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The current perception of finance in society seems tinged with various misconceptions, leaving many confused about its role and significance, especially within the context of a nation's economy. This misunderstanding is often rooted in a lack of a deeper comprehension of finance's fundamental contributions to economic activities. Finance acts as a national asset; for any country, particularly large nations, it serves as a crucial element in the journey towards modernization and development. Alongside technological advancements, finance represents a pivotal variable in the economic progress of nations, functioning like the two wheels on which a nation's economic engine runs. It is a grave fallacy to assume that technological innovations alone can propel industry upgrades or drive economic transformation. In reality, the role of finance is vital in the complex machinery of development.
The focus of institutions and policies must be sharply aligned with the aspirations of ordinary people.
Any economic activity requires funding; without it, one would regress to a rudimentary or natural economy. Economic activities derive from specialization—the bedrock of market economies, where division of labor enables enhanced efficiency in wealth creation. Adam Smith famously stated that "the division of labor is the source of wealth." This division often leads to trade. No single individual, enterprise, or nation can independently satisfy all needs; thus, interdependencies arise, demanding transactional exchanges for mutual benefit. Such transactions must uphold principles of equality, which are founded on free trade and fair market value, established through transparency. A hallmark of civilized society links these principles to comprehensive legal systems, robust contracts, and high transparency. Absent these qualities, a transaction's equity may remain suspect.
Equity is a fundamental trait of civilized society. This notion of equity pertains not merely to equal results but refers to equal opportunities and human dignity. Businesses aspiring for expansion require liquidity; liquidity plays an integral role in a firm's operational health. Without it, businesses stall, unable to scale or innovate. Financial institutions open avenues for loans, thereby injecting liquidity essential for constant growth. Often, when businesses face crises, they may not always stem from financial insolvency but rather liquidity shortages, placing immense pressure on operations and potentially leading to failures. This liquidity crisis can strike financial institutions particularly hard, signifying that financial systems play a critical role in establishing mechanisms that navigate through such times.
Within the Chinese context, personal savings represent a predominant channel for wealth accumulation. By mid-2024, personal savings deposits are anticipated to exceed an astonishing 140 trillion. Presently, with consumer sentiment leaning towards caution, policies seem to strive to incentivize a portion of these savings into circulation. Ultimately, the infusion of these savings into the economy relies on restoring consumer confidence. If stakeholders—consumers, investors, and entrepreneurs—lack certainty about the future, consumption remains stagnant. Thus, policies should aim not to coerce deposits into consumption but to foster an environment of security and optimism. This confidence arises from a solid legal framework rather than mere policy adjustments. For China’s economy to thrive, robust legal structures and incentivizing market economies must take precedence.
Finance is also undergoing significant structural changes.
Today, the value of finance extends beyond mere price-setting, payment facilitation, liquidity provision, and wealth preservation. Structural changes in finance are now increasingly impacted by "disintermediation." This phenomenon, referring to the direct transactions between lending parties via market mechanisms, showcases a broader diversification of financing tools. Disintermediation grounds the essential logic behind capital market evolution. Without this foundational evolution, capital markets risk stagnation, whereas sustained supportive logic fosters growth and innovation. Consequently, finance's relevance broadens beyond traditional boundaries, expanding its foundational functions.
First, the diversification of financial models has given rise to new forms of capital, energizing the growth of sectors such as technology in unprecedented ways. In this context, finance serves as the circulatory system of the economy—a claim that holds true, but it must also be recognized as a powerful catalyst for economic evolution. Modern finance not only responds to existing economic needs but catalyzes innovations and upgrades within various industries. Silicon Valley serves as a quintessential example, exemplifying the intersection of technological progress with financial innovation. The financial innovations fueling Silicon Valley's emergence have been vital; without them, its distinct ecosystem may never have developed. Thus, contemporary understandings of finance must evolve beyond viewing it solely as a response to economic needs.
Secondly, the modern financial landscape has shifted from merely generating monetary liquidity to enhancing asset liquidity. This evolution marks a significant upgrade in financial structures. Whereas traditional finance primarily focused on currency liquidity, current frameworks aim to create fluid asset environments. Through necessary mechanisms such as asset securitization, previously stagnant assets become mobile, enhancing the stabilizing capacity of economic activities. This advancement not only enlarges the pool of tradeable assets but also creates opportunities for innovative financial solutions, enriching how individuals and businesses engage with finance. Meeting diverse financial needs—including wealth management—highlights finance's transformative potential. By fostering numerous liquidity-rich asset classes for societal consideration, modern finance intensifies economic vitality.
Understanding the theories and methodologies of finance equips us with the means to address societal and economic challenges effectively and efficiently. Crafting a knowledge system indigenous to China will require deft efforts, rooted in existing global achievements rather than replicating or dismissing prior accomplishments. This integration will celebrate 'compatible and inclusive approaches,' ensuring contributions emerge as enhancements to the existing knowledge landscape fundamentally. A scientific and innovative mindset embraces learning, humility, and respect for others—critical attributes that foster internal confidence and national progress. China must remain open; such openness will propel social advancement, essential in advancing toward modern civilization. It stands as the Herculean task of our times, emphasizing that closed systems will invariably lag behind.
Thirdly, "new finance" has established effective mechanisms for risk as well as asset pricing. Within market-driven financial frameworks, asset pricing fundamentally equates to risk assessment. The absence of efficient pricing mechanisms undermines asset management, thereby blurring strategic asset allocation paths. Hence, the discourse around asset pricing pivots towards capturing risk perspectives more than simply yield considerations. The advancement in pricing theories amplifies the evolution of financial sciences, with Nobel laureates in recent decades highlighting the scientific maturation of financial academics. This progression reflects a remarkable transition from abstract conceptual frameworks towards a structured, scientific body of knowledge, representing a seismic shift in financial theory.
Fourthly, financial innovations are fostering cross-temporal risk allocations, critical for robust risk management in economic operations. In an interconnected global economy, navigating risks—particularly those arising from fluctuations such as exchange rate shifts—demands the presence of astute risk management tools. The immense value and structure of modern finance draw upon its foundational four functions—be it in traditional or market-oriented contexts. Any underestimation of finance's roles threatens to derail national reforms, disrupt economic restructuring, and impede industrial evolution. To navigate these complexities adeptly, we must deepen our understanding of financial theories and methods, enhancing our capabilities for future challenges.
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