China’s innovation economy a real estate bubble in disguise

The Chinese government’s call to the nation to build an innovation-driven economy from the top down has sparked a rush by local governments to construct new buildings in the name of supporting creativity.

Innovation centres have been popping up around the country and are set to more than double to nearly 5,000 in the next five years, according to Internet research firm iiMedia. The only problem for local governments; entrepreneurs are not moving in.

Many centres are in small Chinese cities or towns, not ideal locations for attracting startups. There is no local market for their product, no local ecosystem of suppliers and fellow entrepreneurs and centres generally provide only basic amenities, such as a desk and a telephone. They lack the financial, technical or marketing expertise that many startups need.

Most incubators have occupancy rates of no more than 40 per cent, iiMedia says.

The result: like steel mills, theme parks and housing before them, the country now faces a glut of innovation centres as another top-down policy backfires to leave white-elephant projects and a further buildup of debt.

“The risk of a bubble is extremely large,” said Shi Jiqiang, a partner at Leilai Management, which runs day-to-day operations at a startup base in the city of Tianjin, near Beijing.

“This is both a test for government and for the managers of startup spaces... there aren’t enough entrepreneurs.”

China’s ministry of industry and IT declined to comment and the state planning agency,

the National Development and Reform Commission, did not respond to a request for comment.

Beijing argues its development model that worked so well for infrastructure and real estate, powering the country through the global financial crisis, can build successful, high-tech startups.

With slogans such as “mass entrepreneurship” and “Internet plus”, Beijing has called for innovation centres to be built all over the country, hoping to lay the groundwork for the next Jack Ma - who founded e-commerce giant Alibaba - to emerge.

It has encouraged college students and even migrant workers to try their hand at starting their own businesses to transform China into a high-tech economy less reliant on basic manufacturing.

Almost 80 per cent of the capital for the innovation centres springing up around the country is coming from the government or universities, which are state-backed in China, or a combination of sources, iiMedia said.

“In any sort of market, you want the experts making the decisions, not some technocrat or bureaucrat,” said William Bao Bean, investment partner at venture capital fund SOSV, which invests in startups. “You don’t tend to see too many successful companies come out of a government-based decision-making process.”

The small town of Shacheng in Huailai county in northern Hebei province answered Beijing’s call for innovation by building two 25-storey adjoining towers - one for office space and the other as an innovation centre.

However, the innovation centre, offering desks and a period of free rent and utilities to potential startups, is empty. The floors are littered with rubbish and dust.

Like other towns in China’s industrial heartland, Shacheng is feeling the brunt of Beijing’s push to reduce massive industrial overcapacity. Glass and cement factories, and coal mines and steel mills have been shut down.

The town offers few signs of the central government’s innovation campaign. Chinese characters hanging on a fence in Shacheng’s economic zone spell out “mass entrepreneurship” but otherwise local people said they had not seen any promotion of the innovation centre and they felt it was not targetted at them anyhow.