Gao Jian, former executive vice president of China Development Bank: Blockchain is hot, but contains many elements of a future bubble

Source: Financial District 1

Editor's Note: The original title was "Gao Jian, the Father of China's Bond Capital Market, on the Financial Revolution and FinTech"

On December 5, the Hainan Free Trade Port Digital Economy and Blockchain International Cooperation Forum was officially held. At the meeting, Gao Jian, the founder of China's bond capital market and former executive vice president of China Development Bank, delivered a keynote speech entitled "Financial Revolution and FinTech". The following is the original speech.

I have participated in many conferences recently, and I feel that the blockchain is very hot, which is of course a good thing. The speech made by Minister Zhang Laiwu just now is very high-level. He talked about six industries and revealed the future of economic structure development. As economists, we study economics and find that we must find a foundation. This foundation is economic philosophy. The entire process of human society from natural space to social space to knowledge space to digital space is determined by its internal laws. Among them, knowledge plays the most important role, and traditional factors of production are nothing but carriers of knowledge, and they have different roles in different times. Everyone attaches great importance to science and technology, and science and technology are productivity. There is no doubt about this. However, from the history of social development, science and technology are not the most important to the progress of human society. The most important thing is the legal system and culture . On the basis of the legal system culture, there are financial progress, and then there is technological progress and economic growth.

As early as 1023, China had a friend in the Northern Song Dynasty. With paper currency, it showed that the concept of payment-based early finance had already existed, but China did not spontaneously evolve into modern finance. Modern finance developed from medieval Europe. In medieval Italy, we all know that there are Banks of Siana, Bank of Venice, and Bank of Amafi, indicating that the currency business has developed into banking. During this period, banks were a relatively mature form of the currency business in Marx's Capital. The currency business starts with the operation of gold and silver, including the storage, transportation, settlement and settlement of gold and silver. One of the deposits was loans, which were early bank loans. The registration certificate issued during transportation and storage, on behalf of the storage order, was later converted into banknotes. Simply put, the banking industry has developed from this. China's Shanxi ticket number is an early form of the Chinese version of the bank. It wasn't the banks that were most influential in Italy in the Middle Ages, but the stock companies.

Everyone knows that the Medici family sponsored masters of art such as Da Vinci, Michelangelo, and Raphael during the Renaissance, because the church was the richest and most credible at the time. So ordinary people are willing to put their money in the church. When the church has the money, it promotes religious knowledge. Early artists painted religious stories. There are so many famous renaissances related to this family. This family organization is the earliest joint stock company in the world. Of course, this joint stock company and later limited liability companies are still different. Later, because of the law of limited liability, and the early system of forgiveness of debt. Only companies in the form of companies developed. Since ancient Greece there has been debt forgiveness to solve the war of slave resistance. The emergence of British individualism, personal property rights, and common law has gradually formed civil and commercial law, which have laid the foundation for financial development. Western scientific and technological progress is still based on ancient Greek philosophy. There was the earliest liberal thought in ancient Greece, which attached importance to the causality of affairs . At the same time, logic was developed, and the principles of logical reasoning were established. These rational subjects based on causality have promoted the development of positivism and logical positivism, and have become the methodological foundation of modern science.

In 1033, the first university in the world was established in Bologna, Italy. Schools like China existed before 2000, but they all talked about Confucian Confucianism, not science. Because we still lacked this element of scientific thought, that is, the ancient Greek philosophical thought. In the early days of the University of Bologna, there were two departments: the law department and the anatomy department. The world's first anatomical case took place there, and the Faculty of Law was established by scholars of Roman law jurisprudence. There is also a very important thing to say is that in the management of the Venetian arsenal, there is a double entry for the first time. Without a joint stock company, no early money management industry or banking industry, no way of keeping books, no concept of financial management, and no modern enterprise. It can be seen that these quiet developments have laid an important foundation for the emergence and development of capitalism in the future. The financial industry subsequently moved from Italy to the Netherlands. At that time, everyone knew that the Netherlands produced tulips. The Netherlands was a large trading country in the world and its commodity economy was very developed. Therefore, tulip production, sales, auctions, and futures were very influential in the history of world finance.

Since then, finance has developed in two directions. One is Wall Street in the United States. The Dutch were introduced to the United States for finance, and Wall Street gradually became a world financial center. The other is the direction of centralization, that is, the financial field is expanding, banks are becoming larger and larger, and some joint-stock commercial banks have become central banks. The Bank of England was the earliest central bank. Its first mission was to raise funds in the name of the state for the issuance of national debt. Financial development must have credit and culture, as well as the legal system foundation. The reason why China's Shanxi ticket number can exist for 500 years is also because of the culture of "loyalty, faith, righteousness" and so on. Because Guan Gong is in Shanxi and the people worship Guan Gong, the people have a credit culture. Finance can develop early with a credit culture.

Some people think that the emergence of capitalism was due to the Industrial Revolution and that the Industrial Revolution was due to technological progress. This view was gradually denied by modern historians. The emergence of the British financial and industrial revolution is not the most important basis for the occurrence of capitalism. First of all because of the existence of joint-stock companies, national debt and colonial wars, and the emergence of common law and civil and commercial law. Marx said that joint-stock companies are a powerful lever of capitalism. At the time the steam engine of the Industrial Revolution appeared, and those technologies were said to have existed. At that time, the steam engine was already available, but it was just that Watt could apply it at this time and become a practical and useful thing. So development is impossible without finance. Many people now go to Alexandria and discover a lot of ancient inventions. Now the steam engine was there. Needless to say, Da Vinci also invented many weapon designs during the Renaissance, because they were not used at the time. No one can help with funding, so the financial revolution accelerated the accumulation of capital. Because with stock bonds, scattered savings can be turned into investments that exceed the capabilities of a few individuals. There is also demand, which is an economic issue.

The scene just described by Minister Zhang is strictly demand. The demand at that time was due to the sharp rise in labor costs, and someone had an incentive to reduce labor costs, that is, to replace people with machines. Besides China, China did not actually have a financial market before the 1990s. We call financial depression. It is not unique to China. It is found in many countries and developing countries, as well as in Korea and Japan. We had two stock exchanges in 1990 and a debt market. In 1996, national bonds were issued through tendering, paperless, multi-variety, primary and secondary market integration, and a self-employed business system. However, the paperlessness of national debt is indeed related to technological progress. At that time, the exchange had already used the electronic trading system based on the IT revolution, so the national debt could be paperless. When the national debt was issued that year, 30 billion yuan was issued. In 1993, 16 trucks were shipped to various parts of the country. That was paper. Now 3 trillion, about 100 times, that is 1,600 trucks shipped to all parts of the country. This means that the progress of finance at that time was related to the progress of technology. In turn, this financial progress can be promoted.

Thanks to the government bond market, ten-year government bonds can be issued. What problems does long-term bonds solve? Due to the success of the long-term government bond issuance, after the departure of President Chen Yuan of the Bank of China in 1998, he began to issue market-oriented financial bonds. CDB financial bonds are issued on the basis of national debt and issue long-term bonds. So after 2000, the bank did two things. One is to set up finance, cooperate with local governments, and support China's infrastructure development. So if you look at infrastructure across the country, including Hainan Province, you can see that many loans, especially after 2000, were loans from the Bank of China, which greatly changed China's infrastructure.

In the early 1980s and 1990s, why didn't you invest a lot of money in infrastructure? At that time, the stock market did not exist in the 1980s, and the bond market developed in the late 1990s. In the development of this bond market, CDB has long-term debt, but commercial banks do not. Therefore, CDB took the lead in supporting infrastructure development. China's economic development is, first of all, a financial revolution, which can also be called a revolution. But financial innovation and development have laid the foundation for economic development. Our investment in the 1980s was very small, because we mainly used foreign capital. In the 1990s, it was relatively higher, but not much. After 2000, the development of the financial market, especially in the 1990s, only met this condition.

The so-called financial revolution generally refers to a movement focusing on financial deregulation, financial innovation, and financial product diversification from the United Kingdom to the United States in the 1960s. It continued for a long time until the United States later developed VC. And venture capital. Everyone knows that VC and venture capital have promoted the IT revolution in Silicon Valley, Boston, and the United States. But there is still demand in it. The industrial revolution just mentioned reduced labor costs. Shanxi ticket number is also a scene. What is the demand? It is the northern soldiers. It is necessary to protect the northern frontiers and serve the army. The American IT revolution has a Cold War background. The competition between the United States and the Soviet Union requires the United States to develop technology. The Soviets have reached the moon, and Americans have to compete with the Soviet Union, so there is a real need. This scenario is specific demand, but the entire demand is definitely economic demand.

The emergence of Bitcoin is not a simple progress, but is based on many advances. Who in the bitcoin inventor Satoshi Nakamoto is still arguing, I guess it is probably the American, it is he who has clearly seen the problems in the financial field and saw the increase in transaction costs brought about by centralization. This is its demand, his scene, he has made such progress.

We in China are now experiencing economic downturns. In fact, this is a financial issue, not a technology issue or even an economic issue. It is essentially a financial problem, and financial problems are related to changes in our economic structure. We are now developing emerging industries, which are the same as the traditional industry department. Who are the emerging industries doing? Private enterprises, small and medium-sized enterprises, Wanzhong entrepreneurship, Wanzhong innovative enterprises are doing. Most of the traditional fields are state-owned enterprises, which have hard assets and credit. Then SOEs were in traditional industries. Therefore, banks correspond to state-owned enterprises and enterprises with hard assets. Who will respond to the emerging industries that will develop on this side? In the past, it was a non-bank, and took many turns. Finally, through trust, bond market, leasing, insurance, various products, asset securitization, and finally to private enterprises. The cost is high, but it leads to internal circulation of funds. Everyone's understanding of finance is still very superficial. Many people think that finance is financing. It is enough to have money. The core of finance is technology and technology. I don't agree with this view that finance is a very complicated matter. But finance is underdeveloped now. The financial market has its own development rules. On the one hand, we need financial support for the real economy, not only seeing the side of financial financing, on the other hand, we forget the deepening of finance itself, financial theory must be deepened, our financial market is not deepened enough, Financial markets with banks as the main body do not meet the requirements of financial institutions to reduce transaction costs. In other words, it is necessary to develop from a bank to a capital market and a corporate bond market, including stock bonds. The corporate bond market is the largest market because of the relatively high cost of banks.

Capital markets are nothing more than saying that non-standard products become standard products. Bonds are the securitization of claims and stocks are the securitization of equity. Futures are forward securitizations, and options are uncertain securitizations. Turning into securitization, standardization can facilitate transactions, and the regulation of the development of the financial industry is to reduce transaction costs. There are many opportunities in the market, including hedging and speculation. These are two important functions. This is not speculation, but speculation that finds opportunities. Many of us call innovation but not innovation, it is arbitrage. Financial innovation has specific meanings. I mentioned earlier those that have had an impact in history, including blockchain. These are innovations. But many are arbitrage, which is to find market opportunities and obtain cost-free arbitrage benefits. Therefore, our market cannot develop soundly.

The blockchain is hot now, but I also want to remind everyone that our heat contains many elements of the future bubble. The blockchain itself is technology, but it is a technology to solve the problem of transaction costs. It is through distributed accounting. Everyone leaves records that can be traced to the source and can go to the center. These are to greatly reduce transaction costs.

How can you reduce transaction costs? There are many scenarios without pure technologies that cannot be applied. By the 2008 US subprime mortgage crisis, the financial revolution that began in Britain in the 1960s came to an end, because finance itself could not find a better way to solve its own problems. At the time, Goldman Sachs created those CTOs, CDSs, and these asset securitization products, which investors did not understand, and eventually led to a crisis. The opportunity for further development of finance is to integrate with finance. This person who combines technology from the beginning to find finance people, finance people and many people who do IT have little interest in these. Now people who want to be financial and economic people are going to create scenes for them and guide people who are technology. These two aspects complement each other. In the blockchain technology, algorithms and computing power are relatively high. We should say that they are not the best. We need to improve these things. The improvement should be combined with a wider range of scene applications. The application of blockchain technology in China is very good, but if we do not increase its technical content and increase its scene applications, it may appear in a certain period of time. foam. The American IT revolution has not ended to this day, but a bubble has long since appeared.

Today I said that the development of finance has its objective laws. In fact, the combination of finance and technology must follow the laws of financial development. The emergence of finance is to manage risk. Finance itself is a risk-bearing department. Finance cannot be without risk, because there is finance only when there is risk. What does finance use to manage risk? It solves risk problems by diversifying risks, hedging risks, managing risks, strict internal control, and credit. Now technology has added new methods to it, so it greatly reduces transaction costs. I think blockchain and finance are a natural combination, because its starting point is in finance, because the Bitcoin itself is a financial thing. The development of China's blockchain industry in recent years has laid a good foundation. A recent speech by the General Secretary and a meeting of the Political Bureau of the Central Committee provided a greater impetus. I think we have the opportunity. The background I talked about is that our economic growth is inseparable from science and technology. Science and technology cannot be separated from finance. Finance cannot be separated from the legal system, culture, and credit foundation. It requires the joint efforts of people in all fields. That ’s all for today, thank you all.