In the morning of June 19, at the 12th Lujiazui Forum in Shanghai, Peng Wensheng, Chief Economist of CICC, shared his interpretation about opening financial markets and asset management in the era of digital economy. He believed that in the era of digital economy, great changes will happen to physical assets, leading to increasing tradeability in the service industry, and declining tradeability in the manufacturing industry. According to past experience, many well-known Chinese technology unicorn enterprises have completed financing relying on the American capital market. This provides an important inspiration for the development of China’s capital market - China needs to develop its own culture and market of venture capital. Specifically, the STAR Market has ushered in a new era of capital market which provides pricing for risk assets. The larger the market is, the more helpful it is for consolidating Shanghai’s position as an international financial center. The increasing tradeability in the service industry Peng Wensheng believed that in the era of the digital economy, securitization or financial assets are securitized products of physical assets. Many changes will happen to physical assets. The first change is that the tradeability in the service industry will increase while that of the manufacturing industry may decline. He said: “Since the outbreak of the epidemic, the so-called contactless economy such as remote education, telemedicine and e-commerce has achieved great development. One inspiration we can draw is that the tradeability in the service industry has increased. The reason why the tradeability in the service industry has been so low before is that it often requires close contact between people. In the epidemic, the contactless economy shows that with the help of digital and information technologies, it’s possible to conduct service activities without close people-to-people contact, which I think may be significant for the economic development model in the future.” In contrast, the tradeability in the manufacturing industry may decline in the future, and the reason given by Peng Wensheng is also simple - machines can replace human workers. He said: “If workers are replaced by machines, it’s unnecessary for developed countries to relocate the manufacturing industry to developing countries. Developed countries can shift it to their own markets and achieve greater development. I think the first important influence of the digital economy era is increasing service tradeability of physical assets, as evidenced by the development of the financial sector over the past few years.” China’s unicorn enterprises have completed financing relying on the American capital market, which offers an important inspiration for China. The second change is that in the era of digital economy, the difference and divergence between tangible and intangible assets will become more prominent. Peng Wensheng explained that the traditional manufacturing industry is about tangible assets. It’s relatively transparent and easy to assess the value of tangible assets including factory buildings, machinery, equipment and real estate, making it easier to associate them with indirect financing collateral. In the era of digital economy, there are more intangible assets. It is about a business model and innovations of apps and technologies, making it difficult to assess its value before it succeeds. Therefore, intangible assets rely more on venture capital rather than indirect financing with bank credit. In his speech, Peng Wensheng specifically mentioned that many of China’s leading digital economy platforms have completed financing relying on the American capital market, which offers an important inspiration for the development of China’s capital market. He said: “From a financial perspective, I have noticed an interesting phenomenon about the financing by digital economy platforms in China such as Alibaba, Tencent, JD.com, Meituan, and Pinduoduo. These unicorns finished the process through venture capitals and capital markets, most of which are American capital market and fund. This is an important inspiration for the development of China’s capital market in the future. We need to adapt to the development of the digital economy as well as the growing importance of intangible assets. China needs to develop its own venture capital culture, venture investment mechanism, and capital market truly setting the price of risk assets. In this sense, the STAR Market established a year ago has opened the era for capital market which sets the price for risk assets.” Financial opening has placed higher requirements on supervision Speaking of the influence of financial opening, Peng Wensheng said that it is mainly reflected in two aspects. First, an obvious trend in the development of global finance over the past few decades is the rising importance of financial markets to the banking system, which is true to the whole world, even to developed countries. In Europe, the banking system once played a dominant role, but the importance of financial capital markets has also increased over the past 40 years. “I think that the fully opening financial market of China means declining indirect financing and rising direct financing. This is the basic logic.” Second, market opening actually means a larger market with more diversified demand and supply, investors and financiers. More diversification means better matching, and more efficient allocation of resources. This is definitely beneficial to the sustainable development of the entire economy. Undoubtedly, market opening also imposes higher requirements on financial regulation. Different from other physical industries, the financial industry has spillover effects and externality. Poor management is often associated with risks, so there are higher requirements for financial regulation. Peng Wensheng also mentioned that there is no need to worry too much about the competitive pressure brought by foreign institutions entering China’s market. He said: “Economics needs localization, which I believe can resonate with investors or financiers in institutions and local markets. The participation of foreign institutions in the opening up can promote our efficiency. I think as long as we can do a good job, we don’t need to worry too much about competitive pressure.” STAR Market is greatly helpful for consolidating Shanghai’s position as an international financial center Peng Wensheng believed that the biggest advantage of building Shanghai into a financial center is that China’s economy may become the largest one in the next decade, which creates a lot of investment and financing demands, making it highly probable for Shanghai to become one of the top three financial centers in the world. He said: “I think there are two aspects worthy of our attention. The first one is venture capital we just talked about in the era of digital economy. In terms of the development of STAR Market in the future, if it can grow larger, it will play an important role in China’s financial market. This is greatly helpful for consolidating Shanghai’s position as an international financial center. The second one is financial infrastructure, including the payment system in the digital economy era, possible pilot of digital currency including the digital currency issued by the central bank in the Yangtze River Delta. These trends may be important for Shanghai as a financial center in the future.” Peng Wensheng said that deregulation of the capital market remains a major trend. The reform of STAR Market is an important example. From issuance, listing to trading and delisting, it follows the direction of market-based reform on the basis of information disclosure. However, deregulation doesn’t mean disorder, and supervision is strengthened. For example, from the perspective of protecting small and medium-sized investors, the Chinese version of the class action system and the legal system, the supervision has been strengthened. Source: https://m.thepaper.cn/newsDetail_forward_7911685f