Currently, the Chinese economy is faced with two challenges: weak export prices and its reliance on foreign reserves. The production capacity of Chinese enterprises has been able to satisfy the rates of global consumption for more than 30 years since the reform and the open-door policy. However, Chinese enterprises are now challenged by weak exports and falling profitability due to the huge impact on the overseas market from European and the U.S. financial crisis. Second, Chinese economic growth has long relied on foreign direct investments. The government policy dividend and the efficient resource allocation of the financial system has long been ignored, thus causing a constant accumulation of Chinese foreign reserves in the form of U.S. treasury bonds, while the RMB has been passively supplied in the form of outstanding funds for foreign investment. So whether for due to the dollar-denominated assets or RMB debts, a lack of proper wealth management has heavily affected China’s implementation of a sustainable economic development strategy.
It is urgent for the Chinese economy to break away from the development model of a world processing factory that “wins simply relying by the quantity of sales.” The economy must grow on a world stage and quickly replace “Made in China” with “Made with Chinese Wisdom,” by exploring an innovation-driven development model. A growth model emphasizing “quality” particularly needs the support of a highly efficient financial system.
Following recent research in the U.S. along with Germany, and Japan in the past, we at the Financial Research Center of Fudan University increasingly feel that the key factor for China to shift to an innovation growth mode is to accelerate financial reform and liberalization – the real pillars of Chinese economic development in the future.
First, a sound legal system of intellectual property protection as well as fair and serious law enforcement are the indispensible incentives to encourage small and micro business to be innovative. Otherwise, a shortage of innovative small and micro enterprises will sizeably affect the performance of institutions that provide financial services to the start-ups and will make it difficult to provide the capital market with good enterprises. A worse consequence is a loss of the government’s financial investment. If the heaviest responsibility of technological innovation has to be placed on large enterprises, a lack of market competition and innovative activities driven by demand could finally lead to slim returns.
Second, it is necessary to build an intellectual property right OTC as early as possible and bring the financial institutions, main investment entities and private capital, into the financial service areas. Thus, there should be a breakthrough in the methods of supervision and regulation for financial institutions. This would allow them to develop a mixed operation in order to remedy the defects of a monotonous existing banking service model, which is based on mortgage. The establishment of such a different financial service mode can better spread the risk of homogenous investment in Chinese financial system. On the other hand, while lowering the threshold of fund raising for the innovative small and micro enterprises, the pre-entry threshold for the main investment entities should also be restricted, which is the necessary condition to ensure lowering fund raising costs and capital stability for the innovative small and micro enterprises.
Third, we need to establish an effective taxation policy to encourage innovation. We can offer tax breaks to the capital gains from the Intellectual property trading market. Meanwhile, tax breaks should also be offered to the equity investment returns gained by those innovative small and micro enterprises that have successfully secured a listing. On the other hand, we should encourage entrepreneurs who restart their business. Such a government “verification effect” can make more investors focus on this kind of business. Historical figures demonstrate that experienced entrepreneurs generally have a higher probability of successful innovations than inexperienced entrepreneurs.
Finally, we should reinforce the pool of talented entrepreneurs through education. Both entrepreneurial training and financier training are crucial to a healthy innovation development. Government can financially support various professional lectures and exchange activities among entrepreneurs. Hence, it is necessary to establish a database of talents with detailed information and a database of innovation projects so as to provide the first-hand reliable information when the government organizes follow-up assessments of the third party’s performance.