On the one hand, China has started cracking down on counterfeit drugs under the Shanying II Initiative. On the other, the Chinese government (at least passively) is protecting its most wanted counterfeiter. What gives?

In the last few years, China seemed to be making some efforts to clean up its image as the counterfeit capital of the world. But just when you think the country is getting serious about redeeming itself in the intellectual property arena, along comes some disconcerting news to make you think otherwise.

First, the good news. China's Ministry of Public Security launched a special initiative – Shanying II – to target IP and major transnational crimes. It also established a Key Enterprises mechanism under which public security organs will provide training, consulting and other services to promote enforcement and enhance public awareness of IP rights.

The key target – counterfeit drugs. In early 2006, the Ministry launched a joint detection system in several Chinese provinces and succeeded in destroying two fake Tamiflu (manufactured by Roche and frequently targeted by Chinese counterfeiters) networks, shut down six manufacturing plants, arrested 19 suspects and seized 40 tons of highly toxic raw materials. Shenzhen authorities have seized more than 90,000 fake Viagra and other impotence drugs in a summer 2006 raid on Shenzhen Jinshuibao Biotech Firm. In October of the same year, police seized one ton of raw materials used to make counterfeit Viagra in Guangdong and arrested twelve suspects.

In early 2007, officials from the Beijing Administration of Industry and Commerce raided Beijing's Silk Street market – the most notorious emporium of fake goods – and confiscated hundreds of bogus Nike and Adidas trainers and tracksuits. The raid came two days before the American commerce secretary Don Evans arrived in China for a forum on the protection of intellectual property rights.

In July of the same year, the Chinese Public Security Bureau, working with the US Federal Bureau of Investigation (FBI) and customs offices in more than 27 countries, raided what appeared to be the largest software counterfeiting operation ever uncovered. Twenty-five individuals were arrested in southern China, multiple businesses and residential locations searched, assets worth over $7 million seized, and over 290,000 counterfeit software CDs and COAs (certificates of authenticity) confiscated.  The counterfeit software seized has an estimated retail value of $500 million.  The operation was believed to have manufactured and distributed more than $2 billion worth of counterfeit Microsoft software.

And just last October, the Hong Kong High Court ordered police to raid a plant that was making copying devices and mod chips for Nintendo DS and Wii machines. The move, carried out at the request of Nintendo, resulted in the seizure of more than 10,000 game copying devices and mod chips from the Supreme Factory Limited plant. The gizmos seized allow punters to copy and play Nintendo DS games offered unlawfully over the Internet, and the mod chips allow the play of pirated Wii discs or illegal copies of downloaded Nintendo games. The court ordered the outfit's assets frozen and blocked Supreme Factory from further distribution of the devices and from shifting its assets worldwide. All of the company's assets have been frozen pending the outcome of the legal proceedings.

These actions are all well and good, reflecting China’s growing recognition that counterfeiting and piracy are a major problem for countries that want to develop technological excellence and foster economic growth.

But now comes the bad news. It seems the year of the rat is not going to be a good one for IP rights holders with the recent developments concerning Yuan Hongwei, the fugitive Chinese business executive accused of violating US trademark laws. His firm, Hunan Magic Power Industrial Company, has been selling adhesives and other chemical products for years, without a license, under the name of a US company. The firm, ABRO Industries, had tried to stop the pirated products from being sold in various countries (including China itself). Four years and $4 million in legal fees later, Yuan was still at large. Then UK police arrested him at Heathrow Airport on a warrant stemming from a criminal counterfeiting charge in Louisiana. In spite of a hefty $200,000 bail and two surrendered passports, Yuan managed to escape and is now back in Hunan. Unfortunately for ABRO, China, a member of the World Trade Organization and subject to is commercial regulations, is taking no steps to extradite him. Worse, the government and the public have the gall to label ABRO as the villain in the saga and Yuan, the fraudster, as a victim of US bullying.

Besides underscoring the need for stricter enforcement and prosecution measures, the case highlights the fact that China still has far to go in changing its image in the intellectual property world.