China Must Abandon U.S. Finance Model, Chart Own Path

iFeng: 新华社刊文：破除“美国金融模式迷信” 中国金融要走自己的路

In recent decades, some people in my country's financial circles have been consciously or unconsciously taking the United States as a model of modern finance and showing a considerable degree of blindness. The root of this blindness is the influence of neoliberalism. And the chaotic performance of the United States in this pandemic has surprised the whole world, causing people with different ideologies and values ​​to think, why is this?

Joseph Stiglitz, the American Nobel laureate in economics, said recently: "The United States has always moved along the ideas of neoliberalism...believe that the market itself can solve all problems. In the past half century, the United States has This experiment has been done, and now we should admit: the experiment failed.” Perhaps these changes that have taken place and continue to help some domestic financial circles dismantle the superstition of the American financial model.

Kerry Brown, a Chinese researcher at King's College London, believes that there is a mindset in Western society's understanding of Chinese culture, and the first thing that needs to be emancipated is the emancipation of the mind. In my opinion, today's Chinese financial circles also need to emancipate their minds and think about China's problems based on China's national conditions and socialist values. We must have a emancipation of the mind to break the "foreign superstition" and "foreign eight-legged" on the path of financial development.

Financialization of the economy is unsustainable

Since the 1980s, under the banner of neoliberalism, the United States has opposed the 40-year financial repression policy under Roosevelt's New Deal, and allowed the financial industry to deviate from the industrial service model of serving as a financing intermediary for the real economy. In the name of innovation, Through financial derivatives and financial leverage, speculative arbitrage, madly chasing profits, and gradually transformed into a naked financial transaction model. By 2008, this model had reached its peak, and then a global financial tsunami broke out, which severely damaged the global economy and affected it to this day.

Regrettably, it seems that we haven't had time to deeply analyze and think about the deep-seated causes and consequences of the global financial crisis in 2008. After a short pause, we accelerated the pace of imitating American finance and started the financialization of the economy.

People are rushing to invest in finance and join in finance, and a large number of new banks, insurance companies and other financial institutions are emerging. Before the US financial tsunami in 2006, there were a total of 238 commercial banks and insurance companies in my country. In 2019, the number of commercial banks and insurance companies in my country increased to 447, an increase of 88% in 13 years. Among them, insurance companies increased by more, an increase of 120%.

Private equity funds with the purpose of betting on listings and speculative arbitrage have sprung up. In addition, there are hundreds of thousands of unregistered similar enterprises. Shadow banking business, wealth management business of various financial institutions, P2P, "backdoor" and "speculation" of junk stocks of listed companies are rampant, and real estate and commodities are financialized.

In the name of financial innovation, and even in the name of serving the real economy, financial derivatives spread from on-market to off-market with greater risks, from financial futures to commodity futures. Algorithmic trading based on computer technology such as leveraged trading and high-frequency trading is popular, making the financial market more fragile and full of crises.

In recent years, no matter how the central bank releases water, it is difficult for funds to flow into the dry fields of the real industry. This is not a problem with the central bank's monetary policy, but the huge siphon effect of the financial and financialized real estate's demonstration effect of making money quickly and making more money.

On the one hand, these siphoned funds have been transferred to financial institutions to make a lot of money in the financial market. Just as a bank president said a few years ago: "The profit of the enterprise is so low, and the profit of the bank is too high, and I feel embarrassed. "On the other hand, the real economy is gradually shrinking, slowly blowing up the financial bubble. In recent years, China's economic momentum has weakened and gradually declined. An important reason is the financialization of the economy.

Here, I would like to use a set of data to briefly describe the trend of economic financialization in my country in the past ten years. I still use 2006 before the US financial tsunami as an example for comparison. In 2006, the total profit of my country's industrial enterprises above designated size was 1,878.4 billion yuan. In 2019, the total profit of my country's industrial enterprises above designated size was 6,199.6 billion yuan, and the latter was 2.3 times higher than the former.

In 2006, the total profit of my country's financial enterprises was 395.01 billion yuan. In 2019, the total profit of my country's financial enterprises was 2,961.274 billion yuan.

In 2006, the ratio of the profits of industrial enterprises above designated size to the profits of financial enterprises in my country was 4.8:1; in 2019, the ratio of profits of industrial enterprises above designated size to the profits of financial enterprises was 2:1. In just thirteen years, the weight of industrial enterprises' profits in the overall economic aggregate has shrunk rapidly and the proportion of financial enterprises' profits has increased significantly, indicating that the financialization trend of the economy has become very significant.

In the first quarter after the outbreak of the new crown pneumonia epidemic in 2020, China's economy suffered a setback and fell by 6.8%, but the net profit of Chinese listed banks increased by 5.62% year-on-year. This phenomenon is unimaginable. The financialized economy will be unsustainable from both historical laws and realistic models, which is worrying.

Manufacturing is the foundation of the economy

China is a big country with a vast territory, a large population, increasing influence and a complex geopolitical environment. Unlike a small country that relies on natural endowments for food, can passively or actively accept the international division of labor, and is a small country, China must establish a relatively complete, Self-contained, healthy and balanced industrial system and economic ecology.

We cannot over-think comparative advantages and fantasize about international division of labor. Otherwise, we will be "incapable of breathing", which will not only make economic development unsustainable, but will also seriously affect national security. The basic driving force of China's economic system is the manufacturing industry. The important position of manufacturing industry is unshakable in the pre-industrial era (handicraft industry), steam engine era, electrical era and today's Internet era.

Manufacturing is as important as agriculture, which provides food for people. It is the creator of real material wealth and the source and driving force of all economic activities. Other industries have a relationship of prosperity and loss. Without the support of the manufacturing industry, other industries will be unsustainable. The foundation of all virtual economies and all service industries is manufacturing, including the splendid Internet economy.

Manufacturing is the core and foundation of the entire economic system, and is in the most important key position. Whether the manufacturing industry chain is complete or not, and how mature it is, determines the national strength, national transport and national economic security, public health security and national defense security. Manufacturing is the foundation of China's economy. We must be mindful and do our best as a nation.

In order to maintain the foundation of the country made in China, it is also necessary to clarify the primary and secondary relationship between the service industry and the manufacturing industry. Over the years, some people have seen that in western countries, including some developing countries whose economies are lagging behind us, the proportion of service industry in GDP is much higher than ours, and they have put forward the idea of building a big country in the service industry. Is this view correct?

First, the increase in the proportion of the service industry in the economic structure is due to the fact that the development of the manufacturing industry has provided technical support for the field of social life and created demand. At the same time, the improvement of labor productivity and technological progress in the manufacturing industry also made it possible for labor to transfer to the service industry, which indirectly supported the development of the service industry.

In short, the development of the service industry is a natural change due to economic and technological progress and changes in social life. It should not be a goal that people deliberately pursue, and should not put the cart before the horse and blindly promote its development.

Secondly, the service industry, especially the life service industry, has relatively low labor productivity, and the development of the service industry alone will affect the level of economic growth.

We should not only develop a life service industry that meets the growing material and cultural needs of the people, but also guide the development of a more productive manufacturing industry and a producer service industry that provides supporting support for the manufacturing industry. On the issue of promoting the development of China's industry, it is necessary to establish a correct concept and guide the optimization and upgrading of the industry.

Kuznets, winner of the Nobel Prize in Economics, proposed that the key to upgrading the industrial structure is the transfer of resources from sectors with lower productivity to sectors with higher productivity, thereby improving the overall resource allocation efficiency of the economy. Therefore, when we formulate industrial policies, we should have the right direction and not move against the direction of Kuznets' optimal allocation of resources.

Finally, the United States and other Western countries have failed to pursue the policy of "de-industrialization" by blindly developing the service and financial industries in the past three decades. The implementation of the "de-industrialization" policy has not only led to industrial imbalance and softening of the US industry, which has seriously affected the normal cycle of the overall economic system, but also caused a large "rust zone", a widening gap between the rich and the poor, and social divisions. When the new crown pneumonia epidemic came, due to the lack of manufacturing, the United States, known as the world's number one developed country, could not guarantee even the most basic public health security, and it was in chaos.

Therefore, we must not blindly imitate the United States in our economic development strategy, and firmly and steadily build a manufacturing power and a strong country.

More at the link.