Hello, welcome to visit Shanghai Forum
A major issue that we have to understand isthe world in the financial systems and the integration that we’re seeing aroundthe world today, it’s necessary to think about the functions of finance in myarea. We keep the functions in place so that some of the questions we talkabout – how to keep China and the Silk Road and the Asian area more productive,more efficient and growing, and so on. To really understand that, we need tounderstand basically six functions of finance, and how to make those sixfunctions more efficient.
Basically, one of the major functions offinance is to enhance trade and enhance transaction, allowing for moreefficient ways in which we can transfer goods, services, and resourcesdomestically and internationally.
The major second function is the idea ofthinking about how to finance large-scale projects. And what I mean bylarge-scale projects is that we have teams of individuals, and we havecorporations or entities, and those teams do not have sufficient capital toactually grow and to be able to provide goods and services that the communityat large needs. It could be as small as a person that has a business in theoutskirts of a region in a particular area in Pakistan or somewhere in China,and that person needs capital to be able to facilitate their ideas for themarginal productivity of their capital is really braced within the cost offinance. Finance tries to make the most efficient and most cost-effective waysof generating capital for actually financing projects. So that is a majorimportant thing for the development of China and the rest of the world: capital.Marry together capital with ideas; marry together capital with teams; marrytogether capital with corporations and think of that as a major function. Andwe need to think about how to facilitate the interaction, the marriage, betweenthe needs of capital and the providers of capital in society.
The third function, which is very importantand we have to always keep in mind, is the transfer of resources, the idea thatwe have individuals now who want to save for the future, whether it’s fortravels, homes, education, children, healthcare, or other charitable or givingneeds that they might have. The idea of creating a system which allows forindividuals to either save or insure or move forward resources not only withina country but within the international community, is a very important functionof finance.
The fourth function is the idea ofrisk-transfer, risk-sharing, and risk-reduction. The whole idea of how we thinkabout risk and how we manage risk is to make our acquisition of resources andconcentrate on what we know as the most productive activity without takingrisks that we don¡¯t want to take. If markets allow for risk transfer, itallows for growth. One has to encompass or take all the risks onto themselves.It may be inefficient, because someone else may be able to take those risks andcarry them forward more efficiently. A society that allows for efficientrisktransfer and risk-sharing allows for an ability to grow more quickly andmore efficiently, and will allow for trade more productively.
The fifth important function of finance isreally the idea of pricing and evaluation signals, the idea of thinking about amarket can give us pricing. We heard earlier about the aspect of having anability of knowing what the markets are telling us. Are markets telling us thatthese are the prices that we can trade at? Are these the prices that the stockmarkets, bond markets, or the other markets around the world which gives usefficient signals? Those signals allow for decisions to be made efficiently, andthat means that access is very important for the markets around the world tomake them competitive and to use the market signals to decide where to raisecapital, where to buy back capital from or where to deploy capital. Withoutusing market pricing, it¡¯s very hard to know how to allocate capital, becauseone is trading in a private market as opposed to using the information from thecapital markets. So establishing an efficient market and allowing the prices tosignal is a very important part of the finance function. It is very importantto the development of a region and the development of countries generally.
And the last function is a reduction ofasymmetric information, market frictions and deadweight cost, the idea that wehave to generate trust, to figure out ways to trust, so that we can interactwith others in the global economy. And that trust aspect, the idea of creatingtrust, has a huge part in finance, the ability to actually marry together theteams of individuals with capital requires an information asymmetry, or ways tobe reduced, with ways figured out to reduce asymmetric information.
These functions are the same in China, theyfunction the same everywhere. The institutions that provide these services arenot the same, but the interesting part about the internet, globalization,learning and the growth of our economy, is that each of the institutions thatserves or tries to provide services within these particular areas is veryfluid. It changes. They evolve all the time. They are not static. But what isstatic? Thinking about how to make money in business is to think about how toprovide these functions, one of these six functions or all of them, or severalof them, faster for individuals, entities, governments, and corporations. Financecompresses time. Finance makes it faster to transact efficiently. Finance makesit faster for entities to raise money. To marry teams together with money is animportant part and that is done more quickly. The more quickly it gets done,the more efficient it is in terms of providing what is valuable to theproduction process.
The first theme that’s important is thetransfer of resources, making markets work, thinking about how marketmechanisms are bettered to make things faster, and also the idea of thinkingabout how to reduce information asymmetries more quickly. The second importantaspect in terms not only of speed but the idea of what we’re seeing around theworld is a way to create and finance individualization, not ‘one shoe fitsall’, but an ability to serve the financial functions and needs moreindividualistically of investors and individuals and not necessarily have tomake it as a big blot to be able to handle the needs. And so the ability toactually create more individualized solutions, more individualized needs, andthat means that we need to see the development of many new techniques andtechnologies that allow us to provide regions functions more efficiently.
And the third really is flexibility.Flexibility is one of the key aspects of finance. How do we do things and makethings more flexibly? What I’m saying about finance also applies to businessesand to corporations and individuals. What we are seeing today through the ideaof telecommunications, computing technology and finance theory, is a tremendousevolution to having more decentralization, more ideas about how to create aninternet system, a system of finance that’s changing the whole nature of thestructure of banking. We are changing the whole nature of the structure of howyou were provided financial services in the past. So that is a revolutionthat’s happening in the United States, Europe and most likely, also China. Wehave Ali Baba and other entities that are trying to provide these financefunctions that I talked about more efficiently. The decentralization isn’tgoing to be the case after the 2008 financial crisis when banks are stratified,atrophied, and cannot provide financial services in the most efficient manner.And others that have horizontal structures are coming to place and actuallytend to now provide financial services. So the growth of new technologies andnew innovations is going to add a tremendous amount of value.
The most impressive piece of news was thatall we learned in accounting and finance since the Medici era and the 1500s wasthe idea that he who owns the ledger, controls the books, and has the records,and the records are the key because that’s the trust. We trust in terms ofmoney and making deposits. We trust in terms of securities we buy to invest in,or bonds that corporations or government issue. And that has always been avertical system, where a bank owns the ledger, or an insurance company owns theledger. The interesting thing with the idea of watching is the ledger becomeshorizontal. The ledger is controlled by miners. Their signature abduction, theinteractions between the consumers and the producers, the merchants and theledger or the lock chain which is a horizontal structure; that horizontalstructure leads to a tremendous change in the way these financial functions areprovided to the community at large.
And that is a major innovation that we’reseeing right now: who is going to have the idea, who is going to be the miners,who’s going to be the ones to control the ledger, control the information.Unlike the system of the past, which was a snapshot, the world of finance andcommerce, is changing from a snapshot to a movie. It’s a sequence oftransaction, not just clearing a transaction. That’s the most important thingin understanding how an individual acts, how to make things faster, and how tomake things more flexible for our consumers. So corporations or entities, smallmerchants in an inclusive society reducing the cost of any of these sixfunctions that I talked about can be handled by the computing systems of theworld through the idea of a block-chain, reporting transactions in a sequenceof transactions, and those sequences of transactions allow for tremendousgrowth and innovation for our global society. So I think that that is going tobe a tremendous competitive force in how finance will change, and how theinternational organization of finance will affect the world.
So moving from transaction processing totransaction analyzing is the most important thing going forward. Innovation andnew ideas come and really satisfy any of these six functions more efficientlyin finance. And as a result, regulation will be behind innovation, and we don’twant regulation to actually create a situation where regulation tries to makethings slower and reduce flexibility. So the idea that there’s a huge balancewe need between infrastructure and replacing of infrastructure, and regulationitself and the idea of how to make regulation flexible as new technologies incomputing and new technologies in communications and in learning actually causethere to be a change that is necessary and not to be impeded. So China shouldopen up to create markets where global corporations, entities and individualsof China are able to use their resources more efficiently and finance theiractivities more efficiently, and get capital investments in a global world.That’s the dream that we all have across the board. Thank you very much.
