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Chapter 41 Financial Crisis: A Game of Human Nature (3)
Hot money is short-term speculative funds that flow quickly in the international financial market in pursuit of the highest return with the lowest risk.The speculative movement of international short-term funds is mainly to avoid political risks and pursue the interests of exchange rate changes, important commodity price changes or changes in international securities prices, while hot money is a speculative behavior that pursues the interests of exchange rate changes.When speculators expect the price of a certain currency to fall, they sell the forward foreign exchange of the currency, hoping that after the expiration in the future, they can buy a lower spot foreign exchange to earn the benefit of the exchange rate difference.Since it is purely a speculative behavior of buying and selling short, it is different from arbitrage.In the foreign exchange market, since such speculative funds are often converted from currencies with a tendency to depreciate into currencies with a tendency to appreciate, this increases the instability of the foreign exchange market. Volatility or the imposition of foreign exchange controls can prevent the flow of such speculative funds.

The scary thing about hot money lies in the huge uncertainty. Hot money comes and goes without a trace, and the person in charge of hot money is looming and disappearing.Its size and timing of its inflow and outflow cannot be determined, so its impact cannot be estimated in advance.Hot money represents a lifestyle of the jungle and a "wolf-like" culture.In order to protect our wealth and avoid financial turmoil, we must always maintain a high degree of vigilance against hot money.

There are more than ten channels for hot money to enter, mainly including:
First, false trade.In this channel, domestic enterprises and foreign investors can join forces to introduce overseas funds through inflated quotations, advance payment, and forged supply contracts.

Second, capital increase and share expansion.Existing foreign-invested enterprises apply for capital increase on the basis of the original registered capital on the grounds of "expanding production scale" and "increasing investment projects". It is necessary to find another excuse to cancel the original project contract, so that hot money can easily flow in and out.

Third, currency circulation and conversion.There is a jingle in the market that can explain this way of hot money inflow: "Hong Kong dollars are not convertible, but RMB is convertible, and the two places are the same as they are convertible."During the inspection, the State Administration of Foreign Exchange found that through such currency conversion and cross-regional operations, a large amount of hot money was "freely flowing in and out".

Fourth, underground banks.Underground banks are the fastest way for foreign capital to enter and exit.The operation of many underground banks is like this: Suppose you send money to a designated local account in Hong Kong or somewhere overseas. After being confirmed, the underground bank in the Mainland will naturally open an account for you and convert your foreign currency into Renminbi.There is no need for foreign currency to come in at all.

The never-ending "Pareto Improvement": Financial Regulation
Suppose there is only a millionaire and a beggar who is dying of starvation in a society. If the millionaire spends one ten-thousandth of his wealth, the latter can be saved from death.But because such a gratuitous transfer of wealth hurts the rich man's welfare (assuming the beggar has nothing to spend in return on the rich man), doing this kind of wealth transfer is not a Pareto improvement, and this one has only one millionaire and one starving A society of beggars can be considered Pareto optimal.A comparison can be made here with the standard of classical utilitarianism.According to the standard of utilitarianism, the ideal state is to maximize the sum of people's welfare.If a rich man loses very little welfare, but can greatly increase the welfare of the beggar, keeping him from dying, then the sum of society's welfare increases, so such a transfer of wealth is an improvement, and the initial state of extreme inequality is not ideal because it has a lower sum of benefits.Therefore, utilitarianism in Western economics believes that one should "pluck out a hair to benefit the world", and in order to increase the total welfare, the welfare of some people can be reduced.However, modern western economics has emerged an optimal solution - "Pareto Optimum", that is, when the welfare of some people is improved, the welfare of anyone cannot be reduced.

A Pareto improvement is a change that makes at least one person better off without making anyone worse off.On the one hand, Pareto optimality refers to the state where there is no room for Pareto improvement; on the other hand, Pareto improvement is the path and method to achieve Pareto optimality.Pareto optimality is the "ideal kingdom" of fairness and efficiency.

Similarly, in financial markets, Pareto improvements are constantly being made.Financial regulation is the best way to Pareto improve the financial market.

Since the 20s, the tide of financial liberalization and financial deregulation has been higher and higher, and all countries are seeking an economic operation mechanism that reduces government intervention.Regulations may be reduced, or may disappear in some industries and fields.But in fact, as long as the government exists, government intervention cannot be eliminated. The government is an important macro-environmental variable that affects companies and markets.Regulation is an important form for the government to perform economic functions, and it will exist with the existence of the government.Finance is the core area of ​​the modern economy. Financial regulation may be reduced, but it cannot disappear, nor should it disappear. It will only produce more alternative forms or newer regulatory methods.Financial regulation has objective reasons for its existence.

Information asymmetry in the financial market is the primary reason for the existence of financial regulation.

If traders possess asymmetric information, the market mechanism cannot achieve efficient resource allocation.Information asymmetry in the financial market is mainly reflected in the risk identification and avoidance between financial institutions and financial product demanders.Financial regulation can effectively solve the problem of information asymmetry in financial operations and avoid large fluctuations in financial operations.

Because the financial market is difficult to achieve complete free competition.As the main body of financial innovation, financial institutions always consider issues from their own micro-interests, which determines that it is impossible to fully consider the macro-interests when making decisions, and may even implement some circumvention controls in order to maximize their own profits. illegal risky behavior.At the same time, in order to prevent the increase of operating costs, it is easier to ignore the standardization and monitoring of operating procedures, thereby affecting its ability to prevent and control risks.

Financial regulation is a form of government regulation. It is an institutional arrangement to ensure the stability and safety of the financial system and ensure the interests of investors. The financial management system provided by the government or society to correct market failures under the circumstances of externalities, externalities, asymmetric information and monopoly, etc.From this perspective, financial regulation at least has the property of Pareto improvement, which can improve financial efficiency and social welfare.However, whether financial regulation can achieve Pareto efficiency also depends on the information capability and supervision level of the regulatory authority.Pareto efficiency is achieved if information is perfectly symmetrical and regulation can fully correct the externalities of the financial system without itself causing a loss of social welfare.The assumption of complete information and symmetrical information cannot be established in the real economic society. It is this reason that forms an important factor that triggers the financial crisis——the general moral hazard behavior of financial institutions, which leads to the inefficiency of financial supervision and loss of social welfare.

Banking Supervision: Limiting Excessive Risk-taking

Bank supervision refers to the government's supervision and management of banks, that is, the government or authority supervises and guides banks through legal and administrative measures to ensure that banks abide by various regulations and avoid imprudent business operations.Although my country's banking supervision has formed a certain system, there are still many deficiencies and shortcomings, which need to be continuously supplemented and perfected.Judging from the historical experience of banking supervision in western developed economies, a more complete banking supervision should include four aspects: risk management assessment, information disclosure requirements, consumer protection, and restrictions on competition.This has good reference significance for the development of China and other emerging markets.

Risk Management Assessment
In the past, on-site inspections of banks have focused primarily on assessing the quality of a bank's balance sheet at a point in time, and whether the bank is adhering to capital requirements and restrictions on its holdings.But an examination that only looks at the state of a bank at a certain point in time is not a good indicator of whether the bank will take excessive risks in the near future.

Changes in the financial environment have led to a worldwide shift in perceptions of the banking supervisory process.

Banking supervision is now more concerned with evaluating the soundness of banks' management procedures to control risks.When rating bank risk management, the following four factors are mainly considered: 1. The quality of supervision implemented by the board of directors and senior management; 2. The effectiveness of policies and restrictions on all business activities with significant risks; 3. Risk test questions 4. Whether the internal control measures to prevent employee fraud and engage in unauthorized activities are appropriate.

Information Disclosure Requirements
Western banking supervision has clear requirements for information disclosure.To ensure that the market and depositors have access to accurate and sufficient information, regulators require banks to comply with standard accounting principles and disclose a range of information that helps the market assess the quality of a bank's portfolio.This can help shareholders, creditors and depositors evaluate and supervise the bank and prevent the bank from taking excessive risks.The European Monetary Standards Committee once issued a report suggesting that the financial risks evaluated by the company's internal risk management system should be disclosed to the public, which is based on this consideration.

consumer protection

Due to the existence of information asymmetry in the financial market, consumers cannot grasp enough information to protect themselves.Since China's banking industry is dominated by the four major state-owned banks, the awareness of consumer protection is not very strong.The attention paid by banking regulators to this aspect is far from reaching the level of developed economies.The protection of consumers is mainly reflected in the authenticity and integrity of information and the principle of non-discrimination in different regions.

restrictions on competition
Increased competition increases the incentive for banks to take excessive risks.The weakening of profitability caused by competition will force banks to take greater risks in order to maintain existing profit levels.As a result, governments in many countries protect against excessive competition through regulation.In the past, regulation in this area in the United States has mainly taken two forms.One is to reduce competition among banks by restricting branches.The other is to prohibit non-bank institutions from engaging in banking business. This was abolished in 1999, but it is still unquestionably enforced in many other countries.Restrictions on banking competition can actually have adverse effects by leading to higher costs for consumers and reducing the efficiency of banking institutions.Therefore, in recent years, the banking regulatory authorities have gradually relaxed restrictions on competition.With the development of electronic finance, the banking supervisory department will divert part of its energy to deal with the new problems that will arise.

In a crisis, faith conquers all

An official from the my country Securities Regulatory Commission once said, "Actually, we don't care about points, but about investment confidence."

On a certain day in April 2008, the Shanghai Composite Index closed at 4 points, approaching the 3094.67-point mark, which was almost half of the high point of 3000 points half a year ago.After the market closed, the China Securities Regulatory Commission urgently convened relevant departments to discuss policy measures to ease the pressure of lifting the ban on "large and small non-existing transactions".

Two days later, on Sunday night, the "Guiding Opinions on the Transfer of Existing Shares of Listed Companies Unlocking Sales Restrictions" was released.The China Securities Regulatory Commission requires "big and small non" to publicly sell more than 1% of the total number of existing shares within one month, and transfer their holdings through the stock exchange's block trading system.

After the opinions were issued, there was a short-term positive optimism in the market.But soon, still overwhelmed by pessimism.The stock index once fell below 3000 points in intraday trading, and the market panic continued to spread.However, according to the subsequent responses of relevant departments, the top financial decision-makers are clearly prepared for this.

One week later, at 4 pm one day, the relevant person in charge of the Ministry of Finance was notified to the State Council for a meeting, saying that the topic was related to the market.As a result of this meeting, the stamp duty rate for securities transactions was lowered by 3 percentage points.The policy paid off immediately.On the first day when the stamp duty rate was lowered from 304.70 per thousand to 9.29 per thousand, the Shanghai Composite Index rose 3583.03 points, or [-]%, to close at [-] points.At the end of the day, nearly a thousand individual stocks in the two cities had their daily limit, which was the second largest increase in history since the A-share market had a price limit.

This is the performance of the 2008 policy in rebuilding public confidence. Although the Chinese stock market cannot escape the fate of continuing to fall as the external environment continues to deteriorate, it gives us the power of public confidence in this stock market defense battle.

How the government rebuilds public confidence plays an important role in the process of managing the financial crisis.If government policies are trusted by the public, the public will have corresponding expectations and will follow official intentions.It would be much easier to suppress financial crises by establishing ideal expectations for the market.But that means the government's rhetoric and policies must have the public's trust.Compared with the Chinese government's support for the stock market, the previous actions of the Bolivian government are even more surprising.

In 1985, the Bolivian government used public confidence to dramatic effect in its fight against hyperinflation.

In the first half of 1985, inflation in Bolivia was 20 percent and rising.In fact, inflation was so high at the time that when people lined up to buy movie tickets, ticket prices also went up. In August 000, Bolivia's new president announced his anti-inflationary policy, the New Economic Policy.In order to control the growth rate of the currency and build public trust, the new government took very aggressive steps to eliminate the budget deficit: it closed many state-owned enterprises, eliminated subsidies, frozen public sector wages, and introduced a new wealth tax.The Treasury is also taking a new approach: balancing the budget every day.Barring unforeseen circumstances, the finance minister pledged not to approve spending beyond a month's tax revenue.

The government's aggressive measures won the public's confidence, and Bolivia's inflation was brought under control within a month, while the loss of total output was small, less than 1% of GDP.Generally speaking, when the inflation rate falls by 5%, the total output of the year will fall by 1%.

There is no doubt that anti-inflationary policies that win the public's confidence can be extremely successful.Confidence plays a supporting role in the development and stability of financial markets.If investors' confidence is severely hit, it may cause the stock market to collapse and the financial environment to become more chaotic.On the contrary, if government measures can stabilize public confidence, it will play a very positive role in supporting market stability.

(End of this chapter)