Cablegate: Innovation Required for China's Economic Growth

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E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD PGOV PREL CH WTO
SUBJECT: INNOVATION REQUIRED FOR CHINA'S ECONOMIC GROWTH

REF: BEIJING 23856

1. (SBU) Summary: The National Bureau of Statistics and the
U.S.-based Conference Board hosted a national forum on
Innovation and China Economic Growth October 20- 22 in Suzhou,
Jiangsu Province. During the conference, PRC officials from the
Chinese People's Political Consultative Conference (CPPCC),
National Bureau of Statistics (NBS), People's Bank of China
(PBOC) and the Shanghai Stock Exchange, as well as
representatives of foreign multinational corporations, discussed
"self-innovation" and identified systemic changes necessary to
foster innovation in China. The systemic changes included:
increased IPR protection, financial sector liberalization,
openness to the world, and creation of a society in which
failure was acceptable. End summary.

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CHINA: Big, but not Strong

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2. (U) CPPCC Vice Chairwoman Zhang Meiying stressed in her
keynote address the importance that China's leadership has
placed on innovation. Zhang said that while China's total GDP
made it the fourth largest economy in the world, on a per capita
basis, China ranked only 110th in the world. This showed that
China was a big country, but not a strong country. According to
Zhang, under President Hu Jintao's leadership, China has decided
that the way to create strength from size is through self
innovation.

3. (U) Zhang said that rapid growth over the past twenty years
had placed strains on national resources that would lead to
decreased economic development. China needed to rely on
innovation to create a foundation for sustainable growth. China
had a low proportion of clean, high-technology industries.
China's leadership realized that the environment was not a free
commodity and that environmental damage would devour many of
China's economic gains. While China manufactured low-technology
items, it was dependent on other countries for its
high-technology needs. Additionally, China's consumption of
energy and raw materials per unit of production far exceeded
that of developed world and was not sustainable, she said. If
China did not develop its own human resources, China would
continue to be only the manufacturing base for the rest of the
world.

4. (U) According to Zhang, in major industries, such as the
petroleum and electronics industries, China was dependent on
imported technology for 75-80 percent of its needs. She said
that China needed to learn to innovate to create its own core
technologies. She said that China needed to "digest
technologies from other countries" before it could "re-innovate
these technologies for other purposes." China needed to
generously fund its own scientists to insure its "leap-frog in
development." She also criticized the "longstanding planned
economy mindset" in China that meant that companies were too
passive -- not taking on risks or investing in the future. As a
result, she said, these companies were not positioned for
success, and China lagged behind. Zhang's speech was widely
quoted and referred to by other government speakers during the
course of the weekend conference.

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What is Innovation?

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5. (SBU) When asked how the Chinese government defined
"self-innovation," National Bureau of Statistics (NBS) China
National Research Association Secretary General Zhang Zhongliang
said: "China is a big country, but it has no power. China needs
to import 90 percent of its technology. China needs to develop
its own name-brands and self-proprietary technology so that it
can build a strong economy. To be a strong country, China needs
to develop its own innovative abilities."

6. (U) In his talk, Development Research Center of the State
Council (DRC) Deputy Director Liu Shijin outlined what was meant
by self-innovation. He said that the three kinds of innovation
are prime innovation, re-innovation, and the integration of
innovation from abroad into China. Liu said that foreign
companies with investments or joint ventures in China had
expressed their concern with China's emphasis on self-innovation
and begun to limit their investment in innovative areas. He
tried to put them at ease by explaining that any innovation done
in China by foreign companies located here was actually "Chinese
self-innovation" because ultimately these companies would
contribute to the building of China and its capabilities.
Ministry of Commerce Vice Minister Shang Ming was more explicit
when he said, "Self-innovation does not rule out the importation
of innovative technologies from abroad."

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Requirements for Innovation - IPR and Financial Reforms

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7. (U) Multiple speakers from Microsoft Chief Research and
Strategy Officer Craig Mundie to Peking University Guanghua
School of Management Dean Zhang Weiying emphasized China's need
to create an environment that would allow innovators to be
financially rewarded for the risks they took to innovate. They
cited the need for real intellectual property rights to protect
innovation and a competitive financial sector that fostered
"innovations" such as venture capital and other mechanisms for
the efficient distribution of financial resources.

8. (U) People's Bank of China Vice Governor Su Ning said that
due to increased global competition, China needed to tear down
restrictions in the financial sector. He said that Chinese
banks needed to reform and innovate in order to increase their
margins of profitability. He also said that China needed to
reform its regulatory framework to allow for financial products
such as bonds, funds, options and other ways to diversify
financial risk. He stressed that China needed a unified credit
database to enable efficient access to financing.

9. (U) Shanghai Stock Exchange (SSE) President Zhu Congjiu noted
that while there was 30 trillion RMB (about USD 3.8 trillion)
worth of capital available in China, Chinese companies had a
"weak capability to engage in venture capital." He said this

SHANGHAI 00007085 003 OF 004

was why quality companies chose to go public abroad, rather than
in China. It also meant, he added, that 83 percent of all
venture capital in China was from foreign sources. According to
Zhu, the SSE planned to make the reforms necessary to keep
Chinese companies in China by creating an environment where they
would have access to the capital they needed domestically. In
response to a question, Zhu admitted that for the financial
sector, "innovation" actually meant reforming the Chinese system
to be more like the international financial market standard.

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Innovative Translation -- Some Words Left Unsaid

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10. (SBU) The conference theme as translated in English was
"Innovation and China Economic Growth." In Chinese, however,
the title was "Self-Innovation (Zizhu Chuangxin) and China
Economic Growth." Chinese government speakers all used the word
"self-innovation," but the translators uniformly translated it
as "innovation." Conference speaker European Union Economics
and Regional Officer Leila Fernandez-Stembridge noted to Econoff
that this appeared to be an intentional "mistranslation." Price
Waterhouse Coopers Senior Advisor Kenneth DeWoskin, another
conference speaker, speculated that a political decision had
been made to de-emphasize the Chinese-centric focus on "self" in
an attempt to soften the tone of the conference.

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When Innovation Means Using an Airbrush

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11. (SBU) DeWoskin noted to Econoff that the "palpable unspoken
undercurrent" had been the sacking of NBS head Qiu Xiaohua eight
days before the conference in connection with the Shanghai
pension corruption scandal. No mention of Qiu was made
publicly, even when Xie was introduced as only having been on
the job for a week. An NBS employee who helped organize the
conference materials told Econoff about the "huge amount of
work" that he had to re-do in replacing Qiu Xiaohua's
information and name with that of new leader Xie Fuzhen in all
of the many professionally produced bound conference materials.
An NBS press officer commented that his office had been given no
notice of the sacking and been inundated with "questions we
cannot answer."

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Challenges Facing Innovation in China

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12. (SBU) Sixteen non-governmental speakers at the conference,
including Sun Microsystems Vice President Piper Cole, GE China
Technology Center Managing Director Bijan Dorri, and The
Conference Board Executive Vice President Gail Fosler, China
were tasked with outlining how China could create and nurture an
environment that led to innovative people and companies. These
speakers described several challenges that China faced to its

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drive for self-innovation, including:

- China needed to stay open to the world. Innovation would be
greatly hampered in a closed system.

- China needed to avoid "nationalizing" or "branding" its
innovations in a way that would limit its global reach. By
creating a "China standard" different from global standards,
China would shut itself out of competition.

- China needed to protect intellectual property rights in order
to protect those who had taken risk.

- China needed to create the financial market conditions that
would support venture capital in order to reward risk takers.

- China needed to create a social milieu in which failure was
acceptable. If the price of failure was too high, no one would
take any risks.

- China needed to develop educational systems that continued to
foster interest in math and science.

13. (SBU) Chinese government speakers appeared receptive and
largely agreed to the above list of prescriptions. However,
they tended to stress the importance of Chinese brands and
standards being the mark of Chinese innovation. As one speaker
commented, "We hope that the day will come when the label does
not read 'Made in China' but 'Created in China.'"

14. (SBU) Comment: Innovation -- or self-innovation -- has
clearly been identified as the next necessary step in China's
economic development strategy. While the mission is clear,
China still faces enormous systemic economic, legal, educational
and social barriers to create an innovation-friendly environment.
JARRETT

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