Chinese Take An Important Step on Intellectual Property

We have suggested that the recent Sino-American SED talks may be an early indication both sides are backing off of their more bellicose rhetoric. Since Geithner's confirmation hearing, in which he cited Obama's campaign rhetoric and the manipulation of the yuan, the US appears to have backed away from at least public pressure on China to re-float or allow its yuan to appreciate or be more flexible. China, which appears to be wrestling with the possibility of its own equity and real estate bubbles, has not been pressing very hard in public forums for international monetary regime change as it did prior to the last G20 meeting earlier this year. Of course, officials in the US and China have not confirmed that this shift has taken place, but if our hypothesis is correct, there should not be an much rancor about the currency issues around next month's G20 meeting.

One issue, however, that is very important to a number of multinational companies and arguably eclipses the currency is China's defense, or lack thereof, of intellectual property rights. China recently lost a WTO case about IPR and at the end of last week, a Chinese court ruled strongly in favor of Microsoft over local pirates.

The Chinese court sentenced 4 men to 3 1/2 years jail and fined them CNY1 mln (~$145k) for distributing pirated software (Windows XP) and other software. The Business Software Alliance, the lobbying arm for the industry, was quoted acknowledging this is the first successful criminal prosecution of a large scale, online software piracy. It estimates that the losses from Chinese software piracy is near $6.7 bln.

To be sure, it is just one case, and there were many barriers that had to be overcome, but the movement seems in a desirable direction. Our hypothesis is that over time, as China develops its own portfolio of patents (note that last year one US company received more patents than all of China--IBM), it will be more enthusiastic about defending IPR. Recall that Charles Dickens refused to allow A Christmas Carol to be published in the US, because American papers were plagiarizing his and other European writers. Dickens came to the US to begin a campaign for international copyright laws.