A Tale of Two Finances: Finance 2.0 in China
by Adam George
October 16, 2014
Dr. Liu Qiao started off his discussion on the financial history of China by changing the title of his lecture at the 15th Annual World Knowledge Forum to “A Tale of Two Finances: Finance 2.0 in China.” Dr. Qiao explored the nature of China’s past economical depression, and then shifted focus to the positive future in China’s grasp.
“Right now, there are more than 50 million companies in China, but only about 10 percent can get financial support from the current financial system,” Dr. Qiao explained.
A lack of efficiency and a focus on fame in the form of the Forbes 500 list has propelled the Chinese companies into a downward spiral as of late. Companies only looked at achieving a certain number in sales rather than taking into account the importance of investments and the return on invested capital (ROIC).
“Greater China has 100 companies entering this 500 list, accounting for 20 percent of this total list…Of the 100 companies, 16 of them are losing money; they don’t have any profit, but they’re so big and so huge that they can’t fail….The financial system supports this kind of mentality, so it boosts lots of credits to their size,” Dr. Qiao said.
While this method for finance seemed to work initially, the economy currently grapples with the repercussions of poor investing and returning. Banking systems normally provide financial loans for starting companies, but banking unfortunately accounts for a large part of China’s debt in the GDP. Because of poor investment decisions, banks can no longer fund startups as much.
“Finance 1.0 is a trouble maker, so we need a new financial reform and system in China,” Dr. Qiao said. He then looked to ways Chinese companies have begun to put an end to this and embrace a new China 2.0.
Dr. Qiao assured the audience that a new surge of finance has been detected in China. Peer-to-peer startups, or P2Ps, are small loaning companies that advise customers on where and how to invest their money efficiently.
“[The] cost is very high, as high as 30 percent, but it’s efficient; [it] takes a couple of days to process an application and then receive the loan,” he explained.
Because of this efficiency, other companies have caught on and have taken it one step further. Alibaba, for example, advises customers on how to efficiently invest any extra money they have in their account and generate a relatively higher yield in return. The achievement can also be viewed online, giving the customer a stronger sense of autonomy and success at their own fingertips.
“This whole process takes 3-4 minutes; a very pleasant experience,” Dr. Qiao said of Alibaba, which sets the company apart from its competitors.
Dr. Qiao’s appreciation of Alibaba and the P2Ps in China demonstrated his optimism for the 2.0 finance plan and encouraged more support for innovations within the country. Multiple municipalities compose the nation of China and each can have a large influence on the economy. By finding a way to support innovations in this area, more ventures like Alibaba can lead China to its coveted 2.0 finance.
By focusing on the issue and efficacy of money efficiency, Dr. Qiao hopes that the Chinese economist will recognize the importance of investment and promising returns to ensure a more stable and fruitful China in the years to come.