Protestors shout slogans during a rally against a pro-Beijing official who was appointed as chairman of Hong Kong University’s (HKU) governing council, in Hong Kong on Jan. 3, 2016. Fears are growing over political interference in the city’s education system. (Anthony Wallace/AFP/Getty Images)Protestors shout slogans during a rally against a pro-Beijing official who was appointed as chairman of Hong Kong University’s (HKU) governing council, in Hong Kong on Jan. 3, 2016. Fears are growing over political interference in the city’s education system. (Anthony Wallace/AFP/Getty Images)

Research shows that the political ideology of communism restricts innovation, today’s panacea for economic growth and long-term prosperity.

In broad strokes, the communist tenets of state ownership of business and property with strict government supervision lead to a risk-averse culture working in an environment that discourages ambition and creativity. This could not be further from the building blocks that innovation needs to thrive.

The 2017 International Intellectual Property Index, recently published by the Global Intellectual Property Center (GIPC) of the U.S. Chamber of Commerce, ranks the two bastions of communism, Russia and China, No. 23 and No. 27 respectively—behind the smaller economies of Malaysia, Mexico, and Turkey, for example.

The report associates stronger intellectual property (IP) protection regimes with more innovative economies and conversely, weak IP protection as hindering long-term strategic innovation and development.

“A robust national IP environment correlates strongly with a wide range of macroeconomic indicators that fall under the umbrella of innovation and creativity,” according to the GIPC report.

The leading countries in IP strength are free market, capitalist economies such as the United States and United Kingdom. First-world democratic countries of Europe and Asia also rank highly.

The key to whether China can become a country of innovation is tied to the respect of property rights and the rule of law.

— Ma Guangyuan, Independent Chinese economist

The report states that Russia’s protectionist moves—local production, procurement, and manufacturing—work to restrict IP rights. Russia also suffers from persistently high levels of software piracy.

For China, the report singles out historically high levels of IP infringement.

China and Russia are the “usual suspects” of cyberespionage. Theft of IP, the infrastructure for innovation, is one way these communist nations try to stay competitive globally.

Melbourne, Australia-based agency 2thinknow has been ranking the world’s most innovative cities for the past 10 years. In its latest rankings published Feb. 23, the most innovative city in a communist country, Beijing, ranks No. 30, and Moscow ranks No. 43.

Blunting Universities’ Effectiveness

According to the Organisation for Economic Co-operation and Development (OECD), not a single Chinese university ranks among the world’s top 30 in terms of most-cited scientific publications.

Universities are breeding grounds for young, innovative minds. Within their walls, ideas are born and debated, companies are formed, and research is conducted. They are key components of a healthy innovation ecosystem.

Harvard Business School professor William Kirby wrote about the strict limitations within Chinese universities on what faculty could discuss with students.

“Faculty could not talk about any past failures of the communist party. … They could not talk about the advantages of separation between the judicial and executive arms of the government,” Kirby stated in an article in the Harvard Business Review (HBR) боюнча 2015.

“It is hard to overstate the impact of these strictures on campus discourse and the learning environment,” Kirby wrote.

Communism is known for its corruption and cronyism. A Science editorial noted that the bulk of the Chinese government’s R&D budget is allocated due to political connection rather than merit based on the judgment of independent review panels.

Communist Interference

McKinsey’s 2014 report “The China Effect on Global Innovation” noted that the impact of innovation on China’s economic growth declined to the lowest level since about 1980.

China has a massive consumer market and a government willing to invest huge sums of money—nearly US$200 billion on R&D in 2014—and its universities graduate more than 1.2 million engineers each year.

Communism as a political ideology is as bankrupt as ever.

— Garry Kasparov, former world chess champion

Clearly, China has so much potential, but it is the United States that has taken the lead in technological dominance.

“The country [Кытай] has yet to make an internal-combustion engine that could be exported and lags behind developed countries in sciences ranging from biotechnology to materials,” according to McKinsey.

“While almost all western technology giants have R&D labs in China, the bulk of what they do is local adaptation rather than developing next generation technologies and products,” wrote Anil Gupta and Haiyan Wang in a 2016 article in the HBR. Gupta and Wang are co-authors of the book “Getting China and India Right.”

Excessive government involvement often leads to waste and excess—overbuilding and overcapacity. China’s real estate bubble and steel mills are two such examples.

Lately, the Chinese government has been trying to spur an onslaught of startups by providing them with generous subsidies. But it doesn’t have the savvy to pick winners and losers. Instead, a more efficient use of capital comes from knowledgeable and discerning venture capitalists. Most startups are meant to fail after all.

Why China Can’t Innovate,” a 2014 article in the HBR co-authored by Kirby, noted that the Chinese Communist Party requires one of its representatives to be associated with every company of more than 50 employees. Larger firms must have a Party cell, whose leader reports directly to the Party at the municipal or provincial level.

“These requirements compromise the proprietary nature of a firm’s strategic direction, operations, and competitive advantage, thus constraining normal competitive behavior, not to mention the incentives that drive founders to grow their own businesses,” according to the article.

The system of “parallel governance” constrains the flow of ideas. China’s innovation largely comes through “creative adaptation,” which can mean a lot of things including foreign acquisitions, partnerships, but also cybertheft.

Capital Flight

Communism is against private ownership of property. This puts a damper on innovation.

“The key to whether China can become a country of innovation is tied to the respect of property rights and the rule of law,” wrote Ma Guangyuan, an independent economist in China.

In his blog, Ma cites renowned U.S. investor William Bernstein’s writings, which discuss property rights as being the most important of four factors needed for rapid economic growth. Guangyang wrote, “Entrepreneurs live in constant fear of punishment,” due to the questionable business practices in China, an environment that leads them to lose trust in a viable long-term economic future.

Capital flight out of China is one symptom of the problem; another is the preference of wealthy Chinese to send their children overseas for higher education. The loss of entrepreneurs like Li Ka-shing and Cao Dewang is a sign that greener pastures lie abroad.

Former world chess champion Garry Kasparov, a Russian, wrote: “Communism as a political ideology is as bankrupt as ever.”

In his blog, he went on to say: “It is no coincidence that the values of the American century are also the values of innovation and exploration. Individual freedom, risk-taking, investment, opportunity, ambition, and sacrifice. Religious and secular dictatorships cannot compete with these values and so they attack the systems founded upon them.”

The authors of the HBR article “Why China Can’t Innovate” recognize the nearly limitless capability of the Chinese individual, Бирок,, the political environment in China acts like a choke collar on innovation.

“The problem, we think, is not the innovative or intellectual capacity of the Chinese people, which is boundless, but the political world in which their schools, universities, and businesses need to operate, which is very much bounded,” they wrote.

Follow Rahul on Twitter @RV_ETBiz

Communism is estimated to have killed at least 100 million people, yet its crimes have not been compiled and its ideology still persists. Epoch Times seeks to expose the history and beliefs of this movement, which has been a source of tyranny and destruction since it emerged.

See the entire series of articles here.

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Another book written in 2012 that too few people paid attention to. If they had, they could have easily predicted and avoided the current troubles in China. From the inevitable overinvestmentto environmental destruction, to the futility of monetary policy and the chronic lack of innovation, Mark DeWeaver covers it allin history, in theory, and in modern-day (mal)practice.
The biggest myth he dispels about the Chinese economy is that it’s socialist in name only and run by private enterprises big and small alike.
“Perverse incentives at the local government level continue to be the underlying drivers. Neither extinct nor even endangered, the animal spirits of the Maoist era are still thriving more than thirty years after the introduction of China’s ‘reform and openingpolicy in 1978.
When ‘numbers produce officials and officials produce numbers,’ as the Chinese say, outright fraud will be an issue as well.Mark A. DeWeaver

Local Distortion
The local governments in very ordinary terms do whatever they want until Beijing throws the baby out with the bathtub and restricts all investment activity everywhere.
“Booms are led neither by Beijing nor by the private sector, but by local government officials motivated by interests all their own,” DeWeaver writes.
So what are the local government’s, or the local government official’s, interests? No, it’s not like it says in the CCP’s constitution, that a party member should always put the party ahead of personal interests.
In fact, it’s these very personal interests that drove overinvestment in industrial capacity and real estate. The CCP rewards local officials through a tournament system where they compete against other local officials to get the best numbers, be it GDP or otherwise, with devastating results for capital allocation and the natural environment.
“When ‘numbers produce officials and officials produce numbers,’ as the Chinese say, outright fraud will be an issue as well.
Mark A. DeWeaver
A good example is China’s goal to have non-hydro alternative energy cover 8 percent of installed capacity by 2020. Because the emphasis is on capacity and investment expenditure, 26 percent of China’s wind-power capacity was not connected to the power grid at the end 2010. Many of the wind farms are continuously blasted by sand from the desert, leading to mechanical failures and defects.
This is also the reason why every province and second-tier city in China needs its own airport, regardless of economic viability. “Some ‘image projectshave no discernible rationale at all aside from creating the impression that officials are getting things done.
Investment in infrastructure and real-estate generates GDP growth, the stick local officials measure each other against. They use tax breaks, cheap land, low-cost credit (channeled via locally-controlled banks) as well as waivers on centrally imposed labor and environmental regulations to attract private and public sector investment.
The PBOC has many of the same tools as the developed country central banks, but it uses them differently and they generally are less effective as instruments of countercyclical policy.Mark A. DeWeaver

Because was is no downside for the local officials, at least not until Xi Jinping unleashed his anti-corruption campaign in 2013, capital was misallocated, the natural environment destroyed, and arable farmland converted into unused real estate.
Of course, there is plenty of upside in terms of corruption for the average local official. “Bid rigging is exceptionally easy to get away with because the same officials are often in charge both of inviting bids, in their capacity of transportation department employees, and submitting bids, in their capacity as managers of department-owned construction companies.
No Central Control
DeWeaver then shows that the much-touted central government control and foresight only has very crude mechanisms to reign in wasteful local government spending.
First of all, most banks, whether central or local are ultimately controlled by the CCP. And it’s CCP officials who benefit most from corruption. “The bankers, whose primary allegiance is to the Party rather than to their institutions, still have little choice but to support local government projects.
As for the central bank’s ability to manage credit, DeWeaver was way ahead of the curve in noting that the impossible trinity renders the efforts of the People’s Bank of China [PBOC] to control bank lending futile, and describes the process in great detail.
“The PBOC has many of the same tools as the developed country central banks, but it uses them differently and they generally are less effective as instruments of countercyclical policy.
Innovation: We’ve Been Here Before
The icing on the cake of this book, Бирок,, is how DeWeaver deals with the claim that China will one day become a leading source of innovation, a narrative much espoused by consulting firm McKinsey for example.
Proponents of the China innovation story often cite the amount of money spent on research and development as well as the number of patents filed. But, like everything in China, and much like the local government GDP growth targets, these figures are given by the regime.
So the national “Medium- And Long-Term Plan for the Development of Science and Technologytargets R&D expenditure of 2.5 percent of GDP by 2020. Lo and behold, China spent 2 percent of GDP on R&D in 2013 producing little, if any, countable results. The same target goes for patent filings, where China is supposed to be number five globally in 2020. In 2014, it was number one already, without anybody in the world noticing.
“This way of thinking substitutes quantity for quality, just as [with] the targets for steel tonnage during the Great Leap Forward,” writes Weaver.
So it comes as a small surprise that more than half of China’s science and technology R&D funding is wasted on non-research activities like business trips, meetings, and entertainment, according to a recent report by Huanqui.com.
DeWeaver also notes that this push for innovation is not a new idea. In fact, the sixth five-year plan of 1982 has much the same content than the 11th and 12th five-year plan, other than the specific mention of scientific development.
Much like the Soviets in the 1980s, DeWeaver notes that you can plan to innovate as much as you like; as long as you get the incentives wrong, all you are going to get

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Regarding the capability to innovate in China and India, the proverb “necessity begets ingenuityrings true.
At least according to Eric Roth, head of Mc Kinsey’s Global Innovation and Growth Practice. He says India is a stronger innovator precisely because it doesn’t have the resources of China.
“India faces severe deficits in infrastructure, skills and resources. By contrast, China’s constraints are found in its abundances. Ironically, China’s abundance of money and talent often stand in the way of innovation,” he writes on the company’s blog.  
First, there is the abundance of capital. Total venture capital investment until September 2015 was $36.2 billion, total foreign direct investment was $114 billion until the end of November.
source: tradingeconomics.com
With these kind of resources there should be many successful startups coming to the market, especially following the stock market boom during the first half of the year. But, according to Roth, IPOs for new startups have actually declined compared to last year.
Roth thinks that at this state, it’s mostly “dumb moneygoing into China. It “chases quick wins, investing fads, and propositions without real value or differentiation.
He says the new-found Chinese millionaires and billionaires don’t understand the venture game and chase quick returns rather than building businesses by offering money and expertise.
“As a result, fledgling businesses must contend with over-funding, pressure from inexperienced board members, and a lottery-like dynamic that encourages size over economic fundamentals,” Roth writes and likens it to the internet bubble in the West in the late 1990s.
The second abundance problem China has is talent. Although the quantity of engineers and scientists is staggering, the quality is lacking.
“Sheer numbers of graduates are not translating into talent that can turn ideas into scalable businesses,” says Roth, much contrary to the opinion of billionaire investor Wilbur Ross, who said earlier this year it’s just a numbers game: “If you have more engineers and more scientists, just on a probability basis, the chance of them discovering something becomes higher.
Even if this was true, Roth thinks talent is not used right whether the quality is good or not. “Sufficient quantities of the right talent organized in the right way are still elusive,” he writes.
For good measure, Roth goes completely against the McKinsey company line and lambasts the way Chinese companies are organized.
“Chinese companies have an abundance of structures and processes, but suffer from the inability to translate these into an increased stream of value creating innovation,” he writes. Economies of scale aren’t creating more innovation as the average size of the Chinese company has increased.
Roth says the hierarchical structure of the typical Chinese company stifles innovative thinking and focuses on leadership and execution rather than bottom-up creativity. “The leadership makes decisions to reinforce the status quo and solidify management power bases,” Roth writes.
He could say the same about the Chinese economy as a whole.

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Wilbur L. Ross Jr., Chairman and Chief Strategy Officer at WL Ross & Co., in Chelsea, Manhattan, on Sept. 2, 2015. (Samira Bouaou/Epoch Times)Wilbur L. Ross Jr., Chairman and Chief Strategy Officer at WL Ross & Co., in Chelsea, Manhattan, on Sept. 2, 2015. (Samira Bouaou/Epoch Times)

NEW YORK—Wilbur Ross Jr. is not like the other Wall Street high rollers like Donald Trump and Carl Icahn. He is a soft-spoken, well-mannered, and impeccably dressed gentleman, and has succeeded on Wall Street, becoming a billionaire in the process.

Ross, worth $2.9 миллиард according to Forbes, has made his names in distressed assets investments and rose to fame turning around Bethlehem Steel as well as Burlington Industries.

Unlike the classic private equity raiders, Ross has managed to save jobs during these turnarounds, working closely with the unions. “In our work, which is mainly dealing with distressed situations, we’re able to do good and do well for ourselves at the same time,” Ross claims.

Epoch Times spoke with Ross about the people factor in investing, the current market valuation, Кытай, and his troubled investments in Greece.

READ: Wilbur Ross on the People Factor in Investing
READ: Wilbur Ross on His Greek Bank Investments

EPOCH TIMES: When you look at American manufacturing today, have some of your predictions about Chinese competition from 2003 come true?

WILBUR ROSS: What we argued against then, was dumping; namely selling products for less in a foreign market than their true price in your domestic market.

China is so much about jobs as opposed to profits.

That’s the kind of activity that we think should be protected against. We are generally free market people but what was happening back in the early 2000s with steel and what is starting to happen again, is that product was actually being sold in this country for less than the total cost of manufacturing it.

That’s not legitimate competition. If someone can make things more inexpensively in their country and sell it here that’s fine with me. But it shouldn’t be that they have one price in their country and a lower price outside.

EPOCH TIMES: Why do you think China did this?

MR. ROSS: I think they had a period of overcapacity and because China is so much about jobs as opposed to profits, it was very important for the government to maintain jobs. So to maintain jobs they had to maintain production, even though there was not enough demand for it. The way they tried to solve the problem was by dumping it outside.

EPOCH TIMES: The United States is probably the most innovative country in the world, something that cannot be said about China.

MR. ROSS: China is coming along in terms of innovation. They now have the world biggest and fastest computer. That would have been unimaginable a decade ago. They’ve launched spaceships into outer space. They have not yet gotten to be as innovative as the United States is, nobody has been as innovative. Year after year the United States gets more patents than any other country by a wide margin. Interestingly, it’s Japan that comes in second.

They have not yet gotten to be as innovative as the United States is, nobody has been as innovative.

EPOCH TIMES: Why is there this difference, especially between the United States and China which has mostly been copying and stealing technology? Now they have something, as you said, but they lack innovation versus the United States which has always created things?

MR. ROSS: The United States is basically a free market economy and their entrepreneurship has been highly prized here for centuries and centuries so there’s a real tradition of risk-taking. Innovation involves a lot of risk-taking.

A state-owned enterprise is much less likely to be a big risk-taker then private capital. Since China had been so dominated by the state-owned enterprises it’s hard in a big bureaucratic system to be innovative. Look at the U.S. government itself, what interesting innovations have they come up with?

When that government shows panic it makes people more frightened, not less frightened.

So it shouldn’t surprise one that a very state-dominated economy has some trouble. In recent years China has made big strides in some areas. They’re also are putting much more emphasis on engineering and technical education in their university system. Something like 42 percent of Chinese graduates this coming year will be in math, engineering, science, or technology. That’s about 3 times the percentage in the United States.

EPOCH TIMES: You are talking about quantity.

MR. ROSS: Yes.

EPOCH TIMES: China is always big on quantity, but sometimes the quality is not as good.

MR. ROSS: If you have more engineers and more scientists, just on a probability basis, the probability of them discovering something becomes higher.

Billionaire investor Wilbur L. Ross Jr., Chairman and Chief Strategy Officer at WL Ross & Co., in Manhattan, on Sept. 2, 2015. (Samira Bouaou/Epoch Times)

Billionaire investor Wilbur L. Ross Jr., Chairman and Chief Strategy Officer at WL Ross & Co., in Manhattan, on Sept. 2, 2015. (Samira Bouaou/Epoch Times)

EPOCH TIMES: What about the current problems in China, like the stock market?

MR. ROSS: We think that China has two separate problems right now. One is the market itself, the equity market, and that got completely out of control. In the June period, many more new brokerage accounts were opened by retail investors than had been in the whole prior year. And most, two-thirds of those who opened accounts, did not have a high school degree.

So it was very unsophisticated people who had been lured in by the huge appreciation in the Chinese market. Still, only 8 percent of Chinese families own securities. You also had the phenomenon of margin trading. Fifteen percent of the entire Chinese market was on margin at the time of the peak of the bubble, 15 percent of the freely tradeable shares. That’s a huge percentage. So you had all those factors compounding each other, then the bubble burst.

I think what they’re trying to do is several things all at once and that makes it very challenging.

I think what then happened, the government seemed to have panicked and made lots and lots of very panicky moves. They first raised the margin requirement then they lowered it. They threw hundreds of billions of dollars into the market. Now they’re prosecuting people who spread negative stories about the market.

I think the difficulty with all that is, when a government shows signs of panic, particularly a government that historically has been able to control what happens pretty well, when that government shows panic it makes people more frightened, not less frightened.

EPOCH TIMES: What do you think about the official growth numbers?

MR. ROSS: The Chinese economy clearly is not growing at anything like 7 percent. We have felt for a couple of years that those figures were very, very generous. If you look at physical indicators—electricity consumption, natural gas consumption, oil consumption, cement consumption, steel consumption, telecom consumption, retails sales—if you look at all those indicators, none of them were growing at a rate that was equal to 7 percent and neither were the exports.

So we have felt for some time that the real growth is something less than 5 percent, probably nowadays something less than 4 percent. Many people in the outside world believed the 7 percent growth and now that it’s become pretty clear that it’s gone there’s been a readjustment of people’s thinking. Since that came as a shock to a lot of people, although it shouldn’t have, it produced spillover effects into our markets as well.

EPOCH TIMES: Do you believe in economic reform Кытайда?

MR. ROSS: I think what they’re trying to do is several things all at once and that makes it very challenging.

They’re trying to become more of a consumer-driven economy, but the reality is that their largest driver is capital investment. It’s hard to make that transition because capital investment is still about 44 percent of the economy.

They’re trying to make the transition, but meanwhile they’re doing the very-much-needed anti-corruption drive and that in a strange way has hurt consumer spending. People are afraid to show they’re spending a lot of money, even middle-class people and even people who have nothing to do with corruption.

You are trying to get rid of some of the huge amount of corruption in the country and yet it’s hurting the transition to a consumer-based economy.

I think they’ll get there, just that the transition is a hard one. Meanwhile there is super-imposed upon it, the economic issues in the rest of the world. Combined with China’s rising labor costs and the very strong currency, make it very difficult to be an exporter.

EPOCH TIMES: What can the regime do?

MR. ROSS: They need to continue lowering the cost of borrowing there. It still is very high relative to developed markets. The bank reserve requirements, well they’ve cut them too, they’re very high relative to those elsewhere in the world.

They need that stimulation for the economy. The other thing that they need to do, and I believe they will in the 13th 5-year plan which will come out in October.

I think this time there will be much more focus on social safety network, on education, on healthcare, on some of the parts of the economy that have not kept pace with the overall economic development of the country. I think they need to do that and I believe you will find that they do it with the October announcements.

This interview has been edited for brevity and clarity.

Wilbur Ross Jr. is the chairman and chief strategy officer of WL Ross & Co., an investment management company which is part of Invesco. Before founding WL Ross & Co. боюнча 2000, Ross worked for Rothschild Investments as a bankruptcy adviser and private equity manager. Ross holds a B.A. from Yale College and an M.B.A. from Harvard Business School.

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Chinese economics professor Zhang Weiying at the World Economic Forum in Davos, Switzerland, Jan. 26, 2011. Zhang believes Chinese state companies have many obstacles to innovation. (AP Photo/Virginia Mayo)Chinese economics professor Zhang Weiying at the World Economic Forum in Davos, Switzerland, Jan. 26, 2011. Zhang believes Chinese state companies have many obstacles to innovation. (AP Photo/Virginia Mayo)

China’s economy is stalling. Its decades-old business model, driven by cheap exports and imitation, and dominated by state-owned enterprises (SOEs), has run its course. Many business leaders realize that they must become more innovative to become globally competitive. A recent reform plan, issued by the Central Committee of the Chinese Communist Party and the State Council, also proposes changes in SOE operations. But according to the following essay by Chinese economist Zhang Weiying, all these plans are not feasible in China’s present-day, deeply entrenched political climate.

Many Chinese people have the belief that once SOEs are traded on the stock market and have established holding companies with cross-shareholdership, China will have implemented the same market economy as Western capitalism. They also believe that with the separation of management and ownership, we will have entrepreneurs. Here are five reasons why I say this is impossible.

1. Official Influence

Under the present Chinese system, it is impossible to separate government influence from enterprise management. Do not believe that real separation of government and business can be achieved at the level of SOEs.

Back in the 1980s, the direction of SOE reform was to detach government from business. But at present, we still have not achieved this goal. Not only that, we cannot even separate the Chinese Communist Party (CCP) from enterprises, which would be relatively easier to do. There is no way for SOE executives to make decisions in accordance with the market.

2. Lack of Motivation

In China’s SOEs there is no ownership authority or constraint, and therefore no pressure to innovate. In a market economy, members of a business must be innovative and strive to make the business a success because they are held accountable by the business owner.

But when you have government officials functioning as representatives of ownership, it is not possible to constrain or motivate those who are running the enterprise in the same way that capitalism does.

3. Myopic Management

Management shortsightedness is another problem in China that is impossible to solve. All SOEs have the issue of being shortsighted. SOE leaders only think about short-term matters. They do not care about anything beyond three years.

We cannot have a successful, innovative business without a long-term strategy. Innovation is an ongoing process. It might take three to five years, or even a decade or two, for a product to develop from inception to market acceptance, or for an important technology breakthrough to happen. If an entrepreneur does not consider the long term, he is not running an innovative business in the real market economy.

Why don’t SOE leaders consider the long-term? Because they are appointed to their positions by government officials, based on standards that are unrelated to innovation and entrepreneurship or to long-term performance as business owners. Those who appoint the leaders do not appoint them for good performance, nor do they punish them for poor performance. SOE leaders’ positions are more dependent upon political factors and connections. The swapping of SOE leaders is one example of this.

I have said that in order for an SOE leader to stabilize his position, it is best for him to have a mediocre enterprise. Неге? If you make the business great, people with better network channels will grab the position. Of course if it is very bad, with years of losses, that’s also a problem.

Here is an example: There is a very large state-owned company with five different branches. The leader of one branch was very capable. When this branch was at the bottom economically, he turned it into the No. 1 branch. Later, the company’s leader replace this branch leader with his secretary, who then turned this branch from the first position back down to the last. There are many such examples. So I say, it is not possible for SOE leaders to really make long-term goals.

4. No Budget Discipline

Implementing hard budget constraints is also impossible to do in China’s SOE enterprises. Under private ownership, budget constraints are hard. If income does not cover costs for the long run, the business goes bankrupt.

What is a soft budget constraint? It means if income is less than the cost, the SOE enterprise still survives because it continues to get financial support from the government.

Since the 1980s, the Chinese government has been trying to implement hard budgets for SOEs, but it still has not happened. When an SOE has problems, the government must save it. The larger the enterprise, the greater the effort by the government. At present, SOE subsidies are still part of the government’s expense budget. Even some very profitable SOEs are getting tens of billions of yuan each year in so-called policy subsidies.

5. Inflated Wages

Another thing that is impossible to implement in China’s SOEs are checks and bounds between management and labor. In the 1980s, a lot of managers and employees worked in cahoots to continuously raise their wages and bonuses, dividing up SOE assets among themselves. This issue remains unresolved. Workers in SOEs, relying on monopoly conditions, are being paid higher salaries and wages than the market. In fact, part of their wages should be counted as capital gains, rather than income from labor.

In addition to these five points, the system of state-owned asset supervision also hinders SOEs from becoming innovative. After all, innovation is an unpredictable force; it can produce success and failure. What would happen if the innovation plan carried out by an SOE leader ended in failure?

If the government chooses to forgive you, the SOE leader will go through a lot of pointless activities, including purchasing patents from individuals, just to use up state money.

Бирок,, if anyone were to be held personally accountable if the innovation project failed, would any entrepreneurs get involved in that project? They would not. Even if they had 100 successes, one failure might result not only a disciplinary action, but even a jail term. There are such examples now.

Therefore, SOE leaders with a mind for innovation will not actually engage in innovation. Maintaining the status quo, rather than pushing innovation, is the most rational choice for China’s SOE leaders.

Zhang Weiying is a prominent Chinese economist and former head of the Guanghua School of Management at Beijing University. This article is an abridged and edited translation of a lecture Zhang presented at a forum titled The Era of Starting New Business: Capital and Entrepreneur. The full lecture manuscript was first posted on Sept. 23, 2015, on Sohu’s Business website.

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