Bloomberg Businessweek - USA (2019-08-19)

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◼ LAST THING

With Bloomberg Opinion

By Shuli Ren

R&D Spending May Be

China’s Achilles’ Heel

Initsbidfortechnologicalsupremacy,

China has one small problem: Its

researchanddevelopmentspending,

ata littlemorethan2%ofgrossdomes-

ticproduct,is dwarfedbythatofIsrael,

Japan,andeventheU.S.A globalbehe-

mothlikeHuaweiTechnologiesCo.can

stillwowtheworldwithitstensofthou-

sandsofactivepatents,butmostChinese

companiesdon’tinvestnearlyenoughin

cutting-edgetechnologytocompete.

That’sbecauseexcessiveR&Dspend-

ingcanhamperChinesebusinesses’abil-

itytogopublic.UnlikeintheU.S.,China’sstockexchanges

requirecompaniestobeprofitableforatleastthreeyears

beforemakinganinitialpublicoffering.R&Dspending

showsuponincomestatementsasanoperatingexpense

andthuskeepsyoungcompaniesintheredforlonger.

StartinginlateJuly,technologicallyambitiouscom-

panies canlist ona new Nasdaq-styleplatform:the

Shanghai StockExchange’sScienceandTechnology

InnovationBoard,colloquiallyknownasSTAR,whereprof-

itabilitydoesn’tmatter.Amongthe 20 orsoindustrialand

techcompaniesthathavelistedtheresofar,R&Dspending

averages12.8%oftheir 2018 sales,morethandoublethat

oftheircounterpartsonthemoreestablishedexchanges.

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 Group

Co., a supplier of smartphone parts to

Apple Inc., was such a market darling

that it was valued in April at more than

30 timesearnings.InJulystatemedia

reportedthatthecompany,insteadof

buildinga 1billion-yuan($142million)

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

(thecompanysaystherewasnomisap-

propriation),andthestockis worthonly

halfofits 2019 peakofabout 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’stradewarwiththeU.S.bitintocorporateprofit,

listedcompanieswrotedownmorethan10%oftheir

1.3trillion 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 hastoteachitscompaniesbettergovernanceaswell.

Otherwisethey’llbestuckchasingtheircompetitors’

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