Air conditioner curbs add to heat deaths – but renewables can help
When Japan shut down its nuclear power reactors in the wake of the 2011 Fukushima disaster, it asked its citizens to conserve scarce energy, such as by using fans instead of air conditioning during summer heat.
But that public-spirited conservation push – the kind of call being made across Europe this winter in response to gas shortages following Russia’s invasion of Ukraine – is estimated to have caused 7,710 premature heat-related deaths each year, most among Japan’s elderly, a new study has found.
The study covered the years 2011 to 2015, the period energy conservation measures in response to the nuclear shutdown remained in effect.
The data suggests that well-intended public policy aimed at curbing people’s energy use to limit climate change or tackle other threats could have unintended health consequences – with swift investment in renewable energy the best way to avoid them.
“People usually think energy saving is a good thing. It helps mitigate climate change and helps people save money,” said Guojun He, a study co-author and an associate professor at the University of Hong Kong.
But the data from Japan suggests “it’s probably a bad idea to restrict individuals’ energy consumption,” he explained.
“The policy objective should be substituting dirty, non-renewable energy with renewable energy (so) it doesn’t matter how much energy you consume.”
People power: monitoring pollution in China
Appeals to Chinese regulators via social media can reduce emissions violations by companies and bring down levels of air and water pollution, researchers from the University of Chicago have found.
The team used open data to identify violations and recruited volunteers to file public appeals for action to local regulators, via social media platform Weibo, and private appeals, via a government hotline or messages to government officials or firms.
The researchers received 1,161 official responses from nearly 3,000 appeals. Weibo appeals resulted in improved environmental performance by companies, as did the private ones, albeit to a lesser degree.
Shaoda Wang, assistant professor at the University of Chicago’s Harris School of Public Policy, tells China Dialogue: “Like other countries, China has set up various channels for citizens to report environmental violations, forcing local regulators to step up enforcement. Our study offers experimental evidence in relation to bottom-up participation in environmental governance by Chinese citizens.”
Power Conservation May Lead to Higher Mortality Risk, Study Says
Energy conservation policies may lead to higher mortality rates and other public health consequences, a new study shows.
Researchers estimated that about 7,710 people died prematurely in Japan each year during energy savings campaigns in the wake of the 2011 Fukushima disaster, as the government sought to avert widespread power shortages. Most of the excess deaths occurred during the hot summer months as elderly residents avoided energy-intensive air conditioning.
The study did not condemn energy conservation policies, which can encompass everything from carpools to power-efficient kitchen appliances, but said policymakers should be aware of the potentially unforeseen trade-offs. The authors recommended governments accelerate the transition to clean energy as adaptation measures like cooling become more pronounced due to extreme weather driven by climate change.
“In the short run, the government should consider promoting and providing subsidies for energy-efficient heating and air conditioning and compliances that use less energy but provide the same level of utility,” co-author and University of Hong Kong associate professor Guojun He said in an email. “In the long run, using renewable energy is the ultimate solution: we don’t want to reduce energy consumption, we just need to consume cleaner energies.”
Bury the U.S.-China Trade Agreement
The COVID-19 Default Time Bomb
BERKELEY/CHICAGO – Without a comprehensive debt moratorium, the COVID-19 pandemic will lead to a wave of uncontrolled sovereign defaults, especially among emerging and developing economies. Should that happen, global efforts to contain the public-health crisis will fail, and the current economic collapse may well turn into a permanent decline.
Rich and poor countries alike are facing an unprecedented economic crisis as businesses close and workers lose their income. A downturn of this magnitude can cause tremendous long-term damage, as critical economic linkages vanish. Scores of firms will close permanently unless urgent action is taken. To this end, the United States Congress recently passed a $2 trillion rescue package, while the Danish and Canadian governments, for example, are subsidizing 75% of the payroll of their countries’ small and medium-size enterprises (SMEs). China, meanwhile, has expanded credit and eliminated payroll taxes, and just announced a rescue package worth almost $1 trillion.
But COVID-19 poses even greater problems for emerging economies such as India and Mexico. There, the economic costs of social distancing are even higher than in the US and Europe, and vulnerable SMEs, with low cash reserves, account for a much larger share of the economy. Such countries also have far more precarious health-care systems. The funds required to support vulnerable workers and businesses, as well as to treat COVID-19 patients, could be as much as 10% of their GDP.
Where will that money come from? Some advanced economies, such as the US, can borrow much more at little extra cost. But some of that funding comes from foreign investors seeking financial safety, and some from US private investors liquidating their foreign holdings. In other words, the financing that America and other advanced economies need comes in part from countries like Mexico.
What’s more, unlike during the 2008 global financial crisis, every emerging and developing economy now needs to borrow at exactly the same time. So, even if Mexico were able to issue bonds, it would be competing with many other countries in the same situation. It is an unfortunate fact, but countries have no one else to borrow from but other countries.
Left to their own devices, financial markets will pick winners and losers. The winners will be those countries with enough capacity to issue safe bonds. They will be able to borrow huge amounts at rock-bottom interest rates. The losers will be the world’s Mexicos. In fact, such countries will be doubly damned: not only will they be unable to raise funds to deal with the crisis, but capital will also move away, as it has already started to, precisely because of borrowing by the US, China, and European countries. It is little wonder, then, that more than 90 countries have already approached the International Monetary Fund for financial assistance.
A cascade of disorderly sovereign defaults now, when developing-country governments need to spend huge sums to keep their citizens healthy and their economies on life support, would have enormous human and economic costs, and sharply diminish our chances of containing the pandemic. After all, to contain the virus anywhere requires containing it everywhere.
To avoid a catastrophic outcome, the world urgently needs strong collective action. The IMF estimates that emerging economies’ funding needs total $2.5 trillion, but this figure seems low. In any case, the resources of the World Bank and IMF are currently far too limited. Efforts to boost the Fund’s firepower – currently only $1 trillion – must be aggressively pursued.
In the meantime, the IMF should act to head off the coming wave of sovereign defaults by coordinating a broad debt moratorium. The moratorium would suspend all sovereign-debt repayments to private and public creditors by emerging and developing economies that requested such a freeze, and would remain in place until the health crisis passed.
Our estimates suggest that a one-year debt moratorium could free upwards of $1 trillion, or 3.3% of low- and middle-income countries’ combined income – vastly more than the estimated $14 billion that would be freed by the proposed moratorium on debt repayments to public creditors by poorer countries only. That would go a long way toward helping countries like Mexico and India tackle the current crisis.
Although some might object that a debt moratorium will stop most private lending to these countries, such capital flows have already stopped or reversed. And although a moratorium could lock such countries out of international capital markets for a long time, the stigma on this occasion should be much less, because the moratorium would be imposed as a result of a worldwide pandemic rather than fiscal profligacy. The IMF’s imprimatur should also help.
Private creditors will be more likely to agree to a moratorium once they understand that the alternative is a slew of uncontrolled defaults, which will not help their bottom line. A debt moratorium preserves the option of avoiding a formal debt restructuring if economic conditions improve after the pandemic.
A substantial share of this sovereign debt is now issued under local law, which can be modified. Debt issued under foreign law and without collective-action clauses is more problematic. In that case, sovereign-immunity laws in the US and the United Kingdom could temporarily be changed to permit judges to end lawsuits from holdouts against countries that the IMF certifies as unable to service their current debt owing to the pandemic. Such a solution would be in the social and economic interest of rich countries, too.
During Latin America’s debt crisis in the 1980s, it took almost ten years for creditors to enter into earnest discussions under the so-called Brady Plan. This time must be different. We need to coordinate a broad debt moratorium immediately to avoid another lost decade (or two) for the Mexicos of this world.
Tech Firms To Benefit From Innovation
Registration-based IPO reform to play key role in high-quality development
China’s A-share market is finally going to see the first initial public offering of a firm with dual-class shares, a special equity structure used by overseas public tech firms, which received the regulatory nod last month.
The China Securities Regulatory Commission, the country’s top securities regulator, said on Dec 24 that it had agreed the IPO registration of UCloud Technology Co Ltd, a Shanghai-based cloud computing services provider, signaling that the company will debut soon.
Upon a fully subscribed IPO, UCloud’s three co-founders will retain 23 percent of the company’s total shares but 60 percent of the voting rights because of the dual-class share structure.
This first A-share IPO allowing dual-class shares resulted from the optimization of listing standards on the sci-tech innovation board, or STAR Market, which debuted on the Shanghai Stock Exchange in July.
Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, said the IPO registration of UCloud reflects the STAR Market’s inclusiveness to innovative enterprises, which is unprecedented in the history of the A-share market.
“The biggest innovation of China’s capital market in 2019 was the launch of the STAR Market with the registration-based IPO system. This marks the determinant battle of capital market reforms and has profound implications,” Dong said.
For many tech firms with strong management teams, the dual-class share structure is critical, as it will guarantee founders’ control over the company despite enormous equity financing, according to Dong.
Other groundbreaking listing standards friendly to tech firms have also taken effect. As of Jan 7, one red-chip firm, which is based on the mainland but was incorporated overseas, had passed reviews for STAR Market IPOs and are awaiting registration with the CSRC, according to market tracker Wind Info. One firm yet to make profits is expected to get listed next week.
President Xi Jinping announced in November 2018 that China would launch the STAR Market and pilot the registration-based system. The country’s top leadership said this is an important move for China to both support innovation in key technologies and push ahead reforms in fundamental institutions of the capital market.
As well as attracting tech firms, the STAR Market is performing a role spearheading registration-based reforms such as those relating to market-oriented share pricing, market data show.
The STAR Market has removed the unwritten price-to-earnings ratio ceiling of 23 for IPOs and strengthened information disclosure to ensure investors are well-informed to price the offerings. Listed companies were priced at about 60 times earnings per share on average in 2019, according to Wind Info.
Also, eased secondary-market trading limits, especially the removal of price fluctuation limits during the first five trading days, have shortened the time of initial speculative trading and helped stock prices to reflect the value of listed firms faster, analysts said.
An index compiled by GF Securities that tracks stock prices of STAR Market-listed companies hit the highest level on the 11th trading day of the new board. By contrast, it took nearly 25 days for the ChiNext, Shenzhen’s innovative enterprise-heavy board that debuted in 2009, to stop the initial stock price surge driven by investor enthusiasm.
Based on the experience of the STAR Market, the country is ramping up registration-based reform efforts on other A-share submarkets.
On Dec 28, the nation adopted the revised securities law and amended new share sales arrangements to set the basis of registration-based reform across the whole A-share market step-by-step, with the ChiNext to be the next test board for the registration-based system.
The registration-based reform led by the STAR Market will play a key role in China’s high-quality development, according to analysts.
Unlike the past 40 years when industrialization powered China’s growth, the new economy backed by technological innovation will be the main driver of future economic development, said Xiao Gang, a national political adviser and former chairman of the CSRC.
To fit such economic upgrading, China’s bank-dominated financing system will also undergo major changes. The capital markets, with multilayered systems that cater to enterprises in different stages, will play a more important role, according to Xiao.
“New risks come with new technologies, so we need a financing mode whereby the fund provider and the fund receiver will bear the risks and reap the returns together. This is what capital markets do,” Xiao said at a policy panel at Tsinghua University in December.
Implementation of the registration-based system, meanwhile, will help the country’s capital markets to enhance their ability to serve the new economy by driving systemic reforms, according to Xiao.
Without the registration-based system, it would be difficult to either enforce stricter delisting rules or reform how the securities regulator functions, let alone intensifying crackdown on legal breaches and strengthening investor protection, Xiao said at a separate forum recently.
Looking ahead, analysts expect the market scale of the STAR Market to rapidly grow to accommodate tech giants, better performing its function of sharpening the country’s technology innovation capacity.
Li Daxiao, chief economist with Yingda Securities, said this would entail both a faster pace of IPOs and listing of firms with larger market capitalization and business revenue, such as those comparable to Ant Financial and ByteDance.
A report from GF Securities said between 160 and 180 firms are expected to list on the STAR Market this year, up from 70 last year, adding that the market may welcome its official index “STAR 50” in the first quarter.
Moreover, the “the sci-tech Q board” in the pipeline has big potential to coordinate with the STAR Market to promote the development of high-tech companies, said Xue Yi, a professor of finance at the University of International Business and Economics.
The Shanghai Equity Exchange said in December that it will establish the sci-tech Q board, where Q represents quotation, to nurture more companies suitable for STAR IPOs.
Companies above a certain size and with the potential to file IPO applications on the STAR Market in the next few years will be qualified to list on the Q board, whereby they could disclose company information, offer stock quotes online, and transact equities offline, the exchange said.
The Q board could address the weak link of the STAR Market whereas it cannot serve the financing needs of small high-tech companies, Xue said. “Information disclosure before IPOs will help mitigate information asymmetries and attract more investors, reducing financing costs faced by small high-tech companies.”
If the Q board’s quotation system grants companies the right to choose investors, it can go a long way toward maintaining their innovative capacity, as they could choose investors that attach less importance to short-term financial performance but encourage long-term innovation activities, Xue said.
For the STAR Market to become a real success, several reforms should be pushed ahead, such as introducing more long-term institutional investors, and formulating policies to address concerns of red-chip companies considering listing on the new board, said a report from the Evergrande Research Institute.
“The STAR Market has just started a groundbreaking journey, and there is still a long way to go to fulfill its ambitious commitment,” it said.
Interview With Lars Peter Hansen, Recipient Of Nobel Prize In Economics: Generally, The Advantages Of China‘s Economy Becoming More And More Open Outweigh The Disadvantages
TRANSLATION
Recently, at the Macroeconomy and Finance in China Conference held by the Macro Finance Research Program at the University of Chicago’s Becker Friedman Institute for Economics and Tsinghua University School of Economics and Management, National Business Daily interviewed Lars Peter Hansen, 2013 Nobel Prize recipient and David Rockefeller Distinguished Service Professor in Economics, University of Chicago.
Professor Hansen said that China’s economy is becoming more and more open, especially in the fields of capital markets, financial markets, and foreign investment. He feels that this is a very good policy and goal and hopes it can play out in these terms. Although China’s economy is enough to provide a buffer for some of the Chinese economy’s own turbulence, there will certainly be more uncertainties after Chinese market opening up. However, in general, the advantages outweigh the disadvantages.
Opening does not necessarily cause instability
In July this year, the Office of the Financial Stability Development Committee of the State Council of China launched 11 measures to open the financial industry on the basis of in-depth research and evaluation, including encouraging foreign financial institutions to participate in the establishment and investment of wealth management subsidiaries of commercial banks; relaxation of foreign insurance companies entry conditions, canceling the 30-year operating life requirement; allowing foreign institutions to obtain Class A lead underwriting licenses in the interbank bond market; further facilitating foreign institutional investors to invest in the interbank bond market.
However, there are also some concerns in the market: Will China’s greater financial openness threaten China’s financial security and stability? How can we find a balance between opening up, financial stability, and macro stability?
In this regard, Professor Hansen told the reporter from National Business Daily, “This is a very important and interesting issue. First, I want to state that I only understand some aspects of China’s reforms at a macro level, and I am not familiar with the specific details. But I do see that the Chinese economy is becoming more and more open now, especially in the fields of capital markets, financial markets, foreign investment, etc. I think this is a very good policy and goal, and I hope it can play out in these terms. ”
“Opening does not necessarily cause instability”, Professor Hansen believes, there are many reasons for this. For example, being more open to foreign investors may be able to better share market risks, and everyone can better resist and respond to insecurity. Certainty, companies can also get more financial support. From this perspective, these reforms can promote economic growth.
He said although China’s economy could provide more buffers for the turmoil, there will certainly be more external uncertainties entering the Chinese market after opening up. However, in general, the benefits outweigh the disadvantages, and he is pleased to see the Chinese government pursuing such reforms.
Additionally, Professor Hansen also mentioned at his age, it’s a wonderful miracle to come to China and meet individuals who are developing these technologies and applying them and see how smart they are in statistics, finance, and economics, and 45 years ago, there was none of that here.
A wise policy decision is to study uncertainty as much as possible
Professor Hansen is an important expert in dynamic economics. With the methods of macroeconomics, finance and statistics, he has been working at the forefront of economic thinking and modeling research. He has made many outstanding contributions in how economic entities respond to changing and risky environments. He has put a lot of effort into developing statistical methods that explore the interrelationship between macroeconomic indicators and financial market assets, and these methods have been widely used in empirical research in financial economics today.
Recently, his work has focused on uncertainty and its relationship to macroeconomic medium- and long-term risks, interpreting economic and financial data, and revealing the long-term importance of policy choices. Professor Hanson, Professor Sargent, and their collaborators have recently been studying methods for modeling economic decisions in an environment where uncertainty is difficult to quantify. They explore the importance of financial market models and characterize environments in which the beliefs of economic actors are fragile.
“From the perspective of a statistician, we mainly study how to interpret and sort out data,” Hansen told reporters. The world today is full of complexity and uncertainty. To try to solve these problems is very difficult. Even so, they still need to do economic analysis. Many people may simplify some situations when doing economic analysis, but he feels that it is important to explore these complexities.
He further pointed out that as statisticians and economists, they are trying to model individuals, groups, businesses. These economic entities will make various decisions. They must have a certain degree of forward-looking ability to be able to make smart decisions to deal with the complexity and uncertainty of the world. Economists also face the same problem when they are modeling, hoping to understand these market fluctuations and give a new interpretation.
Professor Hansen said, “The same is true for policy makers. When making policies, economists who can influence policies often pretend that they know all the answers, but in fact they do not know. So, a more sensible way to make policy decisions is to study these uncertainties as much as possible, and then give a reasonable explanation. How to overcome these uncertainties is what we focus on. I would like to quote from Mark Twain, education is the path from cocky ignorance to miserable uncertainty, and our academic research is to alleviate this pain for everyone. ”
Interview With Thomas Sargent, Recipient Of Nobel Prize In Economics: China Has Been A Leader In The Field Of Small And Micro Finance Applying Artificial Intelligence
TRANSLATION
Recently, at the Macroeconomy and Finance in China Conference held by the Macro Finance Research Program at the University of Chicago’s Becker Friedman Institute for Economics and Tsinghua University School of Economics and Management, National Business Daily interviewed Thomas Sargent, 2011 Nobel Prize recipient and professor of economics at New York University.
Professor Sargent mentioned China is at the forefront of the world in the field of fintech and has developed very rapidly. As an academic, he always aims to explore and understand things. And it’s very fascinating to observe an economy like China’s that’s seeing rapid changes in the overall financial landscape and seeing how it responds to it.
China plays a leading role in fintech
Over the past years, new finance including fintech, internet finance and blockchain have seen rapid growth, but also many challenges too. Regarding the supervision of the new finance industry, could you share your recommendations?
Professor Sargent answered that he saw some problems in blockchain, cryptocurrencies. For cryptocurrencies, there is lots of advertising and promise, which has gone ahead of what’s been realized. There are serious technical problems that involve the cost of running the system and many legal questions too.
About the application of artificial intelligence in the field of peer-to-peer lending and small and micro finance, Professor Sargent said, China’s really been a worldwide leader in applying artificial intelligence to internet funding and microfinance. It was very important in terms of lowering costs of doing transactions.
Professor Sargent also mentioned a colleague at MIT. “He believed that in many very poor societies, there will be huge benefits to getting very poor people access to loans which they didn’t have. For example, in very poor villages, who had ideas to start a business, but they couldn’t get the money. He and some other people were doing experiments to try and show how powerful it was. At a very low level, they didn’t have much money, but they showed they were very promising.”
“They set up systems in these villages where people could get a reputation for repaying even small loans. Because if they had a reputation for repaying, they could get the loans. If they couldn’t get the loans because they didn’t have the reputation. It’s like the chicken and the egg.
He also mentioned Ant Financial doing this. “It is with millions of people. Through artificial intelligence and machine learning build social credit system. China is the leader in this and it’s very exciting.”
Professor Sargent said, as an academic, he always aims to explore and understand things. And it’s very fascinating to observe an economy like China’s that’s seeing rapid changes in the overall financial landscape and seeing how it responds to it. It is useful. As economists, they always say, they always love markets in a way, but here we’re seeing experience with people learning, it’s also learning by doing when you create new markets, and it’s very revealing to have this type of evidence for a scholar like him to draw upon.
Encourage information sharing while protecting privacy
To Professor Sargent, China is indeed at the forefront of the world in the field of fintech and has developed very rapidly. However, he also pointed out that Fintech faces some challenges while developing.
He said, using artificial intelligence to figure out who is creditworthy, and the like, is important to support financial transactions but at some point, it also raises problems about privacy. This isn’t special to China, it’s a problem worldwide. How do we on the one hand encourage this type of information sharing that’s critical to financial transactions while at the same time figure out ways to protect privacy? This is a tremendously challenging problem going forward.
For example, Professor Sargent was in the US Army as an army officer. To become an officer, he needed to get security clearance from the army. So, they checked his bank accounts and loans to know his credit and financial status. The information they wanted to obtain from his bank account was private.
He also talked about a Chinese scholar, who is a cryptographer, who’s working on how to transmit some information but hide it. “But that’s something government regulators are going to get involved in in every country. And different people have different attitudes about where the line on this privacy is. Even my wife and I have different attitudes. An example would be – this is something that annoys her, but I like – you go to Amazon and order a book, and Amazon comes back and says, ‘we also think you’d like this book’, and they’re right. I find that great and my wife finds that creepy.”
In addition, Professor Sargent also shared his recent research topic and progress with us. He worked with Lars Peter Hansen, 2013 Nobel Prize recipient on developing methods for modeling economic decision-making in environments where uncertainty is hard to quantify and exploring the consequences for models with financial markets and characterized environments in which the beliefs of economic actors are fragile. He said they hoped to develop ways to incorporate this caution into economic models. To what extent we will be cautious depends on how much we care about it and how we want to do it.
Recipient Of Nobel Prize In Economics: China’s Fintech Innovation Is In The Front Ranks Of The World
TRANSLATION
As the second largest economy in the world, China has seen immense growth over the last 40 years, a result of more open markets and an innovative approach to advancing financial technologies. The Macro Finance Research Program at the University of Chicago’s Becker Friedman Institute for Economics and Tsinghua University School of Economics and Management co-hosted a two-day academic conference to explore the interplay between finance and macroeconomics in China. The conference ignited an important conversation on the inner workings of the Chinese economy, the key players in economic policy and challenges for future research related to the Chinese financial market. During the conference, sessions dug deeper into the history of China’s financial markets, Chinese state-owned enterprise reform, and the productive role of finance in supporting economic growth in the future.
In his opening remarks, Lars Peter Hansen, Nobel Prize recipient, David Rockefeller Distinguished Service Professor in Economics, University of Chicago, stressed why this was an ideal time to host this conference in China, “Given the economic interconnections around the world and the increasing importance of China in the world economy, it incumbent for academic economists understand better first, what is unique about the Chinese economy and its challenges in future and second, what lessons can learned from the experiences of other economies on their paths towards economic advancement. By bringing together top scholars with knowledge and expertise about finance and the macroeconomy in China, we hope to nurture future research in this area.”
Chong-En Bai, Mansfield Freeman Chair Professor, Department of Economics; Dean, Tsinghua School of Economics and Management echoed this sentiment: “After launching the Tsinghua-Chicago University Joint Research Center for Economics and Finance in last September 2018, this conference is the first joint event organized by two institutions. The Joint Research Center aims to encourage the research on the Chinese economy and just sent out the call for proposals to people who is doing the study on the economy and research. This conference will feature several experts study findings and share the insights of economic development from different perspectives.”
Professor Hansen mentioned during the interview, as a scholar, he hopes to hear more from outside of the academic community and conduct multi-level and comprehensive exchanges with professionals from the government, private sector and other fields, so to better frame future research on the economy of China and to extract insights pertinent to economics more generally. “I should say at the outset, I only know about these reforms in the broadest of terms and I haven’t studied all the specific details of it. But the basic aim I understand, is to open up the financial markets in the Chinese economy, to foreign investors in the capital and financial markets, which I view as overall a good aim and a good policy, and I really hope that it can play out in these terms.”
“I don’t see this as necessarily destabilizing because in many respects. By allowing these foreign investors you might well be broadening the reach of risk-sharing possibilities of coping with uncertainty as well as bringing in new financial resources in the Chinese economy to help support new ventures.” So, Professor Hansen thought it can actually nurture growth and help to provide a buffer for some of the Chinese economy’s own turbulence but China does hold the door to some other source of uncertainty that comes from foreign markets. But overall, he thinks it’s very productive and is pleased to see the Chinese government pursuing such reforms.
Over the past years, new finance including fintech, internet finance and blockchain have seen rapid growth, but also many challenges too. Thomas Sargent, Nobel Prize recipient and professor of economics at New York University, expressed, China’s really been a worldwide leader in applying artificial intelligence to internet funding and microfinance. It is important in terms of lowering costs of doing transactions. China is indeed at the forefront of the world in the field of fintech and has developed very rapidly. “There will be huge benefits to getting very poor people access to loans which they didn’t have. For example, in very poor villages, people who had ideas to start a business, but they couldn’t get the money need to get money from others. It is important to set up things in these villages where people could get a reputation for repaying even small loans. Because if they had a reputation for repaying, they could get the loans.” Mr. Sargent mentioned. “Ant Financial is doing this. It is with millions of people. China is the leader in this.”
Artificial intelligence and machine learning could help to create this social credit system. But Professor Sargent reminded us to notice that using artificial intelligence to figure out who is creditworthy, and the like, is important to support financial transactions but at some point, it also raises problems about privacy. This isn’t special to China, it’s a problem worldwide. How do we on the one hand encourage this type of information sharing that’s critical to financial transactions while at the same time figure out ways to protect privacy? This is a tremendously challenging problem going forward.
Xiao Gang: Securities Law Not Only Protects The Rights And Interests Of Individual Investors, But Also Prevents Excessive Litigation
TRANSLATION
Recently, Mr. Xiao Gang, former chairman of the China Securities Regulatory Commission, was interviewed on Securities Law by media including Sohu Finance at a conference organized by Tsinghua University and University of Chicago in Beijing. The Macroeconomy and Finance in China Conference was held by the Macro Finance Research Program at the University of Chicago’s Becker Friedman Institute for Economics and Tsinghua University School of Economics and Management.
Xiao Gang said that the derivatives market can play a role in hedging against risks and the economic downturn. Regardless of whether it is abroad or China, the period of economic downturn is often a time when the volume of derivative transactions increases rapidly. But most Chinese companies are not involved in derivatives trading.
Xiao Gang believes that to improve the authority and international influence of China’s derivatives market in the future, it is necessary to proceed from two aspects: one is to enrich the product types and tools of derivatives, and the other is to expand the opening-up of the derivatives market. We can have the discourse power and the ability of pricing only when the market is opened up and global investors are allowed to enter.
Xiao Gang also commented on the Securities Law. He said that its revision has made great progress based on the original draft, and made a relatively comprehensive revision from many aspects, such as investor protection and the reform of issuance system, etc.
Xiao Gang also said that China does not have a Class Action System at present. To protect the interests of investors, the Securities Law should incorporate a Class Action System. However, it is necessary to make regulations in line with China’s actual conditions on the scope of the Class Action cases, the qualifications of the litigants and the courts in charge of the cases, etc., to prevent the occurrence of excessive litigation.
The following are highlights of the interview:
Sohu Finance: How do you view the current regulatory model of China’s derivatives market?
Xiao Gang: There are some unique aspects of China’s regulatory model for derivatives that I think are effective.
First, the regulatory authorities have a very strict process for the development and launch of derivatives, with the purpose of serving the real economy, and every product has been rigorously and adequately demonstrated.
Since we believe that each product represents an industry, such as iron ore, rubber and so on, the launch of product futures is not decided by the CSRC but should be fully and repeatedly discussed with relevant industry enterprises and competent authorities.
Second, a complete market supervision system including a margin system has been established to control the risks of futures trading.
Third, China’s supervision is “penetrating supervision”. The supervisory authority can get every investor’s account information, which foreign countries cannot do. This is a unique and effective part of China’s supervision.
Sohu Finance: How to improve pricing ability and international influence in the derivatives market?
Xiao Gang: First, we must enrich our products and tools. Now there are 70 varieties of futures products, which should be further enriched. At the same time, options and swap tools should be appropriately added to hedge industrial investors and provide risk hedging services.
Second, it is a crucial step to expand the opening up of the derivatives market. We can have the discourse power and the ability of pricing only when the market is opened up and global investors are allowed to enter.
Sohu Finance: During the economic downturn, what role can the derivatives market play in resisting financial risks?
Xiao Gang: The derivatives market can play a better role in hedging the downside risks of the economy. According to the empirical analysis of countries around the world, whether in the United States, Japan, or China, the period of economic downturn is often a time when the volume of derivative transactions increases rapidly.
Because whether it is a business entity or a financial institution, it is necessary to hedge against future risks, including the risk of price fluctuations, capital costs, and so on.
For example, China is a big importer of iron ore. From January to November this year, China imported 970 million tons of iron ore, a slight decrease of 0.7% from last year, but the money spent on imports increased by 33%, which meant we are paying 33% more for the same thing.
Iron ore is mainly imported by iron and steel enterprises. During the same period, the profits of China’s iron and steel enterprises fell by 30%. Although this number is a coincidence, it shows that quite a few companies have not done risk management. Since only 8% of companies participate in derivatives transactions, which is far lower than developed countries such as the United States, this highlights the urgency and importance of the use of derivatives for hedging risks by business entities.
Journalist: Is it because the large state-owned enterprises don’t care?
Xiao Gang: Not exactly. There are historical reasons for this. In the past, state-owned enterprises had in deficit when they made derivatives. Therefore, we must summarize experience correctly, not to deny it, but use the derivatives market to hedge risks under the premise of standardized management.
We talk about the opening up of crude and iron ore futures and allowing foreign invest in the domestic crude futures market now. China’s crude futures price have become the third price except the United States and Europe. Companies that using oil will compare the prices of three places, thus the influence of this price will begin to appear.
I believe that after a few more years, the influence will be even greater. In addition, for foreign investors, the funds they invest in crude futures can be easily moved in and out at any time.
Journalist: How do you view China’s progress in opening up the capital account? Is the opening up of capital markets in the short-term still one of the first things economic policymakers would do?
Xiao Gang: China does not currently have a capital account open, but we can create a new model to allow foreign investors free access to China’s A-share market.
China has a long way to go to open its capital account, and we need to achieve it gradually. In this process, we can gradually open our financial trading account. For example, Shanghai-Hong Kong Stock Connect is part of it. In the future, we need to follow this new model to open financial trading accounts and capital accounts.
Journalist: How do you view the progress of the current amendment of the Securities Law? When do you think the Securities Law may take effect?
Xiao Gang: It depends on the legislature. Now that it is the third explanation, the Standing Committee of the National People’s Congress has recently conducted its fourth review in accordance with the procedures of the Legislative Council. We can focus on the published agenda later.
Journalist: From the national significance of the Securities Law amendment, how do you think its development in the capital market?
Xiao Gang: I think it is very useful. Because this amendment is a big step forward from the original law. It has absorbed opinions from various aspects and made a relatively comprehensive amendment such as investor protection and reform of the issuance system. To promote the healthy development of the market, improving the rule of law in the market will definitely have a good impact.
Journalist: Once the amended version of the Securities Law is officially passed, what can we expect to further improve the legal system that is closely related to the interests of investors? Will the securities class action system with Chinese characteristics be included?
Xiao Gang: I think the Class Action System should be included. This is an important weapon for investor protection. To implement this system smoothly, legislation should be made clear first, because China does not have a Class Action System.
Journalist: What are the specific characteristics of the Securities Class Action System with Chinese characteristics?
Xiao Gang: It is worth studying. It is characterized by the need to protect the rights and interests of individual investors, and to prevent excessive litigation. Therefore, it is necessary to make regulations in line with China’s actual conditions on the scope of the Class Action cases, the qualifications of the litigants and the courts in charge of the cases.