Government can only promote innovation, not drive it

Source:Global Times Published: 2018/12/23 19:49:51

Illustration: Xia Qing/GT

Over the past two years, the sharing economy wave has brought vast changes to the capital market and daily life in China. Bike-sharing is one example.

In 2016, the emergence of shared bikes offered a solution to the "last mile" problem for commuters. Almost overnight, many bike-sharing startups including Mobike and Ofo sprang into being, attracting huge amounts of private investment. Umbrellas, chargers and offices were also caught up in the sharing boom.

But as time passed, bike-sharing pioneer Mobike was acquired by Meituan Dianping, China's largest provider of on-demand online services. Another industry giant - Ofo - ran into financial trouble.

Mountains of abandoned bikes in China's cities pointed to the waste of billions of yuan in social wealth. The capital-driven boom and bust of bike sharing wasn't just a failure by individual companies, and its current woes deserve serious reflection.

First, what happened with shared bikes is not the kind of innovation we want. Essentially speaking, bike sharing is a consumption model based on "internet plus rent." It doesn't involve much technological innovation. If China's "innovation" focuses on the application and consumption fields and if Chinese entrepreneurs and investors only want to make "easy money" by using the internet, the country's internet economy may fall into an "innovation dead end."

Second, disorderly expansion driven by capital is a huge waste of resources. As of the end of February, 77 bike-sharing companies across China had flooded city streets with 23 million bikes. According to incomplete statistics, funds raised by bike-sharing projects reached 30 billion yuan ($4.34 billion), nearly 80 percent of which flew to the two industry giants - Mobike and Ofo.

But due to poor management and bankruptcies among bike-sharing companies, a great number of bikes were just abandoned - ending up in "bike graveyards" in many cities.

Moreover, the bursting of the bike-sharing bubble inflicted pain on the upstream manufacturing sector. When bike-sharing was booming, factories expanded employment and production as they enjoyed temporary prosperity. But orders have dried up, and many of those same factories have had to suspend production. Easy money created the illusion of industrial expansion, which ultimately was to the detriment of the manufacturing industry.

Third, we need to reflect on the investment philosophy of the sharing economy. A big problem was in the business model of bike sharing: companies never found a feasible business model and couldn't make a profit. Raising money for an unsustainable business in the name of innovation is actually a "cheating economy."

The reason why the sharing economy could develop was because of a continuous influx of capital, with investors aiming to continue the game through IPOs or luring in new investors. Some late entrants to the industry had problematic motivations, like amassing huge sums through collecting users' deposits.

All this shows that the capital market is speculative and unhealthy, which is why an immature business model became so popular.

Fourth, there's the deposit problem of shared bicycles. According to iiMedia Research, as of the end of November 2017, deposits held by China's bike-sharing companies exceeded 12 billion yuan. Yet there is still no clear regulation on how these deposits are to be handled. If companies go bust, how is the money to be repaid? Deposits should be considered a kind of debt, and failure to return deposits to users could constitute fraud and default. If the deposit problem cannot be properly solved, it will hurt normal market order.

Last but not least, the government should set limits in promoting the shared economy. Encouraging innovation is undoubtedly correct, but what the government should do is to encourage the whole society's innovation culture, cultivate the innovation environment, build public innovation platforms and develop an education system that encourages innovation. In terms of specific industrial development, project investment and business development, the government should not intervene too much. If market participants have the idea that the government is backing certain companies, the implicit guarantee will fuel market speculation and debt expansion.

The explosive development of the sharing economy should lead us to think about how to innovate. Innovation is the only way to strengthen a country's competitiveness, so the government needs to encourage innovation. But the government must pay attention to the boundaries when encouraging innovation.

The government needs to determine a strategic direction and set the rules for regulators, but in terms of future market development, companies, financial institutions, consumers and intermediaries should develop on their own.

The article was compiled based on a report by Beijing-based private strategic think tank Anbound.


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