Li Yang: China is not short of money, what it lacks is "patient capital"

Li Yang, Chairman of the National Finance and Development Laboratory and Member of the Faculty of the Chinese Academy of Social Sciences

In the keynote speech session of the "2023 Phoenix Finance Annual Conference", Li Yang, chairman of the National Finance and Development Laboratory and member of the Chinese Academy of Social Sciences, analyzed and interpreted it.

Li Yang said that this year's financial work conference highlighted the issue of science and technology finance, and proposed to provide science and technology enterprises with full chain and life cycle services.

Li Yang said that as pointed out by the Financial Work Conference, China is not short of money, but what it lacks is money that can become a "capital". "There is no shortage of funds, lack of principal, the key is to improve financing efficiency, focusing on solving the problem of 'uneven happiness' and 'too much money'. He said, "According to my impression, it seems that it is the first time that venture capital can be talked about in such detail at the Central Financial Work Conference." ”

Li Yang believes that the so-called "lack of principal" mainly refers to the lack of "patient capital". He explains, "Patient capital is a slightly adjective concept that refers to the need for patient capital that lasts for the long term. What kind of money has patience? The money that belongs to you has patience, but the money borrowed from the bank lacks patience, the kind of money you borrow today, you have to invest it tomorrow, and then you have to make a fortune, and you will return it to the bank after you have made money. This kind of money certainly has no patience. ”

The concept of "patient capital" has captured the key points of technology finance. Li Yang emphasized that financial support for scientific and technological innovation is essentially venture capital, and venture capital cannot find banks, because banks are risk-averse. In addition, the principle of venture capital is limited liability, patience is required, and the assessment is not limited to a single project, but a general ledger.

Li Yang cited three examples: the packaging loan, the Wuhu model, and the Tianjin model. He said that the main point of these models is to use bank money to support venture capital, but not to review each project one by one, but to put a number of related projects together and consider them comprehensively. Like the "Tianjin model", it is to assess the improvement of the entire Haihe River and the development of the surrounding area as a project, and the sub-projects included in it must have losses, but there are also gains, and the losses and profits are offset by the losses, and the comprehensive result is that it is profitable. This model is particularly important for China's bank-dominated financial system.

The following is the full text of Li Yang's speech:

Li Yang: Distinguished guests, ladies and gentlemen,

As an old friend of the Phoenix Finance Forum, it is a great pleasure to participate in the 2023 Annual Meeting.

The theme I would like to share with you today is "Five Major Articles on Financial Reform", and these five major articles are closely related to China's goal of building a financial power, so I put them together and the title is "Five Major Articles on Financial Power".

Everyone has a very strong feeling that this financial work conference has brought China's financial development into a new stage, including the basic logic, development direction, and key areas of financial reform and development. There are many contents of this meeting, and there are two things that stand out: One is to clearly put forward the goal of building a financial power, and there is a "three-step" arrangement. The other is to clearly put forward the "five major articles" to do a good job in financial development. Of course, the five articles are not all the content of the financial powerhouse, but they must be the most important. I would like to share with you my understanding of these five major articles today.

First article: Fintech Finance.

Science and technology finance refers to a series of financial instruments, systems, policies and financial service arrangements that promote scientific and technological development, the transformation of achievements, the formation of high-tech enterprises, and the development of high-tech industries. Because of the time, I won't go into details. The development of China's technology finance began at the end of the last century. I participated in the drafting of China's first document on the development of venture capital, so it is clear to me that we have developed this area very early, but now there are still problems.

Let me show you this diagram, which depicts the stage of development of a company and the forms of financial support that a company needs at different stages of development. The problem I want to explain is that the lack of money is a problem that enterprises always face, but at different stages of development, the form of "money" required by enterprises is very different. On the figure, I use a red dotted line to divide the development of the enterprise into two stages, under the red line, the enterprise is still a small and micro enterprise, maybe the future enterprise will grow into the world's top 500, but at this time they are not yet known. At this stage, the company's funds, or from the owner himself, or from venture capital, or from a group of caring people, the so-called angel investment, at this stage, the enterprise can also form a partnership, limited partnership, etc., of course, so fundraising, the business promoter's control over the enterprise will change. In short, technology companies especially need money in the early stage of development, but they can't get money from the bank, and they can't get most of the money that exists in society.

Therefore, this year's financial work will be the first time to clearly point out this point, saying that it is "to provide the whole chain and the whole life cycle service for science and technology enterprises", and there are a few sentences that just answer the question of the host Ms. Chen Lin, after decades of development, China has no shortage of funds, but what is lacking is the money that can be used for enterprises for a long time and can form capital in enterprises. Therefore, the Central Financial Work Committee pointed out: "The key is to improve the efficiency of financing, and focus on solving the problems of 'uneven happiness' and 'too much money' and 'too much money'." I have the impression that it is the first time that such a detailed and professional statement can be mentioned in the document of the Central Financial Work Conference. China is not short of money, but what it lacks is money that can become "capital", and this is not a simple issue of financial reform, but various institutional arrangements such as property rights will involve this issue. The Central Financial Work Committee pointed out that the mainland lacks "patient capital". Patient capital is a slightly adjective concept that refers to the need for long-term patience with money. What kind of money has patience? You have patience with your own money, you have patience with money that you are willing to take risks, and you have to borrow money from the bank to be impatient, and you have to borrow money today, you have to invest it tomorrow, and then you have to get rich, and you have to return it to the bank after you have made it. This kind of money certainly has no patience. ”

The concept of "patient capital" has captured the key points of technology finance. Finance supports scientific and technological innovation, which is essentially venture capital, and venture capital cannot find banks because banks are risk-averse. In addition, the principle of venture capital is limited liability, patience is required, and the assessment is not limited to a single project, but a general ledger.

I would like to emphasize three points:

First, financial support for scientific and technological innovation is essentially venture capital, and we must make it clear that venture capital should not look for banks, banks are averse and risk-averse, and this point should be paid special attention to. In some places, when discussing the issue of supporting the development of local technology and finance, a large number of banks are approached, which does not solve the problem.

Second, the principle of venture capital is limited liability and patience. Therefore, the assessment of venture capital should not be limited to a single project, and it should not be assessed year by year, but should be calculated as an overall account and a long-term account. Here I have listed three successful cases in the past: the packaging loan, the Wuhu model and the Tianjin model. The main point of these models is to use bank money to support venture capital, but they all adopt the venture capital model, that is, they are not limited to one project, but put several projects together to calculate the general ledger. For example, the "Tianjin model" is to evaluate the dredging of the entire Haihe River and the surrounding development as a whole project, in which there are definitely losses, such as river dredging, but there are also profits, such as real estate development. Losses and earnings offset each other, and in the end, the total is earned. This model is particularly important for China's bank-dominated financial system.

Third, about the "Hefei model". The Hefei model was widely disseminated. Recently, our researchers have made a preliminary summary of the Hefei model, and here are a few key points to share with you:

1. In the Hefei model, there is a group of people engaged in technology who participate in the entire financing process, unlike other financing activities, only those who are engaged in finance are doing science and technology finance.

2. Limitation of Liability. The expression of limited liability contains a lot of content, and the core point is that the relevant departments should not assess the project project by project and year by year, especially some arrangements such as auditing, and be especially careful and respect the law of venture capital. Everyone should note that there is a very important expression of the central economic work meeting, that is, "to include non-economic policies in the assessment of the consistency of macroeconomic policy orientation, strengthen policy coordination, and ensure that the same direction is exerted and a joint force is formed." In my opinion, this statement is extremely important and pertinent, and it deserves our careful consideration and serious implementation. In my opinion, only by doing what the central economic work will require can we really do a good job in the "science and technology finance" that the central financial work will deploy.

Article 2: Green Finance.

Green finance has a long history of international development, dating back to the United Nations Framework Convention on Climate Change in 1992, followed by the Kyoto Protocol, the Paris Agreement on Climate Change, etc., and the 2022 Bali Sustainable Development Finance Report. China's green finance has also developed very early and rapidly, and since August 2016, a series of policies have been introduced, and their authority can be counted in the world.

However, despite this, there are still many problems, among which five problems are the most prominent: first, it is difficult to measure and verify emission reduction activities, second, it is difficult to measure and verify emission reduction activities, second, it is difficult to internalize externalities, third, it is difficult to internalize externalities, fourth, there is a lack of investment and financing channels, and fifth, it is weak commercial sustainability. These problems are very big, and it is precisely because of these problems that green finance has been implemented for so many years and many documents have been issued, but it is still not developing rapidly.

The proposal and promotion of transition finance may be an effective mechanism to solve the above problems. The introduction of transition finance confirms the fact that the vast majority of existing projects in the world are not "green", so there are various undesirable situations such as greenwashing and green dyeing. We must also start from the reality that our finance must support not only green projects, but also those that are not too green to go green, and those that cannot be turned green to close down and transform. In other words, green finance needs to be able to deal with the various problems that arise in the process of shifting from a less green development model to a green development model, including the disposal of non-performing assets, including the closure of some enterprises and the resulting unemployment, and so on. All of these issues are designed to be addressed by transition finance. It is important to note that the transition finance paradigm should be applied not only in the field of green finance, but in almost all areas.

The main points of transition finance can be summarized in five areas:

1. Provide a workable standard of definition. Green, light green, greenwashing, and black must have more accurate standards, and these standards must be measurable and verifiable.

2. There should be a very effective information disclosure mechanism for transformation activities and investment in transition.

3. Create a variety of transition finance instruments to deal with multiple complex situations.

4. Provide effective incentive compatibility policies.

5. It is necessary to avoid disorderly transformation and implement a just transition. There is an example of disorderly transformation in China. Some local governments have been so impatient to complete the task of reducing carbon emissions that they have turned off all high-carbon energy sources in the absence of a transitional solution, so that a few places cannot heat their homes in winter, a situation that must be quickly corrected.

In short, I think that when the mechanism of transition finance enters the framework of green finance, the issue of green development and green finance can be implemented.

Article 3: Financial Inclusion.

Financial inclusion was introduced relatively early in our country. Financial inclusion is about making financial services accessible to the general public, and having access to financial services at fair prices and with dignity. In this central financial work conference, inclusive finance was once again proposed and included in the national strategy, which shows the importance that the central government attaches to it.

China's financial inclusion has made great progress, which is manifested in four aspects:

1. China's large, medium and small banks have been mobilized to devote themselves to the cause of inclusive finance, which is unique in the world. Through this model, China has been able to promote the goal of financial inclusion at a very fast pace, and its breadth and depth are incomparable to other countries.

2. Fintech empowers inclusive finance. Due to the rapid development of financial technology and digital technology, some "long-tail customers" who are difficult to be covered by traditional financial services can also enjoy timely and convenient financial services. Various types of inclusive financial services, from digital payment to digital credit, as well as digital inclusive insurance, which are still being explored, have been developed to varying degrees.

3. Service stations and service points for inclusive finance have been established in most rural areas of China, which has greatly solved the "last mile" problem of inclusive finance.

4. The government's extensive mobilization and publicity have made the concept of inclusive finance deeply rooted in the hearts of the people. It has laid a very good mass foundation and public opinion foundation for further promoting the cause of inclusive finance with high quality.

In the next step, the development of inclusive finance in China should focus on solving several problems:

1. Inclusion issues. The so-called inclusiveness is to truly bring inclusive finance to those vulnerable groups, including "new citizens", including those who set up stalls, these financial services must be provided, and more importantly, to provide financial services to vulnerable groups that they really need and can accept. Some of our investigations have found that many grassroots people say, "If you give me a loan of tens of thousands of yuan, I dare not accept it, and I am not willing to accept it." What we really need is that when I beg my grandfather to tell my grandmother and can't get any money anywhere, you can give me a few hundred dollars to get us through this difficult time, we just need your financial resources to be able to provide me with a final insurance. Therefore, the next step of inclusive finance should be to develop at this level, and provide financing tools corresponding to the needs of people at this level. Of course, inclusive insurance is very important here.

2. With the development of inclusive finance today, there is a question that needs to be raised: inclusive finance should pay attention to financial supervision. If you push it down as a sport, you may bring in a lot of unhealthy things. If inclusive finance is to be sustainable for a long time and China can lead the world in the long run, it is necessary to let inclusive finance have a healthy development environment, so we should pay attention to the health of inclusive finance, and have a practical understanding of the income, assets, debt structure, insurance, current situation and future expectations of those service users, not simply throwing money.

3. We have found that for inclusive finance to truly cross the "last mile", it needs to be supported by lending mechanisms and lending institutions. The concept of "loan" may not be familiar to many people, a few years ago in the rectification of Internet finance appeared the concept of loan, it is said that the cost of Internet finance is so low, the threshold is so low, but there are still a large number of long-tail people who can not reach the problem, but also need to help lending institutions to help promote. I recently went to Guangdong to conduct research and found that the lending institutions there are developing very rapidly and healthily, and are welcomed by the general public and small and micro enterprises.

The fourth article: pension finance.

Pension finance is mentioned as one of the five big articles such a high position, I think it is relatively rare.

Pension finance is not just about pension, it includes three parts: first, pension finance. This is the most discussed area, the so-called first pillar, the second pillar, the third pillar, talking about the pension finance. Second, elderly care services, home services, centralized services like apartments, etc., are all issues that we need to explore. Third, the finance of the pension industry. Comprehensive pension finance contains such a rich content, we are now focusing only on the first pension finance, that is certainly far from enough.

Let me give you a picture to see how prominent the pension problem is in China. The proportion of the elderly population aged 65 and above is rising very fast, and China's pension system is under great pressure due to the deterioration of the demographic structure.

We look at pension finance, which is known as the "three pillars". Public pension is the "first pillar", occupational pension, including enterprise annuity, is the "second pillar", and personal pension is the "third pillar". Governor Dai just said that China's first pillar may soon be overstretched, which shows the seriousness of the problem. As far as I know, China's second pillar covers only twenty or thirty percent of the population. The third pillar is basically personal, and we don't have very sound statistics for this part. In short, China's pension gap is very large, and it is because of this that the central government will specifically raise this issue. More importantly, there is an investment problem after the pension is raised, and the places suitable for all kinds of pension investment are mainly the treasury bond market and the capital market. In this regard, we still have quite a lot of questions.

We have summarized that there are four main starting points for the development of China's pension system:

1. In terms of institutional design, the boundaries and functional positioning of the three pillars should be clarified, and efforts should be made to raise funds in accordance with these provisions.

2. Pension raising and investment: The gradual delayed retirement policy should be promoted, and the coordinated development system of pension and capital market should be built. 3. Pension industry: optimize the supply of pension services and promote the high-quality development of the cause of aging.

4. Pension model: vigorously develop a smart pension service system to ensure a high-quality and dignified retirement life for the elderly.

Article 5: Digital Finance.

The development of digital finance in China is also very early. However, I would like to draw attention to the importance of distinguishing between a number of concepts, in particular between electronic and digital finance. The development of digital finance in mainland China has gone through three stages: the first stage can be called the stage of financial electronics. At this stage, we have initially achieved a historic breakthrough of "from manual to electronic, from stand-alone to networking", and gradually got rid of the backward situation of manual operation. The second stage is the stage of financial informatization. In the 21st century, we will focus on the fields of data centralization, channel networking, and management informatization, and vigorously promote the informatization development of the financial industry. The third stage is the stage of digital finance development. In recent years, with the emergence of a new generation of information and network technologies such as the Internet, big data, cloud computing, blockchain, and artificial intelligence, finance and technology have shown a trend of further deep integration, and new digital technologies have fundamentally transformed the way the traditional financial industry exists and operates.

The significance of the development of digital finance lies in opening up a new stage of human development, that is, the stage of digital resources. Prior to this, we have already gone through a stage of development with natural resources, financial capital, human capital and technological innovation as the main factors of production, and now we have entered a stage with digital as the basic factor of production. At this stage, the innovation and construction, agglomeration and integration, transfer and circulation of digital resources can supplement the supply defects of traditional factors of production, that is, the "structure of factors of production" can be improved. Due to the addition and role of digital resources, the traditional factors of production have re-condensed or fissioned new development energy, which has given new impetus to the innovation and development of the modern economic system.

To be honest, we are not fully prepared for the changes that the development of digital finance will bring to our economic and financial activities. If our finance is digitized as many experts have designed, do you know how many people will lose their jobs, how many financial institutions will fail, how many banks will be wiped out, and what will become of the entire financial industry? Digital finance also has the function of strengthening risk prevention. Of course, there are other functions, but one thing is certain, and that is that the financial institutions, markets, products, and services that we are familiar with will change unexpectedly. Recently, there has been a lot of discussion about ChatGPT and AI in society. The consensus is that once these developments are made, our society will be turned upside down. We must realize that the revolutionary impact and impact that the development of digital finance may have is similar to that of ChatGPT and AI.

Based on my own understanding, I would like to share with you my Xi experience on the "Five Great Articles". I think that in the next step, we should do a good job in these five articles under the overall goal of building a financial power. These five articles are both a great challenge and an endless opportunity for us. I am confident that we will be able to meet this challenge and build China into a financial power as scheduled.

Thank you!