Goldman Sachs Report and China’s New Financial Lifeforms

Goldman Sachs Report
Last week, Goldman Sachs issued the first of a series of research reports entitled “The Future Of Finance :The Rise Of China’s Financial Technology”. This first report analyses China’s electronic payment systems and technologies, characterizes them as the gateway to the future of the financial world.

The exhibits in Goldman’s research note are self-explanatory. For those who understand wholesale banking, these statistics and the scale of social-economic phenomena underlying them would signal that the circulation of money liquidity and hence, the funding of capital operation of financial markets, will inevitably undergo huge transformations. Therefore, businesses like Goldman Sachs will have to identify the beacon and follow it, or risk extinction.

What Is Going On?
Almost four years ago, China launched its Internet-plus initiatives (I explained what that is in my previous post on “Digital Transformation”). Official and private think tanks gathered to discuss and spec out what it may mean in different aspects of individual, governmental and business functions — calling them new “lifeforms”. Actually, with the development of networking and mobile internet, a lot of these lifeforms were already happening spontaneously. In finance, for example, the government came to me when it was trying to grapple with the stock market crash and I identified several areas where “shadow” financial activities were proliferating through the scaled networks outside of the regulatory purview. Immediately, the country cracked down on the unregulated activities and, step by step, racheted the profits plus penalties from the violations back to compliance requirement.

With new technologies came new “lifeforms” which needed new regulations and support systems, including the creation of new infrastructure and public assets, in order to facilitate and promote their healthy development. That is the practical essence of the Internet Age and, by turning everything into “pluses” and combating the potential “minuses”, society takes a quantum leap.

One of the factors behind China’s advances in this area of financial technology is its population size and economic growth. Over the past two decades, some of the financial growth statistics are staggering.

China FinGrowth

Since 2000, average urban household income has increased more than 6 times, while average rural income also quadrupled (during the period, the percentage of urban population more than doubled to over 50%). The number of Chinese travelling abroad increased 10 times to 125 million per year. Over half a million students are going overseas to study every year, with 80% of them returning to China after their studies; this contrasts sharply with twenty years ago when less than 25,000 per year would be going abroad to study and less than 10% would be returning. There was negligible Chinese investment abroad in 2000, but last year, the total had reached over $150 billion and climbing at a 15-20% annual rate.

Implications For Finance And Investment Bankers
Combining these statistics, one can readily see the amount of foreign currency, principally US dollar, China is responsible for circulating in the world. At the same time, it holds the largest amount of US treasury debts and financial instruments outside the US and is thereby one of the major US dollar funding sources.

The electronic payment technology described by Goldman Sachs indicates that the circulation of money by the Chinese has reached a new stage. It constitutes new lifeforms and gives rise to new possibilities. Goldman knows this is a world change that bankers must not miss.

That will inevitably have huge impact on the world’s currency and monetary system. On the one hand, we have to thank the Chinese for using so much US dollars. Otherwise, the US dollar regime in the world would be shaken (not to mention what the massive amounts of US money created during the QE period would have caused). On the other hand, the RMB world and US dollar world will need to undergo a convergence. That is an elaborate and complicated process that would require long-term developmental relations and intricate designs. The Chinese financial technological reality and new lifeforms will provide better facilitation of that convergence, and make the system operate more efficiently and effectively.

I am trying to lay out the beginning of the creation of a currency and monetary cooperative framework between the US and China. The above serves to partially explain why it is both necessary and beneficial for both sides. It is a complex subject that requires that we revisit the basics behind money and central banking, as it is being revolutionized by the potential of today’s technology. I will do that in the next post.


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