Abstract: Finance promotes market resource allocation by investing in profitable, innovative, and promising businesses rather than all businesses. Instead of complaining about financing difficulties, businesses should strive to earn the market's trust through good management capabilities. Aside from loans, banks can and should support the real economy through a variety of financial services.
Finance is correcting its position in the economy and society by supporting the real economy. Finance comes from the needs of the real economy; it is a pipe dream without the real economy. Under the current situation, it is of great practical significance to propose that finance should return to its origin and support the real economy.
Some countries and regions have overemphasized occupying the top of the economic food chain due to capital profiteering for a long time. As a result, many resource elements are concentrating in the financial sector, deviating from the real economy, hollowing out industries, twisting the economic structure, and causing a huge problem for social governance. Such social and economic risks spread throughout the world, putting other economies in jeopardy. This is a lesson we must face and learn from.
Second, finance plays an important role in promoting reform, opening up, and rapid economic growth in China. The financial industry's scale and operational capabilities have also grown significantly. However, regulatory arbitrage, shadow banking, and fund idling strained real-economy resources and created systemic risks.
Third, in light of current international geopolitics, China requires a stable economic structure in order to resist U.S. suppression. Repairing the relationship between finance and the real economy is required for a healthy and stable economy, as well as the foundation for economic resilience.
I. RATIONAL UNDERSTANDING OF THE REAL ECONOMY
Providing financial support for the real economy is to let finance play a positive role in effectively allocating market resources, accelerating capital accumulation to advance the expansion of reproduction, promoting scientific and technological innovation and industrialization of scientific and technological achievements, and curbing the negative squeezing-out impacts of speculative operations and capital idling on the real economy to ensure high-quality economic development. In turn, the financial system is not isolated, and only a solid structure of the real economy can guarantee the stable operation of the financial system.
Financial support for the real economy requires us to have a rational understanding of the real economy. The so-called real economy is more than just equivalent to manufacturing enterprises. All industries and enterprises that create social and economic value and contribute to the realization of value belong to the real economy. Suppose these enterprises and industries no longer create social and economic value or do not contribute to the realization of value, but only engage in a variety of capital speculation, trading idle, etc.. In that case, they are not in the real economy. Even in the primary and secondary industries, we should make it specific to the subjects. Financial support should be only for those healthy, innovative, effective, and promising enterprises rather than all of them. This is the right thing to do to effectively allocate financial market resources.
This brings us to the issue of "difficult and expensive financing" that has attracted much attention in recent years. The so-called "difficult and expensive financing" is actually an ambiguous statement.
As for expensive financing", people intuitively think that financial institutions determine the price of funds. But in fact, the basic price of funds is determined by the supply and demand in the market, and financial institutions are only intermediaries between the two sides. So, financial institutions do not give the price on their own initiative but on the contrary. In this sense, financial institutions are not the fundamental determinants of the price of funds. In addition to the basic domestic supply and demand of funds, domestic funds prices are also influenced by the changes in international funds prices.
In addition, the price of financing (such as loan interest) also includes the financier's (borrower's) own risk premium, and the financier is actually a determinant of the price of funds. Under the modern central banking system, the central bank's benchmark interest rate provides a basis or benchmark for the market price of funds while regulating the benchmark interest rate, which again does not come in an empty way, according to the macroeconomic conditions. From this point of view, the market interest rate (the price of funds) is neutral and is the result of a combination of factors that cannot simply be said to be expensive or not.
On the other hand, the price of capital itself also plays a very important market role - to eliminate the market players without profitability (i.e., cannot afford the market price of capital) so that valuable resources are really allocated to the market players who can effectively create social value. To play such a regulatory role, the price of capital must indeed be "expensive". Only when we understand the principle of the price of money can we talk about "difficult to finance."
In the same way that financiers always find financing expensive, all financiers want more money, the better. Whether a corporation or an individual, having a need for funds does not mean those needs are effective. An effective demand must be with the ability to pay. In the case of financing, it is the financing demand with the ability to repay and pay interest.
The reality is that, on the one hand, people do not distinguish between effective demand and ineffective demand, and that’s why they think "financing is difficult". While on the other hand, banks and other financial institutions have an asset shortage and cannot find good financiers. Banks, as commercial institutions, need to make profits, so they have a strong desire to lend and are willing to grant loans to market players who can guarantee the safety of credit funds and charge reasonable interest. Safeguarding credit funds is in fact safeguarding depositors' funds. If finance supports many inefficient, highly leveraged, and disorderly expanding enterprises in driving the real economy, this is not in line with the requirements of high-quality development and will weaken China's economic foundation to withstand external shocks.
Therefore, we cannot simply blame the financial institutions for "expensive and difficult financing” and ask them to find the reasons and solutions. The key is that financiers need to continuously improve their own business management capabilities to win the trust of the market. At the same time, we should also deepen the reform and opening up, and strengthen the construction of the market rule of law, to create a good business environment for financiers.
Of course, we should still see that, at the moment when technological innovation is facilitated, the traditional risk assessment model of financial institutions cannot adapt to the characteristics of these enterprises because of the significant difference between the development models of some new industries and sectors with traditional ones, which has indeed caused the problem of "difficult financing", and requires financial institutions to actively innovate and find new business models and products.
For example, in terms of bank credit, can we develop new lending models for science and innovation enterprises? In this regard, the government plays a vital role, and the regulatory and fiscal departments should carry out related support policies to guide financial institutions to actively innovate in this area.
II. BANKS NEED REASONABLE PROFITS
The prerequisite for financial support for the high-quality development of the real economy is that finance itself must be healthy and strong. Commercial banks are the main force of financial support for the real economy. Moreover, as part of commercial institutions, they need to gain reasonable profits in the market competition and interaction to ensure the ability to support the real economy continuously.
Commercial banks earn reasonable profits are in interactive competition with all market participants, instead of from competition among banks alone. All stakeholders should earn profits in a competitive market, not by concessions from other sectors.
Suppose our enterprises, whether state-owned or private, are not competitive in the market and have to rely on other sectors to make profits. How can such enterprises have the ability to participate in international competition? Such enterprises also do not meet the requirements of high-quality development. Therefore, the key to achieving development is playing the spirit of entrepreneurship, and improving the ability to manage, innovate, and explore the market.
Currently, in the A-share market, the asset margins of listed banks are much lower than those of non-bank listed companies, reflecting the highly leveraged nature of banking operations. However, the capital profit margin of listed banks is slightly higher than that of non-bank enterprises. Even so, the profitability of listed banks only ranks 11th among all industries in the A-share market, which is in the middle to upper profitability level.
This shows that in China, the banking industry is not highly profitable. They account for a very large proportion of the A-share market because of the large scale of its assets, resulting in a large absolute amount of profit, giving society the impression that banks make much money. This also shows that many listed companies in China are not very profitable. Although they have a lot of bank credit support, many of them are not operating well enough, and companies still need to work hard to improve their profitability.
When put into international comparison, the profitability of China's banking sector is higher than that of its Japanese and Western European counterparts and slightly lower than that of its U.S. counterparts, indicating that the profitability level of China's banking sector is basically reasonable. On the other hand, in the A-share market, the market capitalization of banks is basically lower than their net worth, indicating that the market does not recognize the banks' current and future profitability. In fact, banks are more willing and able to support the real economy only when they have good profits. Banks are willing to lend because they have a strong desire to make profits; they are able to lend because they have the ability to lend, say, debt capacity and profitability; they dare to lend because the borrowers have proper operations and good prospects and have sufficient repayment capacity and the ability to pay interest; they will lend because they have strong risk identification and management capabilities.
Of course, affected by the Covid-19 pandemic, it is still necessary for commercial banks to give a phase of appropriate concessions to some SMEs with temporary operating difficulties. In this regard, we also need a proactive government. Apart from giving instructions, it needs to provide guidance and subsidies to stimulate the market so that commercial banks can still obtain relatively favorable development opportunities with the temporary concessions.
In short, the most crucial thing is that, under this premise, it is beneficial to support the high-quality development of the real economy by allowing banks to efficiently allocate resources in the market.
III. REGULATING THE DIRECT FINANCING MARKET
There is a lot of work to be done to achieve high-quality development of the real economy through financial support.
The first is to vigorously develop a multi-level capital market, in addition to the stock market, but also to develop a variety of policy support to guide the development of venture capital and other forms of equity investment to support scientific and technological innovation and industrialization of those findings. Policies, on the one hand, should be conducive to activating the market and encouraging more subjects to participate in venture capital. On the other hand, should contribute to suppressing irrational high valuation speculation and solidifying the foundation of science and technology innovation and venture capital.
China's direct financing market started late, and the society, including the industry, still has little knowledge of various types of financing methods, often viewing them simply as a means of speculation. Participants in the direct financing market can be divided into four categories: investors, financiers, traders, and intermediaries.
Theoretically, traders are also investors, but the purpose and logic of traders' investment are different from that of investors in the original sense. In the stock market, for example, investors invest in listed companies and look at the value of the companies; traders only trade stocks and focus more on the changes in market trends, while the value of the companies is secondary. The financier's purpose in the direct financing market is only to raise funds to meet the capital needs of its own operations.
But many investors are now turning into traders and have no desire to be with their invested companies for the long haul. Some financiers, however, see public financing as a way to make money. All these phenomena distort the behavior logic of the direct financing market and cause some market risks from time to time, which affect the development of the real economy. Therefore, it is necessary to prescribe the proper remedy and introduce policies to regulate and guide so that direct financing can better serve the high-quality development of the real economy.
Secondly, the banking industry should improve its asset and liability management capabilities. Now the assets and liabilities of a commercial bank are increasingly diverse. Credit assets only account for about half of the total assets, which means that banks support the real economy not only through credit, and the community should no longer think that banks only provide loan services and should not ask banks to lend whenever financial support for the real economy is needed. Banks should make comprehensive and flexible use of diversified assets, liabilities, and payment and settlement functions to provide a full range of financial services for the real economy.
The bond is an important way for banks to participate in the direct financing market, and banks are also the main providers of liquidity in the bond market. All types of banks need to pay further attention to the internal bond business structure building, team forming, and the improvement of the institutional process, especially the need to strictly segregate the risks of trading and investment. It is necessary to distinguish the different logic and key risk of wealth management and asset management.
Wealth management is to manage wealth for investors, investment is not an end but only a means. The purpose of asset management is to invest in assets and to find capital for them. The standpoint is different, and so is the logic of risk management.
These two types of businesses work differently in supporting the real economy. Now many departments or personnel speaking of supporting the real economy tend to equate wealth management funds with credit funds, which is a risk hazard that can be planted.
In addition, importance should be attached to the imperial role of bank payment and settlement and various types of transaction business innovation in supporting the high-quality development of the real economy.
Third, we should conduct an in-depth study of the new situation, new development format, and new characteristics of the real economy, adapting financial products, services, and risk management models to the changes. In particular, some emerging science and innovation enterprises and new industries have different operational characteristics and risk logic from traditional industries. Supporting these subjects and the real economy is not simply a matter of lowering the risk threshold, but of carefully studying the new aspects of these industries and taking new methods and service products without lowering risk management requirements.
China is an economy with mainly indirect financing, and although it is vigorously developing a multi-level capital market, it will be a long process. In the face of the unprecedented changes in a century and the complex international competition situation, accelerating the development of scientific and technological innovation and strategic emerging industries requires new ways of credit support from commercial banks. In this regard, not only the efforts of commercial banks are needed, but also the active support of regulatory and other government departments.
A high risk of failure and a lack of an effective credit improvement base characterize emerging industries. We must invent new revenue models and risk compensation mechanisms to guarantee loss coverage to provide credit support for such enterprises. This requires political support as well as some special treatment in fiscal taxation and accounting. Onthe other hand, the government needs to establish corresponding credit improvement mechanisms to give commercial banks appropriate risk protection.
This article was first released by Caijing magazine on November 7, 2022. It is translated by CF40 and has not been subject to the review of the author. The views expressed herewith are the author’s own and do not represent those of CF40 or any other organizations.
