China and the Economy, China and Innovation, China and Climate Change

The extra emphasis on China in the media culminates this week with the US visit by President Hu Jintao. Much has been written about the visit and much posturing has taken place to set a “proper” tone. It’s hard not to comment on some of what has been said before hitting on the important topics of Innovation and Climate Change.

Economy. Let’s start with the currency. I don’t quite get all the noise about China needing to increase the value of the Yuan relative to the dollar. Secretary Geithner says it will help them control their inflation and will be “fairer,” whatever that means. The prices of Chinese goods are already going up which is a result of wages rising and productivity, particularly in low value goods, not offsetting labor costs. A rise in the value of the Yuan would increase prices more and would also increase the buying power of the poorer segments of the Chinese population while doing just the opposite for that segment in the developed world.  It would have the effect of creating jobs outside of China—not in the US, but in Mexico, Vietnam and other countries that will have a labor cost advantage relative to China. The rate of inflation would likely fall in China, but, of course, it would rise in the developed world. The short-term effect on the relative trade balance would be negative for the US, as it would take time for US corporations to shift purchasing to other countries. Plus, commodity prices, particularly oil, would likely rise in dollar terms, increasing our trade deficit in energy. Anyone who really expects that such an action would create jobs or a significant enough cost advantage to stimulate US exports or US buying of US goods vs. creating exports for other low cost countries isn’t looking at what China exports and imports vs. what the US makes. Odds are the media and our wonderful congress will spend more time on the currency issues than anything else. I think President Hu is here to go shopping. By that I mean putting China in a position to buy US assets that will be of value to its growth plans, primarily access to technologies that can allow it to meet its objectives of being a leader in innovation over the next several decades. The tradeoff will likely be further access to Chinese companies and markets by the US.  I reach this conclusion from a thorough read of China’s Patent Policy put forth this past fall.

Innovation. China’s National Patent Development Strategy (2011-2020) is a scary read. China sets very high targets for patent filings over the next 5 years, dwarfing filings by the US and Japan (which already exceeds the US in patents in force). It establishes a budget for Patent services that could reach US$16 Billion annually at current exchange rates. It proposes to have ten model cities focused on utilizing the patent system and the incentives to create a vigorous intellectual property market. It will seek to acquire intellectual property from others. A couple of direct quotes from the Strategy are worth noting: “A large number of core patents will be acquired in some key fields of emerging industries and some key technological fields in traditional industries. …Encourage enterprises to acquire patent rights through innovation on the basis of digesting and absorbing imported patented technology. …Support and foster exports of patented technologies and increase the proportion of exported patent-intensive commodities and strengthen guidance on patent policies for enterprises in the process of overseas mergers and acquisitions.”  Implied in the budgets for patent services is a vigorous enforcement of patent rights. Once China has intellectual property rights (IPR) to defend, it will likely be one of the more aggressive enforcers of those rights. The number of patents in force today with their origin in the US and Japan are each almost 20 times those of China. When those numbers get closer to parity it may very well be the US that finds itself on the defensive for not respecting IPR.  This was last the case in the early days of the Industrial Revolution when the US was the upstart and more intellectual property resided in Europe, primarily the UK.

Climate Change.  China’s plans for Patent Development raise significant issues about where intellectual capital will ultimately reside. When it comes to capitalizing on two significant areas of expected (or should we say required) technological innovation and value over the next decades, China is explicit as to their importance:  “…Balance the relationship between the patent policies and some major public policies such as public health and climate change.” (My emphasis)  Others can hold forth on the health front. In the patent document and others, China continues to highlight Climate Change as a focus of its policies and its technological efforts. It is clear that China sees the requirement to respond to this threat as political as well as societal. We will ultimately be a buyer of what China and others produce unless we also look at what policies we can put in place to be competitive.  At the moment we have the intellectual leadership existing in a variety of our institutions. Shame on us if we let that leadership slip away.

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About Jack Rivkin

Jack Rivkin retired in 2008 as EVP, CIO, Head of Private Asset Management of Neuberger Berman(NB) and from NB's Executive Management Committee. He was also on the Lehman(LB) Council on Climate Change(CC) and the NB CC Fund Advisory Board. He has been engaged with the United Nations and other entities on policy issues related to Private Capital and CC. He is an Associate Fellow of the Asia Society. He has continued on the NB Mutual Fund Board and with his CC responsibilities. He began his investment career in 68 as an analyst at Mitchell Hutchins(MH), and became Director of Research(DOR) there. After Paine Webber(PW) acquired MH, he served as DOR; CFO of PW; CEO of PWMH-the equity trading and investment arm of PW; Chmn of MH Asset Management and President of PW Capital. 87-92 he was DOR and, subsequently, Head of the Worldwide Equities Division of LB. 93-95, he served as a Vice Chairman and DOR at Smith Barney (now Citigroup). He was an EVP with Citigroup Investments 94-01, responsible for private equity investments. He was also an adjunct professor at Columbia University teaching a course in Security Analysis. He joined NB in 2002. He is the co-author of “Risk & Reward—Venture Capital and the Making of America’s Great Industries,” Random House, 1987. He is a regular guest on various media. He is the principal subject in a series of Harvard Business School cases describing his experience as DOR and Equity Head at LB. He has served as a director of a number of private companies and the NYSSA. He is currently a director of Idealab, Dale Carnegie, Operative, World Policy Institute and other private companies. He is a member of the Economic Club of NY, the Anglers Club, Theodore Gordon Fly Fishers, and a lifetime member of Trout Unlimited. He continues to be an active private equity investor when he isn’t fly fishing. Mr. Rivkin earned his Professional Engineering degree from the Colorado School of Mines and his MBA from the Harvard Business School

One thought on “China and the Economy, China and Innovation, China and Climate Change

  1. There is a dilemma for emerging economies like China, India and South Africa in increasing their levels of development. Developing countries have, in the past, not contributed significantly to climate change through greenhouse gas emissions like developed countries. China’s development of the past three decades has been unprecedented. Some accuse China of being the highest emitter of carbon dioxide. The Chinese viewpoint is that it is the largest contributor to ‘new’ emissions from their high use of coal fueled energy.
    To tackle the impact of climate change, China has ratified the Kyoto Protocol and was one of the first developing countries to issue a National Climate Change Program.

    The following lessons can be learned from China: i) Technological leapfrogging, through bypassing polluting technologies, does reduce emissions. ii) The successful introduction of electrification schemes, providing electricity to 99% of the population. iii) Passing a Renewable Energy Law with high targets for renewable energy which are comparable to those of the European Union. iv) Giving incentives for energy saving, reducing dependence on coal and aiming at a low carbon economy.

    The Chinese development model is not easy to learn from but it is worth investigating whether aspects of it could be used by other developing countries.

    The lessons China can learn from other countries: i) it should avoid fossil-fueled development which was followed by the developed countries. ii) it needs to access low-carbon technologies and learn how to build them in China. iii) it should learn from the low-carbon implementation record of the Scandinavians and their reliance on hydro-power; and the German, US, Spanish, Danish and Indian push for wind energy.

    There are the following policy implications: i) climate change policies and the introduction of sustainable low-carbon development should be promoted further. ii) policy makers should learn from experiences of other developing countries like Brazil and India. iii) policy makers should continue to promote enabling environments to facilitate technology transfer and cooperation. iv) access to low-carbon technologies from developed countries has to be eased. v) Developed countries should acknowledge their responsibility for most of the climate change. vi) other countries should learn from the steps China has taken so far.

    The development community must understand the rise of China and its likely role in climate change and low-carbon development.
    But importantly, Chinese energy and environmental policymakers know the value of importing clean coal technologies as a means of quickly improving local technology. Market demands are progressively being incorporated into the Chinese process of research and innovation.

    In China’s emerging politico-economic system, efficient financing and a correspondingly efficient patent system are continuing to develop. Better investment policies will help Chinese public and university researchers to collaborate with the international and domestic private sector, while effective patent rights can facilitate R&D collaboration agreements.

    Rivkin is right to point that China’s expanding patent system is playing an important role in encouraging the deployment and development of innovative CCT, especially as intellectual property rights are strengthened. The technologies that emerge from these partnerships can one day be an important part of reducing the pollution problems of coal-based energy.

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