Chinese state capitalism clashes with its technological ambitions

Chinese state capitalism clashes with its technological ambitions

There are signs of real progress, much of which is ironically driven by foreign pressure and fear of stagnation as ties to more open economies erode. But the enduring power of Chinese state-owned enterprises and their influence over the financial sector still represent huge vulnerabilities.

A clear and underestimated example of progress is that of intellectual property. Washington’s rhetoric notwithstanding, a majority of U.S. businesses actually say intellectual property protection in China is improving, albeit from a weak base, according to a U.S. Chamber of Commerce survey this summer. . Since 2014, China has established a system of specialized intellectual property courts and litigation has exploded, with more than 481,000 intellectual property cases in 2019, up almost 50% from 2018.

New bankruptcy courts are also helping to ship struggling businesses faster, which could help resolve China’s chronic problem with “zombie” businesses and free up scarce resources. The average length of bankruptcy cases in China is high: about 1.6 years on average over the last decade, 60% more than in the United States, according to a recent discussion paper from the National Bureau of Economic Research.

But cases handled by emergency courts – today around half of total bankruptcies, up from a negligible percentage in 2011 – proceed about 35% faster than those in ordinary civil courts. Bankruptcy cases have also exploded in numerical terms, from less than 5,000 in 2015 to nearly 19,000 in 2018, according to the Supreme People’s Court of China.

the news about bankruptcy isn’t all good, however. The recent surge in bankruptcy cases has coincided with a crackdown on China’s shadow banking system that has hit hard private companies, which have less access to formal bank loans than their state counterparts.

The persistent problem of parasitic state-owned enterprises remains evident. Despite a wave of public company bond defaults in November, the additional yield that private industrial companies pay to borrow relative to state-owned companies barely budged, data from Wind shows. Beijing’s bitter talks have so far failed to completely remove the impression that SOE debt is a safer bet.

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This is a major problem for China’s technological ambitions. Notably, the two Chinese posters of technological prowess and global success – Huawei and Bytedance, owner of TikTok – are not state-owned companies. Bytedance quickly benefited from the support of American venture capital. Huawei grew up with various forms of state support, but ultimately prospered by going head-to-head in global export markets.

As relations with the United States erode, burgeoning Chinese tech companies are likely to face higher hurdles to foreign funding and foreign markets. If the main Chinese domestic markets remain unfairly oriented towards companies with good political connections, rather than towards the best products, China might find it difficult to create many new companies that truly push the technological frontier.

The so-called Chinese semiconductor champions, many of which are state-owned, are actually running into trouble at an increasing rate. Tsinghua Unigroup has now defaulted on several bonds. Semiconductor Manufacturing International Corp. is added to a US government export blacklist, which could hamper the company’s ambitions to develop current-generation chips.

The problems of these state-owned chipmakers therefore present themselves as an interesting litmus test of the extent of the game China is truly willing to give to market forces in high-tech. If, for example, the minimum wage starts to lose customers or if the quality suffers as a result of escalating American restrictions, will Beijing put pressure on companies like Huawei to continue buying from them completely? way? Will state banks support them?

If so, it will mean less resources available for companies that might have a better chance of really pushing the technological frontier – whether in chip manufacturing or whatever. The minimum wage has already raised billions of new equity finance in 2020 and is benefiting from incredibly low bond financing costs: a minimum wage maturing in 2022 is currently earning a little more than a one-year central government bond, according to reports. Wind data.

Beijing is currently essentially engaged in a massive, long-term attempt to build from scratch an advanced semiconductor manufacturing capacity that is not dependent on foreign suppliers – by channeling gigantic sums of the Chinese people’s money into the process. Rather than trying to reinvent the wheel, a better economic strategy would be to mend its relationship with the West and reform China’s dysfunctional credit system – then import chips and leave Chinese markets and businesses behind. Chinese decide what China is really good at.

Unfortunately, that seems unlikely, given the ideological bent of the current leadership. If Beijing persists in a mercantile approach and actively hostile to core Western values ​​and interests, the United States has options for responding. One strategy might be to do everything in our power to stay ahead of the curve at home by increasing public investment in areas such as research and education, while simultaneously taking targeted action with allies to make the Beijing moon shot as expensive and wasteful as possible.

The technological battle between the United States and China has hit TikTok and Huawei and surprised American companies that produce and sell in China. WSJ explains how Beijing is investing money in high-tech chips as it wants to become self-sufficient. Video / Illustration: George Downs / The Wall Street Journal

Write to Nathaniel Taplin at

Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8


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