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With Bloomberg OpinionBy Shuli Ren
R&D Spending May Be
China’s Achilles’ Heel
In its bid for technological supremacy,
China has one small problem: Its
research and development spending,
at a little more than 2% of gross domes-
tic product, is dwarfed by that of Israel,
Japan, and even the U.S. A global behe-
moth like Huawei Technologies Co. can
still wow the world with its tens of thou-
sands of active patents, but most Chinese
companies d on’t invest nearly enough in
cutting-edge technology to compete.
That’s because excessive R&D spend-
ing can hamper Chinese businesses’ abil-
ity to go public. Unlike in the U.S., China’s stock exchanges
require companies to be profitable for at least three years
before making an initial public offering. R&D spending
shows up on income statements as an operating expense
and thus keeps young companies in the red for longer.
Starting in late July, technologically ambitious com-
panies c an list on a new Nasdaq-style platform: the
Shanghai Stock Exchange’s Science and Technology
Innovation Board, colloquially known as STAR, where prof-
itability doesn’t matter. Among the 20 or so industrial and
tech companies that have listed there so far, R&D spending
averages 12.8% of their 2018 sales, more than double that
of their counterparts on the more established exchanges.
STAR stocks gained 140% on the board’s first day, but
the enthusiasm may not last. Chinese investors tend to like
plain-vanilla consumer brands, especially after waves of
corporate scandals this year taught them to fear compli-
cated accounting. Han’s Laser Technology Industry GroupCo., a supplier of smartphone parts to
Apple Inc., was such a market darling
that it was valued in April at more than
30 times earnings. In July state media
reported that the company, instead of
building a 1 billion-yuan ($142 million)
research center as it claimed, was devel-
oping a five-star hotel near a ski resort in
the Swiss Alps. Han’s Laser is now being
investigated for possible misuse of funds
(the company says there was no misap-
propriation), and the stock is worth only
half of its 2019 peak of about 45 yuan.
Intangibles are difficult to value everywhere, but that’s
particularly true in China, where banks refuse to accept
intellectual property as collateral for loans. Last year, as
China’s trade war with the U.S. bit into corporate profit,
listed companies wrote down more than 10% of their
1.3 trillion yuan worth of goodwill assets.
It’s laudable that Beijing is trying to bring China Inc.
into new fields such as automation and 5G technology, but
it has to teach its companies better governance as well.
Otherwise they’ll be stuck chasing their competitors’
success—or worse, sitting on a pile of worthless assets and
bad debt once the market moves on.
STAR stocks are shining now, but chances are that many
of them will fade quickly. Chinese stockholders risk falling
into the same trap as investors in the U.S., which still lags
behind many of its economic competitors, in viewing “R&D”
as code for “pet projects that will never generate value.” <BW>
�Ren is a markets columnist for Bloomberg Opinion