Innovation in science and technology is emerging as a key factor amid increasing global uncertainties and fiercer investment competitions, and China is facing a crucial task to effectively combine its capital market and S&T innovation so as to boost the quality development of its economy.

Xu Xinzhong, finance professor with Peking University’s Guanghua School of Management, stressed that capital should be used to help enterprises transform science and technology achievements into business innovation.

After four decades of fast development, China transformed from a poor developing country with a GDP only one fifteenth of the United States then to the world’s second largest economy. However, its economic achievements will not be so impressive when viewed in a “per capita” light — China’s current GDP per capita is still below the world’s average.

According to Xu, in order for China to switch from mere size to economic strength, innovation is the key, and it relies on two aspects: basic S&T research and the translation of research results into productivity and products. However, when it comes to innovation, capital is the core factor.

Xu noted that the world’s leading economies have different models of innovation and capital support.

In the U.S., disruptive innovations are backed by private equity and venture capital as well as Nasdaq. Meanwhile, Germany and Japan take the lead in traditional industries, with their companies engaging in consistent innovations backed by an indirect financial system where banks play the key role.

In Germany and Japan, banks are not only big loaners but also key shareholders of corporations. They provide long-term capital for companies, which, in turn, focus on long-term competitions and large investments in research and development. Banks are also there to help companies weather through rough time. In a word, these banks’ acts are countercyclical.

In China, companies mostly rely on indirect financing channels such as banks. The new science and technology innovation board is expected to play a key role in helping the country’s firms innovate, but it is harder for them to succeed there than in main boards because the lack of information on sci-tech companies is far greater than that on one in a mature industry. Regulatory efforts must step up to ensure these companies disclose information in an honest and fair manner.

Capital enables innovation, but before that, there have to be achievements from basic science and technology research.

Based on analysis of wins of Nobel Prizes in nature sciences between 2001 and 2007 as well as the citations of papers by Chinese and American researchers in various basic science fields between 2009 and 2018, Xu noted that, despite great progress made over the past decade, China still lags behind the world’s leading level, especially in biology and medicine. Meanwhile, nearly half of the world’s leading scientists are American.

Leading scientists are crucial for China’s transition from size to strength. Xu called for a free and quiet environment for young professors and scholars to have a decent living while doing the things they love without interruptions in decades to come so that they might achieve groundbreaking results and inventions and pave the way for innovation and the country’s successful transformation.