Dangers of 'excessive financialization' in Chinese economy
- By Zhang Chengsi
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E-mail China.org.cn, January 1, 2016
China has gone the same way. In the past three decades, the contributions of the financial sector and the broader FIRE industries to GDP have grown 1.5 and 4.2 percent respectively to 5.9 and 11.8 percent respectively, especially after 2005. Meanwhile, their contributions to employment rose from 1.7 and 2.2 percent respectively in 1994 to 3.5 and 5.2 percent in 2012.
Chinese financial enterprises have also witnessed record profit growth. Net profits of financial companies listed on China's A share market accounted for only 7.4 percent of all the listed companies in 2000, but reached 49.3 percent in 2009.
China's non financial industry has also raked in more profits from financial channels, with an increase from 3.3 to 19.6 percent in terms of their net profit level accounting for their entire profit in 10 years.
Undermining people's well-being and social security
China, along with the world's major countries, is witnessing expansion of their financial industries and the involvement of non-financial industries in the financial sector. This can be attributed to many things, a key problem being that traditional industries are suffering from long-standing profit decline. For example, China's top 500 manufacturing companies registered a profit rate of 2.7 percent in 2014, far lower than the world average. This induces capital to flow to the more lucrative financial industries and switch the economic focus to the financial sector.
This evolution will have complicated and profound impact on the real economy and moreover on many other aspects, including aggravated social conflict.
The pricing mechanism of goods may be changed: The prices of daily goods may see more fluctuations. Grocery items such as pork and garlic may be transformed into financial products if speculative money enters the market. In fact, the prices of ordinary goods have seen more ups and downs since 2007. Capital-driven increases in prices of daily goods then lead to increases of CPI and hence undermine people's well-being.
This could lead to a widening income distribution gap. Asset income is often inequitable as compared to other means of income distribution, thus excessive financialization will lead to a widening distribution gap. Since the 1980s, the world's richest one percent has gained more wealth than the rest.
As many people in China fail to understand financialization of the real economy, the government needs to closely watch the disintegration of financial innovation from the real economy, properly handle the relations between the two and guide the financial industry to serve the real economy.
Zhang Chengsi is a professor at the School of Finance of Renmin University of China.
The article was translated by Zhang Lulu. Its original version was published in Chinese.
Opinion articles reflect the views of their authors only, not necessarily those of China.org.cn.
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