BEIJING (Reuters) - The man who was selling fake Rolex watches for $1 in Beijing's Forbidden City the other day is hardly an endangered species, but China is quietly starting to win plaudits for its efforts to protect intellectual property.
Last month police detained the operator of a website, "Tomato Garden," from which millions of pirated versions of Microsoft (MSFT.O) software had been downloaded, according to media reports, while in the spring courts passed trademark judgments in favor of Italian chocolate maker Ferrero and luxury goods label Gucci (PRTP.PA).
China is becoming a bit less of a counterfeiters' paradise.
"Obviously there's a ways to go, but I think there's been a vast improvement," said Lee Sands, a former chief U.S. trade negotiator with China. "It's very clear that there was a change in the mentality of the government."
Leaning against piracy fits in with China's desire to cast off its image of a country where exploited workers toil for a pittance in Dickensian factories that turn the air and water black with the pollution they discharge.
In the government's vision, "Made in China" should not stand for knock-off DVDs and artificial Christmas trees but for clean, creative, cutting-edge industries. After all, this is the country that dazzled the world with its Olympic stadiums and is preparing for its first space walk next week.
China may be the workshop of the world but it creates little value itself. In 2006, the export value of a 30 gigabyte video-model iPod assembled in China for Apple Inc AAPl.O was about $150, but the value added by Chinese producers was just $4, according to a National Bureau of Economic Research paper last year.
China, not surprisingly, wants to earn more from the sweat of its labor by capturing the rents that come from designing new products and building brands.
So it is penalizing low-end, energy-guzzling factories, improving workplace conditions and encouraging innovation by getting tougher on copyrights and trademarks.
"Ultimately, it's all about self-interest," said Sands, now a managing director with Sierra Asia, a market advisory and investment banking firm specializing in China.
Violation of intellectual property rights has been a running sore in China's relations with its trading partners, and the issue will be high on the agenda again when U.S. Commerce Secretary Carlos Gutierrez meets Chinese Vice-Premier Wang Qishan for talks in California on Monday. <ID:nN12396208>.
U.S. movie, music, software and book industry groups alone estimate they lost $3.5 billion in China due to piracy last year, three times more than in 2001.
The European Union Chamber of Commerce says infringement of IPR remains the second-biggest concern of its 1,300 member firms.
Joerg Wuttke, the EU chamber's president, said he was puzzled that China's leaders can turn a blind eye to the criminal gangs behind the fake and pirated goods, from designer clothes to golf clubs, that are readily on sale.
"Enforcement across China still remains a major problem," he said in presenting the chamber's annual report last week.
But the chamber also said the proportion of counterfeit goods seized at EU borders that originate in China fell to 60 percent last year from 80 percent in 2006, according to EU figures.
The report said China was making "remarkable efforts" in improving the transparency of its legal and regulatory system and described as "highly constructive" steps taken by the customs administration to deter counterfeiting. The value of fakes seized by Chinese customs inspectors more than doubled in 2007.
Paul Ranjard, a lawyer who chairs the chamber's IPR working group, said the publication in June of a national strategy on intellectual property rights showed China's strong awareness of the need to protect and to develop inventions.
The recently published third draft of China's revised patent law meets more than 80 percent of the reservations EU business had about earlier versions, Ranjard added.
"We were getting increasingly concerned, extremely worried. Enforcement of patents was becoming totally unpredictable," he said. "So we're relieved, because we've seen China's intention."
The State Intellectual Property Office logged nearly 700,000 patent applications last year, more than any other country.
Foreign pressure may play a role, but the progress is also down to a clamor from the likes of Chinese scientists and movie makers for better protection of their own intellectual property.
Wang Zhongjun, the chairman of China Huayi Brothers Media Group, the country's largest private movie production firm, accounting for about 10 percent of box office revenues, said piracy was part of the environment.
"You have to accept this if you want to be in this business," he said. "But the good thing is, you can see that the government is increasing its efforts to crack down on pirates. The situation has improved a lot in the last few years, I have to say."
Additional reporting by Zhou Xin