CHINA 2009 INVESTMENT DISPUTES AND EXPROPRIATION

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