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### Viewing cable 06SHANGHAI7085, INNOVATION REQUIRED FOR CHINA'S ECONOMIC GROWTH

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06SHANGHAI7085 | 2006-11-27 08:18 | 2011-08-23 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Consulate Shanghai

`

    VZCZCXRO8717
    RR RUEHCN RUEHGH
    DE RUEHGH #7085/01 3310818
    ZNR UUUUU ZZH
    R 270818Z NOV 06
    FM AMCONSUL SHANGHAI
    TO RUEHC/SECSTATE WASHDC 5292
    RUCPDOC/USDOC WASHINGTON DC
    INFO RUEHUL/AMEMBASSY SEOUL 0028
    RUEATRS/DEPT OF TREASURY WASHINGTON DC
    RUEHBK/AMEMBASSY BANGKOK 0101
    RUEHBY/AMEMBASSY CANBERRA 0006
    RUEHMO/AMEMBASSY MOSCOW 0001
    RUEHNE/AMEMBASSY NEW DELHI 0012
    RUEHGP/AMEMBASSY SINGAPORE 0020
    RUEHBJ/AMEMBASSY BEIJING 0642
    RUEHRL/AMEMBASSY BERLIN 0001
    RUEHCN/AMCONSUL CHENGDU 0331
    RUEHHK/AMCONSUL HONG KONG 0421
    RUEHLO/AMEMBASSY LONDON 0001
    RUEHOT/AMEMBASSY OTTAWA 0004
    RUEHFR/AMEMBASSY PARIS 0001
    RUEHSH/AMCONSUL SHENYANG 0334
    RUEHIN/AIT TAIPEI 0303
    RUEHBS/USEU BRUSSELS 0001
    RUEHGV/USMISSION GENEVA 0008
    RUEHGZ/AMCONSUL GUANGZHOU 0313
    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

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    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

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