B412 Week 5 Lecture - Economy
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China has transformed from an agricultural to a service-based economy since 1979. The banking sector, though state-owned, faces challenges from shadow banking and non-performing loans. China's housing market and urbanization have also grown rapidly but face issues from restrictive policies. The renminbi is expected to become a top global currency by 2015 and China is focusing on innovation and increasing research and development spending to drive future economic growth.
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B412 Week 5 Lecture - Economy
- 1. School of Business International Business Regions: China Economy Lecture Week 5
- 2. Pearson College London XXXX 2 School of Business International Business Regions: China Economy Learning Outcomes Week 5 • China’s development since 1979 and the transformation from an Agricultural to a Service Economy • Banking Sector: situational analysis & challenges • Housing Market: ready to pop? • Convertibility of the RMB: threat to US$ hegemony and a shift in trading status quo? • Innovation & spearheading R&D
- 3. Pearson College London XXXX 3 School of Business International Business Regions: China Economy
- 4. Pearson College London XXXX 4 School of Business International Business Regions: China Economy Make up of Chin’s GDP 2013/14
- 5. Pearson College London XXXX 5 School of Business International Business Regions: China Economy Banking • 78% of all Chinese banks are state owned • Banks regulated by the China Banking • Regulatory Commission (CBRC) • The big 5 state banks are: • Industrial & Commercial Bank of China (also the largest bank globally) • China Construction Bank • Bank of China • Agricultural Bank of China • Bank of Communications
- 6. Pearson College London XXXX 6 School of Business International Business Regions: China Economy Graph showing % of Non Performing Loans
- 7. Pearson College London XXXX 7 School of Business International Business Regions: China Economy Shadow Banking DEFINITION: ‘The financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight.’ • Shadow banking accounts for 40+% of lending in China • Loans are made via various vehicles: 1. Trust Companies 2. Small Lending Companies and informal lending circuits 3. Wealth Management Products
- 8. Pearson College London XXXX 8 School of Business International Business Regions: China Economy 0 20 40 60 80 1950 2000 2013 2030 Urbanisation growth as % of population since 1950 Urbanisation growth as % of population since 1950
- 9. Pearson College London XXXX 9 School of Business International Business Regions: China Economy Housing/Property Home ownership is <60% in Tier 1 cities. Since April 2010 buyers have a mandatory down payment 20-30% -1st Home 40%-60% - 2nd Home No mortgages for 3rd Homes Source: Deutsche Bank (2011), BBVA (2011) 70% of Chinese now own their own home Source: May 2013 - Jones Lang Wooten research by Amy Pan
- 10. Pearson College London XXXX 10 School of Business International Business Regions: China Economy Global Convertibility of RMB “The Renminbi [is expected] to become a top three global currency for trade settlement by 2015 and to be fully convertible in five years.” - HSBC, 2013 • RMB trade settlement: In 2012 accounted for 12% of China’s total trade – up from 9% a year earlier. • Offshore trading centres: Hong Kong, London, Frankfurt & Singapore
- 11. Pearson College London XXXX 11 School of Business International Business Regions: China Economy Innovation “[China will] step up science and technology innovation and improve the technological sophistication, quality and brand awareness of Chinese industry.” - Li Keqiang, Premier of China, World Economic Forum, Tianjin 10 September 2014
- 12. Pearson College London XXXX 12 School of Business International Business Regions: China Economy Types of Innovation • Cost Innovation • Process innovation: a big focus in China • Application (app) innovation: low hanging fruit • Supply chain innovation • Product innovation: incremental to radical • Business model innovation: often copied and adapted • New product innovation is Research & Development led
- 13. Pearson College London XXXX 13 School of Business International Business Regions: China Economy China’s Research & Development Spending
- 14. Pearson College London XXXX 14 School of Business International Business Regions: China Economy
Editor's Notes
- [ALLOW 3 MINUTES] Previous sessions have touched on the nature of China’s development, mass migration, population control, city and infrastructure building on a colossal scale and so on. The nature of China’s economy is a module in itself so today we are going to look at a snapshot of what China’s economy looks like today. Anything to do with the economy is ultimately down to banking so we will look at how money flows and what regulatory framework is in place. We will look at the changes in the housing market The Chinese government’s intention to internationalise the Renminbi and the impact this will have on global trade and economic status quo Finally we will consider innovation and the role of R&D in a nation’s economy
- [ALLOW 4 MINUTES] [Graph source: https://hbr.org/2013/11/chinas-economy-in-six-charts/ - Harvard Business Review] This graph illustrates China’s astonishing，exponential and rapid economic rise. From 1979 (when the economic reforms instituted by Deng Xiaoping began) until 2013, China’s real gross domestic product (GDP) grew at an average annual rate of nearly 10%. It is estimated that to date 500 million people in China have been raised out of extreme poverty. China has emerged as a major global economic power. (European and US economies growing around 2% per annum). For anyone who is a good listener, you may recall that in a previous session I talked of 300 million people being lifted out of poverty. The thing about China is that there are many grey areas – one of them being the questionable veracity of official statistics. Because of the population and financial numbers are talk about in relation to China, one thing is certain; the numbers are always big? Accuracy however, needs to be verified on the ground and through market research. Consequently, official statistics are cited as a risk factor by international businesses and banking services. That said, whether 300million or 500million people, we are talking huge numbers. To put it in context, 300 million people is almost the population of the United States – and equal to the population of Facebook users around the world! So, what have been the principle drivers for growth? Mark Purdy writing in the Harvard Business Reviews in November 2013 writes: “Capital [so money] has been the key driver of China’s growth over the last three decades.’” The Chinese government leaders have the good sense to look at where other countries have been successful and to assess what principles and factors might work for their own country and systems. The achievements of Japan’s re-building after the Second World War and the Asian Tiger of South Korea gave it much fuel for thought. One thing was very clear: foreign direct investment (FDI) under favourable conditions reaped enormous benefits. Consequently, a key aspect of China’s economic modernization and growth strategy during the 1980s and 1990s was to attract Foreign Direct Investment into China to help boost the development of domestic firms. Investment by Chinese firms abroad was sharply restricted at that time. However, in 2000, China’s leaders initiated a new “Go Global” strategy, which sought to encourage Chinese firms (primarily SOEs) to invest overseas. One key factor driving this investment is China’s massive accumulation of foreign exchange reserves. Traditionally, a significant level of those reserves has been invested in relatively safe, but low-yielding, assets, such as U.S. Treasury securities. (Source: https://www.fas.org/sgp/crs/row/RL33534.pdf) The working population - (so the active labour force) – despite being so huge, interestingly, has had less of an impact on GDP growth, save that it can compete in the global manufacturing sector by keeping wages low. In recent years, though, this has begun to change and foreign companies are heading to other markets (like Vietnam and Turkey) for lower costs including in transportation and labour. The establishment of Special Economic Zones (or SEZs) and industrial clusters that emerged as part of the country’s reforms assisted in attracting capital investment as well as providing employment and experts. Why? Firstly, the SEZs successfully tested the market economy and new institutions and became role models for the rest of the country to follow. The SEZs have also played important roles in bringing new technologies to China and in adopting modern management practices. It is estimated that by 2007, SEZs (including all types of industrial parks and zones) accounted for about: 22% of national GDP 46% of FDI 60% of exports generated in excess of 30 million jobs. The SEZs were great learning centres and enabled models of best practice to be established. How did they do this? The government offered preferential policies (such as low tax rates and low cost property) and leant its staunch support. In addition, proactive participation of foreign governments, foreign direct investment and investment from the Chinese diaspora created a frenzy of interest which aligned themselves with clear goals and vigorous benchmarking, strict monitoring and competition. At the same time, there was a continuum of technology learning and upgrading. China also created economic trade development zones so that if a particular sector was high on the strategy policy lsit then Government gave them special and preferential treatment. In 2007, the 54 HIDZs (Hi Tech Development Zones) hosted about half the national high-tech firms and science and technology incubators. These were very attractive for foreign investors and organisations. They registered some 50,000 invention patents in total, more than 70 percent of which were registered by domestic firms. They also hosted 1.2 million R&D personnel (18.5 percent of Hi-tech Development Zones employees) and accounted for 33 percent of the national high-tech output. Over the 15 years since the formation of HIDZs, these have accounted for half of China’s high-tech gross industrial output and one-third of China’s high-tech exports. In addition, the ETDZs (Economic Trade Development Zones) are also responsible for another one-third of China’s high-tech industrial output and exports. (Source: World Bank, Douglas Zhihua Zeng – 27 April 2011 - worldbank.org/developmenttalk/china-s-special-economic-zones-and-industrial-clusters-success-and-challenges)
- [ALLOW 6 MINUTES] This pie chart shows how China’s GDP is currently comprised. From what we see of China in the media and the news headlines of extraordinary GDP growth and student numbers going overseas and China’s presence in all global markets, it is easy to forget that China is still a developing country. Consequently, its primary industry, highlighted here in yellow, is agriculture. In1983 agriculture made up nearly 35% of GDP; this has now reduced to 10%. Despite that huge drop, China is still the world’s largest agricultural economy including farming, forestry, animal husbandry and fisheries. Developed countries (such as the UK & USA) only have 1% of GDP represented by Primary Industries). The Agricultural sector still employs 34% of the population. When compared with the UK at only 1.5%, the Primary Industry sector is still a huge employer. Secondary Industry – includes mining, manufacturing, construction, electricity, water and gas and make up 44% of GDP. This is normal for a country still developing because there is a huge amount of infrastructure building going on. In 2010, China became the world's largest manufacturing nation (creating 19.8 % of the world manufacturing output) bypassing the US (19.4 %), thus ending its 110 year-run as the largest producer of goods (Source: Study of IHS Global Insight, cited in Financial Times 13/03/2011) That said, take note, because China is already a world leader in industrial output, including mining and ore processing, processed metals, petroleum, cement, coal, chemicals and fertilizer – so a surprisingly huge number of areas. It is also a leader in Machinery manufacturing Armaments Textiles and Apparel / clothing. China is also a top manufacturer of consumer products, a leader in food processing, and a major maker of telecommunications equipment. It is a growing manufacturer of automobiles, train equipment, ships, aircraft and even space vehicles, including satellites. (Source: WDI- World Bank) In 1997 & 2007 the Secondary Sector reached 48%. When you look at the pie chart you will see that there has therefore been a slight reduction since 2007. This is because, suddenly, for the first time in China’s history, the services sector is now the largest and growing sector. So China is going the way of developed countries and moving up the value chain and into services. Tertiary – Service sector – includes: Transport Storage Post (3 making up 5% of GDP) Wholesale and retail trades (10%) Hotel and catering services (2%) Financial services (includes banking, investment funds, insurance companies & real estate) (6%) and a mishmash of services categorized as 'other' (18%). China's service sector has doubled in size over the last two decades to account for about 46% of GDP. In 2013, it surpassed China's secondary industries for the first time. However compared to other developed economies this figure is low. As a comparison, for example, the US stands 79%, Japan 73%, Brazil 69% and India 57%). [Consequently, the carbon footprint is reducing – which will be positive in the long-term!]
- [ALLOW 5 minutes] Google IMAGE – CBRC in Beijing’s Financial Street - Quick question: can anybody name a Chinese Bank? Most banks are state owned, as they are regarded as a strategic sector in the economy. (Source: Luo and Yao, ‘World Financial Crisis and the Rise of Chinese Commercial Banks’; Zhang and Daly, ‘China’s Banks Ownership and Performance’.) Industrial & Commercial Bank of China (ICBC) is – according to the Bankers List of 1000 Banks, by volume of Tier 1 capital (meaning guaranteed, safe capital) – the largest bank globally. What are the advantages of State Banks? Like the heart controlling blood supply to every part of the body…as a government it is vital to know that money is going to the right places to keep the economy healthy! (The Bank of England has the same role as the Chinese Banking Regulatory Commission which regulates the banks). The CBRC was set up as a part of the required reforms for entry into World Trade Organisation in 2001. The Chinese government has the ability to limit excessive remuneration, thus reducing the financial excesses evident in Western countries. Chinese CEOs and other executive level managers are forbidden to make any special compensation policies to benefit themselves or their own companies. Despite that, there are a plethora of instances of fat cat business executives and corruption scandals abound. The banks are very concerned about risk. Traditionally they have favoured projects where they have guanxi connections and therefore the new breed of entrepreneurs have found it difficult to borrow money. [Source: Han, X. M., ‘To Limit Performance Pay Level of Executives in Banks under the Leadership of the Banking Supervisory Commission’ (2011)] The CBRC strongly influence the banks in terms of mortgage supply and therefore house prices. It sets interest rates on deposits and loans, which, for example, means they can make it a requirement for people to put down a deposit or create a higher interest rate. After China’s entry to the WTO in December 2001, China undertook aggressive restructuring and reorganisation of the whole banking industry to reduce the % of Non Performing Loans. [A non-performing loan is one given where the lender knows perfectly well that it cannot be repaid]. Lots of these loans had been made to the State Sector non profit making industries. Today, not only are foreign companies allowed to apply for loans from Chinese banks, but also foreign banks are gradually allowed to provide banking services for Chinese local enterprises and individuals, partly to introduce modern technologies and management techniques to China. (Source: Xia, ‘The Rethinking of the Past 30 Years Finance Reform’, pp. 20-23. ). ICBC has just opened a branch in the Square Mile in the City of London. This is a first for ICBC – which has formerly just had a subsidiary in the UK. Operationally, subsidiaries rely on the capital from the home country. This significant step for ICBC means that the branch is an independent profit centre so that the parent company is not wholly responsible for it. This is another example of Chinese companies Going Global.
- [ALLOW 2 MINUTES] This graph produced by the China Banking Regulatory Commission shows that percentage of non performing loans (NPL). You can see that Chinese banks have really cleaned up their act over recent years. More than 6% were non-performing; this may not sound like a lot but remember that numbers are big in China! The big risk is that if the banks went bankrupt, so did the businesses, their employees were out of work, people’s income dried up and consumer spending went down impacting on economic growth. The present percentage of NPL amongst the big five banks is now similar to that in Germany – around 1% - (as at end 2013) and therefore illustrates that the State owned banking system is now in excellent health.
- [ALLOW 5 MINUTES] Shadow Banking has become a huge growth area in China. What does it mean? Well, it relates to all the money lending that takes place outside of the regulated structures of the financial system. An official definition is given here, namely “The financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight” However because the state banks are less likely to lend to private businesses (the risks being higher), especially when there are no trusted ‘guanxi’ connections, many businesses have had to find funding from elsewhere. These sources of funding are not regulated and interest rates on loans are negotiable. The National Bureau of Statistics in China & Thomson Financial (2013) estimate that 40-42% of lending is made up of shadow banking. The IMF (International Monetary Fund) estimates that of this total, informal lending circuits comprise 6%-8%. [Official figures do not give any figure on the informal lending circuits but there is still a concern that there is huge lack of transparency. Are loans non-performing? Do we really know how much debt there is?] There are different ways of accessing loans, including: Loans provided by Trust Companies, a vehicle through which wealthy individuals provide funds with an interest return to reflect the risk. Financing in the form of a wealth management product, such as a bond (often at a very high interest rate which has to be repaid at a set date) Small lending companies and informal groups of lenders (known as ‘informal lending circuits’) providing funds using money provided again by wealthy individuals. Risks: 1) Lack of transparency. Very few details about how much money is leant in these circumstances and therefore how much debt there is. What does that mean? Well, potentially that a stated asset doesn’t actually exist anymore Could undermine financial stability as no one actually knows how much is invested in property and the consequences if property prices fall Banks have fixed rates on deposits. Consequently, individuals could move money from banks to invest and receive higher interest returns via these informal funding circuits and lose everything as there are no guarantees. Clearly there is a knock-on effect if people then have no money to spend and more businesses go bankrupt. This is being addressed by the Government by removing the fixed rate of interest of funds at state banks to offer higher rates & discourage removal of bank deposits.
- [ALLOW 4 MINUTES] This is a great visual to help us see the rate of change in urbanisation in China 1950 – only 13% of China’s population lived in towns and cities (Source: Karen Seto, Yale Uni) By 2000 – this had increased almost 3-fold to 36% (bearing in mind a surge in population figures as well) By 2013 – we witnessed urbanisation tipping over the 50% mark Source: China National Bureau of Statistics By 2030, 70% of China’s population is predicted to live in cities – that’s a whopping 1 billion people! Source: World Bank & National Bureau of Statistics of China
- [ALLOW 4 MINUTES] When you consider that private property laws were only brought in in the last decade it is astonishing that home ownership has already reached 70%. In the Tier 1 cities, such as Beijing, Guangzhou and Shanghai, home ownership is less than 60% - which equates to the global average of around 60%. With rising incomes and more people moving to urban areas, there has been a demand for housing and consequential increase in property prices. Apart from equities, there is very little else that is considered safe to invest in so property has experienced a real boom. Interest rates on bank deposits are fixed and low, so investing in property has been one of the only reliable and profitable options. You will see from the stat that there has been a huge rise There has been concern 2012-13 of a housing bubble with a whole load of empty flats. However, except at the very top of the housing ladder there is likely to be enough demand that However unlike prior to the 2008 financial crash in the west (UK 119% & Ireland 141%), loan to property value ratios are estimated to be 40-50% (Standard & Poor 2013). In the UK the corresponding Loan to Property Value ratio is 119% & in Ireland 141%. (so it is safer and less likely to implode in China than it could in the west!) Anyone taking out a mortgage post 2010 is expected to make a mandatory down payment of 20%-30% on a first home, 40-60% on a second home. There are no mortgages available on third homes. There is anecdotal evidence of empty properties in Tier 1 cities. There is concern that too much Bank investment is in building developments run by Local Governments including massive shopping malls. When you visit these, you will find them so empty of people. The income from these projects is often insufficient to fund the interest. This connectivity is a risk, if prices plummet as the State Banks will then be dependent on land prices. According to Bank research by De Nederlandshe Bank NV in 2013-14, lending by state banks in this sector has decreased but taken up the Shadow Banking system, which charges more interest, is not regulated and lacks transparency. The IMF (International Monetary Fund 2014) states that 13% of bank lending represents mortgage lending to households, and 7% to project developers (making a total of 20%). De Nederlandsche Bank reports states that this lending figure is not high by international standards and therefore poses little risk. Increase in urbanization means empty properties will be utilized in time, but there is a possibility of high end properties remaining vacant. Government can control house prices, by reducing mortgage restrictions (such as down-payment %) if there is a decline in price. Source: Chinese Banks, Risks & Challenges – Piet Buitelaar 2014 – De Nederlandsche Bank NV
- [ALLOW 7 MINUTES] Question: which are the existing major currencies of trade? US$, Euro, Japanese Yen. The US$ has had the privilege of currency hegemony since the 1920s when the British Pound went into decline. With currency hegemony comes hard military and economic power as well as soft power in the cultural arena. But the Global Financial Crisis of 2008 triggered questions over the imbalance of the International Monetary System and the exorbitant privilege the US has at the expense of developing countries. What does it mean to be an international currency? For the private sector it means it can use it for invoicing international trade and denominating international bonds and loans. It makes it easy for getting money in and out and across borders. For government it means that they can use it to peg local currencies and serves as a medium of exchange. For investors, central banks or sovereign funds an international currency serves as a store of value. China’s aim is to optimise China’s economic power, resilience and prosperity rather than for the RMB to achieve reserve currency status. That said, Chinese policy makers fear that a nationwide liberalisation of capital and currency controls would spark a cash exodus. Indeed, according to a report by media giant Hurun Report, a whopping 44% of Chinese individuals holding over RMB10m in their name have plans to emigrate. As the RMB is not yet fully convertible, the Chinese government has in recent years promoted an offshore market where the currency can be used outside the Chinese mainland. In order further open up the currency for legal cross border transactions, special administrative zones are being established such as the Shanghai Pilot Free Trade Zone (‘PFTZ’) - dubbed the ‘hole in China’s currency wall’. In such special zones, full convertibility of the renminbi is allowed but only a small scale and under certain circumstances. Provinces like Tianjin and Guangdong are also seeking permission to set establish special trade zones to benefit from more relaxed cross currency restrictions. If reforms in special zones are rolled out nationally across China, in effect the RMB will become fully convertible and a global currency as HSBC has predicted. According to Yan Jin, Economist at Standard Chartered Bank and an expert on Chinese RMB internationalisation, financial transactions in RMB have doubled on average between 2010 – 2013. A whopping 15% of China’s total trade is already settled in RMB compared with 0% in 2009 (Eichengreen, Walsh and Weir 2014) Yan Jin also predicts that the Renminbi is likely to become a G4 currency within what’s called a ‘multi-polar currency structure’ for trade invoicing, settlement and investment. Already the world has witnessed examples of huge deals such as the Gazprom deal in 2014 which is contemplating settling the deal via issuing a Dim-Sum bond or settling some of the deal directly in RMB and Rouble. Similarly, Russia and Iran are exporting oil to China in RMB and soon Venezuela will follow suit. (see FT 2014). If Russia, Angola, Sudan and Venezeula all convert oil sales into RMB the world will see over 5million barrels per day traded in RMB (Collins 2013). )That’s equivalent to half of Russia’s total daily oil production (EIA 2013). In the last two years, London and Frankfurt have been designated as offshore trading centres for the Renminbi giving these financial centres a significant advantage and a boost to international trade settlements.
- [ALLOW 2 MINUTES] This comment reflects the Chinese government’s continuing emphasis on technological innovation, including R&D spending which is now around 42% of the US level. (Forbes Magazine Oct 2014)/ Research on innovation by companies in China shows that there are different types of innovation, and that China’s success to date has been built much more on non-technology types of innovation
- [ALLOW 3 MINUTES] Let’s go through the various types of innovation: Cost innovation occurs when changes in the product design, production or delivery process, technology or materials result in reduction in production or delivery costs. In China, it is well known that the extensive use of lower cost unskilled or semi-skilled labour creates products that are cheaper than those made in developed countries. Process innovation occurs when the company creates a new process for producing or delivering an existing product or service. In China, much process innovation seeks to reduce the cost of production. Application (app) innovation – easy to make money Supply chain innovation – where you remove steps or streamline the supply chain process to eliminate costs Interestingly, China has produced relatively few product innovations that are truly new to the world. But based on extensive experience with incremental innovations, Chinese companies are moving from incremental toward radical innovations. The technology gian, Huawei, is an excellent example of this. It is starting to make radical innovations with its distributed base stations and its SingleRAN based LTE solution for mobile operators. Sanyi Heavy Industry Company, is another example, which produces the world’s most powerful crawler crane. In China, most business model innovation has started by taking a Western model, adapting it to China, then further innovating the adaptation. Although Alibaba.com, for example, copied the eBay platform with its competing service Taobao, it quickly overtook eBay, based on its earlier B2B platform experience and innovations to suit the Chinese customer. Tencent, China’s largest Internet portal, experimented with multiple business models in order to monetize its products and it now generates most of its revenues through Internet value-added services. Like some foreign companies, such as Apple or Google, Tencent has created an ecosystem of service offerings centred on its QQ instant messaging service. For its instant messenger service QQ, Tencent did not copy global leader ICQ’s unprofitable business mode. Instead, Tencent created a new business model that was the first to include advertising and that includes an ecosystem where it can monetize all the value-added services surrounding the free QQ instant messenger application. Source: George S. Yip Professor of Strategy and Co-Director of the Centre on China Innovation at China Europe International Business School. (gyip@ceibs.edu). The Americans argue that Chinese organisations – based on traditional cultural norms and behaviours, don’t give enough scope to their PhD students to do their own thing which holds them all back a bit. However, the future scope and potential is huge to make waves in the area of product innovation.
- [ALLOW 3 MINUTES] The rise of China's tech industry is being fuelled in part by its growing investment in research and development. According to a study released in December 2014 by U.S.-based Battelle Memorial Institute, R&D spending in China will likely reach $284 billion this year, up 22% from 2012. That compares with just 4% growth forecast in the U.S. to $465 billion for the same period. It forecasts China will surpass Europe in terms of R&D spending by 2018 and exceed the U.S. by 2022 (Source: Wall Street Journal – January 16 2014) Why is this of interest? Well, R&D is a fundamental part of innovation. If China has the money to do it – which it has – then this could push China right up the value chain away from its ‘Made in China’ label and into the realms of ‘Made for China.’ From the point of view of profits, R&D innovation results in retention of a much larger share of the product retail value. Huawei now has an R&D centre in Shanghai that employs more than 10,000 engineers. This is extraordinary growth when you consider that in 2000 the same research centre employed less than 100 people. Many of these employees have computer-science degrees. As the mobile industry deploys faster fourth-generation networks, Huawei is already working on the technology for fifth-generation networks, which could be ready around 2020. Huawei’s European HQ opened in Reading in 2013. More than 2000 multinationals have an R&D centre in China. Glory Global Solutions Ltd., a U.K.-based global supplier of cash-handling machines used at banks, opened a research centre in Shanghai in 2011. The centre's Chinese engineers are developing advanced sensor technology to identify various security features embedded in bank notes to detect counterfeit bills, combing software programming, hardware engineering and scientific methods like spectrometry. ‘Working on cutting-edge technology with Chinese engineers involves a risk of them leaving to set up local competitors’, said its Chief Executive Paul Adams. That said, local engineers are bringing new ideas to Glory Global, he said. In the 2014 Global Innovation Index, China topped the middle income countries and was ranked 29 globally for innovation. (The UK was ranked 3rd and USA 5th) In terms of ‘quality of innovation’ China topped the list in the middle ranking income nations (India, Brazil, South Africa). Quality of Innovation covers: university performance, the reach of scholarly articles and the international dimension of patent applications. It really looks at how important is the individual in innovation? The UK has an excellent tradition of supporting anyone who has an idea and allows its employees to go off and do research. Chinese organisations are much more directive and projects are very collectively led. Innovation is a key platform for developing services and products and is the next major link in the chain of China’s economic armour. How it achieves that within the constraints of traditional cultural values will be interesting to watch. Multinationals have long been concerned about the risks of IP theft. With an increasingly large number of Chinese domestic companies now recognising the value of IP, this is an area likely to be addressed more strictly over the next few years freeing up the economy to innovate.