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RUEHGH/AMCONSUL SHANGHAI 5610

UNCLAS SECTION 01 OF 04 SHANGHAI 007085 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4420/ITA/MAC/CEA/MCQUEEN 
USDOC ALSO PASS TO NIST AND BEA 
STATE PASS USTR 
USTR FOR STRATFORD/WINTER/MCCARTIN/ALTBACH/READE 
TREASURY FOR OFFICE OF INTERNATIONAL INVESTMENT 
TREASURY FOR OASIA/ISA -- DOHNER, HAARSAGER AND CUSHMAN 
GENEVA PASS USTR 
PARIS PASS TO USOECD 
 
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. 
 
--------------------------- 
 
CHINA:  Big, but not Strong 
 
--------------------------- 
 
¶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. 
 
SHANGHAI 00007085  002 OF 004 
 
 
 
------------------- 
 
What is Innovation? 
 
------------------- 
 
¶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." 
 
--------------------------------------------- ---------- 
 
Requirements for Innovation - IPR and Financial Reforms 
 
--------------------------------------------- ---------- 
 
¶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. 
 
--------------------------------------------- --- 
 
Innovative Translation -- Some Words Left Unsaid 
 
--------------------------------------------- --- 
 
¶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. 
 
--------------------------------------- 
 
When Innovation Means Using an Airbrush 
 
--------------------------------------- 
 
¶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." 
 
------------------------------------- 
 
Challenges Facing Innovation in China 
 
------------------------------------- 
 
¶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 
 
SHANGHAI 00007085  004 OF 004 
 
 
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