How Finance Influences the Real Economy

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In recent years, a growing number of individuals have developed a seemingly fearful approach to financial matters, viewing it as a formidable beast lurking in the shadowsThis shift in perception raises a critical question: what if we had untapped resources right in our backyard, like a mine, waiting to be excavated and sold for profit? The allure of financial gain can be striking, yet the endeavor is much more intricate than it appears at first glance.

Imagine for a moment that you wish to start miningThe initial excitement is palpable—just think about the profits that could be madeHowever, one soon realizes the multitude of challenges that lie aheadTo excavate that precious mineral, equipment is needed, not to mention the construction of access roads and the purchase of transportation vehiclesThe initial financial outlay may reach tens of millions, a staggering amount for someone earning a mere monthly salary of 5,000 yuan

Saving that sum to fund the operation could take centuries—literally hundreds of years—before the prospect of mining even becomes feasible.

This leads to an alternate perspective: consider the possibility of receiving loans that would enable you to start mining immediatelyBy borrowing capital, you can extract the mineral, sell it, and pay back the loan along with interestThe profit you make afterwards would be yours to keepAdditionally, employing local workers would elevate their incomes, thereby invigorating the community's economyRestaurants might spring up to cater to the new workforce, creating a virtuous cycle where everyone benefits from the newfound prosperityThis domino effect is what Karl Marx referred to when he mentioned the impossibility of developing infrastructure without initial investments—if we were to save enough money first, the railways might still be a figment of imagination today.

The essence of financing extends beyond individual narratives; it encapsulates the broader national context

A nation in its infancy requires substantial investments—especially in sectors like mining and steel production—to modernize and industrializeDuring its early days, China faced an immense financial hurdle that necessitated substantial capital inflowsBy strategically inviting investment, China positioned itself within the rapidly evolving landscape of global trade, ultimately facilitating an impressive accumulation of wealth that propelled the economy into a positive feedback loop of growth.

Fast forward to today, and we witness that China now boasts the second-largest capital market in the world, trailing only the United StatesMarx noted that had China chosen to wait and amass wealth through accumulated savings alone, the country might still be waiting for the opportunity to developThe difference between thriving economies and those that falter often boils down to a single critical question: can large-scale projects secure the necessary financing?

This notion transcends individual aspirations; it touches on national ambitions

The ability to finance massive initiatives is a pivotal determinant of a country's progressTake, for example, China's recent assertive push toward semiconductor technologyThis industry has seen astronomical investments—totaling trillions of yuan—transforming what was once an abstract concept into an achievable strategy.

Now, picture a factory that finds itself in dire straitsWith looming debts and no immediate cash flow, the owner could face bankruptcy if unable to navigate this fiscal impasseYet, rather than surrendering, one option remains available: securing a loan from a bank to bridge the financial gap until the next shipment of goods is soldThe business can then stabilize and continue to prosper.

Moreover, the financial toolkit available today—with instruments like futures, insurance, and hedging tactics—has created an environment conducive to business activities that were once deemed too risky or impossible

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The history of exploration, particularly during the Age of Discovery, serves as a prime example of how pioneering financial instruments, such as insurance and shareholding, allowed businesses to navigate treacherous watersWithout these innovations, the ambitious maritime ventures that expanded trade networks and global economies would likely have stagnated.

Today, the absence of such financial mechanisms would stymie growth, preventing most companies from even existingTherefore, the trajectory of human advancement unfolded sequentially: initially, a commercial revolution took hold, followed by a financial revolution, ultimately leading to an industrial revolutionAbsent the financial revolution, the advancements that followed would have been impossible.

What becomes glaringly evident is that financial systems are essential to the functioning of modern societyTheir impact is akin to that of water and electricity: fundamentally defining the infrastructure of our everyday lives

However, the financial landscape is nuanced, particularly in the Chinese context, which diverges from a purely profit-driven approach toward complex financial derivativesInstead, China emphasizes the importance of financial systems that bolster the real economy and support tangible growth.

An illustrative example of this is found in WeBank's recent initiative to significantly enhance its supply chain finance coverage over the next three yearsBy focusing on vital sectors such as consumer services, green energy, and modern agriculture, WeBank aims to invest 300 billion yuan, collaborating with over 1,000 leading industry firms to empower projects that serve widespread community needsThe core principle behind this initiative aligns with the broader financial philosophy we have explored—investments should primarily benefit the majority rather than a privileged few.

Ray Dalio aptly captures this sentiment, suggesting that for an investment strategy to succeed in China, it must prioritize the interests of the masses, governed by principles of state capitalism

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