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Issue 23, June 2010

This newsletter is a monthly supplement to ChinaAnalysis.Com, a new website that aims to promote knowledge sharing in China-related analysis. This newsletter contains original content and may not be reproduced without exclusive written permission. If you have any questions, comments and suggestions, please email support@chinaanalysis.com.

Tip of the Month - Does China Need Billionaires to Spur Innovation?

It is often asserted that a high level of income inequality is necessary to induce innovation. One can point to the billionaires connected to successful companies like Intel, Microsoft, Cisco, Yahoo!, and Google whose fortunes have been made through their ownership of large shareholdings and the gains from exercising stock options. The existence of NASDAQ, as a highly liquid stock market for high-tech companies, has made these fortunes possible, but it is not clear that the creation of billionaires was necessary for the innovation process to occur. It must be remembered, moreover, that in the dot.com boom of the 1998-2000, many promoters of Internet companies made hundreds of millions of dollars by cashing in on the speculative stock market, even when the companies themselves turned out to be total failures.

China is now on the way to embracing this type of financialized business model, as the country seeks to transform into an innovation-based economy. Approximately six months ago, China launched ChiNext, the long-awaited NASDAQ-style board for high-tech start-ups. Due to the “extraordinary enthusiasm of investors” (Caijing, Nov 2, 2009), the first day of trading created 13 paper billionaires based on their declared stakes in the 28 IPO companies. The biggest winners of that day were Pu Zhongjie, CEO of Lepu, a pharmaceutical company, and Wang Zhongjun, Chairman of Huayi Brothers, a film company. Both Pu and Wang saw the value of their holdings exceed RMB3 billion. A total of 116 shareholders became instant tycoons with a combined value on paper of over RMB100 million. Yet such wealth still cannot compare to the gains of the husband-and-wife team of Li Li and Tan Li from the recent initial public offering of Hepalink Pharmaceutical. After the company sold 10 percent of its shares on the Shenzhen SME Board last month, the 80 percent pre-sale stake owned by Mr. and Mrs. Li was worth RMB42.6 billion (US$6.2 billion). Overnight, this low-profile couple became the richest people in China. Meanwhile Goldman Sachs’ original US$4.9 million investment in Hepalink in 2007 is now worth US$975 million (RMB6.7 billion).

While the new stock markets are creating enormous wealth for entrepreneurs and financiers, are they providing the financial foundations for the transformation of new ventures into innovative businesses? In the six-month experiment of ChiNext, 87 companies raised US$8.5 billion, according to the Wall Street Journal. Many of these companies have relatively long operating histories (in some cases as long as ten years) developing technology for niche markets. But, given their narrow niches, even the most outstanding companies seem to be overvalued in terms of their growth potential For example, Hepalink, which recorded the highest IPO price-earnings ratio – 73 – in the history of the Chinese stock market, relies almost exclusively on the export of heparin, a pharmaceutical ingredient for blood thinner extracted from pigs’ intestines, to three US pharmaceutical producers as the only Chinese exporter accredited by the US Food and Drug Administration. In the case of Hangwang, which raised RMB1.1 billion last month in its Shenzhen-based IPO, the company leads China’s e-reader market and has a growth potential as the technology provider to multinational companies of Chinese/Asian language handwriting recognition on touch screen handsets. Even then, however, Hangwang’s key value generator, the e-reader, possesses little in the way of distinctive technology, and is gradually losing its price advantage to new low-cost competitors.

At the same time, for all the ultra rich people who have emerged from these IPOs, how many will continue to lead their companies to generate innovative products? Among these new tycoons, Li Li of Hepalink stands out as a technological innovator for perfecting the process of extracting heparin. Yet even in his case, it is difficult to see why his contributions to innovation warrant his ranking as the richest person in China. It is the highly speculative stock market rather than the value of his contributions to technological innovation that has accorded him this lofty position.

The danger now exists that the Chinese will adopt the ideology, widespread in the United States, that only the promise of enormous riches can spur smart people to provide their skills and efforts to the innovation process. In an advanced economy such as the United States, the creation of high-tech billionaires is the result of the emergence of successful companies in a highly financialized economy rather than a necessary inducement for entrepreneurs and managers to supply their skills and efforts to build these successful companies (see the research of the European Commission project on Finance, Innovation and Growth: http://www.finnov-fp7.eu/). ChiNext may be creating instant billionaires but will it support continued investment in innovation, which is an uncertain, collective, and cumulative process?

Top News of Last Month
May 01 Booming China on show to world at Shanghai Expo
May 10 China plans to levy carbon tax
May 12 Recent violent attacks at schools in China
May 17 With Solar Valley project, China embarks on bold green technology mission
May 17 China looking to make more loan-for-oil deals - report
May 17 China's Ansteel Group to build five US plants
May 17 Senior CPC official stresses innovation ability, calls for faster economic growth pattern transformation
May 21 China May Invest 2 Trillion Yuan in Xinjiang, News Reports
May 24 China hosting major talks with Europe, US
May 26 U.S.-China talks end without accords on key issues
New Books
Mobility, Migration and the Chinese Scientific Research System

By Koen Jonkers

"China’s rise is having a large impact on the global science system. The internalisation of this system in the past two decades would not have been possible without the outbound and especially the return flows of overseas Chinese scientists. This book explores their impact combining macro-level institutional and statistical analysis with an account of how the research culture has changed at the operational level. The theoretical framework used departs from the human capital approach, by building on literature from migration studies and evolutionary theories of the science system. It presents the results of an innovative mix of quantitative and qualitative methodological approaches. Overseas Chinese scientists and returnees are shown to have played an important role in shaping the internal development of the Chinese research system, as well as its relationship with research systems in Western Europe and North America. Now that the situation is improving, return has become an increasingly interesting option for expatriate researchers. This development may result in a virtuous cycle." - from Amazon.com


By Scott Phillips

"'Sir John's ability to comprehend complex concepts and distill these into money-making ideas for his investors was legendary. With this book, Scott Phillips extends Sir John Templeton?s crystal clear vision to some of tomorrow?s most interesting and powerful money-making opportunities. All readers should be prepared to learn?and profit!' ?Jeffrey Everett, Founding Partner, Everkey Global Partners" - from Amazon.com

China Among Unequals: Asymmetric Foreign Relations in Asia

By Brantly Womack

"'China Among Unequals' presents asymmetry theory, a new paradigm for the study of international relations, derived from China's relationships with its neighbors and the world. The first collection of its kind, it brings together key writings on the theory and its applications to China's basic foreign policy, particularly towards the United States and the rest of Asia. Starting with an exploration of the general theory of asymmetry, with particular attention given to such topics as human rights, soft power, regionalism, and asymmetric wars, the book then moves on to the fundamentals of China's external relations, looking at the complexities created by its scale and broad range of neighbors. Traditional imperial relationships are analyzed, as well as China's more recent emphasis on multipolarity. The third section deals with US-China ties - China's most important relationship, and the only one in which it is in the more vulnerable position. The final section treats in detail the relationships between China and its Asian neighbors, including Southeast Asia and the complicated multilateral situations of Korea and Taiwan." - from Amazon.com

Upcoming Events
May 01 - Oct 31 World Expo 2010 Shanghai
June 16 - June 20 Innovation and Change in Chinese Organizations
June 22 - June 23 3rd China Summit on Anti-Corruption
July 09 - July 11 Annual Conference of the Academy of Innovation and Entrepreneurship
July 25 - July 27 International Conference on Asia Pacific Business Innovation and Technology Management
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