The essence of finance is intermediation, which is to convert savings into investment in a simple, direct and effective way to realize the exchange of funds across time and space. The recorded financial history of human society can be traced back more than 7,000 years ago. In the seven thousand years of human civilization, the form of financial intermediation has changed a lot, whether it is the era of commodity currency or the era of credit currency, whether it is the “originate and hold” model of traditional commercial banks or the era of securitization The nature of investment banks’ “originate and distribute” (finance and distribute), which connects the surplus party of funds and the demand side of funds in different spatial and temporal dimensions, has never changed. In the long evolution of human civilization, finance is constantly changing.


What is good finance

Not all finances contribute to economic and social development. Economics and finance studies provide a lot of empirical evidence that financial development is conducive to economic growth. The theory of neoclassical economics also uses a large number of perfect models to prove that as long as financial intermediaries can achieve a reasonable and effective allocation of funds, more finance is conducive to faster economic growth. However, the real world is far from perfect. The financial intermediation process needs to reduce the “cost of trust building” caused by information asymmetry, moral hazard, or other reasons at both ends of capital supply and demand. Financial crises in human history have repeatedly reminded us that what we need is not larger finance, but better finance, and the criterion for judging whether a finance is good or bad is whether it can effectively reduce it The cost of financial intermediation.

It must be pointed out that the larger the scale of finance (the scale of financial assets or the scale of added value of the financial industry), the better, which is our understanding of the essence of finance One of the biggest misunderstandings. The starting point for good finance is to reduce the transaction costs that occur in the process of converting savings into investment. Throughout human civilization, the underlying logic of finance in different forms seems to be complicated or even obscure. Its deepest motivation is always to find a better intermediary way to reduce the transaction costs incurred in the financing process. Financial innovation, whether it is the introduction of new financial products and services, or the introduction of new transaction processes and operating methods, or the emergence of new forms of organization, if they can ultimately reduce the cost of financial intermediation, then they can better Supporting investment, innovation, growth, and economic prosperity, it is possible that after years of hardening, it will become a widely accepted financial product and service, standard processes and standard operations, the organization of financial activities, and a broader financialComponents of norms and standards. To reduce the cost of financial intermediation, it is necessary to reduce the cost of establishing trust due to information asymmetry or moral hazard at both ends of the fund. High-quality finance can significantly reduce the cost of building trust among participants in financial activities from the underlying technology of financial intermediaries, the organization of financial activities, business processes and regulations, and the construction of institutional infrastructure required for financial activities. Evolution does not necessarily mean upgrading. If you can not effectively reduce the cost of financial intermediation, any form of financial evolution is meaningless.


The biggest shortcoming of China’s financial system

Evaluating the changes of China ’s finance since the reform and opening up for more than 40 years, we must take a longer time The dimension must return to the basic logic of financial evolution. It should be pointed out that, after forty years of rapid development, the finance of our era has not formed an “anchor” for pricing the credit market, capital market, real estate market, infrastructure investment, financing and other markets This is the biggest problem of China Finance 1.0. Without a market-oriented “pricing mechanism”, the financial system cannot smoothly perform the function of “price discovery” and use this as a basis to guide the effective allocation of resources. In this context, the rapid development of finance does not form a more effective support for the real economy. Instead, it leads to rising macro leverage ratios, unreasonable leverage structures, excessive financial intermediary chains, high financing costs, and systematic financial risk aggregation. Waiting for the breaking point that endangers the sustainable and healthy development of the economy and society. During the transformation of China’s economy from high-speed growth to high-quality development, China’s finance must respond positively to the breaking points that have emerged and are solidifying in the above financial intermediation process.

In fact, the price changes of financial assets or physical assets will have a significant impact on the smooth progress of financial intermediaries. At the theoretical level, economists Nobuhiro Kiyotaki and John Moore published a paper in the Journal of Political Economy in 1997 to construct a model to analyze physical assets or finance How changes in asset prices affect the real economy. In their model, physical assets or financial assets are used as bank credit collateral. When the asset price changes, the physical assets or financial assets will affect the value of the company’s collateral in the bank, which will The ability of banks to further obtain financing not only hurts the real economy, but also damages the health and stability of the financial system.

Qing Taki Nobuhiro (NobuhiroThe research of Kiyotak and John Moore has brought great inspiration to our understanding of China’s financial system. Since the large fluctuations in asset prices have caused substantial damage to the real economy and financial system, finding an “anchor” for asset pricing should be an important part of the infrastructure construction of the financial system. The biggest shortcoming of China’s financial system, as I mentioned earlier, is the lack of “anchors” for asset pricing.

Take the stock market as an example. Our analysis shows that the Chinese stock market seriously lacks the ability to reasonably price risks. For example, in the seventeen years between 2002 and 2018, the average market risk premium in China was 1.17%, that is, the average return on the stock market was only less than 1.2 percentage points higher than the return on risk-free government bonds. The market risk of China’s A-share market is obviously more than that. Over the past 100 years, the average market risk premium of the US stock market has remained at around 6%. Without the ability to form a reasonable price, for a long time, those high-quality and high-growth companies cannot grow better because they cannot obtain a more reasonable valuation. Instead, a large number of companies with poor operating conditions and poor corporate governance use the pricing mechanism Distortion, gain benefits through system rent-seeking and financial fraud. The “reverse elimination” prevailing in the market makes it difficult for the Chinese capital market to realize the function of resource allocation. In such a market environment, the price of stocks is often not determined by the fundamentals of the enterprise, which will inevitably cause ups and downs in stock prices and cause serious damage to the financial system and the real economy.

Taking bank credit as an example again. Because of the existence of double interest rate and rigid payment, coupled with endorsement by local governments, state-owned enterprises enjoy unique advantages in terms of bank credit availability and loan costs. The financial system has not achieved the principle of competition neutrality in the allocation of funds. According to our analysis of listed private enterprises and state-owned enterprises, under the same circumstances, when financial institutions provide loans to private enterprises, the average loan interest rate will be 1.38 percentage points higher than that of state-owned enterprises. Due to various institutional obstacles, China’s formal banking system has not formed an “anchor” for pricing credit risk. The existence of such a “dual-track system” in credit pricing seriously distorts credit risk pricing, making it difficult for the formal banking system to realize the function of rational allocation of credit resources.


The significance of launching publicly-raised REITs

China ’s economic development has long relied on real estate and infrastructure investment. Taking real estate investment as an example, from 1999 to 2018, China’s real estate investment increased by more than 30 times. In 2018, the cumulative value of real estate investment in China exceeded 12 trillion yuan,The year-on-year increase was 9.5%, an increase of 2.5 percentage points from the 7% in 2017. Taking real estate and infrastructure as collateral has become the main method of credit expansion in China ’s economic and social life . Most real estate and infrastructure investments are closely related to local governments, and land sales revenue is one of the important sources of local fiscal revenue. However, with the transformation of China’s economic growth model, credit expansion with land, real estate and infrastructure as collateral is difficult to become the engine of further growth of the Chinese economy in the future. In the medium- and long-term, there has been a tremendous change in consumer demand brought about by the rapid population aging. The savings rate has fallen and real estate prices and investment have declined. With the increase in urbanization rate, changes in industrial structure and the reconfiguration of labor force, Investment, public service system construction, real estate investment and urban infrastructure urgently need to be optimized. In order to improve the investment efficiency of real estate, infrastructure, and public service systems, accurate price signals are extremely important. China needs an “anchor” for real estate, infrastructure pricing and local government credit pricing. Establish the function of real estate market, infrastructure investment and financing market and credit market price discovery, and guide the effective allocation of resources.

A research team led by Harvard University economists Edward Glaeser and Andrei Shleifer published an article in the Journal of Economic Perspectives in 2017 Research articles on the Chinese real estate market. Using 2000 census data and per capita housing area growth data from 2000 to 2010, they found that at the prefecture-level city level in China, there is a very significant negative correlation between per capita GDP and per capita housing area growth . Cities with relatively backward economic development (measured by GDP per capita) had a larger increase in per capita housing area from 2000 to 2010, showing more aggressive real estate investment; while relatively economically developed cities were less aggressive in real estate investment. Obviously, local governments in backward areas regard real estate investment as the main driving force for economic growth, while also coveting the income from land sales. The economically underdeveloped regions do not have enough industry to absorb employment, attracting inflows of population, resulting in a high vacancy rate. Inefficient investment makes China’s housing prices very fragile, and the ups and downs of housing prices pose huge risks to the real economy and financial system. As of 2017, the annual sales area of ​​China’s commercial housing has reached nearly 1.7 billion square meters, and the per capita housing area has reached 40.8 square meters. The growth space of the incremental part in the future is relatively limited. The Chinese real estate market is entering an era of stock from an era of incremental. How to better revitalize huge stock assets?

Same feelingThe situation also appears in the field of infrastructure investment. With the increase in urbanization rate, changes in industrial structure and the reconfiguration of labor force, the existing industrial investment, public service system construction, real estate investment and urban infrastructure urgently need to be optimized. However, if there is no reasonable understanding of the city ’s population size and consumer demand and its future dynamic changes, it may lead to a large number of unreasonable real estate or infrastructure investments, resulting in improper allocation of financial resources, and financial intermediaries will not be efficient. Convergence of risks in the financial system. Now and in the foreseeable future, real estate and infrastructure investment will still be an important driving force for China’s economic growth. How can we improve the efficiency of real estate and infrastructure investment?

According to the basic rules of finance, the value of an asset (financial asset or physical asset) depends on the net present value of the future cash flow it can bring , Which is the net present value of future earnings. REITs are essentially the securitization of mature real estate industries in the capital market; they have both financial and real estate attributes. Through the development of REITs, the stock of assets and real estate assets formed by infrastructure investment, as well as a large number of incremental parts in the future, can be incorporated into the market-oriented resource allocation system as the underlying assets. Realize price discovery by conducting reasonable valuation, pricing, issuance, and secondary market transactions on them. If there is a more active secondary trading market, the price discovery function of the capital market will be tapped, and the market will price infrastructure assets or real estate relatively accurately, thus providing China’s real estate market and China’s infrastructure. A very important pricing anchor. After the pricing benchmark is provided, relatively reasonable pricing can be formed through market transactions based on the intrinsic value of the asset, thereby guiding the effective allocation of resources. From this perspective, we believe that REITs are one of the most important starting points for China’s financial supply-side reform in the future.

To reshape the finances of our time, we need a new financial development paradigm. This not only requires us to resolutely reform the business models of financial institutions and the products and services they provide, change the shape of the financial market and the financial regulatory system, but also requires us to upgrade our financial thinking and return to the correct understanding that has been formed for thousands of years. , Stick to common sense and remain in awe in the face of the general laws that have emerged in the course of financial evolution. To build finance well, we need to restore the original intention of finance through the perspective of rational analysis, and on this basis, redefine and build a new generation of China’s financial system, and find a solution to the “mystery of financial development” (ie, the cost of financial intermediation is not The fact that it has come down with the development of finance). REITs are good finance, and it is the right time to vigorously develop the Chinese REITs market!

(author Liu QiaoweiDean and Professor of Guanghua School of Management, Peking University)