Author: Fan Gang, President of CDI
Editor’s Note: It is imperative to reexamine fundamental aspects as we innovate the financial sector in order to ensure a bright prospect for its future development and to actually solve current problems.
The further development of China’s financial sector is unstoppable and is also something determined by China’s economic trends. Still, problems such as high leverage, risks and debts remain, which needs further investigation and analysis. Banks are constantly upgrading the technologies they use, such as APPs, networks, the internet, Fintech and big data, which are only natural as new technologies should be embraced by all industries. But the reason why the above-mentioned problems persist or are even worsening, especially regarding debts and the stock market, even as we try to innovate the financial sector, in my opinion is due to weak fundamentals. These fundamentals should be reexamined in the innovation process. As a late-mover, China wants to catch up with and even overtake advanced countries, but tends to only focus on the attractive side of finance but ignore its underlying rationale and past lessons of development. Thus it is important to consider how the financial sector should be developed by revisiting the fundamentals; this is the only way to effectively address the current problems to ensure robust prospect for the financial sector in future.
- Common sense
Money can be generated through investment but can never come out of thin air. The Ponzi scheme and any other financial practices that promise sustained high returns on investment are all frauds. Another common sense is about financial market regulation, especially for public finance. Regulation encourages innovation, provides confidence that risks can be controlled, and thus facilitates the development of new technologies and sound development in general.
- Fundamental integrity
Fundamental integrity refers to basic systems including legislation that punish and take preventive measures against dishonest behaviors. The essence of finance is credit, without which its development will go awry.
Mergers and acquisitions are a notable example. One main mission of finance is to ensure the survival of the fitter enterprises in the economic cycle, as less competitive enterprises are acquired by more competitive ones, so that their productivity can be more effectively used. But endless back-door deals following mergers and acquisitions render projects not operable. It is necessary to establish a credit system, otherwise the market will always face insurmountable challenges. Take for instance block chain, which is designed to make information transmission smoother and ensure privacy, therefore a means to reduce cost of enterprises and individuals in economic terms, including cost to expose false information or overcome information asymmetry. But the essence of block chain is providing information. If it contains false information, or in other words, if fundamental integrity is undermined, then information technology will only bring us disaster rather than progress. This means we should first address the basic issue of integrity.
- Fundamental nature
Finance, which provides money to users by acting as an intermediary based on credit, is in nature a service industry that accommodates the needs of the real economy. Through banks, securities, funds, insurances and financial management, the financial sector channels capital into the real economy to fuel its growth. Starting from investing in funds to developing the capital market is one way to develop the real economy.
4 Fundamental business forms
One important cause for lack of innovation in investment funds is not with finance, but with the property rights system. This goes back to the basic institutional issues, again that of property rights, not finance.
First, personal intellectual property rights can be capitalized and turned into stock rights to attract venture capital and concentrate capital and resources in the fields of scientific and technological innovation. The absence of corresponding systems has resulted in limited investment in new enterprises. Enterprises think that financing is to borrow money from banks, which is both costly and difficult. If funds are robust, enterprises would naturally be invested in by funds. Banks only provide liquidity for enterprises, while investment funds underpin their long-term development.
Secondly, many basic business forms have not been developed, such as financial intermediaries for mergers, acquisitions and reorganizations. This is also one fundamental issue that should be reexamined.
- Fundamental systems
The innovation of the financial sector and its further development depend on a robust fundamental system. Once they find advanced technologies, less developed countries tend to mistakenly focus only those latest technologies while ignoring the systems behind.
It is important to cement fundamental aspects as we embrace new technologies. As a result of the lack of a well-functioning fundamental system, coupled with the absence of fundamental common sense and corresponding means of regulation, new problems and frauds will emerge following the use of new technologies. This does not mean that innovation is bad, but that great importance shall be given to fundamentals in the process of innovation. Only in this way can the whole financial sector develop in a more sound and balanced way to better contribute to China’s economic development, the generation of wealth, and more efficient operations of capital and investment.
