Social Trust: Informal Finance and Economic Transformations 981992930X, 9789819929306

Table of contents :
Preface: It is Urgent to Establish a Modern Financial System Supported by System Trust in the Transformation of Economic and Social Modernization
Acknowledgments
Introduction
Contents
About the Author
List of Figures
List of Tables
Part I Social Trust and Informal Finance
1 Significance of the Sociological Study on Informal Finance
1 Why Do We Study Informal Finance and the Social Problems It Causes?
2 Sociological Significance of Studying Informal Finance
2.1 The Public's Extensive Demand for Financial Management Is the Inevitable Trend of Economic and Social Transformation
2.2 The Informal Finance Is Related to the Modernization Transformation of Regional Economic Society
2.3 The Informal Finance Reflects the Interaction Between the National Financial System and Grassroots Society
3 Origin of Research: Observation, Study, and Thinking on Finance in City D After Returning Home in Recent Years
3.1 City-County Urbanization with Scarce Financial Resources
3.2 The Regional Economy Under the  Dominance of Real Estate Was Not Real but Empty
3.3 Social Stability Problems Caused by the Rupture of Informal Fund-Raising
4 Theoretical Basis: Sociological Discussion on Financial Issues
4.1 Classical Sociologist: Financial Institutions and the Transformation of Modernity from the Rational Perspective
4.2 Modern Economic Sociology: Financial Behavior and Social Network from the Perspective of Embedding
4.3 Multi-Dimensional Research Perspectives and Main Viewpoints on the Phenomenon of Informal Finance
5 New Theoretical Perspectives: Social Trust and Transformation Theory
6 Research Significance
6.1 It Is of Great Practical Significance to the Financial Field
6.2 It Is of Great Theoretical Value to the Field of Sociology
2 Concepts, Methods, Research Findings, and Innovations
1 Core Concepts of This Study: Personal Trust and System Trust
1.1 Traditional Social Trust: Personal Trust
1.2 Trust in Modern Society: System Trust
1.3 The Structural Rupture of Social Trust and Its Reconstruction
1.4 Informal Lending, Informal Debt, and Informal Financial Market
1.5 Culture Gap Is an Important Factor of Social Trust Rupture
2 Place Names and Personal Names in This Study
2.1 City D, District N, County X, and City S
2.2 People and Related Enterprises
3 Research Methods: A Case Study Based on City D
3.1 Case and Representative Analysis
3.2 Data Source
4 Main Findings
4.1 The Foundation of the Development of Informal Finance Is the Traditional Social Trust Network
4.2 The Root Cause of Informal Financial Crisis Is the Rupture of Social Trust
4.3 The Key to Deal with Informal Financial Crisis Is to Rebuild System Trust
5 Research Innovations and Deficiencies
5.1 Innovations of This Study
5.2 Deficiencies of the Research
3 Traditional Social Trust and the Rise of Informal Finance in City D
1 The Scale of Informal Finance in City D
1.1 Overall Evaluation of City D
1.1.1 A Local Survey of City S
2 Important Background of the Rise of Informal Finance in City D
2.1 Large-Scale Promotion of City-County Urbanization and Industrial Transformation
2.2 Unbalanced Allocation of Resources in the Formal Financial System
3 Several Stages of Informal Finance Development in City D
3.1 Capital Gains and Public Participation: The Snowball Effect of Interpersonal Trust Network
3.2 From Acquaintance Society to Stranger World: Trust Construction in the Grey Zone
3.3 From Individual Fund-Raising to Institutional Lending: The Formation of Informal Financial Market in City D
3.4 Summary: Traditional Trust Network Is the Cornerstone of Informal Finance in City D
4 Social Trust Rupture and Informal Financial Crisis in City D
1 The Outbreak Process of Informal Financial Crisis in City D
1.1 Jumping of X1 in T Enterprise: The Fuse of Informal Financial Crisis in City D
1.1.1 Local Industrialists with High Social Reputation and Strong Strength
1.1.2 Business Expansion Driven by the Windfall Profits of Real Estate Windfall Profits
1.1.3 The Dream of Pomegranate With No Loan and the Break of Capital Chain
1.2 Rumor and Misinformation: J Group Suffered a Run by Investors
2 Spreading Rumors and Panic: The Collapse of Social Trust Network
2.1 A Run-On Leading Enterprises: The Collapse of Social Trust in City D
2.2 The Run Storm Spread to Districts and Counties: The Capital Rupture of Business Elites in City S
2.3 Destruction of Social Trust Environment: Informal Enterprises in County X Are Suffering
3 The Government Becomes the Last Reliance: Creditors’ Struggle and Rights Protection
4 The Weapon of the Weak Arouses Social Concern
5 Resorted to the Court, but Faced Enforcement Difficulties
6 With Demonstrations and Petitions, Local Governments Have Become a Lifeline
7 Summary: The Rupture of Social Trust is the Root Cause of the Spread of Informal Financial Crisis in City D
5 Strategies of Different Departments to Cope with Informal Financial Crisis
1 Financial Sector: Tightening Credit and Building Risk Firewall
2 Regulatory Authorities Urged to Crack Down on “Illegal Fundraising”
3 Grassroots Government: Maintaining Stability and Pacifying
3.1 City and County Level: Internal Inventory, Post Deletion, and Interception
3.2 Level 1 Township: Overwhelmed with Appeasement
4 The Judicial System: Willing to Be the creditor’s Grandson
4.1 A Heavily Guarded Creditors’ Meeting
5 Summary of This Chapter: Crisis Response Neglects the Construction of System Trust
6 Efforts to Reshape Regional Finance with Government Credibility
1 It’s Hard to Recover: Regional Economy After the Collapse of Informal Debt
1.1 Difficulties of Informal Enterprises
1.2 Funding for Transformation and Development Is Lacking
1.3 New Urbanization Is a Drop in the Bucket
2 Efforts of State—Funded Guarantee to Reshape Regional Finance: From City Investment to Venture Capital
2.1 Local Debt: Merits and Demerits of Urban Investment Companies
2.2 Reshaping Regional Finance: The Vision of Venture Capital Firms
2.3 Hard to Understand: PPP Suffers Cold Shouder from Private Capital
3 Summary: The Difficulty of Trust Rebuilding and the Root Cause of Government’s Failure to Reshape Regional Finance
7 The Reconstruction of Trust System and the Modernization Transformation of Regional Finance
1 Objectively Judging Informal Finance is the Premise of Correctly Handling Crisis
1.1 The Informal Capital Market is an Important Supplement to the Formal Financial Structure
1.2 Informal Lending Market is an Effective Form of Collecting Social Capital
1.3 Informal Capital Market is the Regional Mode of Sharing Economic Development
2 It is Urgent to Change from Traditional Trust to Systematic Trust in the Transformation of Social Modernization
2.1 Serious Cultural Lag of Traditional Trust
2.2 Structural Rupture in the Process of Trust Transformation
2.3 Reconstruction of Trust and Realization of Modernization Transformation
3 Top Priority: Building a Financial System that Matches the Modern Economy
3.1 To Prevent Systemic Financial Risks, We Must Properly Handle Informal Finance
3.2 To Establish a Modern System of Trust for the Informal Capital Market
3.3 Promote the Rational Connection Between Informal Finance and Formal Finance
Part II National Trust and Economic Transformations
8 Development Finance: Crack the Urbanization Financing Risk with Government Credit Enhancement
1 The Construction of New Urbanization Is Inseparable from the Innovation of Investment and Financing Modes
2 Practice of Innovation in Investment and Financing Mode of Ecological Urbanization Construction
2.1 “Chaohu Governance” Mode—Innovating Financing Subject of the New Urbanization Market
2.2 The “Control and Utilization Plan of Coal Mining Subsidence Area in City Huainan”
3 Innovation of Investment and Financing Mode to Realize the Comprehensive “Ecological, Social, and Economic” Effects
4 Accelerate the Construction of China’s Medium and Long-Term Financing Systems
4.1 The Internal Demand of National Development Strategy for Medium and Long-Term Financing
4.1.1 Development Finance Needs to Accelerate the Construction of Medium and Long-Term Financing Systems
4.1.2 Medium and Long-Term Financing Is the Key Way to Balance the Total Amount of Social Financing
4.2 Challenges and Opportunities in the Construction of Medium—and Long-Term Financing Systems
4.2.1 Learn from Foreign Experiences and Innovate Bond Financing System
4.3 Policy Suggestions
4.4 It Is Urgent to Build Policy-Based Financial Systems and Legislations
4.4.1 The Objective Necessity and Importance of Policy-Based Finance Under the New Situation
4.4.2 China's Policy-Based Financial Reform Should Be Viewed from a Strategic and Long-Term Perspective
4.4.3 Learn from International Successful Experiences and Promote Policy-Based Financial Legislation
4.5 Accelerate the Construction of “Green Finance” System with Chinese Characteristics
4.5.1 The Urgency of Building a “Green Finance” System
4.5.2 The Basic Structure of the “Green Finance” System
4.5.3 Focus on Building a “Green Finance” System
9 Development Finance: A Financing Platform Between the Government and the Market
1 The Characteristics of Development Finance with Chinese Characteristics
1.1 Development Finance Takes a Policy-Oriented Instead of Risk-Oriented Approach to the Selection of Investment Targets
1.2 Development Finance Resolves the Risks of Large Long-Term Loans
1.3 The Credit Support System of Development Finance Helps Ease the Pressure on Fiscal Expenditure
2 “Wuhu Model”: Use Government-Organized Credit Enhancement to Resolve Urbanization Financing Risks
2.1 Local Government-Organized Credit Enhancement Resolves the Risks of Large Long-Term Loans
2.2 “Loan Bundling” Broadens Financing Channels and Eases the Pressure on Fiscal Expenditure
2.3 The “Land + finance” Guarantee Model Strengthens the Credit Support System
3 “Kibing Model”: Development Finance Solves Issues Concerning the Financing of International Production Capacity Cooperation
3.1 Development Finance Resolves Credit Risk in Financing Through the Dual Means of the Government and the Market
3.2 Development Finance Gives Full Play to National Policy Support to Solve the Overseas Tax Problem
3.3 “Syndicated Loans” Provide Medium- and Long-Term Loans for Those Going Out of Private Enterprises
4 Overseas Political Risks of Chinese-Style Development Finance
5 Conclusion
5.1 The Objective Necessity and Importance of Policy-Based Finance in a New Situation
5.2 We Should View the Reform of China's Policy-Based Finance from a Strategic and Long-Term Perspective
10 The Global Financial Change and China’s Monetary Policy in the New Era
1 The Enlightenment of Global Financial Reform and China’s Financial Positioning
2 Challenges for China’s Finance to Achieve Global Strategic Positioning
3 The Reform of International Monetary System and the Strategy of RMB Internationalization
11 China’s Economic Adjustment and Rebalancing: Inspirations, Challenges, and Strategies
1 The Enlightenment of China’s Economic Adjustment and Rebalancing Strategy
2 The Challenges of China’s Economic Adjustment and Rebalancing Strategy
3 The Strategy of China’s Economic Adjustment and Rebalancing
4 Five Fulcrums for China’s Economy to Cope with Current Challenges
4.1 Improve the Fiscal System to Compensate for Slowing Economic Growth and Weakening Export Markets
4.2 Implement the Principle of Competition Neutrality, Break up Monopolies, and Make Private Enterprises Play a Bigger Role
4.3 Actively and Steadily Promote the Urbanization and Improve Its Quality
5 Comprehensively Upgrade the Development Level of Export-Oriented Economy and Improve the Level, Standard, and Efficiency of Opening Up
5.1 To Promote High-Quality Development of the Chinese Economy in the New Era, Scientific and Technological Innovation Is the Primary Driving Force for Development
References
Index

Citation preview

Liu Weiping

Social Trust Informal Finance and Economic Transformations

Social Trust

Dr. Liu Weiping is conducting a field investigation in the townships of City D Photographed by Yang Haibo on July 14, 2016

Liu Weiping

Social Trust Informal Finance and Economic Transformations

Liu Weiping China Development Bank Beijing, China

ISBN 978-981-99-2930-6 ISBN 978-981-99-2931-3 (eBook) https://doi.org/10.1007/978-981-99-2931-3 Jointly published with China Renmin University Press ISBN of the Co-Publisher’s edition: 978-7-300-29547-3 © China Renmin University Press 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Preface: It is Urgent to Establish a Modern Financial System Supported by System Trust in the Transformation of Economic and Social Modernization

In 2020, China’s urbanization rate exceeded 60%, and the registered urbanization rate reached 45%. It is estimated that China’s urbanization rate will reach 75% to 80% by 2035, and China is transforming from a “rural China” to an “urban China”. The rise of China’s urbanization has caused the great modernization transformation of China’s economic and social structure. This book focuses on analyzing and interpreting the social trust problems faced by China’s economic and social modernization transformation from the perspective of the financial mechanism supporting urbanization, using sociological theories and research methods, on the basis of the expansion to the developmental financial development, as well as academic research and policy advice on building national trust during China’s economic transition. The first part of this book, “Social Trust and Informal Finance”, discusses the basic relationship between social trust and informal finance. Through field investigation and visit to study the urbanization development process of a prefecture-level city in central Hunan in the past 20 years and the phenomenon of the rise, development, prosperity, and collapse of informal finance in the process of urbanization. It is found that informal finance is the basic way to support the rapid development of regional urbanization and make up for the lack of formal financial resources. In the context of unbalanced allocation of formal financial resources in the system, over the past 10 years, City D has built a huge informal financial system based on informal lending by virtue of v

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its acquaintance network in the regional society. This informal financial system has extensively and deeply involved many rural families in the economic and industrial modernization process initiated by urbanization, greatly supported and promoted the local urbanization process. However, when the national macroeconomic policy was tightened, the real estate market in City D cooled rapidly, an informal entrepreneur’s jumpers detonated in the informal financial crisis, investors demanded to redeem the principal one after another, which led to the breaking of capital chain of many investment companies, thus triggered the domino effect. The huge snowball of informal capital in City D melted almost overnight, and many investors were wiped out. After the collapse of the informal financial system in City D, thousands of investors began to defend their rights and fight against the problem of informal debt disposal through various ways. A protracted group event occurred in City D, and the local government was faced with unprecedented pressure of crisis management. From the whole process of the emergence, development, crisis outbreak, and governance of the informal financial system in City D, we can see that informal finance is an important social capital bond on which regional economic and social development depends based on personal trust, and the establishment of such social capital is based on the strong relationship network of acquaintance society. However, as a capital factor, informal finance is involved in the process of urbanization and the modern industrial chain with real estate as the core, it is a strange black hole for the majority of individual investors. It is urgent for informal finance to establish a modern “system trust” with the support of supervision department and legal regulation system to provide “Ontological Security” for creditors, so as to overcome the underlying crisis of social trust rupture. Unfortunately, City D has never been able to build the “system trust” on which a modern economy depends. The informal finance developed through relationship and trust on the basis of differential order pattern is a financial form matching the small-scale economic industrial structure of “pre-modern society”, which is far from supporting the large-scale modern economic industrial system dominated by urbanization. The case of City D shows that the modern transformation of economic society requires the establishment of a new financial system based on modern system trust.

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The second part of the book, “National Trust and Economic Transformation”, focuses on the modernization and transformation of China’s economic system from the perspective of financial mechanism innovation. First, China’s rapid urbanization over the past 20 years has accumulated large local debt risks. To drive the modernization and upgrading of China’s economy with new urbanization, it is urgent to innovate the financial system. The core of development finance with Chinese characteristics is that it is a “bridge” between the government and the market. Development finance solves the “market failure” phenomenon of information asymmetry through government intervention in the financial market, and improves the “government failure” problem of low capital efficiency such as financial subsidies. At the same time, it combines the advantages of traditional commercial finance and policy finance it is a financial form that adapts to the backwardness of the system and market failure, and appears to maintain national financial security and enhance economic competitiveness. We should make use of national credit to adjust market failures and promote balanced economic development through rational allocation of total and structure of credit. Second, the current imbalance between economic development and social development, as well as the structural imbalance between social and economic development have become the unique background of China’s reform and development. After more than 40 years of reform and opening up, China has become a major economic power in the world. It is deeply integrated into the global economic system and its influence on the world economy is growing. China’s participation in global economic rebalancing must be both internal and external. The internal path focuses on structural adjustment, while the external path focuses on coordination. Only the internal and external linkage can China truly solve the structural problems that hinder the sustainable development of the Chinese economy in a relatively loose external environment, so as to achieve real rebalancing. Third, to realize China’s economic transformation and development, we need to expand domestic demand, promote a new type of industrialization, urbanization, modernization, and internationalization, and take rapid actions to transform into a comprehensive plan for economic and social development. The book “Social Trust: Informal Finance and Economic Transformations ” is the result of continuous thinking and research on China’s economic and social modernization transformation since the author studied the Doctor of sociology, and it is the exploration and attempt

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of the author to study China’s economic and financial problems from the perspective of sociological theoretical thinking. In his visit to Pudong in February 1991, Comrade Xiaoping pointed out that “Finance is very important and it is the core of the modern economy. If finance is done well, it is vital for all”. In the past 40 years, with the rapid rise of industrialization and urbanization in China, not only the trend of the whole economy is obvious, but also the process of the whole society is speeding up. Nowadays, finance has penetrated into every aspect of Chinese People’s daily life. Financial means have not only become an important factor affecting people’s income level and wealth increase or decrease, but also an important force determining people’s mobility. Modern finance, in essence, is a system of trust based on a large-scale market economy system. The essence of supporting modern finance is modern urban civilization and contract culture. And in the process of rapid economic and social transformation in China, most people lived in a relatively static and closed farming society 30 years ago, people’s basic concepts and behavior habits were acquired in the farming society. The value standard that dominates people’s social actions is still in Weber’s “tradition or emotion”, and even in a blind adherence to the “Karisma” type of personality. From our analysis of the rise, development, and collapse of informal finance in the rapid urbanization process of City D over the past decade, we can see that informal finance in City D is based on traditional personality trust, while the financial intermediary organizations represented by investing and financing company financial activities are widely involved in the modern complex urban economic system, the investment side no longer knows and controls what the financing side is doing, thus losing what Giddens calls “Ontological Security”. As a result, a whammy in the market, even a false rumor, can shatter investors’ confidence and trust. The avalanche of informal finance in City D and the eventual loss of capital for many ordinary people involved in informal finance, to a large extent, should be largely attributed to the lack of people’s own economic and social cognition and social action ability. In the final analysis, it is because of the “cultural gap” brought by the rapid modernization of economy and society. Generally, people have not changed from the traditional social behavior norms based on the trust of individual personality, “relationship”, “blood”, “human” and “face” and other traditional social norms, and established the behavior paradigm based on the modern contract. It also reminds us that to achieve a healthy and sustainable modernization transformation of China’s economy, we must attach great importance

PREFACE: IT IS URGENT TO ESTABLISH A MODERN …

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to promote the modernization transformation of social culture. Today, how to innovate the financial mechanism, develop new financial products, and maintain the financial needs of ordinary investors, so as to promote the construction of contractual rules, cooperation, consciousness, and risk prevention abilities in modern economic finance and social life, has become an important topic for China’s financial development and innovation. It also highlights the critical importance of the establishment of moral culture in modern society for the transformation of economic and social modernization. Beijing, China

Liu Weiping

Acknowledgments

The research results of the book “Social Trust: Informal Finance and Economic Transformations ” have received the guidance, support, and help of many teachers and friends. I would like to express my sincere thanks to them. I would like to express my sincere thanks to Mr. Li Qiang, a senior professor of liberal arts and professor of sociology at Tsinghua University, for his careful academic guidance and gracious care for my life development! Mr. Wang’s tireless teaching by example, rigorous and realistic academic spirit, diligent and practical academic attitude, and high moral character will benefit me all my life. I would like to thank professors Shen Yuan, Wang Tianfu, Sun Liping, Guo Yuhua, Zhang Xiaojun, Jing Yuejin, Sun Feng, Liu Xingwen, He Xiaobin, Zheng Lu, and Jin Jun from the Department of Sociology, School of Social Sciences, Tsinghua University for their support and help. Thanks to teachers Li Caixia, Zheng Qian, and Yu Xin for their kind help. And I would like to thank Professors Xia Jianzhong and Lu Yilong from the Department of Sociology of Renmin University of China for their guidance. I would like to thank Professor Chen Jiyong, a famous economist and my doctoral supervisor in economics at Wuhan University, for his academic guidance. I would like to thank Professor Pu Peide, a distinguished historian, fellow of the American Academy of Arts and Sciences, and my mentor at MIT, for his academic guidance. I would like to thank Professor Liu Jialin, a famous journalism scientist and my head teacher

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of Wuhan University, for his academic guidance. I would like to thank Professor Zhu Wuxiang, a famous financial scientist and my master’s supervisor in Tsinghua University, for his academic guidance. And thanks to Professor Ding Xueliang, a famous sociologist and doctor of Harvard University, for his academic guidance. I would like to thank Professor Ying Xing from the Department of Sociology of Tsinghua University for his paper “A Study on the Informal Financial Crisis in D City from the Perspective of Process and Event” published in the journal of “Tsinghua Social Sciences” before the publication of this book. Thanks to Mr. Wu Jinglian, a famous economist as chief editor, Professor Bai Chongen, dean of the School of Economics and Management of Tsinghua University, and Wu Suping, executive editor of “Comparison” magazine as editorial board member, for supporting the publication of the paper “Development Finance: A Financing Platform between the Government and the Market”. And I would like to thank Professor Golber of the Department of Sociology of Duke University for his contribution invitation on the topic “Developmentalism” and his recommendation to publish “Development Finance: A Financing Platform Between the Government and the Market” in the journal of “Sociology of Istanbul University”. I would like to thank the leaders and editors of “the National Highend Think Tank Report” and “the Results Bulletin” of the National Social Science Foundation. Thanks to Liu Yanhua, Sun Guangyuan, Wu Qiang, and Wang Zhaobin editors from “Qiushi Magazine” and Di Yingna, editor of “Red Flag Manuscripts”. I want to thank Fan Baoling, editor of “Academic Frontier” of “People’s Daily”, and Diao Na, editor of “People’s Forum”. Thanks to the editors of the theoretical section of “Guangming Daily”; Thanks to the editors of the “Economic Journal”; I would like to thank Zhong Guoxing, former editor-in-chief and Yang Yingjie, former vice president of “Learning Times”, the newspaper of the Party School of the CPC Central Committee, Zhang Zhijiang, editor of “Theoretical Dynamics”, Lv Hongjuan, editor of “China Party and Government Cadres Forum”, and other editors. Thanks to Zhu Ping and Zhao Huanxin, editors of “China Daily”, Thanks to Li Bin, editor of Xinhua News Agency, Huang Fu Liping, editor of “Outlook News Weekly”, editors He Junchen and Long Shengdong of “World Studies”, and the editors of “Reference News”. Thanks to Yang Min and Gui Li, editors of the Journal of Wuhan University (Philosophy and Social Sciences) Edition; Thanks to Guo Yuanyuan, editor of “Environmental

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Protection”. Thanks to Li Liqun, editor of “China Banking” magazine. Thanks to Xu Hai and Yi Yan, editors of “Frontline” magazine; Thanks to Li Luyang, editor of “International Financing” magazine. I would like to thank Shang Hao, editor of “China Times” and other editors of academic journals and newspapers for your help and strong support during my publication. Thanks to Professor Zhao Chunjun, former Dean of School of Economics and Management of Tsinghua University; Thanks to Professor Liao Li, Executive Vice President of Wudaokou School of Finance, Tsinghua University; Thanks to Professor Li Cheng, Director of the John Thornton China Center at the Brookings Institution; Thank you to Prof. Xue Lan, Dean of the Schwarzman Scholars at Tsinghua University and Director of the Brookings-Tsinghua Center for Public Policy. Thanks to Professor Pan Qingzhong, Executive Vice President of the Schwarzman Scholars, Tsinghua University; Thanks to Professor Qi Ye, former Director of the Brookings-Tsinghua Center for Public Policy, Director of the School of Public Administration of Tsinghua University and Director of the Institute of Public Policy of Hong Kong University of Science and Technology; Thanks to Professor Xiao Geng of Peking University, the first director of the Brookings-Tsinghua Center for Public Policy; Thanks to Prof. Zhang Yi, Prof. Yao Danya, Prof. Liu Yanxin, Prof. Jia Li, and Prof. Liu Qiang from Tsinghua University; I would like to thank my friends Liao Ming and Dr. Zhao Shaoqin for their support and help. I would like to thank Yang Yanwen, a postdoctoral fellow of the Department of Sociology of Tsinghua University, for her full support and assistance in the study of this book. I would like to thank Dr. Wang Yixuan, Dr. Tian Ying, Dr. Congxiao, Yao Jia, and other scholars for their help in the publishing of this paper. I would like to thank the planning editors Cui Huiling, Han Bing, Qi Tianheng, and the managing editor Wang Song of China Renmin University Press for their great support in publishing this book. Thank you to Professor He Jiankun, former Executive Vice President of Tsinghua University and Dean of the School of Economics and Management, and Professor John Thornton, Director of the “Global Leadership” Program at Tsinghua University (former President of Goldman Sachs, Chairman of the Board of the Brookings Institution, Chairman of the Board of Barrick Gold Corporation, Academician of the

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American Academy of Humanities and Sciences, Chairman of the International Advisory Committee of the School of Economics and Management of Tsinghua University) recommended me to apply for the JD degree of Tsinghua University. Thanks to the cadres and relevant personnel of D City for their strong support in the process of research and investigation! Thank the unit leaders and colleagues for their strong support in the process of writing this book to give strong support! Finally, I deeply thank my wife Lily, my son Ziying, my family, and friends for their selfless love and support! In the end, Many thanks to my research assistant, Ziying Liu, who did a lot of work on the social research and case studies for this book. He is currently studying sociology at Brandeis University. This research was supported by the National Social Science Foundation of China Major Research Project “Accelerating the Construction of the Discipline System, Academic System and Discourse System of Philosophy and Social Sciences with Chinese Characteristics”, project No.: 18VXK005. By the Kunyu River in Beijing July 2021

Liu Weiping

Introduction

The rise of China’s urbanization has triggered the great transformation of modernization in China’s economic and social structure. With sociological theories and research methods, this book focuses on analyzing and interpreting the social trust problems faced by China’s economic and social modernization transformation from the perspective of financial mechanism supporting urbanization, on the basis of the expansion to the developmental financial development, as well as research suggestions on building national trust in the process of China’s economic transformation. The first part of this book, “Social Trust and Informal Finance”, discusses the basic relationship between social trust and informal finance. It is found that informal finance is the basic way to support the rapid development of regional urbanization and make up for the lack of formal financial resources. In the context of unbalanced allocation of formal financial resources in the system, over the past 10 years, City D has built a huge informal financial system based on informal lending by virtue of its acquaintance network in the regional society. This informal financial system has extensively and deeply involved many rural families in the economic and industrial modernization process initiated by urbanization, greatly supported and promoted the local urbanization process. The second part, “National Trust and Economic Transformations”, focuses on the modernization and transformation of China’s economic system from the perspective of financial mechanism innovation. The main challenge facing China’s economy today is the unsustainable growth rate, which is due to insufficient demand. To solve the problem of xv

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INTRODUCTION

expanding demand and sustainable growth, we can promote reform from four aspects: first, improve the financial system to make up for slowing economic growth and weakening export markets; Second, implement the principle of competition neutrality, break monopoly, and make private enterprises play a greater role; Third, actively and steadily promote the urbanization and improve its quality; Fourth, comprehensively raise the development level of export-oriented economy and improve the level and efficiency of opening up. Sequence: Social trust is an important cornerstone for sound operation and healthy development of the economic society Dr. Liu Weiping’s academic monograph “Social Trust: Informal Finance and Economic Transformations” is a sociological study of informal financial behavior and economic and social transformation in the process of county urbanization. He believes that the prosperity of informal finance has played an important role in supporting the rapid development of county urbanization in the past 20 years, when formal financial resources are very poor, after the urbanization has reached a certain scale, the informal finance supported by the traditional social trust network cannot match the increasingly complex modern industrial development. It is urgent to establish a modern financial system based on system trust. Therefore, Dr. Liu extends his research to the developmental financial development and the construction of national trust in the process of economic transformation in China. The topic selection and span have important academic value and practical significance in both academic and social practice. Dr. Liu Weiping works in a national financial institution, he has long been concerned with and studied the modernization and transformation of China’s finance and economy. He used to receive theoretical knowledge and research paradigms in the field of economics and finance, and later pursued a doctorate in sociology at Tsinghua University under my guidance. As we all know, the modes constructed by economics based on the hypothesis of “rational man” have caused much discomfort in explaining social phenomena and behaviors. Therefore, the concept of “bounded rationality”, the hypothesis of “social man”, social capital, and social network, and other sociological concepts, thoughts, and research perspectives are increasingly valued and applied in economics and finance. This book not only reflects the transformation process of the author’s ideological understanding from economics and finance to sociology, but

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also reflects his deep thinking on the transformation of China’s economic and social modernization brought by urbanization. It is generally believed that the discipline of sociology originated in the 1930s. Early sociologists mainly focused on major social problems during the period of social modernization and transformation. Sociology generally respected Karl Marx, Max Weber, and Emil Durkheim as the three founders. Of course, there were more and even more than a dozen masters. Karl Marx’s most important work “Das Kapital” was about finance, and of course there was a time when sociologists did not pay enough attention to finance. Today, however, no one dares not to pay attention to finance. Especially for the Chinese people, after more than 40 years of reform and opening up, the Chinese people not only pay more attention to their own income, but also pay more attention to their own property. Both income and property are measured by monetary finance. Since it is closely related to the daily life of ordinary people, sociologists can certainly not ignore it. Therefore, there are many people in our social circles engaged in “financial sociology” research. Dr. Liu Weiping’s work mainly studies the causes and laws of the emergence, development, and changes of the informal financial crisis in the process of social transformation from the sociological perspective, and explains the importance of the modern credit system for urbanization and modern economic development. Compared with the research of economics and finance, it reflects the integrated and comprehensive characteristics of sociology and shows the charm of sociological research. Taking City D, which he is familiar with, as a case study, the author explores a major financial case in the region, analyzes the emergence, development, and collapse of informal finance reflected in the case, as well as the whole process of the government’s efforts to deal with the crisis. On the one hand, the author deeply analyzes and inspects the informal financial system of City D from two dimensions of personal trust and systematic trust. The author believes that the key to deal with the informal financial crisis is to rebuild modern systematic trust. On the other hand, the author explains the relationship between social trust system and informal finance from the perspective of sociology, which is also quite new. This study is very distinctive in the following aspects. First, this study empirically analyzes social trust through informal finance, and dynamically analyzes the transformation of the trust relationship between the general public and informal finance from the whole process of the rise, development, crisis outbreak, and local government’s

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governance of informal financial crisis. The research on social trust in this study is an empirical analysis from the micro to the meso level. It is a field analysis and investigation of social trust in the context of regional economic and social transformation, social trust is no longer an abstract and grand moral rhetoric. Second, this study finds that the informal lending based on traditional interpersonal trust is in line with the traditional culture, traditional folk customs, and traditional small-scale peasant economy in the region. When a region is in a situation of low social mobility and relatively closed regional society, there will not be too much problem. However, once the informal financial market based on such trust encounters the rapid urbanization of such a large scale in City D, there will be a huge mismatch between the rapidly expanding urban aggregate and the fragile informal lending based on private relationships. Therefore, the rupture of social trust led to the outbreak of informal financial crisis, only the modern system trust based on public power and legal norms can solve the contradiction between regional financial structure and economic structure. Third, this study proposes the problems of social trust rupture, social trust transformation, and social trust reconstruction. Social trust rupture refers to the division of trust transformation caused by the mismatch between interpersonal trust based on personal trust and the modern financial system. In fact, it is the rupture of the basic system in the process of economic and social modernization transformation, namely the interpersonal trust relationship widely embedded in society cannot be transformed into systematic trust, leading to the social capital flows also cannot legally effective. This structural break in trust, therefore, reveals the basic conundrum of economic and social transformation. Fourth, this study highlights the Chinese characteristics of social trust during economic transition. Informal finance was originally a purely individual economic behavior, but after the outbreak of the crisis, almost all the responsibilities were finally transferred to local governments. Local governments also hope to rely on public power to build regional financial system when dealing with informal financial crisis. The trust system reconstruction under the intervention of public power is very consistent with the logic of Chinese society and highlights the Chinese characteristics of social credit reconstruction. The local grassroots government itself is responsible for the serious informal financial crisis in City D. As the “night watchman”, the government witnessed the formation of largescale private lending and fund-raising, but did not take any notice. They

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didn’t get involved until there was a serious problem. Therefore, after the outbreak of informal financial crisis, the public naturally turned to the government to deal with the problem. The issue of trust reconstruction better reveals the relationship between the government and society in the transitional period. Finally, this study extends the scope of community research. At present, most sociological community studies focus on a community within the scope of a community, but this study takes tracking social facts and events as clues, greatly expand the research area. The informal debt event explored in this study occurred in a wide range of regions such as City D, District N, City S, and County X, this study followed the principle of pursuing social facts, greatly expanded the scope of traditional community research, and tracked the whole region of the city, county, and district where the event and group event occurred. Based on the process of the generation and development of informal debt, this study analyzes the social fact of the emergence and development of finance in City D and the outbreak of informal financial crisis, and the research method is also distinctive. Dr. Liu Weiping’s book “Social Trust: Informal Finance and Economic Transformation” is based on his doctoral dissertation in sociology at Tsinghua University. I remember that he got all A in the anonymous evaluation of his doctoral dissertation in Tsinghua University, which is not easy in the anonymous evaluation system of doctoral dissertation in Tsinghua University. Now, his high-level academic works can be officially published, as his doctoral advisor, I am also very pleased. In conclusion, Dr. Liu Weiping’s work has made theoretical and empirical contributions to the research, and I would like to congratulate him especially for the publication of his academic achievements by the academically influential Renmin University Press of China. After the publication of the Chinese version, it has produced a good academic and social impact, and the English version is published in cooperation with Palgrave Publishing Group, one of the world’s top publishing institutions, which is worthy of celebration. Senior professor of liberal arts at Tsinghua University Xiong Zhixing Building in Tsinghua University March 15, 2022

Li Qiang

Contents

Part I Social Trust and Informal Finance 1

2

Significance of the Sociological Study on Informal Finance 1 Why Do We Study Informal Finance and the Social Problems It Causes? 2 Sociological Significance of Studying Informal Finance 3 Origin of Research: Observation, Study, and Thinking on Finance in City D After Returning Home in Recent Years 4 Theoretical Basis: Sociological Discussion on Financial Issues 5 New Theoretical Perspectives: Social Trust and Transformation Theory 6 Research Significance Concepts, Methods, Research Findings, and Innovations 1 Core Concepts of This Study: Personal Trust and System Trust 2 Place Names and Personal Names in This Study 3 Research Methods: A Case Study Based on City D 4 Main Findings 5 Research Innovations and Deficiencies

3 3 5

13 21 28 32 37 37 50 56 59 62

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3

4

5

CONTENTS

Traditional Social Trust and the Rise of Informal Finance in City D 1 The Scale of Informal Finance in City D 2 Important Background of the Rise of Informal Finance in City D 3 Several Stages of Informal Finance Development in City D Social Trust Rupture and Informal Financial Crisis in City D 1 The Outbreak Process of Informal Financial Crisis in City D 2 Spreading Rumors and Panic: The Collapse of Social Trust Network 3 The Government Becomes the Last Reliance: Creditors’ Struggle and Rights Protection 4 The Weapon of the Weak Arouses Social Concern 5 Resorted to the Court, but Faced Enforcement Difficulties 6 With Demonstrations and Petitions, Local Governments Have Become a Lifeline 7 Summary: The Rupture of Social Trust is the Root Cause of the Spread of Informal Financial Crisis in City D Strategies of Different Departments to Cope with Informal Financial Crisis 1 Financial Sector: Tightening Credit and Building Risk Firewall 2 Regulatory Authorities Urged to Crack Down on “Illegal Fundraising” 3 Grassroots Government: Maintaining Stability and Pacifying 4 The Judicial System: Willing to Be the creditor’s Grandson 5 Summary of This Chapter: Crisis Response Neglects the Construction of System Trust

67 68 71 82 103 104 111 124 125 126 128

129 133 134 138 139 145 147

CONTENTS

6

7

Efforts to Reshape Regional Finance with Government Credibility 1 It’s Hard to Recover: Regional Economy After the Collapse of Informal Debt 2 Efforts of State—Funded Guarantee to Reshape Regional Finance: From City Investment to Venture Capital 3 Summary: The Difficulty of Trust Rebuilding and the Root Cause of Government’s Failure to Reshape Regional Finance The Reconstruction of Trust System and the Modernization Transformation of Regional Finance 1 Objectively Judging Informal Finance is the Premise of Correctly Handling Crisis 2 It is Urgent to Change from Traditional Trust to Systematic Trust in the Transformation of Social Modernization 3 Top Priority: Building a Financial System that Matches the Modern Economy

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151 152

163

176

179 180

187 191

Part II National Trust and Economic Transformations 8

Development Finance: Crack the Urbanization Financing Risk with Government Credit Enhancement 1 The Construction of New Urbanization Is Inseparable from the Innovation of Investment and Financing Modes 2 Practice of Innovation in Investment and Financing Mode of Ecological Urbanization Construction 3 Innovation of Investment and Financing Mode to Realize the Comprehensive “Ecological, Social, and Economic” Effects 4 Accelerate the Construction of China’s Medium and Long-Term Financing Systems

201 202 204

208 210

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Development Finance: A Financing Platform Between the Government and the Market 1 The Characteristics of Development Finance with Chinese Characteristics 2 “Wuhu Model”: Use Government-Organized Credit Enhancement to Resolve Urbanization Financing Risks 3 “Kibing Model”: Development Finance Solves Issues Concerning the Financing of International Production Capacity Cooperation 4 Overseas Political Risks of Chinese-Style Development Finance 5 Conclusion The Global Financial Change and China’s Monetary Policy in the New Era 1 The Enlightenment of Global Financial Reform and China’s Financial Positioning 2 Challenges for China’s Finance to Achieve Global Strategic Positioning 3 The Reform of International Monetary System and the Strategy of RMB Internationalization China’s Economic Adjustment and Rebalancing: Inspirations, Challenges, and Strategies 1 The Enlightenment of China’s Economic Adjustment and Rebalancing Strategy 2 The Challenges of China’s Economic Adjustment and Rebalancing Strategy 3 The Strategy of China’s Economic Adjustment and Rebalancing 4 Five Fulcrums for China’s Economy to Cope with Current Challenges 5 Comprehensively Upgrade the Development Level of Export-Oriented Economy and Improve the Level, Standard, and Efficiency of Opening Up

229 232 240

245 249 255 259 260 267 271 283 284 289 295 302

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References

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Index

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About the Author

Liu Weiping born in Changsha, Hunan province, is a Ph.D. holder, a professor, and a Senior Research Fellow with China Development Bank. He holds a Ph.D. in law from the Department of Sociology, Tsinghua University, presides over Professor John Thornton’s Global Leadership Program, and holds an M.A. in management; he holds a Ph.D. in Economics and a B.A. from and is a dualemployed professor of law and economics at the Department of World Economics, Wuhan University; he is a visiting scholar and researcher at the MIT Sloan School of Management and School of History. His main research interests include world economy, economy and society, international finance, and national strategies. He is the author of Global Leadership, A Study on the American Monetary Policy Adjustment and China’s Countermeasures, Social Trust: Informal finance and Economic Transformations, China’s Economy and Foreign Policy: xxv

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ABOUT THE AUTHOR

A New Pattern of Open Economy in the Era of Competitive Cooperation and other works, as well as China-U.S. Infrastructure Cooperation Plan, Challenges Facing ChinaUS Economic and Trade Cooperation and Recommended Responses, Opening up Westward: Jointly Building the Silk Road Economic Belt and many other research reports. He has participated in and presided over major projects funded by the National Social Science Fund of China and major projects tackling hard-nut problems.

List of Figures

Chapter 1 Fig. 1 Fig. 2

Comparison of net operating income and property income of Chinese urban residents from 2002 to 2009 Trend chart of Informal Finance Scale in Zhejiang Province from 2000 to 2017

8 11

Chapter 2 Fig. 1

Location of City D and the relationship between districts and counties

51

Chapter 3 Fig. 1 Fig. 2 Fig. 3 Fig. 4 Fig. 5 Fig. 6

Population and urbanization rate of districts and counties in City D (six popular data) Total agricultural output value and its growth rate of City D from 2005 to 2016 Growth curve of three industries in City D from 2005 to 2017 Schematic diagram of informal personal financing network IOUs issued by Group J in City D to investors Schematic diagram of regional financial market structure in City D

74 75 76 89 92 98

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LIST OF FIGURES

Chapter 6 Fig. 1

New loans and institutions of small loan companies in China from 2011 to 2016

153

List of Tables

Chapter 1 Table 1

Financial system promoting urbanization in the United States, Japan, and Germany

33

Chapter 2 Table 1

Key persons involved in the field investigation and interview

54

Chapter 3 Table 1 Table 2 Table 3 Table 4 Table 5 Table 6

Key cases of cracking down on illegal fund-raising in City S Balance and growth of local and foreign currency deposits and loans of financial institutions in City D in 2015 Deposits and loans of financial institutions in City D from 2006 to 2015 Capital gap of economic development zone in District N of City D Interest rates of RMB deposits in 2015 Loan interest rates of major commercial banks in 2014

70 79 80 81 83 86

Chapter 4 Table 1 Table 2

Collapse schedule of informal fundraising in City D Loans of 8 investors interviewed by the author

111 126

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Chapter 9 Table 1

Characteristics of development finance

233

PART I

Social Trust and Informal Finance

Introduction The traditional social trust is dominated by individual trust in acquaintances in China. However, in the rapid social changes brought by rapid urbanization, the traditional trust network is increasingly broken, and the modernization of China’s economic society is faced with major difficulties on how to rebuild and promote social trust. Taking the emergence, development, collapse, and crisis management of informal finance in the process of urbanization in City D as an example, this study describes the economic and social crisis caused by the rupture of social trust structure in the process of regional economic and social transformation, analyzes the basic laws of the generation, maintenance and rupture of the social trust in regional economic life and also the serious problems faced by trust reconstruction. The study found that in the context of unbalanced allocation of formal financial resources in the system, over the past 10 years, City D has built a huge informal financial system based on informal lending by virtue of its acquaintance network in the regional society. This informal financial system has extensively and deeply involved many rural families in the economic and industrial modernization process initiated by urbanization, greatly supported and promoted the local urbanization process. However, when the national macroeconomic policy was tightened, the real estate market cooled rapidly. After the collapse of the informal financial system, focusing on the disposal of informal debt, thousands of investors began

2

PART I:

SOCIAL TRUST AND INFORMAL FINANCE

to defend their rights and fight against the problem of informal debt disposal through various ways. A protracted group event occurred in City D, and the local government was faced with unprecedented pressure of crisis management. It can be seen from the whole process of the emergence, development, crisis outbreak, and governance of the informal financial system in City D that the informal finance is an important social capital bond on which regional economic and social development based on personal trust, and the establishment of such social capital is based on the strong relationship network of acquaintance society. However, as a capital factor, informal finance is involved in the process of urbanization and the modern industrial chain with real estate as the core, and it is a strange black hole for the majority of individual investors. It is urgent for informal finance to establish a modern “system trust” with the support of supervision department and legal regulation system to provide “ontological security” for creditors, so as to overcome the underlying crisis of social trust rupture. Unfortunately, the “system trust" that modern economic society must rely on has never been established. The research holds that the informal finance developed through relationship trust on the basis of differential order pattern is a financial form that matches the industrial structure of small-scale economy in “premodern society”. It is far from being able to support the large-scale modern economic and industrial system dominated by urbanization. The case of City D shows that the modern transformation of economic society requires the establishment of a new financial system based on modern system trust.

CHAPTER 1

Significance of the Sociological Study on Informal Finance

This part of the book studies the problems of informal finance, especially the broken debt chain caused by the broken social trust, which leads to the informal financial crisis and its resulting problems. The second chapter of this book will give a clear definition of informal finance and its related concepts, which will not be described here. As a science that studies the conditions and laws for the sound operation and coordinated development of society, sociology has always been an important task to research and solve social problems as a discipline. For developing the vision of sociology discipline and promoting the healthy development of China’s economy and society, the study of informal financial crisis and its resulting social problems has an important theoretical and practical significance.

1

Why Do We Study Informal Finance and the Social Problems It Causes?

“Deepening the reform of the financial system and enhancing the ability of finance to serve the real economy” and “holding the bottom line of avoiding systemic financial risks” are the arduous tasks and fundamental principles that China’s financial work must adhere to, as pointed out in the report of the 19th National Congress of the Communist

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Weiping, Social Trust, https://doi.org/10.1007/978-981-99-2931-3_1

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Party of China. The economic and social development resource endowments of various provinces and cities in China vary greatly, the level and stage of regional development vary, the industrial structure varies from place to place, and the social history and culture are different. The basic management system of China is a national unified and centralized management system, which has established a formal financial system with centralized financial management. The advantages of this system are centralized management, high efficiency, but there are both advantages and disadvantages. Its disadvantage is that it is difficult to cope with the various local financial realities, which is also an important reason why the informal finance has emerged in many places in the past 40 years of reform and opening up. Under this situation, in order to implement the basic principles of the central financial work, we must deeply investigate and understand the actual state of financial operation in the economic life of different regions, analyze its actual role and limitations in serving regional economic and social development, so as to constantly improve our financial system, structure, and policies. For the research of the informal finance, it is far from enough to rely only on the professional research of economics, finance, and other disciplines. Economics and finance focus on examining the role of finance in economic operations from the professional perspectives of the formal financial system, monetary policy, interest rate, exchange rate, monetary stock, increment, etc. They often fail to go deep into the impact of financial policies and systems on economic and social life. Sociological research has always emphasized the comprehensive perspective, and the study of the informal financial issues in this study highlights the holistic sociological perspective, which not only attaches importance to top-down research, but also pays more attention to bottom-up research. Through the empirical case study of City D, this study investigates the actual situation of the regional economic and social life of the informal finance at the municipal and county level in China, it is expected to do some empirical research work to promote the innovation of the financial system.

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2 Sociological Significance of Studying Informal Finance Although classical sociologists Marx, Weber, Emile Durkheim, Simmel, and others have discussed the financial problems of modern society, but sociology was born in the industrial society, the classical sociological theory focuses on exploring the impact of industrial enterprises and other entity organizations, and the effects of economic activities on the modernization of human economy and society, there is not much research on the financial field. With the transition from the industrial society to the post-industrial society, finance has become the core issue concerning the economic society and even the overall political situation. Sociology must pay close attention to the important impact of financial, economic, and social modernization and its mechanism. Compared with the formal financial institutions and systems represented by banks and securities, the informal finance centered on informal lending and informal fund-raising has more sociological implications. Since Emile Durkheim’s “Norms of Sociological Method”, the holistic and structuralist perspectives have become the basic methodological perspective of sociological research. Under this perspective, sociological methodology is rooted in “society” and “sociality”. “Society”, “Folk Society”, or “Civil Society”, which is relatively independent of political and economic systems, becomes the core of sociological research. In the preface of “Political Economy”, Karl Marx also attached great importance to the concept of “social life”, and proposed the four systems of material life, social life, political life, and spiritual life and their interrelationships (Zheng Hangsheng, Li Qiang, 2013). In the field of modern and contemporary sociology research, such “society” and “sociality” are highlighted in the high attention to daily life and civil society (Xiao Ying, 2006). Sociology has undergone the so-called “daily life turn”. From Goffman’s drama theory in the 1930s to phenomenological sociology and ordinary people’s methodology in the 1950s and 1960s, sociological research has increasingly returned to daily life and civil society. Garfinkel’s “Methodology for Ordinary People” emphasizes the function of human behavior in constructing social order. Bushia constructed a theory of consumer society around daily life; Elias constructed the theory of daily life world dominated by the relationship chain. Foucault, Lefebvre, and others carried out politics in daily life. For this reason, the famous contemporary French sociologist Bourdieu even said: “Returning to daily life is the

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vitality of sociology” (Bourdieu, Huacand, 1998). Informal finance refers to separate from the formal financial institutions and organizations such as bank of informal lending, informal financing, and informal financing behavior, is now almost universal in the small and medium-sized counties in the country, an informal economic and social phenomenon, the informal finance contains the informal financial behavior, daily and social spontaneous, self-organization of dimensions, it provides a good material for studying financial problems from the perspective of sociology. 2.1

The Public’s Extensive Demand for Financial Management Is the Inevitable Trend of Economic and Social Transformation

After more than 40 years of reform and opening up and the development of market economy, many Chinese households have generally had a certain amount of savings and assets, how to keep and increase the value of wealth at hand has become a common concern of people today. The rise and development of informal finance, on the one hand, reflects that the formal financial structure in China fails to meet the demands of the public investment and financing, on the other hand, it also reflects the broad demands of the public for financial management. Experience shows that the higher the degree of economic modernization of a country, the greater the proportion of residents’ assets in total income, and the amount of residents’ asset income can even become an important symbol to measure whether a country and nation is rich and strong. With the development of modern finance and capital market, the asset income of some social groups has replaced the labor income and become the main factor to get rich, which, of course, has further aggravated the social division between the rich and the poor. Thomas Piketty, a famous French economist revealed in his book “Capital in the 21st Century” that: after the “violent adjustment” in the first half of the twentieth century, the capitalist world constantly adjusted its economic and social structure. By the middle and late last century, the rate of return on capital had declined, the rate of return on labor had risen, and the capitalist world had experienced the process of wealth equalization. But in the second half of the last century, the rate of return on capital again exceeded the rate of return on labor, and a few increasingly controlled most of the wealth. Capitalism, as Marx predicted, “Capitalism has once again begun to haunt the earth of Europe and America”.

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Piketty’s long-term analysis of the history of human economic and social development found that: For more than 300 years after 1700, the annual growth rate of global per capita GDP was 0.8%. Although the per capita GDP had a considerable growth rate after the industrial revolution, especially in the twentieth century, its long-term downward trend was also obvious. For example, the annual economic growth rate from 1950 to 1970 was 4%, and it dropped to 3.5% from 1990 to 2012. It is likely to fall to 3% between 2030 and 2050 and 1.5% between 2050 and 2100. In the nineteenth century, rental returns were around 4–5% a year, and in the twentieth century, they were almost the same. Since the nineteenth century, bond yields have averaged 3–5% and equity yields 7–8%. As a result, over the long course of history, the annual rate of return to “capital” has averaged 5% over the past 300 years, for most of that time higher than the rate of economic growth, and the income gap between those who rely on labor and those who own capital will grow ever wider. In the twenty-first century, people without asset income can only become poorer and poorer, and their wealth will be highly concentrated in a small number of people, who have strong earning abilities and make money quickly mainly because they have capital (Li Yi, 2016). “Capital in the 21st Century” explains the phenomenon that capital income is higher than labor income, or even higher than the economic growth rate in Western capitalist countries, which also made us think of two problems: on the one hand, aiming at the phenomenon of high returns on capital, China should also study the relevant economic and social policies to prevent the trend of widening the gap between the rich and the poor; on the other hand, we need to improve the financial system and mechanism so that the broad masses of the people can really enjoy the benefits of capital rights, financial rights, and property gains. Just as the report of the 18th National Congress of the CPC (Communist Party of China) pointed out, we should “increase people’s property income through multiple channels”. With the continuous in-depth development of marketization and the combination of distribution according to the labor and the production factors, the proportion of interest income, dividend income, bonus income, rental income, and other property income in the total income of Chinese households, especially urban households has been rising. As shown in Fig. 1, from the perspective of property income of urban residents, the growth rate of property income from 2002 to 2009 was relatively slow, while from the perspective of asset-based production and

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Fig. 1 Comparison of net operating income and property income of Chinese urban residents from 2002 to 2009

operation income, its proportion in income increased year by year from 2002 to 2009. Some studies have pointed out that China’s financial structure has been dominated by banks for a long time, with problems such as low-interest rates, underdeveloped capital markets, and single investment channels. In the current situation of extremely uneven distribution of financial assets in China, it is relatively easy for residents of large cities to hold financial assets, while it is very difficult for residents of small and medium-sized cities to hold non-physical financial assets such as securities. Therefore, it is very obvious that residents in small and medium-sized cities are forced to save. The surplus funds of low-income people can be deposited in banks or purchased bonds with low appreciation, while high-income people often choose to invest directly in the industry. Through capital appreciation and gradual accumulation, the income of the surplus assets of the high-income class is significantly greater than that of the lowincome class (Zhang Chenchen, 2012). Through capital appreciation, the rate of return on residual assets of high-income groups is significantly higher than that of low-income groups. Coupled with the continuous low-interest rate of banks, undeveloped financial capital market, relatively single investment channels, and other factors, and the Matthew effect, the income gap between high-income and low-income groups will become wider and wider. At the same time, the development of the capital factor market accelerates the differentiation between high-income group and

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low-income group. This is also confirmed by the data released by the National Bureau of Statistics over the past years. The widening of the income gap in China is reflected in the difference in income growth among different groups, and the higher the income, the faster the growth rate. In 2009, the income of the lowest income group of urban residents in China was 1.98 times that of 2000, and 2.61 times that of the middleincome group, but the highest income group was 3.53 times. Similarly, the income of the lowest income group in rural areas in 2009 was 1.81 times that in 2002, while the highest income group earned 2.09 times. In addition, many domestic sociological studies also found that in recent years, asset income replaced labor income and became the key factor determining people’s social stratification (Qiu Liping, 2006). Under such an economic and social background, it has become the common demand of urban and rural households to ensure the preservation and appreciation of wealth by participating in various financial and investment activities. In recent years, in addition to the property market, other formal financial institutions, such as bank savings and securities markets, have failed to play this role. Due to the limited access to financial management through formal channels or the low-interest rate, some financial assets of urban and rural residents began to look for other ways, or were attracted by other ways and means. As a result, informal lending and informal finance based on high-interest rates have been booming. The rise of chaos in informal finance reflected the financial needs of the general public. Many urban and rural households were involved in the informal capital market, and the informal finance actually involved the economic interests of many households. Sociology is responsible for studying the system and mechanism of the sound operation and coordinated development of society. It pays close attention to the economic and social behaviors of people and the crowd, and the general demand of the general public for financial management should become an important topic for sociological research on today’s social phenomena and problems.

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2.2

The Informal Finance Is Related to the Modernization Transformation of Regional Economic Society

Sociology is a discipline born with the modernization transformation of Western economic society. The modernization transformation of economic society has become a basic issue that sociology has always been concerned about. The birth and development of informal finance is an important manifestation of the modernization transformation of economic society. The establishment and improvement of modern financial system is an important symbol of a country’s economic and social modernization. Under the financial system dominated by state-owned banks, informal finance has been playing a key role in China’s economic and social development and operation. As the researchers pointed out in “Backstreet Finance”: Since the economic reforms of the late 1970s, Chinese entrepreneurs have established more than 30 million private enterprises, however, the vast majority of these private enterprises have no access to official loans. State-owned banks serve state-owned enterprises, while most private banks struggle to gain legal recognition. So, how do Chinese private entrepreneurs raise funds to conduct business? Small business owners have circumvented the country’s financial laws and created dizzying informal financial institutions that effectively mobilize local social and political resources. Entrepreneurs and local officials can take advantage of the fickleness or ambiguity of official political and economic institutions to promote local prosperity (Cai Xinyi, 2013). In addition, many studies have shown that although small and medium-sized enterprises play a crucial role in activating the market and providing jobs, due to the policy orientation and risk preference of China’s formal financial system serving state-owned enterprises and large enterprises, small and medium-sized enterprises are generally faced with financing difficulties in their development process. As an important supplement of formal finance in China, informal finance has made up for the difficulty of financing small and medium-sized enterprises. Therefore, throughout the country, where the informal economy has developed well, the informal finance is also very active. For example, in Zhejiang, research shows that informal finance plays an extremely important role in the economic and social life of Zhejiang residents. In 2017, the disposable income of Zhejiang residents was 2092.987 billion yuan, and the scale of informal finance was 874.226 billion yuan, accounting for 41.77%

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of the disposable income of Zhejiang residents in that year (see Fig. 2). For another example, in Wenzhou, where the market economy developed earlier, despite the occurrence of many informal financial crises in history, the informal finance played an important role in supporting the development, transformation, and upgrading of the local informal finance, and Wenzhou’s economy achieved the phoenix nirvana in the informal financial crisis. It must be noted that although the establishment of the informal finance has promoted the development of regional economy in a certain period of time and laid a certain foundation for the modernization of the entire Chinese economy, there is no doubt that both the informal financial system in Wenzhou and that subsequently emerged in the Yangtze River Delta, the Pearl River Delta, and other places have finally gone into crisis. Why can’t this kind of informal finance get rid of the fate of collapse finally? And all of them go into crisis and collapse? The most fundamental reason is that the legitimacy of informal finance has not been solved by law and system. In fact, each crisis of informal finance is caused by the great adjustment of the regional economy and industrial structure. In each crisis, the development of informal finance running in gray areas has also moved toward standardization and legalization to a certain extent. The standardization and legalization of the informal finance are actually related to the modernization of regional economic society.

Fig. 2 Trend chart of Informal Finance Scale in Zhejiang Province from 2000 to 2017

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2.3

The Informal Finance Reflects the Interaction Between the National Financial System and Grassroots Society

The new institutionalism of sociology has a basic theoretical view that whenever the formal system fails, the informal system will prevail. The growth and development of informal finance are actually the result of the imbalance between the state’s formal financial institutions and the financial system. The informal finance is an important window to observe the state’s formal financial system and the social economic life at the grassroots level. The relationship between the state and society has always been a basic issue in sociological research. In the past, sociological research on the relationship between the state and society mainly focused on urban and rural communities. Scholars took urban and rural communities as a centralized field to observe the interaction between state power and society. It focuses on the relationship between grassroots government, residents, and social organizations to investigate the infiltration of state power into grassroots society or the development of social autonomy. However, with the increasingly serious separation of working and living, the social communication is constantly networked and virtualized. Therefore, through communities, the relationship between the state and society is often faced with many limitations. Informal finance, as an informal financial system generated and developed outside the national formal financial system, essentially reflects the interactive relationship between the state system and the grassroots society. Just as some researchers have pointed out: the rise of informal finance in China is an important event in the vicissitude of the financial system. Informal financing is to induce the growth of the financing system in the mandatory institutional change led by the government. As a market-oriented financing system, it provides strong financial resource support for the gradual reform of China’s economy. With its institutional advantages and strong diffusion effect, informal finance will have a positive impact on the institutional innovation of state-owned banks and even the reform of the entire financial system (Song Donglin, Xu Huili, 2005). Therefore, studying the emergence and development of the informal finance is also an important window to better understand China’s formal financial system.

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3 Origin of Research: Observation, Study, and Thinking on Finance in City D After Returning Home in Recent Years As a researcher engaged in financial research for many years, I have paid more attention to the national macro monetary and financial policy and strategic reform for a long time in the past, but relatively less attention to the phenomenon of informal finance. It was not until one year that I went back to visit my hometown and became very interested in the financial supporting problems in the process of urbanization in my hometown. On the one hand, I was shocked and amazed by the great achievements of urbanization in my hometown over the years. On the other hand, I was also worried about the capital shortage and financial chaos in the urbanization of my hometown. In order to make clear the actual function and existing problems of financial systems and policies in regional economic and social development, and further to promote the formation of a new financial system of urbanization, I am determined to conduct research on the phenomenon and problems of informal finance caused by the urbanization process in my hometown City D as the material. One weekend in the late autumn of 2013, I returned to the capital of my hometown City A to visit my parents. As soon as I got home, two distant relatives came from their hometown in County X. This time, they also brought someone I didn’t know—a deputy director of the county Urban Construction Bureau. After some pleasantries, the deputy director said: now the whole country is undergoing a new type of urbanization, you are working in the capital, and you should help the development of your hometown! And he also took out several planning materials, such as “Overall Planning Scheme for the Protection of County X Historic and Cultural City” and “The Second Water Plant Project in County X” from his briefcase. The next day, their county leaders, directors, and other relevant personnel came. The main purpose was to consult how to obtain financial support from financial institutions through some government and market-oriented channels in the process of promoting new urbanization in the country. County X, City D, is my father’s hometown and also my native place. Although I have not been back many times before, I still know the situation there. After all, some relatives often come and go. It should be said that the scenery here is beautiful, the folk customs are simple, the people are intelligent and capable, and they advocate learning. The people here

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are very industrious, although they are not very rich, most of them have no worries about food and clothing. The villagers come and go frequently. Food must be given to each other during the Spring Festival. Therefore, relatives send new-year goods such as “Ciba” and “rice wine” made by hand on the Spring Festival. Ciba is baked with charcoal fire or fried in oil, and it tastes very delicious. When we had dinner together at home, listening to them talking about their beautiful yearning for urbanization in their hometown dialect and tasting the mellow “beard wine” (a kind of rice wine) of their hometown, I fell into deep meditation. It was more than ten years ago that I went there for the first time. It was about 300 kilometers from the provincial capital to County X, and it took me six hours to go there. The highway conditions were very bad, with a large section of roads being muddy. Roads have since improved, but it still takes four hours to drive from the provincial capital to County X. It is also rich in natural and land resources, especially mineral resources and tourism resources. With a population of more than 1.4 million, it is one of the largest and most populous counties in China, but it has long been a “national poverty-stricken county”. What is the reason? How to solve it? How can I help my hometown to catch this new urbanization express? This time the relatives from County X drove to the provincial capital, and it only took 2–3 hours to walk more than 200 kilometers of highway. I told them the main reason for the poor county here was the underdeveloped transportation. Now that transportation is so developed, why is it still poor and backward? They said: “Although the transportation is developed, the foundation of our economic and social development is weak and there is no enterprise to invest in it. The transportation development only exacerbates the outflow of capital and talents. You should know that rich people go to the provincial capital to buy houses and send their children to school there, and those who are slightly worse also go to prefecture-level cities. Therefore, to develop our county, we need to rely on the implementation of superior projects to develop and drive investment. We should make use the cap of this poor county, get more national project fund support to speed up our county out of poverty and become rich. We hope to seize the great opportunity of this new round of urbanization, integrate project funds and interest-free and low-interest loans to develop the local economy”. What these local officials said is also very reasonable. I am deeply impressed by their initiative and enthusiasm for running the project. First of all, they regard me as a leader, in fact, I am just an ordinary researcher,

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and it is impossible for me to use my power to help them, even if I had that power, it would be against the discipline. However, in their logic, the resources needed for local development are mainly supported by the leaders above. Therefore, it makes me more curious about the local economic and social development: I know that the central government’s policies are so good, but why is the local economic and social development so difficult? Is there something wrong with our macro policy? Or is there a problem with local enforcement? Secondly, an initial judgment formed in my mind at that time was that China’s urbanization process has a long way to go. The Midwest cities and counties that absorb the vast majority of the nation’s population have been in and will remain in the stage of “compensatory urbanization” for a long time to come. The main reason why the population pressure in megacities such as Beijing, Shanghai, Guangzhou, and Shenzhen is extremely high is that the vast city-county level cities and towns in the central and Western regions are not sufficiently developed. Under the current institutional environment, megacity has produced a “siphon effect” on resources and talents in the vast central and Western regions, and the counties and cities in the central and Western regions are further hollowing out. What kind of economic and financial policy system is needed to reverse this trend and promote the balanced and full development of the central and Western regions? Since then, these two issues have been the focus of my attention and thinking. In recent years, I have experienced the economic and social development in my hometown for several times, which is also an important reason for me to study and pay attention to the development of informal finance and regional economic society. 3.1

City-County Urbanization with Scarce Financial Resources

What I feel most about is the urbanization of my hometown. There is no doubt that the urbanization led by prefecture-level and county-level administration is the fundamental force driving the regional economic and social development in the past decade. However, compared with the developed coastal areas, and the cities and towns in or around Beijing, Shanghai, Guangzhou, Shenzhen, and other megacities, the financial resources of most cities and counties in China are extremely scarce. The siphon effect of megacities and economically developed areas on talents and resources further aggravates the imbalance in the distribution and allocation of financial resources. However, the experience observation

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and various data show that, even under the situation of limited financial resources constraint over the past decade, different districts and counties under the jurisdiction of City D have made remarkable achievements in urbanization, driven by the urbanization led by the city-county level, the economic and industrial structure of each district and county has begun to modernize. The modernization transformation of regional economic and industrial structure is highlighted in the following aspects: (1) The industrial structure quickly got rid of the structure dominated by traditional industry and agriculture. The industrial, agricultural, and tertiary industrial structure of each district and county has been continuously optimized, the proportion of industrial and agricultural output value has been continuously reduced, the tertiary industry dominated by the service industry has been growing, the number of employed people absorbed by agriculture has been continuously reduced, the farmers have been continuously part-time, and urban labor has become the main source of income; (2) The economic aggregate and scale of each district and county have grown by multiples, and the gross regional product, fiscal and tax revenues have been increasing continuously, which can be clearly seen from the statistical annual reports of each county and city; (3) The proportion of the stateowned sector in the economy is shrinking, and the scale of the informal sector continues to expand. The total amount of informal investment far exceeds that of the state-owned sector. Most of the local rich families are bosses of the informal sector; (4) The urbanization level of all regions and counties continued to improve, and the expenditure on social public services has been increasing; Per capita disposable income in urban and rural areas has increased rapidly, which is also reflected in local statistical reports; and (5) The proportion of construction industry, real estate, and shareholder asset investment in the industrial structure is increasing. The social fixed asset investment in the construction industry far exceeds that of industrial enterprises and other real economy. The economic system of each district and county is constantly financialized, which can be seen from the economic reports of various regions. However, this kind of urbanization construction at the city-county level is carried out under the situation of extreme shortage of funds. The development of informal finance plays a key role in promoting the urbanization of cities and counties. Taking the transformation of the old city of County X as an example, the informal capital gathered by the informal finance has become the leading force in the transformation of County

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X, which is a state-level poverty-stricken county and a largely agricultural county with very limited fiscal revenue. According to statistics in 2001, the total population of County X was 1.286 million, including 168,800 urban populations and 1,119,800 rural population, and the urbanization level was only 13.1%. The net income of farmers in the county was only 1200 yuan, with 135,000 poor people, and the poverty incidence rate was 11.7%. How to transform a largely agricultural county into a strong agricultural county has always been a strategic core problem that perplexes the decision-making level of the county party committee and the county government. At the beginning of this century, on the basis of investigation, analysis, summary, and study on the current economic and social situation of the county, the County X party committee and county government jumped out of the traditional thinking of revitalizing the county through agriculture and put forward a new strategy of “revitalizing the county through urban construction”. The guiding ideology is to vigorously strengthen the construction of urban infrastructure and drive the leapfrog development of the county’s economic and social vision through city construction. Therefore, it was decided to relocate the county party committee, government organs, and government as a whole, that is, from the west of the Zijiang River to the east of the Zijiang River. Under the guidance of the county relocation strategy, the ancient city with a history of 1000 years began to evolve quietly at an unprecedented speed. The new concept of urban construction of “expanding from east to west” and “improving quality and capacity” has been put into practice in one project after another. In 2004, the county government established County X Urban Construction Investment Management Office and County X Urban Construction Investment Development Co., Ltd., as the main body for implementing the strategy of “Urban Construction and County Revitalization”. This measure not only completely broke the original urban construction management system of “Multi-department and Separate Management”, but also provided a strong organizational guarantee for accelerating the pace of urban construction. These new urban management concepts of “One plan, one approval and one management”, and “High starting point planning, high standard design, high-quality construction, high efficiency management and high-level management” have greatly promoted the development and urbanization process of County X. According to statistics, from 2003 to 2008, the county’s urban fixed asset investment has completed more than 6 billion yuan.

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With the construction of a number of landmark urban construction projects such as county roads, bridges, and commercial and residential communities, a modern new city with unique Meishan cultural characteristics has begun to take shape. At the same time, the construction of small towns was also accelerating the construction of small towns. By 2008, the county’s urbanization rate had reached 29%. The county area has expanded from 4 square kilometers with an urban population of only 40,000 people to 16 square kilometers, with an increase of 150,000 people in the urban population. In a short period of 10 years, County X mobilized the whole county to invest billions of yuan in the construction of “One embankment, six roads and five communities”, initially forming a modern county development pattern of “one river, two banks, east and west cities”. For the multi-billion yuan county government relocation and new town expansion project, the government’s starting fund was actually only more than 200 million yuan, which means that most of the funds come from the market-driven informal capital. It was also in the process of government relocation and new town expansion that the mechanism and channels for County X’s informal finance to participate in urbanization began to take shape. A local real estate enterprise manager told the author: At that time in 2003, doing real estate was empty handed, the starting funds were advance money collected through the project department. The house has not been built yet, a shed was set up as a marketing project department on the construction site, and the house began to be sold. Because there were few commercial houses at that time, people had to queue up or even find relationships to buy a house. Therefore, the project funds for real estate development actually come from the prepayments of house buyers. This pre-sale system has greatly reduced the operating costs of developers, which was actually a disguised form of fund-raising development. But then some bosses ran away after receiving the money, but the house has not been built. Therefore, the housing construction department canceled the pre-sale system and required that the project should be half completed before issuing the pre-sale license. The developer could only sell the house after obtaining the pre-sale license. After the implementation of this system, the start-up capital and cost required for real estate development increased greatly, which has led to the emergence of informal fund-raising, bank mortgage loans and other modes. As far as our county was concerned, in our real estate development, it was a common practice to collect start-up funds from informal fund-raising and

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equity participation. There are also mortgage loans through banks, but not many, because bank loans need a variety of qualifications, materials, and the procedures, it’s very complicated… It can be said that informal capital has promoted the local urbanization process greatly. It is reported that in the past decade, the monthly interest rate of informal capital in County X has remained between 1.5 and 3%, and many people have participated in collecting funds and lending money for interest. In the local area, the monthly salary of a civil servant was only about 2000 yuan, and the loan interest of 100,000 yuan in the informal sector was nearly 200 yuan. As a result, families with savings transferred their savings from the bank to the local emerging investment companies through relatives, acquaintances, friends, classmates, and colleagues. The investment company will then invest the collected capital into various real estate development projects. It should be said that the whole informal capital played a decisive role in participating in and promoting the local urbanization construction. 3.2

The Regional Economy Under the Dominance of Real Estate Was Not Real but Empty

Under the temptation of huge profits from real estate development, many enterprises that used to be engaged in industrial, trade, agricultural, and other real industries also began to transform into real estate-related fields. Real estate has increasingly become the leading industry of local economy, local industry, and mineral economy began to decline, and the land finance has become the main source of revenue. Every time back home, I hear my father and fellow villagers talk about real estate. The prosperity of the real estate market in small cities is highlighted by the continuous rise of commodity prices. Prices for land, building materials, and the improving quality of the commodity house, the price of commercial housing in the county town has almost been rising for more than a decade. The average price of commercial housing in the county town of County X has risen from 450 yuan/square meter in 2004 to 900 yuan/ square meter in 2007, doubled in three years. By 2016, the average price of commercial housing in the county exceeded 3500 yuan/square meter, nearly 10 times in 10 years. With the rapid rise of housing prices, real estate development has become a profiteering industry, so the real estate industry in the county

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has expanded rapidly and its development capacity has also been significantly enhanced. It is reported that by the end of 2007, there are 19 real estate legal entities in the hometown county, and 11 were added within 3 years, among which 17 were real estate development enterprises. Among these real estate development enterprises, 14 were local enterprises, 5 were foreign-funded enterprises, and 5 were domestic and foreign joint ventures. A number of foreign real estate development enterprises, such as FX, LH, MY, YH, and RS, successively entered the area, bringing new concepts of real estate development and significantly improving the development capacity and marketing level of the county’s real estate industry. At the same time, it also promoted the openness of local economic and financial activities, and the regional society began to move from closed to open. The development of real estate has led to the great transformation of the local economic structure. With all kinds of businesses declining, the development of real estate has become the mainstay of the local economy. In order to share the dividends in real estate development, many enterprises have started the business of “making money with money”, that is, absorbing social deposits in the form of high interest, and then lending or equity participation to real estate development enterprises. 3.3

Social Stability Problems Caused by the Rupture of Informal Fund-Raising

The booming county real estate market was accompanied by the rise of “informal fund-raising” and “investment companies”. “Informal financing was a gray area”. Although the national financial supervision department has many legal provisions and restrictions on informal fundraising, this informal economic and financial activity has never stopped. After the rise of real estate development, the phenomenon of informal fund-raising has become increasingly fierce and began to move from personal fund-raising within the traditional small range to large-scale institutional and enterprise fund-raising. Many private entrepreneurs who once worked in the industry have given me their business cards with titles such as the chairman of XX Investment Company. Many relatives and friends around me also talked about making money with “interest release”—namely, putting money into investment companies to earn high interest, which was higher than bank fixed deposit, with monthly interest generally between 1.5 and 2%. Around 2010, people did not worry about

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this, some even borrowed money from friends and relatives, added up to 50,000, 100,000 of funds into investment company for interest, and others even mortgaged their houses to the bank and lent money to the investment company to earn the interest difference. However, the good times did not last long. After returning to my hometown in 2014, many villagers came into contact with me, hoping to recover the principal in investment companies. Some investment companies were insolvent and the capital chain was broken, while the boss of some investment companies ran away. The informal financial system based on informal lending and fund-raising suffered a serious crisis. The rise and collapse of the informal finance, as well as its impact on the local economy and society, have aroused my strong interest. Of course, in this crisis, the lamentation of many ordinary families whose interests have been damaged, the continuous resistance of groups, and the family tragedies and changes of individual families have all aroused my attention to local informal finance issues.

4

Theoretical Basis: Sociological Discussion on Financial Issues

It is not new to bring finance into the sociological research. The classical sociologists have realized the significant impact of finance on social modernity, classical sociology masters Weber, Simmel, and Marx have all specially discussed the important role of finance in the modernization transformation of Western economy and society. However, since sociology was born in the industrial society, enterprise organization was the main form of economic organization and the main body of economic life at that time, traditional sociology paid more attention to enterprise organization, and less specific research on financial institutions and financial behavior. With the rapid development of globalization after the two world wars, finance plays a crucial role in promoting global economic and social exchanges. Financial systems, systems, and behavior are increasingly concern by sociology, especially economic sociology. From the perspective of “embeddedness”, economic sociology has carried out more in-depth discussions on financial problems in modern society. In foreign countries, financial sociology is becoming a new discipline.

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Under the unique institutional environment of the state monopoly of financial resources, the issue of informal finance and informal fundraising has always been a highly concerned issue in the disciplines of law, economic finance, and other disciplines. With the rise of internet finance, informal financial innovations emerge endlessly, and the domestic public is widely involved in a variety of investment and financing, internet finance, and other informal financial organizations. The issue of informal finance has attracted the great attention of domestic sociologists. From the perspectives of sociology of laws and organizations, some researchers have conducted concentrated and in-depth empirical research on Wenzhou’s most representative informal finance in China. The theoretical perspectives, findings, and ideas of these previous studies provide rich inspiration for this study. 4.1 Classical Sociologist: Financial Institutions and the Transformation of Modernity from the Rational Perspective The transformation of modernity is the core of sociology. Classical sociologists Max Weber, Simmel, Braudel, and others have made classic discussions on the relationship between finance and the transformation of modern society. Although their respective focuses are different, they basically reflect on financial problems from the perspective of modern rationality: According to Max Weber, the most fateful force in modern life is the spirit of capitalism, which is not insatiable greed, but industry, thrift and investment, which constantly accumulate and expand wealth. Although in his classic work “The Protestant Ethic and the Spirit of Capitalism”, Weber explored the cultural and religious roots of this modern capitalist spirit. However, in other works such as “Economy and Society” and other works, Weber deeply explained the economic and social significance of modern European financial organizations, systems and behaviors. Although the cultural affinity of Protestant ethics has given birth to the spirit of modern capitalism, it is very important to establish a series of organizations, systems and regulations based on modern rationality of computability, it is the fundamental reason for the development and spread of western modern capitalism. In fact, in addition to bureaucracy, dissecting the imposing manner and detail discussion on the outside, Weber also paid close attention to the rising financial securities system

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at that time. In the 5th volume of the German version of the “Complete Works of Weber”, it includes eight articles on securities trading in the 1890s, with a total length of 1160 pages, This is Weber’s first systematic introduction to the research on securities trading (Yang Yifeng, 2012): In the 1970s, an economic crisis occurred in Germany, which challenged the traditional agricultural society and triggered political turbulence. At that time, “stock and futures” markets sprang up in Europe, and more and more product prices were set by “stock exchanges”. There is widespread debate about this new mode of trading, its nature, and its social consequences. Contrary to the widely held view that “securities trading is a hotbed of fraud” in German society at that time, Weber believed that securities trading did not necessarily destroy people’s good qualities such as honesty and kindness. On the contrary, the modern financial system with securities and futures trading as its core is of great significance to the development of trade and economic progress. Starting from the history of transaction development, through the comparative analysis of securities trading modes in various countries, Weber believed that securities trading itself is a more rational market operation mechanism, and the mutual network relationship between securities brokers and the access system of securities trading industry can effectively continue the norms and trust. The development of financial technology and securities trading financial institutions, represented by the field of securities trading, has rapidly and effectively promoted the “impersonalization” of capital and transactions, thus providing convenience for investors and operators, and greatly promoting the rationalization of modern economic society. Another classical sociologist, Simmel, in his classic masterpiece “The Philosophy of Money”, took money as the research object, and discussed that money, the foundation of modern financial institutions, systems, and technologies, has a great impact on promoting the transformation of social modernity and on modern culture and spiritual life. As a general equivalent exchange, money makes it possible to calculate and exchange transactions with different properties and goods. For individuals, money can not only enable individuals to get rid of personal dependence on traditional society, but also create new unfreedoms. For the whole human society and culture, the emergence of money is not only the inevitable product of the transformation from ancient society to modern society, but also an important force to promote this transformation. Driven by a monetary economy, human society will eventually move toward individualism and utilitarianism. Starting from currency, Simmel revealed

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the cultural and social significance behind the currency and explored the changes in human social destiny and individual destiny from the development of currency. Simmel believed that the development of monetary economy not only completely destroyed the feudal system, but also produced a modern democratic system. In Simmel’s own words, “It is precisely because of this impersonality, colorless and non-characteristic that money can contribute immeasurably” (Simmel, 2002). As for the democratization mechanism of finance and society, David Graber (2012: 365–366) also found that in the past, the rich (such as landlords) were the main creditors, and the public always held a prejudice against creditors, viewing them as exploiters and the unearned profit class. It connects the debtor to the poor masses. However, the modern transformation of economic and social development has reversed the situation. In this era of creditor’s rights and corporate creditor’s rights, mortgage banks, savings banks, life insurance policies, and social security benefits, the vast majority of people with income have turned themselves into creditors. The rich who own debt and run companies have become the most important debtors in modern society. In this sense, modern society is a “democratic society of finance” (David Graber, 2012). Although Simmel, Weber, and other classical masters lived in the era of monetary economy, money was an important medium in economic and social life. In the post-industrial society, monetary economy has been transformed into a financial economy through various financial structures and systems. Through financial leverage and various complex mechanisms, the function of money in modern society revealed by Simmel has been greatly amplified, and this mechanism is more complex than ever before. However, the basic social functions of abstraction, systematization, and rationalization of finance still have not undergone essential changes. The analysis of the transformation of financial system and modern society from the perspective of rationalism of classical sociologists provides profound methodological enlightenment for today’s sociology to explore financial phenomena and problems. 4.2

Modern Economic Sociology: Financial Behavior and Social Network from the Perspective of Embedding

The research on financial phenomena and behavior in traditional economics follows the hypothesis of “rational economic man” and usually relies on mathematical methods to establish various market modes to

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discover the basic laws of finance in economic life, strive to improve the efficiency of financial resource allocation, and pursue the maximization of economic profits. As the famous sociologist Robert J. Shiller (2003) concluded, “The excellent financial modes combine investment asset prices with economic fundamentals. The application of the rational expectations hypothesis enables finance and economics as a whole to be combined into an elegant theory”. However, because the theoretical mode is built on the basis of technical factors such as complete information and complete rationality of market actors, it has obvious deviation and information asymmetry with the financial phenomena and behaviors in the real society, so it cannot fully explain the more unpredictable financial phenomena in most cases. Especially in the face of price fluctuation and financial crisis in the financial market, people’s irrational investment behavior and various uncertain political or social factors have obvious impacts on the financial market order, while these external factors are often ignored by financial modes. After the 1980s, the rise of new institutional economics and sociology new institutionalism provided new ideas and theoretical perspectives for the study of financial market behavior and phenomenon. Simon’s “bounded rationality” hypothesis has been widely accepted, and Granovetter’s view that “all economic activities are embedded in social structures and cultural networks” has been widely accepted. In this context, “embedded-network” analysis has become the main theoretical paradigm of the new economic sociology, and a series of studies on the social structure of financial markets have been published. W. Baker (1984) applied the method of market network analysis to analyze the network securities market as a social structure, and found that the security market is not only a price mechanism, but also a social integration mechanism. Along this path, some studies have explored the role of social network in companies’ access to bank loan resources and verified the impact of social network structure on financial behavior and financial resource allocation. These studies show that financial behavior does not follow the basic economic assumptions of rational calculation and complete market, and financial market is not completely a fully effective market, but embedded in a specific social network, which is a specific network field full of social structural forces (Uzzi, 1999, 2002). However, Beunza and Stark (2005) believed that sociological research on finance should not only focus on the institutions embedded in economic practices, but should inherit the

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organizational research tradition initiated by Merton at Columbia University, focus on economic events themselves, and directly study the daily practices and operation mode of investment banks. 4.3

Multi-Dimensional Research Perspectives and Main Viewpoints on the Phenomenon of Informal Finance

Informal finance is known as “informal finance”, which generally refers to investment and financing activities outside the formal financial organization system and supervision system of the state. In history, informal finance generally existed in the form of informal usury and private banks. After the reform and opening up, with the development of the market economy and the rise of private enterprises, informal finance based on informal lending and fund-raising has been revived again. Especially in the Yangtze River Delta and Pearl River Delta where the informal economy is developed, informal finance is very active. Under the financial system environment where the state monopolizes the allocation of financial resources, informal finance has always been operating in a gray area. Informal financial problems as a result are a phenomenon that scholars at home and abroad pay close attention to, especially in recent years, with the development of internet finance, large-scale informal financial organizations such as Alipay and Yu’e Bao have grown outside the formal financial organizations and systems of the country. Informal finance has begun to receive extensive attention from sociology at home and abroad. “Financial Sociology” is becoming a new and prominent science. The American economists MacKinon and Shaw were the first to theoretically explain the emergence of informal finance. They put forward the views of “financial repression” and “financial deepening”, respectively. They believed that in some developing countries, due to the government’s administrative control over the financial system and inappropriate financial policies, the financial system of developing countries could not reflect the operation of complex market mechanisms. The emergence of informal financial market is the product of national financial repression. Financial repression has led to the segmentation of financial markets in developing countries, forming a dual financial market. Compared with the formal financial market regulated by the government, the informal finance is more efficient. Allen, etc. (2005), even argued that China’s legal system and financial development level could not effectively explain the rapid growth of China’s economy, and a reasonable explanation was that

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the huge informal financial sector promoted the rapid growth of China’s informal economy. Their research revealed the operating mechanism of Wenzhou’s informal financial sector and found that informal finance was based on social relations and reputation. Family members, friends, business partners, as well as consortia, underground banks, and other private enterprises are widely used in Wenzhou. As an important birthplace of China’s market economy, Wenzhou mode has been highly concerned by domestic scholars, and the informal finance in Wenzhou is naturally the subject of many studies. In general, the existing research on informal finance by domestic scholars cannot be separated from three theoretical perspectives. Some studies based on the perspective of rational choice theory believe that the emergence of informal financial organizations and behaviors is people’s rational choice and construction under the context of the formal financial system and unreasonable structure. The emergence and development of informal finance effectively supplement the deficiency of formal financial organizations and systems, and the informal financial system has a variety of advantages, such as more symmetrical information and more convenient services. From the perspective of risk supervision, the informal finance is regarded as a risk factor from the perspective of legitimacy, and the supervision of informal financial behavior is advocated from the perspective of laws and regulations. The socio-cultural perspective focuses on explaining the emergence and development of the informal finance from the perspective of regional social culture. For example, some studies believe that the values of Yongjia culture, which has been passed down for nearly one thousand years, are the basis for the prosperity and development of Wenzhou’s informal finance. Under the dual influence of Yongjia’s cultural values and Chinese Confucian culture, Wenzhou, Zhejiang Province, in spite of highly developed market economy factors, still maintains a informal credit market with a circular structure with typical characteristics of mature society (Zhou Zhifu, 2005). With a review of the existing theoretical resources and research, it is not difficult to see that in the face of financial phenomena in modern society, sociology provides a new perspective of interpretation different from the economic and financial fields, criticizes and breaks through the theoretical assumptions contained in economics and finance, and the understanding of financial essence is closer to real social practice. If traditional economic finance tries to guide financial practice with more logical construction, sociology tries to return to a comprehensive understanding of the social network behind finance and the practice of financial actors.

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5 New Theoretical Perspectives: Social Trust and Transformation Theory To sum up, the previous theoretical studies have made a lot of theoretical explanations on the emergence of informal financial phenomena or a certain link in the development of informal finance, providing a better theoretical interpretation for understanding the development of informal finance. However, at present, empirical research and theoretical explanations on the emergence, development, and changes of the whole informal finance, as well as the explanation of the mechanism and laws of the occurrence of informal financial crisis still need to be deepened. Why did the informal finance in different historical stages and different development processes all over the country eventually lead to crisis and collapse without exception? What is the root cause behind it? There is still no convincing explanation for this problem. This study holds that the traditional social trust network supports informal finance, and the informal financial crisis is the result of trust rupture. Rebuilding social trust is not only related to the future of informal finance, but also related to the modernization of regional economic society. Therefore, this study attempts to analyze the basic rules of the emergence, development and crisis of informal finance in the urbanization process of City D from the theoretical perspective of social trust and transformation in applied sociology. Sociology, to a large extent, is a subject about modernity, and the transformation of social modernity is the core issue of sociology. In the past, studies on the transformation of modernity focused more on social stratum structure, organizational form, and collective movement, and empirical studies on the relationship between social trust and transformation need to be strengthened. However, the sociological theoretical resources on social trust and transformation provided rich theoretical support for this study. Trust plays a role of lubricant in human economic life and social interaction, and is the cornerstone of reducing social interaction costs, improving social security, and establishing a modern market economy and a society ruled by law. According to sociologists’ dichotomy between “special trust” and “universal trust” (Weber, 2004; Parsons, 2003), the transformation of social trust has become a key issue in the transformation of a country’s economic and social modernization. Most trust studies based on Chinese local culture believe that Chinese society is

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“relationship-based”, and the dominant type of trust is relational trust. Relational trust is a special trust, for the construction of China’s trust relationship, Fei Xiaotong proposed the “differential pattern” is of great explanatory power, namely the Chinese trust relationship is self-centered and family-centered, spread out through blood, kinship, geography, industry, and other social relations, and the more extended, the thinner the emotion, the looser the trust relationship; the closer to the center, the deeper the emotion, and the closer the trust relationship will be (Fei Xiaotong, 1998). This relational trust is a social bond that matches the static and acquaintance social structure dominated by traditional Chinese agricultural society. With the modern transformation of economy, the increasing social mobility has led to the disintegration of the original interpersonal relationship based on the acquaintance community. The binding force of traditional interpersonal relationship networks for individual dropped significantly, the community has changed from the previous acquaintance society to the stranger society. Social and economic activities have far exceeded the traditional social network of blood, clan, and kinship. In this context, the role of traditional relational social trust that dominates Chinese people in economic and social activities is increasingly challenged, while the new universal trust system based on organizations and systems has not yet been perfected. Therefore, in the process of social transformation, social trust ruptures sometimes occur, even sometimes the structural rupture of social trust, which makes the trust crisis in China’s economic and social operation increasingly serious. It can be said that the transition from relational social trust to systematic and universal social trust is the only way for China’s economic and social modernization. The establishment of universal trust based on systematic trust is an important support for promoting China’s economic and social modernization. Many sociologists have made classical statements about the relationship between trust types and social transformation. Max Weber distinguished between general trust and special trust (trust in personal relationships) (Weber, 2004). In his analysis of social solidarity, Durkheim discussed the importance of family and blood trust for the mechanical solidarity of traditional society. Simmel proposed the concepts of impersonal trust, institution-based trust, and faitHess (Durkheim, 2013). In the famous American sociologist Parsons’ discussion on the modern social system, the establishment from special trust to universal trust is considered as one of the five basic dimensions of the transformation from traditional society

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to modern society. In “Trust: Social Virtue and the Creation of Economic Prosperity”, the renowned scholar Francis Fukuyama argues that the level of social trust is an important basis and determinant of a country’s economic prosperity. He distinguished two different types of countries and societies according to the level of social trust: Countries and societies with high trust, such as Germany, Japan, and the United States; and that with low trust, such as China, South Korea, and Italy. According to Fukuyama, the main reason why countries or societies with high trust have high credibility is that they have high social capital, which is conducive to spontaneously forming large private enterprises, while countries and societies with low trust are difficult to spontaneously produce large private enterprises due to the relative lack of social capital. Therefore, elements of “healthy social capital” are invariably present in countries with high levels of trust. In these countries, the formation of self-organized communities is very strong, and there are many intermediate organizations, which effectively guarantee the healthy development of social capital. However, in countries with low trust, because trust is only built on the basis of blood relations, there is widespread distrust of strangers, and the intermediary organizations cannot be effectively formed. As a result, there is a relative lack of social capital, the trust environment for modern enterprise mechanisms and its operation cannot be established, and the scale of enterprises is difficult to expand, which brings great difficulties to the economic modernization of these countries (Francis Fukuyama, 2001). According to Putnam, “social capital” is based on the three cornerstones of social trust, social norms, and social networks, which can promote social cooperative behavior and thus effectively improve social efficiency. In the formation of the three cornerstones of social capital, trust is the first, and trust is the premise for individuals, others, and groups to establish organizational networks and form common norms. Therefore, trust is the premise for the generation of social capital, also an important form of social capital, and an important indicator to measure the amount of social capital and the level of social modernization (Putnam, 2001). It is under the influence of Putnam’s theory that the level of social trust is used to evaluate the abundance of social capital in a society, even the modernization of a society, and is widely applied in the study of social mobility, social integration, such as the effects of social capital on job hunting, the effects of social capital on rural migrant workers in urban social integration, etc.

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In fact, not all social trust can produce positive social capital, promote social cooperation, and play the role of lubricant for economic and social development. Whether Fukuyama, Putnam, Bourdieu, Coleman, and other social capital theorists, behind their ideological theories, they all point to the contribution of social capital generated by systematic and organized trust in modern society to economic and social development. In Western modernization, such a social trust system has been formed, in this study, I call it “system trust”, trust system is a kind of public trust, such as the financial system, monetary system, legal system, insurance system, etc. These trust systems are established on the basis of national reputation, legal norms or regimes, and the organizational system of rights and status relations between people. These organizations and systems of “system trust” are the basic guarantee for the sound operation of modern economy and society. Corresponding to “system trust” is the trust system of traditional society or pre-modern society, which can be called “relational trust”, “personality trust”, or “elite trust”. Relational trust is a special trust based on individuals, personal moral prestige, and personal relationships such as blood, kinship, and geography. In a relatively static and closed acquaintance society, interpersonal trust among individuals is deeply embedded in the community structure and moral culture in which everyone grows. Therefore, interpersonal trust is the basic bond connecting people in the pre-modern society. However, in the modern society with increasingly frequent mobility and constant defamiliarization of neighborhood relations, the interpersonal trust between individuals based on the soft constraints of social personality quality and moral culture of acquaintances is not enough to maintain the normal operation of modern economic and social development. The normal operation of modern economic society urgently requires the establishment of a system trust based on the principle of universality. In this sense, it can be said that whether a country or economy can transform from traditional interpersonal trust to modern system trust is an important symbol of whether it can realize the transformation of economic and social modernization.

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6

Research Significance

To sum up, informal finance is a field rich in sociological implications. In a practical sense, it concerns not only the development of people’s livelihood, but also the reform and improvement of the formal financial system. In terms of theory, using sociological bottom-up empirical research methods to observe and analyze the emergence, development, crisis outbreak and response of the informal finance has great theoretical significance. 6.1

It Is of Great Practical Significance to the Financial Field

The core essence of modern financial system is the establishment of a modern social trust system. Modern European and American countries have established modern financial system in the process of urbanization. In the process of urbanization for more than 200 years, although European and American countries have established modern financial systems based on system trust (see Table 1), there is a lack of research on how regional financial systems support urbanization in the process of regional urbanization. After all, under the same financial system and institutional arrangement, the different distribution of financial resources and the different financial phenomena have occurred in different regions. Therefore, it is urgent to empirically study the change in financial system from the regional practice of the organization, distribution, and use of financial resources. With the rise of urban China, China’s financial system must undergo a modern transformation. Otherwise, if the financial system does not match or disconnect with economic activities, it will cause a huge economic and social crisis, and the social modernization transformation will also suffer setbacks. Currently, with the local debt crisis and the increasing demand for funds from new urbanization, how to regulate the local debt in the process of urbanization and expand the financing channels for urban construction is the basic guarantee for the sustainable and healthy promotion of urbanization in the future. There is no doubt that the financial project support and the local borrowing guaranteed by land finance are the two main sources of funds in the process of rapid urbanization in China for a long period of time in the past. However, this government-led financing mode is clearly no longer sustainable today. The

Financial supporting policies

1. Issue municipal bonds and use developed capital markets for direct financing; 2. The government establishes the Small and Medium Business Administration (SBA) to provide financial support in the form of direct loans, coordinated loans, and guaranteed loans for SMEs. At the same time, a small business investment company is set up, which is approved and managed by SBA to provide long-term credit and financial support to small and medium enterprises 3. A complete rural financial support system consists of the following parts: the federal Land Bank system, the Cooperative Bank system, and the federal medium-term credit system

Nation

America

(continued)

1. Loan issued by financial institutions plays an important role in urbanization construction; 2. Local governments provide financial support for urbanization through direct financing, with the government as a supplement and the market as the main source 3. Diversified and flexible SME loans guarantee schemes to provide financial support for smes; 4. The government provides preferential and relief policies for rural financial institutions, and guarantees the development of rural finance from all aspects through relevant legislation

Policy and institutional features

Financial system promoting urbanization in the United States, Japan, and Germany

Table 1

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Financial supporting policies

1. The government takes the lead in establishing a deposit insurance system, agricultural disaster compensation system, and mutual assistance system; 2. The government establishes financial institutions specially for SMEs, and even directly provides policy loans for SMEs; 3. The credit guarantee association system and SME credit insurance system have been established in the form of legislation. The credit guarantee association can act as a guarantor for SMEs to obtain loans. The SME credit insurance treasury funded by the government can not only handle SME credit insurance, but also provide certain loans for the credit insurance association 1. Establish a deposit insurance system to support rural finance; 2. Establish a credit cooperation system, stipulating that each credit cooperative should deposit a special fund account at a certain proportion to help the credit cooperative in crisis. When the credit cooperative has risks, the fund should make corresponding compensation; 3. Establish a guarantee bank based on the guild to guarantee the loans of SMEs. The federal government provides some funds to support the guarantee banks in the form of low-interest long-term liability loans to offset some guarantee losses

Nation

Japan

Germany

(continued)

Table 1

1. According to the needs of national and global economic development, the government provides necessary external conditions, financial support, and preferential tax policies for enterprises and research departments; 2. Rural financial institutions should focus on public services, supplemented by informal financial services, and fully mobilize rural capital

1. The government provides comprehensive financial support to rural areas, but the administrative intervention is strong; 2. The government deposit insurance corporation not only insures deposits, but also provides necessary assistance to the bankruptcy acquisition of credit unions; 3. The policies, regulations, and financial institutions formulated and established by the government for SME financing provide strong support for SMEs, but the capital market is still short of high financing efficiency

Policy and institutional features

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innovation of urbanization financing mode and financial support system, effectively absorbs civil society capital directly to participate in urbanization construction, which has become an important way to effectively fill the fund gap in the process of urbanization. We will explore and promote the integration of diversified urbanization with the new industrialization, informatization, and agricultural modernization through financial innovation, take overall consideration and promote it in a coordinated manner, and achieve green and low-carbon development. At the same time, we will promote people-oriented urbanization and realize the coordinated development of different types of cities. This is an arduous task for implementing the important policy of “human urbanization” proposed in the 13th Five-Year Plan. Under such a background of economic, social, and national strategic development, it is of great practical significance to deeply study the emergence, development, and crisis outbreak of informal finance in the process of regional urbanization in the past decade, and summarize the experience and lessons for promoting financial modernization. 6.2

It Is of Great Theoretical Value to the Field of Sociology

Over the past 40 years of reform and opening up, the modernization of China’s economic system has made considerable progress. However, the modernization of social development is still lagging behind. From the perspective of social trust system, the rural areas in China still stay in the traditional state of interpersonal trust. At the national level, perfect modern system trust has not yet been established. The informal financial crisis is essentially the result of the structural rupture in the social trust system. The study of informal finance from the perspective of social trust is a new development of sociological trust theory, which broadens the field of sociological research and also innovates the theoretical interpretation of informal finance from sociology. For the theoretical research and development of sociology itself, the dimensions of state, social capital, and power contained in informal finance are conducive to expanding and enriching the research vision and theoretical resources of sociology. As pointed out by some studies, the more important significance of studying informal finance is that financial phenomena, including informal finance, are not only a financial phenomenon, but also a social and political phenomenon. What theoretical perspective to choose to understand and explain financial

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phenomena is not only related to how to understand financial issues, but also related to how to change finance and prevent financial risks (Chen Chuan, 2014). In previous studies on financial issues, economics and finance dominated, while people did not pay enough attention to sociology. This study shows that financial issues, especially informal financial issues, are extremely complex social issues. Sociology is characterized by its comprehensive observation of social phenomena. Therefore, sociology also has a special observation perspective and disciplinary advantages for financial issues and the research of informal finance can also expand the research field of sociology. This study explores the causes and rules of the emergence and development of informal financial crisis from the perspective of sociology and explains the importance of the modern credit system for the development of the modern economy. Compared with economics and finance, this study reflects the comprehensive characteristics of sociology.

CHAPTER 2

Concepts, Methods, Research Findings, and Innovations

This chapter mainly analyzes the basic process of informal financial emergence, development, and crisis outbreak in the urbanization process of a prefecture-level city in the past decade from the perspective of social trust. Since this study is an empirical study on financial issues in a regional society, this paper involves a large number of unfamiliar concepts, place names, and people, as well as local knowledge and literature, this chapter focuses on the introduction of these theoretical concepts, place names, research methods, data sources, and the main findings and innovations of the study.

1 Core Concepts of This Study: Personal Trust and System Trust The main theoretical perspective of this study is social trust and transformation theory. The dichotomy between tradition and modernity is the basic thinking of sociological transformation theory. According to the relevant theories of social trust research, the author divides social trust into two basic types: traditional social trust and modern social trust. In general, traditional social trust is the trust based on acquaintance relationships or personality characteristics. According to Max Weber’s thinking of action types, it is the irrational trust based on habit or tradition. However, trust in modern society is a systematic trust based on legal principles. The © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Weiping, Social Trust, https://doi.org/10.1007/978-981-99-2931-3_2

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establishment of modern system trust is an important foundation for a country or region’s economic and social modernization transformation. If there is no transition from traditional social trust to modern social trust, it means the structural rupture of social trust, and the transformation of social modernization will also encounter various crises and difficulties. The fundamental reason why informal finance based on informal lending will eventually lead to crisis and collapse is that the social trust it relies on does not match the modern economy. 1.1

Traditional Social Trust: Personal Trust

Traditional social trust is based on personal relationship and is a kind of trust based on particularism. Classical sociologist Simmel called this kind of trust “personality trust”. In “the Philosophy of Money”, Simmel argued that the transition from special trust to universal trust is the fundamental symbol of modern society through “credit”: “The treasury bonds issued by the government before the eighteenth century were the earliest form of claim for the national tax as a whole. In this case, the certainty of the repayable amount depends not on special circumstances that must be determined, but on the general confidence of the bond purchasers in the solvency of the state” (Simmel, 2009). This form of state-based credit differs from the form of personal credit in that it does not require knowledge of the creditworthiness of others, as personal credit does. According to Simmel, the transition from traditional society to modern society must be accompanied by the type of social trust, that is, from personality trust to institutional trust. It is the use of money that plays a huge role in promoting the transformation of personality trust into system trust (in essence, in short, the circulation and use of money is finance). As a medium and means of exchange, money has completely changed the social relations between people. Through a long-term study of the monetary history, Simmel found that money gradually acquired an abstract and eternal position in the formation of modern society. It was through the circulation and extensive use of money that people gradually established interpersonal relationships limited to specific purposes in the traditional society, thus replacing the interpersonal relationships in the traditional society. Therefore, the circulation and use of money plays a crucial role in promoting the transition of trust form from particularism to universalism. Simmel pointed out that if there is no universal trust between people, society itself will collapse. In the history of human development, almost

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no relationship has been completely based on an accurate understanding of another person. If trust is not as strong as rational evidence or personal observation, then almost no relationship will last. “Modern life is built more on trust of others than what people usually understand” (Georg Simmel, 2007). Weber also believes that trust includes particularism trust and universalism trust. Particularism trust means that the foundation of trust is special kinship relations, such as blood relations, friends, relatives, regions, etc., and it is guaranteed by personality, emotion, tradition, and noninstitutionalized things such as morality and ideology. Universalism trust is established on the basis of credit contracts or legal norms, and the key to maintain this trust is that both “trusting” parties strictly abide by credit contracts. Weber believes that the trust of the Chinese people is based on the consanguinity community rather than the belief community, that is, family consanguinity, or quasi-kinship relationship, which is a special trust that is difficult to summarize (Max Weber, 1995). The reason why traditional social trust is a kind of particularism trust based on personality characteristics is mainly that trust is built on the traditional social interpersonal relationship pattern. Fei Xiaotong put forward the concept of “differential pattern” in “Rural China”, which provides an important theoretical perspective for the interpretation of traditional trust relationship. Fei believes that in stark contrast to the collective structure of Western society, social relations in China are like “throwing a stone into the water”, which creates a circle of ripples on the water surface. As each person is the center of the circle pushed out by his social influence, he is connected with the circle that pushes him to enter (Fei Xiaotong, 1998). Therefore, when it comes to the social trust relationship, the trust relationship of Chinese people is also in the “differential pattern”. The “differential pattern” of trust is mainly manifested as follows: (1) The differential pattern of trust is divided according to the degree of closeness. (2) Everyone is self-centered and then draws circles according to the strength of the interest relationship. The people in the circle are their own people, while the people outside the circle are outsiders. The inner ring is more reliable than the outer ring. The division of inner circle and outer circle involves not only communication and interest relations, but also psychological identity and emotion. (3) In the modern society of rural China, the differential pattern still plays an important role in interpersonal relationships in terms of trust, but due to the

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mobility of people in modern society, it has started to split (Tong Zhifeng, 2006). In addition to the theoretical perspective of Fei Lao’s “differencial pattern”, Mr. Liang Shuming proposed an ethics-based pattern of social trust relationship, and Lin Yaohua also proposed a similar mode of trust relationship based on interpersonal circles and interests in his famous book Golden Wings (Lin Yaohua, 2015). In a traditional society with low social mobility and a relatively static and closed social life, interpersonal trust is embedded in the community context structure and personal moral prestige. Trust between people is built on blood, kinship, and geographical relations, which also has the basic characteristics of “differential pattern” proposed by Fei Xiaotong. The social trust based on the differential pattern is a relational and specialized social trust. Some scholars believe that “relationship” is an important foundation for the construction of Chinese society, and “relationship-oriented” trust is the main way of trust in Chinese society. According to his three-stage theory of interpersonal relations, Chinese people’s social trust is built on the basis of personal ties and acquired achievements, which includes both traditional emotional components and components derived from the rational calculation. In short, this relationship-based trust is specialized trust, and its core is based on the cognition of the personality quality, behavior, and social relationship network of the trusted party. It is mainly through the operation and maintenance of “interpersonal relationship” to establish “human trust” from the perspective of human relations (Yang Zhongfang, Peng Siqing, 1999). Other scholars pointed out that assaulting, recognizing, pulling, drilling, nesting, and connecting are the basic methods for Chinese people to establish and maintain relationships, and inviting guests, giving gifts, and doing favors are common ways to maintain and develop interpersonal trust relationships (Qiao Jian, 1982). Relational trust based on differential pattern has many advantages, but it also has some fatal defects. The biggest advantage of relational social trust is that it is built on the basis of the acquaintance society, such as consanguinity, kinship, and clan, so this trust relationship is stable and reliable and will not be easily broken. This is also the main reason why interpersonal trust is generally high in our society. The experience of various countries shows that interpersonal trust among individuals will generally decline in the process of modernization. However, the interpersonal trust in China shows a higher level. According to the latest survey

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and research report of World Values from 2010 to 2014, the general trust level between people in China is as high as 64.4%, and compared with the world average trust level of 25.4%, our social trust level is far higher than that of other countries. Through the comparison of various survey results of world values, it can be found that in the past 30 years, China’s social trust is higher than that of Japan, South Korea, the United States, and other countries, and has always been higher than the world average level. The biggest defect of relational social trust is that the scope of trust is limited in the “own” circle, which is too dependent on the network constraints of individual personality and social relations, and cannot be extended and expanded across the region and interpersonal circle. Once the person at a key node disappears, it may be impossible to find a replacement person in a short period of time, and the social trust relationship will be broken instantly, and the whole social relationship network may collapse accordingly. 1.2

Trust in Modern Society: System Trust

Trust in modern society is a kind of universal trust, which is based on the abstract system. The German sociologist Niklas Luhmann was the first to clarify and theorize trust. In “Trust: A Simplification of Social Complexity”, Luhmann argues that trust is a fundamental fact of social life and defines trust as “confidence in one’s expectations”. Luhmann believes that the modern society is a society with abnormal functional differentiation, which is mainly manifested in the diversification and complexity of the interdependent structures of familiarity and strangeness. Such a modern world is full of risks and uncertainties. Trust is an important “simplified mechanism” that people have established to deal with the complexity and risks of modern society, and “dealing with complexity is the function of trust”. As the traditional society is a static society and “acquaintance society” attached to the land, it is a society that people naturally recognized and trusted without a doubt. In the traditional society, due to the limited living space, people are almost all in a social system that they are familiar with and full of trust from birth. Therefore, what people should do most of the time is to comply and obey various experiences and traditions. And Luhmann believes that “in the familiar world, the past is better

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than the present and the future. Complexity is simplified at the beginning. Familiarity and trust constitute a complementary way to absorb complexity”. As human society moves from a relatively static and closed traditional society to a more mobile and complex modern society, metaphysical authorities, such as religion, that provide people with a sense of security and trust are increasingly disintegrating. The explanatory power they once enjoyed to the world has lost its potency. People began to face an increasingly unfamiliar world and had to find a new development mode for their own living space. “The effective interaction between human and social life depends on the individual’s self-image or self-expression social continuity, if a person or a system of external social image is difficult to maintain continuity, he/ it has lost its basic social conditions, and unable to participate in social life, because there is no other individual or system will think not to be trusted”, this is the personality of trust, which is the basic trust in daily life system. In fact, however, the modern divided social order is complex, and even the necessary social trust in daily life cannot be simply created through this simple orientation; there must be other ways to build trust that do not rely on personality factors. Therefore, Luhmann further discusses “system trust”. Before discussing trust in systems, Luhmann outlines the complexity of the modern world. Similar to Habermas’s theoretical perspective of “from life world to system”, Luhmann believes that the complexity of modern society stems from the differentiation of social systems. After entering the modern society from the traditional society, the system structure of the society has been further differentiated, and the social form of “segmented system”, “hierarchical system”, “functional system”, and “ternary coexistence and interdependence” has emerged. The main significance of the existence of the “functional system” is to break the boundary between the “segmented system” and the “hierarchical system”, so that the separation between people and the artificial separation and existence between various systems can be communicated. In fact, it is a complex and effective “communication system”. For example, truth, currency, and power are merely a medium of generalization, which are carriers to simplify complex social affairs. In other words, whether money, truth, or power, they are a means to simplify complexity, not an end. However, since the use of these “communication

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codes” in the human process cannot produce essential dialectical understanding, such as “money worship and power worship”, and thus leads to the “materialized state”, “Trust in holding currency”, trust in information providers, or trust in the blood relationship of those in power. It is not enough to become the basis of trust. The simplified system itself requires and sustains trust (Nicholas Luhmann, 2005). In this way, Luhmann turns to the study of “trust itself”, that is, “trust in trust”. Luhmann believes that the main reason for the complexity of modern society is actually based on the overlap and union of various institutions in the society. For any social subsystem, there must be three relations: “First, a subsystem can have relations with the whole society according to its functions; Second, a subsystem can also relate to other subsystems of society… Third, subsystems can also be related to themselves. Luhmann called the third relationship reflexive”. “Trust in trust” is a reflexive process and function of trusting oneself. In these three trust system relations, reflexivity of any system is generated during the formation and maturation of its initial system, without development and certain independence. Therefore, it is impossible to have reflexivity either for people or for systems composed of people. The emergence of “reflexivity” and the establishment of “reflection mechanism” in the process of social development symbolizes the improvement of social modernity and civilization (Che Fengcheng, 2008). On the basis of Luhmann’s thoughts, Anthony Giddens, a British sociologist, comprehensively summarized and deeply discussed the origin, nature, type, mechanism, and function of trust in modern society from the perspectives of philosophy, psychology, sociology, and political science, and constructed a systematic theory of social trust. It provides an important theoretical perspective for understanding and recognizing the transformation of Western modern society and rebuilding the trust system of modern society. In “Modernity and Self-Identity”, “Modernity and its Consequences”, and other works, Giddens discusses the origin of social trust based on the research of psychologist Erickson. Giddens believes that the trust initially generates “ontological security” from the needs of human individuals, and trust between human individuals arises from overcoming the anxiety caused by the “lack of space” between the infant and the mother, which is a universal psychological need of human beings to satisfy the sense of security. Since birth, children develop “basic trust” in their caregivers, an emotional vaccine against “existential anxiety”. This mother–infant

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“basic trust” is connected with the interpersonal organization in a specific time and space in an instinctive and essential way. At the same time, confidence in the reliability of others or institutions plays a fundamental role in establishing the unity of modern social institutions and maintaining social order. According to Giddens, general trust developed from “basic trust” can be divided into two basic types: “interpersonal trust” and “system trust”. He argues that interpersonal trust is based on the “moral character” of others, (motivation) is based on trusting an honest person, or loving confidence in trust in terms of personality and morality. System trust refers to the correctness of trust-based principles and refers to personal confidence in correct judgment, cognition, or perception of abstract principles (such as technical knowledge). Although “interpersonal trust” is always deeply related to “system trust”, the trust in the system is not the trust system itself, but the effective operation of the trust system. Giddens believes that with the transformation from traditional society to modern risk society, the types and mechanisms of trust will also change significantly with the development of modern systems, which shows that “interpersonal trust” will gradually be replaced by “institutional trust”, and passive trust will gradually be replaced by active trust. The so-called active trust is not a new type of trust, but a new mechanism to generate or establish trust. This means that both “interpersonal trust” and “system trust” must be actively created and maintained. In contrast to this trust mechanism is the traditional social compulsory trust generation and establishment mechanism, namely “solidified trust” (Giddens, 2000). Active trust implies a kind of agency and comprehensive judgment and namely “solidified trust” (Giddens, 2000). Active trust means a kind of initiative and comprehensive judgment and political thought. Although it is closely related to life political concern and trust environment, positive trust requires increasing the “transparency” of social relations. Giddens pointed out that: today, the mechanism of social solidarity has undergone profound changes. There is no doubt that the theoretical mechanism of social solidarity in traditional social theory failed to grasp the essence of new social solidarity. As Durkheim said, the collective consciousness, conscience, functional interdependence mechanism, and so on can no longer explain the formation of a new social solidarity mechanism in modern society. In late modern society, positive trust is the source of new social solidarity: “Positive trust is the source of new social solidarity in a variety of situations, from close interpersonal relationships to globalized interactive systems” (Giddens, 2001). In general, positive trust is no

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longer based on obedience to various customs and traditional experiences, but rather on creating “communities” to improve social transparency, but a social relationship constructed and created by creating “community”, improving social transparency, and enhancing consultation and interaction through communications and exchanges. Giddens believes that system trust is the basis for the expansion of modern social order. The modern social order he said is no longer the social norm as the source of social integration in the sense of the classical sociologists Confucius and Durkheim, but the compression and extension of time and space (delocalization). Modern social order means how the modern social system connects time and space on earth, or the conditions under which the talents of time and space, presence and absence, connect. In other words, Giddens’ modern social order is actually a social order in the context of globalization that breaks through the regional and administrative boundaries of traditional nation states, and its core problem is the extension of time and space. The construction of positive trust is the premise and foundation for the extension of time and space. According to Giddens, trust in modern society is related to the lack of space and time: “Trust underlies the expansion of space and time associated with modernity”. Like Luhmann, Giddens also believes that trust originates from modernity and is closely related to modernity. Among the three driving mechanisms for the expansion of modernity, the delocalization mechanism (spatio-temporal separation and institutional reflection are the other two driving forces) refers to the “separation” between the regional relationship of social relations and interaction and the relationship reconstructed through the infinite intersection of uncertainty. In the development of modern social systems, delocalization inherently involves the emergence of symbolic systems and the establishment of expert systems. These “abstract systems” provide people with expected “guarantees” through spanning extended time and space, thus establishing social trust. 1.3

The Structural Rupture of Social Trust and Its Reconstruction

Through the empirical study of City D, this study found that the phenomenon of “social trust rupture” occurred in the process of local financial operation. After that, the author put forward the view of the structural rupture of social trust by reading relevant theoretical literature and sorting out theories. The author holds that the so-called structural

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rupture of social trust has two basic meanings: first, it refers to the collapse of the social interpersonal trust network of traditional acquaintances (the rupture of facts and phenomenona); second, the trust in the modern social public power system established by the legal system and government institutions failed to replace the traditional social trust and failed to play an effective role in coping with the crisis (structural rupture). The previous theoretical review has shown that Western social theorists generally believe that system trust and organizational trust are important components of the modern social trust system, and also the basic guarantee to support the healthy operation of modern economic society. For the urbanization process that dominates China’s economic and social changes, the formal financial system, courts, and local governments are the most critical modern social trust systems. After the collapse of informal finance supported by traditional interpersonal trust, both the formal financial system represented by banks and the public trust system represented by courts and local governments failed to effectively undertake the task of structural transfer of social trust, which is the fundamental cause of the crisis of local social governance after the informal financial crisis. The trust reconstruction proposed in this study is not to revive the traditional interpersonal trust, but to build modern system trust, strengthen the supervision of informal finance through laws and regulations, regulate the development of informal finance, so that it can follow the market rules and have laws to follow. In addition, open up the channel of informal finance and formal finance, and promote the connection between informal finance and formal financial system. The transformation and reconstruction of social trust structure is the fundamental way to get out of the informal financial crisis. 1.4

Informal Lending, Informal Debt, and Informal Financial Market

Informal lending has a long history in China. From the perspective of economy and law, the informal debt relationship generated by informal lending refers to the business activities of individuals, enterprises, and other economic entities outside the financial supervision system. It is mainly the sum of the value transfer of monetary capital as the target value and the repayment of principal and interest. Therefore, informal debt is not only a quantitative relationship between debt, but also a kind of social

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and economic relations between the creditor and the debtor, which lent to party B’s creditors, in this study it is a large number of ordinary families who lend money at interest, and party B who finances is called the debtor. In this study, it refers to a large number of investment and financing companies and their legal representatives and business owners. When the total amount of informal debt formed by informal lending reaches a certain scale and the way of absorbing informal funds appears to be organized, specialized, and marketized, it can be called informal finance. In general, informal finance is the inevitable outcome of the economic and social development to a certain stage. With the gradual accumulation of personal and corporate wealth, its industrial capital is gradually transformed into financial capital. However, the formal financial system cannot effectively meet the social demand for capital income. Informal finance, also known as “informal finance”, is an effective supplement to formal finance. It originates from the imperfect formal financial system and the insufficient credit supply of the formal financial system. Therefore, informal finance based on informal lending is characterized by universality, geography, non-supervision, and concealment (Wang Chunyu, 2010). The huge informal capital (debt) accumulated through informal lending plays an extremely important role in the economic operation of a country, the production, and life of residents. The issue of informal lending is not only a very important practical issue of social and economic activities, but also an extremely urgent theoretical problem. For the definition of informal lending, domestic scholars still have a broad and narrow sense of debate. As for the broad definition of informal finance, the Research Group of Guangzhou Branch of the People’s Bank of China (2002: 102–109), like informal finance, informal lending refers to the activities of raising funds between individuals and enterprises, and between individuals and enterprises of profit-making financial institutions, which are not subject to the constraints of financial institutions approved by the state. Kang Zhengping (2004: 47–51), such as Su Siru (2005, 2006), Chen Jingwei (2005: 10–16), Zhou Suyan (2005: 123–128), and other studies: Private loan refers to financial activities outside the formal financial system. Private loan belongs to the category of informal financing, which generally refers to the general term between individual loans formed spontaneously outside the formal financial system. Lin Sheng (2008: 14–16) believed that informal lending was not restricted by financial regulatory requirements such as capital, liquidity, and capital

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adequacy ratio and was not included in traditional management systems such as national credit control and financial supervision. Other studies have pointed out that, from a theoretical perspective, informal lending is called informal finance due to the lack of supervision (Zhang Shenglin et al., 2002: 125–134). Other studies believe that informal lending, also known as informal finance, is a spontaneous informal credit compared with formal finance (Gao Xiaoqiong, 2004: 135–139). Some studies hold that informal lending belongs to the category of informal finance, which refers to the “underground” financial activities that are not regulated by the central bank and supervised by the government in the financial system (Li Fuguo et al., 2005: 72–75). Guan Bing (2005: 153–161), based on the empirical research on the relationship between informal entrepreneurs and rural lending, pointed out that informal lending is just a form of informal finance, which also includes fund-raising, private banking, pawnbroking, bank backing, cooperation, and other forms. The World Food and Agriculture Organization regards informal lending as “informal finance”, which refers to financial transactions between individuals (or private individuals). According to the investigation of informal finance in countries such as India and Uganda, the International Labor Organization (ILO) considers that informal finance mainly depends on the financing network established by informal relations. In contrast, the National Bureau of Economic Research of the United States focuses on informal relations in its definition of informal finance, emphasizing that informal lending is a way to achieve financial financing through the relationship between informal capital lenders and intermediaries (see, Chen Rong, 2006: 157). Foreign scholars Anders Isaksson (1980), Kropp (1989), Frey (1984), Krahene (1994) and Schmid (1994) all believe that private finance (informal finance) and formal finance coexist in the same country, but at the same time they are separated from each other. Formal finance is controlled by the system of national credit and related financial laws, while informal finance operates independently from such system control. Formal financial activities rely on the social and legal system, while informal finance relies on systems other than the social and legal system. Researchers all believe that informal finance is a form of capital transaction to circumvent the regulation of the regulatory authorities on the formal economy or to circumvent excessive transaction costs. However, informal finance is exactly a form of credit that exists outside the formal finance to evade financial supervision.

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In the context of China’s current financial system environment and imbalanced allocation of financial resources, the formal financial system dominated by state-owned commercial banks mainly serves the economic activities of state-owned economic sectors or systems. Financial resources are highly concentrated in the eastern coastal areas and large cities. For the central and Western regions, the general lack of financial resources in the process of urbanization and the huge gap of financial demand in the economic and industrial transformation are the common problems they face. Therefore, in the past decade and more, the dominant strategic mode of starting urbanization has been different in different regions, despite their different resource endowments and historical characteristics. However, there is a common mechanism behind different leading modes of urbanization, that is, as an informal financial system built on the informal capital accumulated by traditional informal lending, it effectively makes up for the defects of the formal financial system and has played a significant role in supporting and promoting the development of urbanization and economic modernization in the mainland. The essential feature of this kind of informal finance is that it relies on the traditional social trust based on the interpersonal network in the regional society. Therefore, the meaning of informal finance is far beyond the narrow sense of “informal capital” in the economic sense, but more a kind of “social capital” in the sociological sense. This regional social capital accumulated through informal lending is an important force to promote regional urbanization. However, informal finance always operates in the gray area, which is supported by the interpersonal trust of the regional society. It lacks the support of modern system trust based on sovereign trust, legal protection, and central bank or government credit guarantee. On the basis of modern trust system, therefore, the informal financial system’s ability to resist risk is very fragile, once encounter economic fluctuations, rumors, and panic are easy to spread among investors, thus leading to the rupture of social trust. After the break of social trust based on interpersonal relationship and the collapse of informal financial system, establishing modern system trust and promoting the transformation from personality trust in economic life to system trust have become the key to cope with the crisis of informal finance and maintain the stability of local society.

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Culture Gap Is an Important Factor of Social Trust Rupture

“Culture gap” was first proposed by American sociologist Ogburn. It generally refers to two or more parts of a cultural phenomenon in the process of rapid social change. Due to the inconsistent time and degree of change, the reduction of mutual coordination has led to the gap in some parts of a cultural cluster. This study found that the culture gap is one of the important reasons for the rupture of social trust in the informal financial crisis in City D. Because the local people’s habits, customs, ideas can’t keep up with the urbanization on the material level and the huge changes in financial needs, and the government’s response to laws and regulations and systems can’t keep up with the process of social transformation, therefore, when encountering rumors and the phenomenon of individual bosses’ running away, they have no rational and correct understanding of the general trend of economic and social development, and are eager to withdraw cash, which has led to the rupture of social trust and informal financial crisis.

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Place Names and Personal Names in This Study

Since this study involves a large amount of private information such as place names and personal names, in accordance with the ethical practice of sociological research, the places, people, and related enterprises involved in the study are implicitly treated. 2.1

City D, District N, County X, and City S

Since ancient times, county governance and world peace. The county level is the most basic administrative unit in China’s political structure, as well as the most basic unit for social governance and economic development. This study selected 3 districts and counties in a prefecture-level city in the central region to discuss and analyze the regional financial issues supporting the urbanization development of cities and counties. In City D, the local society has established a large-scale informal financial system through informal lending and other forms, which is very representative in the whole country. City D and its three subordinate districts and counties provide a good field for observing and understanding this social phenomenon.

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As shown in Fig. 1, City D is a prefecture-level city located in the middle of the province, 150 kilometers to the southwest of provincial capital C, and is connected with City C and City T by high-speed railway. The provincial capital City C, T, and Z are making integrated planning. City D has jurisdiction over one district and four counties—namely, District N, City L (county market), City S (county-level city), County S, and County X, where the municipal government of City D is located. The total area of City D is 8117.6 square kilometers. According to the statistical bulletin of the city in 2015, the city achieved a gross regional product of 129.138 billion yuan, with a permanent population of 3.8718 million, including 1.6947 million urban population and 2.1771 million rural population, and urbanization rate is 43.77%. In terms of population composition, urbanization level, and economic and social development, City D is representative to some extent. 1. Overview of District N. District N is the seat of the municipal government of City D and was the first to start the urbanization process. In 1992, the provincial government of H approved the establishment of the Economic and Technological Development Zone of City D, which governs two sub-district offices. At that time, the initial development planning area of District D was 42 square kilometers. According to the principle of functional zoning, it is planned as “one corridor and five

Fig. 1 Location of City D and the relationship between districts and counties

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zones”, namely industrial corridor, warehousing and logistics zone, financial and business zone, cultural and education industry zone, efficient agricultural industry zone, and tourist and vacation resort. The industrial park is an important mode to promote the construction and development of modern urbanization. As of 2015, there have been three large-scale modern industrial (industrial) economic development zones in District N. It is under the policy background of vigorously developing park economy that the large-scale and rapid urbanization of District N in City D started. In 2002, the urbanization level of District N was only 26.5%, far lower than the national level of 44.34%. However, after the construction of industrial parks started in 2003, the urbanization of City D began to accelerate. Ten years later, the urbanization rate of City D exceeded 40% for the first time in 2013, and by 2015, the urbanization rate of the city had reached 43.77%. 2. Overview of County X. County X is a county under the jurisdiction of City D, located in the middle reaches of Zishui River. It governs 19 towns and 7 townships, with a total area of 3,634.98 square kilometers and a total population of 1.4 million (2011). County X is a typical agricultural county with very weak industrial foundation and backward urbanization level. It has always been a key county for poverty alleviation in the country. It has always been a national key poverty alleviation county. The county has a large agricultural population base. In 2001, the total population of the county was 128,600, including 168,800 urban population and 1,119,800 rural population, with an urbanization level of only 13.1%. According to statistics, the net income of farmers in County X in 2001 was only 1200 yuan, and the poor population reached 135,000. The incidence of poverty was 11.7%. How to transform County X from a large agricultural county to a strong agricultural county has always been the strategic core problem troubling the Party committee and the decision-making level of County X government. At the beginning of this century, on the basis of investigation, analysis, summary, and study of the current economic and social situation of the county, County X Party Committee and County Government singled out the thinking of traditional agriculture to revitalize the county and proposed a new strategy of “rejuvenating the county through urban construction”. The guiding ideology is to vigorously strengthen the construction of urban infrastructure and drive the leapfrog development of the county economy and society through urban construction. Through

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the mode of county government relocation and new town reconstruction, the ancient agricultural county started the rapid urbanization process. Overview of City S. City S is a county-level city under the jurisdiction of City D. With a total area of 439 square kilometers, the city has 16 township and sub-district offices, an economic development zone, and a population of 370,000. It is an important energy and raw material base, known as the “Coal Sea”, “Antimony City”, “Silicon Treasure House”, and “Home of Nonferrous Metals”. Since then, City S has become one of the most important industrial towns in Province H, with more than 1100 industrial enterprises and more than 100 industrial enterprises above designated size, forming five resource industrial systems of iron and steel, non-ferrous metals, chemical industry, coal power, and building materials. The steel industry group in the region is one of the top 500 manufacturers in China, and the production and design scale of the construction fastener factory ranks first in China and second in Asia. The thermal power plant branch in City S is the largest pithead thermal power plant enterprise in the central and southern region, as well as the largest urea production base in the province. These enterprises and industries are the economic pillars of City S, but they highlight the characteristics of the traditional heavy industry in City S, which is characterized by high resource consumption and heavy industrial pollution. Since the 5th Plenary Session of the 17th CPC Central Committee, accelerating the transformation of the mode of economic development has become an extremely profound reform in China’s economic and social fields. As a resource-exhausted city, transforming its economic development mode is not only a way to survive, but also a way to develop. In order to combine the strategic opportunity of resource city transformation, City S proposed the transformation strategy of “one transformation, three industrializations”, which is to “deepen the transformation project, promote industrial scale, urban ecology and urban–rural integration”. In this context, City S tries to imitate the county government relocation and new town development mode of County X, and its economic and social development enters the fast lane of re-urbanization. 2.2

People and Related Enterprises

This research interviewed a large number of public figures and enterprises involved in the three districts and counties of City D. Following the academic practice, both figures and enterprises were anonymized in

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the book. In order to clarify the interrelationship between people and companies in this informal financial crisis, here is a brief introduction of the following key people and companies (Table 1). Mr. C from D Market financial office, is an important guide for the author to conduct field research. He has been in charge of financial work for many years and is very familiar with the financial field of City D, and has accompanied the author to conduct in-depth research in three districts and counties. In this study, a large number of interviews were conducted to evaluate the financial scale among City D, and Mr. C gave great help to them. In addition, Mr. Y from the financial office of City S and Ms. Z from the county government of County X also gave great support and help to the author’s research. Here I would like to express my special thanks. Table 1

Key persons involved in the field investigation and interview

Government Officials

Mr. C Mr. Y

Ms. X Entrepreneurs

Boss X1 Boss X2 Mr. B Mr. F

Mr. S

Informal Investors

Mr. T A1 A2 A3 A4 A5 A6 A7 A8

City D Financial Office, interview data coding format is C-00x City S Financial Office, interview data coding format is Y-00x County X government, interview data coding format is Z-00x Mayor of a town in City S, interview data coding format is H00x Leader of Municipal Party Committee of City S, interview data coding format is x-00x Chairman of T Company (jumped to his death on Christmas Day 2013) Chairman of J Group, the largest real estate group in City D Chairman of Y Company, one of the largest real estate companies in City S Chairman of Q Technology and the Company, a well-known enterprise in the electronic ceramics industry of County X CT Group, a state-owned enterprise established by D Municipal Finance Bureau and the National Development and Reform Commission Former Chief Financial Officer of T Company The code of interview data: A1-01—A8-01

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Five key companies and three chairmen (general managers) are also involved in this study. The first enterprise is called T Company for short, and its general manager and chairman are pseudonymous X1. After the rupture of T Company’s capital chain, X1 chose to jump off a building on Christmas Day in 2013, which became the fuse that triggered the bank run wave among investors in City D and led to the informal financial crisis. The author found Mr. L, who used to be the chief financial officer of this enterprise, and made a comprehensive understanding of the development process of T Company and the situation of X1’s fund-raising. The second enterprise is called J Group for short, which is the largest real estate investment enterprise in City D, and its general manager and chairman is X2. X2 of Group J and X1 of Company T share the same surname X and are from the same hometown. Therefore, after X1 jumped from the building, it was wrongly rumored that X2 jumped from the building. The panic caused the investor-run phenomenon to be transferred to J Group quickly, which led to the climax of informal financial crisis in City D. The informal debt chain of J Group was complex and huge, which triggered a group protest lasting for 5 years and became the focus of this study and an important case for continuous follow-up investigation. The third enterprise, referred to as Y Company, is a comprehensive commercial service group company with real estate development as its core business in City S. With strong strength, the developed project is located in the golden area of City S, and it is a municipal key project undertaking enterprise for consumption upgrading in City S. Mr. B, the general manager of the company, broke the capital because after the private run broke out in City D, the panic spread to City S, and investors demanded to get back the principal. The case of Y Group Company reflects the rupture of social trust under the background of panic, as well as the difficulties of local people’s livelihood and economic development after the destruction of social integrity environment. In County X, the author visited H Company, an industrial entity. Mr. F, the general manager and chairman of the board, is a friend of the author for many years. Through the visit to this enterprise, the author tries to investigate the impact of the informal financial crisis on the real economy and informal enterprises. Under the influence of the collapse of the informal financial system, company H was forced to suspend loans

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from the formal financial system. The lack of working capital led to continuous layoffs and reduced production scale to cope with the crisis. The fifth enterprise is CT Group funded by the Development and Reform Commission of City D and the financial department. CT Group tries to rebuild the trust of regional society with the guarantee of government credibility and state-owned assets as collateral to guide informal capital to participate in urban development and construction again. The author had a 2-hour detailed interview with Mr. Z, the general manager of CT Group, to understand the purpose of the establishment of the group and its current operation. After experiencing a major trauma, on the one hand, the informal capital in City D has dissipated and exhausted a large part, on the other hand, the trust and confidence in informal investment have also dissipated. Therefore, the “PPP” mode that CT Group tried to guide informal capital investment with state-owned capital failed to reunite the informal financial resources needed for regional economic and social development.

3 Research Methods: A Case Study Based on City D Therefore, this study selected a prefecture-level city in the central region of China as the research object and chose three districts and counties with typical characteristics. Centering on the story of the emergence, development, and collapse of informal finance, it empirically analyzed the operation mechanism of the generation, maintenance, and rupture of social trust in the process of regional urbanization, and analyzed the informal financial crisis in the process of urbanization in City D from the perspective of social trust. 3.1

Case and Representative Analysis

In this study, District N, S prefecture-level city and County X, where D municipal government is located, are selected as field observation points and analysis units. The above three observation points are chosen to consider the representativeness and typicality of individual cases. City D has jurisdiction over one district and four counties. Although they are all under the jurisdiction of the same municipal government, different districts and counties are on different development tracks and have

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different starting points and paths of urbanization. The three districts and counties are typical in the following aspects: First of all, District N, City S, and County X represent three typical administrative systems. As the district where the municipal government of City D is located, District N has always been at the top of resource allocation in the whole city. Its urbanization process is the earliest. The leading mode of urbanization is driven by industrial parks and development zones, and the financial support and innovation problems in the urbanization process are the most prominent. County X and City S actually belong to the same county in history, but in the 1980s, City S was separated from County X to form a county-level city for better industrial development and urbanization. As pointed out above, the city-county urbanization is the normal state of economic and social development in China for more than a decade, and the three regions better represent the “city-county urbanization” proposed by this research. Secondly, City D, District N, City S, and County X also represent three completely distinct urbanization development modes. As the seat of the market government, District N has more policy resources, mainly through the development and construction of industrial parks to promote urban expansion. As an old industrial city with rich mineral resources and huge local state-owned enterprises, City S has a high level of industrialization and urbanization in history. However, in recent years, resources have been exhausted and traditional industrial and mining enterprises have declined. The urgent problem it faces is that the economic development mode urgently needs to be transformed. Therefore, the main mode of re-urbanization of City S is to guide the modernization transformation of economy and industry through old city transformation and new city expansion, and to construct new city through new urbanization. County X has always been the largest agricultural county in City D, with a population of more than 1.4 million, and is a national-level povertystricken county. However, since the implementation of the “county government relocation” strategy in 2003, the urbanization of County X has achieved leapfrog development. Because the resource endowments of these three places are different from the actual situation, the urbanization process of each place is not synchronized, and the implementation plan and leading mode of urbanization adopted by the three places are also different. However, history and reality show that in the process of modern economic and transformation initiated by urbanization, the three

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places almost simultaneously encountered the baptism of this civil financial crisis. Therefore, the study selects these three typical places to explore the impact of informal finance on the economic and social development of different districts and counties. Third, these three regions are the hardest hit areas in this informal financial crisis, which can comprehensively reflect the process of this informal financial crisis and its economic and social impact. District N has the largest scale of informal finance, the largest number of informal investment companies, and the earliest problem of capital chain rupture. After the outbreak of the informal financial crisis, investors’ rights protection and protest lasted the longest and fiercest, and the government had the greatest difficulty in governance. As an old industrial city, City S has the most active informal investment. Despite the baptism of informal financial crisis, it is basically within a controllable range. The real estate market in County X is the most stable, so the real estate market in County X is relatively less affected by the informal financial crisis. By observing districts and counties of different degrees, we can see the knowledge and understanding of informal finance at different levels. In addition, the convenience of research and data is also taken into account when these three places were selected as observation points. Firstly, the author knows the government departments, leaders, and local customs of these three places best. Except for the highest usage rate of Putonghua in downtown D, people in County X and City S use the same dialect. While County F and City L, both belong to City D, use the other two dialects, respectively, and the characteristics of F county are basically the same as County X, while City L is also a county-level city, and the situation is similar to City S. Therefore, the study selected District N, City S, and County X of City D, which basically covers the typical characteristics of different administrative systems, the initial status of urbanization, and the dominant mode of urbanization in China, and is relatively good representation. 3.2

Data Source

This study selected District N of City D (the district where the municipal government is located), County X, and City S as the fields to investigate and analyze the urbanization process, urbanization mode and operation of informal debt in the urbanization process in the past 10 years in these three cities, and then analyze the impact of the outbreak of the informal

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debt crisis on local economic and social development and the impact of social governance. The main sources of information and data are: 1. Relevant information in the work reports, statistical bulletins, and local chronicles of local governments over the past years. 2. Primary data obtained from field investigation and in-depth interviews. The author held a collective discussion on the theme of financial support for urbanization in the region among the leaders of the financial office of City D, the economic and financial departments of County X and City S. 3. Collect the typical case files and trial transcripts of “anti-illegal fundraising office” in each district and county by reviewing the case files related to “illegal fund-raising cases” and the court system, so as to understand the basic situation of creditors and debtors. 4. Through the author’s local acquaintances, in-depth interviews were conducted with local private entrepreneurs, informal financial investors, and other groups, and a large number of petition and oral materials of creditors were obtained. These data vividly revealed the origin, maintenance, and rupture of people’s trust relationship in regional economic and social activities in the urbanization process of City D, and deeply reflect the rupture between interpersonal trust and system trust.

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Main Findings

Through in-depth research, it is mainly found that the social trust network supporting informal finance is the interpersonal trust of traditional acquaintance society. The root of the financial crisis is the rupture and collapse of the social trust network. The fundamental way to govern and respond to the informal financial crisis is to rebuild the system trust. 4.1

The Foundation of the Development of Informal Finance Is the Traditional Social Trust Network

Compared with the cities and counties at the forefront of the reform and opening up in China, City D is still a county with relatively backward economic and social development, and the local culture is relatively closed. This study finds that the root cause of the huge informal capital

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market in City D is its specific economic, financial, and social structural background. The huge demand for capital from the modernization transformation of the economic and industrial system driven by the urbanization development of City D is the basic economic environment for the formation of the informal capital market. However, the formal financial organization and system cannot meet the demand of economic development for funds, which is an important financial environment generated by the informal capital market. In addition, for a long time, the low-interest rate of deposits accepted by formal financial institutions and the high inflation rate in recent years has led to the embarrassing situation of long-term depreciation of household deposits, making formal financial organizations less and less competitive in deposit absorption. After the boom of real estate economy brought about by large-scale real estate development, the real estate development has become a profiteering industry. Due to the huge capital gap in the real estate development market, some enterprises have discovered the “business” of “investment and financing” (i.e. the game of money). After the “business”, City D’s investment and financing companies have blossomed everywhere. People are willing to invest their family savings over the past decades in investment and financing companies, not only for economic greed, but looking for some safe and reliable ways after rational thinking. This is the social trust bond in the acquaintance society. Through such trust bonds as blood ties, kinship, and business ties, decentralized capital is gathered and participated in the economic development process of urbanization. When the real estate economy is booming, local governments, real estate developers, investment and financing companies, as well as investors, all benefited from it. In the financing end of the whole informal debt, it is based on a strong social trust. With the strong social trust relationship of acquaintance society, social idle funds can be effectively concentrated to the maximum extent. Therefore, traditional social trust is the basic support of informal finance in City D. 4.2

The Root Cause of Informal Financial Crisis Is the Rupture of Social Trust

Different from the financial studies that use panic, herding, and economic data to explain the financial crisis, this study finds that the root cause of the outbreak of informal financial crisis is the rupture and collapse of social trust. Supported by the traditional trust network, though the

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informal capital has been rapidly accumulated, the financing side has been involved in the modern market economy system—this system is a world of strangers. The wide ranges of investors who participate in the investment and interest rate reduction have almost a black hole in their cognition of the modern real estate economic system. What supports investors’ confidence and trust is to pay interest monthly, which is the key to gaining investors’ trust. The financing terminal has not established the trust of abstract social systems in the modern sense and has not obtained the support of law and the permission of the public sector. When rumors came, a wide range of investors who did not understand the financiers immediately panic, which is the result of the rupture of social trust. The lack of system trust makes the panic effect more serious. The instant melting of the snowball of informal debt in City D can also be said to be the result of strong informal trust. Because in the panic, the powerful social trust network makes the participants in every link of the financing end think that a major problem has occurred in the financing end, as the financing end is a complete stranger to investors established on the basis of trust network. It is precisely because of this strong individual trust that investors do not trust the financial end that needs system trust as support. The rupture and failure to properly transform the two kinds of trust make the huge informal financial system of City D avalanche. 4.3

The Key to Deal with Informal Financial Crisis Is to Rebuild System Trust

The collapse and disintegration of the huge informal capital market in City D under rumors and panic is essentially the result of the failure of the regional informal capital market to integrate with the formal financial system, always operating in the gray area, and failing to establish the trust of the organization and system on which modern finance depends. As the basic link of economic and social activities in modern society, finance needs the support of a complete legal system and a good credit system. In addition, from the crisis management process of the public sector after the occurrence of the informal debt crisis in City D and its corresponding aftermath, informal finance, as the blood supplement for the development of local economy and industry, is of great significance for the modernization transformation of regional economy and society. In the context of the modernization and transformation of the regional economic system, local governments at all levels shoulder the

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responsibility of developing local economy and industries in addition to undertaking public governance functions. Therefore, the institutional environment of local financial development is inevitably affected by the level of public governance of local governments and the direct intervention of various public sectors in economic operations. In addition to the influence of the financial system and the level of government governance as the formal institutional background, the local financial system is also greatly affected by informal social structures such as informal capital and social trust networks. The study found that although the informal capital market based on informal lending played a key role in promoting the modernization of local economic industries, with the modernization of regional economic industries, this informal capital market based on traditional interpersonal credit has never been organically integrated with the formal financial system, so it cannot support the complex modern economic system. Therefore, establishing the system trust, promoting the integration of the informal capital market with the modern financial system, and establishing a financial system that matches the modern economic and industrial system are the keys to step out of the informal financial crisis, and promote the transformation and upgrading of the local economy and sustainable development.

5

Research Innovations and Deficiencies

This study took a prefecture-level city as the field site, and extensively collected relevant materials of the urbanization development, industrial transformation, and informal lending development in Direct N jurisdiction, County S-level city, and County X under the jurisdiction of the city. This paper tries to comprehensively investigate the formation of the informal capital market and the operation of the social credit system in a regional society from the perspective of historical changes. The research attempts to have some innovative exploration and attempt in theory and method and has some independent views, but due to the wide geographical scope involved and the sensitive events tracked, the empirical research process is faced with various difficulties such as different forms and information asymmetry. Therefore, in a transparent and limited data accumulation, as well as the comprehensiveness of the index and the peripherality of the concept, there are still many deficiencies, which I hope can be clarified further and improved in future research.

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Innovations of This Study

As an exploratory study, this study has made some new explorations in theory, method, and research findings, so it has some potential innovation space, mainly reflected in the following aspects: First of all, this study empirically analyzes social trust through informal finance and dynamically analyzes the transformation of the trust relationship between the general public and informal finance from the whole process of the rise, development, and crisis outbreak of informal finance. There have been many researches on trust in the past, but most of them were from the perspective of macro, abstract, and logical deduction. In this study, trust is placed in the regional economic and social life to observe people’s trust relationship and changes in informal areas of informal finance. Therefore, the research on social trust is an empirical analysis from the micro to the meso level. It is a field analysis and investigation of social trust in the context of regional economic and social transformation. Social trust is no longer an abstract and grand moral rhetoric. Secondly, this study finds that the informal lending based on traditional interpersonal trust is in line with the traditional culture, folk customs, and traditional small-scale peasant economy of the region. When the mobility of a regional society is low and the regional society is relatively closed, too big a problem will not occur. However, once the informal financial market based on such trust encounters such large-scale and rapid urbanization in City D, there will be a huge mismatch between the rapidly expanding urban aggregate and the fragile informal lending based on informal relationships. Therefore, the rupture of social trust led to the outbreak of informal financial crisis. Only modern system trust based on public power and rule of law can solve the contradiction between regional financial structure and economic structure. This research has some innovative value in both theories and applications. Thirdly, at the conceptual and analytical levels, this study proposes the issues of social trust rupture, social trust transformation, and social trust reconstruction when studying social trust. The problem of social trust rupture in the past has been reflected in the research on government credibility and political trust. The social trust rupture proposed in this study refers to the rupture of trust transformation caused by the mismatch between interpersonal trust based on personal trust and modern financial system, in fact, it is the rupture of basic systems in the process of economic

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and social modernization transformation. That is to say, the interpersonal trust widely contained in the society cannot be transformed into the system trust, which leads to the legal and effective flow of social capital. Therefore, this structural rupture of trust reveals the basic problems faced by the economic and social transformation. Fourthly, this study highlights the Chinese characteristics of social trust during the transition period. Informal finance itself is purely individual economic behavior, originated from individuals, but after the outbreak of the crisis, all the responsibility seemed to be transferred to the government. Local governments also hope to rely on public power to build a regional financial system when dealing with informal financial crisis. The reconstruction of the trust system under the intervention of public power is very consistent with the logic of Chinese society and highlights the Chinese characteristics of the reconstruction of social credit. The reason for the serious informal financial crisis in City D is that the government itself has some responsibility. As “night watchman”, witnessed the formation of large-scale informal lending and fund-raising, but ignored it. They didn’t get involved until serious problems arose. The government saw both formal finance and informal finance, but did not regulate them early enough. Therefore, after the outbreak of informal financial crisis, the public naturally turned to the government to deal with the problem. The issue of trust reconstruction better revealed the relationship between Chinese government and society during the transition period. Finally, this study extends the scope of community research. At present, most sociological community studies focus on a small population within the scope of a specific community, but this study has greatly expanded the research area by tracing social facts and social events. The informal debt event explored by the author took place in a wide range of areas such as City D, District N, City S, and County X. It followed the principle of pursuing social facts, greatly expanded the scope of traditional community research, and tracked the whole area of the city, county, and district where the event and the group event occurred. Through the process event analysis method, this paper investigates the economic and industrial transformation brought about by the urbanization construction of a prefecture-level city in the past 10 years and analyzes the changes of social trust relationship behind the modernization transformation of this regional society. Basically, this study follows the process event perspective of the generation and development of informal debt to analyze the

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generation, development, and evolution of the social fact of the emergence, development, and outbreak of informal financial crisis in City D. Process event analysis is a methodological narrative analytical tool proposed by local sociologists. At first, the academia mainly used this tool to interpret the importance of the highly differentiated, dynamic, and practical relationship between state power and ordinary farmers (Tan Weijun, 2008). Compared with the classic “structure system” analysis method of sociology, process event analysis is good at analyzing social reality as a dynamic and mobile process, and can make a more appropriate description and understanding of social reality (Xie Lizhong, 2007). Process event analysis has been widely used in the field of protest behavior and social movement research and has been continuously combined with “structure system” analysis in this research field. On the one hand, it tries to comprehensively analyze social events from the perspective of event process, and describe the process of events and the power of actions. On the other hand, from the perspective of structure and system, we understand and explain the structural causes and constraints of event development. Ying Xing’s “Story of the Great River Migrant Petitioning” combines the two research perspectives and can be regarded as a mode of research. The social facts concerned in this study are highly similar to the petition stories of Dahe immigrants, which occurred in a certain geographical range and seemed to be a purely informal financial crisis. In fact, it is related to the national financial system and institutional arrangements, the governance of various departments of the local government, and surrounding the informal debt crisis, it triggered a large-scale and continuous petition and collective resistance of investors. Therefore, this study draws on the basic narrative and analysis method of “process event”, studies and interprets the crisis management story of the emergence and development of informal financial crisis among City D from the perspective of social trust, and also makes some innovative exploration in the research. 5.2

Deficiencies of the Research

Due to the sensitivity of the research object involved in this study, the universality of the research scope and the long duration of the research period, the empirical research is faced with many difficulties. In addition, the author is born an economics and finance professional, the mastery

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of sociological theory and research methods is limited. Therefore, the theoretical construction needs to be further refined and deepened. The biggest deficiency of this study lies in the representativeness of the research phenomena. The events and stories described in this study took place in a prefecture-level city and its subordinate counties, while China has more than 300 regional administrative regions and more than 270 cities. The economic development and social differences among regions are large, and the financial support systems in the process of urbanization may be different. Therefore, this study explains the modes and ways of regional economic and social modernization, as well as the relationship between social trust and the financial system in this process, it does not necessarily have universal significance. For a country like ours, how to make the finance better serve the regional economic and social development? It needs more case studies to make further comparative research on the grassroots experience of regional economic and social modernization.

CHAPTER 3

Traditional Social Trust and the Rise of Informal Finance in City D

Since 2009, under the stimulus plan of 4 trillion yuan, the urbanization construction of cities and counties has been accelerated, and the real estate transformation of the whole regional economy and industrial system has dramatically expanded the demand for funds. In the financial environment of multiple imbalances in the local formal financial system, the informal lending has grown rapidly. The establishment of informal financial market depends on the extension of traditional social trust relations. The formation and operation of the informal financial market in City D is based on the trust relationship in the traditional society, and the trust relationship in the informal financial market has undergone the construction from interpersonal trust to organizational (institutional) trust. However, as informal finance always operates in a gray area, the trust of non-governmental finance organizations is covered with the halo of trust such as the platform of local leaders and the honorary certificates authorized by various government departments, but these institutions lack legal support and formal financial system recognition, so the trust system is still very fragile. This kind of vulnerability has actually hidden trouble for the huge financial risks produced by the real estate recession. This chapter mainly introduces the scale of informal finance in City D, the rise and development process of informal finance and the traditional interpersonal trust network it relies on. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Weiping, Social Trust, https://doi.org/10.1007/978-981-99-2931-3_3

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1

The Scale of Informal Finance in City D

As an informal finance operating in the gray area, how large is its scale? For the financial supervision departments of City D and the districts and counties under its jurisdiction and some local leaders, it is not only a secret matter, but also a difficult problem through which we find out the total amount of finance among citizens in City D. According to relevant reports of official investigation and evaluation, in 2013, the scale of informal lending reached a peak in City D, and the scale of informal lending funds in the city reached about 40 billion. During 2016–2017, the author contacted various social relations. Through some formal and informal channels, the volume and scale of informal finance in City D can be estimated to be about 25 billion, accounting for about half of the total loans of the city’s formal financial system and a quarter of the total deposits of residents in the city, from the data of the city’s financial office on illegal informal fund-raising in the city. Although there is a big discrepancy between the data collected and obtained from the working departments of local governments and the above official data, it is understood that this gap is caused by the exclusion of some lending quotas with normal interest rates by the local financial supervision departments after calculation. 1.1

Overall Evaluation of City D

The author paid a special visit to Mr. C, Financial Office of City D. The financial office of City D has conducted a special survey on “informal illegal fund-raising”, so the data it has mastered are generally credible. According to the interview with Mr. C, the total amount of social capital absorbed by the informal financial market among whole City D is about 25 billion, involving 300,000 creditors: Author: How much informal financing is available in the whole urban area? Are there tens of billions? More than 10 billions? Mr. C: I’ll be honest with you. I probably can’t say anything at the meeting. The financial sector is also responsible for the handling of illegal activities. Our statistics show that 173 companies have problems, which have surfaced, and 173 have creditor’s rights or unstable factors, our estimate is 19.3 billion. But that doesn’t include the big one, which is our coal industry. You may know that coal is our traditional pillar industry here, which is actually more. We had a bottom line of about 100, with

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a total capital of about 5 billion to 6 billion. Coal is a relatively traditional and independent industry, because we can’t manage it so broadly, and there is no accurate data, which is basically digested by the industry itself. But there are several characteristics: One is that people who have money have made money in coal, they invest some money here and there. Another is that the local people, in the form of shares, have more shares than the others. I remember one coal mine involving more than 3000 people, but the amount of money was only 20 to 30 millions, that is, 20 to 30 thousand yuan on average, and the small one was 3000 or 5000, which was mainly put in by people around the village, The financing of the coal industry is relatively conservative, and the risk is not very big. After all, it is the real economy. What we estimate is the informal financing, which is about 25 billion to 28 billion. To be honest, people in City D are relatively rich. Author: How many people are involved in the 25 billion informal financing? Mr. C: We have more than 78,000 people registered. We sent a working group to each company to conduct public registration. If there is no assignment, there will be no public registration and we predict that the direct creditors in the city will be about 300,000. We only register a small part of them, less than one third of them. Author: The proportion of informal financing in the whole city has reached about half of the city’s loan amount? The informal investment is so active. Mr. C: But there has been a serious decline in recent years. Because the whole flow of bank deposits has stopped. We have had 26 consecutive months, and the total number of household deposits is the first in the province. At present, the household deposit in City D is 103 billion, and by the end of May, the desire to invest is not very strong——Interview data C_001. As can be seen from the above interviews, about 300,000 people participated in the informal capital market of City D, and built up an informal capital force of more than 25 billion, with an average investment of more than 80,000 yuan per person. If the local monthly interest rate of 1.5–2% is calculated, each participant will have 1500–2000 capital gains per month, and the average salary of local civil servants is almost 2000 yuan per month. Therefore, in this sense, we can say that the financial market among City D is not only an effective aggregation of regional social capital, but also an important mechanism for civil society to widely

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participate in the urbanization process, and an important channel for the majority of households to share the dividends of urbanization. 1.1.1 A Local Survey of City S The author obtained a list of enterprises involved in the “illegal fundraising” cases in City S through the relevant departments. The total amount of “informal illegal fund-raising” in the city exceeded 5 billion, among which the 26 enterprises involved in the key cases raised 1.564 billion (Table 1). Table 1

Key cases of cracking down on illegal fund-raising in City S

Industry Investment Wholesale and Retail The real estate Investment The real estate Wholesale and Retail Personal Commerce and trade Investment The real estate Wholesale and Retail Service Commerce and trade Wholesale and retail Real estate Personal Commerce and trade Manufacturing and Construction Service Wholesale and retail Personal Wholesale and Retail Industrial Personal Wholesale and Retail Personal

Financing amount (10,000 RMB)

Amount of financing per creditor (10,000 RMB)

33,203 27,704 16,000 15,000 12,000 11,020 6900 6301 4533 2827 2800 2500 2164 2128 2100 1700 1500 1024

10.18 7.78 6.15 8.82 24.00 68.88 60.00 11.31 10.59 18.85 9.33 12.50 11.33 12.37 70.00 42.50 21.43 6.97

1000 972 900 758 500 408 300 165

11.11 11.85 100.00 18.05 13.51 9.07 15.00 5.89

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The above table is an excerpt from the list of 26 key cases of “illegal fund-raising” enterprises in City S. Of the 26 cases filed, 5 were human fund-raising cases, accounting for about one-fifth of the cases filed. The remaining 21 cases are all corporate financing, including both specialized investment companies and enterprises in a wide range of real industries, including industry, manufacturing, construction, trade, wholesale, and retail. A total of 1.564 billion was raised in 26 cases, involving 14,536 investors (families), with an average investment of about 230,000 yuan per family. It can be seen that these enterprises are basically local leading enterprises, and most of these individual fund raisers are local business elites. These enterprises are not only related to 14,500 middle-class families, but also may involve tens of thousands of enterprise employees. This is an important component of the informal economic sector in the local economic system of S city, and it is also the most dynamic part.

2

Important Background of the Rise of Informal Finance in City D

In the long history of China, informal lending relationship has existed in ancient times, but it has not formed large-scale informal finance. There has never been a time like today when the general public shared the growth of wealth in the process of urbanization by lending to the bosses of some investment and financing companies. The scale of funds gathered by some investment and financing companies through informal financing has become an important force in the local financial capital market, and can even match the financial resources in the formal system. The rise and development of informal finance has a special social and historical background and formal financial system situation. This study holds that the informal finance in City D originated from the tension of financial resources and the distortion of formal financial mechanism in the process of urbanization in the mainland. It is found that the three different administrative regions under City D have different resource endowments and economic foundations, and the urbanization process was started in different modes. However, their common basic characteristics are the scarcity and distorted allocation of financial resources. For a long time, formal financial organizations in City D have absorbed a large number of social deposits cheaply. But due to the allocation rules of financial resources and the risk and profit preferences of financial organizations

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such as banks, these social deposits have not been effectively allocated to the needs of local economic development. Therefore, there is a huge capital gap in the process of urbanization. The rise of urban investment companies has broken the dominance of the formal financial system represented by state-owned banks. The interest rate of urban investment bonds issued by urban investment companies is far higher than that of fixed deposits of formal financial institutions. They began to attract deposits at a rate higher than that of banks but lower than that of local folk usurious loans. In other words, under the background of the large capital gap required by city-county urbanization, the low-interest rate of formal financial institutions to absorb social deposits and the high threshold to allocate financial resources make the public social savings continuously transfer to various informal financing platforms. With the advancement of urbanization, soaring housing prices, the huge profits from real estate development, and the growing snowball of informal debt, the mutual lending and loans among households, real estate enterprises, real enterprises, and investment and financing companies are complicated, and even the formal financial organizations have finally developed various financial products. The resources between formal financial institutions and informal financial institutions are also related. The resources of informal financial institutions slowly began to encase the formal financial system. 2.1

Large-Scale Promotion of City-County Urbanization and Industrial Transformation

This study pays great attention to the urbanization of City D, because it is the large-scale and high-speed urbanization that has driven the agglomeration development of real estate industry and related industries, thus generating a huge demand for financial resources and informal finance. There is no doubt that urbanization led by prefecture-level and countylevel administration is the fundamental force driving regional economic and social development in the past decade. However, compared with the developed coastal areas, and the cities and towns in or around Beijing, Shanghai, Guangzhou, Shenzhen, and other mega cities, the financial resources at most prefecture-level and county level in China are extremely scarce. The siphon effect of resources has exacerbated the imbalance in the distribution and allocation of financial resources. The urbanization in mainland China dominated by prefecture-level cities and counties is the

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urbanization with scarce and poor financial resources, which is completely different from the urbanization path in coastal areas. However, experience observation and various data show that, even under the constraint of such a very limited financial resource situation, different districts and counties under the jurisdiction of City D have made remarkable achievements in urbanization in the past decade. Driven by the urbanization led by the city-county level, the economic and industrial structure of each district and county has begun to modernize. As shown in Fig. 1, in the past 10 years, driven by the rapid urbanization, the economic and industrial structure of the districts and counties in City D began to undergo modernization transformation. According to the archives of the Urban Construction Bureau of City D, during the “11th Five-Year Plan” period, the urban population of the five counties and urban areas of City D reached 1.353 million, and nearly 70,000 people moved to cities and towns every year. This influx of people brought great vitality to the economic development, and at the same time, it also brings a series of problems to the city such as transportation, employment, insurance, environmental protection, housing, education, and fair treatment of rural residents. In view of these circumstances, in order to comprehensively improve the quality and level of urbanization, City D plans the urbanization work at a high level. In the process of development, government leaders believe that only by accelerating the promotion of urbanization can we enhance the absorptive capacity and factor aggregation capacity of cities and towns, and provide a strong guarantee for the industrial modernization and transformation of City D. With the rapid development of urbanization and the continuous growth of the scale, it has effectively expanded the demand for various types of investment, and at the same time, it has effectively shifted the local agricultural population. Since 2006, the construction of new countryside in District N has been launched fully, 78 villages have been listed as provincial “thousand village demonstration project”, 46 villages completed the high standard village construction planning, the construction industry has absorbed 25,000 rural surplus labor throughout the year; The modernization transformation of the economic and social structure of City D is highlighted in the urbanization growth of all districts and counties. In 2015, the permanent population of the 5 counties and cities reached 3.87 million, among which the urban population was 1.6947 million, and the overall urbanization rate was 43.77%.

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The whole situation in D City

X County

Fig. 1 Population and urbanization rate of districts and counties in City D (six popular data)1

Although there are great differences in resource endowments among districts and counties, different districts and counties in City D have gone out of different urbanization paths or modes, no matter what kind of urbanization mode, its prominent feature was the rise and establishment of modern real estate economic system. Over the past decade or so, the three districts and counties selected in this study have different resource endowments. Although they have adopted different urbanization modes according to their own basic characteristics and resource advantages at the beginning, they have finally embarked on the modern economic industrial structure dominated by real estate. The formation of the industrial structure dominated by real estate is highlighted in the changes in the output value and growth rate of agriculture, industry, and construction industries in City D in the past decade. 1 On June 23, 2015, the 1655th meeting of the Judicial Committee of the Supreme People’s Court passed “the Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law to the Trial of Private Lending Cases”, clearly indicating that the fixed interest rate protected by law is 24% of the annual interest rate; A natural debt zone with an annual interest rate of 24 to 36 percent; Loan contracts with an annual interest rate of 36% or more are invalid. The regulation came into effect on September 1, 2015.

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According to the agricultural development analysis report of City D, as shown in Fig. 2: During 2011–2015, the output value of the primary industries such as agriculture, forestry, animal husbandry, fishery, and fishery in City D increased somewhat, but the annual growth rate was very low, and the fluctuation of the growth rate was highly consistent with the urbanization growth rate of the city. This shows that, on the one hand, the growth of the GDP of agricultural areas has little effect on the national economic growth of the whole region, but on the other hand, urbanization has a significant impact on the development of agricultural industry. Moreover, statistics show that from 2005 to 2016, the growth rate of industrial added value of City D has been declining, especially in recent years: from 15.1% in 2011 to 4.2% in 2015, the growth rate of industrial output value reached 5.9% in 2016, despite it recovered slightly in 2015. According to the industrial development analysis report of City D, it can be seen that the industrial development of the whole City D was actually declining in the last ten years (see Fig. 3). In fact, compared with agriculture in the past decade, the city’s industrial system was declining and disintegrating. This also indicated that a new economic system was growing continuously, which is the modern real estate economy accompanies and promotes the process of urbanization.

Fig. 2 Total agricultural output value and its growth rate of City D from 2005 to 2016

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75 70 65 66.3 60 55 50 45 40 35 30 25 20 15 15.4 10 5 0 -5 -10 -15 -20 -25 2005

74.4 55 47.1

45.5

43.8

27.7 18.4

20.1 13.6

21.1 16.1

19.7

16.9

13.5

10.5

9.0

-0.01

5.7 -1.6

6.2

7.3

-8.1 -13.9 -21.4 2006

2007

2008

2009

2010

Growth rate of the added value of the industry %

2011

2012

2013

2014

2015

2016

2017

Growth rate of the added value of the construction industry (%)

Growth rate of real estate development %

Fig. 3 Growth curve of three industries in City D from 2005 to 2017

In sharp contrast to the shrinkage of the industry, the added value of the construction industry, which was closely related to the urbanization construction, increased rapidly year by year and reached its peak in 2013, when the output value of the whole industry in City D increased by 15.5%. Although it started to turn around in 2013, it was still growing at 14.8%. However, according to the development analysis report of the construction industry in City D, the growth rate of the construction industry in City D has slowed down almost at a cliff in recent years (see Fig. 3). From all the above-mentioned output value structure and growth rate of major industries and industries in City D in recent five years, it can be basically shown that the rapid economic and social growth of City D in recent years is basically driven by the urbanization of the region. And the basic feature is that the primary industry dominated by agriculture is basically stable, and the share of the primary industry keeps stable growth in the process of urbanization. In the secondary industry, the proportion of social wealth created by industry and the growth rate of output value are decreasing. The tertiary industry, such as real estate development and construction industry closely related to urbanization and numerous

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service industries around urbanization, has replaced the local economic system dominated by traditional industries in City D. On the whole, in the process of rapid urbanization in recent 10 years, the regional economic and social development mode of the economic growth impetus of City D has quietly changed substantially, that is, from the traditional economic system and development mode dominated by industry and agriculture in the past, to the modern economic and social development mode centered on real estate development, the construction industry and service industry have replaced the traditional industry, and agriculture has become the leading industries of economic growth in City D. Both in terms of the total output value and the complexity of the industrial chain, it has far exceeded the economic system of the past era. The rise of the real estate economy and the modernization of the industrial structure of the regional economy have led to the rapid expansion of the demand for financial resources in the regional economic and social life. In sharp contrast to the rapid changes in economic and industrial structure, the local formal financial system with banks as the main body has not been reformed with the times to better serve the development of local economy and society. In the allocation of financial resources, it still adheres to the principle of giving priority to the state-owned sector, and scarce financial resources are given priority to the state-owned sector, while it is difficult for the informal sector to obtain financial resources in the formal financial system. With the continuous and rapid expansion of private economy, it needs more and more financial resources. In the context of the high cost of obtaining financial resources in the formal financial system and extremely complicated procedures, the informal lending behavior in traditional economic activities has developed rapidly. Based on informal lending and with investment companies as intermediaries, City D has built a huge informal financial system, which effectively makes up for the gap in demand for financial resources of the private economy, greatly arouses the enthusiasm of social funds to participate in local economic development, and effectively promotes the urbanization construction of City D. 2.2

Unbalanced Allocation of Resources in the Formal Financial System

A large amount of statistical data above show that the rapid urbanization in the past decade has promoted the modernization transformation of the

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regional economy and industrial system, both from the overall perspective of City D and from the perspective of sub-counties. In this economic and industrial system dominated by real estate development, finance, and capital are blood vessels. The scale of this modern economic and industrial system far exceeded that of the traditional economic system dominated by industry and agriculture, and its normal operation requires a large amount of capital turnover. However, the system and operation of the local formal financial system are still basically stuck in the industrial era dominated by the traditional industrial and rural economy, which is far from meeting the needs of the modern economic system for capital. As a result, under the institutional tension of the formal financial system, informal finance based on traditional informal lending developed rapidly. In the process of the transformation of the modern economic system led by urbanization in City D, the informal capital market of regional society has been rapidly established through interpersonal trust network. Since there are no real local listed companies in City D, the formal financial system can be almost equivalent to the banking system dominated by state-owned commercial banks. About the formal financial system of City D, we can probably get an overall understanding from the following data: According to the statistical bulletin of City D, by the end of 2015, the deposit balance of various financial institutions in the city was 128.475 billion, an increase of 15.856 billion compared with the beginning of 2016, among which the household deposit was 89.5 billion yuan, and the deposit balance of non-financial enterprises was 18.485 billion. The balance of various loans of financial institutions in City D was 79.065 billion at the end of the year, among which the household loans were 25.107 billion yuan, an increase of 1.438 billion yuan over the beginning of the year, and the loans of non-financial enterprises and organizations were 53.958 billion, an increase of 7.213 billion over the beginning of the year (see Table 2). We can see the basic features of the city’s formal financial structure: First, the city’s deposits mainly come from the household sector, accounting for 69.6% of the total deposit balance; Secondly, the proportion of loan balance to deposit balance is low, 61.5%, and the proportion of residential sector loans is even lower, accounting for 31.7% of the total loan balance. It can be seen that formal financial organizations absorbed a large amount of private savings, but most of the loans went to “non-financial enterprises and institutional groups”, which was actually the public sector represented by local state-owned enterprises and institutional institutions. In addition to the assessment and control of the

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Table 2 Balance and growth of local and foreign currency deposits and loans of financial institutions in City D in 2015 Index

Year end balance (RMB 10,000)

Balance of local and foreign currency deposits of financial institutions Including: household deposit Non-financial corporate deposits Generalized government deposits Non-banking financial structure deposits Overseas deposit Newly added domestic and foreign currency deposits throughout the year Balance of loans in local and foreign currencies of financial institutions Including: household loan Loans to non-financial enterprises and organizations # Personal housing consumption loan # Loans for small and medium-sized enterprises # Loans for agriculture, forestry, animal husbandry and fishery # Manufacturing Loans Newly added domestic and foreign currency deposits throughout the year Balance of various RMB loans of financial institutions Balance of various RMB loans of financial institutions

12,847,504

14.1

8,950,011 1,848,464 2,020,119 25,507 3404 1,585,619

16.2 14.2 6.0 –7.9 –13.7 49.8

790,648

Growth (%)

12.3

2,510,732 5,395,756 875,559 2,566,744 130,087

6.1 15.4 9.1 2.5 –36.1

1,332,212 864,900

5.8 16.4

12,821,828 7,786,661

14.2 12.0

banking system on loan and deposit, the share of financial resources available to the private sector in the formal system only accounts for a small part. In fact, with the modernization and transformation of the economic system, the scale of the private economic sector is expanding gradually and far exceeds the total economic volume of the state-owned sector. Therefore, the demand for financial resources is growing. Table 3 shows the deposit and loan status of the formal financial institutions in City D in the past 10 years. It can be seen that although the loan-to-deposit ratio of the formal financial institutions in the city has maintained a steady growth in the past 10 years, it has basically maintained at about 60%, which means that 40% of the financial resources have not been effectively used for the local economic and social development. The vast majority of the financial resources lent went to the state sector. According to the field survey, the demand for funds in the urbanization process of City D is growing gradually, and the fund gap is widening.

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Table 3 Deposits and loans of financial institutions in City D from 2006 to 2015

Year

Deposit balance

Loan balance

Loan-to-deposit ratio

2006

32.803 billion 38.399 billion 48.696 billion 58.417 billion 65.575 billion 77.737 billion 90.703 billion 102.025 billion 112.610 billion 128.475 billion

18.509 billion 20.869 billion 24.455 billion 33.805 billion 39.932 billion 46.902 billion 55.003 billion 62.984 billion 70.416 billion 79.065 billion

0.56

2007 2008 2009 2010 2011 2012 2013 2014 2015

0.54 50.2 57.9 60.9 60.4 60.6 61.7 62.5 61.5

District N, as the city where the municipal government is located, has abundant financial resources compared with other districts and counties. However, according to the survey, the actual situation of the park planning and investment plan of District N alone shows that there is a large gap in the capital demand for industrial park development (see Table 4). It can be seen that although the industrial (economic) development zone mode has created conditions for the large-scale development and rapid take-off of urbanization in City D, in the actual process of landing, it is faced with serious constraints on financial resources, especially financial resources within the system. The main reasons are: First, the Economic Development zones have higher requirements for loan access to infrastructure construction projects. At present, only the Agricultural Development Bank of China, China Construction Bank, and Agricultural Bank of China among the 10 banking and financial institutions in City D have provided loans for infrastructure projects in the economic development zone. However, some commercial banks set a higher threshold for project loans for infrastructure construction in economic development zones. Industrial and Commercial Bank of China,

3

Table 4

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Capital gap of economic development zone in District N of City D

Name

Level

Leading industry

Infrastructure projects (Number)

Planned investment (100 million yuan)

Completion of investment (100 million yuan)

Economic and technological development zone SF Demonstration New Area LX Economic Zone

National

17

20.45

3.55

Provincial

Equipment manufacturing, biology, new energy New materials

11

11.13

8.85

Provincial

New materials

5

8.64

0.83

for example, the loans from Industrial and Commercial Bank of China require that the disposable income of national development zones in the previous year should not be less than 1.5 billion, and that of provincial development zones should be less than 1 billion. At the same time, the investment intensity of land development also has corresponding conditions, among which, the investment intensity of national economic and technological development zones is not less than 3.2 million yuan/mu, and that of provincial economic and technological development zones is not less than 2.4 million yuan/mu. The Bank of China requires that the progress of national projects in economic development zones should reach more than 60%, and the estimated cash flow should cover all projects under construction. Therefore, from the current situation of the three economic development zones in City D, none of them reaches the credit threshold of ICBC at the same time. Second, the anti-risk ability of the infrastructure construction platform enterprises in economic development zones is weak. From the perspective of the capital strength of the whole platform companies, the average registered capital of the 10 platform companies in City D that are specialized in infrastructure construction in the economic development zone is only 70 million yuan, which is far from the access conditions set by various banking institutions for infrastructure construction loans in the economic development zone.

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Third, from the perspective of the guarantee and repayment source requirements of financial institutions, on the one hand, the scope of a loan guarantee for infrastructure construction in Economic Development Zone of City D is narrow, on the other hand, the repayment source is relatively single. The loan guarantee provided by the banking institutions in the area for the infrastructure construction of the economic development zones is mainly mortgage, the guarantee is mainly land use right, and the repayment source is mainly land transfer income. Of the 2.31 billion yuan of loans, the land use right guarantee loan was 2.05 billion, accounting for 86.8%, the loan risk is too concentrated on the income from land transfer. Once the land price falls, the land transfer income will decrease, which will inevitably lead to the problem of insufficient repayment sources. This fundamentally determines the financial support mode and potential financial risks in the process of regional development and urbanization.

3 Several Stages of Informal Finance Development in City D It is precisely in the context of institutional tension in the formal financial system that the huge capital gap required for urbanization has led to the continuous development of informal finance based on traditional informal lending, and finally formed the informal lending market in City D. In essence, the formation of a informal lending market based on informal lending is an important way for social capital sharing and economic and wealth growth brought about by urbanization. For a long time, China’s commercial bank system has adopted the market-oriented operation mode of low-interest deposit and high-interest loan. The interest rate of household deposits is not enough to offset the wealth depreciation caused by inflation. However, there is no safer, more reliable and more profitable investment channel in the domestic financial system than banks (Table 5). In 2013, for example, the nominal interest rate of one-year fixed deposit of Bank of China was 2.25%. After deducting 20% interest tax, the depositor only got 1.8%. When adjusted for prices, the real interest rate is: Real interest rate = nominal interest rate – inflation rate, generally with CPI inflation, but calculated according to the national CPI rose 3.9% (Q1) data, the one-year bank real interest rate should be 2.1%, which means that if 10,000 yuan is deposited in a one-year bank deposit, the

Zero deposit and lump-sum withdrawal, Whole deposit and zero withdrawal, interest withdrawal for a principal deposited

3 months Half a year 1 year 2 years 3 year 5 years 1 year 3 years 5 years

Interest rates of RMB deposits in 2015

Current Whole deposit and whole withdrawal

Project

Table 5

0.385 2.250 2.500 2.750 3.250 3.850 3.950 2.250 2.500 2.500

Interest rate before adjustment

(continued)

0.385 2.000 2.250 2.500 3.000 3.600 3.700 2.000 2.250 2.250

Adjusted interest rate

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(continued)

1 day 7 days paid in the current year Carry forward last year

Adjusted interest rate

The rate of regular lump-sum deposit and lump-sum withdrawal within one year is 60% off 0.880 0.880 1.485 1.485 0.350 0.350 1.850 1.600

Interest rate before adjustment

Note This interest rate is applicable to non-margin deposits as of June 28, 2015. The listed deposit rate is for reference only, and the actual implementation rate is subject to the final confirmation result between the customer and the branch of Minsheng Bank

Individual housing provident fund deposit

Deposit at notice

Both regular and current

Project

Table 5

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actual purchasing power will be reduced by 210 yuan one year later, that is, 210 yuan. In other words, if you put 10,000 yuan in the bank, your income after one year after deducting principal, interest, and taxes is actually 10,180 yuan. If the commodity price at that time was 10,000 yuan, the commodity price would rise to 10,390 yuan one year later, and residents would have to pay another 210 yuan for the same commodity, based on the 3.9% increase in CPI that year. It can be seen that it is difficult for residents to share the economic growth and wealth appreciation brought by urbanization only through bank deposits if they stay in the existing financial system environment. In addition, the high threshold of bank loans, harsh mortgage guarantee conditions, and the long review and lending process also make it impossible for a large number of private enterprises, small and micro enterprises, and economic activities in economic life to obtain low-cost and efficient financial resources from the banking sector (Table 6). The above factors have boosted the emergence of informal financing platforms. Informal financing platforms absorb residents’ deposits at higher interest rates than bank deposits and lend at higher interest rates than bank loans. However, the threshold is lower than that of bank loans, which is shorter, faster, and can meet the needs of the moment. In addition, the economic development driven by the rapid growth of urbanization, especially the lucrative profit from real estate development, is also an important soil to support the growth and expansion of informal financing platforms. The rise and development of informal finance in City D has gone through the transformation from simple interpersonal lending between individuals, relatives, friends, and neighbors to the establishment of investment companies, and the issuance of deposit notes to absorb social funds with high interest. The lending relationship has shifted from acquaintance society to stranger society. The trust relationship behind lending has also changed from interpersonal trust in acquaintance society to trust in gray areas, and finally is purely based on economic interests. Therefore, the bond of trust is increasingly fragile.

6.000 6.000 6.000 6.000 6.310 6.000 6.000 6.000 6.000 6.000 6.000 6.000 6.000 6.000 6.000 6.000

5.600 5.600 5.850 5.600

5.600

5.600 5.600 5.600 5.600

5.600 5.600 5.600 5.600 5.600

6 months to 1 year (inclusive)

5.600 5.600

Six months (inclusive)

Short-term loans

6.150 6.150 6.150 6.150 6.150

6.150 6.150 6.150 6.150

6.150

6.150 6.150 6.400 6.150

6.150 6.150

1 to 3 years (inclusive)

6.400 6.400 6.400 6.400 6.400

6.400 6.400 6.400 6.400

6.400

6.400 6.400 6.650 6.400

6.400 6.400

3 to 5 years (inclusive)

Medium and long-term loans

Loan interest rates of major commercial banks in 2014

The Central Bank Industrial and Commercial Bank Agricultural Bank Construction Bank Bank of China Bank of Communications China Merchants Bank China Citic Bank Everbright Bank Pufa Bank Shenzhen Development Bank Ping an Bank Guangfa Bank Huaxia Bank Minsheng Bank Industrial Bank

Bank

Table 6

6.550 6.550 6.550 6.550 6.550

6.550 6.550 6.550 6.550

6.550

6.550 6.550 6.800 6.550

6.550 6.550

More than 5 years (inclusive)

4.000 – 4.000 4.000 4.000

– – – 4.000

–

4.000 – – 4.000

4.000 –

Less than 5 years (inclusive)

4.500 – 4.500 4.500 4.500

– – – 4.500

–

4.500 – – 4.500

4.500 –

More than 5 years

Individual housing accumulation fund loans

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Capital Gains and Public Participation: The Snowball Effect of Interpersonal Trust Network

Under the temptation of capital gains, informal lending based on blood, kinship, geographical, and other social relations is prevalent. Relatives borrow 100,000, relatives’relatives borrow 50,000, friends borrow 100,000, friends’friends borrow 50,000, and so on, scattered and small informal capital trickles down to form a river and sea of informal financial markets. A case investigated by the author focuses on the formation process and basic characteristics of informal capital in City D: Mr. S, the contractor of the construction industry in City D, is a primary school culture. Under the leadership of his uncle, he started to work on the construction site and gradually became the foreman of the construction project in District N. From 2007 to 2012, he successively contracted some projects in City D and earned the first barrel of money in his life. He bought 2 houses in City D, gave birth to 3 children, and hired a baby sitter. As far as personal consumption was concerned, drove Mercedes Benz first, and then a BMW. In the small town of County X where he was born, he was regarded as a successful man and a big boss. Many families hoped to be taken out of the countryside by him and work in City D, do business or go directly to his construction site to make money. Some relatives and friends also visited him with local chicken and local dishes on New Year’s Day to inquire about what good projects he would have next. They can invest some shares with him. When the real estate was hot, only special good friends or relatives can get shares, because, after all, resources were very limited. There were always a few people who can get land for development and contract for construction projects. When this small number of people “made a fortune” in the field of real estate, everyone envied, thinking that only real estate was the best industry for social wealth, and they wanted to join this industry whenever they have the opportunity. During the Spring Festival in 2012, Mr. S advocated with his relatives and friends at the family dinner that he would have a large real estate development project, but he lacked funds and needed everyone to buy in. The S family is a big family in the local area, with six brothers and eight sisters.

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Uncle 8 has been following uncle 2 in construction, over the past ten years, he has accumulated more than 500,000 capitals. From an ordinary farmer to a construction site worker, he has accumulated 500,000 capitals, which was also a small gain. So, he decided to follow his elder nephew into a big business. So, he borrowed 200,000 from his father-in-law and let the father-in-law help borrow 200,000, and borrowed 100,000 yuan from his neighbor at a monthly interest of 1 cent. A total of 1 million shares in the H director’s latest project, hoping to build a new house in the village after a big vote. Uncle 2 is an old contractor. He is almost 60 years old, and the fourth has no stable job. He also hoped that Director H would take him to the construction site to learn and exercise, and get familiar with the real estate industry, so that he can take over his father’s business and have his own business. Therefore, he also bought a share of 1 million for his son. Uncle 6 did education and training in X County, and he had a lot of capital savings. Therefore, he also invested 1 million shares, of which 600,000 was personal savings and 400,000 was mortgaged to the bank loan. In addition, Mr. S himself mobilized his father-in-law to absorb capital from his three aunts and six wives to buy shares, which attracted a total of 1 million, and his own capital was also over 1 million. With a total capital of 4 million, he jointly contracted a real estate development project of a parcel in City D with another boss. —Interview data code: S_001. It can be seen that only Director H, an individual financier, has the following social network for financing: Mr. Z’s financing network basically follows the interpersonal relationship network of “differential pattern”. The closer he is to the center, the stronger his blood relationship is, and the greater the amount of funds he collected. Of course, this kind of trust relationship is also more reliable in general. The closer to the edge, the blood relationship gradually switches to geographical and business relationship, and the trust intensity is also relatively weakened. But on the whole, what supports the individual financing network is the interpersonal trust of the traditional acquaintance society (Fig. 4). The interest rate in the informal capital market varies from 1.5% to 3% per month. The monthly profit of money borrowed from relatives and friends maybe 8 to 1.2 cents. Some are even interest-free. The above case is a real estate development project in which relatives and friends have all acquired shares through the head contractor, Director H. After the

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Uncle 8

Brothers and sisters

89

A plot of real

Mr.Z

estate

1 million

development project in City Uncle 2

Father in law

1 million

Distant relatives

Uncle 6 1 million

Colleagues

Neighborhood

Classmates

Fig. 4 Schematic diagram of informal personal financing network

completion of the project, share dividends are actually just capital gains. It is impossible to share the profits according to the profits of the whole project and the number of shares. In fact, the personal financing network represented by Mr. Z is just the lowest level of the informal financial system, and Mr. Z is just a node in the informal capital market network. Many Mr. Z finally invested the funds collected by individuals in investment and financing companies or real estate companies. In Mr. Z’s local network, “Uncle 8” may borrow a sum of money from many relatives and friends with a monthly interest of less than 1 cent, and then lend it to “Mr. Z” with a monthly interest of 1.52 cents, while “Mr. Z” may invest by himself, or directly put the money into the investment and financing company “financing” with a monthly interest of 3 cents or more. When the real estate economy is booming, every link of the market can make money. Therefore, such a network system of informal capital maximally gathers the idle funds of the entire regional society and invests them in real estate development. As a result, the local real estate development market can still be established even though the banking system does not provide much loan support to local private developers.

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3.2

From Acquaintance Society to Stranger World: Trust Construction in the Grey Zone

The initial link of informal finance in City D is embedded in strong social relations. Blood, kinship, and geographical relations are important prerequisites and foundations of informal lending. However, when the informal funds are finally pooled into the investment and financing companies through layers of lending relationships, the trust relationship based on the social network of acquaintances has actually begun to break. Investment and financing companies have been involved in a very modern economic growth system, and entered the investment world of a stranger. The trust relationship between individuals has become a modern contract and contractual relationship (however, such covenants and contracts issued by investment and financing companies are lack of legal protection, because the investment and financing companies themselves operate in a gray area). In other words, the collection of informal capital is based on the credit network of acquaintance society, while the use of informal capital (the investment of the collected informal capital) is involved in the highly unfamiliar modern economic operation system, which needs to support the system trust of modern economic society. However, local informal investment and financing institutions have not gained system trust, but have been operating in a gray area. Various investment and financing institutions are registered in the industrial and commercial departments in the form of foreign trade companies, guarantee companies, and industrial companies, but their investment and financing businesses are actually not guaranteed by any system, whether in the formal financial system or laws and regulations. However, there are several main channels through which organizations in such gray areas can absorb a large amount of informal funds and gain the trust of the public. This study takes Group J, the largest informal investment and financing institution in City D, as an example to describe the process and means of building trust behind this gray system. Group J is actually City D’s largest real estate development company in City D, which has almost contracted more than 50% of the city’s large-scale real estate development projects, and its financing demand is the largest in the city. Since its capital line broke due to the run-on investors in early 2014, it has triggered a protracted group struggle in City D, and the debt dispute has not yet been resolved, so the Group is the most typical.

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(1) Take advantage of public reputation, that is, through the oral stories of internal employees about how they made money through investment and drove a group of relatives and friends to lend money and invest. L is a middle-level manager of Group J. He said that in addition to daily production tasks, the boss encouraged employees to take deposits outside, and got 1% of the loan commission to get more bonuses. But when employees go out to draw deposits to increase business, they naturally start selling from relatives and friends, relatives’ relatives, friends’ friends, one by one, ten by ten, social funds to attract a steady stream. On the one hand, it is the temptation of high-interest rates, and on the other hand, it is out of the trust of relatives and friends that almost all people in City D put their savings into investment companies to “eat interest”. A friend who works in the local education department once told me that almost none of his colleagues, friends, and neighbors did not participate in such informal investment. Meeting in the office and around the neighborhood, people discussed which business would yield the best interest and which would be the safest place to put their money. Mr. W, a resident of District N, still clearly remembers the scene when he went to Group J in City D to handle the loan business before the Spring Festival in 2013: “In the hall on the third floor of more than 100 square meters, the crows were crowded everywhere. Several lines were lined up outside the corridor, and the crowd was full of noise. It was just like a vegetable market during a festival. In fact, there are two counters in the business hall, deposit, and withdrawal, but everyone is crowded in the deposit counter to deposit money, there are few people at the withdrawal counter. At that time, I packed 500,000 yuan in a snakeskin bag to deposit money in the deposit department of Group J. I queued up at the business hall around 10 a.m., and waited until 5 p.m”. According to Mr. W, an activist representative of Group J’s creditor’s committee, the committee registered liabilities of 2.48 billion yuan, involving nearly 10,000 accounts. As a large real estate enterprise in City D, Group J gives a monthly interest of 1.8%. Some “IOUs” collected during field research support this claim (see Fig. 5). As you can see from these IOUs, they were issued at 1.8% monthly interest and 21.6% annual interest. If a 100,000 yuan deposit is kept in Group J for one year, it can earn more than 20,000 of interest, while if a time deposit is kept in a bank, it can only earn 3000 of interest. It is obvious that there is a big income gap. Therefore, with high capital gains

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Fig. 5 IOUs issued by Group J in City D to investors

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and word of oral communication among people, social funds poured into Group J continuously. (2) The halo effect of trust generated by the platform of government officials can enhance the credibility of enterprises by using the public’s worship of the government and the authority of leaders—the “halo effect”. “Halo effect” by the famous American psychologist Edward Thorndike first put forward in the 1920s, is mainly refers to people’s understanding and judgment of people or things that are often only from local, that is often based on local biased, from one spot to present the aura of diffusion and it is concluded that the overall impression to the cognitive and judgment. This kind of strong perception quality or characteristic, similar to “love me, love my dog”, like the halo of the moon, spread out to all around to produce diffuse effect, so people call this psychological effect “halo effect”. X2, chairman of Group J, is very good at applying and grasping this group psychological effect. X2 is not only good at packaging his own identity image, but is also good at creating the social image of the enterprise. It is reported that X2 went to Tsinghua University and other universities to study for a degree in business administration in order to improve his academic qualifications. During the entrepreneurial period, he has successively won dozens of honorary titles, including “China’s Outstanding Entrepreneur”, “National Outstanding Young Entrepreneur”, “The Fifth Provincial Top Ten Economic Figures”, “Advanced Individual of the National Youth Entrepreneurship Assistance Program”, “Provincial Outstanding Young Informal Entrepreneur”, “Provincial Excellent Informal Entrepreneur Caring for Employees”, “City D Excellent Constructor of Socialism with Chinese Characteristics”, and “Mode of Donating Funds to Assist Teaching”. At the same time, X2 was also a delegate to the 10th and 11th provincial People’s Congress, a member of the Standing Committee of the second and third National People’s Congress of City D, and successively served as Standing Committee of the Provincial Federation of Industry and Commerce, Standing Committee of the Provincial Youth Federation, Vice president of the Provincial Young Entrepreneurs Association and vice chairman of the Youth Federation of City D. Official identities and titles abound. In addition, X2 is good at taking photos with provincial Party leaders at every opportunity. For example, when the municipal Party committee and provincial Party Committee leaders come to the enterprise to inspect the work, they are invited to take photos with the leaders. And then hang

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their photos with leaders at all levels on display in the enterprise. This has become a part of its corporate culture, showing the status and glory of the enterprise to the outside world, and implying the background of the enterprise. Based on these government backgrounds, Group J has attracted the attention and trust of the general public. (3) With a variety of official institutions issued by the qualification and rating certificates, enhance the reputation of enterprises to gain social trust. The walls of Group J’s trading floor are covered with “advanced”, “demonstration” and “key” enterprise certificates issued by institutions with various official backgrounds. It is understood that Group J has 7 qualification certificates awarded by relevant government departments and institutions, including “National Advanced Employment Enterprise”, “Demonstration Pilot Project of Staff Education and Training in China”, “China AAA Credit Enterprise”, “Top 500 Enterprises in China’s Service Industry”, “Provincial Top 100 Enterprises”, “National Top 100 Enterprises in Corporate Culture Construction” and “Top 10 Enterprises in China’s Corporate Culture Management Innovation”. The author interviewed a group of creditors who deposited money in Group J for interest and asked them, “Why do you trust Group J and deposit all your savings in this company?” Creditors generally agree: The government has given Group J so many honors and qualification certificates, and its leaders have come to investigate and endorse it. As a star enterprise in the city, one of the top 500 enterprises in China, and with such great influence in our city, don’t we ordinary people still trust the government and leaders? The government trusts this company. Why should we doubt it? Besides, the real estate industry made so much money in those years, and I heard that some people made a lot of money by interest. We also want to make some money… Since 2010, many companies in City D have offered high interest rates ranging from 1 to 3% per month in order to attract social funds. Mr. Zhang, the boss of a well-known local enterprise, said: There has been a very strange phenomenon here in the past few years that the busiest entity enterprises are not the production and sales departments, but the financing and lending departments. Many entity enterprises have actually become financing platforms, and are keen on financing and loan business than banks more. ——Interview Materials A_001.

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3.3 From Individual Fund-Raising to Institutional Lending: The Formation of Informal Financial Market in City D With the rapid development of urbanization and the change of real estate development norms, the market’s demand for funds is constantly expanding, and the scale of informal lending and financing is also expanding rapidly. The original real estate development, in local daily parlance, was actually “raising money to build houses”. At that time, real estate development was like “catching a white wolf with nothing”. Mr. Z, a local construction boss, told me: During the period from 1999 to 2003, the development of real estate did not require much capital. As long as the land is taken down and the real estate development project is approved, a shed can be built on the construction site for “presale”, which is actually 30% or 50% of the total house price. Because there were few commercial houses at that time, there was still a long line of buyers at the time of “presale”. Developers can use this “presale fund” to build construction cities and houses, almost without free capital. Therefore, at that time, it was just like catching a white wolf with nothing. If you had the courage to borrow money to buy the land, you would not worry about selling the house. Even a beggar or a farmer who had the courage could work in real estate, and hardly needed his own capital… In this environment, the earliest wave of “bosses running away” appeared in various places. Some people without integrity and moral bottom line stopped working on the project after they got the “presale money”, stopped building the house and ran away. As a result, some social stability events were triggered, and local regulatory authorities began to gradually regulate and regulate the real estate development market. The most stringent is the “presale permit” system. All real estate development projects must apply for the “presale permit” to the relevant government departments after the project is approved and the main body of the project is built to a certain extent. For example, to build a 12-storey building, 5-storeys must be built before opening for sale. This system has greatly increased the development cost of developers. Developers must have certain capital strength to develop real estate. Of course, this is also the inevitable result of intensified market competition and the continuous institutionalization, standardization and modernization of the real estate industry. —Code of interview data: S_002.

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It can be seen that the standardized development of the real estate market requires more and more of the developer’s own funds. In the mainland, most developers are grassroots, small businesses, or even former construction contractors. There is not even a formal company with a business license, but it spends a sum of money to be affiliated with a formal enterprise. For example, “XX Project Department of XX Company” actually spent money to buy a company’s shell, which was actually developed by several private partners. At the beginning of such a project, it was easier to get loans from rural credit cooperatives, while land pledge loans from state-owned commercial banks required various relationships and gifts: It does not mean that you cannot get a loan from the bank, but the bank can either lend to you or not lend to you. The power of loan is in the hands of the bank president, not in how legal and formal your project is, nor in how much profit space your project. The greater the profit margin, the higher the cost of bank loans. If you don’t reward the governor, he won’t approve. In some cases, you may even have told the bank in advance when you want the loan. They promised you: “It’s good to say, there’s no problem for the bank as long as you make up enough funds for the bridge first…” And once you scrape together or even borrow money from the usury to prepare the bridge funds, when you go to the bank for a loan, they will find various reasons to refuse, saying that this is not good, and that is not good, there are ten thousand reasons, in fact, the back is to ask for benefit. So, like me, after my first encounter with a bank, I have given up dealing with them for the rest of my life, preferring to borrow money on my own good faith and through personal connections. —Interview data code: S_003. In this context, the demand for informal lending is expanding, and the funds of traditional single lenders are obviously unable to meet the growing demand for funds. Therefore, the direct lending relationship is bound to develop in the direction of intermediary organization and institution lending. As a result, various financing platforms registered in the local industrial and commercial departments appear in the market as investment companies, trading companies, guarantee companies, micro loan companies, etc., so the number of informal fund-raising objects is increasing. These companies and enterprises have become the convergence point and intermediary of informal capital, and the informal capital market of regional society has been established. In this way, the blood, geographical, and social relations among the participants of informal

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lending in traditional regional societies are also loose. In addition, the traditional informal lending relationship is more or less helpful, while the participants in the informal capital market enter the informal lending market purely for profit, and the lenders become simple profit pursuers and fund suppliers. In fact, there is no close blood relationship, geographical relationship, and kinship between the fund users and lenders, but there is a simple lending contract relationship with various intermediary companies. The capital source and internal operation of this regional informal capital market are complex. There are lending relationships among individuals, between individuals and enterprises, between enterprises and enterprises, and even between formal financial institutions represented by enterprises and banks, as well as with other regions outside the regional society. In the traditional informal lending relationship, the source of funds is mainly the idle funds of ordinary households and the surplus funds of informal business owners. Under the background of urbanization, the source of funds in this informal capital market has changed significantly: Government officials, ordinary households, corporate legal persons, commercial banks, listed companies, large enterprises and stateowned enterprises, and various informal financing institutions are all involved in the process of local urbanization, which together constitute the regional financial (capital) market. As shown in Fig. 6, the part below the dotted line is basically the informal capital market, while the formal financial system is above the dotted line. The informal capital market is connected with the formal financial system through the residential sector at the source of funds, and is associated with informal financing institutions through financial management and lending in investment products. In the economic system, it is finally tied to urbanization through real estate development projects. Before the rise of large-scale informal finance, most of the household savings and idle funds were absorbed by the formal financial system represented by banks in the form of deposits. The formal financial system allocates the residents’ deposits absorbed at low-interest rates to state-owned enterprises, listed companies, or large and medium-sized enterprises in the form of loans, which makes it difficult for small and medium-sized enterprises to obtain bank credit resources. With the largescale urbanization of City D, the local informal economy with real estate as the core has developed rapidly, and the demand for financial resources

deposit loan

Rural credit cooperative post

trading companies

Guarantee companies

investment companies

financial products

loan

loan

Fig. 6 Schematic diagram of regional financial market structure in City D

Intermediator

Interest release

Idle funds of residents' property

Various urban commercial banks

Mutual lending

Formal financial institutions informal financing institutions

State-owned commercial banks

Self-employed

Small and micro enterprises

Private enterprises

Large enterprises

listed companies

State-owned enterprises

Real estate development

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has expanded rapidly. Therefore, on the basis of the initial informal lending, professional investment and financing companies have emerged, specializing in the “money” business, and numerous real enterprises have become involved. Informal investment and financing institutions take the form of “investment companies”, “guarantee companies” and “trading companies”. They absorb household deposits at higher interest rates than bank deposits and borrow money from informal enterprises and real estate projects at higher interest rates than bank loans. Under the influence of high-interest rate and high return, household deposits have a tendency to flow from the formal financial system to the informal financial system. In the Informal financial system and the formal financial system, there are also some exchanges, that is, in the heyday, informal investment and financing institutions will also buy part of the liquidity of the bank wealth management products (relatively high interest) to reduce financing costs. In this way, there is actually a positive interaction between the formal financial system and the informal financial system, which together constitute the financial (capital) market that promotes regional urbanization. 3.4

Summary: Traditional Trust Network Is the Cornerstone of Informal Finance in City D

This chapter mainly summarizes the industrial transformation and financial structure background of the rise of informal finance in City D, evaluates the scale of informal finance in City D, and explains the social trust mechanism behind the support of informal finance. It is found that the traditional trust based on the social and interpersonal relationships of acquaintances, such as blood, kinship, and geography, is an important cornerstone of financial support in City D. From the background of the rise of informal finance in City D, it can be seen that the industrial structure change caused by rapid urbanization has led to the rapid expansion of regional economic development’s demand for financial resources, while the formal financial system with banks as the main body has a narrow access to credit resources due to a series of policies and systems such as the loan threshold and risk preference. In addition to the serious deviation between the deposit interest rate of the formal financial system and the informal interest rate, these three factors are the main background for the gradual growth of informal finance based

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on informal lending in City D, which can also be said to be the structural background. From the perspective of the development process of informal finance in City D, this study finds that it can be divided into three stages. The first stage is informal lending based on one’s reputation, status, and character. This kind of informal lending depends on the personality of the individual, social prestige. In the informal lending stage, default rarely occurs, because the credit network behind it is based on the strong relationship of blood and geography, and the informal lending period is in the early stage of the rise of real estate, the whole industry was in an upward cycle, and the capital operation was relatively fast. Thus, in the informal lending phase, investors who dared to lend out their deposits to “release interest” were rewarded. The second stage is the rise of informal investment and financing companies. All kinds of real enterprises also began to open investment departments, using various means and channels to attract informal deposits with high-interest rates. The lending relationship between individuals gradually shifted to the contractual relationship between individuals and investment companies. Of course, most of the informal credit network was embedded in the institutional investment network and became some key nodes in an organized informal lending network. During this period, the scale and efficiency of informal financing were greatly improved. The third stage of informal financial development in City D is the stage when investment and financing institutions participate in the real estate market investment and inter-institution lending. This stage makes the whole informal finance more complicated. It seems that a regional informal financial market has been established, and it is related to the formal financial system through some brief channels: For example, individuals mortgage real estate to the bank sector and then deposit the loan to the informal investment and financing institutions to earn interest rate. Investment and financing institutions may also use the surplus cash flow to buy short-term wealth management products issued by formal finance to reduce the cost of funds and so on. The development of informal finance is a process of complicated economic interests. From the perspective of the mechanism of financial accumulation in City D, it has to be said that regional social culture, especially the trust relationship in the traditional acquaintance society, is the fundamental force supporting the continuous development and expansion of informal finance. Before large-scale urbanization, City D and its districts and counties still maintained the social customs and norms of behavior in the

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agricultural society, and the personal trust relationship in the acquaintance society was an important cornerstone of informal lending. If the link of informal lending is still based on the interpersonal trust network, the form of informal lending has also undergone significant changes in the process of urbanization. The rise of many investment and financing platforms has made informal lending move from interpersonal lending to an organized and institutionalized informal investment and financing system. However, since these investment and financing institutions operating in the gray area do not have the authorization of the formal financial sector and the credit given by the law, their credit system is extremely fragile. Once there is any disturbance on the investment side, the acquaintance social network on the financing side will spread rapidly. People do not any longer trust each other, but distrust the system on the investment side, because the investment side is a black hole for the acquaintance social network that collects informal funds. The only things that underpin faith in this black hole are the safety of the principal and the payment of interest on schedule. Anything that jeopardizes those two things will create waves in the network of acquaintances’ trust, which will jeopardize people’s trust and confidence. The mismatch between the financial system and the industrial system caused by the deficiency of trust in the system has laid a huge hidden danger for the huge financial risks during the economic recession.

CHAPTER 4

Social Trust Rupture and Informal Financial Crisis in City D

The informal capital market, which is gradually formed and developed on the basis of the trust of individuals in acquaintance society and informal lending behavior, is a necessary supplement to formal finance. In the informal financial system, the trust of investors initially came from the social trust between acquaintances. When it developed to the stage of institutional lending and financing, although the loan certificate was issued, which has a certain contractual nature, this contract itself has a lot of legal loopholes. Because the legitimacy of the financing qualification of enterprises and investment institutions themselves is questionable, so is the legitimacy of the borrowing credentials. Therefore, when the society of acquaintances turns to the society of strangers, the trust of investors has been quietly transferred. In fact, the trust in institutions comes from the timely and full payment of monthly interest and the good credit environment of the whole informal lending market. Once the interest payment is broken, or the market suddenly sends out a danger warning signal, the informal financial market based on the fragile informal trust will face the disaster. In City D, at the end of 2013, the huge informal financial market began to collapse gradually due to the “suicide” of an informal entrepreneur. Finally, rumors led to a run-on the investment department of Group J, the largest real estate group in the city, leading to the collapse of the entire informal financial market, a huge informal financial © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Weiping, Social Trust, https://doi.org/10.1007/978-981-99-2931-3_4

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crisis occurred in City D. After the informal financial crisis, debt disputes occurred between a large number of private investors and investment of financing institutions. Around the debt repayment problem of Group J, a protracted creditor debt collection group event occurred in City D. Local governments have also fallen into the dilemma of resolving the informal debt problem. Why did the “abnormal death” of a private entrepreneur ignite the informal financial crisis in City D? This chapter believes that the private entrepreneur’s jumping off is not an occasional individual event, but a local social event. As the author has explained in the previous chapter, the personal trust in the acquaintance society is an important foundation to support the huge informal financial market in City D. In the personal trust network established on the basis of the interpersonal relationship following the differential pattern, the central figure has an irreplaceable position and role in the short term. The death of the central figure means that the social network relationship is facing the risk of dissolution or reorganization. In the trust network of the whole informal financial system, such a private enterprise is also a key node. The death of this private entrepreneur means the disappearance of this node. Therefore, a gap is torn in the trust network of the financial system in City D. In other words, different from the explanations of human nature theory (including “greed theory” and “panic theory”) and group theory (herding effect), this study believes that the fundamental cause of the collapse of the financial system in City D and the large-scale informal financial crisis is the rupture of social trust network. This chapter will review the specific process of the informal financial crisis in City D to present this view.

1

The Outbreak Process of Informal Financial Crisis in City D

The sustainable and prosperous real estate economic system that supports the effective operation of the informal capital market in City D, and the huge profit space of real estate development is the basis for the financing subject to pay high interest. However, it did not last long. Since 2010, China’s real estate regulation has shown a “three waves” mode of advancement. These three waves of increasing intensity have led to the most severe round of macro-control in history. Under the background of these three waves of severe real estate regulation policies, the mainland real estate market gradually cooled down, and most real estate

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could not be sold in City D, and developers could not get their money back in time. As a result, the capital chain of some real estate development projects broke and the boss ran away. It was also during this period that cases caused by informal financing occurred frequently throughout the country: in Sihong County, Jiangsu Province, many large borrowers fled one after another due to the rupture of the capital chain. In Harbin Shengrui Company, the amount of illegal fund-raising reached 4.5 billion yuan, resulting in the outflow of funds from many creditors. In the “Huilong Illegal Fund Raising Case” in Baotou, due to the abnormal death of the legal representative Jin Libin, more than 1500 investors suffered heavy losses as a result. In the online report of Nanyang, Henan Province, in 2015, there were many developers who raised funds illegally, and creditors suffered heavy losses due to the broken capital chain… These cases show that financial risks have taken the lead in the field of informal financing and produced a wide and far-reaching economic and social impact. Once the rupture of the informal financing chain occurs, the general public at the investment end of the entire informal capital market will fall into panic. As far as City D is concerned, in City N and City X County S, since 2013, there have been informal financial crises caused by the rupture of informal lending capital chain. Based on the specific cases of the three districts and counties in City D, this chapter explains the specific process, occurrence mechanism, and economic and social consequences of the informal financial crisis in City D, thus revealing the huge economic and social risks contained in the informal financial market that lacks systematic trust. 1.1

Jumping of X1 in T Enterprise: The Fuse of Informal Financial Crisis in City D

On the eve of Christmas in 2013, City D was busy with traffic, and shops in every street and lane were decorated for the coming grand Western festival. The Christmas moneymaker trees with colorful lights, wearing a red Christmas hat, a white beard, a red cotton coat, and red boots, Santa Claus stood at the door. Seems to have been preparing to distribute Western holiday gifts to hardworking Chinese people for a long time… However, on the eve of the holy night of carnival, a tragedy brought endless panic and even riots to the whole City D: At about 6:40 P.M. on the 23rd, Mr. X1, the chairman of T Company, an outstanding informal enterprise operating for more than 20 years in

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City D, died suddenly in an international residential community in the city. After on-site survey and investigation by the local public security department, it was preliminarily determined that X1 died from a high height fall, and the specific cause is under further investigation… According to the public information, Company T is a comprehensive large private enterprise in City D, and it has 6 subsidiaries. Mr. X1 is a deputy of the People’s Congress of City D, the 4th excellent young entrepreneur of City D, the vice president of the Agricultural Industrialization Association of City D, the vice president of the Young Entrepreneur Association of City D, and the standing director of the Quality and Technical Supervision Association of City D. He was awarded as the “Leading Figure in Leading Farmers to a Well-off life” by the Provincial Township Enterprise Bureau. According to the official information of the Economic Development Zone of City D, Company T was founded in 1993, it has a total assets of 120 million yuan and is currently the largest provincial-level leading enterprise of scientific and technological agriculture in the city. With fixed assets of 70 million yuan in 2003, settled in City D economic and technological development zone, Company T has been granted AA credit by the Agricultural Development Bank of H provincial branch for 4 consecutive years, and has been rated as the financial integrity enterprise of H province. It is a key grain processing enterprise supported by the National Grain Bureau and the Agricultural Development Bank of China, and a provincial dynamic grain reserve unit.1 From the next day, hundreds of citizens gathered in front of Company T and asked to withdraw their deposits. From then on, there have been banners of citizens in front of the main intersections and government offices in City D, many of whom have lost their wealth for decades. A 47-year-old citizen said that he had invested more than 1 million yuan in Company T, with a monthly interest of 2 cents. Now X1 has gone, and I don’t know how to deal with the funds. There are hundreds of similar investors. A woman once told me: “I invested more than 100,000 yuan in Company T, of which the monthly interest is 2. It was my hard-earned money and I could have received more than 10,000 yuan in interest by the end of that month, but I never thought this would happen”. The

1 The first wave was the contraction regulation represented by “Article 10 of the State”.

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investors hope that other shareholders of the company can come forward and negotiate with informal investors to deal with the matter. “After all, it is estimated that there are hundreds of millions of funds involved in private lending”. 1.1.1

Local Industrialists with High Social Reputation and Strong Strength In order to find out the specific situation behind the “fuse for the collapse of informal debt” of Company T, I personally investigated and visited Mr. L, the financial director of Company T. Mr. L introduced that Enterprise T, which attracted investment in 2003, is the only leading enterprise of provincial agricultural industrialization engaged in rice processing in Economic and Technological Development Zone of City D. With the support of local government leaders at all levels and departments, especially the Agricultural Development Bank, Company T’s strength has been growing. As early as 2006, it acquired the state-owned refined rice factory in the neighboring county and established a branch company of City D T Co., Ltd. The company has been awarded the title of “Municipal Food Backbone Enterprise” and “Provincial Leading Enterprise of Agricultural Industrialization”. The company has been listed as a small giant enterprise project in the city and a grain and oil processing enterprise supported by the province. The company attaches great importance to brand building, and its products have been awarded the title of “Provincial Famous Brand Agricultural Products” and provincial famous trademarks. At the same time, the company was elected as the standing director unit of the Municipal Quality and Technical Supervision Association, the director unit of the Provincial Rice Association, and the vice chairman unit of the Municipal Agricultural Industrialization Association; Mr. X1, the chairman and general manager of the company, was also elected as the standing director of the Municipal Association of Quality and Technical Supervision Association, the vice president of the Municipal Agricultural Industrialization Association, and the 4th outstanding young entrepreneur of the city. According to the operation mode of “company + base + association + farmer”, in 2007, Company T developed 210,000 mu of high-quality rice planting bases in towns and townships of districts and counties under the jurisdiction of City D, developed order agriculture, drove more than 65,000 surrounding farmers, and increased the annual income of farmers by 1400 yuan. The rice produced by the company has been certified by

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the National Green Food Development Center, and it has become the first enterprise in City D to obtain the green food label certification. By the end of 2010, the total assets of T Company were about 1.18 billion yuan, the total land area was about 72.7 mu, and the total construction area was about 96,500 square meters. It is the largest provincial military grain designated processing enterprise in the grain and oil processing industry in City D and the provincial leading enterprise in agricultural industrialization. The company has been successively identified as the national key grain and oil processing enterprise supported by the National Grain Administration, the Agricultural Development Bank of China, and the Ministry of Finance, and has been awarded AA credit enterprise by the Agricultural Development Bank of China for 5 consecutive years. It has been recognized as a national temporary grain storage unit and provincial dynamic reserve grain enterprise by China Grain Storage Corporation, and was rated as the “Best-selling Gold Award” in the first Green Food Expo in China, and is also one of the 16 backbone enterprises in the rice industry of the province. The high-quality late indica rice produced by the company was rated as provincial famous agricultural products, and won the green food certificate issued by China Green Food Development Center. 1.1.2

Business Expansion Driven by the Windfall Profits of Real Estate Windfall Profits How could such a high-quality local real economy and informal enterprise suddenly fall into crisis, and how could it become the fuse for the collapse of the capital market among the whole City D? This is a difficult question for almost everyone. Mr. L solved the mystery of the event for me: On the basis of the rice industry, X1 has successively founded TX Real Estate, TX Media, TX Restaurant and other companies. Among them, the chief executive X1 of T company accounts for more than 99% of the shares, and only less than 1% of the shares are held by his daughter. Except X1’s son-in-law, who is in charge of Company T, other subsidiaries are managed by professional managers.

Business expansion had been very stable until 2009, when a wave of financial stimulus led to a flurry of local projects. In addition to the popularity of real estate, Company T could not resist the temptation of short-term windfall profits, so it formed TX Real Estate to invest in the

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real estate field. However, due to lack of understanding of engineering construction, we lost millions of dollars due to the engineering quality problems when we contracted to develop a project. Of course, this loss is not enough to cause financial problems. ——Code of interview data: L_001. 1.1.3

The Dream of Pomegranate With No Loan and the Break of Capital Chain The biggest failure was the Tunisian soft seed pomegranate project launched by the company in 2009. Of course, X1 is a very sentimental person. His biggest dream is to change the countryside and farmers. In 2009, the company established Tunisia Soft Seed Pomegranate Comprehensive Development Co., Ltd., contracted thousands of mu of farmland in the surrounding countryside to plant soft seed pomegranates imported from Tunisia. Company T plans to develop 50,000 mu of soft seed pomegranate planting base in five years. So far, the whole enterprise has invested more than 1 billion yuan in the project. Due to the large investment in the “Soft Seed Pomegranate” project and the narrow capital channel of the company, the construction fund is seriously insufficient, and there is a large capital gap. By the end of 2011, the total assets of Company T were 539 million yuan, and the sales revenue was 250 million yuan. Therefore, it can be imagined that it is difficult for Company T to meet the capital investment demand of the “Soft Seed Pomegranate” project only by relying on its own rolling development, and Company T’s external debt development has become the only way for enterprises. Company T has few bank loans, so informal lending channels may become an important source of funds. Previously, the company encouraged employees to lend money to the company, but now it is encouraging employees to raise money from society by promoting the company. The amount that some people lend to enterprises ranges from tens of thousands to hundreds of thousands yuan, most of which are between 100,000 yuan. The monthly interest rate varies from 1.5% to 3%, and most of them reach 2%. The repayment term is mostly one year, and the interest rate varies from annual settlement to monthly settlement. The borrowers who participated in the fund-raising came from all levels of society. In addition to the employees of Company

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T, there were local farmers, enterprise workers, hotel attendants, selfemployed people and migrant workers, and some of them had full family members. The company’s biggest mistake was not in informal lending, but in the pomegranate project. The land contracted by the Pomegranate Project, which covers thousands of mu of farmers, cannot be borrowed from banks, so informal financing is the only way. However, this kind of agricultural project can only rely on the weather. In 2013, when the fruit trees were blooming and bearing fruit, the continuous rain weather made the fruit-bearing rare, only then did we realize the huge risk of the project. The company has invested heavily in this project for four consecutive years, and the company has indeed run into financial difficulties. ——Code of interview data: L_002. 1.2

Rumor and Misinformation: J Group Suffered a Run by Investors

Coincidentally, as the largest real estate development group in City D, chairman X2 of Group J and chairman X1 of Company T share the same surname X and are from the same hometown. Therefore, after X1 jumped off the building, some people in the society who did not know the truth mistakenly reported that X2, chairman of Group J, had committed suicide by jumping off the building. As a result, shortly after the Spring Festival in 2014, Group J successively encountered a run-on investor. A large number of investors have come to Group J to invest capital and demand repayment of capital and interest. On April 25, 2014, Group J announced to stop cashing business. This announcement of Group J was like a bomb exploded in City D. People began to demand the recovery of funds, which affected all local borrowing enterprises. A total of 73 enterprises and individuals in City D have been involved in the unprecedented informal lending crisis, with the problem funds reaching 11.8 billion yuan, according to the relevant staff of the Department of Finance of City D. Although officials say that more than 90% of the companies in trouble are in the real world. But in fact, local insiders revealed that the owners of real industrial enterprises would not fail to understand such a simple truth, that is, a considerable number of enterprises in trouble are under the guise of doing business, absorb a large amount of informal funds to “do industry”, and then transfer to the real estate sector to make quick money.

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Spreading Rumors and Panic: The Collapse of Social Trust Network

According to the data released by the People’s Bank of China’s urban branch in D city, by the end of 2013, the scale of loans among residents in D city was about 40 billion yuan. In fact, the informal debt crisis of D City emerged at the end of 2013. District N Economic and Technological Development Zone is a national economic development zone. There are more than 80 enterprises with an output value of more than 10 million yuan, among which more than 10 are in loan crisis. Three years ago, attracted by the high profits of the real estate market in City D, many real enterprises poured into the real estate market through investment and financing, in the peak period of the real estate market, the real estate profit in City D was as high as 100%, with a short period and quick effect. The high profit was enough to support the high interest. As a result, more and more real enterprises set up the investment department, or developed the guarantee and loan business, or directly financed to enter the real estate market. However, since 2012, the real estate market in City D has become saturated, and the development mode relying on high interest is unsustainable, which eventually leads to a large-scale lending crisis. After the social panic caused by the chief executive of Company T jumping from a building, the “capital rupture” incident in City D and its districts and counties has also surfaced (see Table 1). Table 1

Collapse schedule of informal fundraising in City D

Time

Event

October 2013

The legal person X1 of Company T jumped to his death from a building, opening the prelude to the “collapse” of informal lending in City D In the economic development zone of City D, a large number of enterprises have payment difficulties, causing a run-on the bank J Group, the leading enterprise in City D, announced to stop paying interest, which led to a run-on the bank and a parade of creditors The second wave of run-on banks in City D is coming, and more than 70 private enterprises are caught in the run-on banks D Municipal Party Committee and government determined a group of enterprises supported by the government, and J Group and other 5enterprises became government-supported enterprises

Early 2014 April 2014 May 2014 December 2014

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A Run-On Leading Enterprises: The Collapse of Social Trust in City D

On April 25, 2014, Group J, the largest real estate company in City D, stopped paying its debts due to the rupture of its huge informal lending capital chain. All of a sudden, public anger, panic, and thousands of creditors surrounded Group J. Group J can be regarded as the pillar of the real estate industry in City D. It used to be brilliant and almost occupied the majority share of the real estate development market in D market. It has won many awards, such as “AAA Credit Enterprise in China”, “Top 100 Enterprises in H Province”, “Top 10 Informal Enterprises in H Province”, “Top 500 Service Enterprises in China”, “Quality Trustworthy Unit of NonPublic Enterprises in H Province”, “Provincial Re-Employment Base in H Province” and “The First Mayor Quality Award of City D”. Leaders at all levels and government departments repeatedly visited the company to investigate and participate in activities and ribbon cutting, for the enterprise platform, endorsement. On April 26, 2014, a further incident occurred in City D where crowds forcibly blocked public transport. In the morning, officials from the financial office of City D and the government of District N of City D were at the hotel to explain and persuade creditors. At noon, X2, chairman of Group J, came to the scene and made a public promise to the crowd: guarantee to restore normal production and operation within 5 years and pay off debts. He would never “jump or run”. However, the panic of investors has not been calm. Two days after the incident, the Municipal Party Committee and the Municipal Government of City D still tried to stay out of it, defining the incident as purely a matter between the borrowers, and had nothing to do with the government departments. Little did we know that Group J is full of various glory garlands, and the temptation of relatively high capital gains income. It is precisely by relying on the influence of local party and government leaders and official mainstream media and other public institutions that many kind people in City D (many of whom are middle-aged and elderly people) lent their hard-earned money over the past decades to Group J. It can be seen that the people in City D were not greedy, but a rational choice of investment. Faced with the pressure of high drug prices, high housing prices, high prices, high living difficulties, high inflation, and RMB devaluation, which made real income

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not increase but decrease, they chose to lend their hard-earned money to Group J, a seemingly relatively safe enterprise with reasonable interest rates, to share a little of the dividend of economic development from the rapid development of this enterprise, which is crowned with many glory garland and the key support of the local party and government. In fact, the informal financing of Group J is not a scam or illegal fund-raising, because the financing interest rate of Group J is not too high. The monthly interest rate of Group J is only 1.8 cents, while the monthly interest of many informal loans in City D is as high as 3 cents. It should be said that investors behavior completely conform to the “Contract Law” and the Supreme People’s Court “On the Several Opinions of the People’s Court Lending Cases” about “informal lending interest rates may be higher than bank interest rates appropriately, but shall not exceed the highest similar loan interest rates four times”, thus it can be seen that the behavior of the informal investors is not illegal. By the end of June 2015, the director of the Standing Committee of the People’s Congress of City D, together with the Standing Committee of the Municipal Party Committee, the deputy mayor of the Municipal government, and the secretary of the Political and Legal Committee of City D, convened the municipal government’s assistance working group in Group J, the municipal Financial Office, the committee of District N of D City, and the district government for many times to discuss the work of how to resolve the informal debts of Group J. A more comprehensive evaluation and in-depth and detailed research has been conducted. With the joint efforts of the government support working group, the individual creditors committee, and the group, the debt management work has achieved a preliminary result—the 6.30 agreement, which agreed to repay the principal and interest in installments and was recognized by the majority of investors. The 6.30 agreement is relatively an agreement that tends to protect the rights and interests of investors. In addition to obtaining loan support from some banks, the most important thing is to successfully introduce strategic cooperation with several large state-owned enterprises in the province, and make every effort to pay 20% of the first phase interest and 10% of the total principal in cashes, the rest will be paid in installments. However, due to various reasons, Group J was unable to raise funds for the redemption of each period after the 6.30 agreement. Therefore, they tried to restructure their debts through judicial channels. It was this move

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that the majority of creditors believed that Group J, the local government and the judicial department were all “wearing one pair of pants” but reneged, and the debt restructuring was a “conspiracy of officials and businesses”, trying to systematically renege on their debts. As a result, over the past two full years, people’s petitions for rights and interests continued around the problem of informal debt repayment of Group J. The current situation is: on the one hand, the enterprise has not been revived, on the other hand, the rights and interests of creditors have not been effectively protected. What’s more, the wind of default in City D has spread to all corners of the city, including remote rural areas. It is no exaggeration to say that the informal financial crisis caused by informal lending has also led to the rupture of social trust between people, and the integrity ecology and survival and development space of the whole City D have been destroyed unprecedentedly. A friend confessed to me: I live in a remote mountain village. Now all the people around me who had a few savings have lent their money to their friends or relatives. Some are borrowed for urgent needs, some for business, and some for building houses. But now when it comes to borrowing money, it’s all a sigh. The result is that those who have no money are unwilling to pay back the money, but they live happily. Those who have money do not want to pay it back, they live more comfortably; And only those who lend out their money become grandchildren! In City D, some people who have worked hard for decades in business and saved hundreds of thousands of yuan with great difficulty. Some of them were supposed to build houses, some were ready to marry their daughters-in-law, and some were ready to retire for the elderly. However, none of them can stand the muddle of relatives and friends, so they lent the money out one after another. As soon as the money passes their hands, it becomes someone else’s money. When money is in the hands of others, it is more difficult than ever to take it back. Now, the borrower (debtor) gives the lender (creditor) two words: No money! Most of these people who lent money out are very frugal and hardworking people. The money they earned after decades of hard work was cheated into “ashes” overnight. As we all know, it is very common for enterprises to make money or lose money. But is the entire D enterprise in deficit? Where did all the money go? And why do those who are in debt still live a happy life? Why are they better off than their creditors? There is only one possibility: The enterprise has money but does not pay its debts!

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——Code of interview data: Investor Interview a1_001. On the one hand, according to the relevant system design of Chinese enterprises, if the enterprise is insolvent, it should immediately apply for bankruptcy repayment procedures according to its own decisions or the requirements of creditors. The advantages of this approach are as follows: first, it can guarantee the fair compensation of the creditors, and make the creditors get the maximum benefit and minimize the loss; Second, it can maintain overall social stability. Once the case is settled, there will be no social chaos. Third, enterprises can dispose of some nonperforming assets through auction or disposal, and transfer or reorganize some advantageous assets to revitalize. On the other hand, if the company has become insolvent and has not gone through bankruptcy procedures according to law, the possible result is that the company owner will transfer the company’s property; Or they pay off their assets to someone close to them or powerful. As a result, the debt assets that the creditor could have obtained have become the collateral of the bank. In this way, it no longer belongs to the category of assets that the creditor can be repaid. What is more serious is that those who have defaulted on their loans should be prosecuted by law. But now those who are protected by the government are those who renege on their debts, while those who are hit by the law are creditors. Social values are reversed, honest and trustworthy, and they become fools; lawbreakers become role modes. From these phenomena, the result is that judicial order is also disordered, lawbreakers are protected, and discipline is observed, while the law-abiding is discouraged. As a result, on the one hand, the integrity ecology of the whole City D has been seriously damaged; On the other hand, the whole legal environment has been seriously polluted. ——Code of interview data: Investor Interview a1_002.

At present, there is a lack of trust in almost anyone in City D, and almost no trust in the public sector such as the law and government. 2.2

The Run Storm Spread to Districts and Counties: The Capital Rupture of Business Elites in City S

As a resource exhausted and industrial and mining enterprise city in transformation, commercial real estate is an important investment field in urban transformation and redevelopment. Y Group is a strong local

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commercial real estate development company that grew and developed during the transformation of S City. Group Y was established in June 2008, with a registered capital of RMB 150 million. It is a real estate development enterprise with strong comprehensive strength in the central region of the province, and has 14 subsidiaries. The company is widely involved in real estate development, star hotels, cultural education, trade, and investment fields. There are more than 70 employees, and the largest number of employees is more than 400. D International Business Square is a key project developed by Group Y in City S, with a total land area of 8244.6 square meters, a building area of 4653.75 square meters, and a total construction area of 78,800 square meters. D International Business Square is located in the most prosperous section of City S, which can be called the “Golden Wharf” of City S. The project integrates shopping, leisure, entertainment, catering, living and star hotels, and strives to build a CBD urban complex with the highest level, largest scale and most influence in central Hunan. The project of Group Y consists of a five-story commercial podium and two towers. One of the towers will be developed as a 30-storey luxury residence and the other as a 28-storey five-star hotel and serviced residence. KK International Hotel is a luxury five-star hotel built by Group Y in the old city of City S. There are 190 guest rooms, including senior single rooms, standard rooms, business suites, administrative suites, and luxury presidential suites. The lobby bar, Chinese and Western restaurants, Dafengtang Chinese restaurants, multi-functional conference halls, Shangpin Tea Club, foot bath health care, etc. are of novel design, with new fashion elements and different styles; The hotel entrusts the management mode of HK International Management Group to conduct comprehensive operation and management. In July 2011, WalMart China headquarters decided to invest in D International Business Square. The settlement of Walmart, an international retail giant, has directly improved the commercial retail level and urban business environment of City S, and has also brought 1000 jobs and about 10 million yuan of annual tax revenue to City S. According to relevant departments, D International Business Square is a key project for the city upgrading of D and S municipal governments, and a benchmark for the city’s commercial upgrading, with a total investment of more than 300 million yuan. The project occupies the most important administrative and commercial core area of City S, which is in

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line with the international commercial level, covering fashionable blocks, large shopping centers, star hotels, international apartments and high-end residential buildings, and other diversified ecosystems, and strives to build City S into a one-stop fashion city and leisure city. However, under the background of rumors and panic about the collapse of informal debt in City D, Group Y also suffered a bank run, which led to an informal debt crisis in City S. Affected by the collapse of informal debt in City D, creditors in City S began to demand the withdrawal of principal. Two creditors took Group Y to court first: The plaintiff claimed that: On July 19, 2013, Mr. B, the legal representative of the defendant Group Y (hereinafter referred to as Group Y Company), borrowed 2 million yuan from the plaintiff on the ground that the company needed capital turnover. Mr. B agreed to mortgage the house property, and the monthly interest rate of the loan was 2%. Interest was paid monthly and an IOU was issued. On the same day, the plaintiff transferred 2 million yuan to the account designated by the defendant through bank transfer. Affected by the collapse of informal debt in City D, the plaintiff and defendant signed a loan mortgage contract on December 26, 2013. After January 2014, the defendant could not pay the plaintiff interest as agreed. The plaintiff repeatedly asked the defendant for the loan and interest, but the defendant still did not repay it. Therefore, the plaintiff sued the court to request judgment according to law. (1) The defendant shall repay the principal and interest of the loan borrowed by the plaintiff (the interest shall start from January 1, 2014 to the principal repayment date); (2) When the defendant fails to perform the above debts, the plaintiff has the right to convert the mortgaged property into money, or the proceeds from the auction or sale of its property shall have the priority to be compensated; (3) The litigation costs of this case shall be borne by the defendant. Defendant Group Y argued in court that: (1) The agreed borrowing time of the loan was from July 19, 2013 to December 19, 2014 when the loan was pledged. Due to the deterioration of the company’s economic situation, the interest on the loan has been paid to January 19, 2014, and a total of 570,333 yuan has been paid, including the interest paid for 6 months calculated as 240,000 yuan. The remaining 330,333 yuan is to repay the principal; (2) The company is undergoing asset-debt-for-equity restructuring, and the bank promises to issue the loan immediately after the restructuring, hoping that the plaintiff will extend the loan for a few

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more months, or directly participate in the debt-for-equity restructuring, and the defendant will repay the loan at that time. The court made the following judgment based on the evidence provided: 1. Defendant Group Y shall repay the loan principal of RMB 2 million and pay the interest to the plaintiff within 7 days from the effective date of this judgment (the interest shall be calculated at the monthly interest rate of 20% from January 1, 2014 to the date of repayment of the loan principal); 2. If the defendant Group Y fails to pay off the debt in accordance with the first judgment, the plaintiff shall have priority to pay the mortgaged property located in International Business Square of D city. 3. If defendant Y Group fails to perform the monetary payment obligation within the time specified in this judgment, it shall double the debt interest during the delayed performance period in accordance with relevant laws. 4. The handling fee of this case shall be borne by defendant Group Y. 5. If you are not satisfied with this judgment, you may file a petition of appeal to the court within 15 days from the date of service of this judgment, and submit copies according to the number of the other party. Appeal to City D Intermediate People’s Court. ——Data code: S Court File 001. As the crisis of informal debt imploded, local banks tightened the supervision of bank loans. Postal Savings Bank of China Limited City D branch (hereinafter referred to as Postal Bank D branch) has also filed a lawsuit against Group Y: The plaintiff, Postal Bank City D branch, filed a lawsuit: On June 26, 2013, the defendant Group Y signed a “Small Business Credit Contract” with the plaintiff and the “Small Business Working Capital Loan Contract”, the contract agreed that the plaintiff would provide the defendant with a revolving loan line of 5 million yuan. In the event that the defendant’s business deteriorated and the defendant refused to repay the loan principal and interest, the plaintiff could recover all the loan principal and interest in advance. On the same day, the plaintiff and the defendant Group Y Company signed the “Maximum Mortgage

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Contract for Small Enterprises”. Group Y Company provided a guarantee for the above loan principal and interest with its real estate located at No. 15, Xincheng Road, City S, and handled the mortgage formalities in the real estate department. The other defendants and the plaintiffs jointly signed the “Maximum Guarantee Contract for Small Enterprises”, agreeing to set up joint and several liabilities guarantee in the contract. On July 8, 2014, the plaintiff issued a loan of RMB 5 million to the defendant DY Industry and Trade Company according to the agreement, and the defendant DY Industry and Trade Company issued a IOUs to the plaintiff with the annual interest rate of 8.4% and the annual interest rate of 12.6% for overdue loans. The defendant DY Industry and Trade Company failed to repay the principal and interest of the loan on schedule since November 20, 2014. By March 20, 2015, the defendant DY Industry and Trade company had defaulted on the loan principal of RMB 5 million, interest and penalty interest of RMB 171,004.91 due to the plaintiff. However, the operating condition of the defendant DY Industry and Trade Company has seriously deteriorated, and it has been unable to pay off the plaintiff’s debts due. To sum up, the plaintiff and the defendant DY Industry and Trade Company, and the small business credit contract signed the “Small-Business Working Capital Loan Contract” legal and effective, and signed with the other defendants “Small Business Maximum Amount Guarantee Contract” and “the Contract for Mortgage of Maximum Amount of Small Enterprisest” are also the expression of the true intention of both parties and are within the legal and valid guarantee period. Now, the defendant still fails to repay the principal and interest of the corresponding loan to the plaintiff according to the contract, which constitutes a serious breach of contract and has caused great losses to the plaintiff. Request: (1) Order to cancel the “Small-Business Working Capital Loan Contract” signed by the plaintiff and the defendant Group Y; (2) Order the defendant Group Y Company to immediately repay the plaintiff’s total loan principal of RMB 5 million yuan, interest and penalty interest of RMB 171,004.91 (temporarily calculated until March 20, 2015, and then calculated as agreed until the date of judgment repayment), and bear the corresponding default losses; (3) Order the defendant Group Y Company to bear joint and several liabilities for the loan principal and interest owed by DY Industry and Trade Company and the loss of breach of contract; (4) The defendant shall bear all legal costs and attorney’s fees of RMB 75,000.

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——Data Code: S Court File 002. It can be seen that the run-on informal creditors caused by the debt collapse in City D broke the capital chain of Group Y and made it unable to pay the principal and interest to the bank lending institutions, which further led to the demand of the bank institutions to recover the loans, and ultimately led to the failure of Group Y, a commercial real estate development company, to operate. The author interviewed Mr. B, the general manager of Group Y. Mr. B fully affirmed the operation concept of the company and the whole project planning, saying that he grasped the opportunity of urban transformation of City S and the direction was right. The only regret is that when the real estate market was good at that time (2010–2012), the proportion of fixed assets retained by the company was too high. Out of more than 80,000 square meters of real estate, 50,000 yuan was retained by the company. As a result, the company failed to return its own capital in time, and the company expanded its business in other areas, so it had to borrow from the informal sector. In addition to regret, President B’s biggest complaint about the current situation of the company is about the disorderly informal lending in the past few years. He believes that the government is inescapable because of its inadequate supervision: Ruin at the hands of the ruffians! Some local ruffians rent a shop and set up a bank without supervision. They collect funds at the interest of one or two cents for various investment houses, and then release them at the interest of three or five cents. Some even spend money on whoring and gambling. Once this kind of thing breaks out, it will ruin the whole local capital market environment... Such a solid and sound project like ours, many investors have followed the trend, resulting in the rupture of the company’s capital, of course, it does not rule out that some people threw stones at me... ——Interview data code: B_001.

As Group Y plays an important role in the local economic and social stability, S municipal government has timely intervened in the crisis management and become a key enterprise supported by the municipal government.

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Destruction of Social Trust Environment: Informal Enterprises in County X Are Suffering

According to official statistics, by the end of 2015, the balance of various monetary deposits of financial institutions in County X was 2,574,706 yuan, with a year-on-year growth of 19%. Of which, the balance of household deposits was 20,037.2 million yuan; The deposit of non-financial enterprises was 2182.71 million yuan. At the end of the year, the balance of local and foreign currency loans of financial institutions in the county was 10,780.31 million yuan, an increase of 13.9% over the previous year. Among them, the balance of resident loans was 4457.91 million yuan, and the balance of loans to non-financial enterprises and institutions was 63,224 billion yuan.2 It can be seen that the deposit balance of financial institutions in the county reached 25.7 billion in 2015. However, it is precisely in such a county with high savings that all walks of life are in short supply of funds. Therefore, informal lending is also very active. However, under the general environment of the collapse of informal debt in City D, many investment and financing enterprises in County X have also encountered a run-on bank, various “illegal fund-raising” cases have also surfaced, and the rights protection events about the illegal fund-raising cases in County X also flew everywhere. In 2015, the Provincial Commission for Discipline Inspection and Supervision Office reported the rectification of the 4th group of feedback from the provincial party committee inspection on its website. It was reported that among the 71 CPPCC members of informal enterprises, 17 were involved in informal fund-raising. At present, 6 members have been suspended and 4 members are suspected of informal fund-raising. With regard to the issue of “cadres involved in informal fund-raising and took advantage of their power to seek illegitimate interests”, the inspection circular called for serious investigation and punishment of leading cadres involved in illegal fund-raising. We will establish an investigation system for creditors of informal financing, form a joint inspection team together with discipline inspection, organization, and other departments, carry out a special investigation on the participation of public officials in informal financing, and deal with the group matters involving leading cadres and 2 The second wave was the suppression regulation represented by “Article 10 of the State”.

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creditors who make illegal profits from informal financing, once verified, in accordance with the law and the quick processing according to regulation.3 In this context, the Standing Committee of the Municipal People’s Congress of City D established a leading group on the participation of deputies to the People’s Congress in the rectification of financing issues. The leading group has 6 working groups, and each county and city has set up a special working group, specifically responsible for the rectification of the participation of representatives of the industrial and commercial circles in the municipal informal financing issues. These 6 working groups were respectively responsible for visiting and investigating the 74 representatives from the business circles of City D and the people’s congress at or above the municipal level one by one, and comprehensively understanding the situation of deputies’ participation in informal fund-raising. The specific practice of City D is to deal with some enterprises that have been determined to participate in informal fund-raising with three categories: first, for those that have been listed in the fight against illegal activities, public security organs have been allowed to take compulsory measures against them according to law; Second, for those who have been listed in the category of handling by the office of combating illegal fundraising, the electoral unit shall immediately persuade them to resign once the illegal problems are verified; The third category is for those who are included in the category of assistance from the office of Combating illegal fund-raising, that is, to coordinate relevant departments to support and help them get out of the shadow of informal fund-raising. While rectification of illegal fund-raising, we should accelerate the establishment and improvement of relevant systems. For those “members” or “representatives” involved in illegal informal fund-raising, the following measures shall be taken: that is, the members who are suspected of illegal crimes, have great social influence, have been taken compulsory measures by judicial organs, but have not reached a conclusion, will be suspended from their posts, once the conclusion is made, the qualifications of the members will be revoked immediately. And for those who participate in the large amount of informal fund-raising and social influence of the committee, they are advised to ask for leave and not participate in the CPPCC meetings and activities, if they propose to

3 The third wave was the regulation regulation represented by “9.29” New Deal.

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resign, the CPPCC agreed to resign from the committee, so as to reduce the negative social impact. Under the vigorous action of “cracking down on illegal fund-raising”, the informal enterprises in County X, under the background of the continuous downturn in the real estate economy, suffered another long winter since the financial crisis in 2008: Q Technology Co., Ltd. is a new material manufacturing enterprise engaged in electronic ceramic products in County X. It was founded in 1997 and implemented share reform in 2010. The company covers an area of 66,000 square meters. The company has 226 employees, including 47 with bachelor’s degree or above, accounting for 20.8% of all employees, and 31 technology research and development personnel, accounting for 13.7% of all employees. The company is headquartered in City A, and its manufacturing base is in Xianghong Industrial Park, Economic Development Zone of County X. Since 2010, in order to expand the company’s production scale, the company has purchased 100 mu of planned land, including 82 mu of construction land and 18 mu of green land. It is expected that the annual production capacity of 10 million sets of new composite ceramic idlers and 60,000 tons of belt conveyors will be formed. Therefore, in recent years, 64,500 square meters of new plants have been built, 3 production lines have been added to achieve project capacity, 10,500 square meters of new office and research buildings, 13,500 square meters of warehouses and other supporting buildings have been built, The dormitory and canteen for single employees are 4500 square meters in total. The implementation of the above projects is based on the national industrial development and relevant economic policy environment since 2009, and a loan agreement has been preliminarily reached with a policy bank. H However, due to the collapse of informal debt in City D since 2014, the entire banking system has increased its vigilance against the informal debt crisis in City D, so the city has been put on a credit blacklist and the 4 major state-owned commercial banks have stopped providing loans to domestic enterprises in the city. And has reached a preliminary agreement, on the bank’s top meeting approved the loan YH company was also accidentally injured. Since the company failed to obtain the originally expected bank loan in time, after having invested 30 million yuan in infrastructure, it also invested 50 million yuan of enterprise risk fund in the construction of new projects. Therefore, under the influence of the local debt crisis, the company could not raise funds from the informal

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market, and the company suddenly fell into financial difficulties and had to cut down expenses on a large scale. At its peak, the company had more than 600 employees, but now it has less than 300, which has been reduced by more than half.

3

The Government Becomes the Last Reliance: Creditors’ Struggle and Rights Protection

In the debt crisis in City D, many ordinary families were involved, and some families even suffered from the disaster. With the economic development in the past 30 years of reform and opening up, most families have not only solved the problem of food and clothing, but also accumulated some family savings. However, under the circumstances of low bank interest rate and slow principal appreciation, large financial fraud risks, and lack of investment knowledge and experience, it is almost impossible for ordinary people to have asset returns from their savings. With a chance to make a return on their investments, some families not only put all their decades of savings into investment companies, but also take advantage of low-interest debt from friends and relatives. Others even mortgaged their houses to banks to earn interest spread. As a result, many households lost all their money when the local financial chain broke down and the informal debt crisis broke out. So some creditors banded together and marched on the government’s doorstep, demanding a solution. The government became a lifeline. A few creditors have no choice but to take up the weapons of the weak to fight, or die in fear and despair. This informal debt crisis has played a lot of human tragedies in the local area. After the outbreak of the debt crisis, the social trust of creditors has shifted. The consistent logic of “If there is a problem, go to the leader” and “if anything goes wrong, go to the government” has led creditors to start pressuring local governments to solve their problems. Some resorted to the courts, hoping to pursue fairness and justice and safeguard their rights by law. The court system had no choice but to make judgments in accordance with relevant laws and regulations. As people struggle to take debtors to court only to find that the judgment was unenforceable, they lost faith in the modern, credible court system. After the court’s decision was unenforceable, creditors began a long and endless road to petition for rights protection, hoping that a higher level of government and leaders

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would pay attention to the difficulties at the bottom and find solutions. At this time, governments and leaders at all levels become the only object for people to ask for help.

4

The Weapon of the Weak Arouses Social Concern

After the outbreak of the informal debt crisis in City D, many families lost all their money and fell into a disaster. Parents and children were ill and had no money to see a doctor. Their lives were in dire straits. The author randomly inquired about the family life status of several creditors of Group J, and they reflected as follows: Ms. Q1: In the past 4 years, we have spent all our time, energy and money. I am a lung cancer patient and I have an 85-year-old father to support. I have no ability to make money and need a lot of medical expenses every year to sustain life, all the burden of my family fell on my wife, but I can’t live without her, so I have to farm at home to barely support our life. At present, I am heavily in debt. I sincerely hope that the leaders of higher authorities can make decisions for our creditors. —–Code of interview data: Investor Interview a2_001. Mr. Q2: In the past 4 years, we have spent all our time, energy and money. Now my father is suffering from lung cancer and has no ability to make money, he needs a lot of medical expenses every year to maintain his life; I had an 85-year-old grandfather to support at home, and my wife is pregnant and unable to work. The burden of the whole family fell on me alone, which caused economic difficulties for the whole family and led to heavy debts. ——Code of interview data: Investor Interview a3_001. Similar incidents mentioned above occurred in City D from 2014 to 2015 and could be seen everywhere. Many private families lost their savings for decades in an instant. Some families even mortgaged their houses in banks and borrowed money from relatives and friends… For a while, many families fell into extreme poverty, which also led to many folk tragedies: some were angry to death, some jumped into a river, some committed suicide by drinking pesticides…

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5 Resorted to the Court, but Faced Enforcement Difficulties At the beginning, the public believed in the law and hoped to protect their legitimate rights and interests by resorting to court decisions. With regard to the debt problem of Group J in City D, the author interviewed 8 creditors about their “legal struggle”. All the 8 creditors had hired lawyers to sue Group J in court by legal means, demanding the company to repay its principal and interest. The loan time, amount, and interest of the 8 creditors from Group J are agreed as follows (Table 2). The plaintiffs claimed that the defendants successively borrowed money from Group J with an agreed monthly interest rate of 1.8%, the term of the loan was one year and the interest was settled every six months, and Group J issued the IOUs to the plaintiff. However, since April 25, 2014, the defendant unilaterally defaulted on the debt suspension and threatened the creditor to refuse to repay the money without signing the agreement, cheating the creditor into signing an unfair repayment agreement. Therefore, the plaintiff has petitioned the government Table 2

Loans of 8 investors interviewed by the author

Creditors

Loan time

Loan amount

Loan period

Agreed interest

Ms. Q1

2014.3.11

100,000

1 year

Mr. Q2

2014.3.22

290,000

1 year

Ms. Q3

2013.2.22

120,000

1 year

Ms. Q4

2014.1.17

50,000

1 year

Mr. Q5

2012.9.22

200,000

1 year

Ms. Q6

2013.3.1

210,000

1 year

Mr. Q7

2013.12.8

225,000

1 year

Ms. Q8

2013.7.1

140,000

1 year

Monthly interest settlement Monthly interest settlement Monthly interest settlement Monthly interest settlement Monthly interest settlement Monthly interest settlement Monthly interest settlement Monthly interest settlement

1.8%, half year interest 1.8%, half year interest 1.8%, half year interest 1.8%, half year interest 1.8%, half year interest 1.8%, half year interest 1.8%, half year interest 1.8%, half year interest

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of H Province twice, and the minimum requirement is to enjoy the treatment of creditors who have signed the agreement, that is, to return 10% of the principal and keep the original IOU. However, the defendant still ignored this and tried to persuade the plaintiff to sign a repayment agreement, which was a serious violation of the law. Therefore, in order to safeguard the legitimate rights and interests of the plaintiff, we appeal to the court for a fair ruling. First instance judgment of the court: This court holds that legitimate lending relationships are protected by law. The defendant Group J Company borrowed money from the plaintiff, which was supported by the defendant’s IOUs submitted by the plaintiff and the bank transfer certificate, and the defendant Group J Company recognized the fact of the loan. The loan relationship between the two parties was clear and legal, and the court could confirm according to law that the defendant should repay the loan. Therefore, the court supports the plaintiff’s claim that defendant Group J should repay the loan. As for the interest rate, the agreed interest rate between the original and the defendant did not exceed the annual interest rate of 24%, which is in accordance with the law. The plaintiff’s claim to pay interest at the agreed interest rate was supported by the Court. ——Data code: D Court File 001.

However, the judgment of the court has become a dead letter, which cannot be enforced at all. The creditor has worked hard to ask a lawyer to file a lawsuit, and what he has obtained is only the confirmation of the facts with the official seal of the court system. In this regard, people are also disappointed in the legal system with credibility. Ms. Q1: Since the accident occurred 4 years ago, we have been rushing to the municipal government, Group J, the court and other departments to rationally defend our rights. We have applied to the court for filing a case and the judgment has not been implemented for many years. If we can’t get our hard-earned money back, we have to constantly defend our rights. Instead of responding positively, the local government does everything possible to stop and suppress our hard working creditors. Over the years, we have been running around in various departments of the company, the court, and the government. The physical and mental exhaustion, coupled with the mental torture, I am now deteriorating health, even the basic life is difficult to maintain, so I can not go to work to make money. Because we believed in the government’s initiative to encourage informal enterprises to operate independently, we lent

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Group J money to help enterprises develop. Now, the enterprises and the government have repeatedly failed to trust the people, making us creditors miserable. ——Code of interview data: Investor Interview a4_001.

6 With Demonstrations and Petitions, Local Governments Have Become a Lifeline The court’s judgment failed to be executed, and the creditors’ demands to sell off the company’s assets failed to be enforced, so they marched in front of the municipal government to protest, and the provincial government to petition. The superior government became the last straw for creditors. Since 2014, there have been a number of creditor mass demonstrations and petitions for rights protection in City D and the provincial government. On October 9, 2014, hundreds of creditors of 4 companies in City D held banners on the square in front of the municipal government to safeguard their rights, demanding the government to punish the fundraising enterprises and recover the defrauded funds. The marchers were suppressed by a large number of police and arrested, after which the creditors continued to sit in the district police substation, strongly demanding the release of the arrested creditors. As of the morning of the 10th, two creditors had not been released. It is said that since April 2014, creditors of more than 20 companies in City D have repeatedly launched demonstrations due to the failure to cash in their funds. In the middle of 2014, after the failure of J Group to pay the creditors’ pooled funds, another top-100 enterprise in City D had a fund-raising crisis, and the storm of informal fund-raising in City D broke out comprehensively. Creditors of several units carried banners demanding that the main leaders of the municipal party committee and the government meet and solve problems. Many creditors began to lose their minds because the government ignored them. They sat in sit-ins and blocked roads, and petitioning became their regular rights protection actions. It is reported that the creditors in City D have never stopped fighting for their rights in the past 4 years. A lot of time and energy spent on debt collection of things, but no effect, a batch of helpless creditors even embarked on the path of begging for a living. A group of creditors in City D hold “begging books” to sit in silence along the street, hoping

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that passers-by would sponsor some money for living expenses based on sympathy. Mr. Q7, a creditor of Group J, reported to the author: With the support of the municipal government, we creditors easily believed the government’s promise of help and support after the fund chain of Group J was broken, and signed an agreement with Group J to repay the interest and principal in 8 installations within 4 years. Unfortunately, the government and the enterprise only paid 10% of the principal and interest and 20% of the interest at the time of signing the agreement. Since then, there was no news. The government and enterprises have broken their faith to us poor creditors again and again, we are torn to death. ——Code of interview data: Investor Interview a5_001. During the two sessions (NPC and CPPCC) in 2018, a large-scale creditor marches and protests took place again in City D. The square in front of the municipal government and the main municipal roads were full of protesters. Creditors required the enforcement of the court’s effective judgment to give many people a way to live. Creditors also formed a debt collection team, to the central dispatched to the local inspection team to submit claims report. However, there is no Bao Qingtian in the informal sector anymore. In the face of the widespread phenomenon of organized irresponsibility in modern society, people run and break their legs without any effect. It is still unknown when the creditors’ principal can be recovered.

7 Summary: The Rupture of Social Trust is the Root Cause of the Spread of Informal Financial Crisis in City D On the surface, a very accidental event of jumping off a building triggered an informal debt crisis in the whole City D, resulting in a domino effect. The informal lending market in City D, which had been established through interpersonal trust, suddenly collapsed. Of course, the tightening of national macro-monetary and financial policies is an important reason for the recession of the real estate economy in City D, and also an important environmental background for the financial crisis in City D. However, it must be noted that the outbreak of the informal debt crisis in City D, in essence, is the inevitable result of the basic contradiction that the financial system does not match the modern industrial

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structure and system. The informal financial system established by means of the social and informal trust network of acquaintances can effectively gather the idle funds and family savings of the local people, make up for the shortcomings of the formal financial system, and effectively support the urbanization process and the modernization transformation of the industrial system of City D. However, the operation of modern economy and industrial system requires not only large-scale capital accumulation, but also stable and predictable trust system. This trust system is based on the sovereign trust and government credibility of modern countries, even in developed countries. In City D, the regional informal capital market established on the basis of informal lending, despite its large size, is a lack of organization, scattered and disorderly, growing savagely, and always operates in a gray area. Both local governments and financial regulators turned a blind eye and let it go until there was a problem. When the capital chain of an enterprise breaks or a boss runs away, it is also based on the trust of traditional acquaintances’ social network that makes rumors and panic widely spread. Without the support of modern system trust, investors are worried about themselves and ask for the return of principal, so there is a run-on investment institution. Under such circumstances, even the local banking system may not be able to cope. Since the informal financial system established by relying on the informal lending network has not been timely integrated or transformed into the formal financial system recognized by modern countries, it will inevitably fall into stampede due to panic once it encounters the fluctuations of the macroeconomic environment. From the perspective of the whole process of informal financial crisis in City D, we can see that the huge informal financial system accumulated for many years collapsed in just half a year and evolved into a regional informal debt crisis. The most fundamental reason is the rupture of social trust. In the process of the emergence and outbreak of the informal financial crisis in City D, the social trust was broken in three aspects: One is the rupture of individual trust. The abnormal death of X1 has opened a hole in the trust network behind the informal financial system. X1 is the informal capital flow accumulated through individual personality status and social prestige. However, through the real estate development projects and agricultural projects of Company T under X1, these informal funds are involved in the process of greater regional economy and industrial modernization. As a key node in the financial system in City D, the

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abnormal death of X1 not only means the end of a life, but also the instant rupture and collapse of the social trust network it carries behind. The second is the structural rupture of the type of social trust. As previously analyzed, in the development stage of informal finance from individual lending to institutional lending, the social trust relationship has quietly changed from the social trust based on strong ties such as blood in the traditional acquaintance society to the trust between strangers based on contracts and contractual relations in the modern society. This means that the investment activities of informal finance based on the traditional social trust network have begun to break away from the basic characteristics of economic activities in the acquaintance society and become involved in the high-speed flow and unpredictable modern economic vortex. Informal finance must be supported by modern laws and public authority to establish universal trust in modern system. However, in City D, informal financial institutions are investment and financing companies that have not been authorized by national and local laws and operate in a gray area. Therefore, the informal finance has not established the modern system trust. This is a structural rupture in social trust. Third, the government’s public trust has not effectively accepted the transfer of public trust, resulting in a complete rupture of social trust. After the outbreak of the informal financial crisis, the majority of investors placed their hopes on the local governments to uphold justice and stabilize the situation. In fact, with the efforts of relevant departments of the municipal government, the 6.30 Convention has initially stabilized the panic of the majority of investors and won the opportunity to buffer. But the government-sponsored agreement, which was widely accepted by investors, has not been followed through. The local judicial authorities tried to restructure the debt according to the opinions of the enterprise, which triggered the contradiction between the majority of investors, the government, and the enterprise. In dealing with the debt crisis, the local public sector also showed “broken faith with the people”, and the confidence of the majority of investors almost collapsed. At present, their last glimmer of trust has been transferred to the “superior government”, which has opened a protracted struggle, hoping that the “upper leaders” can preside over justice and help them recover the “hard-earned money” accumulated over the past decades. There is no doubt that the informal debt crisis in City D has affected many middle-class families, and further affected the overall economic and social development of City D. From an ideal perspective, whether it’s

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starting from the fundamental interests of the general public, or from the maintenance of the local economic and social stability, the local government and the formal financial system should be dialogue and cooperation with the local informal financial system, scientific evaluation of informal financial system’s assets and risk, it will be fully incorporate them into the regulatory system and achieve its modernity transformation. How did the crisis actually play out? The local authorities’ response to the crisis is described below.

CHAPTER 5

Strategies of Different Departments to Cope with Informal Financial Crisis

Undoubtedly, the informal debt crisis has obviously evolved into a public governance crisis related to the government, market, and society. In the face of this crisis, which affects the overall development of local economy and society, how did all departments respond to the emergency and manage the crisis? This chapter selects crisis governance sections of three organizational systems, namely financial supervision department, local judicial department, and local government, and shows the governance strategy of City D for this public crisis. Faced with this informal debt crisis that broke out in the central area and then spread to the three counties and two cities under the control of City D, the public departments did not realize that this was an overall problem that would soon affect the economic and social development of the city, but only treated it as a general private incident area. The core logic of each department’s response to the crisis is to first separate the relationship between the incident and the department. The first response of each department is to start from their own work and strive to ensure that each department has not committed any mistakes in the crisis. Under this principle, the financial sector is to prevent risks, quickly tighten the local money, stop lending to all private enterprises, and the four major state-owned banks have put City D on the credit blacklist; And the regulatory authorities have played a “crackdown on illegal

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Weiping, Social Trust, https://doi.org/10.1007/978-981-99-2931-3_5

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fundraising” banner to highlight their responsibilities; The local government, under the pressure of the superior government, strives to maintain stability, and in line with the principle of “family clowns cannot be publicized”, is highly wary of all “journalists”, for fear of publicizing family clowns; In addition, we will use various methods to do grassroots work, appease the investment-impaired groups, and try to quell mass incidents and petitions. The study found that after the collapse of informal debt in City D, the trust of investors was shifted, and they placed their hopes on the organizational systems of modern society, such as courts and local governments. These on behalf of the organization system of the general will, however, did not have the effect of reassurance, each department tried to mitigate the negative impact of the crisis on itself. As a result, the whole governance system had extremely negative effects on the crisis, which further exacerbated the collapse of local social trust. The local rationality of each department led to the overall irrational. The collapse of investors’ social trust is a great loss in the local economic and social development. Whether it is the transformation of informal enterprises or the transformation of local economic structure, without the participation of local informal capital, it is just like a tree without roots and water without source. Therefore, it is the key to the sustainable development of local economy and society to rebuild the regional social trust system and foster the confidence of informal capital.

1 Financial Sector: Tightening Credit and Building Risk Firewall After the outbreak of the informal debt crisis in City D, under the public opinion environment of fear and panic, the provincial banks issued an internal notice to put City D on the credit blacklist. The major commercial banks in City D immediately received the instructions from the superior banks and tightened the loans to all informal enterprises in the city. In order to avoid risks, some banks simply stopped lending to informal enterprises in the city. The president of a local bank branch reflected that: At that time, due to the continuous downturn of the global economy, the impact of domestic shadow banking, non-performing loans, local debt and real estate bubble on our banking industry was intensified. Therefore, commercial banks generally used credit crunch to avoid risks, and took

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measures to accelerate the collection of maturing loans and comprehensively improve lending standards. At the same time, due to the increase of compensation funds, each guarantee company has basically stopped new guarantee business under the condition of increasing risk of guarantee funds. In 2013, some enterprises in City D suffered from the first form of capital chain rupture, which triggered a storm of informal financing. The affected enterprises were on the verge of bankruptcy, and other enterprises in City D were also deeply affected. In particular, the original capital accumulation of productive enterprises is solidified into land, equipment, plant and so on. Once enterprises need to purchase raw materials, they have to pay cash, and the sales money cannot be collected in time. Therefore, most enterprises lack working capital and are in a situation of ischemia or hemorrhagic shock. Once this situation continues, the production of enterprises will stop, close down, creditors will jump, bosses will escape and other bad phenomena may appear and show a trend of spread. We fear that once the economy declines sharply, social stability will also face serious challenges. ——Code of interview data: S-E_ 001. In fact, after the outbreak of the debt crisis, protests and demonstrations for rights protection took place almost every day in City D, demanding the government to recover the hard-earned money of investors. Under various social pressures, the government departments also actively organized dialogue meetings with local state-owned banking systems, hoping that banks could lend money to enterprises with certain economic foundations to tide over difficulties. After all, these enterprises are related to local economic development and people’s livelihood and employment. Do local banks really want to prevent and control risks? According to “the 2013 Social Responsibility Report of the Banking Industry”, there are 3.55 million employees in the banking industry in China. The huge team spends no less than 500 billion yuan on salaries, operations, and training alone. At the same time, according to the 15% annual growth rate of savings in various regions, the more sluggish the economy is, the more people prefer to choose savings as the way of financial management. Even if the interest is paid according to the bank interest rate, the interest needs to be paid over one trillion yuan a year. In addition, the risks of non-performing loans and foreign debts make it difficult for banks to close the door. Therefore, the cover of loans on the surface of the bank to avoid risk, in fact, it is just an excuse to “let die”. The deputy head

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of County X in charge of economic and financial work reported to the author: After the crisis broke out, the county held a financial work conference, the county magistrate pointed to the sub-branch president angrily rebuked, said: “you let die, you are the criminal in the history of economic and social development of the county”! As we all know, our county magistrate is standing on the overall situation of the county’s economic and social development to think about the current problems. In this case, it is really necessary to have a power that can guarantee and provide capital buffer for the whole informal financial system to stabilize the confidence of investors and keep the trend of capital chain breaking. But who has such great strength to provide guarantee and such credibility to stabilize the situation? Of course, only the state-owned banking system does. From a moral point of view, it is indeed the responsibility of the local banking system to stand up and lend a helping hand. However, the state-owned banks have been commercialized for a long time, and they are enterprises that are responsible for their own profits and losses. They do not have the obligation to provide real money to rescue the market. Moreover, the local state-owned banks are only local branches of the state-owned banks, and the branch presidents have no such authority at all. Finally, even if the government uses public finance to set up a risk fund as a guarantee to provide assistance to the informal market, however, the informal finance is in such a mess, there is no supervision, there is no base, how can we determine which guarantee? Lack of maneuverability … ——Code of interview data: S-Z_ 001. Communication and dialogue between major informal enterprises, local banking system, financial regulatory authorities, and local governments is imminent! This kind of dialogue is not simply to enhance mutual trust and understanding. It requires a sense of responsibility and great sense of responsibility. The local real estate market is sluggish and there is no credibility to talk about. Most importantly, how can the government, banks, and companies stay together to survive the winter? How to turn danger into opportunity, quickly find the new economic growth point of regional economy, and restart the regional economic development mode? This requires consistent efforts toward the direction of promising government, safe finance, and honest enterprises to jointly build a modern

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bank credit system based on mutual assistance, security, and win–win marketization. However, this mechanism has no upper system arrangement, it is difficult to build up at the local level. In our current financial system and economic environment, it is difficult for the upper echelons to take local conditions into account individually. The director of the financial affairs office of City D expressed the core difficulty faced by local governments and the local financial system in resolving the informal debt crisis: In the past, we had 17 informal guarantee companies, each of which had a 100 million yuan. Now the banks are not allowed to cooperate with informal guarantee companies. As I told you just now, we only have three hundred million yuan. How much do you want to guarantee? Including your concern that you have added 1.7 billion yuan, which was a guarantee and also an informal investment. You have blocked the way, and the informal investment has decreased. It is also an informal investment. I heard that this policy started from the head offices. Provincial level branches have no authority, but do not cooperate with you privately. You are also talking about informal guarantee. Just as I said that the information of your informal enterprises is also asymmetric and outstanding. Second, the harder it is, the higher the cost is. Dr. Y, you can’t afford to start a business, your salary is so high, you can only go up by 20%. I’m a strong enterprise, and you can talk about it. The chairman of the board will cut you 5 points. This is a vicious circle. Also, you can see that many documents issued by the CBRC regulate the charging of industrial services, including evaluation fees and information fees. This is not a criticism of the banks. As you know, if these problems cannot be solved, which one is detrimental to the economy, especially to the cultivation of a large number of newly emerging micro, small and medium-sized enterprises. I feel that you are also worried about what I just said. How can this be good? Your finance is the core, capital is the blood. With two requests, we still have some specific goals for the “13th Five-Year Plan” fund. Despite the current difficulties, I should say that you feel that the fundamentals of our economy have not changed. You should draw that conclusion. ——Code of interview data: S-C_ 004.

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2 Regulatory Authorities Urged to Crack Down on “Illegal Fundraising” As for financial regulators, after the outbreak of the informal debt crisis, they diverted manpower from various departments and quickly set up “anti-illegal offices” to crack down on illegal fund-raising. It began to survey and audited the accounts of major local enterprises to investigate whether they have informal financing activities. One of the basic modes we have adopted for this risk problem is to classify disposal. After reporting all the risk exposures, the government would send a working group. The working group has the leading department, the public security and law enforcement force, and the comrades from the People’s Bank of China, the banking regulatory authority, finance, tax, audit and other relevant functional departments. Because of this, other provinces may also benefit from the XX cases, In 2013, the leading group of the provincial party committee issued a document No. 6, 2013, which made a detailed provision on the identification, handling and disposal of risk exposure. This is a semi-public document, which cannot be found on the website, but they have no complete restrictions on the internal system, after all, it’s operational. That’s very good. So according to that, according to some of its spirit and the operating principles, we just said that there are many enterprises in City D, so why should we classify them into three categories, namely, legal assistance, legal disposal and legal strike? We have established a standard for these three categories, 5 or 6 standards, one of which is how to classify them, why is president L of helping? And why our Dr. Y’s is a blow? That family was not satisfied. 5–6 standards issued a specification document, which is the leading group. First, according to the situation of assets and capital verification, whether the enterprise can pay its debts or not is consistent with the bankruptcy law; Second, do you take the risk as a business owner? You run, you want me to go after him, I’m gonna crack down hard. The third is whether there is the transfer of assets, evasion of debt through a variety of check your accounts, your cash flow and your mechanism, if there is such a situation, we will resolutely investigate and punish it. Fourth, the support of banks is very important, because banks are professional departments and institutions, and bank surveys are very scientific and more professional than the government. Fifth, we should call fund-raising investment in the future. Now we are not called creditors, but creditors

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originally. Now I think there is a new standard called investment, or fundraising participation. The understanding of the fund-raising participant is that he thinks you are a good person and I will support you. This is an auxiliary condition. According to these 5–6 conditions, it is obvious that if you are insolvent and have transferred property, you will not cooperate with the government to deal with it, right? Then I’m going to crack down. It should be said that you have lost money, this person is very honest, so you bring your personal property to deal with the problem. In addition, please check that I did not transfer, the government does not have to kill you, I will take measures to break the bankruptcy, right? The government will try its best to help it overcome the crisis by repaying its debts due to insolvency just mentioned. The most difficult thing for us now is to deal with them according to law. Under the law, assets must first be repaid to the state-owned sector, such as banks, and then they can be used to repay informal investors. And many companies don’t have enough assets to repay the banks. In this case, how can you handle it according to law? Is it better to repay all that little property to the bank? If we do like this, the informal investors will not play with you … ——Code of interview data: S-C_005.

3 Grassroots Government: Maintaining Stability and Pacifying The local government, under the pressure of the superior government, strongly maintained stability, and in line with the principle of “domestic clowns cannot be publicized”, was highly wary of all “journalists”, for fear of publicizing domestic clowns; In addition, they deleted posts, maintained stability and intercepted visits. The municipal and county governments were highly wary of the media and journalists, fearing that they would report the civil scandal to the internet, which will attract the attention of the senior management and the outside world, and do everything possible to “cover the lid”. For the governments below the municipal level, especially the township governments, after the outbreak of the crisis, their basic function was to cooperate with the superior government to comfort and pacify the masses. We will use various means and methods to mobilize various grassroots forces to do mass work, pacify the investment-impaired groups, and try to quell mass incidents and petitions.

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3.1

City and County Level: Internal Inventory, Post Deletion, and Interception

After the outbreak of the informal financial crisis, with the increasing number of people and incidents of debt collection demonstrations, it has threatened social stability. Therefore, at the city and county levels, the primary task is to maintain local social stability and prevent social disturbances caused by mass incidents of debt collection. In order to maintain local social stability, the city and county levels have used a large number of police to maintain social order in public places. As a large number of debtors have the status and title of city and county people’s congress representatives, CPPCC members, and other system members, it is easy to cause people’s dissatisfaction with the government, which also becomes an important reason for creditors to petition for leadership. In this context, the Standing Committee of the People’s Congress of City D has established a leading group on the participation of deputies to the National People’s Congress in the rectification of financing issues. Under the leading group, there are 6 working groups, with each county and city setting up a special working group respectively, which is specifically responsible for the rectification of the participation of deputies to the people’s Congress and CPPCC members in the business circles of the district. These 6 working groups were respectively responsible for visiting 74 representatives of the People’s Congress of City D from the business sector and above, one by one, to fully understand the participation of the city’s representatives in informal fund-raising. For those “members” or “representatives” involved in illegal informal fund-raising, the following measures shall be taken: those members or representatives who are suspected of committing crimes, have a great social impact, and have been subject to compulsory measures by the judicial authorities, but have not yet reached a conclusion, will be suspended from their duties, and those members or representatives who have reached an illegal conclusion will be disqualified immediately. For those who have participated in a huge amount of informal fund-raising and have a great social impact, they should be advised to ask for leave and not participate in the meetings and activities of the CPPCC meetings and activities. If they propose to resign from their posts as members or representatives, they should be agreed to resign to reduce the adverse impact of society.

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In 2015, the website of the Provincial Commission for Discipline Inspection and Supervision Office reported the feedback and rectification of the 4th group of the Provincial Party inspection. Among the 71 CPPCC members, 17 participated in informal fund-raising. The problem of “many cadres participated in informal fund-raising, and some use their power to seek illegitimate interests” was reported, requiring serious investigation and punishment of leading cadres involved in illegal fund-raising, the establishment of a system for troubleshooting creditors of informal financing, and the formation of a joint inspection team together with the discipline inspection, organization, and other government functional departments to carry out special clean-up and troubleshooting actions for public officials involved in informal financing. Any group event involving leading cadres and creditors of the organization who have made illegal profits from informal financing in this city, once investigated and verified, will be dealt with in accordance with the law and regulations.1 In addition, the public relations departments of the city and county governments have put a lot of effort into deleting posts and maintaining online public relations. Some creditors posted various demonstrations and debt collection scenes on WeChat official account, WeChat groups, and community forums to expand their influence, attract high-level attention and investors’ resonance. Therefore, timely cleaning up these online comments has become an important task for the municipal and county governments to deal with the informal financial crisis. Finally, there is an interception. Some investors went to the provincial government or even to Beijing to appeal in groups. The municipal and county governments organized special working teams to try to resolve the case. In the interview, Mr. C from the Financial Office of City D also basically followed this idea: Now the society has been too complex, and the media can easily magnify a thing and put it on the line. Therefore, our grass-roots government is now most afraid of journalists. Some media have reported on the informal debt crisis in our region. In my opinion, our propaganda departments now only report the news, regardless of whether the public opinion and social influence of the news report are positive or negative. When you report like this, your news department is curious and releases news. 1 Xinhua net, Hunan City D: the city’s 71 corporation CPPCC 17 people participated in the informal fundrising, http://news.xinhuanet.com/local/2015-09/02/c_1281 89036.htm.

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However, your influence has further aggravated the spread and spread of the crisis, making people panic. So I think now our news and propaganda departments have no political awareness. I know this very well. I have said CCTV Finance Channel before, but you understand later? I predicted at the time that there must be something fishy going on, and sure enough, I arrested 18 people, including Rui Chenggang and others. It is not that we do not trust the reporters from outside such as CCTV, but the political consciousness of these propaganda departments is out of order. Therefore, there is a saying on campus, called “Fire prevention, anti-theft, and defense brother”, and we now also have a saying, called “Fire prevention, anti-theft, and defense against journalists”. The problem of informal lending financing is a common situation in third-tier and fourth-tier cities across the country, but it is not yet a phenomenon. It was exposed earlier here, at the end of 2013. The State Council issued a document No. 19 last year, and held a teleconference in May this year, attended by Vice Premier Ma Kai and the leaders of the third meeting of the relevant State Council member units, and six provinces made speeches. This is not an introduction to experience, but mainly to exchange some practices, some of which are policies. The whole province of H is ranked tenth, and the region with high risk of informal lending is ranked tenth. The position of H in the whole national economy is almost the same as that of the top ten. We happen to be the top ten in GDP, and the high risk of informal financing is also the top ten. Then City D was also exposed earlier in H Province. After the outbreak of the XX Autonomous Prefecture case in 2015, City D was exposed earlier. Why did City D have such a big impact after its exposure? First, I just said that the exposure was early, and second, the concentration of exposure. In April 2014, we had 14 enterprises for the first time, more than 40 at a time. You can imagine how serious that is. Why did the third informal debt crisis have such a big impact in our City D? It has something to do with the character of the people here. As you know, the self-employed people here are fierce, known as barbarians, who do not concede defeat and insist on killing the boss who borrows money and does not return it. If we cannot find the boss, we will blame the government. For example, there are bosses who do not pay back loans and flee to say that the government does nothing, but do not give up to seek media exposure, or through various aspects of the relationship to report the problem to the superior. The first is to strive for policies, and the second is to put pressure on local governments. This is what local people do. So you can

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see that when we talk about this, good news will not go out and bad news will spread far and wide. In addition, when the debt crisis of J Group broke out in April 2015, someone inside our company unexpectedly invited CCTV Financial Channel to buy a deputy director. The deputy director of our financial and economic office told him, “How come some national media are out of order now?” Journalists from CCTV Finance Channel came to me to interview questions, but they didn’t need the approval of the Propaganda Department of the Provincial Party Committee and the Propaganda Department of the Municipal Party Committee of D to make secret interview? The problem of the debt crisis is not the inaction of any government department here. Why do you make secret visits? Your news reports must be in order. After I told him this, a week later, you can see that all the financial directors of CCTV have been arrested. Of course, it does not mean that he was arrested after he interviewed me about the informal debt crisis. I mean, there is something wrong with the management order of CCTV and other media. Finally, if you don’t mind, you sent a list of documents last week, in which there were two journalists. I did not mean that these two journalists were bad, but I felt very sensitive at that time. I said that you came to do social research, why are the journalists from the news media in the list here? It’s not a joke to talk about fire prevention, anti-theft and defense journalists in the folk. To tell the truth, if you bring two journalists, I can’t tell you a lot of things. ——Code of interview data: S-C_ 006. 3.2

Level 1 Township: Overwhelmed with Appeasement

For local governments at the 1st level township, maintaining stability and appeasing investment victims are the heaviest task. Some families have been left destitute after investing decades of savings in investment companies. The minority of families who deferred their homes to banks and put their mortgages into investment companies are even more miserable. Therefore, all kinds of extreme behaviors may occur. The basic way of maintaining stability at the grassroots level is to implement localized management and decompose the indicators of stability maintenance work to the most grassroots level 1. The author once visited the next township in City S, and the staff of the complaint and petition said:

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In recent years, there have been more and more public petitions triggered by the informal debt crisis. Our town is not the worst place. However, there are also 26 households involved in informal debt crisis in the whole town. Several of them are basically in poverty and often come to the town government to ask solutions. We have given them all the policies and resources we can, such as subsistence allowances, poverty alleviation and relief. It is useless to ask us for more. But there are still a few people who come to the town government and sit for a whole day, making you unable to work normally … ——Code of interview data: SXF_001. The mayor once participated in the resolution and disposal of an informal debt crisis, and deeply felt: The informal debt crisis has really hit some families hard, and some have literally been looted. I was once involved in a small case where I visited a family. It was a family of four, the man was working on the construction site, the family was an old red brick house in the 1980s, two children, one was about 6 years old, the other was still nursing, the family put all the savings of 50,000 yuan into the investment company to earn interest. It is said that the boss ran away, and the principal could not be back. To make matters worse, the main labor force of the whole family had an accident on the construction site, with secondary disability. When I went to their house to comfort them, the woman was feeding the baby, and the poor mother’s shriveled body had no milk to eat, so the baby kept crying. When I left, I put 400 yuan of my own on the table, saying that I bought milk powder for the children in my name. But I can’t get the money back for them in a short time, the government will make efforts. Later, some people said that they saw a good car of the runaway boss parked somewhere. Dozens of creditors surrounded the car and demanded to sell it immediately. However, it was illegal. After receiving the case, the police could not approach anything because they did not trust anyone. Finally, I went there, including the family I visited. When the woman saw me, she beckoned everyone out of the way. She thought I was a trustworthy person, so she asked me to drive the car to the police station. Later, the car was sold according to law, and part of the principal of the creditors was repaid. Therefore, I think that in addition to appealing to emotion and reasoning, people can understand our grassroots work… Even if we can’t recover their capital, we should at least give them confidence that we are working on their behalf and earn their trust.

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——Code of interview data: SZ_ 001. Therefore, after the outbreak of the informal debt crisis, the primary task of the grassroots government is to persuade the families of the investment victims, and strive for some social assistance, minimum living allowances, and other policy treatments for these families, so as to soothe their wounded hearts.

4 The Judicial System: Willing to Be the creditor’s Grandson As the most credible judicial system, in addition to legally adjudicating some rights protection cases appealed to the court according to the laws and regulations, it has no operability in the implementation, which also makes the last glimmer of hope for investors to rely on the law almost completely destroyed. After five years of repeated negotiations, the Intermediate People’s Court of City D held an investor meeting at the end of May 2018 specifically to resolve the debt problem of Group J, held a hearing and invited all parties to participate, hoping to restructure and dispose the largest debt case of City D. The court wrote an impressive open letter to investors, in which it declared: Comrade Xiaoping once said: ‘I am the son of the Chinese people, and I deeply love my country and people’, so are our court staff. As long as possible, we are willing to be the son or grandson of the creditors, and we will try our best to get the creditors’ money back. Therefore, we must work together, even if we do our utmost, we must live up to our mission, fight for the people and fight for honor. ——An open letter from the Intermediate People’s Court of City D.

The letter was intended to gain the trust of creditors and to express the court’s commitment to the interests of investors. However, according to investor representatives at the hearing, the actual debt restructuring plan basically negated the phased repayment of principal agreed by the government, enterprises, and investors in 2014. As a result, investors have rallied again to fight. Here are the investor’s notes after attending the debt restructuring hearing organized by the court:

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4.1

A Heavily Guarded Creditors’ Meeting

At 9:00 a.m. on May 28, as a representative of JG community creditors, I attended the meeting of Group J’s creditors for judicial reorganization held in the HT conference room. The whole scene felt like a formidable enemy. My heart was as heavy as the atmosphere at that time, and I had an indescribable taste! The day before the meeting, I had a party with my classmates in City A, and I received several calls from the management of Group J and the community, repeatedly informing and urging me to come back to the meeting. On the day of the meeting, I returned from City A by train and arrived at the HT Hotel in the stadium at 8:00. At a glance, I saw that there were many public security and armed police standing on the road at the gate. An isolation barrier had been set outside the gate of the venue, making it almost impossible for vehicles to pass. I had to enter the venue from the south gate with my ID card because I didn’t get my ID card in advance, but the staff blocked me from the door. After the staff took my ID card to enter the venue for verification, they let me enter the first checkpoint. The second pass was to sign and register at the entrance of the hotel, where more than a dozen staff lined up to help me copy my ID card and register. Then I entered the venue and was stopped by armed police at the door for a comprehensive search. My backpack was taken down and checked one by one. Daily necessities such as essential balm, mineral water, eye drops and small bottles of perfume were all taken out and not allowed to be brought into the meeting. Upon entering the venue, I was immediately guided to my seats, which were numbered and named, with a bottle of mineral water for everyone. At that time, I didn’t see many people, so I could just look at the information and take pictures of the venue. I estimate that all the police in the city were dispatched that day, and there were many armed police and staff on both sides and behind the venue. On the background wall of the rostrum of the venue, there was a theme written with the theme of “The First Creditors’ Meeting of the Judicial Reorganization of 13 Companies including J Economic and Trade Group”. There were two cameras pointed at the rostrum. On the platform sat the president of the Municipal Intermediate People’s Court and four judges, in addition to two clerks sitting nearby. At the end of the meeting, the presiding judge made some explanations on several issues concerned by all creditors. He said that this judicial

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restructuring is to protect the legitimate rights and interests of creditors to the maximum extent; 6.30 The legal effect of the agreement is beyond doubt and constitutes a breach of contract, but the implementation of the agreement is like the realization of communism; All assets of the group will be incorporated into judicial reorganization; If it is only disadvantageous to creditors, and it is within the scope of the public security, the court has no right to decide, etc. ——Source: Private investors interviewed. Judging from the organizational form and venue of the judicial restructuring meeting reported by the investor representative, it is obvious that the investing public does not support, approve or cooperate with such judicial restructuring. The public does not believe that the justice system will truly stand on the side of investors and that will be “the grandson of creditors” to protect the interests of creditors.

5 Summary of This Chapter: Crisis Response Neglects the Construction of System Trust After the collapse of the capital market in City D, the investors with damaged interests asked the government to solve the problem one after another. The trust of the people has been transferred to the local public sector, and the government has become the lifeline to solve the problem in the eyes of the majority of investors. Instead of responding to investors’ demands, however, everyone from the banking system to regulators to local governments has done their best to keep themselves out of the way. The banking system took the lead in building a firewall, blacklisted City D, and stopped lending to all small and medium-sized enterprises. This move has already made the economic and social environment of City D, which was already suffering from “money shortage”, worse. Up to now, four years have passed, in City D, the investors who have lost their money have been petitioning, gathering, and marching around the debt repayment issue of Group J. Every time during the two sessions of the NPC and CPPCC or the major meetings of the Party and the State, they gather in the square in front of the municipal government to make a collective petition, asking the government to maintain the validity of the 6.30 repayment agreement reached in 2014 and strictly follow the agreement of that year. The investors investigated and discovered that Group

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J owned a commercial building in the provincial capital and wanted to auction off the asset to repay the debt. This commercial real estate is estimated to be the core asset of Group J and an important fixed asset to maintain the company’s operation. After the housing price doubled since 2016, investors asked the government to auction the real estate to repay debts. The government, however, rejected the investors’ suggestions and instead attempted a “debt restructuring”. This practice of the local government has aroused the suspicion and antipathy of the majority of investors, so in the past two years, the collective protests and rights protection activities of investors have become more and more vigorous. This has shown that the local government’s management of the informal financial crisis has fallen into a predicament that is completely out of control. One of the main reasons for the government to fall into such a passive governance dilemma is that it did not realize at the beginning that although the informal lending crisis occurred in the informal sector, it was related to the overall situation of local economic and social development. The local rationality of various departments in responding to the crisis led to the overall irrational situation. The second reason for the failure of the government’s crisis governance is that it did not realize that the essence of the informal financial crisis is the rupture of social trust. When dealing with the crisis and handling the public’s demands, it did not realize that the informal finance is actually an important social capital for the local economic and social development, as well as a solid foundation for local political stability and social governance. The third reason for the failure of government crisis management is that it failed to provide confidence guarantee for the protection of legitimate rights and interests of creditors when responding to their demands. In other words, the public adjudication system, including the judicial system, did not clearly tell people where the boundaries of rights and interests were, and even the cases that have been decided cannot be enforced, which was a great blow to people’s confidence. As the local representative of public welfare and the public interest, the local government failed to provide due confidence support, and interest protection to the public through laws and institutions in dealing with the informal lending crisis. The research in this chapter shows that after the financial crisis broke out in City D, government departments eventually became an important basis for public trust. However, the strategies of local governments

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in dealing with and managing the informal financial crisis did not effectively carry over the trust (confidence) of the people. For a long time, the trust of the public in the government and the construction of government trust have been the hot issues in the study of political sociology. People trust the central government more than the local government, which is a basic consensus in the field of research on the relationship between public and government trust in the past. In the rise, development, crisis outbreak, and crisis governance of informal finance in City D, local governments do have some unshirkable responsibilities: one is in the process of informal financial rise, some leading officials of government departments intentionally or unintentionally endorse some enterprises or entrepreneurs. Some honors granted by the government to enterprises have enhanced the public’s trust in enterprises; Second, in the process of the development of informal finance, the relevant government departments, especially the financial supervision departments, failed to assess the scale of informal finance as early as possible and standardize its operation, let alone establish a risk warning and corresponding credit guarantee system; Third, after the outbreak of the crisis, the government failed to give full play to the credibility of the government and effectively accept the trust transfer of the public, thus falling into a passive state of public credibility crisis. “Confidence is more important than gold”. The story of City D shows that the most fundamental and effective way to deal with the informal financial crisis, the crisis of the formal financial system, and the social crisis in the future is to fully rely on and give full play to the credibility of the public functional departments of the government, appease the people and win the support and trust of the people. Establishing and maintaining trust in modern social system is the basic bottom line to resist economic, financial, and even social crises.

CHAPTER 6

Efforts to Reshape Regional Finance with Government Credibility

The collapse of investors’ social trust is a great loss in the development of local economy and society. No matter the transformation of informal enterprises or the transformation of local economic structure, without the participation of informal capital, it is just like a tree without roots or water without a source. Therefore, to rebuild the regional social trust system and improve the confidence of informal capital is the key to the sustainable development of local economy and society. At the municipal level, the government is also trying to re-establish a new trust system for economic and social development. On the one hand, through summarizing the experience and lessons of urban construction investment companies, on the other hand, through investigation and study in other provinces and cities, City D decided to integrate stateowned idle assets, with state-owned assets as a collateral guarantee to the bank, and lend a part of the initial funds to the bank as the original capital to establish a venture capital company with state-owned assets as a guarantee, so as to attract and drive informal capital investment and continue to promote the development of local urbanization. However, due to the local government not being able to provide a satisfactory solution to the informal financial crisis, most of the informal capital has been deeply trapped in the debt quagmire of the informal financial crisis. The new informal capital no longer believes in any investment project, and would rather deposit money in the bank than easily © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Weiping, Social Trust, https://doi.org/10.1007/978-981-99-2931-3_6

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participate in the “PPP” mode advocated by the government. The whole informal investment environment has deteriorated, and people’s basic confidence in project investment has collapsed. Therefore, the reconstruction effect of the government-led regional trust system is extremely limited.

1

It’s Hard to Recover: Regional Economy After the Collapse of Informal Debt

As mentioned above, after the outbreak of the informal debt crisis, all departments intervened and managed the crisis according to the principle of minimizing their own local risks to themselves. The financial sector tightened monetary policy, the regulatory authorities cracked down on illegal fund-raising, and the grassroots government-maintained stability. The local rationality of each department has led to the overall irrationality, and the informal capital market environment on which the economic and social development of City D depends has disappeared, which has brought a series of extensive and far-reaching chain reactions: first, it has made the informal enterprises in City D suffer from insufficient capital flow even worse; Second, resource-exhausted cities such as City S lack more funds for transformation and development; Third, the new urbanization strategy is also unable to be implemented due to the lack of participation of informal capital and the lack of start-up funds. 1.1

Difficulties of Informal Enterprises

Private enterprises are the main force to absorb social employment. According to the National Economic Statistics Bulletin of City D, in 2015, the added value of the informal economy in the city was 59.745 billion yuan, an increase of 9.5%, accounting for 46.3% of the regional GDP, and the contribution rate of informal enterprises to the city’s economic growth reached 58.6%. However, for a long time, due to China’s unique financial system and environmental reasons, private enterprises have been facing difficulties in financing and loans, which has seriously restricted their further development. People may ask, in order to solve the problem of financing difficulties of SMEs, didn’t the government set up financing institutions for small and micro enterprises to serve their financing—small loan companies? In 2008, the China Banking Regulatory Commission and the People’s

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Bank of China actively launched the system of small loan companies serving SMEs, and issued the Guiding Opinions on the Pilot of Small Loan Companies. “Small loan companies are limited liability companies or joint stock limited companies that are set up by natural persons, enterprises and other social organizations to operate small loan business and do not absorb public deposits”, the guideline said. According to this opinion system, we can conclude that small loan companies are considered as important financial service institutions specialized in serving SMEs, self-employed households, and farmers. The starting point and target expectation of the policy and system are good. However, micro-credit companies have not actually solved the financing problems of informal enterprises. Studies have shown that since the introduction of the policy, both the business quantity and loan balance of small loan companies have seen a rapid growth (see Fig. 1 below). By 2013, however, new loans had fallen sharply. In 2015, the new loan quota of small loan companies even began to show negative growth, and in 2016, the new loan quota was reduced by 13.1 billion yuan year-onyear. The number of small loan companies has also decreased by 1900 within a year. The main reason is that microfinance firms are shackled from the start: “unable to absorb public deposits” effectively means that their sources of funding are severely restricted, making it hard for them

Fig. 1 New loans and institutions of small loan companies in China from 2011 to 20161 1 Yiou Net, in the name of the people: Why can’t small loan companies survive to solve the financing difficulties of SMEs? http://www.iyiou.com, 2017-5-5.

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to expand lending. “One can’t make bricks without straw”, the official microfinance institutions have been plagued by the problem of limited financing channels, for the private economy with huge capital demand, it is obviously a drop in the bucket, and cannot quench their thirst. Under such a financial system and environment, the survival and development of most informal enterprises mainly rely on social fund-raising with informal lending as the core. In County X, informal enterprises are mainly concentrated in the electronic ceramics industry. County X, known as the reputation of “Hometown of National Electronic Ceramics” and the “National Export Base of Electronic Ceramics and Artistic Ceramics”, its special ceramics started in the 1970s. With mature technology, solid industrial foundation, excellent product quality, and high market share, it is the most promising characteristic industry in the county and even in the whole City D. Relevant report data of County X Bureau of Industry and Information Technology shows that: After decades of development and precipitation, County X Special Ceramics has basically formed an industrial cluster integrating ceramic production, machinery manufacturing, technology development and product marketing, and has accumulated unique core advantages. First, the industrial foundation is solid. There are more than 200 special ceramic enterprises in the county, 5 national high-tech enterprises, including 27 large-scale enterprises, and 4 enterprises with an annual output value of more than 100 million yuan. There are more than 1000 varieties of seven categories dominated by discharge tube, water valve plate porcelain parts, electric heater porcelain parts and temperature controller porcelain parts, etc. The initial formation of electric vacuum devices, electric light source, temperature controller, ceramic metallization series, insurance tube series, shell series, structural ceramics, water valve plate, hair splints and wear-resistant ceramic products. There are more than 20,000 professional technicians and skilled workers in the county. In 2015, the total output value of special ceramics reached 3.868 billion yuan … At present, from the domestic perspective, our county water valve plate porcelain products occupy more than 80% of the national market share, thermostat porcelain products occupy more than 70% of the market share, and the porcelain tubes for insurance tubes and discharge tubes use metallized porcelain tubes occupy more than 50% of the market share. From the international perspective, nearly 10 enterprises such as XX electroceramics and MC Ceramics have established business relations with the world’s top 500 enterprises such as Emerson, Germany Siemens,

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Japan Mishima Co., Ltd. Their products are exported to the United States, France, Japan, Korea, Germany, Malaysia and other countries as well as Taiwan, Hong Kong and Australia. ——Interview data No.: X-J_ 001. For a long time, the electronic ceramic industry has become an important cornerstone and pillar of County X’s industry. However, after the outbreak of the informal debt crisis, many enterprises have broken the capital chain and have to go bankrupt and close down. According to statistics, there are 83 electronic ceramic enterprises in the county, which absorb 4831 people, including 417 technical personnel and 4414 ordinary workers. It can be seen that, under the dual background of the informal debt crisis and industrial transformation and upgrading, the informal economy has suffered a great blow, but also brought serious pressure on local employment. Many families fell into poverty because of the unemployment of the main labor force. Under the vigorous action of “cracking down on illegal fund-raising”, private enterprises in County X suffered from another long winter since the financial crisis in 2008 under the background of a continued downturn in real estate economy. 1.2

Funding for Transformation and Development Is Lacking

For City S, after the informal financial crisis, its transformation and development are difficult. Due to the exhaustion of coal, mineral resources, and other resources, the transformation and development of industry and economy have become the hope of sustainable development of cities. In recent years, the city has implemented a series of transformation and development strategies, and the municipal party committee and government have made efforts to launch six major projects of transformation and development, namely, promoting industrial quality and transformation, agricultural quality and efficiency improvement, tertiary industry quality and upgrading, environmental protection and quality improvement, urban quality and capacity improvement, and people’s livelihood improvement. To truly implement all these development plans, a total of more than 10 billion yuan will be invested. However, these are all beautiful blueprints for the transformation and development of City S. In fact, to realize the transformation and development of such an old industrial city with a population of more than 400,000, it is a drop in the bucket only depending on the formal financial

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and financial resources within the system. Therefore, in fact, the transformation and development of City S is very slow. Especially in the context of the spreading informal debt crisis, the rich no longer dare to take risks in investment. The social capital is mostly frozen or dormant, and the informal capital has lost its former vitality. Therefore, the transformation and development of City S are increasingly difficult. The author interviewed a deputy mayor of the city. The mayor said that there is a great financial difficulty in the renewal of urban infrastructure alone: Now, in fact, the construction of 11 square kilometers of new urban areas since 2009 is not only a major strategy of urbanization in our city, but also an important part of municipal expansion. Because our original old city is only 9 square kilometers, where we ate yesterday belongs to the old city, which is only 9 square kilometers. Over the past 20 years, this city has basically carried 150,000 to 180,000 urban populations, and our total population is only 380,000. Basically, this central old city has carried 150,000–180,000 people. Therefore, we wanted to rebuild the 11 square kilometers of new city to expand the urban area and promote our new urbanization. However, we have implemented development policies such as capacity reduction, transformation and upgrading. Many industrial and mining enterprises have closed down, and the city’s financial and tax revenues have declined sharply, including the economic downturn in recent years. The enthusiasm for land transfer is not very high. Therefore, in this new urban area, despite the opening of the road network structure, the development of the industry and its driving capacity are actually very small, it is as much as the 2.8 billion yuan of our original investment. In fact, this kind of investment has played a very small role in stimulating a larger round of economic development, because the informal capital did no longer believe in the economic environment, so they did not invest anymore. However, the time point of new town reconstruction in County X is nearly 10 years earlier than that in City S, so the pulling effect of County X is very obvious. However, under the current real estate economic downturn and informal debt crisis, our strategy of trying to drive industrial and economic transformation and development through the expansion of new towns is actually blocked, and many policies cannot be used. For example, our government buildings, which were previously approved, cannot be rebuilt under the current situation. ——Code of interview data: S-X_ 001.

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As an ancient industrial and mining city like City S, when the resources are almost exhausted due to over-exploitation, the pace of transformation and development is particularly difficult and urgent. It is known that in City S, nearly half of the multi-millionaires and even billionaires in City D are gathered. Many depend on coal and mineral resources. In fact, City S has quite rich informal capital. However, due to the informal financial crisis, the loss of social capital, and the lock of the hold-up, the blood to promote economic development almost dried up. As the director of the city’s financial office sighed: God gave us good resources in City S, but because of the lack of strategic development vision, the good resources were not well utilized, which did not bring much benefit to the city. On the contrary, what remained was environmental pollution, tuberculosis, cancer … When the economic situation was good, we did not want to carry out urban construction and expansion, and we were immersed in and stuck in the industrial and mining economic era, the urbanization was not started early. As a result, many local bosses went to other places to engage in real estate after they became rich by relying on minerals, and our informal capital flowed out to other places to help people for house construction. Well, now that the real estate market is down, most bosses are trapped in the real estate. However, the capital has indeed flowed to other places, you see, the surrounding cities have better infrastructure and larger than us. If City S could also start the new city expansion and a new round of urbanization earlier, then with the capital vitality of the whole city at that time, it would be basically no problem to realize the transformation and development with the capital vitality of the city at that time. ——Code of interview data: S-Y_001. Through this case, it is no exaggeration to say that the government’s standardized guidance and timely utilization of informal capital are related to the development of a city. Unfortunately, in City S, at the critical moment when informal capital is urgently needed to participate in the transformation and development of the city, the informal capital has already been exported to surrounding cities and locked in the real estate trap. City S started the strategy of transformation and development, no matter how much the government has invested, it is just a one-man show.

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1.3

New Urbanization Is a Drop in the Bucket

The spread of informal debt crisis not only makes the capital environment needed for the transformation and upgrading of resource-exhausted cities like City S lack but also delays the process of new-type urbanization to a large extent. H Town is the main carrier to realize the urban expansion and pilot new urbanization of City S, as well as the first batch of pilot towns for the new urbanization of the whole city. Here is a general introduction of the town’s fiscal and tax status and then to analyze some financial and capital problems faced by its implementation of new urbanization: In 1989, H Town was established from the countryside and built into a town. The total area of the town is 45.7 square kilometers, and now our urban built-up area is 3.2 square kilometers. With the building materials industrial park as the leading, H Town has initially formed a township industrial system based on six industries: chemical industry, metallurgy, building materials, machinery, textiles and mining. At present, there are 154 large and small enterprises, more than 10 informal enterprises, and three informal enterprises with an output value of more than 100 million yuan. There is a waterworks with a daily output of 40,000 tons, two 110KV and 35KV substations, a post and telecommunications building with a capacity of 10,000 gates, four mobile communication terminals, two large markets, a bus terminal with a capacity of more than 60 passenger cars, a garbage landfill and a garbage transfer pool, 1500 meters of cement hardened three slab roads, 3000 meters of embedded sewers, 100 high-pole street lamps, and comprehensive greening on both sides of the street, H town has very convenient traffic conditions and complete infrastructure. The traffic conditions in H Town are very convenient, and the infrastructure is complete. It should be said that the construction of small towns in H Town has begun to take shape. In recent years, the GDP of H town has continued to grow, and in 2016, the industrial GDP reached 4.4 billion yuan. Fiscal and tax revenue increased significantly, with local tax revenue rising from 7.44 million yuan in 2012 to 9.68 million yuan in 2016 (including 7.51 million yuan in state tax revenue and 2.17 million yuan in local tax revenue), with an average annual growth of 7.8%. Based on the existing foundation, giving play to the advantages of resources, capital, technology, talents and location, the industry has achieved cluster development, forming a building materials industrial park represented by HX cement, YH cold resistance

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and XD fire resistance, a circular economy industrial park represented by BJY and a modern logistics park represented by TTX logistics, which have made outstanding contributions to the development of the economy and the city’s financial resources. At present, there are 128 government cadres in H Town, including two early retirees and 52 retirees. According to relevant laws and regulations, the National People’s Congress, the CPPCC, the Commission for Discipline Inspection, the People’s Armed Forces, trade unions, the Communist Youth League, the Women’s Federation and the Disabled Persons’ Federation are set up. Within the party and government organs, there are nine stations, including the Party and Government Office, the Family Planning Office, the Economic Development Office, the Comprehensive Administration Office, the Safety Supervision Station, the Human Resources and Social Security Station, the Culture and Sports Radio and Television Station, and the Agricultural Development Center. In 2016, municipal finance continued to implement the financial contract system for the finance of H Town. After several rounds of calculation, the contract base was determined to be 9.283 million yuan per year. In 2016, the financial expenditure of the town was 28.1661 million yuan. The departments with large annual expenditure amount are as follows: 8.035 million yuan (including 6.0704 million yuan of unified financial wages in the town), 6.03886 million yuan of comprehensive rural reform (of which 381,800 yuan at the level and 5.6568 million yuan of special funds at the higher level), the urban and rural environmental reconstruction expenditure of 3.7039 million yuan (2.5 million yuan invested by the superior special funds), and the comprehensive governance and stability maintenance expenditure of 2.143 million yuan. The expenditure on agriculture, forestry, and water affairs was 792,800 yuan, the expenditure on social security and employment was 668,100 yuan, the expenditure on family planning was 436,300 yuan, the expenditure on the general office of the Party committee and related affairs was 350,000 yuan, and the expenditure on the police station was 301,200 yuan. The above financial data show that: first of all, the township financial security is extremely limited. Basically, the financial system’s lump-sum base of 9.283 million yuan can only cover personnel and social security contributions and expenditures, which cannot meet the growing expenditure needs for urban management and comprehensive social governance. Secondly, the financial power and administrative power at the township level are not symmetrical. The responsibility for small-town construction,

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comprehensive management and stability maintenance, safe production, taxation, and other work lies in the villages and towns, and the financial system has not fully considered these work needs. Third, the distribution of taxes is unreasonable. The division of national tax makes the local tax system here almost have no main tax with a thick tax base and a wide range of tax sources. At present, most of the local tax is difficult to collect, scattered tax sources, and small lol tax. Although the tax-sharing system has realized the goal of centralizing the tax to the central government, many local governments like City S have been struggling financially in recent years, and the implementation of “replacing business tax with value-added tax” has made it even worse. Fourth, the current tax-sharing system does not match the government’s hierarchical management system in design and implementation. China has five levels of government, namely, the central, provincial, municipal (prefectural), county (county-level city), and township (town) governments. The budget law stipulates that the first-level government enjoys the first-level financial power, and the five-level government is divided into five levels of taxes. In fact, the county-level finance shares a small part of the tax revenue, while the township undertaking a large number of grassroots specific work has no tax sharing at all. Finally, the transfer payment system is not perfect. The method of determining the scale of central transfer payment is lack of scientific basis, the form of transfer payment is not standard, and there is too much arbitrariness. Therefore, “running the money into” has almost become a basic way for local governments to strive for financial transfer payment. For a long time, the “running ministry money into” has relied on the local development and reform Commission district to plan various projects and report to the higher authorities level by level. However, in recent years, with the systematic promotion of anti-corruption, local development, and reform departments have no incentive to engage in projects. As a result, the funds for local development relying on projects at the township level are becoming less and less. This is the financial dilemma of the new urbanization system. Outside the system, with the spread of informal debt crisis, the informal capital was even more unable to enter the township level to invest and drive the development of local industries. As the key economic town of City S, H Town was approved as the only provincial well-off demonstration town in City D in 2005, and was listed as the first batch

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of new urbanization pilot towns in City D in 2014. Under such a financial environment, how can H Town promote the construction of new urbanization? The author interviewed a person in charge of H Town: The villages and towns now have almost no financial resources. Therefore, the blueprint for the new urbanization that we have reported is very beautiful, and there are many projects and industries to be built. Are these projects and industries pompous? It’s not flashy at all. We plan our projects according to the local resources conditions. For example, the river corridor and the scenic belt are built with multiple functions. The first is flood protection. Along the banks of the Zijiang River, raising the embankment can effectively improve flood control and flood fighting function; the second is to develop the tourism industry and promote industrial transformation and upgrading. The beautiful natural resources along the river can drive the development of the tourism industry in City S and improve the income level of the surrounding people. Third, improve the environment and control pollution. This was originally a comprehensive project established with the help of new urbanization. It has achieved many benefits with one stroke. However, the start-up of such a large project is basically unprofitable in the early stage, and to a large extent, it belongs to infrastructure investment. As a result, informal capital is reluctant to come in, especially now that the informal debt crisis is spreading and many bosses have fled. Therefore, it is difficult to attract informal capital through investment attraction. At present, according to the arrangement of the provincial small town construction coordination leading group, the provincial environmental protection bureau is responsible for supporting the small-town construction in our town. Since 2006, the provincial Environmental Protection Bureau has specially developed a work program for the construction of small towns in our town. They came to the town for investigation and guidance several times and solved the capital problem of hundreds of thousands of yuan. Under their own financial and difficult circumstances, the Party Committee and the government of our town actively sought the support of the superior department and constantly increased the investment in the construction of small towns in our town. In 2006, more than 400,000 yuan was invested to reorganize the urban management team, establish the department of environmental sanitation, and improve the urban management organization; In 2007, 1.28 million yuan was raised to repair the area between the police station and the town market, relieving the

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drainage pressure in the town. In 2008, another 980,000 yuan was raised to build a new passenger station, which solved the problem of taking the road as the station. In 2009, another 2 million yuan was raised by domestic enterprises to harden the main roads in the town. Over the years, the construction of small towns has also been strongly supported by the superior leadership and the government. The provincial Construction Department has supported 200,000 yuan. The Party secretary and mayor of City D have visited our town for several times for inspection and guidance, and helped to solve the fund of 250,000 yuan. The Municipal government of City S also attaches great importance to the development and construction of our town, and has held several special meetings to solve the fund of more than 500,000 yuan. Therefore, during the development of the first round of pilot towns in China, H Town has preferential policies such as land and household registration, and its financial condition is good. The D and S municipal governments give at least hundreds of thousands yuan to our town for the construction and maintenance of small towns every year, and the urban construction has developed rapidly. But in recent years, preferential policies have been cancelled, the source of financial disposable income is extremely limited. At present, the financial gap of the whole town is more than 2 million yuan, and its own operation is very difficult. On the other hand, because it is a pilot town of national development and reform and a demonstration town of a well-off province, it needs continuous investment and construction. At present, the annual financial revenue of the whole town is about 2 million yuan allocated by the municipal government. Every year, it can get a small amount of project funds from the relevant departments at the higher level, which can only ensure the normal operation of the government agencies and the payment of basic salaries for government officials. It is unable to invest too much in the construction of small towns in our town, As a result, the construction of small towns in our town is stagnant. In the current environment of spreading informal debt crisis and sluggish local economy, it is also very difficult to attract investment. Therefore, we are considering whether we can set up an investment and financing platform at the town level. After all, there are many idle assets in our town. Can we reinvigorate them, set up an investment and financing company, borrow money from the bank, and first build the infrastructure for the development planning of small towns? If so, it will be easier to attract social capital later …

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However, in the current financial regulatory environment, especially the crackdown on illegal fund-raising and other policies, the town level investment and financing companies are not approved. ——Code of interview data: S-H_001. Obviously, the avalanche of the regional capital market built around the real estate industry in City D through informal lending has had a fundamental impact on the overall economic and social development of City D. It is obviously impossible to re-establish and restore this credit relationship in a short time. However, rebuilding social credit is the top priority for the economic and social development of City D. How to rebuild credit quickly? City D government has created a new type of investment and financing platform—venture capital company by studying in Chongqing and other places, and taking local state-owned assets as credit guarantee. Venture capital firms both raise money and invest, but mainly in industrial projects. If the past urban investment companies mainly used land as collateral to promote local infrastructure construction and urban development, the new venture capital companies used local state-owned assets as collateral to finance industrial development from banks or society, hoping to lead local investment to the real economy. However, under the situation that the informal debt crisis has not been well managed, the progress of this mode is very slow. The social confidence of the destroyed informal investors is difficult to recover in the short term.

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Efforts of State---Funded Guarantee to Reshape Regional Finance: From City Investment to Venture Capital

In the context of the collapse of the informal financial market and the difficult development of regional economy, how to implement the requirements of the CPC Central Committee’s supply-side structural reform and accelerate the transformation and upgrading of economic growth mode? For a long time, local governments have formed a set of patterns and systems in promoting regional economic development. Academics have previously put forward well-known propositions such as “local government is a company”. In fact, the rise of the real estate economy under the background of urbanization is the result of the promotion of local

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governments. In the period of rapid urbanization, the local government has created the regional economic development mode led by an “urban investment company”. In the new era when the urbanization of real estate has encountered the bottleneck and urbanization needs to be deepened, the old mode of urban investment company has been heavily in debt. Under the situation of weak informal investment, how can we start a new local economic engine? After studying in Chongqing and other places, under the leadership of the new Municipal Party Committee and municipal government, City D Government tried to create a “venture capital company” mode driven by local government state-owned assets, focusing on guiding and driving the growth of the real industry with government power. This is actually the effort of local governments to rebuild social trust and regional finance. 2.1

Local Debt: Merits and Demerits of Urban Investment Companies

In the context of insufficient capital reserve and weak financial support for urbanization, urban investment companies once provided a strong role in promoting the rapid start of urbanization on the mainland. With land as the guarantee and local government finance as the credibility, urban investment company attracted informal funds by issuing bonds, and made outstanding contributions to the large-scale development of municipal public infrastructure construction. Take City D as an example: City D Construction Investment Group co., Ltd was established in 2001. After more than 10 years of development, the Group now has 12 subsidiaries, including City D Hotel, South New Area Construction Development Co., Ltd., Ceiling Asset Management Co., Ltd., City D Investment Real Estate Development Co., Ltd., City D Municipal Urban Construction Investment Property Co., Ltd., Agricultural Development Co., Ltd., Shantytown Renovation Investment Co., Ltd., Shantytown Reconstruction Investment Co., Ltd., Water Supply Company, Municipal Engineering Corporation Bus companies, etc. There are 320 employees, with total assets of 22.6 billion yuan, net assets of 12 billion yuan and liabilities of 10.8 billion yuan. In the past ten years, City D Urban Investment Company has accumulated financing of 11.8 billion yuan, completed 10.4 billion yuan in construction investment, completed 138 municipal infrastructure projects, built a high-speed line, numerous schools, highways, parks,

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bridges and other major infrastructure construction projects, and made a significant contribution to the city’s economic development and urban construction. On March 18, 2011, it successfully issued 1.2 billion RMB of 8-year municipal project construction bonds. This is the first time in the history of the city to directly finance from the capital market, and has successfully opened up new areas of financing. In 2012 and 2014, RMB 1.3 billion and 1.8 billion urban investment bonds were issued respectively. In March 2016, the company issued a non-public offering of 15.3 yuan corporate bonds. Currently, it is coordinating with China Development Bank to issue a fund of 2 billion yuan. The downtown area has expanded from 26 square kilometers when City D was removed to nearly 60 square kilometers now. This is inseparable from the outstanding role and positive contribution of the urban investment company as the main platform of urban financing, the main carrier of urban investment and the main force of urban construction in promoting the urbanization process of the whole city. However, the mode of urban growth of urban investment companies has some natural drawbacks. First, there are defects in company attributes and organizational management mode. Urban investment companies generally implement a management mode of two brands (Urban Investment Group: Urban Investment Management Office), a set of personnel and joint office. Enterprises are actually organs and institutions, the existing system and mechanism cannot adapt to the fierce market competition. Therefore, in order to achieve sustainable and healthy development, the company is preparing a restructuring plan, which will transform the municipal urban Investment Group into a wholly state-owned enterprise, and implement a modern enterprise management system of independent operation and self-financing. As the capital contributor of the Urban Investment Group, the municipal government authorizes the municipal state-owned assets supervision department to perform the contributor’s duties and supervise the Urban Investment Group. The municipal Party committee and the municipal government shall be in charge of the board of directors, the board of supervisors, the management team, and the total salary and performance assessment of the group company. We will further strengthen the internal management, rebuild an efficient and professional talent team, rally people, and boost confidence.

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Secondly, another disadvantage of urban investment companies is the non-profit operation. Over the years, the projects undertaken by the Urban Investment Company are all public welfare projects, and the construction projects cannot form operational assets of the company. Therefore, the assets invested in the construction cannot become the income of the company. In the past, a large amount of experience and funds of Urban Investment Company were concentrated on projects that could not generate direct income, the proportion of non-operating assets was too high, and the company lacked self-hematopoietic function, so the company’s “cash flow” was negative, which directly led to the company’s increasingly heavy assets and liabilities, and it could not effectively expand financing: For example, after our urban investment company invested tens of billions in the construction of Xiangzhong Avenue, the price of the surrounding land increased from 50 to 200 million. However, the land appreciation has nothing to do with the investment of the urban investment company. Most of the land appreciation brought by the improvement of the municipal infrastructure has gone into the pockets of the real estate developers. Therefore, the company is planning to request the municipal government to approve the company to buy back the completed projects. Even if the finance is temporarily unable to buy back, the company should send a letter to confirm and form a mechanism; According to the proposal of municipal People’s Congress, a special account for debt repayment should be established, requesting the finance to arrange a certain amount of debt repayment funds every year to further enrich and prevent sudden risks of the platform. ——Code of interview data: S-T_001. Finally, the biggest disadvantage of the urban investment development mode is that it can only promote the growth of urban hardware scale at or without cost, but cannot create urban economy. In essence, the basic role of urban investment company is to transform urban land into various architectural Spaces and promote the construction of urbanization. But for the development of urban economy and industry, urban investment companies are powerless. Therefore, the biggest disadvantage of urban investment companies is the “land finance” mode criticized by public opinion recently. City investment corporation is the key link and organizational carrier of local government land finance. Without the organizational platform of urban investment companies, land finance cannot operate. The basic logic of the urban investment company is

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land acquisition—land consolidation—bank loan with land as collateral— investment in public infrastructure construction—auction, hang, and transfer of land—repayment of bank mortgage loans. Obviously, the last driving mode of urban investment development is the real estate economy. Therefore, once the real estate market reaches saturation, this mode will reach its limit and will not be sustainable. The development of a real economy and industry is the foundation for the sustainable prosperity and development of a city. Nowadays, the real estate market of City D has been basically saturated with urbanization. The biggest recent crisis in the city’s economic development is the collapse of informal financing. In fact, this informal financing is not only available in our place, but also in other places. Although the new secretary has stabilized some situations, it is hard to recover. At present, the city’s development strategy is to respond to the call of the central government and slowly develop to the real economy. Therefore, the municipal government’s decision is to slowly dilute its functions (urban investment company), which is a little offensive to our company. It is a little disgusted with our company, so it set up a new venture capital company. ——Code of interview data: S – T_002. 2.2

Reshaping Regional Finance: The Vision of Venture Capital Firms

City D Venture Capital Co., Ltd. (hereinafter referred to as Group CT) is a state-owned investment and financing platform that integrates investment, financing, construction, and operation with the approval of the municipal people’s government. It was listed for operation in November 2015 with a registered capital of 1.5 billion yuan, all of which comes from the municipal state-owned idle assets. Since its establishment, the company has successively set up many branches and subsidiaries and invested in many high-quality enterprises focusing on the three functions of industrial support to promote transformation, development, and construction of Shuiyang Ecological New Area, and development and operation of urban assets and resources. With the continuous expansion of business, the company is gradually developing into a state-owned group company leading the economic transformation and development of our city.

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The company operates in strict accordance with the modern enterprise management system. It has set up the Board of Directors and the Board of Supervisors, implements the general manager responsibility system under the leadership of the Board of Directors, and sets up six departments including the Office, the Human Resources Department, the Financial Audit Department, the Investment and Development Department, the Capital Operation Department and the Engineering Management Department. There are four wholly owned subsidiaries of City D Venture Capital Company: YC Development and Construction Co., Ltd., HC Environmental Protection Technology Co., Ltd., XC Consulting Management Co., Ltd., and Asset Management Company (under preparation); There is also a branch and six private enterprises to participate in the equity. The distinctive feature of Group CT is to promote the development of local enterprises through various investment and financing means, which are guaranteed by state-owned assets, and under the review and supervision of SASAC. The main functions are to help local industries attract investment and new regional development and construction, as well as the development of urban state-owned resources. It can be seen that in the context of the collapse of social confidence of informal capital, in order to continue to promote local urbanization construction and economic structural transformation, City D Municipal Government tried to integrate all state-owned assets to establish a modern state-owned enterprise guaranteed by the government credit, so as to promote the participation of informal capital. In essence, the establishment of Group CT shows the efforts of the new municipal government to rebuild the social trust system. Mr. Y of City D Urban Investment Company has a thorough understanding of this: As far as I know, there are still some details, mechanism problems, system problems and talent problems reported by them just now. In fact, I think the biggest puzzle for venture capital is what you said just now, that is, when we do the top-level design by ourselves, how can we use it as a kind of government in the market economy environment? It is an innovation of the government-guided economic mode under the market economy conditions of China, and the company you venture into should be considered from the perspective of the whole area. Venture capital is not only a company, but also a member of many state-owned enterprises. But from this perspective, it is also one of the market players. Venture capital is different. It is an economic mode of the first-level city government. That is to say, I am the government in the government politics, and

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I am the venture capital in the units and in the economy. I dare to participate in the market economy. I want to lead the whole local economic pattern, and also guide the economic trend of the whole region. This is what my venture capital to do. Then my operation is the economy of the whole city, not just a project, but a share. If I evaluate the performance of a venture capital company according to this, and do it according to this so-called “project” and “share”, it is meaningless. What should I do to set up a state-owned venture capital company? So many stateowned enterprises have been restructured. I set up another state-owned enterprise. The establishment of this state-owned enterprise is different from the previous state-owned enterprises. Venture capital is a mode, an economic self-reliance mode, and a top-level design. This is an important way for the government to realize macro-control of the economy. This is a way of thinking. How to realize the government economy? Don’t do the old tax-deductible stuff. It’s boring, isn’t it? So what’s the new approach? How can I try again to realize the government’s economic growth in a market dominated situation? How to do that? When you get there, the economy gets better the government itself invests in this project, but the money has been invested. Ten years have passed, and the account has not yet been cleared, this is the traditional mode. Then I will take the project of government relocation as an example. The investment of this project is 2 billion yuan. What is the return generated by this project? This spillover benefit is 12 billion, this is the money I calculated. Before I found it, it was all market discovery, but I felt it quietly, that is to say, the project was marketized, and the government relocation was regarded as a big project. The 2 billion yuan project actually brought 12 billion yuan. After the road was completed, the value of the land on both sides increased, and the profits generated by the boss after entering the real estate development reached 12 billion yuan. In the past, the government has just invested 2 billion, not the 12 billion wealth appreciation dividend. The current venture capital mode is to enjoy the dividend of wealth appreciation. ——Code of interview data: S-T_ 003.

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Hard to Understand: PPP Suffers Cold Shouder from Private Capital

The author held a symposium with the leaders of the newly established Group CT in City D. According to the discussion, since its establishment, the company has closely focused on the national, provincial, and municipal industrial development policies to promote the implementation of 18 projects from 3 aspects of industrial investment, urban infrastructure construction, and urban asset resource development and operation, which has driven the total investment of about 13.5 billion yuan, planned more than 10 reserve projects, and is expected to drive the investment of about 8 billion yuan. However, these are the industrial development and project planning of the Group, and there are many difficulties in actual implementation. The PPP mode also faces the reconstruction of the trust relationship among the government, enterprises, and the private sector. 1. Industrial PPP projects. In terms of investment attraction and investment in industrial projects, Group CT has invested and participated in four industrial projects with a total investment of 3.3 billion yuan. First, attract investment and introduce an electronics company in Shenzhen to establish SX New Energy Company, and jointly invest in the construction of “Power Battery Production Line and Clean Recycling of Waste Batteries” project, with a total investment of 2 billion yuan. At present, a series of preliminary work of the project and purchase of Phase I plant have been completed, plant decoration and equipment procurement are under way. The project is scheduled to be completed and put into operation by the end of September. The second is to attract investment and introduce a technology company in Guangdong to cooperate with the establishment of HJ Optoelectronics Co., Ltd., and jointly invest in the construction of “large-size YAG laser crystal and deep processing” project, with a total investment of 560 million yuan. At present, the project company registration and project approval have been completed. The construction is planned to start in the fourth quarter and strive to be completed and put into operation by the end of the year. The third is to attract investment and introduce a provincial agricultural cooperation to establish JF Intelligent Company, and jointly invest

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in the construction of “civil UAV production, detection and supervision cloud platform construction” project, with a total investment of 540 million yuan. At present, the project company registration, plant leasing and project approval have been completed, and the project is scheduled to be completed and put into operation by the end of September. Holding 20.8 million yuan special construction fund of Agricultural Development Bank on behalf to invest Lekou Company in City D and jointly invested in the project of “One-step integrated Rice Noodle Complete Equipment Manufacturing without addition”, with a total investment of 208 million yuan to put into production officially. 2. PPP projects in the service sector. In the service industry, venture capital companies have invested in 4 projects with a total investment of 1 billion yuan. The first is to cooperate with downtown hospital and County X Tourism Construction and Investment to establish HQ Health Industry Co., Ltd., and jointly invest in the construction of “County X TM Health and Wellness Base” project, with a total investment of 300 million yuan. At present, the first investment has been paid in full, and the land regulation and planning and design are being carried out. The construction is scheduled to start in the fourth quarter. The second is to invest in the construction of “City D Entrepreneurship and Innovation Service platform” project, with a total investment of 200 million yuan. At present, the feasibility study and preparation of the project have been completed, and the land change procedures, and the survey and design bidding are being handled. The construction is scheduled to start in the fourth quarter. The third is to held a special construction fund of 46 million yuan from the Agricultural Development Bank of China as an agent to participate in and invest in City D Hand-in-Hand Company, and jointly invested in the construction of the “Internet + intelligent security system integration and application platform” project, with a total investment of 460 million yuan. At present, it has been promoted in more than 30 schools in County X and will be rolled out across the city in the next stage. The fourth is to establish BT lending company in City D in cooperation with Shenzhen FT Loan and XL Guarantee, to carry out bank lending business of SMEs in the city, with registered capital of 60 million

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yuan. In the first half of the year, 45 times of loan business has been handled, the cumulative loan is 300 million yuan, the main business income is 1.4 million yuan and profit is 1 million yuan. 3. Urban construction and development PPP projects. Venture capital companies also participate in the development and construction of urban areas and investment. Since its establishment, the venture capital company has mainly carried out the following businesses: The first is the planning and design of the area: China Urban Planning and Design Institute was entrusted to complete the overall planning of Shuiyang Ecological New Area, and three functional areas were planned: TH area dominated by urban characteristic services, SH area dominated by health care and elderly care and characteristic living, and LH area dominated by culture, education and wetland leisure. Relying on several consecutive SX River bays, build SX River bay area with the theme of leisure and entertainment, and build two ecological areas of highway flower belt area with distinctive road landscape relying on the regional road network project. The second is the infrastructure construction: we have planned and packaged six urban infrastructure construction projects including water, electricity, road and gas, with a total investment of 4.3 billion yuan. We are carrying out preliminary work such as feasibility study and preparation of the projects, and plan to start construction in the fourth quarter. It includes: LX South River LT bridge to the East Second Ring Road Flood Control Project, with a total investment of 545 million yuan; The total investment of the new road construction project in the east extension section of LP Avenue is 304 million yuan; Comprehensive water pollution control project in LX and SX intersection area, with a total investment of 549 million yuan; The construction project along the road on the south bank of LX River has a total investment of 836 million yuan; The total investment in the construction of underground comprehensive pipe gallery is 1.569 billion yuan; The total investment of water supply and drainage pipe network construction project is 500 million yuan. The third is the construction of public service projects: planning and packaging three public service projects such as health care for the elderly, shantytown renovation and sports facilities, with a total investment of

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1.68 billion yuan. Preliminary work such as feasibility study and preparation of the projects is being carried out, including: SH nursing home construction project, with a total investment of 765 million yuan; SH Village Community Shantytown Reconstruction Project, with a total investment of 530 million yuan. The construction project of sports facilities in SH area has a total investment of 386 million yuan. The fourth is the industrial investment attraction of the area: we have contacted and negotiated with many well-known schools, hospitals and film and television investment institutions at home and abroad, including SXH Bay Film and Television Base jointly funded by HD Film and Television and SZ, and have reached an investment cooperation intention. The total land area of the project is about 1000 mu, with a total investment of about 3 billion yuan. Currently, the planning and design scheme is being prepared, and the construction is expected to start in the first half of 2017. 4. Local state-funded development of PPP. City D Venture Capital Company is also responsible for the development and operation of some local state-owned assets and resources. In terms of transfer of local state-owned assets: in order to enrich the company’s assets, the company has applied to the municipal government for approval to transfer 13 state-owned assets, including: six idle office buildings, three idle land, municipal service outsourcing building and four related assets. Relevant procedures have been officially started and the transfer is planned to be in place by the end of September 2016. In terms of receiving and operating state-owned resources: With the approval of the municipal government, the company has established XC Consulting Management Co., Ltd. through the overall transfer to receive the engineering consulting center of the Municipal Development and Reform Commission and the Environmental Protection Bureau of the Municipal Environmental Protection Bureau. In July 2016, the company was officially put into operation. The next step is to receive the municipal planning and design Institute and other public institutions, and create a comprehensive consulting service agency that can provide the whole process service for the project construction. In terms of the development and construction of local state-owned resources: after successfully winning the right to develop and operate the

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government’s public resources, the company has prepared an overall plan for gas stations, filling stations, and charging piles (stations) in the central urban area, completed the preliminary project approval of the “Municipal New Energy Vehicle Charging Station (Pile) Construction Project”, and simultaneously carried out the application of national special construction funds, construction, operation, investment and other related work. The total investment of the project is 500 million yuan, it is planned to build 3 charging stations and 7380 charging piles, and the construction is planned to start before the end of the year. Finally, venture capital companies are buying social assets. In order to seize favorable business opportunities, the company established an asset management company for professional operation, actively contacts and buys non-performing financial assets that have been publicly auctioned according to law, and realized the appreciation and efficiency through investment attraction operation or resale. An industrial plant and a commercial real estate have been identified for investigation and preparation for auction. Although the newly established venture capital companies have extensive layout in the four major fields related to urbanization construction and economic industry transformation, they try to attract and drive part of the market and enterprise funds to participate in the exploration and development of the projects by planning some large-scale key projects in these key fields and taking state-owned assets and local government credit as the guarantee. Thus promoting the regional economy from the real-estate-led industrial system to the real economy transformation. The organization is well-designed. However, the reality is not as good as the imagination. After experiencing the severe pain and trauma of the collapse of informal debt, both the market and the civil society in City D have lost confidence and are in a wait-and-see state. Investment has shrunk in an all-around way. Once again, people would rather put their money in the bank, or even hide it under their beds, than invest it easily. For local investment promotion, the destruction of the entire credit environment in City D has also made enterprises outside the city turn pale at the sound of City D, and they are afraid at the sight of it. No matter how preferential the policy is, it is just a trap for entrepreneurs outside the city. As a result, a series of PPP projects launched by venture capital companies with state-funded guarantees are actually progressing very hard. The first large-scale project of the company was actually a local boss introduced from Shenzhen through the personal relationship of

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the secretary, who took advantage of this relationship of fellow villagers and personal friendship to return home to start his own business. Even so, investment bosses are actually worried. The general manager of the company also reflected the informal enterprises’ distrust of local areas and worries about the prospects of cooperation: The Author: There is another question, that is: do they have any concerns about your attracting these informal enterprises to participate and promote their development to eat up them? When it comes to attracting investment, these customers are likely to have several shareholders. If one shareholder accepts it, the other shareholders will not, so they need to do the work repeatedly. In other words, the biggest issue they raised was not to deal with the government, not to be tied to the government. Venture capital Group Manager: There is a trend in private enterprises. Just as you said, don’t tie up with the government. I do my own business, and there is a risk to be tied up with the government. This risk has indeed occurred, and it has also occurred if I ate him. The Author: Is there any mechanism to restrict this? Venture capital Group Manager: No mechanism yet, no … What is the core competitiveness of our venture capital? I think it is a government advantage, which is the core competitiveness. In fact, there is a mechanism that needs to be established, such as the exit mechanism of international management companies. The current informal enterprise is like our Internet Hand-in-Hand company, which holds 20% of the shares. In this case, he applied for the national fund project at that time, but 20% of the government shares came down first, and you can use the money. But when the project becomes normal, it is more mature, and he can run away by himself. Then after we have promoted these projects, venture capital companies should come back to do other things. Then we should settle accounts with him, and a corresponding mechanism should be pushed out. ——Code of interview data: S-C_ 001.

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Summary: The Difficulty of Trust Rebuilding and the Root Cause of Government’s Failure to Reshape Regional Finance

With the stagnation of regional economic development, the major setback of informal economy, and the unprecedented crisis of livelihood and employment, the traditional extensive urbanization mode is unsustainable, and the urban investment development mode is heavily indebted. Although the local government tries to find another way, with local stateowned assets and government reputation as the guarantee, it establishes a government-led “venture capital company” to promote innovation and entrepreneurship on the basis of extensive urbanization, Guide capital to invest in the real economy, attract and leverage informal capital to participate in local economic and industrial transformation. However, due to the failure to properly handle the historical debts, the large-scale and continuous creditor’s rights protection struggle and petitions, the streets are full of beggars in trouble due to the debt crisis, and the cases decided by the judicial system cannot be effectively executed, all these have led to the loss of public trust in the government, and the deterioration of the social trust environment in City D. When interpersonal trust disappears, people no longer trust credit cooperation enterprises and local governments. The whole social trust is broken and disintegrated. This is also why the local government attempts to reconstruct the government-led venture capital mode with wishful thinking are of no avail. From the perspective of the actual operation of venture capital companies, it is basically the state-owned capital of the government playing around, while informal capital always stays in a wait-and-see state and is afraid to participate easily. Moreover, a large number of informal capitals has been deeply trapped in many real estate development projects interrupted by the rupture of the capital chain. In fact, looking back, with the jump of the national real estate market in 2015, the real estate prices in City D have generally doubled since 2016. If the government had handled the informal financial crisis in 2013 and worked together with enterprises and public investors to overcome the difficulties, by now all asset prices would have doubled, any real estate project could have paid off its debts, and the government, enterprises and public investors would have achieved a win–win situation. However, unfortunately, due to the ineffective management of the informal financial crisis, the local economic and social development is still mired in

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the crisis for five years. The transformation and upgrading of the city’s economic structure and the transformation of old and new driving forces of regional development failed to realize the switch smoothly. All this is attributed to the fact that the modern social credit system on which regional economic and social development depends has not yet achieved real transformation, and the modern financial system based on system trust cannot be established. Therefore, there is still a long way to go for the modernization transformation of the regional economy and society. The central region has a broad space for in-depth urbanization and great potential for development. However, the most critical thing is what kind of system should be used to restore the trust of social investors and realize the joint construction and sharing in the process of economic and social development. City D’s missteps in dealing with the informal financial crisis have consumed the credibility of the local government. Therefore, efforts to reshape regional finance with state-owned assets as a guarantee have had little effect. The difficulty in reshaping regional finance by the local government of City D with the guarantee of SASAC (state-owned assets supervision and administration commission) shows that once social trust is broken, it will be a very long and difficult process to rebuild social trust. The credibility of the government is an important foundation for rebuilding social trust, and also the cornerstone of the social credit system. The so-called government credibility refers to the authoritative resources obtained by the government through the public’s general trust in the process of public management, which plays a vital role in promoting the national credit system and system construction. In the report of the 19th National Congress of CPC, it was proposed to enhance the credibility and executive power of the government and build a service-oriented government that the people are satisfied with. The credibility of local governments is an important fortress to deal with social crises, including the financial crisis. Under the socialist political culture with Chinese characteristics, the Party and the government are the backbone of the people. “If there is a problem, find the government”, and the public authority of the government is still maintained by the masses. According to the 2018 Global Trust survey released by Edelman, the world’s largest public relations company, shows that the Chinese people’s trust in the government continues to lead the world by 84%. Other studies have shown that compared with providing various welfare and material benefits to

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the public, building a fair and just institutional environment have increasingly become an important way for the government to win public trust and support. Therefore, the construction and maintenance of government credibility is the core of rebuilding the social trust system. However, rebuilding social trust and relying solely on the government credibility will not help. The credibility of the government is only an important part of the modern social trust system. To rebuild social trust, it is also necessary to establish a series of interconnected and complementary modern social system trust, including laws, institutions, rules, guarantee and credit organizations, arbitration institutions, and law enforcement systems. For City D, the informal financial system is originally an important platform for gathering social funds and a regional social capital market supported by the traditional interpersonal and social trust network. Due to the lack of construction and connection of systematic trust, the informal financial crisis has broken the social trust relationship and exhausted the capital of civil society, which also means that in the process of economic and social modernization, the reconstruction of social trust also means the modernization of the traditional social trust network and system. The transformation of this trust system is to establish modern system trust to gradually replace traditional individual interpersonal trust and to absorb the role of social capital played by traditional trust networks with modern trust systems. In the economic field, it is necessary to establish a financial system that matches the modern industrial structure, fully recognize the important role of informal capital and informal finance in modern economic construction, and constantly brings informal finance into the legal, institutionalized, and standardized operation track.

CHAPTER 7

The Reconstruction of Trust System and the Modernization Transformation of Regional Finance

As an important force to promote local urbanization and economic development, informal finance integrated through informal lending and foreign exchange has played an important role in promoting regional urbanization and the modernization of the economic and industrial system. However, the outbreak of the informal financial crisis has made the City D municipal government and the people experience unprecedented pain. In response to this crisis, the local government and the financial regulatory authorities have launched various measures within their respective terms of reference to maintain local social stability and try their best to reduce the loss of public fund-raising. However, due to the exhaustion of the economic situation and financing difficulties, the effect of the government-led “credit reconstruction” and financial remodeling is not obvious. The social trust crisis behind the informal financial crisis is more harmful, deeper, and longer. The improper handling of the informal financial crisis has led to the unprecedented destruction of the trust ecology of the whole regional economy and society. Therefore, the urgent task for the transformation of economic and social development is to restore social confidence, rebuild the social trust system, and promote the modernization of regional finance.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Weiping, Social Trust, https://doi.org/10.1007/978-981-99-2931-3_7

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1 Objectively Judging Informal Finance is the Premise of Correctly Handling Crisis From the origin, rise and development of informal debt in City D and its contribution to the local economic development, especially in urbanization, we can see that if the informal debt is well standardized and applied, it is actually a very effective financial mechanism to collect social capital, and also an effective mode to realize the growth of the shared economy among the public, which is an important supplement to the current formal financial structure. 1.1

The Informal Capital Market is an Important Supplement to the Formal Financial Structure

In City D, we can see that the total size of the informal debt market officially recognized through informal lending is about 30 billion yuan (in fact, with the healthy informal finance allowed by judicial regulations, it is up to more than 50 billion yuan), accounting for more than one third of the total social deposit balance and half of the loan balance of the whole formal financial system. The existence of this market has effectively absorbed idle funds from the whole society to participate in the local urbanization construction and promoted the development of the local economy and society. The informal capital market based on informal lending is actually an important supplement to the formal financial system, making up for the deficiencies of the formal financial system. Therefore, the informal lending market should actually become an important part of the local financial system architecture. From the perspective of the real economy, due to the imperfect governance structure and low risk control management of the existing banking financial system, the phenomenon of credit “discrimination” against informal enterprises in the traditional lending market has always existed. As a result, this kind of business discrimination has caused the informal SMEs to have to use “informal” private lending for market financing. For a long time, the existence of this phenomenon has objectively caused the prosperity of the informal lending market. At the same time, the prosperity of this informal lending market is also highly related to the maturity of the local informal economy. In recent years, the reform of Chinese enterprises has actually witnessed a trend of “state advances and informal retreat”, which has further aggravated the difficulties for

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private enterprises to obtain financing from formal financial institutions, which has also promoted the further development of the informal lending market to some extent. From the perspective of national macroeconomic environment, due to the inflation and negative interest rate and the narrow investment channels of residents and other important factors, a large number of informal capital has entered the informal lending market. We can draw conclusions from the following three aspects. First, since the global financial crisis in 2008, the long-term loose monetary policy adopted to stimulate the economy has objectively resulted in high domestic inflation and negative interest rates. In this situation, the objective also caused the informal capital to find ways to maintain and increase its value. Second, the continuous downturn of China’s stock market cannot absorb huge social idle capital with high returns. Under such circumstances, the high return financing method of the informal lending market provides a timely channel for this kind of capital, and the combination of both lenders and borrowers has resulted in the boom of the informal lending market in recent years. Third, since the central bank adjusted interest rates in 2010, China has actually entered the era of negative interest rates, and many bank savings assets are at risk of depreciation. In addition, in response to the worsening inflation, the central bank had to adopt a continuous tightening of monetary policy. But at the same time, the process of urbanization has become unstoppable. The large amount of capital demand for urbanization construction further aggravates the difficulty of informal enterprises in financing from formal financing channels, so they can only resort to informal lending. In view of the fact that informal finance is only involved in the urbanization construction, as an effective supplement to the formal finance at this stage, there is no doubt that the informal lending market has effectively solved a large part of the social financing needs to a certain extent, thus alleviating the financial difficulties of a large number of small and medium-sized enterprises and “three rural” enterprises in the construction, investment, and operation. We can also see that in this process, due to the limitations of the credit supply of formal financial institutions, the informal capital market based on informal lending makes use of its flexible and efficient operation characteristics, and also makes up for the gap in bank credit services from many aspects, such as meeting the development of informal enterprises, the “three rural” economy, making up for

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the lack of liquidity of SMEs, and satisfying the financing needs of the development of local industrial clusters. In this sense, the formation of informal capital market based on informal lending is conducive to the formation of multi-level capital markets, this formation can enhance the self-adjustment and adaptation ability of local economic operation, so as to meet part of the financing needs of various market players, and has become an important supplementary channel for social financing. Over the years, China’s informal lending market has been extremely active in some areas, and its fast and flexible way has been favored by many SMEs, especially start-up small enterprises. Informal finance has more effectively supported the investment demand of the informal economy in China. From the development history of Chinese informal finance, the market development of informal lending is usually compatible with the characteristics of informal economy and market economy. As far as the development of local informal finance is concerned, for example, the rapid development of the informal economy in the relatively developing Zhejiang Wenzhou, there is no doubt that informal investment in Wenzhou cannot be separated from it. Another very important problem is that the majority of spontaneous informal investment business plans in China are often not closely verified feasibility, so formal financial institutions are generally reluctant to give credit support to planned entrepreneurs from the perspective of preventing credit risks. So this huge investment gap between market failure and policy failure is entered by a large number of informal capitals, which makes the rapid growth of informal lending in China and spontaneously become an important force to support private economic venture capital. Because of this, after the outbreak of the informal debt crisis in Wenzhou, the People’s Bank of China decided to give “institutional legitimacy” to informal lending. The so-called institutional legitimacy means that the financial authorities have given a clear identity to the longstanding informal financing market, allowing it to serve as an effective supplement to the formal lending market dominated by the state-owned banking system. In terms of management, the state has established a corresponding operating warning line for informal finance, so that the development of the informal lending market, such as the usury market, will no longer be left unchecked: According to the “Several Opinions of the Supreme People’s Court on the Trial of Loan Cases by the People’s Courts”, the interest rate of informal loans may be appropriately higher than that of banks, and local

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people’s courts may determine the interest rate according to the actual conditions of their respective regions, but the maximum interest rate shall not exceed 4 times that of similar loans by banks. Beyond this limit, the excess interest will not be protected. If an individual or unit takes credit funds from a financial institution for the purpose of making profits by transferring them to others at high interest, and the amount of illegal gains is relatively large, it may be punished as the crime of transferring loans at high interest according to the provisions of Article 175 of the Criminal Law. In order to facilitate management, the People’s Bank of China, as the top management institution of the national financial market, plans to approve a group of institutions or organizations engaged in professional lending business in the informal lending market, and further plans to separate them from the general informal lending subjects and treat them as professional lenders of informal lending. It can be seen that the central bank can allow the huge amount of capital hidden in the informal sector to be “regularized” by introducing a new policy to relax the restrictions on informal lending operations, and on the basis of strengthening supervision, this measure is considered to gradually establish a diversified financing system in China. However, from the reality of the situation, due to lack of supervision, there has been brutal growth and disorderly expansion of informal lending markets in various regions. At present, the most important problem is to gradually solve the simple procedures for informal lending, the serious lack of necessary professional management and support of laws and regulations, non-normative, blind, scattered and disorderly, which is easy to cause disputes between lenders and borrowers, poor risk management. 1.2

Informal Lending Market is an Effective Form of Collecting Social Capital

From the social consequences of the development and collapse of informal debt in City D, it is not difficult to see that the emergence of the informal capital market based on informal lending is the result of the local urbanization development and the tense environment of the formal financial system. The emergence of the informal capital market rapidly and effectively gathered a huge amount of social funds. It is not so much informal capital or social capital in the economic sense as social capital in the sociological sense, because behind the accumulation of these social idle

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funds is a wide and far-reaching social relationship network. It is really based on the trust of acquaintances that these funds are continuously collected into streams and finally gathered in various investment companies to participate in the local economic development and urbanization process. This is a social capital field generated and gathered spontaneously in the sense of market and society, which does not require the organization and establishment of the government, but needs the legal guarantee provided by the regulatory department. The regional capital market based on informal debt is exactly the “social capital” called for by various financial and policy sectors to participate in economic development in recent years. In 2012, in order to implement the “Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Informal Investment” (GF [2010] No. 13), the CBRC encouraged and guided Chinese informal capital to enter the banking industry, and strengthened financing support for informal investment, the CBRC, in accordance with the Commercial Bank Law, the Banking Supervision and Administration Law and other laws and regulations and relevant national policies, the Implementation Opinions of the CBRC on Encouraging and Guiding Informal Capital to Enter the Banking Industry were formulated. The Opinion requires that banking regulatory authorities at all levels should fully realize the importance of encouraging and guiding informal capital to enter the banking industry to accelerate the construction of a multi-level banking market system and establish a fair competition banking market environment. The Opinion requires that on the basis of promoting the diversification of the equity structure of banking financial institutions, protecting the legitimate rights and interests of all types of investors equally, and improving the corporate governance and internal control of banking financial institutions, we will take practical measures to actively support informal capital to enter the banking industry. In 2012, the Ministry of Health issued the “Notice of the Ministry of Health on the Nature of the Operation of Medical Institutions Run by Social Capital”. The notice stipulates that social capital can independently apply for the establishment of for-profit or non-profit medical institutions according to the business purpose. In the same year, the CSRC issued a notice on the key points of the implementation of the “Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Informal Investment”. To implement the “Several Opinions

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of the State Council on Encouraging and Guiding the Healthy Development of Informal Investment” (GF [2010] No. 13) and the “Notice of the General Office of the State Council on the Division of Key Work of Encouraging and Guiding the Healthy Development of Informal Investment” (GBH [2010] No. 120), which require the full play of the function of the capital market, we are now studying and putting forward specific measures to encourage and promote the sound development of informal investment. The circular requires all units and departments of the system to earnestly study and understand the spirit of relevant documents of The State Council, fully understand the importance of encouraging and guiding the sound/healthy development of informal investment, take the sound development of informal investment as an important part of the capital market to serve the real economy, incorporate it into the reform, development, and supervision of the capital market, and earnestly implement it. The current popular PPP (Public–Private Partnership) project financing mode is eager to join and participate in social capital. Specifically, it is “public–private partnership”, which includes broad and narrow categories. At present, the narrow PPP mode is discussed more. Compared with BOT (build–operate–transfer) mode, PPP mode will put more emphasis on sharing by the government and social capital, which is conducive to reducing the risk in the early stage of investment. Lou Jiwei, former Minister of Finance of China, put it this way: “In the context of innovating the urbanization investment and financing system, making efforts to resolve the debt risks of local financing platforms, and actively promoting enterprises to go global, the promotion of the use of the PPP mode is not only an upgrade of operation mode at the micro level, but also a reform of institutional mechanism at the macro level”. However, through the analysis of the informal debt crisis in the process of urbanization in City D, we can see that social capital has in fact already participated in the regional economic and social development and urbanization process comprehensively, extensively, and effectively in the form of informal debt market. While policies in various sectors are eager to call on social capital to participate in the construction of various fields, the rich social capital in various regions has been wiped out due to the collapse of the informal debt market. Therefore, the formation of social capital and its participation in economic construction cannot be called upon by issuing a few policy documents. The key is to build a social trust system.

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Informal Capital Market is the Regional Mode of Sharing Economic Development

From the perspective of the origin and development impetus of the informal debt market in City D, the informal debt is also an effective mode for local residents to share economic growth. Investors who participate in informal lending spend an average of 30,000–50,000 yuan each. According to the monthly interest of 1.2 cents, the monthly asset income is 360–600 yuan. An average civil servant earns about 2300 a month. So asset income accounts for 1/5 to 1/4 of income. For ordinary residents, this is a considerable income. More importantly, they have participated in the local economic development and urbanization construction with this form of investment. This asset income is not generally understood as unearned, but an effective mode of sharing the growth of the local real estate economy. The leaders of the city’s financial office also realized that: In City D, informal funds are relatively active. Our territory is rich in mineral resources, so there are more small bosses. But in recent years these informal bosses have had limited access to investment. At present, the biggest problem at the national level is that the channels for investment are very limited. Do you think you can make money by speculating in stocks? Is it profitable to speculate in stocks? From 6000 points to more than 2000, 3000 points, and then some organization came from outside to collect all the wealth. People dare not invest in the stock market even if they have money! In the first half of last year, the stock trading volume of our city increased by 300% in a small market. Last year, the total securities trading volume of the city was 450 billion yuan. What is the concept of the 450 billion yuan? How many people are there in our city? How many of them do not trade? Last year, the futures trading volume of our city reached 370 billion yuan, and the overall stock futures trading volume was 820 billion yuan. Therefore, the current situation is that, over the past 30 years of reform and opening up, most people have become rich and have some savings at home. But on the one hand, the real estate prices are increasing year by year. On the other hand, the RMB assets are depreciating continuously. With our stock market, it is difficult to make profits in the futures market. Therefore, the informal debt market has become a relatively reliable investment profit channel, which is the result of every investor’s rational choice.

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In fact, if the real estate economy can continue, this is a good mode to share the growth of real estate economy. Developers have the money to build houses, migrant workers have the opportunity to work, investors have the dividends, and there is no lack of funds for local urbanization. Therefore, in fact, informal debt is an important cornerstone for the development of local economy and society, as well as an effective form of sharing economic and social development. If the regulatory authorities can reasonably regulate and guide, this market is not only an important supplement to the formal financial structure, but also an important mode for generating and accumulating social capital, stimulating social vitality, and realizing the sharing economy.

2 It is Urgent to Change from Traditional Trust to Systematic Trust in the Transformation of Social Modernization Over the past 40 years, the modernization transformation of China’s economic system has made great progress. However, the modernization of social development is still lagging behind. From the perspective of trust system, China still stays in the traditional interpersonal trust relationship, and the modern system trust has not been established. This study calls this phenomenon of failing to shift from traditional relational trust to modern system trust as structural rupture of social trust. It is the structural breakdown of social trust that leads to many economic and social problems. According to the dichotomy of “special trust” and “universal trust” by sociologists such as Weber and Parsons, the transformation of social trust has become a key issue in the transformation of China’s economic and social modernization. The trust research based on Chinese local culture basically believes that Chinese society is “relationship-oriented”, and the dominant trust type is also relationship trust. Relational trust is a special kind of trust. The construction of trust relationship follows the basic principle of “differential pattern” proposed by Fei. Centering on self and family, it spreads through social relations such as blood, kinship, geography, and business ties. The closer to the center, the deeper the emotion is and the stronger the trust relationship. This relational trust is a social bond that matches the static and acquaintance social structure dominated by traditional Chinese agricultural society.

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With the modernization of the economy and the increasing social mobility, the original interpersonal relationship based on the acquaintance community continues to disintegrate, and the binding force of the traditional interpersonal relationship network on individuals decreased significantly. The community has changed from the previous acquaintance society to the stranger society, and the social and economic activities have far exceeded the traditional social network of blood, clan, and kinship. In this context, the role of traditional relational social trust that dominates Chinese people in economic and social activities is increasingly challenged, while the new universal trust system based on organizations and institutions has not yet been perfected. This structural rupture of social trust has made the trust crisis in China’s economic and social operations more and more serious. It can be said that the transformation from relational social trust to systematic and universal social trust is the only way for China to realize the modernization transformation of our economy and society. The establishment of universalized trust based on systematic trust is an important foundation and support to promote the modernization transformation of economic society. However, generally speaking, the trust system in China’s economic and social operation has not yet completed its modernization transformation. 2.1

Serious Cultural Lag of Traditional Trust

In the case of City D studied in this book, it can be seen that City D still stays on the basis of a traditional trust based on personal relations and special trust. As mentioned above, sociologists such as Weber and Parsons put forward the dichotomy concept of “special trust” and “universal trust” about trust. In this study, the concepts of traditional trust or personal trust and modern trust or system trust are more used. For this kind of trust, the previous academic research also proposed that it is a kind of “relationship-oriented” or private relationship-dominated trust, which is similar to the special trust proposed by classical sociologists. The “differential pattern” proposed by Fei Xiaotong, a famous sociologist, means that it takes self and family as the center and spreads out through social relations such as blood, kinship, geography, and business ties. The further it goes, the weaker the emotion and the looser the trust relationship. The further it goes, the deeper the emotion and the closer the trust relationship will be. From the analysis of the financial case of City D in this study, we can clearly see such a traditional trust phenomenon.

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The case of City D also reflects that the traditional trust has been seriously lagging behind in the face of today’s urbanization and financial system. The phenomenon of cultural lag in City D is generally as William Ogburn revealed, in social change, the change of intangible culture will lag behind that of material culture, that is, the material culture of City D—the material construction of urbanization is too fast. It is not material culture—people’s informal credit based on informal trust is still based on traditional Shinjuku. According to the principle of “cultural lag”, it is the most difficult to change people’s traditional social relations and customs. Therefore, from the analysis of the case in City D, we realize that in order to truly establish a new trust relationship, there must be a full understanding of the long-term and sustained efforts to be made. 2.2

Structural Rupture in the Process of Trust Transformation

In the second chapter, the concept of structural rupture of social trust has been put forward to explain the basic concepts of this study. In the case of City D, although the suicide of Chairman X1 of T Company who broke the informal credit chain by jumping from a building and the subsequent rumor spread were accidental, the financial pressure of urbanization that cannot be sustained by the huge informal credit built by relying on personal relations is a structural and institutional problem. Because of this, it is only a matter of time before the outbreak of the civil financial crisis in City D. The structural rupture of social trust has a profound background and institutional environment of economic and social transformation. The case of City D reflects that with the modernization of regional economy, social mobility is increasingly enhanced, which makes the original acquaintance relationship network based on rural society constantly closed. The binding force of traditional interpersonal relationship on people has decreased significantly, the rural society has become a stranger society, and the social and economic exchange and mobility relations have far exceeded the traditional social network of blood, clan, and kinship. In the case of City D, the financial lending based on the traditional trust relationship suffered a devastating blow. Due to the lack of the modern universal trust system based on laws and institutions, the regional social trust was structurally ruptured. The case shows that once the structural rupture of social trust occurs, the financial trust chain based on personal relationship will immediately change into an “avalanche”

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collapse. In this collapse, a series of “financial stampede” events occur. The consequences of the structural rupture of social trust are extremely painful. Although local governments have tried to save the situation and clean up the mess with the “credibility” of local governments in response to the crisis, mass incidents are still ongoing, which indicates that the structural rupture of social trust has caused a huge impact on the credibility of local governments. There has also been a loss of trust in public authority systems such as government and grassroots courts. Therefore, the case of City D shows that, from the perspective of the local government, in terms of financial issues, we must spare no effort to avoid the structural rupture of social trust. When faced with this risk, we must take timely and effective rescue measures to prevent the occurrence of avalanche-like structural rupture. 2.3

Reconstruction of Trust and Realization of Modernization Transformation

In the case of City D, the informal financial crisis led to the structural rupture of social trust, which had a significant impact on the economic and social development of City D. How to deal with such a situation? The only way forward is to rebuild trust. The fundamental path to rebuild social trust has been described many times in this paper: the transition to a modern financial system, building trust in a system based on legal, institutional, and professional financial institutions and regulations. In the case of City D, because the creditors no longer trust the debtors, mass incidents such as agglomeration and protest frequently occurred. In this situation, the local government must make a proper response and handle it according to law. We can see that creditors seek fair treatment from the government for informal debt disputes, which shows that the majority of creditors have trust in the public power of the government. Therefore, the government and judicial organs should properly handle debt disputes and seriously resolve all first-class debt disputes, so as to rebuild trust. In the case of City D, the local government has made efforts to set up a special office to deal with different types of debt disputes, which should be fully recognized. In terms of reshaping the new regional finance, the new government of City D is also trying to stabilize the local finance in the form of new venture capital companies and establish a new system trust institution, which is also a beneficial measure.

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Of course, the reconstruction of financial trust and the realization of financial modernization must be fully prepared, which will be a very difficult process. The theory of “cultural lag” or “cultural gap” mentioned in this paper many times holds that in the process of the change of immaterial concepts and cultures, the construction of institutional culture should take the lead, while the most difficult thing is the change of people’s habits and cultures. The latter is lagging behind. Therefore, even if the innovation in the local financial system, whether people can follow this set of institutional norms remains a problem. It will take practice and long training to get people used to the system, so rebuilding trust and modernizing will be a slow process. In short, trust is a complex social, psychological, and cultural phenomenon, and social trust is the premise and basis for different social groups to build consensus and form common values. For China in the transition period of social modernization, it is of great significance to rebuild and enhance social trust in social construction. Rebuilding and enhancing universal social trust is a systematic project, which requires scientific research to understand the premises, foundations, institutions, and mechanisms for building and maintaining social trust. Therefore, focusing on social trust, we need not only grand institutional analysis and framework, but also cross-cultural criticism and reflection. Therefore, focusing on social trust requires not only grand institutional analysis and framework conception, but also cross-cultural criticism and reflection. It requires not only the reform of mechanisms, systems, policies, and regulations, but also the reflection and reference based on psychological perspective and local culture.1

3 Top Priority: Building a Financial System that Matches the Modern Economy The story of the development, prosperity, collapse of the informal lending market and its economic and social consequences in the process of urbanization in City D shows that even in a prefectural-level city in the central region of China, with the promotion of urbanization, the local economy and industrial system have gradually undergone modern transformation.

1 Zhai Xuewei: “Friends have Faith” and Trust in Modern Society, Guangming Daily, July 20, 2016.

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However, due to the constraints of formal financial system, the development of local economy in the whole urbanization process is faced with serious financial repression. The development and expansion of the traditional informal lending based on interpersonal trust and the formation of the informal capital market have collected a large number of private funds and effectively and extensively involved a large number of families in the modern economic system with urbanization as the core. The informal capital market has provided a powerful driving force for local rapid urbanization and economic and industrial modernization, effectively made up for the deficiencies of the formal financial system, and greatly promoted the regional economy from the traditional industrial and agriculturalled economic system to the modern economic system dominated by real estate development and service industry. However, because the informal capital market has not been organically connected and legally connected with the formal financial system, it has always been in a state of disorderly growth and lack of supervision and has always been operating in a gray zone. However, when the economic system of a regional society has realized the modern transformation, the informal lending based on traditional interpersonal trust can no longer meet the needs of the operation of the modern economic system. Especially when the macroeconomic environment is in a period of substantial adjustment and fluctuation, the informal capital market has been unable to cope with the risks brought about by such fluctuations. Therefore, in City D, we have seen such a protracted and thrilling informal debt crisis. After the collapse of the informal capital market in City D, what was left was the petition and rights protection of ordinary investors everywhere, and the local government became the straw for people to save their lives. The story of City D tells us that modernizing the economic system requires a financial system to match it. The traditional informal capital market based on interpersonal trust and informal lending is far from supporting the operation of modern economy and industrial system. This is the fundamental reason for the informal debt crisis in City D. The story of City D has a profound warning effect on the economic and social transformation of the whole country, that is, in the context of the continuous expansion of informal economy and informal investment and the dominant role in the national economic system, the healthy operation of modern economy and industrial system must establish a modern financial system that effectively absorbs and legally protects the

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informal capital market. If the financial system does not match the needs of economic operation, it will inevitably generate huge risks and affect the transformation and upgrading of the industry. 3.1

To Prevent Systemic Financial Risks, We Must Properly Handle Informal Finance

In recent years, preventing systemic financial risks has become the economic focus of the CPC Central Committee and the State Council. At the Central Economic Work Conference in 2017, the key task of “preventing and resolving major risks” was put forward, with a focus on preventing and controlling financial risks. The report of the 19th National Congress of the CPC put forward the grand goal of building a modern economic system, which requires deepening the reform of the financial system and enhancing the ability of financial services to the real economy. We should improve the construction of the financial supervision system and keep the bottom line that no systematic financial risks occur. On April 2, 2018, the first meeting of the newly established Financial and Economic Commission of the CPC Central Committee made it clear that we need to fight a tough battle to prevent and defuse financial risks, adhere to the bottom-line thinking, and focus our efforts and give priority to dealing with problems that may threaten economic and social stability and trigger systemic risks. On April 9, 2018, The General Office of the State Council issued the Opinions on Comprehensively Promoting the Comprehensive Statistics of the Financial Industry, which called for the establishment of a working mechanism of “unified standards, synchronous Collection, centralized verification, summary and sharing” to comprehensively promote the comprehensive statistics of the financial industry, stressing that all departments and regions should base on the overall situation, deepen understanding, strengthen organization and leadership, and strengthen overall planning and coordination. We will fulfill our responsibilities, strengthen key support, and work together to make comprehensive statistics for the financial sector. The series of intensive central meetings and documents all point to the battle against financial risks, which shows that the central government has realized the serious problems existing in the financial system in the country’s economic and industrial operation. However, from the investigation of the financial problems in the economic and industrial operation of City D in the past 10 years, the author believes that the central government’s understanding

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of “preventing and resolving systemic financial risks” ignores the severity of the problems existing in the informal financial system, so it is difficult to account for the huge potential financial risks in the national economic system. As Mr. Huang Qifan pointed out not long ago, the real problem in China’s economic system is the debt of informal financial enterprises outside the formal financial system, which accounts for about 160% of GDP. At present, China’s GDP has reached more than 80 trillion, while our corporate debt is more than 1.3 million. The total debt ratio of 160% of corporate debt, government debt, and household debt is more than 250%, making the macro leverage ratio one of the highest in the world. Through the field investigation and empirical analysis of City D, this study also realized that the systemic risk of China’s financial economy lies in the private sector. If we do not attach great importance to the largescale informal debt, which is an important part of the national economic system, it will inevitably lead to significant social unrest risks. In fact, the economic growth mode dominated by government investment through borrowing under the extensive urbanization mode for a long time has been unsustainable. Government local debts are guaranteed by government reputation, land, and other state-owned assets. In this process, the informal debts accumulated through interpersonal trust have actually collapsed in various places. After the outbreak of the informal debt crisis in City D, the social protests and rights protection actions triggered by the local society have shown the seriousness of this problem. To resolve the potential risks in the informal financial system, it is necessary to fully recognize and understand the macroeconomic structure and micro-institutional environment of the informal financial system and open up the cooperation channel between the informal financial system and the formal financial system which is still in the grey zone. How to establish the modern system trust for the informal capital market through the regulation of the formal financial system, and realize the trust matching between the local financial system and the economic system, is the key to resolve the risk of the regional society’s informal financial system. Therefore, in 2015, the Supreme People’s Court issued the Provisions on Several Issues Concerning the Application of Law to the Trial of Informal Lending Cases, which gave an authoritative definition to a series of core issues in the current field of informal lending, the People’s Court initially legalized informal lending. However, this practice did not solve the core problems hidden in informal lending, nor did it recognize

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the importance of informal capital market based on informal lending for China’s economic and industrial transformation and upgrading, as well as the importance of preventing systemic financial risks and holding the bottom line. Because of this, the theoretical and practical significance of the trust rupture and the systematic transformation of social trust in gray areas found in this study are more prominent. 3.2

To Establish a Modern System of Trust for the Informal Capital Market

Through the case study of the rise, development, expansion, and collapse of the informal capital market in City D, this book has revealed that the informal capital market is built on the basis of the informal lending network with the traditional informal trust as the core, and the informal trust in the acquaintance society is an important basis to support the normal operation of the informal capital market. Through the huge blood relationship and kinship network of acquaintances, the informal capital market has effectively gathered idle social funds, rapidly gathered huge informal capital in a snowball manner, and played a strong role in promoting regional urbanization and economic and social modernization. However, in the case of occasional incidents such as individual bosses committing suicide by jumping off a building or running away, rumors are often spread with the help of acquaintances’ social relations, which is the fundamental reason for the run on the capital market in City D and the break of the informal capital chain. In other words, the so-called “Success or failure caused by the same person”, the informal trust based on the acquaintance society is not only an important network mechanism for the establishment of the huge informal capital market in City D, but also an important reason for the avalanche of this capital market. Therefore, as the huge informal capital was gathered and involved in the modern economic system through various project investments, the informal trust based on acquaintances began to break down and became involved in the unfamiliar world of modernization. This is precisely the weak link that leads to the structural rupture of social trust. Only by strengthening supervision in this link, establishing laws and regulations for the informal capital market, and establishing modern trust in the system, taking the credit of the modern financial system as the guarantee and the rule of law as the strong backing, can the informal trust on the basis of the transient society be established. Only in the face

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of economic contraction, individual accidents or rumors, can the powerful trust in the system provide support, so as not to produce a big economic and social crisis and turmoil. Therefore, to improve and standardize the operation of the informal capital market, learn from the informal capital market supervision system of developed countries in Europe and the United States, and establish a modern system trust for the informal capital market is an important guarantee for the development and expansion of the informal capital market and the avoidance of regional economic fluctuations. 3.3

Promote the Rational Connection Between Informal Finance and Formal Finance

From the perspective of financial supervision law, finance can be divided into formal finance and informal finance. Formal finance is a financial system under the supervision of central bank and financial laws and regulations. And the finance outside the supervision of the central bank and the restriction of national financial laws and regulations is called informal finance. The “bipolar cycle” of China’s financial capital market has a long history, one is the lack of funds for the informal enterprise development, and because of its own credit and property conditions, it is very difficult to achieve the formal financial system (bank led) loan requirements. The other polar is that a large amount of informal funds are left unused and deposited. In order to realize the value of funds, this part of informal funds is increasingly absorbed by the informal capital market. The existence of “bipolar circle” in the financial capital market is an important environment for the continuous development and innovation of the informal finance in recent years. As revealed in the case of City D, the development and expansion of informal finance play an important role in promoting the urbanization construction and economic and social development of City D, but it also has huge potential risks, especially when capital runs are caused by various accidental events, leading to a systemic crisis of informal finance, if not handled properly, huge economic and social turbulence will occur. Therefore, on the one hand, the informal financial system is an important supplement to the formal financial system; on the other hand, the informal financial system also has its own shortcomings. Especially after being involved in modern economic activities, the power of the informal financial system is still very limited and its operation mechanism is not

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sound. Therefore, to give full play to the advantages of informal finance and avoid its defects, it is necessary to promote a reasonable connection between informal finance and formal finance. How to connect informal finance with formal finance has always been a controversial issue in the field of financial research. But in practice, it is a problem of system and standard construction, system and mechanism reform, and many research reports have put forward various suggestions. As early as 1989, the World Bank Development Report pointed out that at present, global informal finance can effectively provide sustainable financing services to SMEs, farmers, and agriculture. There is a need to establish sound and effective mechanisms for linking informal and formal finance to facilitate these services and create a competitive environment, which is a promising strategy for the development of financial systems. Some scholars have put forward 4 approaches to promote the combination of informal finance and formal finance. The first is “top-down”, which makes informal finance easier to deal with through the institutional adaptation of formal finance. Second, “bottom-up”, using informal finance to gather funds together to form formal finance; the third is to connect the two; the fourth is to establish new micro financial organizations where both are scarce (Seibel, 1997). In fact, these paths can be comprehensively utilized to establish a multi-level financial capital market. As far as City D is concerned, although the informal finance has suffered a great trauma in this crisis, many explorations and innovations have been made in the practice over the years, from which experiences and lessons can be summarized to promote the improvement of the informal financial system, which is an important support for the economic recovery and in-depth urbanization development of City D. As revealed in this study, the reconstruction of social trust system is the core and key to promote the connection between informal finance and formal finance.

PART II

National Trust and Economic Transformations

Introduction The main challenge facing the Chinese economy today is the unsustainable growth rate, which is due to insufficient demand. To solve the problem of expanding demand and sustained growth, we can promote reform from 4 aspects: first, improve the financial system to make up for slowing economic growth and weakening export markets; Second, implement the principle of competition neutrality, break monopolies, and enable informal enterprises to play a bigger role; Third, actively and steadily promote urbanization and improve the quality of urbanization; Fourth, comprehensively upgrade the development of the export-oriented economy and raise the level and efficiency of opening up. In the changing financial environment after the international financial crisis, how to further develop China’s financial industry and how to avoid the occurrence of crisis as much as possible during the development, so as to better serve the real economy has become an important topic that must be answered after the crisis. For example, the financial structure is unreasonable, and the core competitiveness of the financial industry has not yet been formed, and other areas need to be deepened and strengthened. At present, the imbalance between economic development and social development, the structural imbalance within society and economy has become the unique background for China’s reform and development. China’s participation in global economic rebalancing must be carried out both internally and externally. The internal path focuses on

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structural adjustment, while the external path focuses on coordination. Only the internal and external linkage can enable China to truly solve the structural problems that hinder the sustainable development of China’s economy in a relatively loose external environment, so as to achieve real rebalancing. The core of development finance with Chinese characteristics is that it is a “bridge” between the government and the market. Development finance solves the “market failure” phenomenon of information asymmetry through government intervention in the financial market, and improves the “government failure” problem of low capital efficiency such as fiscal subsidies. At the same time, it integrates the advantages of commercial finance and traditional policy-based finance. It is a financial form that adapts to the backward system and market failure, and appears to safeguard national financial security and enhance economic competitiveness. The core mechanism of development finance is to build a government credit system through the cooperation between policy banks and the government, rely on government organizations to increase credit, combine project construction with market construction, mobilize government initiative as the focus of market-oriented operation of development banks, make use of national credit, regulate market failure, and promote balanced economic development through the rational allocation of the total amount and structure of credit.

CHAPTER 8

Development Finance: Crack the Urbanization Financing Risk with Government Credit Enhancement

The urbanization of population requires great efforts to strengthen the construction of social and public utilities. But for a long time, this field has faced serious financing bottleneck constraints due to high financing costs, high risks, difficult operations, and other problems. The construction of social public utilities is characterized by large investment scale, long construction period, concentrated risks, and strong sociality and commonweal, which requires long-term, large, and stable financing support; this is where national financial institutions play their advantages. Therefore, in addition to financial allocation, development financial support is an effective way to solve the shortage of funds in the process of population urbanization. By exploring and innovating financial services, Bank K conducted pilot projects on “Chaohu Governance” and “Huainan Coal Mining Subsidence Governance and Utilization Plan”, gave full play to the guiding role of development finance, and increased financing input in social security, environmental and ecological protection, public health, compulsory education, infrastructure, labor safety, employment services, and other fields involved in population urbanization. So as to help solve public financial problems, ease the bottleneck constraints of economic and social development and serve the major national development strategies. At present, China’s economic development is faced with 3 major development challenges: unbalanced economic development, energy and environmental bottlenecks, and a widening gap between the rich and the © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Weiping, Social Trust, https://doi.org/10.1007/978-981-99-2931-3_8

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poor. The new urbanization strategy established at the Third Plenary Session of the 18th CPC Central Committee has become the core and key to the smooth progress of reform and opening up. The key to promote China’s urbanization is to identify the important and overall problems of urbanization and put forward innovative solutions. Therefore, how to build a market-oriented investment and financing mode, effectively promote the construction of financial service urbanization, innovate and promote the combination of new urbanization and industrialization, information technology and agricultural modernization, take overall consideration and coordinated promotion, and realize green and low-carbon development and realize the comprehensive effect of “ecological, social, and economic”? It will be an important task for China’s new urbanization construction, improving people’s livelihood, and promoting industrial modernization.

1

The Construction of New Urbanization Is Inseparable from the Innovation of Investment and Financing Modes

As a unique financial form in China’s financial system, the developmental finance is different from the existing policy-based finance and commercial finance in the Chinese financial system. As a bridge between the government and the market, development finance cultivates and improves the market in a unique way, provides stable and efficient financing support for the national strategic planning of new urbanization, and plays the role of the forerunner and main force of long-term financing in China’s economic construction. It is a powerful strategic tool to implement the country’s macro strategic intention, obtain the national strategic significance, and promote the national economic and social development. Highlight the “new” connotation of new-type urbanization. The core of new urbanization is human urbanization. The main body of urbanization is people, and the fundamental purpose is for people. If we use a sentence to describe it, urbanization is people’s yearning for a better urban life. When people come to cities, they hope to have more employment opportunities, higher income, and better development. To improve urban functions and the quality of urbanization, we must focus on people’s needs. First, new urbanization is neither a simple urban infrastructure construction anymore nor a “city building” movement, its core

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is the urbanization of people. We will enhance the carrying capacity of cities, improve urban service functions, improve the living environment, strengthen the social security mechanism, promote the development of education, medical care, housing, social security, and other areas of people’s livelihood, and adhere to the environment-friendly development path of resource conservation and low-carbon environmental protection. Support urbanization with industrialization, adhere to the integration of industry and city, improve the efficiency of urban management with information technology, and emphasize the quality of urban construction and the connotation of development. Adhere to the overall development of urban and rural areas, and drive agricultural modernization with urbanization. Second, the promotion of new urbanization should be fully connected with the regional development strategy and plan formulated by the state. According to local conditions, we should give play to the advanced concept of financial institutions’ planning and the advantage of financial innovation. Through reasonable design and scientific demonstration, we should positively construct the urbanization construction project group to enable the project portfolio to achieve reasonable resource allocation and income balance. The third is to realize the strategic goals of “the strategic necessity of the project itself, the financial balance of the overall business and the sustainability of the institutional development” of financial institutions in the process of serving the urbanization of China. The construction of new urbanization is inseparable from the planning guidance, policy support, and active participation of the government. The premise of government borrowing to support the construction of new urbanization is to scientifically and accurately measure the disposable financial resources of local governments and regulate borrowing behavior. The government’s dynamic disposable financial resources should match the debt structure and maturity. On this basis, we should continue to improve the corporate governance structure of government financing entities, inject high-quality assets, enhance self-hematopoietic function, and realize the construction and operation of government-entrusted projects through market-oriented means and contractual mechanisms. We will encourage local governments to purchase government services on the basis of franchise rights and explore investment and financing modes of government guidance and marketoriented operation. Give play to the pioneering role of financial institutions in financial innovation, and guide local governments to explore ways to improve

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investment and financing mechanisms and expand financing channels. Under the background of industrialization, urbanization, and agricultural modernization in China, the existence and development of local government financing platforms are objective and inevitable. The emergence of local government financing platforms, to a certain extent, conforms to the needs of local economic development and infrastructure construction in the process of urbanization in China, which is an economic phenomenon with Chinese characteristics. In the process of promoting multi-party cooperation among banks, governments, and enterprises with local governments to build new urbanization, CDB (the National Development Bank) guided the establishment of “three special sources (special bonds, special funds and special loans)” funding sources, and innovated the project development review mode based on “four unified (unified planning, unified rating, unified review and unified credit)”. Try to combine environmental governance with first-class land development and infrastructure construction”, unified borrowing and repayment” and “pre-credit + approval” mode, inter-enterprise BT and entrusted construction mode, poor income projects bundle commercial supporting facilities to enhance the income mode, and the government purchase service mode.

2

Practice of Innovation in Investment and Financing Mode of Ecological Urbanization Construction

According to the different needs and priorities of economic and social policy objectives in different historical stages, policy banks served as a tool for the government to regulate and manage the economy and society through policy-based financial activities and promoted the development of the national economy and society. The urbanization of population requires great efforts to strengthen the construction of social and public utilities. But for a long time, this field has faced serious financing bottleneck constraints due to high financing costs, high risks, difficult operations, and other problems. The construction of social public utilities is characterized by a large investment scale, long construction period, concentrated risks, and strong sociality and commonweal, which requires long-term, large, and stable financing support. In addition to financial allocation, development financial support is an effective

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way to solve the shortage of funds in the process of urbanization. By exploring and innovating financial services, CDB conducted pilot projects of “Chaohu Governance” and “Huainan Coal Mining Subsidence Area Management and Utilization Planning”, gave full play to the guiding role of development finance, and explored and innovated investment and financing modes conducive to realize the “ecological, social and economic” comprehensive effects, helping to solve public financial problems, ease the bottleneck constraints of economic and social development, and serve the country’s major development strategies. 2.1

“Chaohu Governance” Mode—Innovating Financing Subject of the New Urbanization Market

The construction of new urbanization is inseparable from the government’s planning and guidance, policy support, and active participation. In the process of exploring and promoting the “Chaohu Basin Comprehensive Management Project” with financial innovation, the financing development mode of "government led, market-oriented operation, improving the comprehensive carrying capacity of the city"was used by CDB, It is the specific work carried out under the guiding ideology of “planning first, scientific development, innovation mode, market construction, financing leading, innovation driving, risk prevention and stable operation" proposed by Hu Huaibang, Chairman of CDB. At the same time, it is required that development finance must follow the 3 principles of the strategic necessity of the project itself, the financial balance of the overall business, and the sustainability of institutional development. The first is the strategic necessity of the project itself. The overall institutional design of development finance itself determines its mission of serving the national strategy. Chaohu governance is an important part of the national strategy of “three rivers and three lakes”, and also a key project in the “five areas” cooperation between CDB and Anhui Province. According to the ideas of watershed management and land consolidation, CDB and Hefei Municipal government have organically combined water conservancy construction, ecological protection, land consolidation, and urban development, and comprehensively promoted the implementation of projects such as river management around Chaohu, resettlement of immigrants, wetland construction, township sewage plant construction, and village renovation, making Chaohu management an important part of the new urbanization construction of Hefei.

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The second is the financial balance of the overall business. Economic accounting must be strengthened and comprehensive benefit analysis of projects should be done well. In terms of specific planning and implementation methods, firstly, Chaohu management should be integrated with the planning and construction of Hefei Binhu New District, so that Hefei New Area has a beautiful environment, livable ecology, complete facilities, supporting medical education, improving urban management level, and high-quality and efficient construction of new urbanization; Secondly, Chaohu governance and relocation of riverbank residents are closely combined with the construction of secure housing and affordable housing; Thirdly, while cleaning up and controlling river pollution, the river has been widened, port facilities have been perfected, water transport has been improved, and water transport logistics around Hefei has been driven. Fourthly, we should improve the environment along the lake, build wetland parks and forest parks, improve the environment, provide Hefei citizens with a beautiful place for leisure, sightseeing, and tourism, and provide employment options for residents around lakes and rivers. Fifthly, the collection and treatment of Chaohu blue-green algae can turn waste into treasure and produce high-quality organic fertilizer. Through land development, industrial integration, government subsidies, and other ways, achieve the balance of comprehensive financial benefits. The third is the sustainability of institutional development. Development finance is not a budget department that directly allocates funds according to the national strategy, nor is it a social welfare organization solely responsible for providing assistance. In terms of government procurement and financing planning, from 2012 to 2013, CDB has committed a total of 20 billion yuan in loans for the first and second phases of Chaohu governance projects, and designed and implemented government-led, market-based schemes: firstly, make the borrower real, and promote Hefei Municipal Government to inject nearly 11,000 mu of operational land (worth nearly 40 billion yuan) into the borrower Chaohu Urban Construction Investment Co., Ltd; Secondly, relying on the company’s own strength to implement repayment and guarantee, with thousands of acres of operational land owned by the borrower as the project repayment source and mortgage guarantee; Thirdly, strengthen the organization of credit enhancement, promote Hefei Municipal People’s Congress to approve the establishment of a special fund for the ecological protection and restoration project around Chaohu in Hefei,

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and raise funds of no less than 2.2 billion yuan annually. Meanwhile, the Hefei Municipal Finance Bureau and the borrower shall sign the “Repayment Balance Supplement Agreement” to provide a double-layer guarantee for the matching funds and repayment sources of the project. 2.2

The “Control and Utilization Plan of Coal Mining Subsidence Area in City Huainan”

Plan the project in an all-round way. Huainan Huaibei City is an important coal resource area in East China. The subsidence formed after coal mining has continuously swallowed up the limited cultivated land. Residents in the subsidence area are often relocated, and there is a lack of long-term planning and arrangement. The Anhui Provincial Government and Huainan Municipal Government broke the traditional practice and closely combined the overall planning of the control of Huainan subsidence area with the planning and construction of the new urbanization of Huainan Shannan New Area. The head office of CDB and its branches held discussions with Huainan municipal government for many times to plan the project in an all-round way. Firstly, the subsidence area should be treated with water if it is suitable for water, and the area should be cultivated if it is suitable for farming. The water surface regulation and surrounding green environment management should be combined to drive the development of aquaculture and tourism. Secondly, combine environmental governance with homestead reclamation and land use indicator transfer; Thirdly, the relocation of residents should be combined with the construction of affordable housing and the construction of new urbanization in Shannan New Area; Fourthly, the planning and construction of the new area focus on the improvement and sustainable development of living facilities, hospitals, schools, cultural venues, community service facilities perfect, the construction of Huainan mining supporting industrial park to provide employment options for relocated residents. Construct the main bodies of the project implementation and the investment and financing. Huainan Municipal Government and Huainan Mining company each provided 1 billion registered capital to establish a fully market-oriented new-type urbanization construction company, operating and developing subsidence area management, land development, infrastructure construction, and undertaking marketoriented operation of other projects. Financial institutions assume the

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role of financing advisers and main banks. Huainan New City Investment (tentative name) rating, unified review, unified credit extension, and sub-projects. Try to combine subsidence area governance with first-level land development and infrastructure construction, "unified borrowing and repayment” and “pre-credit + approval” modes, inter-enterprise BT and commissioned construction mode, commercial supporting facilities to enhance the income mode of projects with poor income (such as hospitals, schools, cultural projects, or limited by the lack of cash flow, or limited by the project social attributes can-not be assets against the pledge, need more cash flow commercial infrastructure projects as a balance). Try to implement the construction of hospitals and schools in Shannan New District by government purchase of services. Develop advantages and utilization potential according to local conditions. The coal mining subsidence area in Huainan City should be treated with water when it is suitable for water and should be cultivated when it is suitable for farming. The water surface treatment should be combined with the surrounding green environment treatment to promote the development of aquaculture and tourism; Environmental governance is combined with homestead reclamation and land use index transfer; The relocation of residents should be combined with the construction of affordable housing and the construction of new urbanization in Shannan New Area; The planning and construction of the new area focus on the improvement of living facilities and sustainable development, the improvement of hospitals, schools, cultural venues, and community service facilities, and the construction of Huainan Mining Supporting Industrial Park to provide employment options for relocated residents.

3

Innovation of Investment and Financing Mode to Realize the Comprehensive “Ecological, Social, and Economic” Effects

In the process of the new urbanization of Anhui Province, the new urbanization construction will be closely combined with the governance of Chaohu in the national “Three Rivers and Three Lakes Governance” plan, and the environmental governance, ecological construction, and improvement of people’s livelihood will be integrated into the planning and construction of the new urbanization of Hefei City. Combine the transformation of resource-based cities with the construction of new

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urbanization. We will integrate urban and rural integration and build a beautiful countryside by transforming rural fringe areas and building affordable housing with the new type of urbanization. It is the successful path of financial innovation to explore and promote the construction of ecological urbanization that CDB has provided comprehensive financial services for the ecological protection and tourism development around Chaohu, as well as the implementation of the governance plan of Huainan coal mining subsidence area. The innovation of this investment and financing mode has brought new enlightenment to the construction of ecological urbanization with the comprehensive effect of “ecology, society, and economy” in China’s new urbanization. 1. Chaohu governance is an important part of the national strategy of “Three Rivers and Three Lakes”, and also an important project for Anhui Province and Hefei City to build a good ecological environment and lay a foundation for long-term economic and social development. At the same time, the rapid economic and social development, the steady growth of fiscal revenue, and the improvement of investment and financing environment in Chaohu (Hefei) provide a good external environment and financial support for the protection and restoration of Chaohu ecological environment and tourism development. 2. The goals and tasks of supporting systematic investment and financing in ecological protection, restoration, and tourism development around Chaohu are (2012–2015). The investment in key projects of ecological protection, restoration, and tourism development in Chaohu will reach more than 85 billion yuan, the credit investment will reach more than 30.5 billion yuan, and the budgetary investment will reach more than 17.1 billion yuan, the utilization of foreign capital has reached more than 800 million dollars of foreign capital, and invested more than 32.3 billion yuan from enterprises, the capital market, and other channels. Only through continuous innovation of financing modes and continuous enrichment of financing tools and means can the investment and financing guarantee ability to support the ecological protection and tourism development around Chaohu be continuously strengthened to realize planning goals and tasks.

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3. In order to ensure the implementation of the plan, financial institutions are required to encourage provincial and municipal governments to continuously standardize and build government financing platforms, improve relevant supporting industrial policies, fiscal and financial policies, land policies, and further deepen development and reform in such fields as perfecting risk management and monitoring and preventing systematic investment and financing risks. Government expenditure planning, project financing planning, government-bank-enterprise communication, and coordination mechanism, etc. 4. As a development financial institution, CDB has played an important and unique role in the ecological protection and restoration, and tourism development around Chaohu. By deepening the development financial cooperation with local governments and taking medium—and long-term loans as the main tool and support, it has driven the business development of investment, debt, leasing, and licensing, and provided comprehensive financial services for the ecological protection and tourism development of Chaohu. 5. The implementation of Huainan coal mining subsidence area governance plan will improve the situation of reduced production and no production of cultivated land in the coal mining subsidence area, as well as the housing and employment problems of 300,000 land lost people in the subsidence area, ease the social conflicts in the subsidence area, increase the income of the regional people, improve the regional environment, promote the urbanization process, expand the urban development space, and build the “industrial granary” in East China into the future “Huainan water town”. It is conducive to adjusting industrial structure, upgrading and transformation, and promoting regional economic development.

4

Accelerate the Construction of China’s Medium and Long-Term Financing Systems

In 2010, as a pilot city to issue local bonds independently, Shanghai successfully issued 7.1 billion yuan of local construction bonds. Zhejiang, Guangdong, and Shenzhen will also issue local bonds independently. In the important development stage of urbanization, industrialization, and internationalization of China’s economy and society, the lack of capital

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for investment projects and the fact that huge “savings funds” and “social funds” cannot be converted into centralized, large-scale, and long-term construction funds have become the basic contradiction in China’s investment and financing qualification bureau. During the important period of China’s promotion of interest rate marketization financial reform, how to accelerate the construction of China’s medium and long-term financing system with innovative thinking and creative working methods, and vigorously develop policy-oriented and development-oriented finance will play a key role in the stable and rapid development of China’s economy. 4.1

The Internal Demand of National Development Strategy for Medium and Long-Term Financing

Over the years, in the process of international business development, development financial institutions have closely centered on the national “going out” strategy and actively exerted financial leverage, and made positive contributions in promoting the alleviation of our energy resources constraints and serving our national development and security strategy. At the same time, China also needs to participate in international cooperation through various ways to get familiar with international rules and seek and control its development space. While actively participating in international cooperation, development financial institutions can not only bring opportunities for the country’s “going-global” strategy but also bring the development financial concepts and platforms to countries in Asia, Africa, and Latin America. This mode not only challenges the traditional concept of international aid but also greatly influences the mode of South–South interaction and will increasingly become a new theoretical basis for the interaction between countries in Asia. This mode not only challenges the traditional concept of international assistance but also greatly affects the mode of South–South exchanges and will increasingly become a new theoretical basis for exchanges between Asian, African, and Latin American countries. Urbanization creates demand, industrialization creates supply, and internationalization expands space, all of which are inseparable from policy-oriented and development-oriented financial concentration, and large and long-term capital investment. It has become an inevitable trend to accelerate the construction of medium and long-term financing systems.

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4.1.1

Development Finance Needs to Accelerate the Construction of Medium and Long-Term Financing Systems Throughout the course of global economic development, as an important policy tool to make up for market failures, no matter in developing or developed countries, no matter in the stage of stable economic development or in the stage of coping with the financial crisis, policy and development banks, as the main force of medium—and long-term investment and financing, are an indispensable part of the financial system and play an important role in moving the market. In line with this, the task of policy-oriented and development-oriented finance is to solve the common maturity mismatch risk of loans in the development business field by issuing medium and long-term bonds for direct financing, and providing long-term, stable, sustained, and rapid financing support for infrastructure construction and other fields. These rules and development factors determine that in the construction of medium—and long-term financing systems, the national financial policy-making department and development financial institution need to start from the requirements of national development strategic planning, while making financial investments in the development of finance and bonds for medium—and long-term projects. We must promote the investment of “savings funds” and “social funds” in the construction of medium—and long-term financing systems, so as to effectively coordinate the overall domestic and international situation and the market. 4.1.2

Medium and Long-Term Financing Is the Key Way to Balance the Total Amount of Social Financing Since the beginning of this year, the central government requires monetary policy to use a combination of various tools, maintain a reasonable scale and pace of social financing, and replace the credit index with the total social financing as the intermediate variable, so as to conform to the changing trend of China’s financing structure. It is expected that the social financing other than RMB loans will exceed that of 2011, which is an inevitable trend for the change of China’s financing structure and the rapid development of direct financing. No matter when the total RMB loan is taken as the intermediate variable of monetary policy, or when the total social financing is taken as the intermediate variable of monetary policy, the policy and development financial institutions mobilize and absorb a large number of long-term and relatively low-cost social funds for the construction of

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key national projects by issuing financial bonds as the main body and supplementing corporate deposits and other sources of financing. It has strongly supported the implementation of national macroeconomic policies and the growth of national economy and also ensured sustainable development finance. The medium and long-term investment and financing system has become a key way to stabilize the fluctuation of the national economic cycle and balance the total amount of social financing, and also an important lever to balance the overall stability and upward development of the national economic and social construction. 4.2

Challenges and Opportunities in the Construction of Medium—and Long-Term Financing Systems

Under the system background of separate operation and management in China’s financial industry, it has become a significant financial phenomenon that the surplus (depositor), social capital, and those with a shortage of funds (investors) directly conduct capital transactions without indirect financing intermediaries of banks. This change of “financial disintermediation” has many influences on China’s financial operation and macro-control. In the micro aspect, it has compressed the traditional income sources of banks, and made the regulatory department lose the basis to implement its policy intention of restraining high investment by controlling the “credit gate”. We need to recognize that in the context of the comprehensive market-oriented economic system, the development of direct financing has become an important part of our financial reform and development. According to the experiences and lessons of other economies, it has been decided that China’s interest rate marketization will adopt a consistent and gradual reform mode, and the complete interest rate marketization will still take a long time. This change in financial pattern will be a very important historical topic for China’s policy-oriented and development-oriented financial institutions, which mainly focus on “bond direct financing”, to fully grasp the opportunities and challenges brought by the development of financial reform from “indirect financing” to “direct financing” and “interest rate marketization”.

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Learn from Foreign Experiences and Innovate Bond Financing System Before the mid-1980s, the practice of the United States monetary authority on the financial industry of strict separation of operations and management showed that this practice was not only futile but also harmful to the process of financial modernization. As a result, the US economy lagged behind Germany and Japan for a long time. After the mid-1980s, the US monetary authority changed its thinking. Instead of implementing the tradition of “strict separation” in the financial industry, it gradually devoted itself to “opening up” the communication channel between banks and markets, and increasingly blurred the boundary between direct financing and indirect financing. Only then did the US finally get rid of the problem of “separation”. Based on this new financial system, the US regained its world leading position in the financial industry. The experience of the United States tells us that the modernization of a country’s financial system usually goes through a process from “separate operation” to “mixed operation”. Only by finally opening the boundary between direct financing and indirect financing, and implementing a mixed operation of finance, can the financial system achieve modernization. At present, China is carrying out the development of a direct financing strategy, in fact, it has allowed the development of financial mixed process. This makes it possible for China to avoid the problems caused by other countries’ vigorous development of direct financing under the background of strict separation of industries. From this point of view, the modernization of China’s financial industry is now facing a rare strategic opportunity. At present, the implicit debt of local governments has become a common behavior in China, reducing the credit ratio of commercial banks and developing more transparent policy, development finance and bond financing of the local government platform is not only beneficial to the transparency of the local debt, but also reduce the information asymmetry between the central and local governments; Moreover, it can effectively reduce the scale of the hidden debt of local governments, promote the diversification of financing channels, and reduce the huge pressure brought by the current financing structure to the commercial banking system. At the same time, the local government rating is introduced into the issuance of urban investment bonds, so as to more accurately reflect

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the economic development level and fiscal revenue and expenditure situation of the region where the issuing enterprise is located, so as to form a multi-level credit rating framework and provide a reference system for the accurate pricing of urban investment bonds. 4.3

Policy Suggestions

China’s development has no ready-made experience or mode to follow, and the development of medium—and long-term financing systems depends on the soundness of the financial system. We must accelerate the construction of China’s medium—and long-term financing systems with innovative thinking and creative working methods to formulate policies and methods that meet China’s national conditions and development needs. Firstly, formulate policies conducive to the development of bond banks. In the current financial pattern characterized by high savings rate, abundant liquidity, and bank financing, to solve the problem of converting huge savings funds and social funds into medium—and long-term construction funds, the financial policies, and regulatory authorities need to formulate development policies that strengthen the important role of bond banks in transformation, manage, and control medium- and longterm risks, and prevent systemic risks caused by mismatched short deposit and long loan terms. Internationally, the policy-oriented and development-oriented banks with bonds, as the main means of financing, are a long-term objective existence. The development of China’s National Development Bank, Import and Export Corporation Bank, and Agricultural Development Bank shows that the operation of bond banks is successful and effective. Bond banks not only play a role in raising large, centralized, and long-term construction funds for the country but also promote the development of the bond financial market. Bond banks, which mainly issue bonds to raise funds, have very different business characteristics from savings banks, and it is difficult to apply the supervision and performance evaluation standards of savings retail banks. In order to better promote the development of bond banks,

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financial policy-making, and regulatory authorities should learn from the international practice of special classification, statistics, management, and legislation of bond banks, and establish appropriate and systematic institutional arrangements, including supervision, performance assessment, and evaluation standards, and create the basic conditions necessary for the survival and development, business operation, and risk control of bond banks. Secondly, we should promote the transformation of savings and social funds into medium—and long-term funds. Under the circumstance that the divided operation and management pattern of banks in China ca not be changed completely, during the financial reform and market developing process from the indirect financing of the banks to the direct financing of the society, we can establish a “buffer zone” for bond investment and financing, promote the transformation of savings and social funds to the centralized, large and long-term funds, and increase financing support for key areas and weak links. In the process of implementing the market-oriented reform of interest rates, the financial policy formulation and supervision departments proposed to consider giving a larger floating range for the large and longterm deposits and design the transformation of “savings fund” and “social fund” into a financial reform plan which is in line with China’s urbanization, industrialization, and international development stages and are in urgent need of centralized, large, and long-term construction fund. So as to alleviate the basic contradiction of investment project capital shortage. Thirdly, strengthen international cooperation and expand overseas financial markets. Under the pattern of economic globalization, the financial markets basically dominate the risk of all economic activities. Government entities are the main issuers in China’s bond market, while state-owned banks are the main investors, and the government should build a stronger bond market. With the development of issuing RMB bonds to overseas investors, it is suggested that the national finance, financial management departments, and development financial institutions should consider

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issuing China’s medium and long-term financing bonds overseas to attract global funds to China. The Ministry of Finance of China issued RMB 20 billion bonds in Hong Kong in August 2011. Although the demand for RMB was attracted this time, it was a pity that it absorbed the Hong Kong dollar, which is directly linked to the US dollar, which could not guide the conversion of US dollars into RMB. If China chooses to issue more treasury bonds at home, the remaining US dollar trade surplus will still be blocked by liquidity and foreign exchange control, resulting in the recovery of RMB at home. In order to resist the expansion of US dollar assets, we must issue special bonds denominated in RMB in the capital market with abundant US dollar funds. As the future market of RMB is highly optimistic, the investment value of special Treasury bonds can overcome the cost concerns of various issues and distribution. In the European and American markets, the special Treasury bonds can recover part of the US dollar trade surplus. In the countries or regions that actively promote the settlement of trade in RMB, foreign importers can also store the long-term RMB funds needed, essentially boosting the cross-border settlement of RMB. Overseas special national bonds denominated in RMB can attract RMB to move outward. With the carrying tool of currency, RMB internationalization will not fall into an empty talk. The RMB obtained from overseas issuance of national bonds can provide financing needs for trade settlement and satisfy investors’ demand for RMB accounts. China should actively promote medium—and long-term bonds in major export trading countries and assist them to create channels to store RMB with high potential value in addition to US and European bonds for mutual benefit. 4.4

It Is Urgent to Build Policy-Based Financial Systems and Legislations

At present, China’s economy and society are at an important stage of new urbanization, industrialization, informatization, and agricultural modernization. On the one hand, the task of infrastructure construction is arduous, the industrial foundation is weak, and consumption has not become the main driving force. On the other hand, there is a lack of capital for investment projects, and the huge amount of “savings funds" and “social funds” cannot be converted into centralized, large-scale, and

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long-term construction funds, which has become the basic contradiction in China’s investment and financing pattern. As a bridge between the government and the market, policy finance plays a leading role in the medium and long-term financing of China’s economic construction, providing stable and efficient financing support for the strategic planning of new urbanization and industrialization. It is a powerful strategic tool to implement the country’s macrostrategic intention and promote the country’s economic and social development. Therefore, it will play a key role in building a reasonable and effective policy-based financial system and promoting the construction of the legislative system, giving play to the advantages and role of policy-based banks and supporting the realization of national development strategic objectives. 4.4.1

The Objective Necessity and Importance of Policy-Based Finance Under the New Situation Different from general commerciality finance, the policy-based finance is the government’s participation in the allocation of funds and resources in response to “market failure”, which vigorously serves China’s national modernization to catch up with and surpass strategy, and it has the characteristics of “policy-based purpose, market-oriented operation, and professional management”. Its main functions include: filling the financing gaps or deficiencies in bottleneck areas, and playing a leading role in forwardlooking and strategic investment pioneer role; In areas where the market is insufficient and institutions are lacking, we should cultivate, build, and improve the financing market and institutions, and give play to the role of institutional builders. Attracting and driving social funds into areas where funds are in short supply and giving play to the guiding role of informal capital; Serves certain government development objectives, promotes social equity, helps resolve financial risks, and acts as a supporter of the public interest and social stability. Policy-based financial system can effectively reduce the social cost of achieving national policy objectives, promote social equity, and carry out specific strategic intentions. From the perspective of the history of economic development and the internal logic of economic growth, the development of a policy finance system has long-term inevitability. From the perspective of international experience, policy-based financial institutions not only widely exist in developing countries but also in developed countries with sound financial systems, becoming a beneficial

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and necessary supplement to the market mechanism. Large-scale policybased financial institutions exist in the UK, Germany, France, Japan, Brazil, and even the US. For the developing countries that carry out the modernization catch-up strategy, the necessity and strategic significance of developing policy-based finance are more significant. In view of China’s situation, policy-based finance should not be weakened in the short term, but should also be further developed, improved, and innovated. In general, the framework system of policy finance in China is not perfect. There are some problems, such as the lack of legal norms, the cross-business between policy banks and commercial banks, the lack of risk compensation and subsidy mechanism, the lack of evaluation standards for policy banks, the weakening of policy objectives, the vagueness of functions, the imperfect supervision structure, the single way of raising funds, etc. The process of resolving conflicts between policybased businesses, commercial businesses, and reforming policy financial systems is far from over, and the institutional guarantee for sustainable operation of policy-based financial systems has not been effectively established. In addition, there are still some problems in the fields of policy guarantee financing, urban investment debt financing, and infrastructure construction concession grant financing. To construct a reasonable and effective policy-based financial system, the basic idea is to make clear the policy objectives of policy finance and the boundary between it and commercial finance. Secondly, the management mechanism of policy-based financial institutions should be solved actively with market objectives. The third is to build a risk-sharing mechanism and improve the benefit compensation mechanism to support the realization of market objectives; In addition, the performance evaluation system should be reasonably constructed to ensure the realization of policy objectives. Therefore, the main contents of the overall framework should include: one is to determine the business scope of China’s finance. Second, the realization of various businesses included in Chinese policy finance. Third, in order to realize various businesses of policy finance, what kind of policy financial institutions and governance structures should be built in China? Fourth, we should set up reasonable supervision and management institutions of policy finance. Effective supervision is a necessary condition for the healthy development of policy-based financial institutions. Different countries and regions need to make corresponding regulatory arrangements according to the development of policy-based financial institutions. As far as Chia is

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concerned, the legal framework of policy-based finance should be established gradually; the next is to establish and improve the policy finance supervision committee system. In terms of corporate governance mode, it is suggested to absorb the advantages of German, the US, and Japan, combine China’s practice to establish a corporate governance structure based on stakeholders, and implement a market-oriented action mode of professional division of labor and cooperation between policy-based financial institutions and commercial financial institutions in business development. 4.4.2

China’s Policy-Based Financial Reform Should Be Viewed from a Strategic and Long-Term Perspective Policy-based financial institutions around the world have shown a general trend of diversified development, including the mode of separating from the policy-based financial field in the orientation of commercialization, and the mode of continuing to abide by the business rules and strictly prohibiting competition with commercial financial institutions. Internationally, the commercialization reform of policy-oriented financial institutions is under constant experiment, its theoretical basis is not mature, and the final result is difficult to predict. In this uncertain trend, we should try to summarize the experience to guide the practice of our policy finance reform. From the perspective of the development process of policy-based finance, the understanding of policy-based finance has not been clear in the beginning, and its development orientation was also obviously misplaced. The policy bank was only regarded as the by-product of the professional bank’s commercial reform, and its function was only to bear the burden of certain specific policy financing businesses left by the professional bank. Basically, the long-term development of policy finance has not been planned from the perspective of national economic development strategy, and the scope of policy business of the three policy banks, the National Development Bank, the Export–Import Bank of China, and the Agricultural Development Bank of China, has not been clearly defined. This has a great impact on the development of policy-based finance in China, which not only affects the integrity of constructing a policy finance system but also affects the decision-making layer’s judgment of policy finance existence necessity. Based on this, it is necessary to have strategic thinking and look at this issue in the long term to design the reform thinking of our policy-based

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financial system. From the strategic development Angle of policy-based finance system, according to the stage of China’s economic development and the actual situation of the demand for policy-based finance, the policy-based financial system should cover a wide range of fields, and the existing business scope is far from being included. Therefore, it is important to realize the significance of policy-based finance from the economic development strategy. In the long run, we should consider the design of policy-based financial system, attach more importance to playing the role of policy-based finance, rationally plan the business areas of policybased finance development, constantly improve the policy-based financial system, and enhance the role of policy-based financial institutions. Negative effects such as unfair competition and insufficient profit-oriented orientation caused by policy-based financial institutions should not be unilaterally emphasized, let alone taken as the main factor and basis for determining the path of policy-based financial reform. China’s policy-based financial system needs active construction, rational development, and long-term existence. In the reform of policy banks initiated in China since 2007, an important tendency is to gradually transform the policy banks into the operation mode dominated by commercial banks and supplemented by policy-based business through the reform. However, between the lines, it reveals a kind of information that seems to be outdated policy-based financing and hopes that the commercial financing channel can basically cover all financing requirements. The application of this idea in practice will bring an unfavorable influence on the construction of our financial system. China, which is in the midst of “comprehensively deepening reform” and “economic transition and industrial restructuring”, must be based on the fact that China has been in the primary stage of socialism for a long time. The existence of policy-based finance must first meet its traditional demand targets for policy finance business in the fields of import and export, agriculture, SMEs, etc., because the external dependence of China’s economy is increasing, and SMEs financing difficulties have been difficult to solve. The development of the “three rural” field has been lagging behind for a long time, and the gap between urban and rural areas is widening. The problems in these areas are more serious than those in other countries. It is difficult to obtain the support of commercial funds for the huge capital demand in the process of development, which is characterized by obvious “market failure” and urgently needs the intervention of government policy funds. Moreover, with the strategic goals of “new

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urbanization” and “going-global” locked, China still needs to vigorously promote the upgrading of economic structure and the transformation of development mode through policy-based finance. The high-tech industry, new energy industry, green industry, and the construction of a reasonable industrial chain in the circular economy that China will focus on in the next step require huge investment. These industries are risky and commercial banking businesses are reluctant to get involved. Therefore, it is necessary for the state to constantly foster them through policy-based financial institutions. 4.4.3

Learn from International Successful Experiences and Promote Policy-Based Financial Legislation Different from most developed countries, China’s policy banks have been developing continuously in the absence of complete laws and regulations, and have not yet formed a clear legal position on policy banks, which has resulted in an embarrassing situation where China’s policy banks cannot operate in accordance with and have no regulation to follow. Foreign policy banks have laws to follow. For example, after the war, Japan established the Japanese Revival Financial Treasury in accordance with “the Japanese Revival Financial Treasury Law”, the Japanese Policy Bank in accordance with “the Japanese Policy Banking Law”, and the SME Credit Insurance Treasury in accordance with “the SME Credit Insurance Treasury Law”. Germany established the German Renaissance Credit Bank according to “the Renaissance Policy Banking Law”. The Republic of Korea has also established policy financial institutions with different functions in accordance with “the Law of the Republic of Korea on SME Banks”, “the Law of Agricultural Cooperative Organization”, the “Law of the Republic of Korea on the Export Import Bank”, etc. The legislation of foreign policy banks has the following characteristics: first, the corresponding policy banks are established according to the laws of national policy banks; second, different policy banks are legislated independently; third, the legal system of national policy banks with the characteristics of a country has been formed. The long-term absence of China’s policy-based (bond) banking law has resulted in various problems, such as unclear market positioning, single business means, more administrative intervention, lower financing ability, and unsmooth relationship with the government. Therefore, the legislation of policy banks has practical necessity and urgency and should be put on the legislative agenda as soon as possible.

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It is suggested to draw lessons from the successful experience of foreign countries to formulate the “Policy Banking Law”, which should be given several clear problems: the first is the credit problem. Whether explicit or implicit, it is very necessary to continue to maintain the national sovereign bond rating. Foreign bonds financial institutions, such as the German Renaissance Bank, the Korean Industrial Bank, and the Policy Investment Bank of Japan, all maintain zero risk weights. Providing long-term state credit support: through institutional arrangements, define the long-term sovereign credit rating of policy banks, ensure that policy banks better perform their national strategic responsibilities, and maintain the stable operation of the financial market. The second is the tax relief policy. The state should give policy banks tax relief policies so that all operating profits can be used as capital supplements for rolling development. The third is supervision. The supervision of foreign bond banks is different from that of commercial banks, for example, the requirement for capital adequacy ratio is lower than that of commercial banks. Implement regulatory standards for policy banks and enjoy equal regulatory policies: In view of the particularity and strategy of policy banks, it is necessary to implement regulatory standards for policy banks, rather than “differential supervision” for policy banks. The fourth is business performance appraisal. The operation performance evaluation guidance of the state for policy banks should be different from that of state-owned holding commercial banks, and the evaluation should be classified. Implementation of assessment standards for policy banks: in view of the task of policy banks serving the national strategy, as well as the particularity of financing and business, policy banks should be given equal treatment in performance assessment with policy bank supervision. As a unified legislation to regulate bond banks, “the Policy Banking Law” must provide clear and explicit provisions on the above issues to provide a legal guarantee for the healthy and stable development of bond banks. 4.5

Accelerate the Construction of “Green Finance” System with Chinese Characteristics

As a widely used and effective financial means, “green finance” has been widely implemented in developed countries. Building a comprehensive “green finance” credit system that integrates finance, economy, and taxation is a market-oriented mechanism to attract social capital to

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invest in ecological environment protection and an effective mean to upgrade China’s economy and realize the historical mission of sustainable development strategy. 4.5.1 The Urgency of Building a “Green Finance” System At present, China’s ecological situation is severe, so it is urgent to construct the “green finance” system. As the world’s second-largest economy and a heavily polluted country, China’s economic development is severely restricted by environmental factors. In 2014, only 8 of the 74 major cities in China met the air quality standard, 75% of the drinking water quality exceeded the standard, and more than 19% of arable land was polluted. China’s “environmental carrying capacity has reached or is close to its upper limit”, according to the Central Economic Work Conference. Faced with such a grim environmental situation, we urgently need to promote the development of a comprehensive “green finance” system that integrates fiscal, financial, and tax functions to unleash market forces. This is a major problem in the process of China’s industrial structure upgrading and economic restructuring. As a credit resource allocation industry, the financial industry can achieve the effect of taking drastic measures by building a “green finance” system and guiding capital to withdraw from the highly polluting and energy-consuming industries. There is a significant funding gap for environmental protection, which needs the support of the “green finance” system. According to relevant data, during the “13th Five-Year Plan” period, China’s green industry will be invested at least 2 trillion yuan annually, and the investment demand for air pollution control in the past five years is about 1.7 trillion yuan, of which only 10–15% can be provided by government-financial funds, a large amount of funding gaps need to be supported by a financial channel. At the same time, supporting energy conservation and environmental protection industry also starts a new economic growth point in China and provides an effective way for China to realize the macro goals of “dual goals, dual integration, and dual engines”. In the process of building the “green finance” system, there are still some problems. First, the policy has not formed a synergy, and the responsibilities of the competent government departments exist simultaneously, which makes it difficult to form a policy synergy when financial support ecological and environmental protection projects; Second, there is a lack of capacity building for “green finance”, and the government’s weak supervision and law enforcement on the environmental impact of projects

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cannot support the innovation of “green finance” products such as carbon emission trading and emission trading. Third, the current policy system ignores environmental externalities and distorts price signals, making it difficult to activate and guide the flow of informal capital to green industries. Fourth, there is a lack of incentive mechanism in financial regulation. The regulatory authorities did not provide preferential policies for “green finance” projects in terms of capital occupation, deposit reserve, loss provision, risk tolerance, etc. The fiscal and tax policies did not provide preferential policies of interest discount or tax reduction for ecological and environmental protection projects, which could not mobilize the enthusiasm of financial institutions to promote “green finance”. Fifth, information asymmetry made it difficult for financial institutions to timely and accurately grasp corporate environmental information and environmental law enforcement results; Sixth, the ecological environmental protection projects are characterized by scattered, disorderly and small, lack of mature business modes, with low economic benefits of projects, lack of initiative of enterprises, and the financial support is difficult. 4.5.2 The Basic Structure of the “Green Finance” System Promoting ecological progress requires the support of a “green finance” system with a complete system, sound mechanisms, supporting policies, and sound operation. We should do a good job in top-level design and promote the construction of “green finance” architecture with sound institutions, policies, financial infrastructure, and legal infrastructure. Construct “green finance” institutions. First, establish new financial institutions to specialize in “green finance” business, or establish “green finance” business departments in banks, insurance, funds, brokers, guarantee and loan companies of existing financial institutions. Second, with reference to the “Equator Principle” and the “Global Compact Organization”, formulate our “green finance” rules, guide financial institutions to improve the awareness of green environmental protection, fulfill social responsibilities, and develop financial business in accordance with the “green finance” rules. Third, innovate “green finance” service products, provide green credit, green bonds, green insurance, and green funds, and innovate investment and financing modes to support the development of green industries. At present, banks play a prominent role in social financing. Through the establishment of a green banking system, green banks can give full play to their professional capabilities, scale,

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and risk control advantages in green credit and investment. The PPP mode can be tried to promote the development of green industries and leverage informal capital equity investment with limited government funds. Fourth, strengthening the cooperation with the World Bank, the Asian Development Bank and other organizations promote the Silk Road Fund, the Asian Infrastructure Investment Bank, the BRICS New Development Bank, and other overseas investment and development institutions led or participated by China to meet the requirements of the “green finance” guidelines and establish a high standard environmental risk management system in international financial business. We will improve fiscal and financial policies. First, improve the efficient discount mechanism for green loans; Second, competent authorities should issue guidelines on green bonds to allow and encourage banks and enterprises to issue green bonds. Third, strengthen the mechanism of stock market support for green enterprises. Construct financial infrastructure for green investment. First, accelerate the construction of emission rights and carbon sink trading markets; Second, establish a green rating system, establish a public welfare environmental cost accounting system and database, improve the availability of environmental assessment methods and data, guide local governments to establish a green GDP measurement system, and provide third parties with energy conservation and emission reduction benefit measurement and environmental assessment consulting services; Third, establish a green IPO sponsor mechanism, promote the development and application of green stock index, and guide the capital market to invest more in green industry; Fourth, establish a green investment network to guide social investors to invest in green industries. Build a legal and regulatory system and guarantee mechanism for “green finance”. First, implement mandatory green insurance in more areas, using the insurance market mechanism to restrict polluting investments and provide environmental remediation; The second is to clarify the legal liability of banks for the environment, allowing pollution victims to sue financial institutions with joint liability that provide funds for pollution projects; Third, the CSRC and the stock exchange should establish a mandatory disclosure mechanism for environmental protection information of listed companies to provide a basis for environmental risk assessment and accurate valuation of listed companies.

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4.5.3 Focus on Building a “Green Finance” System We will introduce special support policies to promote the development of “green finance” as soon as possible. This will serve as the policy basis for cooperation between local governments and financial institutions and will help mobilize their enthusiasm and initiative. To this end, the state should formulate relevant supporting policies and special development plans as soon as possible, set up a special “green finance development” in the annual government investment budget, increase the state input in “green finance”, and create a favorable policy environment for local governments and financial institutions to carry out various kinds of cooperation. Explore the establishment of a “green finance” development fund for cooperation between the government and financial institutions. First, the government and large financial institutions will cooperate to set up policyoriented “green finance” guidance funds. As the parent fund, such funds will provide equity and creditor’s rights financing support to various commercial “green finance” development funds (companies) based on the principle of capital preservation and appropriate profits. Second, the government and large financial institutions jointly set up joint stock and commercialized government-financial cooperation funds, or the domestic banks, insurance companies, investment companies, and other financial institutions jointly set up specialized and commercialized funds with the support of preferential policies provided by the government. Through the establishment and development of various policies and commercial “green finance” development funds, efforts are made to alleviate the current “green finance” construction fund shortage bottleneck. Accelerate the building of cooperation capacity between the government and financial institutions. First, encourage qualified local governments to accelerate the establishment of government investment and financing platforms (companies) to promote the development of “green finance”, and build legal and compliant loan commitment entities for local governments and financial institutions to cooperate and undertake loans from financial institutions, and promote the standardized operation of credit cooperation between the government and financial institutions. Second, we should actively promote the reform of the financial system, establish a stable source of tax revenue for the government, and increase the government’s share in the existing “tax sharing system” of the financial and tax system, so as to enhance the government’s financial investment capacity for the development of “green finance”. Third, integrate the current sources and channels of the government’s “green

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finance” construction funds, integrate the “green finance” development funds, infrastructure construction funds, industrialization loans from the state and governments at all levels, and the relevant funds used to support environmental protection and development, arrange and use them in a unified way, and effectively enhance the lending capacity of direct lending financial institutions. And take the policy input capacity to encourage and guide financial institutions to issue loans to small and medium-sized environmental protection enterprises engaged in the development of “green finance”, such as subsidies, subsidies, and loan interest discounts.

CHAPTER 9

Development Finance: A Financing Platform Between the Government and the Market

The core of development finance with Chinese characteristics is that it is a “bridge” between the government and the market. Development finance addresses the phenomenon of “market failure” due to information asymmetry and alleviates the problem of “government failure” due to the inefficiency of fiscal subsidies and other funds through government intervention in financial markets. Meanwhile, it integrates the advantages of commercial finance and traditional policy-based finance. It is a form of finance that was introduced in response to institutional backwardness and market failure and in order to safeguard national financial security and enhance economic competitiveness. The core mechanism of development finance is to build a government credit system through cooperation between policy banks and governments and by relying on governmentorganized credit enhancement, and to form a financing mechanism consisting of “project selection by the government, development finance incubation, and the realization of market outlets”. Development finance combines project construction with market building, makes initiative on the part of the government the focus of the market-oriented operation of development banks, utilizes national credit, regulates market failure, and promotes balanced economic development through reasonable arrangements for credit volumes and structures. How to restore economic growth has become a common challenge facing countries around the world, and financial measures that can bring © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Weiping, Social Trust, https://doi.org/10.1007/978-981-99-2931-3_9

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capital investment have become an important means for countries to develop their economies. However, in reality, the uneven distribution of financial investment often results in unbalanced development in the world, that is, the “financial paradox of poor countries”. As a purely market-based means, commercial finance, limited by the requirements of risk control, often only provides financial support for projects that can provide valuable collateral, while the underdeveloped areas of developing countries and the least developed countries that are in urgent need of financial assistance often find it difficult to obtain financial support. Classical economics holds that the market is an effective means of resource allocation in a perfectly competitive environment, but facts have proved that market information asymmetry will cause “market failure”. In order to alleviate this problem, often the government will intervene, but rent-seeking and other issues seriously hinder the efficiency of resource allocation by the government, resulting in the problem of “government failure”. Development finance addresses the phenomenon of “market failure” due to information asymmetry and alleviates the problem of “government failure” due to the inefficiency of fiscal subsidies and other funds through government intervention in financial markets. Meanwhile, it integrates the advantages of commercial finance and traditional policy-based finance. It is a form of finance that was introduced in response to institutional backwardness and market failure and in order to safeguard national financial security and enhance economic competitiveness. International experience shows that for developing countries, development finance plays a special role in making up for institutional backwardness and market failure. In developing countries, governments are faced with very prominent structural guidance tasks and distinct structural optimization objectives, and in particular, they need substantial, sustained, and strong credit support for the basic and strategic industries of their national economies through development finance. Development finance, as a part of policy-based finance, originated in Europe in the nineteenth century. In the 1960s and 1970s, development financial institutions were successively established around the world. Compared with commercial financial institutions that have strict requirements for risk, collateral, etc., development financial institutions are mainly funded by governments and provide loans to industries that are poor or cannot be served by commercial banks. In the 1990s, development finance developed into

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an important mode of financial investment.1 The Development Bank of Japan, the KfW, and the Korea Development Bank are three representative development financial institutions established after World War II. They focused their investment on infrastructure construction such as electricity, coal, and steel, and were committed to post-war economic recovery. At that time, however, it was difficult for development financial institutions to maintain the effective operation of government funds through market-based means, and their operation mechanism was questioned by the public. As the largest developing country in the world, China has been committed to providing financial solutions for developing countries and the least developed countries through the development financial services. China Development Bank (CDB) has achieved significant results in the adjustment of the country’s industrial structure and the transformation of its economic development mode through development financial services. After the tax-sharing reform in 1994, CDB was officially established. In 1998, it pioneered a means of financing based on stateand government-organized credit enhancement in the light of China’s national conditions, giving full play to the different competitive advantages of the government and the market in the process of investment and financing. It is bank-government cooperation. On the one hand, it solves financing problems through market-based means and alleviates the pressure with traditional policy-based financing which is provided mainly by the government through fiscal subsidies; on the one hand, it reduces investment risk and guarantees investment efficiency and return on investment through state- and government-organized credit enhancement. Chen Yuan, former chairman of CDB, pointed out that “development finance is to use the superior resources and high energy of government organizations to advance market and institutional building through market-based financing, promote constructive interactions between the government and the market, and turn a sound market mechanism into an internal driving force for economic development.”2 So, how does development finance as an extension of policy-based finance utilize the advantages of the government and the market to realize 1 Yuan Leping, Chen Sen, Yuan Zhenhua, Development Finance: New Meaning, Theoretical Orientation and Reform Direction, Jiangxi Social Sciences, 1st issue, 2012. 2 Chen Yuan, Between the Government and the Market—China’s Exploration of Development Finance, Beijing: CITIC Press, 2012.

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financing? What are the differences between development finance and traditional policy-based finance and commercial finance? As a practitioner of development finance in China, how does CDB solve its own risk problems while achieving policy objectives in the specific financing process? As more and more development financial institutions “go out”, does this risk reduction approach also apply to overseas projects? This paper examines the differences between development finance and commercial finance on the basis of summarizing the large amount of first-hand information obtained through a combination of the literature method and the interview method, and on this basis, analyzes the Chinese mode of development finance by taking the two typical cases of CDB’s “Wuhu Model” and Malaysia “Kibing Model” as examples. Meanwhile, it provokes discussions on risks associated with the “going out” of development finance.

1 The Characteristics of Development Finance with Chinese Characteristics Development finance is a bridge between the government and the market. It guides investment in areas with high technical and market risks, advocates investment in emerging industries or national strategic areas with unclear prospects and great uncertainties, supplements financing for projects with long payback periods and low yields, provides loans to growing infant industries at preferential interest rates, guides the flow and scale of funds in commercial finance through indirect financing activities or guarantees, and provides medium- to long-term and even ultra-longterm loans to relevant projects in light of the fact that commercial finance mainly provides medium- and short-term loans.3 It can be seen that, as an extension of policy-based finance, development finance mainly relies on state- and government-organized credit enhancement organizations like policy-based finance. It is different from commercial finance in terms of business objectives, areas of investment, investment periods, funding sources, and credit support, but it is not exactly the same as traditional policy-based finance (as shown in Table 1).

3 Chen Yuan, Ten Years of Reform and Ten Years of Development: Reflections on the Practice and Theory of Development Finance, Qiushi, 13th issue, 2004.

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Characteristics of development finance

Business objective Credit support Areas of investment Investment period Funding source

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Policy-based finance

Development finance

Commercial finance

No profit target Government credit

To break even or make small profits

To maximize profits Collateral

Government-organized credit enhancement under bank-government cooperation Designated by Selected by the market under the the guidance of the government government Long term Long term and medium- to long-term and mediumto long-term Government Diversified funding sources finances

Selected by the market independently Short-term

Banks’ savings funds

As far as the business objectives are concerned, policy-based finance does not pursue achievements in the operation process, requires a very low return on investment, and hardly considers the issue of profitability, while commercial finance aims at maximizing profits, and gaining profits is its main goal. In contrast, development finance only seeks to “break even or make small profits”. Unlike traditional policy-based finance, which does not consider profit at all, or commercial finance, which is profit-oriented, development finance pays more attention to the efficiency of the use of funds than profit. In terms of credit support, unlike commercial finance, which relies on a collateral-based credit guarantee system, development finance, like traditional policy-based finance, mainly relies on credit guarantees provided by the government. But different from traditional policy-based finance, development finance acquires credit enhancements from government organizations through “bank-government cooperation”. In the process of government-organized credit enhancement, the government goes from being passive to being active, and the relationship between the bank and the government changes from separation to cooperation. The core of government-organized credit enhancement is to establish a risk control mechanism and credit system through “bankgovernment cooperation”, so that the party whose credit is enhanced can effectively prevent risks and reduce losses. As far as areas of investment are concerned, in order to maximize profits, commercial finance often

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chooses areas with relatively mature market development for investment, while policy-based finance invests in government-designated investment categories, and development finance, under the guidance of government policy, develops independently in a market-oriented way and mainly invests in infrastructure construction and other areas where the level of market development is low, the initial investment is large, earnings start low and end high, and risks are difficult to control. As far as investment periods are concerned, limited by liquidity restrictions, commercial finance mainly offers short-term loans to avoid triggering a liquidity crisis. Development finance retains the investment period characteristics of traditional policy-based finance and is characterized by the raising and lending of long-term funds. In terms of funding sources, commercial finance derives funding mainly from the savings funds of commercial banks, policy-based finance derives funding mainly from government subsidies, and development finance, backed by government credit, continuously uses and expands the function and role of government credit in the market and institutional building through state- and governmentorganized credit enhancement and bank-government cooperation, so as to ensure the diversity of funding sources. Development finance is a form of financing based on government credit but not yet differentiated by the market.4 1.1 Development Finance Takes a Policy-Oriented Instead of Risk-Oriented Approach to the Selection of Investment Targets Development finance is based on the business objective of “breaking even or making small profits” and the support of government credit. Therefore, when it comes to the selection of areas of investment, development finance, rather than taking a risk-oriented approach, as is the case with commercial finance, is guided by the government. Development finance emphasizes market performance, not for furthering the interests of individuals or institutions, but for focusing financial resources on new bottleneck areas to achieve economic and social development goals.

4 Chen Yuan, Between the Government and the Market—China’s Exploration of Development Finance, Beijing: CITIC Press, 2012; “Research on the Practice of Developmental Finance with Chinese Characteristics” research group, Theory and Practice of Development Finance with Chinese Characteristics, Research on Development Finance, 4th issue, 2017.

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The profitability of development finance is conducive to maintaining the market image of government credit, further consolidating and enhancing national credit, and better serving the government’s policy intentions. As mentioned above, the business objective of commercial finance is to maximize profits on the basis of a balance between returns and risks, and minimizing investment risks is an important basis for the selection of investment targets. Based on a collateral-backed credit support system, commercial finance tends to select large enterprises with better profit prospects, less risk, and more transparent information or mature market areas as investment targets. Commercial finance is generally reluctant to get involved in rural and backward areas where the market economy is less developed, small- and medium-sized enterprises with serious information asymmetry, poor financial conditions, uncertain profit prospects and high risks, and high and new technology industries, as well as large infrastructure that requires large initial investments and have long payback periods. Since development finance is an extension of policy-based finance, “being policy-based” is its essential attribute. Unlike commercial finance, which allocates microfinancial resources based solely on the profit motive, in terms of resource allocation, development finance provides funds for project areas that need to be given priority for state support and have the public nature of social capital, such as large-scale basic industries, mainly based on the macro objectives of resource allocation and from the perspective of policy-based investment and financing and the formation of social capital, so as to solve the “market failure” problem of commercial finance in the field of investment. However, development finance is different from traditional policy-based finance, which does not care about investment returns. With “breaking even and making small profits” as its business objective, development finance pays more attention to the efficiency of the use of funds, guides private economic activities through the supply of funds, promotes the formation of social capital, and gives full play to the resource allocation function of social capital, so as to solve the low-efficiency problem of the “visible hand” in the investment process. As a bridge between the government and the market, development finance is a powerful strategic tool to implement national macro strategic intentions, gain national strategic significance and promote national economic and social development. Development finance does not go directly into the highly mature commercial sector but rather starts from immature markets. It builds markets where there are no markets, makes

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full use of and improves markets where there are, uses financing as a lever to guide private capital into areas given priority for state support, and effectively fills financial market gaps in weak links and backward areas. 1.2

Development Finance Resolves the Risks of Large Long-Term Loans

Development finance usually focuses investment on infrastructure construction which requires large amounts of long-term funds. How to deal with concentration risk has become the paramount issue for development finance. By building the new type of cooperative relationship of “bank-government cooperation” and by means of government-organized credit enhancement, developmental finance effectively resolves the risks of large long-term loans. Owning to the necessity of unifying “safety, liquidity, and profitability” in the course of operation and considering the need to match the maturities of assets and liabilities, development finance is generally unwilling and unable to provide large amounts of long-term and sustained credit support for infrastructure, basic industries, and other quasi-public goods areas with economies of scale and positive externalities. The construction and development of these areas play a decisive role in the balanced development and rapid growth of the economy in the early stages of economic development. If we rely solely on commercial finance, a large number of investment projects and construction areas that have a role in the formation of social capital will be subject to severe financing constraints in the process of economic development and take-off. This is also one of the problems faced by developing countries in the process of financial deepening. In addition, judging by the role of commercial finance in balanced economic growth, the main business of commercial finance includes industrial and commercial lending, consumer lending, agricultural lending, real estate mortgage lending, interbank lending, and other forms of lending. These areas of investment are consumption areas with relatively high short-term profits. They are all at the end of the industrial chain, and their influence on related industries is very limited in scope and strength. Because commercial finance cannot make full use of the linkage between industries, the accumulation effect of capital cannot be brought into full play, the multiplier effect is limited and the influence is weak. In addition, the spillover effect of commercial finance is

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limited. Although commercial finance has a responsibility and obligation to assist the government in achieving certain social objectives, this responsibility and obligation cannot replace the core objective of commercial finance—profit maximization, so its social function is very limited. Therefore, medium- to long-term investments in development finance effectively solve the deficiencies of short-term investments in commercial finance. But how does development finance resolve economic cycle risks? The government credit and market financing mechanism established by development finance through “bank-government cooperation” provides an institutional guarantee for solving this problem. First, institutional risks in the investment and financing process are remedied by relying on state- and government-organized credit enhancement and with the help of government commitments, government credit, and government coordination. Second, a variety of means such as government coordination, development finance, capital markets, and national macro-control are integrated to deal with the economic cycle risks brought by large medium- to long-term loans. Finally, national credit is securitized. Development financial bonds are guaranteed by national credit. Their safety is second only to government bonds—hence the term “silver-edged bonds”. Their ability to cover risks is better than that of the retail savings of commercial banks.5 As an extension of policy-based finance, development finance aims at serving national strategies, uses medium- to long-term financing as a lever, relies on national credit, raises large amounts of funds through the issuance of financial bonds, supports the key areas and weak links of national economic and social development in a market-oriented way, and gives full play to the role of medium- to long-term financing as a pioneer and dominant force in China’s economic construction. 1.3

The Credit Support System of Development Finance Helps Ease the Pressure on Fiscal Expenditure

Government-organized credit enhancement is the core of credit support for development finance. This kind of special cooperation between banks and governments effectively makes up for the deficiencies of the collateral 5 Chen Yuan, Give Play to the Role of Development Finance to Promote the Sustainable Development of China’s Economy And Society, Management World, 7th Issue, 2004.

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system and gives full play to the organizational and political advantages of governments. Credit endorsement by the government helps development finance diversify financing sources and effectively eases the pressure on government spending caused by traditional policy-based finance relying solely on fiscal subsidies. In the early stages of economic construction in developing countries, a large amount of investment is needed for infrastructure construction, and basic industries are important but weak industries. Affected by risks, basic industries hardly have access to commercial financing and need direct fiscal subsidies and policy-based financial support from the government. For most countries, in the recovery and early stages of economic development, due to the weak foundations of economic development and take-off, and an underdeveloped financial system, it is difficult to raise funds needed for investment in basic and important industries in economic development through financial markets, and the government’s fiscal spending is the primary funding source. The government gives huge, sustained, and strong direct credit support to the basic and strategic industries of the national economy through policy-based finance. But large-scale and sustained fiscal spending has the potential to increase the burden on the government and plunge it into a fiscal crisis. In this context, establishing development financial institutions and raising the huge amount of funds needed for economic development through the issuance of policy-based bonds is conducive to easing the pressure on fiscal expenditure and reducing the fiscal expenditure burden. Development finance helps promote private investment through a government-backed credit support system, greatly easing spending pressures on local finances. The primary source of fiscal investment is the central government. Limited by its status and responsibilities, the central government is subject to many inconveniences and is likely to have coordination problems when cooperating with other economic entities. Meanwhile, the government’s management style is not suitable for the market. Development financial institutions are standardized financial entities and are on an equal footing with other market entities, so they have a flexible choice of projects, conduct management in a standardized way, and can engage in market-oriented operations, including cooperation with private investors and equity participation. Development finance attracts private capital mainly through market behavior and makes private capital feel profitable. As long as it operates successfully, development finance can work very well in attracting and leading the way for private capital,

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and really play a role in promoting balanced economic growth. Development financial institutions attract private investment mainly through direct financing and indirect financing. Indirect financing is to indirectly attract private investment through information production activities, that is, development financial institutions take the lead in making investments, private commercial financial institutions follow suit, and then development financial institutions change the direction of investment and start another cycle. Meanwhile, development financial institutions make use of the advantages of policy-based finance in information production to select excellent enterprises and improve the reputation of enterprises in financing markets. In this way, a mechanism whereby policy-based finance leads and guides the investment orientation of commercial finance is formed. As financing offered by policy-based financial institutions is accompanied by the production and transmission of information, it reduces the agency cost of external financing for enterprises, improves the market value of enterprises, and induces private banks to offer finance to enterprises. In summary, development finance is a mode of finance between policybased finance and commercial finance. Its core is to form a financing mechanism consisting of “project selection by the government, development finance incubation, and the realization of market outlets” through cooperation between policy banks and the government, governmentorganized credit enhancement, and the creation of a government credit system. On the one hand, development financial institutions actively implement the government’s development strategy, and local governments determine investment projects according to the needs of national industrial policies and regional strategic planning (project selection by the government). On the other hand, development financial institutions resolve risks in the course of their own operations with the help of government-organized credit enhancement and promote project construction and financing system construction with financing under government coordination (development finance incubation). Finally, the realization of market outlets is to design different repayment mechanisms for different loan forms, purposes, and uses, including normal loan repayment, repurchases by parent companies, the issuance of shares in capital

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markets, and other market-based means, so as to achieve the business objective of “breaking even or making small profits”.6 Next, based on the two cases of the Anhui “Wuhu Model” and the Malaysia “Kibing Model”, this paper will expound on the specific operation mechanism of development finance and clarify how development financial institutions resolve risks in the financing process.

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“Wuhu Model”: Use Government-Organized Credit Enhancement to Resolve Urbanization Financing Risks

With the rapid development of China’s economy, China is facing a series of problems brought about by urbanization. Compared with the West, China’s urbanization involves a large population and is unprecedentedly complex. Among the many questions we face, the central question of “where the money comes from” is not to be avoided. In traditional urbanization, informal institutional arrangements such as local land finance and the development mode of “only wanting land and not wanting people” have given rise to many problems such as local debt risks and social contradictions. In the process of new-type urbanization, it is necessary to build strong and efficient medium- to long-term financing systems and financing markets. However, urban construction projects have the attributes of public goods in that they are generally anticipatory, geared to the needs of society, and oriented toward the public interest, and they are characterized by large investments, long construction cycles, high sunk costs, inelasticity of demand, etc., which is clearly misaligned with commercial finance’s pursuit of short-term profits. Such misalignment has created a gap in urban construction financing in China. There are two relatively mature financing models for urban infrastructure construction in the world. One is the municipal bond model of the United States, under which municipal bonds are issued by local governments and guaranteed by credit guarantee companies to attract the participation of individual investors in urban infrastructure construction; the other is the Japanese model dominated by investment with central

6 Chen Yuan, Development Finance and China’s Urbanization Development, Economic Research Journal, 7th issue, 2010.

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or local tax revenues, under which the central finance assigns a development blueprint to each region through direct intervention or fiscal subsidies. However, the smooth implementation of the municipal bond model requires effective institutional support to ensure an intergenerational balance between financing and repayment, and the central finance model needs to be supported by strong fiscal revenues.7 But for most local governments in China, the institutional building is inadequate, and large-scale issuance of municipal bonds can easily cause local government debt imbalances. In addition, most local governments are not supported by strong fiscal revenues, and long-term large government subsidies will further exacerbate local fiscal deficits. The “Wuhu Model” of development finance pioneered by CDB in cooperation with the local government of Wuhu, Anhui Province effectively solves the funding source issue for urbanization construction through “bank-government cooperation” and government-organized credit enhancement. Wuhu is a famous city in southern Anhui Province with a long history of more than 2000 years and a profound business tradition. In the late 1990s, Wuhu was in the take-off period of a new round of economic and social development, and efforts were urgently needed to advance urban infrastructure construction, but due to the fact that the economic benefits of urban construction projects were insignificant and the government’s financial resources were insufficient, a shortage of funds had become a bottleneck restricting infrastructure construction in Wuhu. The “Wuhu Model” is an epitome of development finance boosting urbanization in China. The biggest feature of the “Wuhu Model” of development finance pioneered by CDB in cooperation with the local government of Wuhu is the creation of a new type of bank-government cooperation. By using government-organized credit enhancement to turn local urban construction investment companies into financing platforms, and with the help of “loan bundling”, it combines the advantages of CDB in financing with the advantages of local governments in organization and coordination to solve the urban construction financing problem that has plagued local governments for a long time.

7 Chen Yuan, Development Finance and China’s Urbanization Development, Economic Research Journal, 7th issue, 2010.

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Local Government-Organized Credit Enhancement Resolves the Risks of Large Long-Term Loans

The new bank-government relationship constructed by the “Wuhu Model” solves the difficulties that local governments have in securing funds in the process of urbanization. As mentioned earlier, commercial finance is sensitive to risks and often requires collateral. Urban construction requires a large number of infrastructure construction projects. These projects take place over a long period of time and generate little profit, so they can hardly meet commercial finance’s demand for short-term profits. The new bank-government cooperative relationship under the “Wuhu Model” initiated cooperation between policy banks and local governments, solved the project credit issue through the endorsement of projects by local governments, and gives full play to the advantages of policy banks in financing and the advantages of local governments in organization and coordination. After the 1980s, driven by the reform of the national investment and financing system, local governments joined a push to set up urban construction investment companies, providing a platform for government-organized credit enhancement under the “Wuhu Model”. On August 10, 1998, CDB and the Anhui provincial government signed an investment and financing service cooperation agreement in Beijing, under which the parties would jointly build a credit support system and agreed on the source and method of repayment. CDB and the Wuhu municipal government set up an infrastructure construction financing committee to jointly discuss overall development plans and implementation plans, and assess overall debt-paying ability. The Wuhu municipal government established Wuhu Urban Construction Investment Company as the main lender in the urban construction process of Wuhu. The local government borrowed from CDB through the financing platform, integrating the local government’s credit reference and financing activities. The credit structure follows the World Bank model. Guarantees or undertakings are provided by local finances. In the same year, CDB signed a 10-year loan agreement worth 1.08 billion yuan with Wuhu Urban Construction Investment Company. The money was mainly used for six infrastructure construction projects in Wuhu City, including road construction, urban water supply system improvement, landfill site construction, etc. Regarding the loan guarantee and source of repayment, a model whereby repayment funds were arranged within and outside the

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budget of Wuhu City and repayment was fully guaranteed by Wuhu City’s finance was adopted. The core of the “Wuhu Model” is to strengthen the role of local governments in the financing process and establish a risk control mechanism and credit system through government-organized credit enhancement, thereby alleviating the economic risk of large long-term loans provided by development finance for urban construction. 2.2

“Loan Bundling” Broadens Financing Channels and Eases the Pressure on Fiscal Expenditure

As mentioned earlier, because urban infrastructure construction incurs high sunk costs and is slow to produce results, it is difficult to obtain financing from the market, and local fiscal subsidies are often relied upon, putting a lot of pressure on local fiscal expenditure. What makes the development finance model implemented by CDB in Wuhu unique is that traditional financial support is no longer relied upon as a funding source and a wide range of financing options are available through “loan bundling”. Under the “Wuhu Model”, urban construction projects that commercial finance is not willing to invest in are bundled through “loan bundling”, the financing platform designated by the municipal government acts as the legal person who manages all borrowings and repayments, and the “debt service reserve” created out of budgetary revenues serves as the source of repayment. This model is called “loan bundling”. Multiple urban construction projects are “bundled”, so that high-quality projects can “remedy” low-quality projects, shortages can be supplemented by surpluses, and losses can be made up by profits, turning the bundle as a whole into a high-quality project. In addition, local government finances provide guarantees and undertakings to provide government endorsements for financing projects. While organizing credit enhancement, local governments actively introduce a series of preferential policies to attract investment. “Bundled” projects are endorsed by government credit, effectively dispelling private investors’ risk concerns. In addition, the “debt service reserve” created out of budgetary revenues also provides evidence of repayment ability for the urban construction investment and the financing platform, namely, the legal person who manages all borrowings.

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The “Land + finance” Guarantee Model Strengthens the Credit Support System

In 2002, the “Wuhu Model” launched the “Land + Finance” model, under which the government authorizes the borrower to pledge land transfer proceeds as the main repayment guarantee, and with the approval of the Wuhu Municipal People’s Congress, repayment will be made with municipal fiscal subsidies if the borrower fails to repay the loan principal plus interest in time. CDB and the Wuhu municipal government jointly decided to establish the Wuhu Municipal Land Reserve Center to centrally manage and operate the land reserves, development, and auctions of Wuhu City.8 The government authorizes the urban construction investment company (the borrower) to pledge land transfer proceeds as the main repayment guarantee, and with the approval of the Wuhu Municipal People’s Congress, repayment will be made with municipal government subsidies if the borrower fails to repay the loan principal plus interest in time. On the basis of the original policy banks plus local governments, this innovation gives full play to the huge value of land, improves the credit structure, and eases financing difficulties in the urbanization process. This model organically combines the source of infrastructure loan repayment with income from land appreciation, and organically integrates the infrastructure financing mechanism with the concept of “managing the city”. Through a series of institutional designs such as standardizing the land transfer system and setting up a financing platform, it pledges the right to derive income from land, covers the cost of urban infrastructure construction with income from land appreciation, and cultivates market-oriented operation entities, not only creating a virtuous circle for the government’s infrastructure funds but also reducing financial risks and driving the development of related industries. It can be seen that under the “Wuhu Model” of development finance, CDB reduces the economic risk of providing medium- to long-term loans through local government-organized credit enhancement and the “land + finance” pledge model. In addition, with the help of “loan bundling”, high-quality projects and low-quality projects are combined, which coupled with government credit endorsement makes it possible 8 Research Institute of China Development Bank, The "Wuhu Model" of Development Finance, Shanghai City Development, 1st issue, 2011.

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to obtain funds from a wide range of sources in the market, realizing a virtuous cycle of capital flow. Under the “Wuhu Model”, an urban infrastructure investment and financing mechanism that operates in a virtuous cycle has been created, a market-oriented investment and financing platform carrier has been cultivated, financing channels for urban infrastructure construction have been opened up, and commercial banks and other social funds are actively involved, laying a solid foundation for continuously, rapidly and efficiently advancing urban infrastructure construction in Wuhu City.

3 “Kibing Model”: Development Finance Solves Issues Concerning the Financing of International Production Capacity Cooperation With the continuous advancement of the Belt and Road Initiative, the Chinese government encourages enterprises that possess advantages to “go out” in a variety of ways to optimize the distribution of manufacturing locations. The “Kibing Model” whereby CDB helped Kibing Group invest and build a plant in Malaysia by means of development finance is a typical case of development finance supporting the “going out” of domestic private enterprises’ advantageous production capacity and serving China’s Belt and Road Initiative and sheds light on issues concerning the financing of international production capacity cooperation. Kibing Group is a large enterprise group in China that mainly produces high-end glass products such as high-quality float glass, energy-saving glass, solar glass, and ultra-thin glass, with production bases in Hunan, Fujian, Guangdong, and Zhejiang provinces. In 2014, in response to China’s Belt and Road initiative and the call for the “going out” of advantageous production capacity, Zhangzhou Kibing Glass Co., Ltd. established a wholly owned subsidiary Kibing Group (Malaysia) Co., Ltd. (hereinafter referred to as “Kibing Malaysia Company”), and invested 1.18 billion yuan to build the group’s first overseas glass production base in Seremban, Negeri Sembilan, Malaysia. As the local political and commercial environment in Malaysia is quite different from that in China, Chinese enterprises often encounter issues such as credit structure, overseas taxes, administrative inefficiency, and controls over the outflow of

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foreign exchange funds in the process of investment and plant construction. Under the “Kibing Model”, CDB helped the private enterprise solve the relevant problems encountered in the process of investment and plant construction in a foreign country by means of development finance. 3.1

Development Finance Resolves Credit Risk in Financing Through the Dual Means of the Government and the Market

Chinese enterprises generally set up local project companies to operate their overseas investment projects. As local financial institutions are not familiar with foreign enterprises, it is difficult for project companies to get credit support from local financial institutions. For risk assessment reasons, domestic banks generally do not accept land, real estate, equity, equipment, and other assets formed by overseas investment as collateral for loans. Due to the relatively high risk of overseas investment projects and the weak strength of private enterprises, it is difficult for overseas investment projects to obtain bank credit support. Kibing Group was a private enterprise controlled by natural persons, and the project was a purely market-oriented project. There were great challenges in building a reasonable credit structure. Using only the project assets as collateral was far from meeting the credit structure requirements. In addition, the project required substantial financing and had a long payback period, and ordinary commercial banks could not provide products that met such financing needs. The key to solving this problem lies in market building and credit structure construction. In terms of the market building, CDB hired industry experts to give expert opinions and visited the Malaysian Investment Development Authority (MIDA), the Plate Glass Industry Association, and upstream and downstream importers and exporters to understand the local market along multiple dimensions, and conducted due diligence on the Malaysian plate glass market in collaboration with CDB’s review department for the industry. In addition, we also examined the operations and financial position of Kibing Group, visited the headquarters of Kibing Group in Dongshan, Zhangzhou, and studied the upstream and downstream markets of the group. In terms of credit structure, CDB experts and Kibing Group made an inventory of resources that could be used as collateral, including guarantees provided by the parent company of the group, mining rights, land, plants, machinery and equipment, joint and several liability guarantees provided by the actual

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controller, and project assets. In the end, the two parties negotiated and designed a reasonable collateral scheme to meet the credit structure requirements and reduce CDB’s credit structure risk. 3.2

Development Finance Gives Full Play to National Policy Support to Solve the Overseas Tax Problem

Malaysia implements a withholding tax system for overseas financial institutions, with the withholding tax rate ranging from 10 to 15%. Nonresident companies are subject to withholding tax on interest and royalties from Malaysia. China and Malaysia signed the Agreement between the Government of the People’s Republic of China and the Government of Malaysia for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income (hereinafter referred to as the “Agreement”) in 1985, stipulating that the interest obtained by the government of one contracting state (including institutions wholly owned by the government) from the other contracting state shall be exempted from taxation in the other contracting state. However, under the then tax regulations of Malaysia, development banks were not included in the tax exemption list, and loan interest was subject to 10% withholding tax, which increased the financing cost and burden of borrowers. In order to solve this problem, CDB, with strong support from the finance and accounting bureau and the international cooperation bureau of the head office, took the initiative to coordinate with the State Administration of Taxation and Fujian Provincial Tax Service and helped negotiate with the Malaysian government to include CDB in the double taxation avoidance list between China and Malaysia, so as to exempt CDB from interest withholding tax in Malaysia. In November 2016, in the presence of Premier Li Keqiang and the Prime Minister of Malaysia, the State Administration of Taxation and the Ministry of Finance of Malaysia signed the Exchange of Notes Concerning the Tax Convention between China and Malaysia on behalf of the two governments, and incorporated it into the joint communiqué between China and Malaysia, establishing the tax-exempt status of “7 + 7” state-owned institutions of China and Malaysia, including CDB. The agreement directly exempted CDB loans for Kibing Group’s project from the 10% withholding tax in Malaysia.

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“Syndicated Loans” Provide Medium- and Long-Term Loans for Those Going Out of Private Enterprises

In the process of cooperation between CDB and Kibing Group, due to the low administrative efficiency of Malaysian government agencies, the issuance of a land certificate for land purchase to the borrower was delayed, making it impossible to meet the conditions for signing a medium- to long-term contract. This made Kibing Group unable to sign a medium- to long-term contract, but project construction was in urgent need of large-scale funding support. Through syndicated loans, export credit, project financing, and other means, CDB secured funding from special funds such as the China–Africa Development Fund, the Special Loan for the Development of African SMEs, and the special arrangement for export financing and insurance for complete sets of large equipment, so as to increase financing support for international production capacity cooperation. Meanwhile, CDB actively innovated credit products to meet the financing needs of enterprises in international production capacity cooperation, promoted the innovation of mortgage (pledge) financing products, explored the use of equity, overseas assets, etc. as collateral for financing, and provided credit support for project financing through performance guarantees, financing guarantees, and other external guarantees. China—under pressure to control its foreign exchange funds—imposed strict controls on the outflow of foreign exchange funds in 2016. For private companies like Kibing Group that needed to invest and build factories overseas, their projects were then at a critical stage of construction, but their own funds and CDB loans had difficulty exiting China, leaving them struggling to pay for project construction. This directly affected normal project construction. Taking full account of the borrower’s demand for funds, under the “Kibing Model”, CDB provided loans in dual currencies, namely RMB and USD, to facilitate the use of funds by enterprises. The Malaysia “Kibing Model” is an important innovation developed by CDB in response to the country’s Belt and Road initiative with the help of development finance. It solves Chinese private enterprises’ financing difficulties in the “going out” process through syndicated loans, export credit, project financing, and other means. It can be seen that state- or government-organized credit enhancement is an important tool for risk aversion for development finance with Chinese characteristics. Then is

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this approach applicable to all overseas projects funded by development finance? What are the risks? In the next part, on the basis of summarizing the characteristics of development finance with Chinese characteristics, this paper will discuss the potential risks that development finance may encounter in the process of “going out”.

4 Overseas Political Risks of Chinese-Style Development Finance The above two cases confirm the basic logic behind the operation of development finance, that is, development financial institutions ensure that their business objective of “breaking even or making small profits” is met through the state- or local government-organized credit enhancement. It should be noted, however, that one of the core premises of this operational logic is that the state or government responsible for organizing credit enhancement first needs to be a development-oriented state or government, which means that the political system can get enough space to take the initiative. Under the “Wuhu Model” mentioned above, CDB offered, in cooperation with the local government of Wuhu, guarantees for medium- to long-term loans needed for urban construction by means of local government-organized credit enhancement. In the event of a default, repayment will be made through the “debt service reserve” created by the local finance. Local development and promotion of officials follow the local championship system all year round. Defaults on policy-based loans will greatly affect the political achievements of local officials and thus affect their promotion. Moreover, most local governments have soft budget constraints in their fiscal expenditures. Even if the relevant local fiscal expenditure is inadequate to cover the cost of the project, funds will be raised through central government subsidies or transfer payments to ensure the smooth operation of the project. Therefore, local governments are very willing to provide guarantees for urban infrastructure construction and other projects funded by development finance. It can be seen that a government that is willing to “guarantee” is a prerequisite for the realization of a virtuous circle for the operational logic of development finance. However, when Chinese-style development finance undertakes overseas projects, directly copying the domestic operating mechanism may create exposure to default risk due to differences in national governance logic. China’s development finance practice at Sri

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Lanka’s Hambantota Port encountered this kind of problem, and even led to allegations that China was setting up a “debt trap”. So, why did the Export–Import Bank of China (EIBC) think this project was a project that could be supported by development finance? In fact, at the beginning of the Hambantota Port project, the Sri Lankan government first sought financing from Japan and India, but both countries refused to invest due to risks associated with short-term investments. Thereupon, the Sri Lankan government turned to China for investment. After a comprehensive evaluation of the project, EIBC concluded that it met the investment requirements of development finance. First, the Hambantota Port project was a medium- to long-term national strategic project implemented by the Sri Lankan government and met development finance’s requirements for medium- to long-term investments. Sri Lanka’s economy had suffered a severe setback after more than two decades of civil war since 1983. In order to revive the economy, after coming to power in 2005, Rajapaksa’s government unveiled Sri Lanka’s medium- to long-term development plan, Sri Lanka, the Emerging Wonder of Asia: Mahinda Chintana, Vision for the Future, which aimed to develop Sri Lanka into Asia’s knowledge, aviation, investment, business, and energy center. The Hambantota Port project was a key project under the “Two Wings and One Belt” strategy in “Mahinda’s Vision”. The “two wings” refer to Colombo and Hambantota, and the “one belt” refers to the economic belt between Colombo and Hambantota. The strategy aimed to build Hambantota into an industrial base in Sri Lanka linked with Colombo, and the Hambantota Port project came into being at the historic moment. Second, after a comprehensive evaluation, EIBC thought that the project had great development potential. Located just 10 nautical miles from the Indian Ocean’s busiest international shipping lane, which is regularly used by a large number of vessels, Hambantota Port serves as an important transshipment hub and refueling base for vessels. In fact, in 2003 and 2006, the SNC-Lavalin Group, a Canadian company, and Ramboll, a Danish engineering consulting firm, respectively, evaluated the Hambantota Port project, and both believed that the port’s prospects for development were optimistic. Finally, the government of Sri Lanka was willing to borrow under a sovereign guarantee. To borrow under a sovereign guarantee means that a country borrows money with its own sovereign credit as the guarantee, which is consistent with the operational logic of development finance

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in China. It was with the help of national sovereign credit that EIBC organized credit enhancement for this round of development financing. For this reason, EIBC decided to provide financing for the Hambantota Port project through development finance. However, in the first phase of investment in 2008, EIBC, acting out of prudence, only provided commercial loans totaling $306 million to cover 85% of the cost of the Hambantota Port project. This was because Sri Lanka was in the midst of a fierce civil war, the domestic situation was not clear, “Mahinda’s Vision” had just been proposed, its development prospects were still uncertain, and whether it could be successfully implemented had yet to be verified.9 But the development potential of Hambantota Port as a logistics and transportation hub did exist, and Hambantota was the hometown of President Rajapaksa. As the new president, he was very much hoping to boost the economy through infrastructure investment in Hambantota, which to some extent provided a guarantee for the development of Hambantota Port. At the end of Sri Lanka’s civil war in 2009, Rajapaksa’s government launched “Mahinda’s Vision 2.0”. The updated version of the development plan was more practical and concrete. By this time the development prospects of the Hambantota Port project were clearer. Consequently, in the second phase of the project, EIBC raised the investment to $900 million. However, due to the different nature of the political system, the development finance logic, which can realize a virtuous circle in China, may encounter potential political risks abroad due to regime change. After losing his reelection bid in the 2015 presidential election in Sri Lanka, President Rajapaksa was accused by his successor President Sirisena of stimulating the economy by borrowing heavily, putting huge pressure on public finances. The new government thought that the Hambantota Port project needed to be reviewed, so the project was suspended. In addition, due to poor management and a lack of industrial and commercial operations, Sri Lanka Ports Authority was unable to attract passing ships to the port. As a result, Hambantota Port had been operating at a loss for years. But Sirisena’s government did not deny that the construction of infrastructure such as the Hambantota Port project would promote Sri Lanka’s economic development. In 2016, the Sri Lankan government decided 9 Koh King Kee, The real story of China’s involvement in Sri Lanka’s Hambantota Port, Beijing Weekly, September 29, 2018. http://www.beijingreview.com.cn/shishi/201 809/t20180929_800143048.html.

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to restart the operation and development of Hambantota Port through market-oriented reforms and offered to rent out the operating rights of the Hambantota Port project in a single package through bidding in the hope of reversing the loss-making situation. In the bidding process, the Sri Lankan government once again gave priority to Japanese and Indian companies, but received a refusal again, and then turned to Chinese enterprises. In the end, China Merchants Port Holdings Company Limited (CMPort), a subsidiary of China Merchants Group, won the bid and formed a joint venture with the Sri Lankan government to operate Hambantota Port. According to the agreement, CMPort would acquire an 85% stake in Hambantota International Ports Group (HIPG) and a 49.3% stake in Hambantota International Port Services (HIPS), representing about 70% of the total equity; CMPort owned the operating and management rights of the above two companies, as well as the lease and development rights of approximately 11.5 square kilometers of land in the port area; the concession period was 99 years. CMPort invested a total of $1.12 billion in Sri Lanka, of which $974 million were used to acquire the 85% stake in HIPG and the remaining $146 million were deposited into a bank account in the name of CMPort in Sri Lanka to be used for the expansion of Hambantota Port and shipping-related business. Within 10 years from the effective date of the concession agreement, Sri Lanka Ports Authority has the right to repurchase 20% of HIPG’s shares on terms acceptable to all parties. Seventy years after the entry into force of the agreement, Sri Lanka Ports Authority may acquire all the shares of HIPG held by CMPort at a reasonable price determined by the valuer appointed by both parties. At the end of the 80th year of the agreement, Sri Lanka Ports Authority can acquire the shares held by CMPort in HIPG at a price of $1 per share, allowing CMPort to retain 40% of the shares in HIPS. When the agreement expires at the end of the 99th year, CMPort will transfer all its shares in HIPG and HIPS to the Sri Lankan government and Sri Lanka Ports Authority at a nominal price of $1 per share. However, since it was a Chinese company that won the bid, some media alleged that Chinese-style development finance was a “debt trap”. So what does the actual process look like? First, the Hambantota Port project is not a debt trap laid by China. The project was initiated based on the political will of the former president of Sri Lanka, rather than proposed by China. The reason why the Sri Lankan government borrowed from China was that it failed to obtain

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financing from Japan and India. After the financial crisis, compared with other countries that were caught up in the vortex of the economic crisis, China became the country most likely to invest abroad thanks to its steady economic growth. EIBC’s willingness to provide loans for the Hambantota Port project in Sri Lanka is not based on the so-called strategic goal of dominating, or China’s intention to use it as China’s military base as claimed by some media, but on the recognition of the viability of the development of the shipping logistics market in the Indian Ocean, where Hambantota Port is located. Moreover, the leased port is jointly operated by a joint venture composed of CMPort and the Sri Lankan government. The Sri Lankan government holds 30% of the shares, and the port is not used for military purposes.10 Second, the Sri Lankan government voluntarily decided to transfer the port’s operating rights in order to implement market-oriented reforms, CMPort acquired operating rights not through a debt/equity swap. Since its launch, the Hambantota Port project had been operating at a loss for years due to poor management. Sirisena’s new government hoped to improve the situation by resorting to the market-oriented means of renting out the port’s operating rights and forming a joint venture with the winning company to jointly operate the port. After winning the bid, CMPort paid $1.12 billion for a 70% stake in the joint venture. Part of the money was used to make up for the port’s operating losses, and the other part was used to repay other debts. The loans offered to the Hambantota Port were not converted into equity under the lease. The development finance loans provided by EIBC have been transferred to the Ministry of Finance of Sri Lanka and still need to be repaid in full.11

10 Koh King Kee, The real story of China’s involvement in Sri Lanka’s Hambantota Port, Beijing Weekly, September 29, 2018, http://www.beijingreview.com.cn/shishi/201 809/t20180929_800143048.html; Mao Jianming, An Analysis of the Practice and Experience of Chinese Enterprises Investing in Hambantota Port, Indian Ocean Economic and Political Review, 3rd issue, 2020. 11 Shahar Hameiri, Debunking The Myth of China’s “Debt-Trap Diplomacy”, The Interpreter Website, September 9, 2020, https://www.lowyinstitute.org/the-interpreter/deb unking-myth-china-s-debt-trap-diplomacy, Mao Jianming, An Analysis of the Practice and Experience of Chinese Enterprises Investing in Hambantota Port, Indian Ocean Economic and Political Review, 3rd issue, 2020.

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Finally, it was not the debt pressure from China that plunged the Sri Lankan government into a sovereign debt crisis. In fact, it was excessive borrowing from capital markets dominated by the West.12 Since the outbreak of the civil war, Sri Lanka’s economic development has been severely hampered, and non-productive inputs such as arms procurement have risen sharply. As a result, over the years, Sri Lanka has been running a massive fiscal deficit and relying on debt for development. In the past, Sri Lanka’s main creditors were Japan, Europe, and the United States, as well as international multilateral financial institutions such as the IMF. It was not until the end of the civil war that China became a major creditor of Sri Lanka, but China’s debt share was very small compared with other creditors. As of 2016, Chinese loans accounted for only 9% of Sri Lanka’s government debt, and more than two-thirds of them were medium- to long-term loans at preferential rates, not enough to create the so-called debt crisis. After its sovereign credit rating was downgraded, Sri Lanka could no longer get concessional loans from other countries and had to borrow high-interest short-term commercial loans from banks such as those in the United Kingdom and the United States. This was what really caused Sri Lanka’s debt crisis.13 A large number of facts have proved that the Hambantota Port project in Sri Lanka is not “Chinese debt trap”. When receiving credentials presented by new ambassadors from South Korea, Germany, the Holy See, and Switzerland, Sri Lanka’s current president Gotabaya specifically pointed out that the Hambantota Port project was a project with great development potential and not a “debt trap”.14 Professor Shahar Hameiri at Australia’s Lowy Institute has also confirmed in his research that there is no such thing. First, the Hambantota Port project is not a debt trap set by China. The project was initiated based on the political will of the former president of Sri Lanka, rather than proposed by China. The reason why the Sri Lankan government borrowed from China was that it failed to

12 Shahar Hameiri, Debunking The Myth of China’s “Debt-Trap Diplomacy”, The Interpreter Website, September 9, 2020, https://www.lowyinstitute.org/the-interpreter/deb unking-myth-china-s-debt-trap-diplomacy. 13 Song Yinghui, Wang Se, Zhao Liang, An Analysis of the “Chinese Debt Trap Theory”—from the Perspective of Sri Lanka’s Government Debt Problem, Contemporary International Relations, 6th issue, 2019. 14 “President defends China investment in H’tota port”, The island website, October 1, 2020, https://island.lk/president-defends-china-investment-in-htota-port/.

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obtain financing from Japan and India. After the financial crisis, compared with other countries that were caught up in the vortex of the economic crisis, China became the country most likely to invest abroad thanks to its steady economic growth.15 EIBC’s willingness to provide loans for the Hambantota Port project in Sri Lanka is not based on the so-called strategic goal of dominating, or China’s intention to use it as China’s military base as claimed by some media, but on the recognition of the viability of the development of the shipping logistics market in the Indian Ocean, where Hambantota Port is located. Sri Lanka’s sovereign debt crisis was not caused by Chinese investment.16 However, the problems encountered in the Hambantota Port development financing project and the ensuing response from international media also provide a lesson for the “going out” of China’s development finance. How to avoid political risks under a completely different political system in the process of “going out” of development finance remains an outstanding issue that needs to be tackled urgently in the development of China’s development finance.

5 5.1

Conclusion

The Objective Necessity and Importance of Policy-Based Finance in a New Situation

A policy-based financial system can effectively reduce the social cost of achieving national policy objectives, promote social equity, and implement specific strategic intentions. From the perspective of the history of economic development and the internal logic of economic growth, the development of a policy-based financial system is necessary in the long run. Internationally, policy-based financial institutions exist not only in developing countries but also in developed countries with a sound financial system. They have become a beneficial and necessary supplement to the market mechanism. There are large policy-based financial 15 Meera Srinivasan, It’s China That Happens to Have The Cash Now, Says Sri Lanka Minister, The Hindu Website, October 19, 2020, https://www.thehindu.com/news/int ernational/its-china-that-happens-to-have-the-cash-now-says-sri-lanka-minister/article32 895560.ece. 16 Shahar Hameiri, Debunking The Myth of China’s “Debt-Trap Diplomacy”, The Interpreter Website, September 9, 2020, https://www.lowyinstitute.org/the-interpreter/deb unking-myth-china-s-debt-trap-diplomacy.

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institutions in Britain, Germany, France, Japan, Brazil, and even the United States. For developing countries implementing a modernization catch-up strategy, the necessity and strategic implications of developing policy-based finance are even more significant. In China, policy-based finance should not be weakened in the short term but should be further developed, improved, and innovated. On the whole, the framework of China’s policy-based finance is imperfect and incomplete. For example, there is a lack of legal norms, there is overlap between the business of policy banks and commercial banks, the risk compensation and subsidy mechanism are imperfect, there is a lack of evaluation criteria for policy banks, policy objectives are weak, functions are vague, the supervision structure is imperfect, and there are limited ways to raise funds. The process of resolving the contradiction between policy-based finance and commercial finance and reforming the policybased financial system is not over yet. In addition, there are still some problems in the fields of policy-based guarantee financing, LGFV bond financing, financing with the granting of concessions for infrastructure construction, etc. To build a reasonable and effective policy-based financial system, first, we must try to clarify the policy objectives of policy-based finance and its boundary with commercial finance; second, we should actively solve problems in the operating mechanism of policy-based financial institutions with market objectives in mind; third, we should vigorously build a risksharing mechanism and improve the interest compensation mechanism to support the realization of market objectives; in addition, we should also build a reasonable performance evaluation system to ensure the realization of policy objectives. Thus, the main contents of the overall framework should include: First, to determine the business scope of China’s policybased finance; second, ways to implement the various services contained in China’s policy-based finance; third, in terms of governance structure, what kind of policy-based financial institutions China needs to build in order to implement the various services contained in policy-based finance? 5.2

We Should View the Reform of China’s Policy-Based Finance from a Strategic and Long-Term Perspective

Policy-based financial institutions around the world are developing in different directions, with some policy-based financial institutions moving toward commercialization and away from policy-based finance, and some

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abiding by operating guidelines and strictly prohibiting competition with commercial financial institutions. Internationally, the commercialization reform of policy-based financial institutions is undergoing a trial and error process, its theoretical basis is not mature, and the final result is even more unpredictable. Amid such uncertainty, we should try to sum up the experience to guide the practice of reform of China’s policy-based finance. Judging by the development of policy-based finance, China did not have a clear idea about what policy-based finance was from the very beginning and is apparently wrong in its positioning of policy-based finance in that policy banks are only regarded as a “by-product” of the commercialization reform of specialized banks, their function is only to assume some specific policy-based financing burdens left by specialized banks, there is basically no planning for the long-term development of policybased finance from the perspective of national economic development, and the scope of policy-based business conducted by CDB, EIBC, and the Agricultural Development Bank of China has not been clearly defined. This has a great impact on the development of China’s policy-based finance, not only affecting the integrity of the construction of the policybased financial system but also affecting decision-makers’ judgment on the necessity of the existence of policy-based finance. Based on this, the design of ideas for the reform of China’s policybased financial system requires strategic thinking and a long-term perspective on this issue. From the perspective of the strategic development of the policy-based financial system, according to the stage of China’s economic development and the actual demand for policy-based finance, the policybased financial system should cover a very broad range of areas, but the existing business scope is far from inclusive. Therefore, we should pay more attention to the role of policy-based finance and rationally plan for the areas of business to be developed for policy-based finance. We should not only focus on the present and overemphasize the negative effects of policy-based financial institutions, such as unfair competition and insufficient profit orientation, and still less should we take this as the main factor and consideration in determining the path to reform policy-based finance. China’s policy-based financial system needs to be actively built, reasonably developed, and kept in place for a long time. In the reform of policy banks in China that started in 2007, a tendency worthy of attention is to gradually transform policy banks into an operating model dominated by commercial banks and supplemented by policy-based business through reforms. But care should be taken to avoid the notion that policy-based

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financing seems to be outdated and that commercial financing channels can basically cover all financing needs, a notion that, when applied in practice, can adversely affect the construction of the financial system. For China, which is in the process of comprehensively deepening reform, transforming its economy, and adjusting its industrial structure, we must base ourselves on the greatest reality that China will stay in the primary stage of socialism for a long period of time. Policy-based and development finance must first meet the traditional demand for policy-based finance in the fields of import and export, agriculture, small and medium-sized enterprises, etc. This is because China’s economy is increasingly dependent on foreign countries, solutions to the financing difficulties of small and medium-sized enterprises have been elusive, the development of agriculture, rural areas, and farmers has lagged behind for a long time, and the gap between urban and rural areas is widening. Problems in these areas are more serious than in other countries, and commercial funds needed to meet the huge demand for funds that arises in the development process are difficult to obtain. These are clear signs of “market failure”. Therefore, government policy funds are urgently needed. Second, while zeroing in on the strategic objectives of “new-type urbanization” and “going out”, China still needs to promote the upgrading of its economic structure and the transformation of its development mode through policy-based and development finance. The high-tech industries, new energy industries, green industries, and the construction of industry chains in the circular economy that China will focus on developing in the next step require huge investment. These industries entail great investment risks, so they need to be continuously supported by the state through policy-based financial institutions.

CHAPTER 10

The Global Financial Change and China’s Monetary Policy in the New Era

The financial system is an important component of the socialist market economic system. Since the reform and opening up, China has gradually established and improved its socialist market economy, basically established a financial system that meets the requirements of the market economy, and continuously improved its financial macro-control and financial supervision systems. Financial resources are the core resources of modern economy. To make the market play a decisive role in the allocation of resources, we should improve the system of financial institutions in which commercial finance, development finance, policy finance, and cooperative finance have a reasonable division of labor and complement each other. Build a multi-level, wide coverage, and diverse banking system; Promote the rapid and steady growth of a number of Chinese financial institutions with international competitiveness and the right to allocate cross-border financial resources; Rely on cooperative economic organizations, guide the sound development of cooperative finance and form a comprehensive, sustainable, and complementary organizational system; Improve the service quality of financial institutions and reduce the financing cost of enterprises; And improve the management system for state-owned financial capital and enhance the vitality, control, and influence of state-owned financial assets.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Weiping, Social Trust, https://doi.org/10.1007/978-981-99-2931-3_10

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In the post-financial crisis era, in the future reform of international monetary policy and financial system, China should deal with the uncertainties arising from the transition of the international monetary system from the dollar system to the multi-stage system, and at the same time, proceed from the needs of China’s reform and opening up, adhere to the 3 foreign financial strategies: participation in the governance of international financial institutions, expansion of East Asian regional currency cooperation, and the internationalization of RMB. From the perspective of finance, China needed foreign exchange reserves at the beginning of its reform, while the US was the only country that could print dollars at that time, so the two countries came together with such a coincidence at the beginning. Developing countries, including China, are still very keen on the US dollar and hope to use it as the main currency for China’s foreign exchange reserves, which is also the reason why they hope that the US dollar will not depreciate so quickly. However, it is difficult for China or other developing countries to break away from the dollar pegged exchange rate system, because they have always implemented such policies, and China’s financial market is not particularly mature. China can contribute to the world on issues such as exchange rate and reserves, but there are several points to be noted. First, the opening up of China’s finance, it shows that the market may fail, and the coordinated market rescue measures between the US and China means more government intervention and control, which may slow the pace of deregulation and financialization in China. The second is China’s currency policy, which is also a stable force. It can be found from the Asian financial crisis that China’s policies and those of Asian have a great external impact, and China’s contribution is of great significance to the US. There is also the issue of RMB internationalization, which now is the perfect time to raise it. As long as China continues to grow, the market will continue to work for China. Moreover, the convertibility of RMB will be enhanced, and RMB is likely to become one of the globally major currencies in the future.

1 The Enlightenment of Global Financial Reform and China’s Financial Positioning After the international financial crisis, certain changes have taken place in the financial landscape, and China needs to reposition itself in the process of continuous adjustment of the global financial industry.

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The global financial pattern before the crisis. After the World War II, the world’s political, economic, military, and other aspects of the power have undergone major adjustments. The Bretton Woods System, which was established on this basis since the 1870s, is actually a global financial structure with the US dollar as the center and a distinct hierarchical nature. The characteristic is that the US dollar acts as an international currency and is linked to gold, while other countries’ currencies are linked to the US dollar. Through the coordination of international organizations such as the IMF, the World Bank, the Bank for International Settlements, and the General Agreement on Tariffs and Trade (GATT), the Bretton Woods System has provided some temporary stability to the world financial and economic order. During this period, the United States also acted as the engine of capital accumulation. The vast market and investment opportunities it provided attracted a large amount of commodity capital and monetary capital. But due to the Triffin problem, international competition, racism, the Cold War, and many other factors, that period ended around 1970. Instead, the “Jamaica Agreement” was reached in 1976. Although America’s pre-eminence was declining with the revival of Europe and Japan, as well as the rise of emerging countries, the Jamaican system has largely retained the dollar monopoly established by the Bretton Woods system. More importantly, after the US dollar stopped exchanging with gold, the international monetary system has lost its solid material foundation since then, and has slipped into the stage where the US dollar, a credit currency, was used as the main reserve currency, thus getting rid of the hard constraint on the issuance of international reserve currencies under the gold standard and the Bretton Woods system. Through the dollar-centered floating exchange rate mechanism, the United States also acquired the power to levy seigniorage and inflation tax on other countries, which further aggravated the contradiction between the United States and the diversified development of the world economy. The birth of Euro at the end of the twentieth century and the beginning of the twenty-first century was the result and appeal of European countries to continuously improve their political and economic status. It was the most important adjustment of the international financial system since the collapse of the Bretton Woods System in the 1870s. It replaced the declining Japanese yen and greatly challenged the dominant position of the US dollar. It changed the reserve currency composition of central

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banks and the direction of informal investment, and promoted the conversion of a large amount of dollar assets inside and outside the EU into euro assets, thus exerting a profound influence on the global financial market, especially the currency market. In addition, the globalization and liberalization of finance and the financialization of economy are constantly reshaping the global financial pattern. The technological revolution in the fields of microelectronics, information technology, and modern informatics in the past 30 years has helped to create extensive and complex connections within and between banks, reducing the cost and speed of transactions and settlements while enabling information sharing; Various non-bank financial institutions, such as investment banks, insurance companies, mutual funds, and pension funds, have emerged in large numbers and become important participants in the global financial market. In the process of pursuing profit maximization, they stimulate the innovation of financial products and financial markets. According to incomplete statistics, the securitized bonds are nearly 1.4 times of global GDP, while financial derivatives are more than 8 times of global GDP. At the same time, the rapid development of the European dollar market and the gradual opening of emerging countries’ markets have facilitated the global circulation of capital, but also objectively caused the accumulation and diffusion of financial and economic risks worldwide. Under such circumstances, how to establish an effective supervision and inspection mechanism worldwide, as well as a linkage mechanism for crisis prevention, has become an indispensable part of the international financial system. In short, before the outbreak of the international financial crisis in 2008, from the perspective of international currency, the euro became the main competitor of the dollar in the international market. If the “lost” yen is included, the international currency actually has a situation of “two big (dollar, euro) and one small (yen)” playing games with each other; From the perspective of economic location, financial institutions and financial markets in Europe and the United States, especially in the United States, still occupy a dominant position, while the progress of science and technology and the development of financial liberalization and globalization have linked the financial sectors of various countries in the world into a whole, and promoted the accumulation logic of the latter as a universal value to the whole society. So that capital can transcend time, space, material form, and its own limitations to achieve profit maximization. However, behind this pattern, there are always contradictions

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between the decline of the U.S. economic status and the monopoly of the U.S. dollar, between developed countries and developing countries, and between the real economy and the virtual economy. The long-term accumulation of these contradictions has created conditions for the outbreak of the crisis and the readjustment of the global financial pattern. Transformation of the post-crisis global finance. The concept, mode, and pattern of global finance have been deeply reflected in this crisis. In the long run, further changes are needed to provide a solid foundation for sustainable economic development. The scale and operation mode of the global finance will undergo dramatic changes. Under the impact of the financial crisis, the nominal value of these financial assets has fallen sharply, and the size of bank assets will also shrink rapidly. Off-balance sheet business such as financial derivative trading, bond trading, and leverage financing will be gradually reduced. As Citibank was divided into Citibank and CitiHoldings, the business mode of traditional banks that pursued universal banking was also questioned. The global financial market will undergo structural changes, and the diversification of international finance is inevitable. The United States suffered a great impact in the financial crisis. A large number of enterprises have gone bankrupt, unemployment has intensified, and its economic strength has declined significantly. In response to the crisis, the eurozone adopted expansionary fiscal and monetary policies, which promoted the overall recovery of the region’s economy to a certain extent. However, due to weak economic growth and increasing fiscal deficit, eurozone countries such as Iceland and Greece soon fell into the quagmire of sovereign debt crisis, and the rise of the euro still needs time to further test. After years of struggle, Asia is becoming the center of world economic growth, which is in sharp contrast to the decline in economic growth rates in the United States, Europe, and Japan. At the same time, Asia’s position in the international financial market is gradually rising. Its huge amount of official foreign exchange reserves has a significant impact on the global financial market, and the responsible attitude of major countries such as China in several crises has been fully recognized and praised by the international community. Therefore, when the global financial market structure is redefined, Asia will receive more attention. Tokyo, Hong Kong Shanghai, and other major cities will usher in new development opportunities, and the global financial landscape will inevitably become diversified.

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Sovereign funds are emerging as a new force in the international financial market. For a long time, the international financial market has been the stage of Western informal financial capital. Under the influence of the financial crisis, the strength of these informal financial institutions has been greatly weakened in the process of deleveraging and nationalization. After the outbreak of the financial crisis in 2007, major financial institutions in Western developed countries sought capital injection from sovereign funds one after another. Non-Western sovereign wealth funds, including Abu Dhabi Investment Council, Kuwait Investment Council, China Investment Corporation Limited Liability Corporation, and Government Investment Corporation of Singapore, successively bought shares in financial giants such as Citi group and Goldman Sachs, and their investment scale reached tens of billions of dollars. It has greatly stabilized the international financial markets. The global financial regulatory framework needs to be rebuilt. The crisis fully exposed the weaknesses and loopholes of the original Basel Agreement, making all countries realize the importance of parallel supervision, unified supervision, and global supervision. At present, almost all financial stock institutions, financial markets, and financial instruments will be appropriately supervised which has been reflected and implemented in the financial supervision reform plans issued by the United States and the European Union. In addition, with regard to the rapid and large-scale flow of capital, the international community will also consult and coordinate on supervision more closely than ever before. Bilateral and multilateral financial cooperation will become an important form of international finance. Of course, the development of the global financial pattern in the above four dimensions will be a complex process of competition and dynamic game between various economic, financial, political, and military forces, involving the world standard currency, international reserves, balance of payments, and other core and sensitive issues. Countries need to constantly seek cooperation in competition, seek common ground while reserving differences, and jointly avoid the outbreak of global financial crisis. To promote the sustainable development of the world economy, it also requires major developed and developing countries to assume the responsibility and obligation of promoting consultation and establishing a new international financial order. The global positioning of China’s finance after the crisis. Affected by the international financial crisis and many domestic factors, China still

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faces great challenges in the overall macroeconomic situation, economic growth mode, foreign direct investment, and export trade. But it is also an indisputable fact that the overall scale and development level of China’s economy and finance have steadily improved in the past decades, and the decline in the relative status of the United States and the US dollar has opened a “window of opportunity” for the accelerated development of China’s finance. In the next 10 to 20 years, the global economic and financial landscape will be dramatically transformed. As the largest developing country in the world, China must take precautions and plan as early as possible, strive to establish an international voice commensurate with its status as a great power, actively promote the formation of a new international financial order, and demonstrate the sense of responsibility and leadership qualities that a rising power should possess. Therefore, China’s finance should find its correct position in the constant changes of the new global financial pattern and achieve leapfrog development. China should strive to become one of the global financial centers. China is the second largest economy and the largest exporter in the world, and has 3 trillion US dollars in foreign exchange reserves. Therefore, it is necessary for China to establish an international financial center that suits its economic development level and serves its development needs. To this end, it is necessary to actively regulate the daily operation of domestic financial institutions in accordance with the basic principles of international financial management, accelerate the construction of financial infrastructure and supporting facilities, promote the research and development of financial products, improve the efficiency and level of financial services, and strive to ensure the stability of the financial system and actively promote the development of Hong Kong, Shanghai, and other places into regional and even global financial centers. The RMB should become one of the major currencies in the world. It is an inevitable historical trend that the currency of a big country becomes the currency of the world, from the pound to the dollar and the euro. Since the resumption of the RMB exchange rate reform, the RMB has appreciated by 5.5% against the US dollar, which shows the confidence of the international market and major institutions in the future development of the RMB and even China’s economy and finance. The forecast report released by the World Bank on June 15, 2011 also declared that in the next 10 to 15 years, the RMB is expected to become a major international currency along with the US dollar and the euro. However, based on the long-term development of China’s economy, the

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process of RMB internationalization should not only ensure the balance of international payments, but also promote the economic development of the surrounding areas. Therefore, it is bound to be gradual and largely depends on the development status and trend of the new international financial pattern. At present, RMB has achieved current account convertibility and partial capital account convertibility. In the next stage, we can explore ways and paths to realize RMB capital account convertibility at an appropriate time. China should have a number of powerful financial institutions among the world’s peers. The consolidation of China’s financial position cannot be consolidated without the support of a number of financial institutions that have a certain influence worldwide. At the end of June 2009, with a market value of $257 billion, Industrial and Commercial Bank of China (ICBC) was the world’s largest bank, followed by Bank of China (BOC) with a market value of $257 billion as the U.S. banking crisis hit and European and Japanese banks recovered. However, China should also fully realize that financial competitiveness depends more on soft power such as talent, technology, management, and culture, and even the overall improvement of government supervision ability. In these aspects, there is still a big gap between China and developed countries. Therefore, while expanding their global business and network and seizing the opportunity to “go global” as soon as possible, Chinese financial enterprises should focus on cultivating and improving their management level and innovation ability. China should be a positive factor in maintaining global financial stability. Over the years, China’s economy has maintained a momentum of rapid growth, playing a pivotal role in terms of economic aggregate, growth potential, and contribution to the world. With this strong economic backing, China’s finance has contributed to the stability of the regional and world financial system. As early as in the Asian financial crisis in 1998, the Chinese government made a commitment not to devalue the RMB in view of the overall situation of maintaining regional stability and development, which effectively contained the further spread of the crisis and showed the demeanor of a major financial country. In the face of the severe test of the global financial crisis in 2008, China’s economy and finance continued to operate steadily, boosting the confidence of other countries in pulling out of the recession and crisis. China should play a leading role in regional financial cooperation and promote the establishment of a new global financial order. The vast

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number of developing countries has played and will continue to play an increasingly important role in the global economy. China should rely on the rising emerging markets and further promote regional financial cooperation within such cooperation frameworks and mechanisms as the “10 + 1”, “10 + 3”, the Shanghai Cooperation Organization and the “BRICS countries” to achieve mutual benefit and win–win results for all parties. At the same time, China should also actively participate in the joint actions of other countries to deal with the crisis, enhance the interaction with developed countries in the financial field, strengthen the negotiation, consultation, coordination, and cooperation on the establishment for a new international financial order, and strive to win more voice for developing countries. This is not only the trend of the development of international financial competition, but also the inevitable requirement to enhance China’s international status and promote the sustainable development of the world economy.

2 Challenges for China’s Finance to Achieve Global Strategic Positioning In the context of the adjustment and change of the world financial structure, China’s financial industry must clarify the main difficulties and challenges in order to achieve the global strategic positioning. The degree of financial marketization needs to be improved. In the 1960s and 1970s, Mackinnon and Shaw had already pointed out the mutual promotion and mutual restriction between financial development and economic growth. They believe that developing countries should implement financial marketization and liberalization reforms to remove financial repression, promote financial deepening, and promote economic growth. On the other hand, inappropriate financial marketization and liberalization will threaten the stability of the financial system, thus causing economic recession and social turbulence. This international financial crisis fully demonstrates this. Nevertheless, from the evolution of the international financial system and the historical experience of developed countries, a free and open macro-financial environment is essential for a country, especially a large developing country like China, which has transformed from a planned economy to a market economy, to occupy a place in the global financial pattern and achieve the strategic positioning and leapfrog development of finance in the post-crisis. Therefore, in the coming period, China should constantly deepen financial reform,

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improve the degree of financial marketization, and strive to overcome the following three obstacles: First, barriers to interest rate marketization. Interest rate is the basic price of financial products and services and the reference benchmark for pricing many other financial innovations and derivative products. Therefore, it plays an extremely important role in the allocation of resources by the market. Through interest rate marketization, financial institutions can independently provide diversified financial products and services, and realize the survival of the fittest in the free choice of consumers, so as to balance the supply and demand relationship between different financial products and services, help enterprises make the correct judgment and pricing of risks, and promote the optimal allocation of capital. In addition, the market-oriented interest rate is also the basic guarantee for the establishment of a smooth and effective monetary policy transmission mechanism, which reflects the needs of economic macro-control. China’s interest rate liberalization is a process connecting the past and the future. It has gone through the stages of liberalizing the domestic foreign currency deposit and lending rates, expanding the floating range of bank loan and deposit rates, implementing market pricing in all aspects of corporate bonds, financial bonds, commercial bills, and money market transactions, and expanding the floating range of commercial individual housing loan rates. However, this is far from meeting the inherent requirements of the socialist market economy for the liberalization of capital prices. Therefore, we must continue to promote the reform of interest rate liberalization in a planned and step-by-step manner. Second, obstacles to capital flow. With the steady progress of China’s economic reform and the gradual expansion of economic space, the capital market has also achieved considerable development, and its importance is increasingly obvious. At present, China is playing a more and more important role in the international economy, but it has little influence in the international capital market. One of the important reasons is that the capital market is not open enough, which hinders the inflow of international capital. Although the control of capital flows can effectively prevent the risks caused by rapid capital flows, it also loses the benefits of optimizing resource allocation globally. In the future, if China wants to find a balance between economic development and resource utilization and expand its role in the international financial market, it must properly remove the obstacles to capital flow and ensure fair competition under the conditions of market economy.

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Third, barrier of the exchange rate. According to Krugman’s “triangle of impossibility” mode, a country cannot simultaneously achieve free capital flow, independent monetary policy, and stable exchange rate. In the future, if China wants to have an independent monetary policy while realizing the global allocation of funds, the market-oriented reform of exchange rate is imperative. More importantly, the reform of the exchange rate system can also create a favorable monetary environment for the internationalization of RMB. In the future, it is still necessary to further promote the reform of the RMB exchange rate formation mechanism, enhance the flexibility of the RMB exchange rate, improve the anti-risk ability in the process of capital opening up, and lay the foundation for the strategic goal of RMB becoming one of the major currencies in the world. The financial structure is unreasonable. At present, China’s financial structure system is still dominated by banks, which is highlighted in the following aspects: bank assets occupy an absolute advantage in all financial assets; although the development of capital market increases the proportion of direct financing, the dominant position of indirect financing has not been fundamentally changed; insurance, trust, and financial leasing industries develop slowly, and social financing risks are highly concentrated in the former. Excessive monetary assets will undoubtedly compress the channels and space of social financing, reduce the ability and motivation of financial innovation, and make the debt level of enterprises remain high, which is not conducive to the optimization of financial structure and the development of the real economy. Its resource allocation is mainly concentrated in state-owned enterprises and large enterprises, which excludes most SMEs and informal enterprises from the organized financial market, which objectively gives birth to various forms of informal financial market, exacerbates the instability factors of the financial system, and increases the difficulty of financial supervision. The urban–rural dual structure of finance in China is obvious, with a large gap between east and west. On the one hand, rural and less developed areas have low industrialization, low economic benefits, high information costs, and lack of sufficient collateral and alternative means to prevent risks, which leads to financial institutions often unwilling to carry out business in the above areas, resulting in “market failure”; On the other hand, due to adverse selection, moral hazard, and other reasons, the use efficiency of funds injected through government subsidies and donations from non-profit organizations are inefficient in practice, and defaults

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occur frequently, which affects the recycling of funds and reduces the overall credit status of rural and underdeveloped areas, resulting in “government failure”. The above two kinds of “failures” in turn will produce obvious siphon effect, causing the reverse flow of capital from rural to urban, and from the west to the east, further hindering local economic development and the formation of a reasonable and balanced financial structure. Therefore, in order to achieve strategic rise after the international financial crisis, China’s financial sector must first focus on solving its own structural problems, constantly optimize the internal structure of the financial industry, establish a unified national financial market, and promote the healthy development of the financial system. The core competitiveness of the financial industry has not yet been formed. Through more than 20 years of financial reform, China’s banking, securities, and insurance industries have made great progress, but the international competitiveness of the financial industry is still low. In the “Global Financial Top 500” list jointly released by British magazine “The Banker” and British Brand Consultants in 2010, the largest ICBC China ranked 12th, down 7 places from the beginning of 2009. This change fully shows that the brand value and core competitiveness of financial institutions do not entirely depend on market capitalization and assets. It is a comprehensive contest between hard and soft power, involving product development, market influence, human resources, information technology, risk control, corporate governance, and other aspects. China’s financial industry lags behind developed countries in these dimensions. The assets of major commercial banks are of low quality. According to the quarterly NPL Statement of Commercial Banks disclosed by China Banking Regulatory Commission (CBRC), although the NPL balance of China’s commercial banks has been on a downward trend in recent years, and the NPL ratio has also dropped from over 10% to about 1%, this is mainly attributable to the NPL stripping and overall restructuring launched in 2005, as well as the new economic cycle, rather than the substantial improvement of operating capacities. Its asset structure and quality need to be further optimized and improved. Financial innovation is relatively backward. The starting point of financial innovation and financial product R&D is to activate financial market transactions and effectively improve the service level and efficiency of the

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financial industry. After the international financial crisis, Western countries began to review financial innovation and the slowdown of financial derivatives trading. Therefore, financial innovation is a double-edged sword. However, in terms of China’s current situation, financial innovation is still in the “initial stage”, and many innovations to improve the operation and management of financial institutions, promote the capital market, and improve the efficiency of the financial system have not yet appeared or formed a scale. At this stage, vigorously promoting financial innovation and enriching financial products will help enhance the core competitiveness of China’s financial industry. Weak risk management ability. With the development of financial liberalization and economic globalization, as well as the breakthrough of information technology, the scale and speed of capital flow are increasing gradually, financial innovation and derivative transactions are expanding constantly, and financial risks are becoming more complex and diversified. Therefore, it is particularly important to identify, measure, and control financial risks. Most of China’s financial institutions do not have independent risk management departments, their internal organizational structure and governance structure are not yet perfect, coupled with the lack of effective information disclosure mechanism and financial innovation products to disperse risks, which objectively increases the difficulty of risk management. On the other hand, China’s financial institutions have a weak sense of risk prevention, and their understanding of financial products and risks in international financial market transactions is not deep enough, which often leads to the accumulation of financial risks within them and huge investment losses. To continue to develop and grow in the international competition and cooperation, China’s financial industry needs to pay attention to its own development in the above three aspects, strive to cultivate and form its core competitiveness, refer to international standards and experience, and constantly learn, improve, and innovate, so as to occupy a place in the post-crisis transformation of the world financial structure.

3

The Reform of International Monetary System and the Strategy of RMB Internationalization

The RMB has been successfully included in the International Monetary Organization’s (IMF) Special Drawing Rights (SDR), IMF Managing Director Christine Lagarde said at the press conference: “The RMB’s

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entry in the SDR will be an important milestone in the integration of the China’s economy into the global financial system, which is also a recognition of the progress made by the Chinese government in the reform of the monetary and financial system in the past few years”. It took five years since the last round of IMF evaluation of RMB, and the IMF finally approved RMB to enter SDR. The reform of international financial rules in the post-financial crisis era must focus on diversifying international reserve currencies, increasing the voice of emerging markets in rule-making, and building a global financial safety net aimed at maintaining global financial stability. Although it is a relatively long-term process for RMB to become an international reserve currency, the diversification of international reserve currencies has become an irreversible process in the post-financial crisis era. Although RMB still has a long way to go to become a global reserve currency in a real sense, entering SDR is undoubtedly a new starting point for RMB and China’s financial market to enter the international stage. The analysis shows that the main function of reserve currency is to maintain sufficient foreign exchange to cope with external financing difficulties in the event of external shocks and crises, and provide external debt service and domestic currency support with external assets; To provide the government with the means to cope with foreign debt and domestic natural disasters. However, in order to ensure the normal implementation of the above functions, proper management of foreign exchange reserves is very crucial. First, the proper management of foreign exchange reserves is to ensure an appropriate scale of foreign exchange reserves; Second, to ensure the liquidity of foreign exchange reserves and control the exposure of foreign exchange reserves to market and credit risks; The third is to provide certain profitability in the medium and long term while ensuring effective control of liquidity and risks. However, this financial crisis has brought significant challenges to the reserve management of foreign exchange reserve holders. Since the US dollar has always been the main currency in the foreign exchange reserve, the long-term depreciation of the US dollar makes the preservation of foreign exchange reserve become an important problem faced by various countries. Predictably, the reform of the international monetary system in the next 5 to 10 years will be characterized by the weakening of the hegemony of the dollar and the diversification of international currencies. Continue to promote the internationalization of RMB by taking advantage of the withdrawal of US QE policy. The internationalization

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of RMB itself also faces unprecedented opportunities. Meanwhile, RMB will certainly become an important part of the reform of the international monetary system in the post-financial crisis era. The internationalization of RMB has both benefits and costs, but the benefits are far greater than the costs on the whole. Therefore, we should take advantage of the withdrawal of US QE policy, actively create favorable conditions for internationalization, gradually and steadily promote the internationalization of RMB. At the same time, increase the acquisition or merger of commodities and strategic resources from emerging economies. With the decline of commodity prices and the continuous appreciation of the RMB, China’s foreign commodity trade and strategic resources conditions have improved significantly. From the perspective of demand, although China is in a critical period of economic restructuring and declining demand, with the deepening of economic reform, China’s urbanization and infrastructure resources still have a large demand space. Therefore, it is a good time to merge or acquire the bulk commodities and strategic resources of overseas emerging economies. The global financial market will undergo structural changes, and the diversification of international finance is inevitable. The United States suffered a great impact in the financial crisis. A large number of enterprises have undergone bankrupt, unemployment intensified, and its economic strength has declined significantly. However, a large number of bonds and dollars issued to stabilize the market and stimulate the economy will involve the monopoly position of the U.S. dollar, which will inevitably lead to the devaluation of the U.S. dollar in the long run, causing huge pressure on the current floating exchange rate system, which is mainly pegged to the U.S. dollar. In response to the crisis, the euro area has adopted expansionary fiscal and monetary policies, which has promoted the overall recovery of the region’s economy to a certain extent. However, due to weak economic growth and increasing fiscal deficit, eurozone countries such as Iceland and Greece soon fell into the quagmire of sovereign debt crisis, and the rise of the euro is still waiting for time to be further tested. After years of struggle, Asia is emerging as the center of world economic growth, which is in sharp contrast to the decline in economic growth rates in the United States, Europe, and Japan. At the same time, the status of Asia in the international financial market is gradually rising. Its huge amount of official foreign exchange reserves has a significant impact on the global financial market, and the responsible

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attitude of major countries such as China in several crises has been fully recognized and praised by the international community. Therefore, when the global financial market structure is being redefined, Asia will receive more attention. Major cities such as Tokyo, Hong Kong, and Shanghai will attract new development opportunities, and the diversification of the global financial landscape is inevitable. New challenges for the US dollar. The Triffin problem remains unsolved, and the “double deficit” cannot be sustained. The Triffin Problem points out that if any country’s currency wants to act as an international currency, it will inevitably be in a dilemma: on the one hand, to meet the needs of international trade, payments, and reserves, the country must maintain a long-term balance of payments deficit; On the other hand, to maintain currency stability, the country must also be a longterm surplus country. After the outbreak of the financial crisis, a large amount of funds turned to the Asian and European financial markets, making it difficult for the United States to sustain the double deficit situation. The expanding export of US dollars cannot be balanced with the relatively shrinking repatriation of dollars, and the depreciation pressure on the dollar is increasing. The United States enjoys a lot of economic, political, cultural, and other benefits brought by the dollar standard, but it lacks the corresponding restraint mechanism in the aspect of responsibility. According to the “center - periphery” theory, each country exports raw materials, oil, and various industrial products with low prices to the “central country”, the United States, and obtains the international currency—dollar, while the United States “exports” financial products such as bonds to other countries by virtue of its developed and sound financial market, thus forming the return of dollars. The result of the combination of these two aspects is the rapid development of the American financial industry, the extremely developed virtual economy, the real economy shows the trend of “deindustrialization”, and it is in an absolute dominant position in the international division of labor. Because of this serious imbalance, other countries are also not willing to maintain the status quo for a long time, but are committed to exploring and building a new international monetary system. Due to the unbalanced development of the world economy, the dominance of the United States has been gradually shaken in recent years, and European countries, Japan, and Asian countries represented by China have taken advantage of the latecomer to catch up. The currencies of these

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countries have also embarked on the road of internationalization. The leading international currency status of the US dollar is being increasingly impacted by other international currencies such as the euro, the Japanese yen, and emerging Asian currencies. After the financial crisis, countries around the world questioned the supremacy of the dollar. First, although the total economic output of the United States still ranks first in the world, its high debt and worsening fiscal and balance of payments deficits have shaken the international community’s confidence in the dollar, and concerns about the solvency of the United States have affected the long-term expectations of the international community for the dollar. Second, in the absence of regulation and restrictions, the United States has maintained its development mode of high consumption and high deficit by printing money for a long time and paid no attention to its obligations as an international currency, which has also raised many doubts. The increasingly prominent instability of this single sovereign currency dominated monetary system has become increasingly prominent, which makes the international community hope to break this system as soon as possible and establish a more stable and reasonable international monetary system. The direction of international monetary system reform. At present, there are two main types of views: one is to seek a super-sovereign currency to replace the status of the US dollar in the current international monetary system, so as to solve the Triffin problem. Its ultimate form is to establish the IMF Special Drawing Rights (SDR) as the global reserve currency and promote the full application of SDR. The other is to build a diversified international monetary system and allow more sovereign currencies into the global mainstream currencies, including the euro and the future Asian currencies. The possibility of the SDR, a super-sovereign currency, replaced the dollar as an international reserve currency. As an international currency, SDR has both advantages and disadvantages. As an international currency, SDR has the following advantages: First, the use of SDR as an international reserve currency completely avoids the “Triffin problem” which sovereign countries must face when the currency acts as an international currency. Second, taking SDR as the international reserve currency is conducive to avoiding exchange rate risk. Third, taking SDR as the main international currency is more conducive to fairness. After using SDR as the international currency, the seigniorage and other income obtained by IMF from SDR issuance can be shared by all countries in the world, which

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is conducive to the common development and progress of the world economy. However, there are still some problems with SDR itself, which limits its function as an international currency. First, the SDR is issued in small quantities and its use is very limited. Second, the allocation range of SDR is small and unreasonable. Most of the current SDR quota is allocated to developed countries, led by the US, while the developing countries share a small quota. Third, the range of fixed value currency basket of SDR is narrow. At present, there are only four fixed currencies of SDR, namely US dollar, Euro, Pound, and yen, which are very limited in scope and not very representative. Fourth, to become an international reserve currency, the issuing institution of SDR must have strong control and decision-making ability, complete independence, impartiality and non-sovereignty, and be free from interference and influence of any sovereign country. The current IMF has obviously not done enough in this regard. Aiming at the existing problems of SDR, the academic circle has discussed a series of reform schemes involving various aspects. To sum up, it mainly includes the following three suggestions: first, expand the scope of SDR and increase the issuance quota; Second, reform the composition of the SDR basket to include the currencies of emerging markets such as the BRIC countries; Third, set up an alternative account. The specific approach is to allow central banks to convert part of their foreign exchange reserves into SDRs, deposit them in the IMF’s “alternative account” in the form of SDRs, which can be converted into foreign currencies when needed. Based on the above analysis, it is difficult to replace the current dollar standard with a super-sovereign currency in the reform of the international monetary system. Even if it can be realized eventually, it will take a very long time. Compared with the creation of super-sovereign currency based on SDR, the reform idea of international currency diversification is relatively more down-to-earth and easier to realize. In the future, the international monetary system will continue to show the trend of diversification. First, the US dollar will continue to play a dominant role in the international monetary system for a long time, but its position will gradually decline. Second, the international influence of the euro will continue to expand. Although the long-term development potential of the euro is not as great as people think, the euro area has been taking a down-to-earth and steady path of development, and its status as an international currency has shown

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a steady upward trend in the long run. Third, as the currency with the most potential for development, the RMB will steadily improve its position as a key currency in Asia. We should seize this great opportunity to steadily advance the reform of the global international monetary system in the post-financial crisis era. Of course, to build a diversified international monetary system, we need to address the following issues: First, we need to create an independent, impartial, and professional international regulatory agency; Second, establish a more reasonable and orderly exchange rate restraint mechanism; Third, promote the internationalization of the RMB, a key currency in Asia, as soon as possible. In the future, major international currencies—US dollar, euro, and Asian currencies will form a tripartite pattern, and the RMB will play a mainstay role in Asian currencies as a key currency. In the process of building a new pattern of diversified international monetary system, it is necessary to promote the internationalization of RMB in a stable and orderly way, so that it can compete with the other two “feet” as soon as possible. Based on the above discussion, Dr. Liu believes that the latter is more feasible among the two reform plans of creating a super-sovereign currency and diversifying the international monetary system. On the other hand, the diversification of the international monetary system is a more realistic reformist way of reform, which is conducive to balancing the interests of all parties and easing these contradictions and conflicts. In the long run, the system of international monetary diversification can be seen as a transitional phase before the ideal of creating a super-sovereign currency is achieved. The historical opportunity of RMB. The financial crisis is a good opportunity for RMB to step onto the international stage, weakening the status of US dollar as the primary international currency and creating a broader international environment for RMB internationalization. China should seize the opportunity and actively promote the internationalization of RMB. The reform of the international monetary system and the strategic opportunity of the RMB internationalization. While the global financial crisis has had a profound impact on financial markets and economies, it has also exposed the shortcomings of the US dollar as the main international monetary system. For China, as the world’s second largest economy, the internationalization of RMB is facing unprecedented opportunities, and it is an important part of the reform of the international monetary system.

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When the global financial crisis broke out, it also exposed the inherent defects of the international monetary system. In 2008, the outbreak of the global financial crisis derived from the US subprime mortgage crisis broke the original prosperity of the international financial market. Alan Greenspan, the former chairman of the Federal Reserve, said publicly that the financial crisis is a once-in-a-century event, and the possibility of causing economic recession is increasing. Different scholars have made different judgments on the causes of the financial crisis from different perspectives, which can be described as divergent opinions. To sum up, there are theories of excessive financial innovation, promotion of rating agencies, weak financial supervision, and invalidation of international accounting standards. In general, these analyses of the causes of the financial crisis are generally started from a certain aspect, and the causes of the crisis are abstracted based on the actual situation of the financial crisis. Dialectically, all kinds of theories have some truth, but none of them have gone deep into the essence of the causes of the crisis. It can be said that the defects of the current international monetary system are one of the most important reasons for the outbreak of the crisis. The most fundamental problem revealed by the global financial crisis is the inherent defects of the current international monetary system. Then, how to understand the current international monetary system? What are the inherent defects of the current international monetary system? Why is the internal defect of the current international monetary system one of the most important reasons for the outbreak of the global financial crisis? One of the current international monetary systems is the “Bretton Woods” international monetary system (1944). This system has established the dominant international status of the US dollar, making the US dollar the only functional currency in the world. With the US dollar as the center, it has established the global standard currency system of US dollar and gold linked “double linked” gold exchange. This established the dollar’s super-reserve status; The second is the “Jamaica Agreement”. In 1976, the agreement gave legal recognition to the gold system exchange and the free floating of exchange rate. The core of the “agreement” can also be summarized into two parts, namely, multiple functional currencies and floating exchange rate mechanism. In theory, the “Jamaica Agreement” aims to break up the dollar as a single currency and establish a multi-standard international monetary system with floating exchange rates. However, the reality is often beyond the imagination of the “protocol” designers.

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The analysis based on the perspective of private products and public products shows that there are profound contradictions between international currency and sovereign currency. As a sovereign currency, the dollar assumes the function of international currency, which is also the historical choice of the political and economic games among the world’s major powers. This result reflects the national interests of the United States and has been accepted by the world in a certain period of time and to a certain extent. It can be said that the internationalization of the US dollar has facilitated international trade and investment to some extent, promoted economic globalization and the prosperity and growth of the world economy. However, it must also be emphasized that the internationalization of this single sovereign currency essentially reflects the contradiction between sovereign currency and international currency. This contradiction can be analyzed from a variety of perspectives. From its essence, we can draw lessons from the basic framework of private product and public product theory. From the perspective of all countries in the world, a country’s sovereign currency and the monetary system derived from it have extremely obvious private product attributes. Sovereign currency performs the functions of means of circulation, measure of value, storage, and means of payment within the country. Central bank monetary policy serves the country’s economic growth, full employment, price stability, and balance of payments. Different monetary policy tools produce different policy effects, and such effects only affect the residents within their own country. Other countries have no right to interfere in the implementation of their monetary policies regardless of any policy demands. The private product attribute of sovereign currency and sovereign monetary system shows that the monetary system supply of a government is the result of balancing the marginal cost and marginal revenue of its own policy. Theoretically, the equilibrium supply of sovereign monetary system should be satisfied that the marginal benefit and marginal cost of the policy are equal. However, the international currency that acts as the standard currency and the international monetary system derived from it have extremely obvious public goods attributes. An international currency is a currency that acts as a measure of value, a means of payment, circulation and storage, and a function of world currency in the world. There are obvious contradictions between the two. Specifically, as far as the US dollar and international currency are concerned, it reflects the irreconcilable contradiction in two aspects. On the one hand, the cost of

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sovereign state policy is not equal to the cost of international economic operation. On the other hand, policy rationality promotes a vicious circle of “free riding” behavior, which ultimately leads to global economic imbalance under the flood of liquidity. Undeniably, the economic policies of any sovereign state under this system arrangement are rational. In order to seize the economic benefits of the “dollar standard”, the rational policy of the United States prompts it to take the free ride of the “dollar overissue” repeatedly and successfully. Through the continuous launch of QE1, QE2, and QE3, the United States stimulates the rejuvenation of its real economy and transfers the cost of high dollar debt. In order to prosper their capital markets and obtain the excess benefits of cheap funds, other countries also unthinkingly take the free ride of the “dollar overissue” and enrich the funds of their own virtual economy through the opening of the domestic capital market to smooth the channels of international capital flow. This vicious cycle of “free riding” behavior, as well as the “free riding” benefits obtained at the moment, enabled the United States and other sovereign countries to reach a high degree of tacit understanding on short-term interests. In the long run, this vicious cycle of “free riding” behavior becomes a solidified mode, forming the basic pattern of world economic operation. The net result is a flood of global liquidity; The capital outflow country has a large current account deficit, while the capital inflow country has a large current account surplus and capital financial account surplus, accompanied by excess foreign exchange reserves. International hot money is flooded with the markets of major economies in the world, constantly blowing and expanding the foam in the capital market, forming a serious global economic imbalance. In recent years, due to the changes in the international economic situation and the defects of the US dollar standard, the reform of the international monetary system has become the consensus of the international community. Countermeasures and suggestions for RMB internationalization. Strengthen the supervision of cross-border capital flows and promote the convertibility of RMB capital account. The emerging market turmoil is mainly due to capital outflows triggered by the unwinding of the Federal Reserve’s quantitative easing policy. While China’s capital account has not been fully opened up, the impact is relatively limited, but China cannot delay the process of capital account convertibility independently. The regulatory authorities should strengthen the integrity monitoring of international short-term capital flows, change hot money, improve the

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statistical analysis of hot money flowing into the market mechanism of Chinese assets, and form a complete monitoring system of cross crossborder capital flows to effectively prevent financial risks. Strengthen the cooperation between customs, foreign exchange, industry and commerce, and central bank supervision departments to prevent the trap of foreign exchange arbitrage. We will prudently advance the RMB exchange rate reform mechanism. At present, the RMB exchange rate is close to the equilibrium level. In the short term, the increase of currency exchange rate fluctuations in emerging markets can bring about certain expectations of RMB exchange rate depreciation and two-way fluctuations. We should seize this favorable opportunity to promote the realization of market-oriented interest rate reform goals determined by market supply and demand and an exchange rate formation mechanism determined by demand. We will continue to promote market-oriented reform of the exchange rate and increase its international standing and influence. China should pay close attention to the ability of RMB exchange rate to change, continue to expand the scope of RMB exchange rate fluctuations, and further enhance the flexibility of RMB exchange rate. The central parity rate of the RMB exchange rate will be improved to truly reflect the relationship between market supply and demand. Expand foreign exchange market participation and trading. Taking advantage of the withdrawal of US QE policy to promote the internationalization of RMB, in the context of emerging economies, the quantitative easing policy of the United States faces liquidity pressure, which has caused tension. At this time, China can conditionally start currency swaps among the signatories. For example, BRICS countries have established a US $10 billion Foreign Exchange Stabilization Fund and launched a series of financial products and credits denominated in RMB, taking this opportunity to strengthen the widespread use of RMB for cross-border settlement, investment, and financing, forcing governments to recognize the important role of RMB as one of the reserve currencies of some Southeast Asian countries, Eastern Europe, and Africa. Although the internationalization of RMB is a long process, the withdrawal of QE and the shrinking of the balance sheet can be used to comprehensively promote the internationalization level of RMB settlement, reserves, and investment. Properly adjust the investment strategy of foreign exchange reserves strategies. China should actively adjust its foreign exchange reserve investment strategy and steadily promote the diversification of foreign exchange

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reserve assets. In the long run, we should curb the growing foreign exchange reserves, reduce the proportion of foreign exchange reserves in foreign currency assets, and “hide” the direction of change. At the same time, we should innovate the use of foreign exchange reserves, vigorously support Chinese enterprises to “go global”, propose to set up a sovereign wealth fund in pension and energy, and expand alternative investment around the world, so as to improve the return on investment of foreign exchange reserves. Increase the purchase or acquisition of bulk commodities and strategic resources from emerging economies. With the decline of commodity prices and the continuous appreciation of the RMB, China’s foreign commodity trade and strategic resources conditions have improved significantly. From the perspective of demand, despite China’s economic restructuring and declining demand, China’s urbanization and infrastructure resources are still in large demand with the deepening of economic reform. Therefore, it is still a good time to merge or acquire overseas commodities and strategic resources.

CHAPTER 11

China’s Economic Adjustment and Rebalancing: Inspirations, Challenges, and Strategies

Over the past 40 years of reform and opening up, China has made great achievements, but the changes that have taken place are also changing the original rules of the world. How to skillfully follow and adapt to this change and achieve rebalancing challenges the wisdom of both China and the major countries in the world. How to grasp this rare period of strategic opportunity? An in-depth and thorough analysis combined with the current global situation will help us to judge the current economic situation comprehensively and accurately, and it is also of great significance to formulate the right response measures. The current situations under the economic crisis. The international financial crisis has slowed down China’s real economy, greatly reduced external demand, and made its exports difficult, and the adjustment period is likely to last quite some time. Nevertheless, the fundamentals of China’s economy are still improving, and the trend of growth has not changed. In addition, compared with other markets, including developed countries, the current liquidity is very abundant in China, these are all signs of China’s economic recovery. China is facing the pressure of export, but because of its large economic scale and the stage of development, it

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Weiping, Social Trust, https://doi.org/10.1007/978-981-99-2931-3_11

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can maintain a relatively stable growth by stimulating consumption, active fiscal policy, and moderately loose monetary policy.1 The direction of economic reform. China has much more potential to increase domestic demand than exports. In the next 40–50 years, China will need to invest in many aspects to expand the pace of urbanization, and it will also shift more to an urban economy, which will be more environmentally friendly and efficient. In addition to the 4 trillion yuan investment plan in 2008, China needs a long-term higher level of public investment. China needs a better strategy to finance public expenditure. Improve the capital market. Under the background of economic crisis, whether the dividend system of state-owned enterprises can be applied to the construction of social security system, further increase social security, reform the price of resource factors, and further improve the capital market are the key to the sustainable development of China’s economy. However, it is necessary to realize that any adjustment at the institutional level must be based on China’s national conditions and basic reality, which determines that China’s economic transformation will be a gradual process.

1

The Enlightenment of China’s Economic Adjustment and Rebalancing Strategy

The general idea of China’s participation in the global economic rebalancing strategy. The global economy has been running in a state of continuous imbalance in the past 40 years, during which the East Asian financial crisis, the U.S. subprime mortgage crisis and the global financial tsunami caused by it are all the results of the unbalanced world economy suffered from the asymmetric impact. Global economic imbalances are concentrated in the accumulation of large current account deficits in the United States and the continued growth of current account surpluses in emerging East Asian economies such as China and oil-producing countries. The external current account imbalance is caused by the imbalance in the internal economic structure of both sides and is influenced by the inherent international economic system. In the circulation mechanism of global economic imbalance, the U.S. and others provide consumer

1 Liu Weiping, China’s Economic Adjustment and Rebalancing: Implications, Challenges and Strategies, People’s Forum, Academic Frontiers, January 2018.

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demand, while East Asian countries and oil producers produce supply. This mechanism is extremely unstable. Once the United States and other developed countries encounter the crisis and can’t provide sufficient consumption demand, the whole world economy will be in a difficult situation. While being fully passive, China and other surplus countries do not enjoy the growth dividend corresponding to the amount of their reserve assets, but become the target of shifting the crisis. Therefore, the global economic rebalancing is ostensibly to achieve the balance of external current account income and expenditure, but in essence, it is to achieve the optimization, adjustment, and balance of internal consumption, savings, and investment structure in developed and emerging economies. The new trend of global economic rebalancing in the post-financial crisis era. Due to the impact of the international financial crisis, global economic imbalances have been temporarily adjusted. Although the circulation mechanism causing the imbalance has not changed fundamentally, some new trends have emerged in the global economic rebalancing. The goal of economic rebalancing has been expanded from mere trade rebalancing to balanced development among countries. The global spread of the international financial crisis shows that global economic imbalances are not only trade imbalances, but also involve imbalances in global finance, investment, and other fields. At the Paris Summit after the outbreak of the crisis, the G20 put forward indicators to assess imbalances, including public debt, fiscal deficit, private savings rate, and trade account, and extended the adjustment indicators of global economic rebalancing from trade to multiple fields. The G20 has become the most prominent imbalance governance mechanism in the world, and emerging economies have gained more voice in global economic governance. The G20 not only provides more equal rights for dialogue between developed countries and emerging economies, but also provides a better platform for coordination and dialogue on the differences and differences among the 11 emerging economies within the G20, and provides more opportunities for G20 members to contact with institutions such as IMF and World Bank under the Bretton Woods system. Through the G20, emerging economies represented by China successfully achieved the reform of IMF voting shares.

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Developed countries such as the United States, which are deeply affected by the financial crisis, will require emerging economies represented by the “BRICS to assume more global economic governance obligations, so as to implement new trade protection in the name of global economic rebalancing. Global trade protectionism may therefore rise again, and international economic and trade conflicts will continue to increase. In addition, the “re-industrialization of developed countries may also have a new impact on the international economic and trade pattern and rebalancing. China’s overall strategy to participate in global economic rebalancing. After more than 40 years of reform and opening up, China has become a major economic power in the world. It has been deeply integrated into the global economic system, and its influence on the world economy has been growing. At the same time, as one of the major surplus holders, China is an important force for global economic rebalancing, both in terms of its own economic development and its image as a responsible major power. Under the impact of the financial crisis, the US economic recovery is weak, which will exert huge pressure on China in all aspects, and China-US economic and trade relations will face new challenges and tests. Therefore, when formulating its strategy for global economic rebalancing, China must follow the principle of self-centered, internal and external consideration, active participation, and mutual benefit. China, as a large developing country and a major unbalanced surplus contributor, is also a relatively good economic performer. It faces heavy pressure from the international community when participating in global economic rebalancing. However, as a developing country, China still faces many problems in its own economic development. The global economic imbalances are not mainly caused by China and cannot be resolved only through China’s adjustment. Therefore, we must adhere to the principle of “self-centered”, maintain the direction, speed, and extent of rebalancing, shoulder the responsibilities within our capabilities, and safeguard national economic security and interests. The strategic goal of China’s participation in global economic rebalancing should not only be to achieve the relative balance of international payments, but also focus on the following aspects: First, by adjusting the unbalanced internal and external economic structure to change the investment and export driven economy into consumption driven

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economy and change the resource input driven economy into innovationdriven economy, providing new impetus for China’s sustainable economic growth. Second, we should actively participate in the global economic rebalancing led by the G20, play the unique role of a major developing country, safeguard the interests of China and other developing countries, enhance China’s voice and participation in global economic governance, and improve China’s international status; Third, by creating consumer demand to gradually achieve a balance between imports and exports, achieve mutual benefit and win–win results for our economic and trade partners, and create a more favorable external environment for China’s economic development. The internal and external paths of China’s participation in the global economic rebalancing. China’s participation in global economic rebalancing requires an open economy that combines both internal and external steps. The internal path focuses on structural adjustment, while the external path focuses on coordination. Only the internal and external linkage can enable China to truly solve the structural problems that hinder the sustainable development of China’s economy in a relatively loose external environment, so as to achieve real rebalancing. In terms of internal path. First, balance the savings and investment through equalization of opportunities and income, so as to stimulate domestic private consumption. Restricted by preventive motives such as pension, medical care, housing, children’s education, and traditional consumption concepts, China’s private consumption is still weak. The existing policies mainly promote the equalization of income distribution results through the government’s secondary income distribution and the construction of social security system, but ignore the impact of opportunity equalization on the primary income distribution. Therefore, on the basis of continuing to improve the construction of the social security system and increasing farmers’ real income and other policies, it is more important to strengthen the equality of opportunities in education, employment, entrepreneurship, and public services, steadily promote the collection of inheritance tax and gift tax, and reduce people’s actual tax burden when appropriate. Second, strengthen the market competition mechanism, accelerate the building of an innovative country, realize the upgrading of the value chain, and reduce the “shifting” surplus level. A significant part of China’s current account surplus is attributable to the “shifting” exports of final assembly products brought about by foreign direct investment in China,

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which reflects the position of China’s current resource endowment and comparative advantage in the international division of labor. Under the current international division of labor system, China should pay more attention to the upgrading of the value chain, so as to truly improve the quality of economic growth. The key to achieve this goal is still the improvement of innovation capacity and technological level. Only by further strengthening the market competition mechanism can we create the necessary soil for commercial activities of innovation, which is more important than increasing government investment in research and development. Third, improve the efficiency of virtual economy and optimize the structure of real economy and virtual economy. Finance is the core of resource allocation in the modern economy. China should accelerate the deepening of banking market reform, strengthen the construction of capital market system and supervision, and improve the efficiency of financial resource allocation for the real economy. The development of virtual economy not only helps to keep the current account surplus for domestic use, but also promotes the innovation activities of enterprises and stimulates domestic private consumption, which is one of the keys to China’s economic rebalancing. In terms of external paths, first, institutionalize the G20 international coordination mechanism. The G20 is more broadly representative than the G8, and as the recovery in Europe, the US, and Japan falters, and the more dynamic emerging economies will have a greater say in the global economic rebalancing than ever before. China needs to work with BRICS and other emerging economies to institutionalize the G20 mechanism, strengthen domestic and international policy coordination with developed economies, and promote global economic rebalancing. Second, strengthen bilateral coordination with the United States, Japan, and Europe, and develop economic and trade relations with developing countries in Asia, Africa, and Latin America. The most important of these is the coordination of China-US economic and trade relations. As the most important surplus side and deficit side of the imbalance, if China and the United States can truly achieve economic structure rebalancing, the global rebalancing will come naturally. This requires the two powers to coordinate their domestic and international policies while pursuing their domestic economic goals. In addition, in order to enhance the stability of economic operation and reduce the concentration of imbalance direction, China should gradually change its high

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dependence on European and American markets and realize the diversification of export markets. At the same time, we should continue to expand imports, provide new export markets for other countries, enhance their integration with the Chinese economy, share the fruits of China’s economic growth, reduce the “China threat” theory, and achieve mutual benefit and win–win results. Third, actively participate in the reform of the international monetary system and steadily promote the internationalization of the RMB. The US dollar dominated the international monetary system established by the strong economic and financial strength of the United States, which is one of the important reasons for the global economic imbalance. Therefore, the reform of the dollar-led international monetary system is an important condition for the active participation of multiple parties in the global economic rebalancing. The internationalization of RMB is a prerequisite for enhancing China’s position in the future international monetary system, but the internationalization of RMB should follow the principle of gradual, steady, and controllable. With the acceleration of the free conversion of RMB, it is urgent for the Chinese government and enterprises to improve their risk management ability under the floating exchange rate system.

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The Challenges of China’s Economic Adjustment and Rebalancing Strategy

After the international financial crisis, although the global financial structure has not undergone fundamental changes on the whole, after the shock of the crisis, the international financial industry has made corresponding adjustments in the reflection, thus causing some new changes in the global financial structure. In this changing financial environment, how to further develop China’s financial industry and avoid crisis as much as possible in the process of development, so as to better serve the real economy, has become an important issue that must be faced after the crisis. The timely measures taken by the Chinese government helped the economy achieve a V-shaped reversal and maintain a relatively high growth rate, which helped support the two-speed recovery of the global economy. In spite of this, the sovereign debt crisis in some European countries and developed countries may lead the global economy to a double-dip recession. Meanwhile, the fundamental problems restricting

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China’s economic development, such as insufficient consumer demand and unreasonable economic structure, cannot be solved in a short time. China’s economy is facing multiple internal and external challenges. Rising inflation and declining economic growth are increasing the risk of “stagflation”. After the outbreak of the global financial crisis, the Chinese government resolutely implemented an expansion policy to stimulate domestic demand in the face of rapidly declining foreign demand. At the end of 2008, the central government decided to invest 4 trillion yuan to stimulate domestic investment. In 2009, the total money supply reached 13.5 trillion yuan, an increase of 28.42%. Under the strong stimulus of expansionary fiscal and monetary policies, the task of “maintaining 8%” economic growth in 2008 was accomplished, and the GDP growth rate reached 8.7% in 2009. However, under the international environment of global low-interest rates and the two quantitative easing monetary policies of the United States, China’s domestic expansionary macroeconomic policies have led to rising inflation levels. On the one hand, the economic recession and trade protection in the United States and Europe have worsened China’s export environment. China’s GDP growth is strongly dependent on the trade surplus, and the Europe and the United States are China’s main export markets. Therefore, changes in the external economy greatly restrict the development of the domestic economy. On the other hand, the unreasonable economic structure weakens the effect of policies, and the effect of economic stimulus policies is getting weaker and weaker, the space for further stimulus measures is getting smaller and smaller. Private investment has not been fully mobilized, and SMEs have difficulty in financing. In addition, China’s economy is excessively dependent on exports, which are mainly labor-intensive low-value-added products. With the increase of labor costs and the opening up of Vietnam and other countries, the way to promote economic growth by relying on export advantages will not be sustainable. As for the “stagflation phenomenon in Western developed countries in the 1970s, many economists believe that the causes of “stagflation” are mostly the results of the implementation of demand management policies. According to Keynes’ theory, the combination of proactive fiscal policy and expansionary monetary policy in response to the crisis can promote the improvement of effective demand of national economy, and thus promote the growth of national economy. However, inflation occurs when too much money is issued chasing too few goods. In order to reduce inflation, the authorities often implement tightening policies. The

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tightening of monetary policy increases the interest rate, thus increasing the production cost of enterprises, and thus increasing the cost of the entire economic operation. As economic growth declines, “stagflation” occurs. The United States experienced “stagflation” from 1970 to 1983. The economic growth rate was high, but the inflation rate was also high, so the real growth rate was zero or negative. At present, if China fails to effectively manage inflation expectations, curb the continuous rise of inflation, and eliminate the adverse factors that lead to the decline of economic growth, it may lead to “stagflation”. China’s economy is at a critical stage of economic development. We should be alert to the risk of “stagflation” caused by rising inflation and falling economic growth. The change in international division of labor system and the rising cost of enterprises bring the pressure to reshape industrial competitive advantage. Due to the re-industrialization of developed countries, the rising costs of Chinese enterprises and the gradual prominence of the advantages of low costs and young population in India and other countries, make China’s industrial technology must be upgraded to maintain its advantages. In the international division of labor system, China is in a lower position, and its technological innovation ability is insufficient. The changes in the international division of labor system and their mutual effects will have a huge impact on China’s existing export-oriented economic development mode. Moreover, Chinese enterprises are also facing the challenge of rising costs. Enterprises costs rose sharply after the financial crisis. First, the rise in commodity prices has increased the cost of enterprises. The monetary policy of quantitative easing in the United States made the dollar continuously depreciate, resulting in the rapid rise of global commodity prices in dollar terms. Coupled with the continuous appreciation of the RMB against the US dollar, the prices of these commodities will rise even more when converted into RMB, which will have a greater impact on exporters. Secondly, the carbon emission design of developed countries puts China under great pressure to reduce emissions, and the energy conservation and emission reduction of various enterprises also aggravate the rise of enterprise costs. Faced with the changes in the international division of labor system and the trend of rising costs, Chinese enterprises are facing unprecedented challenges in their competitiveness and need to rebuild new competitive advantages.

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In dealing with climate change and the trend of low-carbon development, China’s economy faces new challenges. In response to climate change, developing a low-carbon economy has become a global consensus, which poses great challenges to China’s existing development mode. China’s coal-based energy consumption structure is difficult to adjust, and in the transition to low-carbon development mode, more technology and capital investment will be needed. However, China’s industrialization, new-type urbanization, and modernization are still in the rapid development stage, and the demand for traditional energy is growing rapidly, which inevitably leads to high emissions of greenhouse gases. On the one hand, it is the pressure of the international community to reduce emissions, and on the other hand, it is the inherent requirement of domestic development, which makes China in a dilemma. Therefore, China will face huge challenges in developing low-carbon economy. For developing countries like China, the development of low-carbon economy will have a great impact on the existing production structure, consumption structure, and foreign trade structure, and directly affect the smooth transformation of the economy in the post-crisis period. First, according to the current “carbon tariff” design of developed countries, China’s previous advantage of low labor price will no longer exist. On the contrary, the price of industrial products in developed countries will decline relatively, and the technological lead will be more obvious. Second, the right to set standards for advanced technologies has always been in the hands of developed countries. In the trend of low-carbon economic development, developed countries will undoubtedly make use of their technological advantages to set standards in line with their own interests. Third, the burden of emission reduction is heavy. Due to China’s overall technology research and development capacity is limited and its technology level is backward, the equipment and technology needed to develop low-carbon economy need to be imported, which is an economic burden for China. Fourth, limit the responsibility for emission reduction. Emission reduction is a global consensus, which is both a commitment and a responsibility for China. While China is transforming its economic growth mode and adjusting its economic structure, the limited global carbon emission budget space will make China bear too much international obligations such as carbon emission while facing huge pressure of domestic development. Developed countries are also imposing unrealistic carbon emission requirements on China, which is bound to bring greater pressure to China.

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As the global sovereign debt crisis intensifies, China’s economy will also suffer a negative impact. Since the Greek issue, Belgium, Portugal, and Spain have successively exposed their domestic deficits, and the European sovereign debt crisis broke out in an all-round way. In fact, developed countries including the United States are currently facing a high proportion of sovereign debt globally. The problem of China’s monetary policy platform cannot be ignored. If it cannot be properly handled, it is likely to evolve into a global public debt crisis. It is conceivable that the worsening European debt crisis will eventually affect the entire European economy, and China’s economy will also be affected. This impact is mainly reflected in two aspects: foreign trade exports and hot money inflows. In terms of exports, the first affected enterprises are those that rely heavily on euro zone exports. With the deepening of the global financial crisis, Europe’s import demand is bound to decline, and the euro zone’s trade protectionism against China will rise again. In addition, as the exchange rate of the US dollar against the euro continues to rise, the effective exchange rate of the RMB will also recover on the basis of the appreciation rate of the RMB against the US dollar, which will ultimately be bad for exports. The scale of foreign exchange reserves has grown tremendously, and the management system needs to be reformed and innovated urgently. In the 17 years from the reform of the foreign exchange system in 1994 to 2001, China’s foreign exchange reserves have risen from US $51.62 billion to US $3044.674 billion, an increase of nearly 58 times, with an average growth rate of 35.98%. Especially in recent years, under the strong expectation of RMB appreciation, the balance of payments has changed from the traditional current account surplus to the “double surplus” of current account and capital financial account, and the inflow of hot money has further exacerbated the expansion of reserves. Such a huge foreign exchange reserve has increased the difficulty of its own management in the post-financial crisis period. However, the current situation of China’s reserve asset investment has brought great challenges to the management of stock assets. Commodity prices have fluctuated sharply, and uncertainties in economic development have increased. After the international financial crisis, commodity prices fell by nearly 40% from the historical peak in April 2008, but by September 2010, they had roughly recovered to the 2008 level, and since then, commodity prices have been on a rising trend. China is a processing center in the global industrial structure, and the processing

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trade outside raw materials and markets accounts for a relatively large proportion in the overall trade structure, which makes China one of the most important importers of energy and primary products in the world. The fluctuations of the international commodity market will have a more obvious and huge impact on the Chinese economy. At present, international liquidity is still surplus. At the same time, under the continuous recovery of the world economy and the gap between supply and demand of commodities, international commodities have been operating at a high price, which brings great pressure to China’s economic development. First, it will exacerbate imported inflationary pressure in China. Because energy expenditure such as oil and food account for a larger share of China’s economy, the impact of fluctuations in international commodity markets is more pronounced. The international market price is transmitted to the domestic market through international trade, which increases the domestic price level and leads to an increase in imported inflation pressure. Moreover, in the long run, China’s economic prospects are good, and the demand for commodities will be more robust, which will inevitably face the input of price pressure. Second, it faces “second-round effects”. Higher prices for commodities such as food and energy will feed into the current consumer price index, adding to inflation expectations. In theory, as long as commodity prices fall back, rising inflation will return to a rational level. However, due to the aggravation of inflation expectations, employees will demand higher wages to maintain their purchasing power, while enterprises have to raise the prices of products and services due to the rising costs. As a result, as long as expectations of future inflation develop, companies and workers are trapped in a vicious cycle of rising prices, even if commodity prices fall back. This is the so-called “second-round effect”, and it is a potential danger China is facing. Third, the export trade situation is grim. Due to the chronic shortage of domestic demand, China’s economic development relies heavily on export trade, and it is impossible to transfer production costs by raising prices. As a result, the profit margin of enterprises is squeezed and the export trade is greatly affected, which will cause the fluctuation of China’s economy to a certain extent. A large number of international hot money flows in and out, affecting the smooth operation of the market. After the financial crisis, the inflow and outflow of international hot money will easily cause economic bubbles and increase financial risks. As a result, China’s current real estate

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bubble has emerged, which has increased the difficulty of government regulation. Once the international environment changes, the sudden withdrawal of hot money will make the bubble burst quickly, causing serious market turbulence, and then the blow to China’s economy will be fatal. The more hot money flows into China, the more foreign exchange reserves there are, forcing the central bank to passively increase the supply of money. If hot money continues to pour in, the demand for RMB will rise, and finally increase the pressure of RMB appreciation. The continuous strengthening of RMB will attract the entry of international hot money, which will cause a vicious circle and reduce the effect of macrocontrol. Hot money inflows and outflows disturb financial order and impact economic development. After the financial crisis, China’s economy was the first to recover, and its promising development prospects attracted the influx of hot money. In recent years, hot money has entered China in various ways, speculating everywhere for high profits, mainly pouring into the domestic real estate market, the stock market, and other fields, posing a threat to the healthy development of the economy. Moreover, hot money is everywhere in the commodity markets, which further boosted the strong rise of commodity prices, increased the production costs of Chinese enterprises, and impacted the development of China’s economy.

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The Strategy of China’s Economic Adjustment and Rebalancing

Challenges: coordinated development of resources, environment, society, and economy. At present, China’s economic development needs to solve three problems urgently: the first is to coordinate urban and rural development and regional development, change the urban–rural dual system; Second, change the mode of economic development and upgrade and transform the economic structure; Third, we must address the three major challenges of “resources”, “environment”, and “coordinated social and economic development” in the process of internationalization. At the same time, China’s economic development also faces three major development challenges: uneven economic development, energy and environmental bottlenecks, and the widening gap between the rich and the poor. Without a large net transfer of funds from the rich to the poor, there would be huge regional differences in the allocation of financial resources. The imbalance between economic and social development and

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the structural imbalance within society and economy have become the unique background of China’s reform and development. Although China has entered the middle stage of industrialization, it is still a developing country with half of its labor force engaged in agricultural production. The task of industrialization is far from complete. On the one hand, in accordance with the national development strategy and macroeconomic policies, there are still a large number of key areas and weak links that need financing. On the other hand, in the important stage of transforming the mode of economic development and adjusting the economic structure, a prominent problem we need to solve is how to transform the products that have been in high energy consumption and low added value for a long time to the level of low energy consumption and high added value. In 2020, China’s urbanization rate has just exceeded 60%, which is still far behind the average level of developed countries of around 80%. It is this gap and pressure that determine the huge space for China’s urbanization development and the demand for China’s urbanization construction, industrial upgrading, transformation, and development in the coming decades or even centuries, which will be the driving force for China’s and even the world’s stable economic growth. At the international level, China has entered a new stage of development by implementing the “go global” strategy and is faced with new opportunities for development. At the same time, China also needs to participate in international cooperation through various channels to familiarize with international rules and seek and control its development space. On the one hand, we need to “explore” resources for the national development into the international market; On the other hand, while promoting global GDP growth, China, as a responsible major country, needs to establish the mode transformation from the concept of “exploration” to the concept of “development”, and export the whole set of sustainable development plans to the investment target countries, so as to promote the transformation of economic development mode and the balanced and coordinated development of society. Specifically, as long as China continues to grow, the market will continue to work for China. When China becomes a major power integrating global energy, resources, population, capital, and technology, these factors of production will inevitably begin to be highly mobile. This will change the status of countries related to China’s economy, politics, and other aspects in the world economy, and the change of national status

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will eventually lead to the change of the entire international political and economic order. From the perspective of macro system, the process of China’s promotion of globalization will be a process of major changes in the international financial and trade order. With the gradual enhancement of global convertibility, RMB will certainly develop into one of the major currencies in the future world. From the perspective of micro market supply and demand, China’s basic industries such as energy, raw materials, and transportation will be the next breakthrough in the reform. However, the reform of basic industries has been slow, with many monopolies, leading to inefficient economic operation. The reform of basic industries will release the potential for future economic growth. Quick actions: A shift to integrated planning for economic and social development. As early as the end of the twentieth century, China put forward the slogan of boosting domestic demand, but why the domestic demand is shrinking? Of course, the severe polarization of income distribution and the excessive marketization of education, social security system and housing are the two main causes, but people have not noticed that the export-oriented economic development mode and foreign direct investment, which are closely related to the development strategy of the international circular economy, are another major cause, and the development strategy of the international big circular economy is one of the important factors causing the serious polarization of income distribution. In the era of globalization, China’s economic development mode is marked by the world’s factory. Based on its comparative advantage of cheap labor, China participated in the global division of production and expanded its exports by vigorously absorbing efficiency-driven foreign direct investment and inter-business trade of multinational corporations. We will increase imports and exports of energy, resources, and products to drive domestic economic growth. China’s economic development has been relying on processing trade and the division of labor at the lower end of the global production chain to participate in the whole process of globalization. In fact, more than 70% of China’s current GDP is related to trade, and multinational corporations account for nearly 60 percent of China’s foreign trade, both in imports and exports. Domestically, in order to accelerate the transformation of economic development mode, China should make strategic planning as soon as possible, learn from the historical experience of the UK and the US, and gradually realize the strategic transformation from the “international circulation” to “national circulation”. We should be soberly aware that,

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contrary to the original intention of the development strategy of the international circular economy, the “big import and big export” has not solved the contradiction between the coastal and inland areas. Instead, it has led to the siphon of capital, resources, and labor to the export-oriented sectors in the coastal areas, creating a “dual economy” divided between the external and domestic demand. It is the main reason that domestic demand cannot be started for a long time, the investment opportunities of national enterprises are crowded out by foreign capital and cause serious economic bubbles. This strategy not only failed to communicate the circular relationship between agriculture and heavy industry, but also caused the overcapacity of low-end products of heavy industry and the monopoly of high-end technology by transnational corporations. It also becomes the main source of higher education with no way out, urbanization development is seriously lagging behind, and “three rural issues” become deadlocked and employment problems become increasingly serious. The author believes that China’s future development philosophy in the world economy and global governance should realize the strategic transformation from “comparative advantage” to “competitive advantage”, and from “scientific” to “ideological” development, and in this way, formulate strategies and methods that meet China’s national conditions and needs to participate in the development of global governance. This is a major issue for the development of medium- and long-term investment and financing brought forward by the current social system crisis. However, from an international perspective, the transnational planning of China’s investment in Africa may go further, transforming from development finance to comprehensive planning of economic and social development. The recent political turmoil in the Middle East and North Africa, especially China’s investment in Libya, Sudan, and other countries, shows that only helping capital importing countries achieve economic growth cannot solve a series of political and social problems in these countries after economic growth. These development plans must also incorporate indicators for social development. Only when economic growth is accompanied by solving the problem of distribution and ensuring that all social groups share the fruits of growth can we expect political stability in these countries and thus reduce the risks of Chinese investment. But this is precisely the problem that China has not been able to solve at home. In turn, the need for future Chinese investment in Africa requires that China must first solve its own social problems in the process of development.

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Setting a reform agenda beyond the economy: economic investment and social assistance. From the analysis of the international economic situation, the goal of economic rebalancing has expanded from simple trade rebalancing to balanced development among countries. Compared with developing countries, similar starting conditions and world political status make the economic and social development of China and countries in Asia, Africa, and Latin America inherently complementary and consistent. The long-term growth of China’s economy inherently includes the development elements of countries in Asia, Africa, and Latin America. Whether these countries can achieve their own development is closely related to, or even dependent on, China’s economic development. Aid and investment in Asia, Africa, and Latin America can be divided into two categories: “social infrastructure construction” and “economic infrastructure construction”. EU countries focus on “social infrastructure construction”, while China’s development finance is planning to invest in Africa mainly in “economic infrastructure construction”. The “social infrastructure construction” without hematopoietic function is characterized by “non quantifiable non-material”, “project”, and “nonplanning”. Therefore, the EU’s aid to African countries cannot have national and transnational significance planning; The “economic infrastructure construction” with hematopoietic function is characterized by “quantifiable materiality”, “overall structure”, and “planability”. In this process, the EU is just a non-governmental institution of an international organization. It is impossible for the European Union, like the National Development Bank, to promote enterprises to “go global” through national financial behavior according to the needs of national development strategies. This win–win mode of “positive planning”, “teaches people how to fish”, is increasingly welcomed by many African countries and Chinese enterprises of “going-global”. At the same time, China’s development financial institutions will carry out large-scale economic investment and social assistance to Asia, Africa, and Latin America, namely “economic infrastructure construction” and “social infrastructure construction”. However, the crux of the question is how do we integrate “economic investment” and “social assistance” when comparing development financial institutions such as the National Development Bank with international financial institutions such as the World Bank and the European Union with non-national credit? These two questions need to be answered simultaneously. Therefore, we need to develop a reform agenda that goes beyond economics and incorporates

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important elements such as economic investment and social assistance into national development strategies. At the same time, China should continue to expand the import market, provide new export markets for other developing countries, strengthen their economic cohesion with China, share the fruits of China’s economic growth, reduce the “China threat” theory, achieve mutual benefit and win–win results, and gradually change the international economic and trade cooperation. In particular, in the process of investment in Asia, Africa, and Latin America, the “political and economic dualism” pattern appeared. Demonstrate confidence and determination in reform: promote the opening of the “One Belt and One Road” to the west and advance the Eurasian strategy. China’s economy is in a critical period of transforming its growth and seeking a new balance. In essence, the transformation of growth stage is the transformation of growth impetus, a process in which the original competitive advantage is gradually weakened and the new competitive advantage is gradually formed. It is also a process in which the original balance is broken and a new balance needs to be found and established. The overall economic operation is relatively fragile. Under this strategic background, the development goal of “accelerating the transformation of economic development mode, promoting long-term, steady and rapid economic development, focusing on adjusting economic structure, and expanding domestic demand as the strategic basis” proposed by the Central Committee will surely become an important strategy for transforming the traditional development mode into a comprehensive plan for economic and social development, and seeking for the driving force and rebalancing of economic growth. It is also a demonstration of China’s confidence and determination for reform and development to the world. From the perspective of China’s development in the next decade, decades, or even longer, the development of industrialization, urbanization, modernization, and internationalization will be complemented by the blue ocean strategy, land-rights strategy, the Eurasian economic integration strategy, and the westward opening up in the process of economic transformation and development and the important strategy of expanding domestic demand. Among them, promoting the development of the “One Belt and One Road”to the Western region, using high-speed rail as the basic means of transportation connection, and promoting the economic integration of the Eurasian continent will bring about an era of land power and enable the country to establish a hedge situation matching the blue ocean strategy. We should adapt to the new situation. While

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continuing to promote coastal opening up and opening to the east, we should speed up the coastal opening up and opening to the west, and expand the space for open development and cooperative development. A new round of Xinjiang aid work should also be planned and promoted under this background. The construction of high-speed railway lines from China to Central Asia, South Asia, the Middle East, Eastern Europe, Russia, and finally Western Europe will strongly promote the economic integration of the “Silk Road Economic Belt” and Eurasia. Transport arteries linking Eurasia will realign factors of production in the countries along the route, creating new demand and attracting new investment. This will lay a foundation for regional economic integration. In the process of Eurasian economic integration, China could be the eastern driving force, the European Union the Western driving force, Russia the northern driving force, India the southern driving force, and progress in all directions could converge in the Middle East. To develop the Western region under the grand strategy of promoting the economic integration of the Eurasian continent of “One Belt and One Road”, make it become a pole of China’s economic development and inevitably cause migration to the west. Such migration would ease pressure on land use in the east and create conditions for strict controls on commercial exploitation of arable land. This will raise the significance of developing the west to a new height: it will no longer be a natural extension of the economic development of the coastal areas, nor a social policy simply to solve the imbalance of regional development, nor a necessary measure to maintain stability. It will become an important pillar of China’s international strategy. The development of the Western region will promote the transformation of the traditional development mode into a comprehensive plan for economic and social development, and will also become an important driving force for China’s balanced economic development. This land-rights strategy will fundamentally reverse a series of unbalanced economic structure and social development, as well as the political and social problems arising from the simple reliance on blue ocean strategy in the past 40 years. To sum up, the construction of high-speed railway to promote the economic integration of Eurasia under the “One Belt and One Road” will bring about the rapid development of Western China. The economic development and opening up of Western China will provide the second engine for the long-term balanced development of Chinese economy. Not

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only that, it will also help China solve the serious development imbalances caused by the Blue Ocean strategy in the past 30–40 years. This is a grand strategy for China to seriously consider in the twenty-first century.

4

Five Fulcrums for China’s Economy to Cope with Current Challenges2

The sudden COVID-19 has had a significant impact on China’s political economy. The real challenge facing China today is the unsustainable growth rate, which is due to insufficient demand. To solve the problem of expanding demand and sustained growth, reform needs to be carried out on multiple fronts. First, the current financial system has played an important role in promoting economic growth, but there are problems in the structure of revenue and expenditure, the central and local financial arrangements, and the ability to collect information. The reform of the financial system is an effective way to solve these problems. Second, China’s economy will experience its weakest quarter since 2009, decelerating in a soft slump. Therefore, the principle of competition neutrality should be implemented, monopolies should be broken, and private enterprises should play a bigger role. Third, actively and steadily promote urbanization and improve the quality of urbanization. Fourth, China has now entered the decisive stage of building a moderately prosperous society in all respects. Its internal and external economic environment is undergoing profound changes, bringing both opportunities and challenges. Therefore, while increasing internal demand, China must comprehensively upgrade the level of external economic development. Fifth, to promote the high-quality development of China’s economy in the new era, with scientific and technological innovation as the primary driving force for development. The “14th Five-Year Plan” period is the first five years when our country has entered the stage of high-quality development from high-speed development. Therefore, the development mode, development pattern, and institutional foundation for high-quality development need to be further reformed and upgraded during the “14th Five-Year Plan” period.

2 Liu Weiping, Chen Jiyong, Four Fulcrums for China’s economy to cope with Current Challenges, People’s Daily • People’s Forum, May 11, 2020.

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China’s economic growth is facing a shift, some long-term accumulated social problems are becoming more and more prominent, and the original social structure and system are facing challenges. The basic idea for China to get out of the middle-income trap is to promote structural adjustment through system reform, realize industrial upgrading and transformation, and thus complete the dual transformation of economy and society. However, in promoting economic and social transformation, there are still two conflicting trends that deserve great attention. First, the institutional issues are becoming more and more prominent, while the impetus for institutional change is becoming weaker. At present, China’s reform has entered a deep-water zone and a critical period. The remaining hot spots and difficulties in reform are all inextricably linked to the current system. China’s structural reform is far from complete. As China enters the middle-income stage, the extensive growth mode in the take-off of economy is no longer effective, and it is urgent to reform the social structure and interest pattern at the institutional level. However, while institutional reform is becoming more and more urgent, the motivation for reform from within the system is becoming weaker and weaker. Secondly, the problems that were not solved in the early stage of the reform have become more and more difficult. Different from radical reform, China’s reform adopts a gradual mode, and the determination of various reform contents usually follows the principle of large benefits and small resistance. For example, the initial breakthrough of the reform chose the rural areas where the reform cost was lower, rather than the cities where the reform cost was higher. For example, the initial breakthrough of the reform chose the rural areas where the reform cost was lower, rather than the cities where the reform cost was higher. There is a problem with the gradual reform, that is, those “hard bones” that are the most difficult to chew will be delayed, and eventually the most difficult areas will be concentrated together, forming a complex situation that affects the whole body and makes it difficult to carry out reform. For problems not solved in the early stage of the reform, the cost of reform will not be reduced, but may continue to expand, and eventually form a situation that cannot be undone. In view of these two conflicting trends in the process of economic and social transformation, as well as the decline in aggregate demand caused by the combined impact of COVID-19, China-US trade, economic

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downturn, and employment, reform needs to be carried out in the following four areas: 4.1

Improve the Fiscal System to Compensate for Slowing Economic Growth and Weakening Export Markets

While socialist economies are characterized by their ability to own and control critical resources and lead major strategic activities, China’s total fiscal budget is only 28% of GDP, which is small compared to other similar countries or economies (35% in upper-middle-income countries and 40–45% in most OECD—the Organization for Economic and Cooperative Development—economies). The “China 2040” report released by the World Bank points out that compared with other similar countries or economies, China’s budget provides social services and other consumption needs as a percentage of GDP, which ranks third from the bottom in the world. This explains why China’s overall consumption ratio (household and government) is 10–15% lower than in other similar countries or economies. If we implement the fiscal budget reform and increase the government’s budget expenditure on social services and other consumption needs (4–5% of GDP) would ensure that China has enough demand to sustain growth of around 6% a year. Specifically, we should start from the following three aspects. First, we will control the scale of public finance and optimize the tax structure. The first is to adjust the VAT rate. According to the announcement on matters related to the 2019 VAT reform , “For VAT taxable sales or imported goods of general taxpayers, the tax rate previously applied to 16% will be adjusted to 13%; Where the tax rate will be adjusted to 9% if the original tax rate of 10% is applicable”. The second is to improve the collection system of enterprise income tax and individual income tax, and increase the proportion of these two taxes in government revenue. The third is to improve income distribution, establish inheritance tax and gift tax. Second, we will improve the structure of fiscal expenditure and increase unemployment insurance. The proportion of unemployment insurance expenditure in GDP should be raised from 0.07% during the 11th FiveYear Plan period to 0.5% during the 13th Five-Year Plan period. During the 14th Five-Year Plan period, we will further improve the mechanism for adjusting unemployment insurance standards and raise the level of

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unemployment insurance benefits by an appropriate amount. In addition, subsidies for urban and rural “subsistence allowances” should be raised. In order to improve income distribution and promote economic growth, it is necessary to establish a subsidy program for children from poor families to solve the problem of intergenerational transmission of poverty. At the same time, in order to better solve the social security problems brought about by the COVID-19 epidemic, the government also needs to establish a unified social security number and citizen information system covering the whole country to serve macro-control and income distribution adjustment. Third, adjust the functions of the central government and build a new relationship between the central government and local governments. Focus on government transformation, adjust the relationship between the central and local governments, and clarify their respective functions. The central government will assume more functions in regulating economic fluctuations, improving income distribution, responding to major emergencies, and improving the ecological environment. Local governments can focus more on local education, fire protection, and other matters. “Corporate and personal income taxes must be the responsibility of the central government; The central government will be responsible for unemployment insurance, pension insurance, medical insurance and social assistance, and establish a routine and emergency system covering all groups of people in the country”. 4.2

Implement the Principle of Competition Neutrality, Break up Monopolies, and Make Private Enterprises Play a Bigger Role

Implementing the principle of competitive neutrality, breaking up monopolies, and enabling private enterprises to play a bigger role are conducive to more economic growth in China. The essence and soul of a market economy is competitive neutrality, which means that all economic entities are treated equally. Given that the private sector now accounts for about three-quarters of total economic output and employment, it makes sense for China to pursue an anti-monopoly agenda that would open up more sectors of the economy. But the real question is whether China is really willing to let its economy move in this direction. At present, the answer is no. But as growth continues to decline, the Chinese government should reconsider

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this issue. If the right choices are made, there is still plenty of room for growth. Although we have recognized the need for reform, resistance from state-owned enterprises has been stronger than expected and remains a major obstacle to the implementation of reform. Overinvestment is a structural problem rooted in China’s economic growth mode. Solving this problem requires an analysis and understanding of the overall framework of China’s economic imbalances. The first is the process of economic adjustment. Economic growth will lead to economic imbalances to some extent, and economic imbalances will eventually lead to economic recession. The measure of economic capacity of developing countries is not the performance of economic growth, but the capacity of economic adjustment. The cost of economic adjustment is much higher than expected. Therefore, rather than how to make the economy grow, economists and policymakers should consider how to handle economic adjustment well and minimize the cost of adjustment. The second is debt and balance sheets. Generally speaking, the total amount and maturity structure of debt are the “largest part” of the economic adjustment cost, which is basically measured by the ratio of long-term debt to total debt, namely the balance sheet method. Therefore, economists must understand national balance sheets and sovereign financial crises must reach the level that corporate finance experts understand corporate balance sheets and corporate financial crises. The third is the savings imbalance. The capital market provides a direct channel for converting savings into productive investment. Although opportunities for productive investment are plentiful, institutional constraints in individual countries greatly reduce the capacity for productive investment. Income inequality and mechanisms that constrain the level of middle household income level (which is closely related to the growth of gross national product) often lead to excess savings. The results of excess savings include speculative asset booms, trade imbalances, unemployment, and unsustainable increases in debt. The fourth one is globalization. The globalization has made all national economies interact with each other. If there is an economic imbalance in one country or region, there must be a corresponding imbalance occur in another country or region. The more open a country’s economy is, the more likely it is to be affected by economic imbalances elsewhere.

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Actively and Steadily Promote the Urbanization and Improve Its Quality

Urbanization is an inevitable trend of economic and social development, and an important symbol of industrialization and modernization. In the new era of open economy, actively and steadily advancing urbanization and improving its quality are the basic approach and major strategy for building a moderately prosperous society in all respects and developing socialism with Chinese characteristics. The core of China’s urbanization development is how to promote the rural traditional economic and social structure to modernization in a short period of time. This requires that the human, material, and financial resources of large, medium, and small cities, urban and rural areas should be highly connected. While continuously strengthening the mutually beneficial effect of urbanization structure, an urban system with central cities as the “leader”, mediumsized cities as the main body, and small cities and central towns as the basis should be formed to continuously improve the agglomeration effect of urbanization. The improvement of the agglomeration effect of urbanization should include two levels of implications. One is industrial agglomeration to form “leading” cities and central towns. Urbanization should be based on industrial development. Without industry and employment, “leading” cities and central towns cannot be developed. Without the development of “leading” cities and central towns in a region, it is impossible to form a driving force and radiation to drive the economic and social development of urban and rural areas in the region. The second is the combination of urban agglomeration and town agglomeration. The cluster development of cities and towns is the guarantee and foundation of urbanization. Only by achieving the cluster development of large, medium, and small cities, central towns, and small towns in a certain region can the industries be highly integrated and the modernization transformation of rural economic and social structure be promoted. Therefore, the central cities and towns should be developed preferentially. We should take the development of central cities as the “leader”, vigorously develop medium-sized cities, strive to build a growth core of county towns with the county seat as the center, prosper the county economy, develop the county seat into a small city with an urban population of 100,000 to 200,000, and form a satellite city with medium-sized cities and small county-level cities as the regional central big cities, and

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urban network system with central towns as the support. Constantly improve the urban system to rural radiation and diffusion effect, so as to promote the modernization of rural economic and social structure transformation. The development of urbanization is not only a simple expansion of the size of cities and towns, but also the improvement of the quality of urbanization. If only the simple expansion of urban size, without the improvement of urban industrial quality and the strengthening of urban influence on the countryside, then such urbanization is not the real urbanization. Expanding the size of cities and towns in a “big pie” and extensive way goes against the inherent requirements of urbanization development. In order to achieve the short, medium, and long-term goals of urbanization development, we should pay great attention to the mutual benefit effect, opening effect, and agglomeration effect of the urbanization structure, attach great importance to the technological innovation and ecological environment protection of urban and rural industries, and improve the structural upgrading effect of urbanization. The improvement of urbanization quality is mainly reflected in the following aspects: first, the technological innovation capacity of urban industries is enhanced, and the speed of technological upgrading is accelerated; Second, the urban advanced technology industry accelerated the transformation and integration of rural industries, improved the technical level of rural industries, and strengthened the cooperation and relevance between rural industries and urban industrial technological innovation; Third, with the integration of urban and rural industries, institutional barriers such as education, social security, and registered residence in urban and rural areas have been gradually eliminated, and finally urban and rural institutional resources have been shared; Fourth, the life style of urban and rural areas is gradually integrated. With the integration of urban and rural economy and culture, the “de-rural” of farmers has become more and more intensified, and the traditional farmers are transforming into modern farmers. Farmers have really become part of the industrial workers. Fifth, the ecological environment in urban and rural areas has been continuously improved, and people and nature have developed harmoniously. At present, China has about 200 million to 300 million semi-urban residents (migrant workers), which is a huge potential resource in terms of consumption. Accelerating the transformation of migrant workers into full citizens will greatly promote the growth of consumer demand. To

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speed up the transformation of migrant workers into citizens, we should start from the following aspects. The first is to promote the rationalization of urban housing price. The high housing price is not accompanied by urbanization. The current housing price level in China is very high compared with the income level. Second, we will carry out large-scale housing projects for migrant workers, mainly to use government forces to establish migrant workers’ affordable housing. Third, encourage the transfer of coastal labor-intensive industries to the central and Western regions, and promote the urbanization development of the central and Western regions. It is very important for the healthy development of urbanization to maintain the stability of farmers’ contracted land management rights and enable farmers to flow bidirectional between urban and rural areas. The lessons of India and Brazil remind us that the health of urbanization has a lot to do with rural land systems. China’s basic national conditions have determined that land will remain the most basic living guarantee for farmers for a long time. Most migrant farmers are in a precarious state, and their land back home is the last line of defense for their livelihood. Before farmers settle down in cities and towns without obtaining stable employment and social security, they should retain their land contract rights and allow farmers to flow between urban and rural areas, which will help prevent a large number of farmers from gathering in cities and forming slums. To expand the scale of agricultural land and promote the industrialized operation of agriculture, we must not promote the development of crops, deprive farmers of the right to land contractual management, or create landless farmers. Adjust the thinking of urban construction, and consider the needs of migrant workers in urban employment in urban planning, housing construction, public services, and community management. The cases of India and Brazil show that housing, in addition to employment, is a major problem for the rural population moving to cities. In contrast, there is a big difference in the migration of Chinese farmers. Some farmers can return to the countryside without jobs. However, there are a considerable number of people who will work and live in urban areas for a long time with their families, and cities should consider them as permanent residents and incorporate their needs for housing, education, medical care, and other facilities into urban construction planning.

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5 Comprehensively Upgrade the Development Level of Export-Oriented Economy and Improve the Level, Standard, and Efficiency of Opening Up At present, China has completed the important stage of building a moderately prosperous society in an all-round way. The internal and external economic environment is undergoing profound changes, bringing both opportunities and challenges. To achieve the ambitious goal of building a moderately prosperous society in all respects and successfully overcoming the middle-income trap, we need to further expand opening up, continuously improve the open economic system, and give full play to the powerful driving force of opening up. Internationally, in the coming period, the world economy may fall into a long-term downturn, weak external demand is likely to become regular, protectionism of various forms is on the rise, and trade frictions will enter a peak period. The competition among countries around the market, resources, talents, technology, rules, standards, and other aspects has become fiercer. China is increasingly competing with other developing countries in industries with traditional advantages, and with developed countries in medium- and high-end industries. The external environment for development has become more complex. Domestically, after more than ten years of accession to the WTO, China’s productivity, comprehensive national strength, and people’s living standards have been greatly improved, a relatively complete industrial system has been formed, and its ability to participate in international competition and cooperation has been enhanced. China has the foundation and conditions for further opening up and upgrading its level of opening up. The international community has placed higher expectations on China to shoulder greater international responsibilities. However, China’s current economic development mode is relatively extensive, resource and environmental constraints are strengthened, traditional advantages are weakened, and new advantages are yet to be established. The task of transforming the growth mode and optimizing the economic structure is daunting. There are still many institutional obstacles to the development of the open economy. The risks of opening up to the outside world are increased, and the level, standard, and benefits of opening up need to be improved.

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In order to comprehensively improve China’s opening up in the future, the following three areas need to be broken through: First, strive to transform the growth mode of foreign trade. Firstly, we need to change the mode of export which mainly relies on low cost and quantity, change the mode of economic growth which is extensive and quantitative, and diversify the main forms of export and the forms of trade. Efforts should be made to create exports of goods and services with their own intellectual property rights and brands, control the production and export of resource-based, high consumption, and high-pollution products, and expand the export of new technology products and high-value-added products. Raise the level of processing trade, change the current situation that the volume of product trade increases while the value added of trade is low, accelerate the upgrading of products, and transform export trade from quantity expansion to quality improvement. Second, we need to adjust the structure of imported products and markets, give priority to the import of new and high-tech products, equipment, and strategic resources that are essential, important, and in short supply for domestic development, and realize the diversification of sources, methods, and channels of strategic materials import. Third, we need to develop trade in green products, strictly control trade in energy-intensive and high-polluting products, and form a trade structure conducive to resource conservation and environmental protection. Second, we will strive to raise the quality and level of foreign investment utilization. First, we should integrate the introduction of foreign capital with the promotion of domestic industrial structure and technology level, and with the promotion of regional coordinated development and the improvement of enterprises’ independent innovation ability. Through the introduction of foreign capital, the existing enterprises will be transformed and improved, and scale operation will be realized relying on the optimization and upgrading of technology. Efforts will be made to improve the benefits of structural optimization, scale economy, and regional division of labor. Instead of relying mainly on increasing capital input, we will rely mainly on improving the quality of production factors and increasing the share of contribution of comprehensive factor productivity to economic growth. Second, we should make rational use of foreign capital, develop an open economy, change the situation of irrational structure, poor product quality, and low added value, accelerate the optimization and upgrading of the industrial structure by introducing a number of high added value and high-tech products,

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and do a good job in the transformation, absorption, and innovation of imported technologies. Third, we should strengthen guidance to the investment of foreign-invested industries and regions, seize the opportunity of international industrial transfer, expand the scale of foreign direct investment, and guide foreign investors to participate in capital construction projects encouraged by the state, including comprehensive agricultural development, energy, transportation and important raw materials construction projects, and projects with advanced technologies that can improve product performance, save energy and reduce consumption, and increase enterprises’ economic returns, technology projects that can comprehensively utilize energy to prevent environmental pollution, etc. Third, we will work hard to implement the “go global” strategy of Chinese enterprises. The implementation of the “go global” development strategy is an important measure of opening up in the new stage and an inevitable requirement for the implementation of the sustainable development strategy. The report to the 16th CPC National Congress clearly stated that “we will encourage and support enterprises with comparative advantages of all forms of ownership to invest overseas, promote the export of goods and services, and form a number of powerful multinational enterprises and famous brands”. To this end, the first is to better optimize the allocation of resources globally, make full use of foreign natural resources, scientific and technological resources, and human resources, implement strategic overseas investment, and create China’s own world-class brand products. Second, we should take our technology, equipment, and products abroad, increase their share in the international market, give full play to our comparative advantages, and promote the development of the national economy in the win– win situation of mutual benefit. Third, we should actively participate in international economic competition and cooperation, carry out transnational operation and investment, cultivate transnational corporations, and make foreign investment enterprise-oriented, market-oriented, and aimed to improve economic efficiency and enhance international competitiveness. The focus of investment should be placed on energy, raw materials, and high technology.

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To Promote High-Quality Development of the Chinese Economy in the New Era, Scientific and Technological Innovation Is the Primary Driving Force for Development

According to the report on the 14th Five-Year Plan, as China’s economy is still in the historical stage of industrialization, IT application, urbanization, and agricultural modernization, the development of the real economy is still the main part of economic growth. As a result, China’s human and talent resources are huge and in abundant supply. Technology supply, on the one hand, market-led application technology research and development is increasingly active, and is becoming an important source of technology supply; On the other hand, the major core technology breakthroughs led by the state are speeding up the layout and become an important technology supply potential. China’s economic modernization is also a process from catching up to surpassing in core technology, and technological innovation will always remain active. Therefore, we must be soberly aware that there are still various worries and challenges in the development path that China has been pursuing for 40 years. China’s development path is not yet a complete development mode, and some socio-economic and political problems have not been fundamentally solved because of the rapid economic development. According to the 14th Five-Year Plan, we should systematically strengthen scientific and technological innovation and institutional innovation. The core of high-quality development is to improve efficiency and innovation capacity. Scientific and technological innovation is the primary driving force for development, the strategic support for promoting high-quality development and building a modern economy, and the core task of the 14th Five-Year Plan period. Institutional innovation is an inexhaustible driving force for development, a source of creativity and innovation in the whole society, and a source of institutional guarantee and driving force for scientific and technological innovation. Therefore, “science and technology” is the driving force to promote innovation, and “talent” is the guarantee to stimulate greater vitality. The transformation of “improving innovation capacity”, the core growth engine of the economy, requires a major adjustment of the original distribution pattern and incentive mechanism, the establishment of a new distribution pattern and incentive mechanism, and the acceleration of the reform of the important economic system that restricts industrial upgrading and the expansion of domestic demand.

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First, we will encourage scientific and technological innovation, enhance industrial competitiveness, and take the path of innovationdriven development. The “14th Five-Year Plan” period is the first five years when our country has entered the stage of high-quality development from high-speed development. Therefore, the development mode, development pattern, and institutional foundation for high-quality development need to be further reformed and upgraded during the “14th Five-Year Plan” period. After China enters the middle-income stage, the low-cost advantage of the economy will be gradually lost. Therefore, it is necessary to improve the R&D ability and attach importance to human capital, carry out industrial upgrading, and cultivate new competitive advantages. The gap between Korea and Brazil in the 1980s was small. The energy crisis that broke out in 1978 also had a great impact on South Korea, which lost the comparative advantage of labor-intensive industries. However, South Korea took the initiative to change, promoted industrial upgrading through the implementation of the strategy of “building a nation by science and technology”, and finally completed the transformation from light industry to technology-intensive heavy industry, and realized the transformation from “technology imitation” to independent innovation. Today, scientific and technological innovation contributes more than 70% to South Korea’s economic growth. Relying on scientific and technological progress to change the mode of economic development by improving the scientific and technological innovation ability, we need to start from the following two aspects: first, strengthen the investment in education and scientific research, improve the quality of education, cultivate outstanding scientific and technological innovation talents and teams, and accumulate a solid foundation for scientific and technological innovation; Second, we need to reform the educational and scientific management systems and innovate the incentive ways and methods for scientific research. On the one hand, we need to provide a favorable environment for scientific research. On the other hand, the government-led scientific research management system will be transformed into a market-driven enterprise innovation mechanism. Based on the market demand, we will vigorously develop higher vocational and technical education, strengthen the communication and interaction among institutions of higher education, research institutes, and enterprises, and improve the promotion efficiency of scientific research achievements.

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Encouraging independent scientific and technological innovation is mainly to reduce the over-incentive for non-independent innovation. As long as there are more incentives than independent innovation (such as over-incentive for foreign investment and real estate), the investment in independent innovation will not increase, but decrease. Therefore, the government should improve the incentive environment or direction. First, reduce the proportion of state-owned capital in industries with strategic competitiveness, and give play to the important role of informal capital in industrial upgrading. Second, we should use the capital market to promote independent innovation. The surplus social funds will be imported into the real economy, so that it can be combined with industrial upgrading, and promote the improvement of industrial competitiveness. Second, we will promote high-quality economic development in the new era. At present, the strategic competition between major powers has replaced anti-terrorism, and the world has entered an era of “competitive cooperation”. The trend of the relationship between China and the United States affects the policies and positions of the world’s geopolitical competition. China and the United States account for 41% of global GDP, 50% of global economic growth, and 35% of global trade in goods. China and the United States should recognize that there are some uncertainties in China-US economic relations at this stage, such as the trade deficit issue, differences in trade rules, and disputes over intellectual property rights, which are inevitable in the era of “competitive cooperation”. Therefore, we must be soberly aware that there are still various worries and challenges in the development that China has been pursuing for 40 years. China’s economic development is not yet a complete mode of development, and some social, economic, and political problems have not been fundamentally solved because of the rapid economic development. The report of the 19th CPC National Congress pointed out that “socialism with Chinese characteristics has entered a new era”. The principal contradiction facing China has evolved into the contradiction between unbalanced and inadequate development and the people’s evergrowing needs for a better life. To improve the quality development of the Chinese economy in the new era of socialism with Chinese characteristics, the core is to emancipate the mind and solve the sustainability problem of development. The basic idea is to change from “two over-dependence” to “two dependence”, that is, the economic growth mainly depends on expanding domestic demand, and the expansion and upgrading of

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domestic demand mainly depends on expanding consumer demand. At the same time, it mainly relies on the ability of independent innovation rather than the excessive input of resources and capital. The transformation of this growth impetus requires a major adjustment of the original distribution pattern and incentive mechanism, the establishment of a new distribution pattern and incentive mechanism, and the acceleration of the reform of the important economic system that restricts industrial upgrading, the expansion of domestic demand and the “double cycle”. A century of ups and downs in the world economy shows that delivering benefits to all citizens is the key to effectively expanding demand and promoting healthy economic development. For economically developed countries such as the United States, which have completed the “infrastructure construction” and “industrialized economy” stages of the “consumer” economy, the so-called effective expansion of domestic demand is to let as little money as possible flow into the pockets of highincome groups who save money, and as much as possible into the hands of low-income groups who need to spend money, in order to solve the social problems caused by the gap between the rich and the poor. To achieve this goal, policymakers need to carefully design fiscal policies, monetary policies, tax policies, and public service policies under the dual principles of efficiency and fairness. For China and other developing countries, which are in the dual “rigid” economy of “infrastructure construction” and “industrialized economy”, the so-called expansion of domestic demand is to “fill the weak points”, so as to invest as much funds as possible in nonrepetitive infrastructure construction, promote the process of national industrialization as quickly as possible, enable more people to benefit from national economic development, and solve social problems caused by unbalanced economic development. To achieve this goal, policymakers of major economic powers such as the US and China need to follow the market principle under the dual adjustment of planning and market, give full play to the role of national macro-control, formulate more effective social mechanisms, further observe the economic revitalization plans of various countries and economies, and guarantee “self-rescue” under the circumstance that the global supply and demand relationship is bound to undergo fundamental changes, and examine the changes in the global economy with great wisdom and new vision at any time. Third, the high-quality development of the Chinese economy requires deepening reform. We: First, we need to deepen economic restructuring and transform government functions. The Third Plenary Session of the

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18th CPC Central Committee and the report to the 19th CPC National Congress clearly pointed out that deepening economic restructuring is the key to accelerating the transformation of the economic development pattern. The core issue of economic restructuring is to properly balance the relationship between the government and the market. We must respect the laws of the market more and give better play to the role of the government. The role of the government in a standardized and mature market economy is mainly reflected in the following aspects: mediating income distribution; Correcting market failures; Safeguarding judicial justice; Restricting monopoly and encouraging competition; Providing public goods and services and carrying out macro-control. The current absence of the government is mainly manifested in: the adjustment of income distribution is not in place; The monitoring of market failure and its benefits need to be improved; The provision of public goods and services needs to be strengthened; The culture of service-oriented government needs to be established; Fair market norms and rules must be better maintained; A judicial system independent of administrative intervention needs to be established. The offside of the government is mainly manifested in excessive intervention in industries and resources that have no natural monopoly attribute and do not involve national security. Therefore, the first thing is to clarify the relationship between enterprises and the government and the boundaries of their rights. The government needs to change its role from its multi-role in the past as a provider of social services to keep the rules of the fair game running smoothly. The role of the government is mainly reflected in the following aspects: First, in the fields that do not involve the national economy and people’s livelihood, it lowers the threshold of market access and introduces diversified investment subjects. The second is to deliver public goods and services more efficiently, reduce market failures and reduce the cost of trial and error. The third is to build community services and social governance with Chinese characteristics, and further improve the public management capacity and mode of mobilizing resources and organizing emergency response under crisis situations. Fourth, we should promote a healthy culture and social atmosphere on the basis of respecting democracy. Fifth, we will establish a sound legal system and a more efficient and just judicial system. Second, we need to narrow the three major gaps in income, urban and rural areas, and between regions. Since the reform and opening up,

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although the rapid economic growth has covered up the huge negative impact of the three gaps on social development to some extent, we can believe that, as China enters the stage of medium–high-speed development from high speed, these gaps will become a major obstacle to sustained economic growth. When the economic development reaches a certain stage, the main driving force for growth will come from technological progress and household consumption, and narrowing the gap has obvious Pareto improvement effect. Narrowing the gap by one point may have greater growth effect than increasing the investment by many points. If the gap between income, urban and rural areas and regions is not improved for a long time, there will be obvious constraints on expanding consumption. Third, we should encourage scientific and technological innovation, enhance industrial competitiveness, and follow the path of innovationdriven development. After China enters the middle-income stage, the advantage of low cost of economy will be gradually lost. Therefore, it is necessary to improve the R&D ability and pay attention to human capital, carry out industrial upgrading, and cultivate new competitive advantages. Relying on scientific and technological progress to transform the mode of economic development by improving the scientific and technological innovation ability, we need to start from the following two aspects: first, strengthen the investment in education and scientific research, improve the quality of education, cultivate excellent scientific and technological innovation talents and teams, and accumulate a solid foundation for scientific and technological innovation; Second, we need to reform the educational and scientific management systems and innovate the ways and methods for scientific research. On the one hand, we need to provide a favorable environment for scientific research. On the other hand, the government-led scientific research management system should be transformed into a market-driven enterprise innovation mechanism. Based on the market demand, higher vocational and technical education should be vigorously developed, and the communication and interaction between institutions of higher education, research institutes, and enterprises should be strengthened to enhance the promotion efficiency of scientific research achievements. Fourth, we will comprehensively raise the development level of exportoriented economy. The practice of China’s reform and opening up has proved that reform and opening up are the two fundamental means of

11

CHINA’S ECONOMIC ADJUSTMENT AND REBALANCING …

319

China’s development, and they are mutually reinforcing and inseparable. At present, China’s reform has entered a critical period and a deep-water zone. Facing the deep-seated contradictions and development bottlenecks, it is necessary to promote domestic structural reform through a higher level of opening up, and create a new period of opening up for China’s sustainable economic development.

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Index

0-9 11th Five-Year Plan, 73, 304 13th Five-Year Plan, 137, 224, 304 14th Five-Year Plan, 302, 304, 313 19th CPC National Congress, 317 19th National Congress of the CPC, 193 2019 VAT reform, 304 5th Plenary Session of the 17th CPC Central Committee, 53

Allocation rules, 71 Anhui Provincial Government, 207 Annual economic growth rate, 7 Annual financial revenue, 162 Antimony City, 53 Anti-risk ability, 81 Asian financial crisis, 260 Avoidance of Double Taxation and Prevention of Fiscal Evasion, 247

A Acquaintance social network, 101 Acquaintance society, 41 Added value, 76 Advanced Individual of the National Youth Entrepreneurship Assistance Program, 93 Agglomeration effect, 307 Agricultural Development Bank of China, 108, 171, 215 Agricultural Development Center, 159 Agricultural modernization, 35 Alipay, 26 Allocation, 15, 77

B Baker, W., 25 Bank-government cooperation, 233, 236, 241 Banking market reform, 288 Bankruptcy repayment procedures, 115 Beunza, D., 25 Bidirectional, 309 Bilateral coordination, 288 Bipolar cycle, 196 Blood relationship, 88 Bond banks, 215 Bond direct financing, 213

© China Renmin University Press 2023 L. Weiping, Social Trust, https://doi.org/10.1007/978-981-99-2931-3

329

330

INDEX

BOT (build-operate-transfer) mode, 185 Bottom-up, 197 “Bretton Woods” international monetary system, 278 BRICS countries, 267, 276, 281, 286, 288 Buffer zone, 216 C Capital chain, 130 Capital gap, 72 Capital income, 7 Capital market, 147 Capital rupture, 111 CBRC, 137, 184 CCTV Finance Channel, 142 Center - periphery theory, 274 Central bank monetary policy, 279 Central Economic Work Conference, 193, 224 Central transfer payment, 160 Chaohu Basin Comprehensive Management Project, 205 Chaohu Governance, 201, 205 Chaohu Urban Construction Investment Co., Ltd, 206 China 2040, 304 China AAA Credit Enterprise, 94 China-Africa Development Fund, 248 China Banking Regulatory Commission (CBRC), 152, 270 China Development Bank (CDB), 204, 205, 210, 231, 242 China Green Food Development Center, 108 China Merchants Port Holdings Company Limited (CMPort), 252 China’s financial industry, 271 China’s National Development Bank, 215

China’s Outstanding Entrepreneur, 93 “China threat” theory, 300 Chinese characteristics, 64 Chinese debt trap, 254 Chinese policy finance, 219 Chunyu, Wang, 47 City county urbanization, 57 City D Excellent Constructor of Socialism with Chinese Characteristics, 93 Civil financial crisis, 58 Civil Society, 5 CMPort, 253 Coal Sea, 53 Commercial bank system, 82 Commercial finance, 202, 235, 236 Commercialization reform, 220 Competitive cooperation, 315 Competitive neutrality, 305 Comprehensive Administration Office, 159 Comprehensive financial benefits, 206 Confucius, 45 Coordinated development, 295 County government relocation, 57 COVID-19, 302 COVID-19 epidemic, 305 CPC Central Committee, 163, 193 CPI, 85 CPPCC, 140, 141 Cracking down on illegal fund-raising, 155 Credit environment, 174 Credit gate, 213 Credit network, 100 CSRC, 226 Cultural gap, 191 Cultural lag, 191 Culture and Sports Radio and Television Station, 159 Culture gap, 50

INDEX

D Debt and balance sheets, 306 Debt chain, 3 Debt collection, 128 Debt crisis, 124, 135 Debt restructuring, 148 Debt restructuring hearing, 145 Debt service reserve, 243, 249 Debt structure, 203 Debt trap, 250, 252 Deep-water zone, 303 Democratization, 24 Demonstration Pilot Project of Staff Education and Training in China, 94 Deposit balance, 78, 121 De-rural, 308 Development finance, 212, 229, 231, 232, 234, 235, 237, 238, 246 Development-oriented finance, 211 Dichotomy, 37 Differential pattern, 39, 88, 187, 188 Differential supervision, 223 D International Business Square, 116 Direct financing, 213 Direct financing strategy, 214 Disposable financial resources, 203 Distribution, 15 Dollar standard, 280 Double cycle, 316 Double deficit, 274 Dual economy, 297 Dual goals, dual integration and dual engines, 224 Durkheim, Emile, 5, 45

E Ecological protection, 209 Ecology, society and economy, 209 Economic accounting, 206 Economic adjustment, 306

331

Economic and Technological Development Zone, 51 Economic crisis, 284 Economic Development Office, 159 Economic Development Zone, 82 Economic downturn, 156 Economic growth mode, 292 Economic industry transformation, 174 Economic infrastructure construction, 299 Economic recession, 101 EIBC, 250, 255 Embeddedness, 21 Emerson, 154 Environmental governance, 208 Environmental protection, 311 Equator Principle, 225 European debt crisis, 293 Extensive urbanization, 176

F Family Planning Office, 159 Financial accumulation, 100 Financial allocation, 204 Financial chain, 124 Financial crisis, 60, 275, 286, 294 Financial disintermediation, 213 Financial innovation, 203 Financial institutions, 203 Financial liberalization, 262 Financial macro-control, 259 Financial marketization, 267 Financial modernization, 35 Financial paradox of poor countries, 230 Financial regulatory authorities, 136, 179 Financial repression, 26 Financial resources, 259 Financial security, 159

332

INDEX

Financial Sociology, 26 Financial structure, 8, 269 Financial supervision, 133 Financial supervision departments, 68 Financial supervision systems, 259 Financial system, 32 Financing companies, 99 Financing platforms, 227 Folk Society, 5 Formal finance, 48 Formal financial structure, 78, 180 Formal financial system, 4, 10, 82 Free riding, 280 Frey, B.S., 48 From life world to system, 42 Fukuyama, Francis, 30 Functional system, 42

“Going global” strategy, 211, 222 “Going out” strategy, 211, 258 Government borrowing, 203 Government economy, 169 Government failure, 229 Government financing platforms, 210 Government-guided economic mode, 168 Government investment, 227 Government-led financing mode, 32 Government-organized credit, 229 Government-organized credit enhancement, 237, 241 Granovetter, 25 Greek issue, 293 Green finance, 223, 224, 226

G G20, 287, 288 GDP, 152, 158, 290, 296, 304 GDP measurement system, 226 German Renaissance Credit Bank, 222 Germany Siemens, 154 Giddens, Anthony, 43 Global Compact Organization, 225 Global division, 297 Global economic imbalances, 284, 286 Global economic rebalancing, 285, 287 Global economic rebalancing strategy, 284 Global economy, 134 Global financial crisis, 181, 278, 290 Global financial market, 263 Global financial pattern, 264 Global Financial Top 500, 270 Globalization, 21, 262, 306 “Go global” strategy, 266, 282, 296, 312

H Hefei Municipal People’s Congress, 206 Hierarchical management system, 160 Hierarchical system, 42 High-speed urbanization, 72 Home of Nonferrous Metals, 53 Huainan coal mining subsidence area governance plan, 210 Huainan Coal Mining Subsidence Area Management and Utilization Planning, 205 Huainan Coal Mining Subsidence Governance and Utilization Plan, 201 Huainan Mining company, 207 Huainan Mining Supporting Industrial Park, 207, 208 Huainan Municipal Government, 207 Huainan Shannan New Area, 207 Human Resources and Social Security Station, 159 Human urbanization, 202

INDEX

I Illegal activities, 68 Illegal fund-raising, 70, 71, 121 Illegal informal fund-raising, 122 Imbalanced allocation, 49 Impersonalization, 23 Implementation Opinions of the CBRC on Encouraging and Guiding Informal Capital to Enter the Banking Industry, 184 Import and Export Corporation Bank, 215 Indirect financing, 213, 239 Industrial (economic) development zone mode, 80 Industrial era, 78 Industrial granary, 210 Industrialization, 35, 296 Industrial park, 52 Industrial structure, 99 Industrial transformation, 62, 155 Informal capital, 161, 168, 176 Informal capital market, 61, 103, 182, 192, 195 Informal debt, 64, 107, 117, 118, 180, 183, 186, 190 Informal debt chain, 55 Informal debt crisis, 59, 124, 129–131, 133, 134, 144, 145, 155, 158, 160, 182 Informal debt market, 180 Informal debt problem, 104 Informal debt repayment, 114 Informal economy, 176 Informal finance, 5, 6, 9, 28, 99, 179, 182 Informal financial crisis, 140, 148, 155, 177, 178, 190 Informal financial market, 67 Informal financing, 69, 167 Informal financing chain, 105 Informal financing platforms, 85

333

Informal fund-raising, 20, 96, 121, 122 Informal illegal fund-raising, 68 Informal lending, 21, 46, 63, 77, 87, 96, 183, 192 Informal lending capital chain, 112 Informal lending financing, 142 Informal lending market, 181 Informal lending relationship, 71 Informatization, 35 Infrastructure construction, 172 Infrastructure construction platform enterprises, 81 Initial informal lending, 99 Institutional economics, 25 Institutionalism, 12 Interest rate marketization, 213, 268 Intermediate People’s Court, 145 International circulation, 297 International division, 288, 291 International financial crisis, 260, 262, 267, 289, 293 International financial market, 268 Internationalization, 272, 279, 289 International Labor Organization (ILO), 48 International Monetary Organization (IMF), 254, 261, 271, 275 International monetary system reform, 275, 277 Interpersonal lending, 85 Interpersonal trust, 44 Investment and financing, 60 IOUs, 91 Isaksson, Anders, 48 J Jamaica Agreement, 261, 278 Japanese Revival Financial Treasury, 222 Japanese Revival Financial Treasury Law, 222

334

INDEX

Japan Mishima Co., Ltd, 155 Jian, Qiao, 40 Jingwei, Chen, 47 Judicial restructuring meeting, 147

K Kibing Group, 245, 246 Kibing Malaysia Company, 245 Kibing Model, 240, 245, 248 Kratnen, J.P., 48 Kropp, E., 48

L Labor income, 7 “Land + Finance" model, 244 Law of the Republic of Korea on the Export Import Bank, 222 Lending crisis, 111 Lending relationships, 90, 97, 100 LGFV bond financing, 256 Lizhong, Xie, 65 Loan balance, 78 Loan bundling, 243 Loan principal, 118 Local debt crisis, 32 Local informal investment, 90 Long-term loans, 236 Low-carbon development, 292 Luhmann, Niklas, 41

M Macro-economic structure, 194 Macro policy, 15 Mahinda’s Vision, 251 Market failure, 229 Market-oriented channels, 13 Market-oriented financing system, 12 Marx, Karl, 5 Medium—and long-term financing systems, 212, 215

Medium- to long-term investments, 237, 298 Meishan, 18 Micro-institutional environment, 194 Middle-income stage, 318 Middle-income trap, 303, 310 Ministry of Finance, 108 Mixed operation, 214 Mode of Donating Funds to Assist Teaching, 93 Modernity, 22 Modernization, 10, 29 Modernization catch-up strategy, 256 Modernization transformation, 16, 61, 187 Modern social trust, 37 Monetary policy, 212 Monthly interest rate, 19 N National Advanced Employment Enterprise, 94 National economic development strategy, 220 National Grain Administration, 108 National macro monetary, 13 National Outstanding Young Entrepreneur, 93 National Top 100 Enterprises in Corporate Culture Construction, 94 New-type urbanization, 258 New urbanization, 222 Nominal interest rate, 82 Non-physical financial assets, 8 Non-profit operation, 166 Notice of the General Office of the State Council on the Division of Key Work of Encouraging and Guiding the Healthy Development of Informal Investment, 185

INDEX

Notice of the Ministry of Health on the Nature of the Operation of Medical Institutions Run by Social Capital, 184 NPL Statement of Commercial Banks, 270 O Observation points, 56 Ogburn, 50 One Belt and One Road, 300, 301 Opening up, 214 Operation of informal debt, 58 Opinions on Comprehensively Promoting the Comprehensive Statistics of the Financial Industry, 193 Organization for Economic and Cooperative Development (OECD), 304 P Particularism trust, 39 Party and Government Office, 159 Party Committee and the government, 161 People’s Bank of China, 153, 182 People’s livelihood, 32 Personal financing network, 89 Personality trust, 38 Policy Banking Law, 223 Policy-based finance, 202, 232, 234, 235, 237, 255, 257 Policy-based financial institutions, 256 Policy-based financial system, 218, 221, 255 Policy finance, 218 Policy-oriented, 234 Political and economic dualism, 300 Population pressure, 15 Post-crisis global finance, 263

335

Post-financial crisis era, 260, 285 PPP mode, 152, 170, 185, 226 “Pre-credit + approval" mode, 204, 208 Presale money, 95 Private consumption, 287 Private finance, 48 Private loan, 47 Private relationship-dominated trust, 188 Process-event, 65 Professional investment, 99 Provincial Commission for Discipline Inspection and Supervision Office, 121, 141 Provincial Excellent Informal Entrepreneur Caring for Employees, 93 Provincial Outstanding Young Informal Entrepreneur, 93 Provincial Top 100 Enterprises, 94 Public governance crisis, 133 R Rational economic man, 24 Rationalism, 24 Real economy, 55 Real estate, 18–20, 74, 77, 87, 95, 104, 108, 157, 163, 187 Real estate economy, 89 Reform and opening up, 6, 26, 35, 59, 283, 317, 318 Regional economic, 66 Re-industrialization, 286 Relational trust, 40 Relationship-oriented, 187, 188 Release interest, 100 Resource conservation, 311 Resource endowments, 74 Rights protection, 128, 135 RMB, 272, 277, 289, 291, 293, 295, 296

336

INDEX

RMB exchange rate, 281 RMB internationalization, 217, 266, 277, 280 Running ministry money into, 160 Running the money into, 160 Rupture, 61, 104, 105, 112, 130

S Safety Supervision Station, 159 SASAC (state-owned assets supervision and administration commission), 177 Savings funds, 216, 217 Savings imbalance, 306 Schmid, R.H., 48 Second-round effects, 294 Segmented system, 42 Separate operation, 214 Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Informal Investment, 184 Several Opinions of the Supreme People’s Court on the Trial of Loan Cases by the People’s Courts, 182 Shanghai Cooperation Organization, 267 Sheng, Lin, 47 Shenglin, Zhang, 48 Shiller, Robert J., 25 Shuming, Liang, 40 Silicon Treasure House, 53 Silk Road Economic Belt, 301 Simmel, Georg, 5, 39 Siphon effect, 72 Siqing, Peng, 40 Siru, Su, 47 Small Business Credit Contract, 118 Small Business Maximum Amount Guarantee Contract, 119

Small Business Working Capital Loan Contract, 118, 119 Small-town construction, 161 SME Credit Insurance Treasury, 222 Social capital, 30, 184 Social confidence, 168 Social deposit balance, 180 Social deposits, 72 Social employment, 152 Social funds, 216, 217 Social idle capital, 181 Social infrastructure construction, 299 Social modernization, 66, 178 Social trust, 130, 151, 177 transformation of, 187 Social trust network, 59 Social trust rupture, 45, 63 Soft seed pomegranate project, 109 Solidified trust, 44 Sovereign debt crisis, 263, 273 Sovereign funds, 264 Special Drawing Rights (SDR), 271, 275 Special trust, 28, 188 Stability, 143 Stagflation, 290 Standing Committee of the Municipal People’s Congress, 122 Stark, D., 25 State Council, 193 State-owned banks, 136, 216 State-owned commercial banks, 96 State-owned enterprises, 113 State-owned resources, 173 State-owned sector, 77, 139 Stock and futures, 23 Strict separation, 214 Supply-side structural reform, 163 Surplus cash flow, 100 Suyan, Zhou, 47 Syndicated loans, 248 System trust, 31, 42

INDEX

T Tax sharing system, 227 Technology imitation, 314 Ternary coexistence and interdependence, 42 the 19th National Congress of the Communist Party of China, 4 The Bank for International Settlements, 261 The Bretton Woods System, 261 the Contract for Mortgage of Maximum Amount of Small Enterprisest, 119 The Fifth Provincial Top Ten Economic Figures, 93 The General Agreement on Tariffs and Trade (GATT), 261 The Global financial regulatory framework, 264 The Law of Agricultural Cooperative Organization, 222 The Law of the Republic of Korea on SME Banks, 222 The “lost” yen, 262 The Ministry of Finance of China, 217 The Renaissance Policy Banking Law, 222 The SME Credit Insurance Treasury Law, 222 The Third Plenary Session of the 18th CPC Central Committee, 202, 317 The World Bank, 261 Thorndike, Edward, 93 Thousand village demonstration project, 73 Three Rivers and Three Lakes Governance, 205, 208, 209 “Three rural” field, 221 Three special sources, 204

337

Top 10 Enterprises in China’s Corporate Culture Management Innovation, 94 Top 500 Enterprises in China’s Service Industry, 94 Top-down, 197 Traditional social trust, 37 “Triangle of impossibility” mode, 269 Trust reconstruction, 46 Trust relationship, 63 Trust rupture, 28 Two dependence, 315 Two over-dependence, 315 U Unified borrowing and repayment, 208 Universal social trust, 29 Universal trust, 28, 188 Urban Construction Investment Management Office, 17 Urban construction planning, 309 Urban expansion, 57 Urban investment company, 72, 164, 166 Urban investment development mode, 166 Urbanization, 13–15, 75, 76, 95, 161, 296, 307, 309 Urbanization construction, 67, 174, 181 Urbanization development, 62 Urbanization mode, 58 Urbanization process, 58 Urbanization quality, 308 Urban-rural dual structure, 269 Urban service functions, 203 US dollar, 291 V Venture capital, 168

338

INDEX

Venture Capital Co., Ltd, 167 Venture capital company, 163, 164, 174, 176 Violent adjustment, 6 W Weber, Max, 5, 22, 39 Weijun, Tan, 65 Wenzhou, 11, 22, 182 Window of opportunity, 265 Working capital, 56 World Bank Development Report, 197 WTO, 310 Wuhu Model, 240–242, 244, 249 Wuhu Municipal People’s Congress, 244 Wuhu Urban Construction Investment Company, 242

X Xiaotong, Fei, 39

Y Yaohua, Lin, 40 Yongjia culture, 27 Yu’e Bao, 26

Z Zhejiang residents, 10 Zhengping, Kang, 47 Zhifeng, Tong, 40 Zhongfang, Yang, 40 Zijiang River, 17 Zishui River, 52