Why China Will Fail

This is not a happy time to be an entrepreneur seeking to list your firm on one of China’s stock exchanges. Nor is your situation better if you’re one of the Securities Commission members charged with approving listing applications.

Chinese companies aren’t doing very well, and Beijing thinks it’s because the standards on initial public offerings (IPOs) weren’t strict enough in the first place. A better winnowing process is needed to ensure that only the crème de la crème of Chinese companies gets listed. Those not making the grade are viewed as “locusts that must be killed,” or as viruses, with the commissioners’ mission being to “prevent diseases from entering the body via the mouth.” That kind of thinking would put a dampener on an entrepreneur seeking seed capital no matter how great he thinks his idea is.

In China, the only way to obtain seed capital is first to get regulatory approval. That’s a process that can take years. And the commissioners aren’t inclined to view applications benignly, for they will be held “accountable for life” for each IPO they approve. Only last month, Chinese authorities swooped down to seize a large private insurer deemed to have become too risky. One would not want to be one of those who approved its application.

Is there any wonder, then, that the Chinese are widely regarded as not being creative? Yes, they file a lot of patents, but the quality isn’t great, with the state news agency Xinhua complaining, “China owns very few patents featuring originality and high or core technology.” In fact, Chinese innovation relies on the modification of existing technologies, like putting together a cell phone and a cigarette case. These creations are fun, but they lack depth according to a Chinese writer who prefers to remain anonymous.

Israel, on the other hand, is a tiny country of about 8 million people that’s been called the “Start-up Nation.” Israelis have created, among many other technologies, the Waze app used by 50 million drivers worldwide, a technology that’s allowed blind people with intact optic nerves to see (OrCam), and a lithium car battery that’s tripled the mileage for electric cars (Phinergy). These are more than mere trinkets. They will have a lasting effect on future technology.

The difference is that Israel encourages risk-taking. Israelis are innately risk-takers or they wouldn’t be living in a country that’s surrounded by 17 hostile Arab countries with 46 times its population.

Creativity, like entrepreneurship, thrives in an environment that welcomes risk, not in one where risk-taking is punished. By its very nature, creation is risky. This is why I’m amused when I hear people sneering at Donald Trump’s bankruptcies, as if failing when taking big risks is a cause for shame. Gary Shapiro, author of two best-selling books on innovation, explains the innovative success of the United States and Israel: “Both countries share the unique view that entrepreneurial failure is an education rather than a badge of dishonor. They don’t punish risk-taking the way many other nations do.”

Billionaire Mark Cuban explains it this way. “Failure is part of the success equation.” You don’t succeed unless you take risks. And when you take risks you sometimes fail. When that happens you pick yourself up and start over again. Except that doesn’t happen when failure means you get a visit from your friendly local commissar.

China has aspirations to become a world power equal to the United States, and many American declinists believe this is inevitable. I don’t share their view. So long as the Chinese people lack the freedom to fail, China will remain weak. The country that today funds its failing companies is running out of money, and the international community is running out of patience, as can be seen from the tariffs President Trump is levying on Chinese steel.

China’s response is to try to strong-arm its companies into succeeding. It will have the opposite effect.

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