Financial Reforms And Developments In China

Cheng Siwei

• Publisher: WSPC
• Year: 2013
• ISBN:
  9789814578691
• Topic: Biological Sciences
• Subtopic: Science General
• Index: Biological Sciences

China has initiated and implemented its economic reforms for over 30 years, however, the comprehensive economic reforms and opening up is still unfolding. The author was a state leader, who has personally engaged in China's economic policy-making process from 1999 to 2008, and is an economist, who has deeply studied and thought over China's financial reform in various aspects. This book summarizes the results of the author's research on China's financial reforms, adopting the fictitious economy theory, in the past 10 years.

Financial Reforms and Development in China focuses on the developmental process and main features of the fictitious economy; the essence and the law of the fictitious capital (including credit capital, knowledge capital, social capital, etc.); the relationship between the fictitious economy and the real economy. The book attempts to use the fictitious economy theory to analyze the chaos and self-organization of financial system, financial crisis, inflation and deflation, economic globalization, and knowledge-based economy and society.

The book, comprising 12 chapters, covers all the main aspects of China's financial reform and provides readers with a practitioner's reading of China's financial markets, including financial globalization, the financial system and product innovation, financial crisis, financial security, financial regulation, universal banking, capital markets, money market, commercial banks, rural finance, futures markets, foreign exchange markets, financial derivatives, equity markets, insurance and so on.

The book is invaluable from the perspectives of its contribution to economic theory, in developing an understanding of the actual workings of China's economic and financial reforms in the past decade, and in forecasting future developments in China's economy and financial markets. It will appeal to academics, undergraduate students, graduate students, professionals, general readers interested in finance, the financial reform and market in China, as well as China's development and the fictitious economy.

Contents:

• Introduction: Finance from the Perspective of Fictitious Economy
• Financial Globalization and China's Financial Reform
• Causes of Deflation and China's Countermeasures
• Systematic Analysis and Proposals for Improvement and Modification of China's Stock Market
• Strategic Thinking about the Development of China's Money Market
• The Reform of China's State-Owned Commercial Banks: Objectives and Measures
• Seeking Effective Ways to Develop Chinese Rural Finance
• Status Quo and Prospects of China's Venture Capital Industry
• Analysis and Suggestions on Chinese Housing Reform
• Global Financial Crisis and the Strategy for China
• The Reform of RMB Exchange Rate System
• Conclusion: Three Directions for China's Financial Reforms

Readership: Academics, undergraduate students, graduate students, professionals, general readers interested in China's financial reform, financial market, China's development, fictitions economy.

Chapter 1

Introduction: Finance from the Perspective of Fictitious Economy

Fictitious economy, in contrast with the real economy, is a mode of economic activity with its own structure and evolution process, existing in the economic system. Fictitious economy is a combination of economic activities, related to the circulatory movement of fictitious capital supported mainly by the financial platform, and the relationships resulting from these activities.

Fictitious capital is a kind of resource, established on the basis of a trust relationship, without a real or currency form, without value in itself, but capable of producing profit. The advent of ownership certificates or titles has reflected the dual nature of capital ownership, realized the separation of ownership and the right to use, giving rise to fictitious capital. Fictitious capital consists of three categories: credit capital, knowledge capital and social capital, whose owners, though they do not have any real capital, they do have the ability to obtain the right to use it. As ownership certificate does not have any value in itself and is only the carrier of fictitious capital, it is called secondary fictitious capital.

The development of fictitious economy can be divided into five stages: (1) capitalization of idle capital, (2) socialization of interest-bearing capital, (3) marketization of securities, (4) internationalization of the financial market, and (5) integration of international finance.

Fictitious capital moves according to the following laws: (1) Exchange — re-exchange represents the major movement for fictitious capital; (2) Uncertainty of fictitious capital makes speculation possible; (3) Inflation of fictitious capital could bring about certain risks; (4) Movement of fictitious capital does not create social wealth directly.

Fictitious economic system possesses the following characteristics: (1) complexity, (2) metastability, (3) high risks, (4) parasitism, and (5) periodicity.

The focus of research on fictitious economy includes studying: (1) the relationship between the fictitious economy and the real economy; (2) institutional factors involved in fictitious economic activities; (3) risk generation and prevention in fictitious economy; (4) evaluation system in fictitious economy.

Research methods for fictitious economy include: (1) the method of complexity science; (2) the method of uncertainty decision making; (3) group decision making method; (4) complex data analysis supporting decision making; (5) the method of mathematical finance; and (6) computer simulation method.

Fictitious economy refers to various kinds of activities in which fictitious capital is involved based mainly on the financial platform,^[1] while virtual economy refers to economic activities supported by information technology, including the well-known electronic commerce. However, in recent years, it is more commonly defined as the generation and transference of virtual wealth in cyber games especially in foreign countries. For example, Wikipedia’s explanation for virtual economy is as follows: “A virtual economy (or sometimes synthetic economy) is an emergent economy existing in a virtual persistent world, usually exchanging virtual goods in the context of an Internet game. People enter these virtual economies for recreation and entertainment rather than necessity. However, some people do interact with virtual economies for “real” economic benefits.”^[2] On the homepage of Virtual Economy Research Network, it is clearly indicated: “Some online resources, such as domain names, virtual objects in community website and powerful characters, are similar to real goods and real persons that could only be controlled by one person for a certain period of time. Nowadays, virtual goods and properties are being bought and sold by tens of thousands of people with real money in many different markets all around the world.”^[3] There is also some research regarding this aspect in China.^[4]

Studies on virtual economy in China started in 1997. I was then the director of the Management Science Department of the Natural Science Foundation of China and together with the Mathematics Department, we commenced an important research project called “ Mathematical Finance, Financial Engineering and Financial Management” at the beginning of 1997. After the breakout of the East Asian Financial Crisis in early July of 1997, the author and some other scholars had tried to analyze it by applying the theory of fictitious economy.^[5,6] Studies on fictitious economy flourished especially after the objective of “to deal correctly with the relation between fictitious economy and the real economy”^[7] was voiced at the 16^th National Congress of Communist Party of China. Up to now, a total of five national seminars about fictitious economy have been conducted and thousands of articles on this topic have been published on domestic newspapers and magazines by Chinese scholars.

Among researchers of fictitious economy in China, three schools of thought or three types of views exist.

The first school believes that fictitious economy is a fictitious value system. Most scholars of this group are traditional economists. As in traditional economics, economy is considered to be a value system itself, which naturally makes fictitious economy a fictitious value system.

The second school holds that fictitious economy is just finance. Most scholars of this group are people in the financial world. To them, fictitious economy is finance and some of them even think that it is not necessary to use the term “fictitious economy”.

The third school defines fictitious economy as a mode of economic activities, with its own structure and evolution process, existing in the economic system that is in contrast with the real economy. In their opinion, fictitious economy is the software of the economy. This view was first mooted by the author and it has gained the approval of some scholars of system engineering, natural science & technology.

I believe that research on fictitious economy in China is still at the stage of exploration and no fixed model has yet taken shape. The guideline of “letting a hundred of schools of thought contend” should be pursued and scholars should be encouraged to do research from different perspectives. Coexistence of different thoughts would surely lead to the same destination through different ways. However, as the three schools differ in research philosophies and methodologies, though they may complement one another, only through practice could we discover the correct or most appropriate view or views that suit China’s conditions.

I for my part have conducted some exploratory work, trying to apply the principles of complexity science and financial studies — on the various aspects namely the securities market, money market, foreign exchange market, futures and options market, property transactions market, financial crisis, inflation and deflation, commercial bank reform, rural finance, real estate finance, etc. and the associated problems of chaos and self-organizing abilities — under the perspective of fictitious economy. Theories and methods concerning the research of fictitious economy are also involved.^[8,9] The aim is to promote the reforms and development of China’s financial industry. Each chapter of this book contains to some extent some preliminary research achievement of the author.

1.1. The Emergence and Development of the Theories on Fictitious Capital Theory

1.1.1. Marxian Fictitious Capital Theory

In his monumental work Das Kapital (Volume 3), Marx put forward the theory of fictitious capital.^[10] As Volume 3 of Mark’s work was collated based on Marx’s manuscript and published by Engels after Marx’s death, we could thus say that this is also Engels’ contribution to the theory.

According to Marx, the term “fictitious capital” was first used by W. Leatham (a Yorkshire banker) in his Letters on the Currency (Second Edition, 1840, London), where it refers principally to ‘short drafts’ or notes. In the Fifth Section of Das Kapital (Volume 3), especially after the illustration of credit in Chapter 25, Marx has conducted an in-depth systematic research on fictitious capital. Marx’s theory about fictitious capital could be simply summarized into the following two points:

Firstly, Marx believes that fictitious capital is produced or created on the basis of loan capital or interest-bearing capital and bank’s credit system.^[11] Under capitalist production, currency could be transformed into capital, through which it changes from one with a fixed value to one with an increasing value. The utility value of currency then is its transformation into capital which produces profit. Therefore, currency, under such circumstance, could be considered as a special commodity, whose owner may lend it to people in need of capital subject to certain laws and conditions and then get back in return both the principal and interest after a certain period of time, according to their agreement or contract. Currency thus becomes a kind of capital that bears interest ( interest-bearing capital), while credit is the basis for loans.

However, when currency is lent out as an interest-bearing capital, the owner would not get anything equal in return as they would usually do for ordinary goods. What they get is a certain form of guarantee that promises to pay them back both the principal and interest. This guarantee (usually in written form) is the so-called fictitious capital. After the advent of banks, quite a lot of idle money in the society is gathered together and used as interest-bearing capital. As the use of the credit system gets expanded, banks begin to give out many kinds of credit instead of just loans, thus enlarging the variety of fictitious capital. According to Marx, fictitious capital should include bank credit such as bank notes, value of capitalization such as securities, real estate mortgage bonds, etc.

Secondly, Marx believes that fictitious capital does not have value in itself but has the ability to produce profit through circulatory movement, that is, an ability to produce some kind of surplus value.

According to Marx’s theory of labor value, the value of something’s utility is the socially necessary labor time that is needed to produce this utility value. Since fictitious capital does not include any labor in it, it has no value at all according to this view.

Marx has also pointed out that surplus value could only be generated through real economic activities: capitalists use currency as capital to exchange for production factors such as employed labor, raw materials, factories, machines, etc., which, through the production process, are used to produce goods that become commodities through a circulation process, after which these commodities are changed back to currency through the exchange process. During this circulatory process in the real economy, surplus value is produced and so is profit. This is a fundamental point of great importance in Marx’s work.

In Marx’s Das Kapital (Volume 3), he has pointed out that fictitious capital could also produce some kind of surplus value through circulatory movement. But strictly speaking, this kind of surplus value is not directly “produced” by fictitious capital but paid in the form of interest to the owner of fictitious capital by functional capitalist (industrial capitalist or commercial capitalist) from their profit (surplus value) according to the contracts between them. This is the reason why Marx has used the words “some kind of” for this concept.

Marx also thinks that capital has two characteristics: (1) It has to have its own value; (2) it has to be able to produce surplus value. As fictitious capital possesses the second characteristic, it is appropriate to call it ‘capital’; however, as it does not have the first characteristic, that is, it can not be used to purchase production factors through exchange, it is only a kind of fictitious capital.

We have to agree that Marx has been a far-sighted or a prescient man. It was not that easy to put forward such theory about fictitious capital in the 19^th century (He was born on May 5, 1818 and passed away on March 14, 1883.). Of course, after over a hundred years, our understanding of fictitious capital has become much wider and deeper.

1.1.2. Definition of Fictitious Capital

I believe that fictitious capital is a kind of resource, established on the basis of a trust relation, without a real or monetary form, without value in itself but capable of producing profit. It could be used to acquire the right to use real capital but it has to promise to pay the owner a certain amount of money in return or to share risk and profit together with the owner. For example, bonds belong to the category of “promising to pay the owner a certain amount of money in return” (or ‘promissory note’) while stocks belong to the second category, that is “to share risk and profit together with the owner”. The most important thing is that the advent of ‘ownership certificate’ of ‘certificate of title’ has reflected the dual nature of capital ownership, realizing the separation of ownership and the right to use, which gives rise to fictitious capital.

As we all know, in real economy the exchange process is the exchange of both the ownership and right of use of currency with the commodity bought and these two rights are inseparable. When someone has bought something with a certain amount of currency/money, he/she would no longer enjoy these two rights. But as capital has the duality feature, it could be divided into ownership and right of use, and these could be separable. For example, if someone purchases the bond of a firm with currency, he/she has given the right of use of the currency to the firm. Of course, the firm would give him/her an ownership certificate — the bond — which is the proof for the ownership of part of the currency concerned and would thus give him/her the right to ask for the principal plus interest from the firm. Stocks are proof that the owner enjoys shareholder rights but the shareholder also has to undertake shareholder obligations. As to real estate mortgage bond or bill or certificate, it proves that the ownership of the real property in question has passed to the financial institution or person who has accepted the mortgage arrangement. The mortgagor borrower has reserved the right to use the real property in the agreed period of time, but if he/she fails to return the money on time, he/she would also lose the right to use it. So it’s quite obvious that it is exactly the separation of ownership and right of use that has given rise to fictitious capital. This is a very important point, which features prominently in the analysis of many related problems.

1.1.3. Major Categories of Fictitious Capital

There are two pivotal points regarding the creation of fictitious capital. First is that real capital has acquired universally accepted evaluation in symbols of value. The second factor is the capitalization of such “soft” factors as science & technology, education and management, which would make it possible to view and evaluate these “soft” factors the way we do for traditional capital — and thus fictitious capital is created. Through such a construction model, the relationships between various kinds of fictitious capital and real capital with valued symbolic evaluation become matched in an economic sense. And with such a relation, we would be able to see the operation and efficiency of the fictitious economic system, which makes this relation the core of many other relations in the fictitious economy.

From the perspective of “soft” factors, fictitious capital could be divided into three categories.

First is credit capital. This type of fictitious capital had already existed in Marx’s era and has become the foundation of the financial industry today. For example, banks get deposit through credit, firms issue bonds and stocks with their credit and people who t...

Table of contents

• Cover
• Halftitle Page
• Title Page
• Copyright Page
• Preface
• Contents
• Chapter 1: Introduction: Finance from the Perspective of Fictitious Economy
• Chapter 2: Financial Globalization and China’s Financial Reform
• Chapter 3: Causes of Deflation and China’s Countermeasures
• Chapter 4: Systematic Analysis and Proposals for Improvement and Modification of China’s Stock Market
• Chapter 5: Strategic Thinking about the Development of China’s Money Market
• Chapter 6: The Reform of China’s State-Owned Commercial Banks: Objectives and Measures
• Chapter 7: Seeking Effective Ways to Develop Chinese Rural Finance
• Chapter 8: Status Quo and Prospects of China’s Venture Capital Industry
• Chapter 9: Analysis and Suggestions on Chinese Housing Reform
• Chapter 10: Global Financial Crisis and the Strategy for China
• Chapter 11: The Reform of RMB Exchange Rate System
• Chapter 12: Conclusion: Three Directions for China’s Financial Reforms
• Index