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"Sierra Asia delivers. For us in China, they brought access, built bridges, developed commanding positions and accelerated accomplishment in China... and we have been working successfully in China for over a decade.""
Patrick Jenevein
CEO
Tang Energy Group

"Lee guided us through the ins and outs of the Chinese business and entertainment world, allowing us to avoid many of the common mistakes newcomers to China make."
Robert Nederlander
Jr. President
Nederlander Worldwide Entertainment

"I am particularly impressed with Paula's ability to connect with senior Chinese clients. Her proven track record in adapting and excelling in new business environments and her abilities to understand, appreciate and leverage unique cultural intricacies and nuances will be of particular value to her clients."
Charles Li
Chairman
JP Morgan, China

"Lee Sands was essential to our efforts to establish the first sanctioned Cooperative Joint Venture in the highly sensitive youth culture oriented music business in China. The depth of his cultural awareness, linguistic skills and familiarity with Chinese Government personnel and process were the practical key to our success in our market entry strategy."
John Dolan
Former Senior Vice President of Business Development
Sony Music

Lee's "tenacity and street smarts win raves from U.S. business."
Business Week

Lee was commended for "developing a negotiating strategy for persuading China to drop a range of restrictions on foreign companies, and to phase out protection for state-run industries."
The New York Times

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NEWS

Occasional Notes On China – Government Restructuring

April 5, 2008 - The Qingming Holiday has arrived, one of China's newly denominated cultural holidays, and more importantly, the day that all Chinese sweep the graves of their ancestors, lay food and drink by their tombs, and then celebrate the onset of spring. Traffic in the Shanghai area is clogged, with several hour waits for travel to Jiading and Suzhou, where most Shanghainese lay their dead. The snow storms of February and March have finally cleared, leaving 107 dead and losses of 15.4 billion RMB, but the weather is warming, though it is cloudy, rainy and damp. Soon, Shanghai's evanescent spring will pass, the meiyu season of clouds and rain will arrive, and then the heat of summer will be upon us.

The next few months in China will be a period of great excitement, because we are now less than 120 days from the opening of the Beijing 2008 Games, and also a period of anxiety – in part because of the reaction in Europe and the United States to Tibet and its manifestation in the troubled passage of the torch relay. There is a distinct possibility of a strong nationalist, or even anti-foreign reaction, if the West takes measures that tarnish the Olympics. The Olympics, in China, is an event that marks China's emergence on the global stage and virtually all Chinese support it, and will react harshly to foreign criticism of China. The economy, though still very strong, with rapid growth, is also facing some unknowns, particularly with the reappearance of inflation, particularly food inflation. At the same time, the leadership is completing a transition on the government level to a new group of leaders, raised during the Cultural Revolution and reflecting a different outlook and background, certainly, than the pre-Hu Jintao era. For business, opportunities continue to abound, but the environment, as always, will be complex.

China's economy has entered into a period of uncertainty, with Premier Wen Jiabao announcing at his March 19 press conference that the year 2008 may well be the most treacherous year in many years. There are so many uncertainties, the Premier announced, that it is difficult to make correct economic policy choices. The prospect of inflation, which was pronounced dead last summer, has reappeared, with the CPI rising to 8.7% in February and food prices rising alarmingly fast – the result of shortages of staples such as pork and vegetables. Shanghai's stock market, which doubled in value in 2007, has fallen 45 percent over the past three months, taking some of the glee out of the city's now numerous day traders, but not precipitating panic among the population or any discernible political fallout. The sub-prime crisis has yet to have a major impact, and the economy feels as though it is continuing to boom – China grew at a rate of 11.7% last year, and another 11.1 percent in the first quarter (with an astonishing 19.6% growth rate for heavy industry), had another record haul of foreign direct investment in 2007, above $50 billion, a trade surplus in excess of $200 billion, and foreign currency reserves that stand at north of $1.6 trillion.

In travels up and down the east coast over the past two months, China is transforming. Cities are being torn down and rebuilt all along the Nanjing to Shanghai to Hangzhou corridor, from Jiangsu Province three miles south to Zhejiang. Guangdong's coastal cities and the Pearl River Delta are transforming into recognizably modern areas, with dusty, dirty manufacturing towns like Dongguan turning into high tech centers. In Shanghai, walls of skyscrapers now create a memorable skyline and surround the monstrous Shanghai Exhibition Center, the lone remnant of the Maoist era, with its red star stretching 40 stories into the air. $40 billion of investment in infrastructure and Olympics facilities later, Beijing is a city transformed, with the remaining traces of the imperial capital now lit up like ornaments in the midst of glass and steel skyscrapers.

Interestingly, the second 5 year term of the Hu Jintao administration proclaims its focus on creating a "harmonious society," the long neglected Chinese countryside is receiving greatly enhanced social welfare and social safety-net systems are being set up. While urbanites tend to snicker at the notion of a "harmonious" city, in the vast countryside, where more than half the population ekes out a living, conditions and incomes are improving. Income growth was up 15 percent last year, the most in a decade. Further, the ubiquitous agriculture tax was eliminated last year, rural health care is improving, welfare and unemployment for rural workers is increasing dramatically – albeit from an almost non-existent base, and China's 200 million peasant workers are beginning to receive basic labor protections. That said, the central government remains under enormous pressure to grow the economy. Over the past five years, according to senior officials, 51 million new jobs were created, roughly 10 million a year, including 12 million in 2007. New entrants in the job population, however, number 20 million annually. Employing, educating, taxing and taking care of the employed and the newly unemployed will remain an overwhelming task.

Leadership Changes. The annual "Two Meetings" – the National People's Congress and the Chinese People's Political Consultative Committee convened in March, "re-electing" the top leadership, appointing the State Council's' cabinet – including four Vice Premiers and a number of State Councilors, and reorganizing the central government. All of the top-level personnel changes and the reorganization of the ministries and offices under the State Council were pre-figured last October at the 17th Party Congress and affirmed at the Second Plenary Session of that Congress in February, just before the NPC opened. The government leadership, just as with the party's new leadership, is significantly better educated, younger, more experienced in provincial affairs, and more hands-on than the "Third Generation" of Chinese leaders, under Party Secretary Jiang Zemin.

Top Leaders. While announced with great fanfare on March 20, there were no surprises. Party General Secretary Hu Jintao was elected "President" – State Chairman, in Chinese, Wen Jiabao remains Premier, and Xi Jinping was appointed "Vice President." Xi Jinping appears to be following the path taken by Hu Jintao, as Vice President, head of the Central Party School, and, in addition, acting as the most senior leader in charge of the Olympics. The son of a former senior leader, Xi Zhongxun, Xi is an effective leader, with top-level experience in the central government and in the provinces. He is a potential successor to Hu. Most important are the Vice Premiers, who effectively run the government on a day-to-day basis. They include:

Li Keqiang, former Party Secretary of Liaoning Province, former senior official in the Chinese Youth League, and protégé of Hu Jintao. Li is one of two PhDs in the senior leadership, having graduated from China's Harvard, Beijing University, with a PhD in economics. Li will be the Executive Vice Premier, in charge of the economy. He now sits atop a vast patronage network of officials whose careers began with the China Youth League, and for now, is best positioned to act as a potential successor.

Wang Qishan, former head of the China Construction Bank, Governor of Hainan Province, Minister of the State Council's Economic Restructuring Commission, and Mayor of Beijing. Wang will be in charge of trade and finance, replacing Wu Yi, on the one hand, and Huang Ju and Premier Wen on the other. While Wang became known to the foreign business community through his clean-up of the bankrupt Guangdong GITIC in the 1990s, his career has been primarily domestic, though very impressive. Wang will bring a deep knowledge of the country (he spent 9 years in rural Shaanxi Province during the Cultural Revolution) and an appreciation for finance. In his first foreign trade role, Wang is now Treasury Secretary Hank Paulson's counterpart in the Strategic Dialogue on Economic Development.

Zhang Dejiang, former Party Secretary of Guangdong, graduated from Kim Il-Sung University in North Korea in the early 1970s and worked on Korean issues in Jilin Province in Manchuria for the first 20 years of his career, before becoming Party Secretary of Zhejiang Province in 1998, and joining the Politburo in 1998. In light of his unusual background, and evident Korean language ability, Zhang will likely play an important but eclectic role in the government leadership.

Super Ministries. Premier Wen Jiabao announced a major reform of the central government, reducing State Council organizations, rationalizing the structure of the State Council and eliminating redundant departments, and marginally reducing the size of the government. Hua Jianmin, the State Council official in charge of the restructuring set out an ambitious plan to create a "rational," efficient bureaucracy by the year 2020, further reduce the power of the central government to control China's industries, and to create five "Super Ministries." While the plan will increase efficiencies and continue the 30 year process of devolving control of the economy to the provinces, and ultimately, to the private sector, virtually all observers regard this year's plan as only a half-step – but a half step in the right direction.

Gaining control of the bureaucracy and reducing the bureaucracy's direct control of the Chinese polity and economy has been a consistent goal of the Deng, Jiang and now Hu administrations. Since economic reform began in 1978-79, China has reorganized the central government, on average, every five years.

  • In 1982, when Zhao Ziyang was Premier and the debate over the efficacy of central planning was just beginning, the State Council eliminated 39 ministries, bureaus, and offices, moving from 100 central government agencies to 61 and removed 20,000 bureaucrats.
  • In 1988, as China moved into the "preliminary stage of socialism," Premier Li Peng ordered 66 State Council organizations reduced to 62, 45 State Council commissions and ministries to 41, and a total of 9,700 bureaucrats sent off to other positions.
  • In 1993, after another period of bureaucratic bloat, Premier Zhu Rongji reduced the number of State Council organizations from 86 to 59. And,
  • In 1998, in the most important reorganization, Zhu eliminated 50 percent of China's central government officials and cut the number of commissions and ministries to 29. Significantly, Zhu eliminated all of the major industrial ministries, whose role had been to supervise huge state-owned companies and run China's industries by fiat, and went on to cut the size of the state sector in half as well.

This year, government ministries now number 27. Under the latest reform, the National Development and Reform Commission (NDRC) will lose more of its direct authority over industry and major projects, and set overall macroeconomic policy. The NDRC will form a troika with the central bank, the People's Bank of China and the Ministry of Finance, guiding government policy at the direction of the State Council. The NDRC will continue, however, to play a very direct role in the establishment and direction of energy policy – including the new National Bureau of Energy, under the Executive Vice Chairman of the NDRC, Zhang Guobao.

The five Super Ministries are meant to consolidate bureaucratic functions that have remained scattered throughout the government and military bureaucracies – and set policy for the critical sectors they govern. (See attachment for a recitation of the new ministries and their component parts). They now include the:

  • Ministry of Industry and Information. While debates around reform of the telecommunications system swirl, the leadership took the interim step of merging the NDRC's oversight function of China's industry with the old Ministry of Information Industry. Appearing more as a shotgun marriage than a reform, the old MII will continue to oversee the lucrative telecommunications system. Former SASAC (State-owned Assets Supervision and Administration Commission) Vice Chairman Li Yizhong will act as minister.

    In the midst of the MII's demolition, the telecommunications industry is now undergoing a major reform. The six telecommunications carriers will be reorganized and combined into three – a "New" China Mobile, "New" China Telecom, and "New" China Unicom. China Mobile, which now controls 70 percent of the mobile market, will absorb Railway Telecom, and run the new, homegrown TD-CDMA network; China Telecom will merge with Unicom's CDMA service and China Satellite's CDMA2000 ground network; and China Unicom will join with China Netcom, and for now, anyway run the GSM protocol.) At the same time, licenses for 3G telephones have been issued for 8 cities.
  • Ministry of Communications and Transportation. The new ministry, which combines the old Ministry of Communications with the CAAC – the National Civil Aviation Administration and the Postal System – will create greater efficiencies. Absent, however, is the Ministry of Railroads, which forms the bulk of the transportation system in China. Former Mayor of Tianjin and NDRC Vice Chairman Li Shenglin was appointed minister.
  • Ministry of Human Resources and Social Welfare. A consolidation of the old Human Resources Ministry and the Labor and Social Welfare Ministry, the new ministry will be headed by Yin Weimin. It will focus heavily on creating employment and protecting Chinese workers, and managing the substantial "social security" funds that the provincial and local bureaus now control.
  • Ministry of Environment. Highlighting the newly-recognized importance of the environment, the old Environmental Bureau has been elevated to the status of a full ministry, and its new minister, Zhou Shengxian will now have a seat on the state council and a strong role in environmental policy.
  • Housing and Urban and Rural Construction. The Ministry of Construction has been given added responsibilities, particularly focusing on rural areas.

Super Culture Ministry. Equally important is the Super Ministries that were not established. Much debated and ultimately rejected was creation of a Super Ministry of Culture. Under the now scotched plan was subordination of several adjuncts of the party's Ministry of Propaganda, such as the State Administration of Radio, Film and Television, the General Administration of Press and Publications, and others. With the emergence of new media, in which the lines between content and telecommunications are blurred, the Ministry of Propaganda now appears to remain in firm control, complete with a minister who is a member of the Politburo, Liu Yunshan and a member of the Standing Committee of the Politburo acting as the sector's overseer at the highest levels. Such continued control will likely mean that conflicts over the direction of new media, and the Internet will remain unresolved – or in the firm control of the party.

Energy. According to the Chinese media, a new Super Ministry of Energy was to be established, but evidently, at the last minute, the plan was scrapped. Instead, all sectors of energy – supremely important and supremely scattered in China – will be consolidated under the new National Energy Bureau and a National Energy Committee. The Committee will be responsible for broad, overarching policy decisions, while the Bureau will take charge of implementing energy policies. A bureaucratic issue, however: the huge state energy companies hold ministerial rank and command gigantic resources. The bureau, to be run by Executive Vice Chairman of the NDRC, Zhang Guobao, will report directly to the NDRC, but will not have the status or prestige of a ministry. Most observers believe that creation of the bureau is a half-step toward a full energy ministry, time of creation to be decided in the future.



Lee Sands | Managing Director