Premier Li Keqiang’s innovation push proves no miracle cure for China’s economy

Entrepreneurship and innovation campaign has seen plenty of policy support and hype, but it has created few jobs and many failed companies

PUBLISHED : Thursday, 09 March, 2017, 9:29am
UPDATED : Thursday, 09 March, 2017, 11:08am

At 26, Yu Jiawen is one of China’s youngest and most high-profile internet tycoons.

His mobile social-networking app Super Curriculum, created four years ago, catapulted him to fame and wealth and is used by more than 33 million mainland university students.

Yu is just one of countless young Chinese, born in the 1980s and 1990s, who embraced the country’s top-down national “entrepreneurship and mass innovation” campaign, seen as a key to boosting the flagging economy.

Yu created an uproar in 2014 after appearing on the China Central Television programme Voice of Youth, where he encouraged his peers to break free from society’s expectations and embrace the internet, while also promising a bonus pool totalling 100 million yuan (US$14.5 million) for employees in 2015.

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While he was unable to fulfil that pledge, the company not only survived but expanded. However, many other start-ups that secured financing burned through their investments and closed down.

The mass entrepreneurship and innovation campaign was the brainchild of Premier Li Keqiang, who first promoted it at the World Economic Forum’s 2014 summer gathering in Tianjin. Since then Beijing has continued to support entrepreneurs and start-ups with generous financial incentives in the hope of boosting growth and generating jobs.

In his government work report the following year, Li said China needed to develop the twin engines along with an increased supply of “public goods and services, such as education and health care, and encourage non-governmental participation to improve the efficiency of supply”.

Li delivered his fourth government work report on the opening day of the annual meeting of the National People’s Congress on Sunday.

The government also stepped up policy support, not just through subsidies but also by simplifying registration procedures for start-up companies. Entrepreneurs were able to set up small businesses in less than a week with only a few thousand yuan, without needing an office or registered capital.

With incentives from the central and local governments, more than 3.65 million enterprises were registered across China in 2014. The number rose to 4.43 million in 2015 and 5.52 million last year. Most were small enterprises in the service sector, according to the State Administration of Industry and Commerce (SAIC)

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An average of 15,000 new firms were registered each day last year, up from 12,000 a day in 2015, according to mainland media.

As the central government began to push Li’s “mass entrepreneurship and innovation” campaign, local governments at all levels – provincial, city, county, township – jumped on board by subsidising incubators (companies that help start-ups with management training and office space) and innovation parks, and establishing venture capital funds to allow “micro-enterprises” to mushroom under their jurisdiction.

Officials can the claim some credit, at least for those that succeed.

But despite the impressive figures, some observers are worried about a lack of official or third-party data to show how well the start-ups have performed these past few years.

“There is also lack of systematic and effective research and means to assess the national campaign driven by the authorities,” said Tang Jun, a specialist in social policy at the Chinese Academy of Social Sciences.

“The economy is still feeling downward pressure. We need more research and observations to see if the mass entrepreneurship and innovation drive is just a temporary phenomenon or can really last for years, promoting jobs and real economic growth.”

Li’s grand plan for entrepreneurs to boost jobs and growth has not panned out for the wider economy. Between 2012 and 2015, China’s working population grew very slowly as the registered urban unemployment rate stood unchanged at about 4.1 per cent from 2012 to 2015. In that time, the number of employed people rose from about 767 million to 774.5 million, according to official figures.

Even Yu’s fortunes have been precarious: despite 33 million university students using his app, 4.5 million daily active users and backing from several venture capital firms, the company remained in the red until last year.

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“We made zero profit in 2015,” Yu said. “I kept a very low profile that year and in 2016 and I tried every way I could think of to keep the company afloat among its competitors. Only last year did we finally turn a profit.”

He said things had only got harder for start-ups.

“Compared to the year I started my business, I think it is much harder today for start-ups in spite of the government incentives,” Yu said.

“In 2012, the internet and e-commerce boom was just starting and venture capitalists were hungry for any app. Today there are 10 times as many new innovation or tech start-ups than in 2012. Everyone is thinking of starting a company and looking for investment. But things have changed. Venture capital funds are approaching Chinese projects with greater caution.”

It is not just competition that is rising – costs such as rent, labour and taxes are squeezing entrepreneurs.

“For example, a product manager’s wage was 5,000 yuan a month in 2014. Today it is 8,000 yuan,” Yu said.

Despite his own success, Yu warned that not everyone was suited to being an entrepreneur, even those with a good eduction.

“I think the mass entrepreneurship and innovation movement started with good intentions, but I really wouldn’t encourage a university graduate to rush off and join a start-up,” Yu said.

“Many young people join start-ups because they can’t find a conventional employer. Actually, these are the people who are just not qualified to be entrepreneurs.”

The failure rate for start-ups also sounds a warning for those hoping for quick success.

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“At least two dozen of my employees quit the company and started up their own businesses in the past couple of years,” said Li Zhiguang, founder of Looksee Group, a Guangzhou-based garment company. “Some rejoined us after their start-ups failed. I feel many young Chinese entrepreneurs are impulsive. Many are not well prepared for start-ups but just follow others into the tide.”

The official Xinhua news agency said the success rate for graduates in first-time start-ups was just 2.4 per cent.

According to the White Paper 2000 of Human Resources Management on China’s Small and Medium-sized Enterprises, released by China HRKEY, a mainland human resources and recruitment website, the average company in China survived for 3.6 years – and just 2.5 years for small- and medium-sized enterprises (SMEs) – far less than their European and US counterparts that have an average life expectancy of more than 40 years.

A survey by SAICin late 2015 showed that 30 per cent of the start-ups founded in 2014 across 100 counties had gone out of business. Among those that had survived for the year, about half were able to start paying tax to the government.

News coverage on start-ups at the time showed there were roughly as many companies finding investors as there were going out of business.

As of February last year, more than 800 mainland Chinese online to offline (O2O) companies that secured “A series” (or first-round) financing in 2014 had used up the money and had closed, according to the government-run Guangzhou Daily.

Investors are becoming increasingly cautious about internet and tech industries. It is becoming harder this year to attract second- or third-round financing,” said Gu Ying, who set up a mobile car-washing app in 2014.

The ongoing, nationwide mass entrepreneurship and innovation campaign looked more like an emergency plan to counter the wave of factory closures and unemployment from the economic slowdown, said Liu Kaiming, head of the Institute of Contemporary Observation in Shenzhen, a think tank that focuses on China’s social and economic issues.

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The campaign had sought to create many enterprises and jobs in the short run, Liu said, but the actual entrepreneurial environment was worsening for start-ups, “especially those in innovation”.

“While local governments are simplifying registration procedures, taxes and expenses – not just rent and financing but relatively large contributions to workers’ social insurance and other surcharges – eat up about half the profits of Chinese enterprises,” Liu said.

A recent World Bank report estimated that the total tax rate for Chinese firms averaged 68 per cent, making the mainland’s corporate taxes the 12th-highest in the world.

In a television interview early this year, Chinese windshield tycoon Cao Dewang said his main reason for investing U$600 million in a US factory for his Fuyao Glass Industry Group was China’s high taxes, which he claimed were 35 per cent higher than for US manufacturers.

But government support is likely to see mass entrepreneurship and innovation continue to boom on the mainland in the coming years.

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Just look at Zhubajie.com, also known as zbj.com, one of China’s largest online crowdsourcing platforms, which is based in Chongqing and was backed by the local government. It has become a unicorn company, being valued at 11 billion yuan by Chongqing’s Bureau of Science and Technology Innovation last year, and plans to go public this year. With investment of 2.6 billion yuan, mostly from government-backed funds, it plans to evolve from being a “Witkey website” (where people can use their knowledge or skills to earn income by solving problems for other people or companies) into a super incubator for entrepreneurs and business start-ups in 35 cities across the country this year, according to its founder, former journalist Zhu Mingyue.

In cooperation with local governments, Zhubajie planned to eventually expand to 100 cities across China, becoming the biggest servicing platform for Chinese start-ups and SMEs, Zhu told the Post in an earlier interview.

With Li Keqiang about to begin his fifth year as China’s premier, the South China Morning Post sent reporters across the country to see how his efforts to retool economic growth have progressed.

Today we look at Li’s push to create jobs by encouraging entrepreneurship and innovation.