
been paid. The claimant reported a good relationship with its 
JV partner, but observed that as a municipal SOE, the line 
between its interest and the city's is not always clear. The 
claimant is also in the process of renegotiating loans 
secured by the original property. 
 
Case Five (ref B) 
----------------- 
 
a. Claimant E 
 
b. 2001 
 
c. Local officials reportedly sought to evict the claimant 
from its factory on short notice and without adequate 
compensation in May - June 2002. The claimant in 1998 
established a factory to produce cast-iron furniture in 
Tongzhou District on the outskirts of Beijing and signed a 
26-year lease with a local government-owned corporation for 
land and buildings at a rate of approximately $56,000 a year. 
The lease was notarized by the Tongzhou District Government. 
Since then, real estate prices in the area have apparently 
skyrocketed as builders have erected luxury residences. At 
the end of 2001, the Tongzhou District Planning 
Administration Bureau notified the claimant in writing that 
the building it had rented was not in conformity with the 
future development of a new section of Tongzhou and should 
therefore be demolished. On May 10, 2002, both the claimant 
and the state-owned firm that had leased the property to the 
claimant were notified by Tongzhou District that some of the 
buildings were illegally constructed and had to be torn down 
by May 25. 
 
On June 7, 2002, approximately 100 workers with hand tools 
and a bulldozer reportedly appeared and dismantled the 
facility's gatehouse, administration building, and employees' 
dormitories, as well as cutting off the company's power and 
water supplies. The claimant's attorneys contacted the 
Embassy while the demolition was in progress, whereupon the 
Commercial Section telephoned the head of Tongzhou District, 
the Beijing Municipal Foreign Investment Service Center, and 
several other officials, but the demolition continued. After 
meeting with the claimant's American owners, the Commercial 
Section sent a letter to the head of Tongzhou District urging 
fair compensation. The District raised its compensation offer 
from RMB 200,000 (approximately $24,000) to RMB 500,000 
(approximately $60,000) but then inexplicably returned to the 
lower offer of RMB 200,000. Congressman Waxman raised the 
case in a letter to the then-Ambassador on June 25, 2002. 
 
By 2006, it appeared the Claimant had abandoned the case. 
Neither the Claimant nor officials acting on its behalf had 
any further contact with the Embassy until June 2009, when 
the Embassy contacted the claimant's majority shareholder in 
the United States. The shareholder informed the Embassy that 
the claimant has left China as a result of unsatisfactory 
resolution of the case ("the owner left pretty bitter") in 
which claimant estimates claimant was paid less than one 
tenth of what claimant it was owed. 
 
Case Six 
-------- 
 
a. Claimant F 
 
b. 2009 
 
c. Claimant F owns and operates a restaurant in Beijing. On 
May 12, 2009, the claimant was given notice by the Jiang Tai 
Xiang Government and Chaoyang District Construction 
Department Project Office that the land occupied by the 
street upon which claimant's restaurant operates had been 
taken over by what claimant called "eminent domain 
proceedings," and that the claimant should negotiate with the 
landlord for a commercial settlement as compensation for 
breaking claimant's lease and the imminent destruction of 
claimant's business. 
 
As of June 2009, the landlord has apparently refused to meet 
with claimant or to negotiate in good faith. There have been 
reports of violence inflicted by the landlord's security 
staff against another tenant on the street and claimant has 
been issued notices and threats that claimant's business 
would be destroyed without a settlement. 
 
Claimant has been to two police stations - Beijing Police 
Bureau and the Police Station of Chaoyang District - to 
discuss the violence and security concerns. Claimant has been 
to Jiang Tai Xiang Government (which is in charge of and owns 
the area) to discuss settlements and compensation. Claimant 
has been to the Conflict Resolution Center of Chaoyang 
District three times for meetings and to request fair 
treatment. During these meetings, claimant's landlord sat on 
the same side of the table as the government. Claimant went 
to the Conflict Resolution Center of Beijing and obtained its 
agreement to urge the landlord to meet with claimant to 
discuss settlement. Claimant has been to the Conflict 
Resolution Bureau of Central Government to try to pressure 
the local government and claimant's landlord to negotiate. 
Claimant has also retained local counsel and has contacted 
FCS at Embassy Beijing for help. 
 
Apparently as a results of the meetings with various 
government agencies, the police seem to keep a presence 
nearby which has quelled any issues of conflict with the 
landlord's additional security staff. The mayor's office 
reportedly forced the landlord to "hear" claimant's claim for 
damages. The central government conflict resolution center 
appears to have forced the Chaoyang conflict center into 
action - it met with claimant in June and together with the 
landlord issued a "take it or leave it" offer. The offer came 
with a threat: destruction slated for June 11, 2009, which 
has since taken place. 
 
Case Seven 
---------- 
 
a. Claimant G 
 
b. date unknown 
c. Claimant entered into a commercial relationship with the 
Anshan Municipal Government in Liaoning Province. The local 
government reportedly reneged on contractual obligations, 
stalled in paying for services, and did not issue a land 
permit for the development site. FCS is assisting, and the 
local government recently demonstrated interest in resolving 
the case before the U.S. Consul General in Shenyang visits 
Anshan again later this year. 
 
Case Eight 
---------- 
 
a. Claimant H 
 
b. date unknown 
 
c. Claimant leased farm land from the People's Liberation 
Army (PLA), which was then expropriated based on allegations 
that the company mistreated workers. A district court 
confirmed the company's rights under contract, overturning a 
lower court decision, but the PLA apparently continued to 
occupy the land, complicating enforcement. The Liaoning Court 
of Appeals declined to hear the case; the company is now 
appealing to the People's Supreme Court. Claimant requested 
help from FCS and from Congressman Royce (CA). 
 
Case Nine 
--------- 
 
a. Claimant I 
 
b. date unknown 
 
c. Claimant had its factory vandalized, allegedly by its 
local guard force, causing 1.3 million RMB of damages. FCS 
supported claimant as it filed a case in district court 
requesting damages. Claimant was advised by the district 
court to settle for less than 10 percent of damages. Claimant 
continues to receive threats and is considering arbitrated 
disengagement from its contract. FCS is monitoring the 
situation and providing assistance as appropriate. 
Case Ten 
-------- 
 
a. Claimant J 
 
b. date unknown 
 
c. Claimant signed a contract with the Chinese Medical 
Education Association (CMEA) to provide education programs 
for Chinese nurses. According to claimant, CMEA did not 
fulfill its contractual obligations to market the program, 
resulting in a failed launched effort. CMEA continues to 
refuse to market the program, claiming it is not feasible. 
FCS has met with claimant and written letters on its behalf. 
 
Case Eleven 
----------- 
 
a. Claimant K 
 
b. 2007 
 
c. Claimant signed a contract in 2005 to build a light rail 
link in Wehai, Shandong Province. Claimant prepared extensive 
engineering designs but city officials have not supported the 
project as promised, specifically by establishing a 
one-ticket system. Since the installation of a new mayor in 
2007, the project has not moved forward. 
 
Case Twelve 
----------- 
 
a. Claimant L 
 
b. date unknown 
 
c. Claimant had a dispute with the landlord over rent 
payments which quickly escalated into threats and seizure of 
the store. Local police did not intervene. Consulate General 
Shanghai contacted local authorities, including via a letter 
from the Consul General to the Shanghai Vice Mayor. The 
company contacted Congressman Ed Royce, who highlighted 
claimant's case in a Congressional hearing in July 2008, at 
which both claimant and then-Director General of FCS 
Hernandez testified. The landlord's legal case against 
claimant for back rent was rejected by the court. In order to 
obtain damages from the landlord, claimant must file a claim 
with the court, which claimant apparently has not yet done. 
 
Case Thirteen 
------------- 
 
a. Claimant M 
 
b. date unknown 
 
c. A local township government threatened to condemn and 
demolish claimant's manufacturing facility in Nanjing without 
offering adequate compensation. FCS Shanghai contacted the 
Nanjing Government Foreign Affairs Office to urge that 
negotiations between the company and local government 
officials resume. The local officials have agreed to open 
negotiations. 
 
Case Fourteen 
------------- 
 
a. Claimant N 
 
b. date unknown 
 
c. Claimant owns a manufacturing facility in Hangzhou. 
Claimant's managers were reportedly held hostage and the 
company was liquidated by "auction" by the Zhejiang 
Provincial Foreign Service Corporation without consent from 
the American owner. FCS Shanghai and the Consul General wrote 
letters to the Hangzhou City Foreign Affairs Office (FAO) and 
met Hangzhou FAO officials concerning the case. The FAO 
officials have been generally unresponsive. 
 
Case Fifteen 
------------ 
 
a. Claimant O 
 
b. date unknown 
 
c. Claimant, a dental supply company, had a dispute with the 
local government of Minhang District of Shanghai concerning 
compensation for forced relocation of claimant's 
manufacturing facility. FCS Shanghai has contacted Shanghai 
government officials concerning this dispute, which is still 
ongoing. 
 
¶4. (SBU) Proprietary Information -- Identity of Claimants: 
 
Claimant A: General Electric 
Claimant B: Anderson and Anderson 
Claimant C: EMG, an Indiana-based investment firm 
Claimant D: SureBlock 
Claimant E: Beijing Taico Industry Metal Products Co., which 
is majority owned by Amco Metal Industrial Corporation of 
City of Industry, CA, with the remainder owned by a 
Taiwan-based firm. 
Claimant F: Tim's Texas Roadhouse 
Claimant G: American Pacific Homes 
Claimant H: Shenyang Tigers 
Claimant I: Shenyang Taidong Construction 
Claimant J: Maricopa Community College 
Claimant K: Aerobus 
Claimant L: Nancy's Lifestyles 
Claimant M: Jensen 
Claimant N: LP Apparel 
Claimant O: Dentsply International 
GOLDBERG