VZCZCXRO0900
PP RUEHGH RUEHVC
DE RUEHCN #0294/01 3430002
ZNR UUUUU ZZH
P 090002Z DEC 09
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC PRIORITY 3616
INFO RUCPDOC/USDOC WASHDC PRIORITY 0028
RUEHOO/CHINA POSTS COLLECTIVE
RUEHCN/AMCONSUL CHENGDU 4329

UNCLAS SECTION 01 OF 02 CHENGDU 000294 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/CM 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ETRD PGOV KIPR CH
SUBJECT: KUNMING PHARMACEUTICAL CHIEF CLAIMS CHINESE IPR IS STRONG; 
UNFORTUNATELY FOR HIS U.S. HOLDING COMPANY, SO ARE SEC FILING 
REQUIREMENTS 
 
CHENGDU 00000294  001.2 OF 002 
 
 
¶1. (U) This cable contains sensitive but unclassified 
information - not for distribution on the internet. 
 
 
 
¶2. (SBU) Summary.  Chinese intellectual property rights (IPR) 
have strengthened considerably in the last 10 years, the 
chairman of a New York AMEX-listed, Chinese pharmaceutical 
company claimed to Consul General in Kunming, Yunnan Province. 
The chairman was confident that Chinese patent law could protect 
his company's IP.  A foreign attorney at an IPR seminar in 
Chengdu predicted, however, that the PRC would comply with 
international IPR standards (and thus also protect foreign 
companies) only when Chinese companies had IP worth protecting. 
 
 
 
¶3. (SBU) The chairman of the Chinese pharmaceutical company 
complained that U.S. lawyers, auditing firms, and stock dealers 
were manipulating his company's stock price, and "blinding the 
U.S. Security and Exchange Commission (SEC)," but failed to 
mention that his company has been sued in a federal class action 
lawsuit for allegedly filing false and misleading reports with 
the SEC.  End Summary. 
 
 
 
No Problems with Chinese IPR, 
 
Per Chinese Pharmaceutical Chairman 
 
----------------------------------- 
 
 
 
¶4. (U) On November 20, Consul General and ConOff discussed 
evolving patent protection in China with Lan Guihua, Chairman of 
the Board of China Shenghuo Pharmaceutical (aka Shenghuo USA), a 
holding company listed on the American Stock Exchange (AMEX) in 
June 2007.  Shenghuo USA owns Kunming Shenghuo, which engages in 
research, development, and marketing of pharmaceuticals and 
cosmetics based on Chinese herbs in the Kunming Economic Trade 
and Development Zone (KETDZ).  According to Shenghuo Deputy 
Director Tan Xiangxun, the KETDZ considers his "American" firm 
as a high-tech foreign company, thereby qualifying it for 
preferential investment policies from the local government. 
 
 
 
¶5. (U) According to Lan, China's IPR protection has improved 
considerably over the last 10 years, and his company's IP is 
sufficiently protected by Chinese law.  Shenghuo owns seven 
Chinese invention patents, and has applied for American patents 
and FDA approval for two pharmaceutical products.  Lan said that 
Shenghuo's products are strongly protected by Chinese law, and 
would be hard for other companies to replicate.  Lan claimed 
that, if another company violated Shenghuo patents, the 
infringer would face fines and perhaps corporate dissolution by 
Chinese authorities. 
 
 
 
Chinese Company Lists Firm in U.S. Stock Market, But 
 
Finds That Cooking (Accounting) Books Is Not Allowed 
 
--------------------------------------------- ------- 
 
 
 
¶6. (SBU) When CG asked why Shenghuo decided to start an American 
holding company, Lan said that the tougher listing standards in 
the United States helped his company institute stronger 
management and financial controls over its operations.  Lan also 
said it was "very good that there is no tradition among American 
companies of giving and receiving gifts."  Later however, Lan 
opined that Shenghuo USA's stock price did not reflect the 
company's true value, and complained that U.S. lawyers, auditing 
firms, and stock dealers were manipulating his company's stock 
price, and "blinding the U.S. Security and Exchange Commission 
(SEC)." 
 
 
 
¶7. (SBU) Conoff's research into Shenghuo's legal status in the 
United States revealed the basis for Lan's frustrations, and 
also suggest that shady PRC business practices will be under 
 
CHENGDU 00000294  002.2 OF 002 
 
 
closer scrutiny as more Chinese companies internationalize and 
list overseas.  Shenghuo USA, Lan, and other defendants were 
named in August 2008 in a federal shareholder class action 
lawsuit in the Southern District of New York.  The plaintiffs 
claim that Shenghuo USA issued materially false and misleading 
press releases and SEC filings in 2007 and 2008, and ignored 
Generally Accepted Accounting (GAAP) Principles. 
 
 
 
¶8. (SBU) In August 2008, Shenghuo USA released press statements 
confirming that auditors had found errors in Shenghuo's 
accounting practices, internal controls, and personnel 
management.  Shenghuo's stock price dropped from $2.58 a share 
in August 2008, to $0.39 a share in December 2008.  The 
plaintiffs claim in court filings that a former Shenghuo USA 
director, in his resignation letter, claimed that Shenghuo USA's 
internal auditing was a "sham," and wrote that Shenghuo's 
managers "are uneducated and seemingly unwilling to be educated 
on what is necessary to be a good member of AMEX or any other 
credible market."  Shenghuo's current stock price is $0.82 a 
share and the class action lawsuit is ongoing. 
 
 
 
Will Stronger IP for Chinese Firms Eventually Help Foreigners? 
 
--------------------------------------------- ----------------- 
 
 
 
¶9. (SBU) Comment:  Lan's confident attitude toward IPR suggests 
the emergence of a double standard for Chinese and foreign IP. 
Given recent reports from U.S. companies, few American firms 
would now be willing to trust that their IP would be protected 
by China's IPR regime and court system.  However, the evolution 
of IPR in China for local companies may also eventually assist 
foreign companies.  According to Elliot Papageorgiou, an IPR 
attorney with Rouse & Co. who specializes in IPR enforcement in 
China, Chinese firms that have developed valuable IP are fueling 
the development of Chinese IPR.  Papageorgiou, at a public 
seminar by the European Chamber of Commerce attended by ConOff 
in Chengdu, predicted that China would comply with international 
IPR standards only when Chinese companies had IP worth 
protecting.  End Comment. 
BROWN