德国工商协会英文刊物《Ticker》10月刊刊出上海高级金融学院金融学教授严弘的专访报道，就中国股市今年出现的大幅震荡的原因，影子银行可能引发的问题，以及为何收入差距会日益扩大等一系列热点问题，严弘教授在专访中一一作出了解答。

What caused the turbulence in the stock market? Are shadow banks a problem in China? What is the reason for China’s growing income gap? These and many other questions arose during the preparation of this special issue on business and finance. Who else could we ask these questions to than a professor of finance?Professor Yan of the Shanghai Advanced Institute of Finance at Shanghai Jiaotong University patiently answered questions from the German Chamber Ticker team.

Before becoming a professor in finance, you were awarded a doctorate title in applied physics. Can the functioning of financial markets be explained with physical laws?

Finance as a part of economics is quite different from physics. Physics studies the natural laws in a physical world, which is essentially pretty straightforward. Once we understand the laws, we can understand physical phenomena. Atoms always move in the same way; they are predictable. Economics, in contrast, studies society and the consequences of human behavior. This is actually more complicated, because human beings can respond very differently to the same stimulus. That is why incentives are a big issue in economics: it is about finding mechanisms to induce people to behave in a certain, predictable way.Atoms, on the other hand, need no incentives to move in a certain way.

Can you explain the stock market turmoil in China?

The stock market valuation before the turmoil began was unreasonably high, even though economic growth was sluggish. The Chinese stock market defied this weak economic performance and reached a level that was both exciting and frightening. There was the expectation that the structural reforms would inject new life into the economy and encourage innovation and entrepreneurship. Due to these expectations, the ChiNext,the Nasdaq-like trading board, rose very quickly and reached historical levels. At the same time, there was also a tremendous amount of leverage.Margin trading, which has been admissible since 2010, was not in full swing before last year. Many brokers provided margin financing for stock trading. When the market went up, people obviously tried to magnify their gains, and wanted to borrow even more money. To meet these needs,many non-official brokers provided additional funding.

But leverage is a double-edged sword: when the market goes up, external financing seems to be a panacea, but when there is a sudden dip in the market, people who are heavily leveraged will be badly hurt. It magnifies the gains, but it also exacerbates the losses.The sudden downturn happened when regulators started to investigate and adjust the amount of leverage people could use and that in turn was the trigger for the market to decline.

What is the regulators’role in the financial market?

The regulators did not fully understand the market. They were not alarmed early enough by the potential danger of the high level of leverage and reacted too late. In the US, leverage is not permitted to be higher than one-to-one; you cannot borrow more than half of the value of your stock. Here, as described earlier,the non-official brokers caused external financing to soar.

Now, I think the regulators understand the potential dangers posed to the market. They realize that they need to moderate the leverage in the early stages in order to mitigate this kind of turmoil. However, the Chinese market is still pretty young, and there are still many lessons to learn.

What will the Chinese stock market look like in ten years?

It will be much more mature and developed, and is likely to be of a similar size to the US stock market. Right now, the Chinese stock market is dominated by small individual investors. They were also most affected by the turmoil. In the financial business, these individual investors are called chives, because you can cut them easily and they quickly grow again.Let’s hope for their sake that they will soon realize the stock market is a game for professiongals.Institutional investors proceed more methodically and systematically. Once they hold a larger share of the market, they can stamp out some of the inefficiencies in the Chinese financial market. In the coming years the IPO processes will also be completely reformed.

A decade ago, when people in China needed to borrow money, the stateowned and tightly regulated conventional banks were the place to go. In recent years, a range of alternative financiers, known as shadow banks,have appeared on the scene. For a layperson, it is difficult to distinguish the different actors and their motives. Could you tell us about the different lenders and how to find respectable ones?

Aside from state-owned banks, the Chinese government also encourages privately-owned banks to become operational. The state-owned banks alone cannot meet the vast amount of financing needs. Some shadow banks are actually offshoots of the state-owned ones, and do what the state banks cannot, namely giving loans to small and medium-sized enterprises and individual consumers. Credibility remains a major concern.Therefore, the central bank started the deposit insurancescheme in 2015,which protects depositors from losses caused by any officially approved bank's inability to pay their debts.

To attract your deposit, some private financial institutions will offer you much higher interest rates than a bank would give you. That difference can be considered the risk premium.

What legal steps have been taken to regulate shadow banking?

Shadow banks in China are hardly subject to any form of large-scale regulation. One problem with the Chinese regulatory regime is that we have many different regulators. We have CSRC (China Securities Regulatory Commission) for financial markets; we have CBRC (China Banking Regulatory Commission) for the banks and trust companies; and we have the CIRC (China Insurance Regulatory Commission) for insurance companies. Lastly, there is the central bank: the People's Bank of China,which has an overall monitoring function. The small financial firms stay below the radar of all of these institutions. They are only regulated by the office of financial affairs in the cities and provinces.

What is the significance of the One Road, One Belt initiative for the Chinese financial market?

Performing this project obviously requires the financial markets to provide a lot of funding. To do that, they appraise the risks and return of the individual projects to evaluate which are worth funding. In that way financial markets impose some discipline, and ensure that the One Road, One Belt initiative is not only politically viable but also economically efficient.

What roles will the Asian Infrastructure Investment Bank play? Could you contrast these roles with the new BRICS Development Bank? What are their different competencies?

In terms of function and purpose there is a lot of overlap. The aim for both is developing infrastructure. They can be seen as two parallel institutions that pretty much serve the same function for a different set of countries.

Do you consider the AIIB a rival for the International Monetary Fund and the World Bank?

I would see its function more as a complement than as a competitor.I know that it is very common in western media to talk about this alleged rivalry, but the banks clearly have different functions and scopes. The International Monetary Fund and the World Bank themselves also have very different purposes. The World Bank focuses on infrastructure building and poverty reduction, whereas the IMF operates more on a macro level. It comes to the rescue when a country’s financial system is in trouble. The function of the AIIB will be more similar to the one of the World Bank. However, the World Bank has a much broader scope.

According to the International Monetary Fund, the top quintile now captures 47% of total income (up from 38% in 1980), while the lowest quintile accounts for only 4.7% (down from 8.7%). China’s sharp increase in income inequality appears to be a reflection of faster income growth among the rich rather than stagnant living standards among the poor. Is it possible to put justice on a par with profit?

Income inequality is a big problem, in China as much as anywhere.Earlier on, the secret of China’s growth was to allow some people to become very wealthy,so they would drag the whole economy,comparable to draught horses. Now these horses are faster, but the economy has also become bigger. You cannot rely on these few horses to drag the whole economy any more, especially if they want to gallop out of China and take their wealth with them.

You actually have to allow a bigger mass of people to become wealthy in order to make economic growth more sustainable. For a middle class to grow, people need to feel safe enough to spend their money. Therefore,you have to provide basic social security like a retirement fund and an adequate healthcare system.The current government has now realized this, and is trying to implement measures so that people dare to spend more without being preoccupied with having to save for health, housing and education. However, consumption is still lagging. The transition from the current manufacturing-based economy to a service-based one will take more time and effort than people expected.

Professor Yan, thank you very much for taking the time to talk to us!

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