OPINION

Innovation Nation

Americans seem to love worrying about China. There are fears that China's economy is growing too fast and fears that it is growing too slowly. There are critics that bemoan U.S. debt to China and some that fear a military conflict. Now, another worry has emerged from the American media: China's growth is built on unsustainable cheap labor and government support, and that it will collapse without a pivot toward invention and innovation.

China is "getting rich but unless it can learn to innovate, its economy will never overtake the United States," writes Michael Schuman in a November issue of Time magazine titled Why China Can't Create Anything. Ironic, considering that China has been known as the birthplace of many of humankind's most significant innovations: paper and printing, the compass, noodles, belt drives, the toothbrush and, of course, gunpowder. China's inventive spirit is still in force in the modern era, with the development of new pharmaceuticals, cancer therapies, maglev wind power generators and e-cigarettes—all from Chinese inventors. It's in China's DNA to be innovative.

Schuman's point, however, is well taken. China has been focused on manufacturing and lifting its massive population out of poverty to create a middle class. It is far more expedient for companies to use existing product designs rather than going through the arduous process of product testing and refinement. Better to save their money for expanding their sales and manufacturing networks than for original research. Lee Kai-Fu, venture capitalist and former President of Google China said that Chinese entrepreneurs practice iterative innovation—borrowing an existing idea and tweaking it for the Chinese market.

Another issue facing China at the moment is that many of their top engineers and product designers are producing the best inventions for foreign-owned companies, or they have moved to Western countries for higher salaries, leading to brain drain. Of the top five firms with China-based applications for U.S. patents, only one is a Chinese mainland company—telecom giant Huawei. Topping the list were Foxconn, a Taiwanese manufacturer of Apple products, and Microsoft.

Even if the benefits of Chinese innovation are primarily boosting foreign companies, Chinese developers are gaining valuable international experience. Signs of the new innovative era of China's economic rise are already apparent. Though many companies are taking a "buy it" rather than "build it" approach to speeding up market growth, the need for original product development is gaining momentum. Research and development (R&D) expenditures increased to 1.6 percent of the GDP in 2012, up from 1.1 percent a decade earlier, according to the World Bank. China's share of the world's R&D expenditure grew to 13.7 percent last year, second only to the United States.

"Right now, the United States is seen as the innovation leader of the world, and China is right behind it. But in five to 10 years, China could lead," KPMG partner Egidio Zarrella told Forbes. Big data, cloud computing and mobile apps, in particular, are emerging markets for Chinese innovation.

Promoting innovation has emerged as a key goal from the recently concluded Third Plenary session of the 18th Central Committee of the Communist Party of China. Party chief Xi Jinping called for an "innovation-driven development strategy" and for the development of internationally recognized brands. The social reforms, the growing middle class and consumer society will also help stem the brain drain of talented Chinese inventors.

If China can successfully cross the gap from workshop of the world to inventor of world-class brands, the possibilities are endless. All signs point to a supportive role from the Chinese Government and a favorable market. These reforms have the potential to change the lives of more than 1 billion people, and the world at large.

This is an article by Corrie Dosh, a contributing writer to Beijing Review, living in New York City

THE MARKETS

Yuan Bonds in Taiwan

Four Chinese mainland banks issued yuan-denominated bonds worth 6.7 billion yuan ($1.1 billion) in Taiwan on November 10. The bonds were traded on the GreTai Securities Market.

Bank of Communications issued 1.2 billion yuan ($197.64 million) in bonds. Agricultural Bank of China issued 1.5 billion yuan ($247.06 million). Bank of China and China Construction Bank issued 2 billion yuan ($329.41 million) each.

The issuance took the total of yuan-denominated bonds issued in Taiwan to 10.6 billion yuan ($1.67 billion). The first bonds, worth 3.9 billion yuan ($642.33 million), were issued in March.

Wealth Management Up

China's wealth management products totaled 9.92 trillion yuan ($1.63 trillion) as of the end of September, according to a report from the China Banking Association.

These products accounted for the biggest share of the Chinese asset management market, the report said.

The figure has more than doubled from 4.59 trillion yuan ($755.97 billion) at the end of 2011, and is up from the 7.1 trillion yuan ($1.17 trillion) total recorded at the end of 2012.

Wealth management services from Chinese banks and financial institutions have been growing quickly in recent years as customers seek higher returns in the face of limited investment channels and high inflation.

Figures showed that there is a margin of roughly 1 percentage point in returns between wealth management products and bank deposits with similar tenors. The report said average yields of wealth management products in China stood at 4 percent to 4.5 percent.

China tightened regulations over the sector this year by limiting the portion of wealth management money invested in non-standard assets, in an effort to enhance the transparency of wealth management plans' capital flows and reduce default risks.

NUMBERS

24.84 tln yuan

The amount of China's private fixed-asset investment from January to November, up 23.2 percent year on year

11.5 tln yuan

The amount of private fixed-asset investment in the service sector from January to November, up 25.5 percent year on year

5.13 tln yuan

The amount of private fixed-asset investment in west China from January to November, up 26.2 percent year on year

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