Economist Chen Zhiwu: Without a Globalization of Ideas, Business Is Just a One-Off Deal | Interviews

“A big reason China's capital markets and stock market don't work is that engineering thinking still plays the lead, not financial thinking or market thinking.”

In June 2018, Chen Zhiwu went to a conference in India and found that other countries had changed their minds about China. At the meeting, guests from the United States, South Korea, Indonesia, and India were all “on guard against China, full of suspicion.” “It wasn't like this a few years ago. You can blame their bias, of course, but what are the other reasons?” Chen wrote on Weibo.

Ten years earlier, Chen had published two essay collections in China: Irrational Excitement (《非理性亢奋》) and Why Are the Chinese Hardworking but Not Rich? (《为什么中国人勤劳而不富有》). It was the 30th anniversary of reform and opening-up, phrases like “the rise of China” and “the China model” were everywhere, and many Chinese took pride in them. Chen thought otherwise: without the global trading order and mature industrial technology, the so-called China miracle would have been impossible, and a lot of people were simply caught up in irrational excitement. China's reform experience, he argued, had not refuted the economic and political model that neoliberalism advocates — it had confirmed it.

“Precisely because the achievements came so fast, and so easily, they invite irrational excitement and wrong conclusions. Not only do we credit the success entirely to ourselves, we also reach short-sighted conclusions like ‘development has nothing to do with rule of law,’ ‘economic growth has nothing to do with property-rights protection,’ and ‘constitutional democracy is only the abstract demand of a few intellectuals,’” he wrote in the preface to Irrational Excitement.

Ten years on, facing a new situation in which “the trade war is escalating, the world's attitude toward China has fundamentally shifted, and the world has changed,” Chen believes the last thing China should do is challenge the existing international order or shake its foundations. It should draw some lessons instead, and reach some new understanding.

He told QDaily: “From here on we can't only stress the things you can see and touch — trade in goods, trade in services, investment. We also need to bring our values closer to the world's. Because without a globalization of ideas, without meeting the world halfway on ideas, a business relationship tends to be a one-off deal. It can't last.”

Chen Zhiwu, 56 this year, is a leading Chinese-American economist, now the Fung Chair Professor at the University of Hong Kong and director of its Asia Global Institute. His research covers finance theory, the sociology of finance, economic history, emerging markets, and China's economy and capital markets. He has won the Graham and Dodd Award (2013) and the Merton H. Miller Research Award (1994), among others.

Beyond academic work, Chen has spent years explaining the knowledge and the logic of finance and markets to the general public, and carries considerable weight doing it. He publishes articles and gives interviews often, and The New York Times, The Wall Street Journal, and Barron's have all cited him. His books include The Logic of Finance, Vols. 1 and 2, and 24 Lessons on Wealth; he served as chief academic adviser on the documentaries Wall Street and Currency.

He has also worked in finance itself, as one of three founding partners of Zebra Capital Management. From 2001 to 2011, the firm's hedge-fund quantitative investment models came mainly out of his earlier research. He left in early 2011, when the firm managed roughly $600 million.

Trace Chen Zhiwu's life and you find the marks of his generation of intellectuals: political campaigns and hardship, almost no schooling early on, ferocious work later, an attachment to grand questions like “where is China headed,” and a strong sense of social duty and concern for the country.

Chen's home county is Chaling, in Zhuzhou, Hunan. His parents farmed. Because it was the Cultural Revolution, from primary school through high school he hardly had to attend class and spent his days working in the fields. In 1978, China restored the national college entrance exam. Chen sat it twice before getting into Central South University of Technology to study computer science — a subject he had never heard of at the time. It just sounded “interesting, and new,” so he signed up.

After graduating in 1983, Chen was admitted to graduate school at the National University of Defense Technology to study systems engineering. Swept up in the intellectual awakening of the 1980s, he read widely: the Toward the Future book series, Western classics from the Commercial Press. Milton Friedman's Free to Choose affected him most, and set the ground tone of a belief in free choice he still holds. Chen was an idealist then, and found systems engineering dull, even hollow. “So many people in China go into engineering, and in the end hardly anyone studies political mechanisms. That's dangerous,” Chen said.

So he and his friend Cui Zhiyuan published two papers in the journal Political Science Research. One took up democratic political theory, looking at the rules and design of democracy mathematically and asking what kind of rules could genuinely express democracy's various meanings. “According to the great economist Arrow's theory, democracy has to satisfy certain basic requirements, and we used mathematical methods to study what those requirements are. Cui Zhiyuan and I also translated one of Arrow's books, Social Choice and Individual Values, for the Toward the Future series,” Chen recalled.

After finishing in 1986, Chen worked half a year in the political studies office at the National University of Defense Technology while preparing to do a PhD in social science at Yale. Foreign exchange was tightly controlled then, and the TOEFL had to be paid for in US dollars, which Chen could not get hold of, so he wrote to the Yale professor in charge of admissions and explained. Yale agreed to admit him without the TOEFL or the GRE, and gave him a scholarship.

Carrying the seventy or eighty US dollars the state allowed him to convert, Chen went to America alone to study. He stayed more than 30 years. As with computer science as an undergraduate, his choice of financial economics for the doctorate was largely accidental. Yale had two well-known professors in the field at the time, and the jobs were easy to find, so a friend told him to pick financial economics. He did.

Chen got his PhD in 1990, taught at the University of Wisconsin-Madison and Ohio State University, and returned to Yale in 1999 as a tenured professor of financial economics. In 2017, to give himself fully to the quantitative-history research project he had underway, he left Yale after 18 years of teaching there (22 counting the PhD) and joined the University of Hong Kong.

Over the 30 years Chen spent studying and teaching in the United States, China changed beyond recognition. When he left in 1986, the country had no financial markets and almost nobody knew what financial economics was. On July 15, 2001, Chen read the seventh 2001 issue of Caijing magazine cover to cover on a plane and saw how far China's financial markets had already moved. From then on, he says, he “really began to follow what was happening in China with everything I had.”

In May 2017, Chen launched an audio course, Yale Professor Chen Zhiwu's Finance Course (《耶鲁大学陈志武教授的金融课》), on the paid-knowledge platform Ximalaya. By July 10, 2018, it had been played more than 16 million times. That same month he published the companion book, Chen Zhiwu's General Course on Finance (《陈志武金融通识课》). “I now put special stress on how crucial general education is, and general education in finance above all. A big reason China's capital markets and stock market don't work is that engineering thinking still plays the lead, not financial thinking or market thinking,” Chen said.

On the afternoon of June 23, 2018, we met Chen Zhiwu in a reception room at the Beijing International Finance Museum. He wore a formal, sober suit, as always. For most of the conversation he was calm, talking fluently as if lecturing students. Only a few times, when the subject turned to China's present and its future, did his voice rise and quicken.

Asked what he made of 40 years of reform and opening-up, for instance, he said: “I think at this point there are still a lot of rules that need adjusting, to change people's opportunities. In the end, we still need reform! Institutional reform, so the whole society runs more on rules and less on connections and the rule of individuals.”

Q = QDaily

Chen = Chen Zhiwu

The best way to lower risk in the property market is to let it fall when it should fall and rise when it should rise

Q: My first question is about housing, which a lot of young people care about now. In your book you say that the more China regulates housing prices, the more they rise — because the more restrictions there are on property transactions, including on speculative buying, the worse the market's liquidity, and the lower a home's value. So a society that lets property trade freely is also a society that maximizes property value. That's the upside of free trading in property, but there's a risk on the other side. I'm curious: under what conditions does a freely traded property market tend to produce a speculative bubble?

Chen: First, for young people, my advice is: don't buy. Young people should rent more. Because right now, in Beijing, in Shanghai, in Shenzhen, rents in first- and second-tier cities are relatively low compared with buying — renting is a much better deal. I know different people have different preferences, of course. Personally, I wouldn't insist my own children buy while they're young. Where you'll live in the future isn't clear yet. Maybe in a few years you'll want to move to Changsha, or to Wenzhou, and locking yourself into a home this early could be a problem. Property has terrible liquidity, which makes moving very awkward for a young person. Young people should always be ready in their own minds to move. Don't say, “I was born in Shanghai and you'd have to kill me to get me out.” Maybe the best place to realize your future dreams is Shenzhen, or Beijing, or Wenzhou, and not Shanghai. Locking yourself into Shanghai that young isn't necessarily the best thing for the dreams of your whole life.

As for what property regulation policy actually produces, I think the best way to lower risk in the property market is to let it fall when it should fall and rise when it should rise — to let the market run on its own logic. Chinese property prices have kept climbing all these years, and every round of regulation has pushed them higher, because the method of regulation is badly flawed.

For one thing, for many years now the controls have been tightened on the supply side: developers have been squeezed on the financial support they can get, and required to put up a lot of their own capital to buy land. It wasn't like that at the beginning. Pan Shiyi got into property in the early 1990s without much money of his own, because back then, as long as you could get the land, whether you had your own capital wasn't the main thing. That let people like Pan Shiyi, from a poor, ordinary family, and many others besides, enter property development. Housing supply had more sources, and prices could stay relatively cheap. The reasoning is simple: the more supply there is, the harder it is for prices to keep rising, whether or not demand is high too.

The second point, and the more important one: in the past, every time prices were about to fall, local governments at every level found ways to apply pressure and stop the fall. That created an expectation that property prices would only go up in the future and never down, which kept stimulating more speculative buying and turned prices into a one-way street with no downside risk. Over the long run, though, the more you do this, the bigger you blow the property bubble, and the higher the probability of an eventual crash once more people — young people included — have bought at high prices.

So fundamentally: on the surface, keeping prices from falling helps a lot of homeowners in the short term, but over the long run it harms them, it harms ordinary people, it harms the young. Because once they've bought at high prices, if the day comes when it can't be held up and the bubble bursts, everyone takes heavy losses, and some lose everything. In that sense it actually increases long-term property risk.

Q: Is that a trend China is likely to see?

Chen: I think Chinese people and Chinese society are part of human society too. The experiences and the patterns that hold for other societies — rest assured — hold for Chinese society as well.

Q: Right. I also saw your book discusses Japan's property bubble in the 1980s. It's quite possible China repeats that history.

Chen: That's right.

Humanity can hardly avoid financial crises in the end — and perhaps shouldn't

Q: This year is the tenth anniversary of the 2008 financial crisis, and a lot of people are discussing it. Your book says the way the United States rescued the market after 2008, and the “the government will cover it” signal that sent, may have planted the seeds of the next crisis. Why? Could you say more?

Chen: Because every one of us — buying a home, speculating, investing, running a business, even raising children — knows that if you did it this way once, you'll do it again. Banks and companies that should have gone under weren't allowed to go under; they were rescued. So what do the people running those banks and companies take from that? That they don't have to be too careful. That they can lend recklessly and invest recklessly from now on and nothing will happen. Because if anything goes wrong, the government will cover it and pull them out.

In economics we call this moral hazard. Moral hazard means that on the surface I'm helping you today, rescuing your bank or your company, but for society as a whole and for the people involved, I'm actually doing them harm. You give people the illusion that they don't have to answer for themselves — that if they get it wrong, the government will bail them out. And then nobody in banking or business takes anything seriously.

The property market has exactly the same problem. When prices should fall and aren't allowed to, in the end no home buyer cares about risk, because the government will hold prices up for them anyway. That's why, in recent years, third- and fourth-tier cities have been clearing their housing inventory — and if you look at the data, clearing that inventory with government help amounts to encouraging irresponsible developers to build even more projects even more irresponsibly. Because if they can't sell it, the government will help clear the inventory for them.

So when a financial crisis does come, some things that should happen ought to be allowed to happen. There will be short-term pain, but human society has no way around that pain, and shouldn't avoid it. People don't learn without these lessons. Bail them out indiscriminately and you teach them to behave worse, not better.

Q: But as I read you, this is a last resort. You've said that looking back at American history, every financial crisis was followed by reform and innovation, and those reforms and innovations planted the seeds of the next crisis. So in your view, can humanity never cure financial crises? Why?

Chen: Humanity can hardly avoid financial crises in the end, and perhaps shouldn't. The reasoning is what I just said. First we have to stress, and remember, that every financial transaction crosses time and points at the future — it is an exchange of value between today and tomorrow. Because every financial transaction involves the future, and the future is always full of uncertainty and risk, that uncertainty and risk give participants in financial markets a great deal of room to imagine. And in that room, some people — Trump, for example — know how to work on the psychology of the party across the table. Financial markets will always leave room for some people to play on other people's expectations. So financial bubbles happen from time to time. Given that they happen, and that some market participants know how to work on the psychology of the market and of retail investors, these bubbles are usually impossible to avoid in the short run.

So what then? Only a financial crisis can force people to take a fall and learn from it. That's why human nature, plus the uncertainty built into the future, guarantees that financial bubbles and financial crises will always happen — and in many cases should happen. It's also why, in China, the financial bubbles and property bubbles that ought to burst should be allowed to burst. Otherwise, every time the government steps in and rescues things, it plants the seed of a bigger bubble and a bigger crisis. That's simply how it works.

Q: So refusing to face the small crises guarantees a big one, one that might be beyond anyone's ability to bear?

Chen: Right. That's how it goes, that's the logic of it.

Q: After the crisis, many people called on governments to tighten regulation of banks and financial institutions. I'm curious how you see the Chinese government's current regulation of banks and financial institutions.

Chen: China's financial industry — the stock market, banking, insurance — is over-regulated on the whole, not under-regulated. And it's worth understanding that inside China's financial markets, from the regulators to the practitioners to the other participants, people overwhelmingly come out of science and engineering. People with that training always believe one thing: you can't just leave things alone. How can you stand by and watch a market trade in disorder? You have to step in! Which is why, in my view, general education in finance is so necessary. If more people — engineers, scientists, whoever — had some training and exposure in general financial education, they would know that finance has its own logic and markets have their own logic.

You can't want to manage and intervene in everything. The more you intervene, including when you shouldn't, the more bubbles and distortions you create in the end. The most typical case is the one we just discussed. We decide the property market is growing too fast, so we push it down. Then, when property prices should fall, we decide that won't do. If prices fall too far, local governments' land revenue runs into trouble; if they can't sell land, where does their spending come from? So falling prices are banned. From the point of view of these regulators and the science-and-engineering-trained officials setting policy, the ideal is for property prices to rise a bit — not too much, but never to fall.

The result of running things that way is that everyone wants to buy homes and put money into property. The reasoning is simple: prices have only gone up and never down for years, while the stock market, and many individual stocks especially, have fallen badly. The contrast is too stark. Stocks carry that much risk and overall long-run returns aren't that high; property only goes up. So where do people want to move their money? They keep buying homes, of course. At which point the government thinks: there's so much demand from speculators and investors, this can't go on, and so from the other side it tries to hold prices down with purchase restrictions and the rest. The result, naturally, is that the more the government regulates property, the higher prices climb, and speculative demand only grows. A vicious circle.

I think, first of all, that the future of China's financial markets needs more groundwork laid at the most basic level — high school and college students should all get at least some general education in finance. Hong Kong does this fairly well: because the financial industry is such a critical base for Hong Kong's economy and society, students there take basic general finance courses starting in high school. Financial education from high school onward then lays more groundwork at the university level for the whole economic structure. Look back at the mainland, and even in Shanghai, Beijing, and Shenzhen, where finance makes up such a large share of the economy, even in first- and second-tier cities, high school students and ordinary college students still have no chance to learn anything about finance, financial logic, or market logic. In the end that will undercut the shift in industrial structure we hope for, including developing financial markets further and building Shanghai into an international financial center. Fine aspirations, all of them — but if we don't work on human capital, starting in high school, through general education, to change this situation, those goals and that ambition will be very hard to reach. The talent won't keep up, and the regulators' thinking will be out of joint too.

A society built on connections is in fact the most unequal kind of society

Q: One of your recent Weibo posts said: “In The Logic of Wealth (《财富的逻辑》) I stressed that without the global trading order and mature industrial technology, the China miracle would have been impossible. The last thing we should do is challenge the existing international order, shake its foundations. Now the trade war is escalating, the world's attitude toward China has fundamentally shifted, and the world has changed.” How do you see the effects of the trade war, and what comes next? Do you have a lot of worries? You went to that conference in India and found that many countries are now on guard against China, full of suspicion, compared with before.

Chen: The economic achievement, the economic miracle that 40 years of reform and opening-up brought us, is there for everyone to see. But along the way we should also draw some lessons, reach some new understanding, and go deeper in that understanding.

Because a lot of people used to think that once we were rich and strong we wouldn't have to worry about much else. In fact, if we don't dig further and think harder — above all if we fail to see how favorable the international order of the past 40 years has been to international trade and cross-border investment — we miss something. In 1978, the Chinese military had no ocean-going capability at all, and China had taken no part in building the international order before 1978. Yet the moment Deng Xiaoping said China would open up and reform, overnight, China could become one of the world's great manufacturing nations.

The reason that was possible is that the international order, and the peaceful environment the world provided, were the fundamental thing underneath it. Without them — as we can see today — a great deal of cross-border investment and trade becomes very hard to do. So we should recognize that from here on we can't only stress the things you can see and touch, trade in goods, trade in services, investment. We also need to bring our values closer to the world's. Because without a globalization of ideas, without meeting the world halfway on ideas, a business relationship tends to be a one-off deal. It can't last. The reasoning is quite simple. Whether running a company or making friends between one family and another, we all know that to hold a trading relationship, a business relationship, together over the long run, you can't only exchange goods. You also have to close the human distance — meals and drinks, visits between companies, visits between families. That gives the business a better foundation to go on for years. International trade and international relations work the same way. It's exactly the thinking and exactly the challenge we face in everyday life.

I've often said as much before: China's foreign relations, its international relations, should basically line up with our economic structure. Whichever countries matter most to China's economy and society is the answer we should use to decide how to handle international relations. Put it this way: if you think of China as a big company, anyone who has run a company knows that the relationship an executive has to look after first is the relationship with the biggest customers. Big customers come first. China's foreign relations should follow the same basic logic — which countries are China's biggest trading and investment partners? Those countries are the most important to China, and keeping good relations with them should come first. So decisions about international relations should be made on this basic commercial logic, this market logic.

Of course, I know I can't put this any more plainly than that.

Q: What's really tied to the trade war is globalization, and a lot of people worry that globalization has worsened inequality worldwide and brought on financial crises, migration crises, and so on. How do you see the problems globalization has created? I saw an earlier article of yours discussing inequality, which said: “For a modern society, as long as the consumption gap doesn't spin out of control and low-income groups can still live decently, other gaps aren't necessarily only a bad thing.”

Chen: This is a very interesting subject, actually. I've spent some time researching it recently and gathered quite a lot of material. Put simply: first, from primitive society to today, every advance in technology has worsened the wealth gap. Second, every time the complexity of social organization has stepped up, that too has widened the wealth gap further.

The conclusion feels disappointing, pessimistic, as if it oughtn't to be this way. But I think it isn't hard to understand. Every advance in technology gives people with special abilities and special human capital a better chance to seize the new technology and make money. The simplest example, and I think the best one, is Jack Ma. In a primitive society, in the age of hunting and gathering, the people with more physical capital — the tall and the strong — could hunt better, and had that advantage. Later, as society moved into farming, and now that we have the internet, whether you can become the next Jack Ma or Pony Ma no longer depends on how tall or how strong you are. It depends on your emotional intelligence, your general education, how much general-purpose capital you have, whether you can seize opportunities the way Jack Ma did. Jack Ma isn't tall, and he isn't physically strong, so in a primitive society someone like him would have had a hard time rising above others. Today, wave after wave of technological change has produced an internet era in which strength, looks, and height matter far less. Which is why, as technology keeps advancing and social organization keeps getting more complex, the people without ability, without general knowledge, without special human capital keep getting left further behind. Every transformation hands people with special abilities another, better chance to come out on top. And that's why, for the young, the middle-aged, and the old alike, general education matters more and more for understanding today's world and today's society, and it matters more and more to build up and draw out every dimension of your own human capital. Otherwise you watch the wealth gap widen in front of your eyes, with no way to join the new wave.

That said, as I've noted before, human society as a whole — from primitive society to agricultural society, to industrial society, to today's information society and the internet age — hasn't actually seen its consumption gap worsen much. On the level of basic subsistence, with financial markets, plus the welfare protections modern governments provide, fewer and fewer people in modern society actually starve to death. In famine or in ordinary times, the number of people worldwide who actually starve keeps falling. That in itself shows that as the wealth gap keeps worsening, the consumption gap hasn't — it has been narrowing instead.

Put the two together and I think that's why we moderns are quite lucky to live in today's world. In ancient times, a drought, a flood, or some other natural disaster would starve whole families, or force people to flee as refugees, or sell their wives and daughters. All of that used to happen; today we see much less of it.

Q: The problem, though, is that many people feel that even if we don't ask for equality of outcome, opportunity today is very unequal — power and capital have distorted a lot of resources and opportunities, and competition isn't open enough. That's what worries them.

Chen: Right. Which is why ordinary young people today shouldn't buy the line so many people used to think was a good thing: that Chinese society is a society of connections. Many take pride in it, as a Chinese characteristic. But we should all remember that a society built on connections is in fact the most unequal kind of society. Because who has connections? The powerful and privileged have connections; ordinary families don't. The more a society stresses connections, the more unfair it is to the children of ordinary people, and the fewer routes upward they have. So we have to work at changing it — get Chinese society to give up its reliance on connections and become a society under the same rule-of-law rules, one that stresses rules, laws, and procedure rather than recognizing only connections.

In the end, we still need reform!

Q: You just mentioned that this year is 40 years of reform and opening-up. It strikes me that in 2008 you published two essay collections, Irrational Excitement and Why Are the Chinese Hardworking but Not Rich?. That was the 30th anniversary, and many people were full of hope. Now it's been 40 years. Looking back at the history of China's rise, what stays with you most? What risks and challenges do you think China faces ahead?

Chen: China today, compared with 40 years ago, has turned around beyond recognition. There's no doubt about that; everyone can see it. People still complain plenty, but on the whole personal and family wealth is far better than before, and venture capital and the capital markets are now well developed, so a young person with a good business idea doesn't have to worry much about finding capital. If anything there's more capital than there are places to put it. On that count, the young and the middle-aged living today are far luckier than people were 30 or 40 years ago.

But I think at this point there are still a lot of rules that need adjusting, to change people's opportunities.

Q: Could you be specific? Which rules?

Chen: Too many, far too many. In the end, we still need reform! Institutional reform, so the whole society runs more on rules and less on connections and the rule of individuals. Some of this is too sensitive to say.

Q: Those two books actually spell it out fairly clearly — rule of law, property-rights protection, contract enforcement, the other institutions that keep market transactions safe.

Chen: That's right.

Q: Let's take a few specific issues. First, this year a lot of big Chinese companies — Tencent, Alibaba, Baidu, NetEase, JD.com — have said they'll list on the A-share market once the conditions and the institutions are ready. How do you see big Chinese companies coming back to list on A shares?

Chen: I think these big tech companies should decide whether to come back on their own considerations and their own needs, across the board. Everyone rushing back at once isn't a good thing for some of them. Take a company like Tencent. It has been doing fine for years, operating under the rules of the Hong Kong Stock Exchange and of Hong Kong-listed companies, with no shift in the Hong Kong government's preferences or policies to disturb Tencent's operations, its focus, its priorities.

It's fairly obvious that if a listed company picks an exchange with a poor listing environment, then after listing, regulatory policy that changes from one day to the next will wear its executives out, day in and day out, pulling their attention off the core business and onto responding to this shift in the regulators' preferences and that one. So if I were an executive at one of these listed companies, I'd make the choice based on my own company's direction and strategic position.

For many of these companies, if they're already listed in Hong Kong or the United States, financing isn't a problem, and even valuation isn't a problem — Tencent's valuation on the Hong Kong exchange is already very high. So does it make sense to go back to A shares with a CDR (Chinese Depositary Receipt) just to push the valuation up further? When financing isn't a problem, and they're thoroughly used to the Hong Kong exchange and its institutional environment, adding a whole new layer of complexity may not be very rational. They'll make the right choice for themselves, no doubt.

Q: Second, how do you see internet companies' impact on banking now? On one side, Tencent and Alibaba are taking stakes in setting up private banks; on the other, internet finance is challenging the banks. Both have run into a lot of restrictions. Do you think those restrictions are reasonable?

Chen: This is a big subject, and people have paid a lot of attention to it in recent years. But I think some of the regulation here has gone too far. Looking at the handful of private banks already approved and launched, there's a great deal in the whole approval reasoning and approval process that's open to question, and that ought to be challenged.

First, why can't there be more private banks than these four or five? The original worry may have been that private banks wouldn't do a good job — but Minsheng Bank is more than 20 years old now, and has done quite well. And the four or five new private banks have done reasonably well so far, each on its own niche positioning. So why can't there be more?

Second, I'd like more people to pay attention to the fact that only a few very successful billionaires are allowed to take part in founding private banks. This kind of policy is the textbook way to make the rich richer and make it harder for ordinary people to get a chance at wealth. On what grounds, and why, should only Tencent or Alibaba and a handful of other big companies be allowed to hold stakes in these private banks? Why can't other people capable of running a bank, even if they aren't billionaires, be approved to found their own private bank, or join in founding one? Why, when those four or five private banks were approved a few years ago, did the right and the opportunity to take part rest entirely with companies and billionaires who had already succeeded? These big companies had no previous experience running banks. The logic behind it is badly flawed.

I've noticed that when people talk about widening income gaps and wealth gaps, everyone gets worked up — and then, when they make these financial regulatory policies and decisions, they never connect their own decisions and their own actions to the widening income and wealth gap. In fact it is exactly these everyday, ongoing regulatory and approval decisions, made by government departments at every level, that are lowering social mobility in China and widening the wealth gap. There were fewer such restrictions 30 or 40 years ago. For someone born into an ordinary family, the routes upward back then were arguably wider than they are now.

Now that a first and second generation of wealth already hold that much economic power, those departments decide who may enter the financial industry and run a bank, and who may not, on the basis of exactly that economic power. This is badly wrong! I'm sorry to say that in all these years I haven't seen anyone discuss the subject from this angle. This angle shouldn't be ignored!

Q: Right, your book also says China banned private finance for many years, and that this actually creates substantial risk.

Chen: It doesn't only create risk, it creates a great deal of unfairness. The more financial development is banned and the more restrictions financial regulation imposes, the bigger the sacrifice ordinary people have to make. In several chapters of my book — I mean Chen Zhiwu's General Course on Finance — I take up the question of why loosening controls on financial markets and letting them develop freely actually brings ordinary people more benefit.

The reasoning, in plain terms, is simple. For someone already rich, whether or not there's a lot of financial support available is a matter of icing on the cake. For an ordinary person from an ordinary family, whether they can get the financial support they need is sometimes a matter of how to go on living at all. That challenge is nothing like icing on the cake.

A big reason China's capital markets and stock market don't work is that engineering thinking still plays the lead, not financial thinking or market thinking

Q: There are too many current issues and not enough time to get through them, so I'd like to end with two historical questions. First, looking back, intellectuals in the May Fourth era called for freedom, but didn't see that freedom needs foundations, financial markets above all. Why didn't the intellectuals of that period see it?

Chen: First, traditional Chinese intellectuals were against commerce and against making money, and therefore against finance. So understanding of financial markets, basic financial literacy, understanding of free markets — all of it was neglected. Hu Shih included. Hu Shih should count as one of the finest 20th-century Chinese scholars and intellectuals arguing for individual freedom, and even he opposed private property and opposed a genuinely free market economy. Which shows us how urgently Chinese society needs general courses in finance and economics from high school through university. Without making up that lesson, people and intellectuals in Chinese society will keep making the same mistake.

Second, think about it: if you don't have financial freedom, if you have no economic security against birth, age, sickness, and death in the future, how can you have individual freedom? How can you have individual rights? How can you go wherever you like, afraid of nothing? The moment you're hungry, the moment you fall ill, you're taught the lesson and reminded. Without economic security, without financial freedom, you have no freedom. Because when you're hungry all the time, or sick all the time with no way to be treated, you're forced to go to others, to accommodate others, to give up your own rights.

In that sense, precisely because financial markets are the way to deal with every kind of future risk — birth, age, sickness, death — this is why I keep stressing, in Chen Zhiwu's General Course on Finance and in my earlier books, that finance is the best path to individual freedom, and perhaps the only one. There's no other way. Only financial instruments let you arrange every dimension of your future needs entirely as you prefer. Only then do you have a real economic foundation, a real financial foundation, for asserting your individual rights and your individual freedom.

Q: My second historical question: China had stock trading as early as 1872, but its first modern bank didn't appear until 1898. More than 100 years later, the stock market is still thrashing about and refusing to grow up, while more than half of the world's ten largest banks are Chinese. Why can big banks develop even where rule of law is weak, but capital markets can't?

Chen: Because big banks, relatively speaking, can be built to a certain scale through the government's administrative power. In particular, if the government can step in and rescue a bank at any time, then the bank, as the vehicle that holds ordinary people's basic wealth, offers the public a very high level of trust and reassurance. But the financial market is far more than banks. Put simply, there's also the capital market — the stock market, venture funds — and different insurance products and insurance companies, and different derivatives markets on top of that. This rich array of financial markets is what finally gives the whole of society, ordinary people, companies, and the state alike, so many different tools for arranging their lives, their work and careers, and national security. So after more than a hundred years of development, the stock market still doesn't work, and even digital currency has become a serious bubble — and Chinese people may well make up more than half of the world's digital-currency speculators.

The root of all these phenomena, I think, still comes back to how finance is understood, to grasping what finance really is. Because to this day, China's regulatory bodies, the people working in the financial industry, and the participants in financial markets are dominated by people trained in science and engineering. As I said, people with that training share an affliction — I studied computer science myself — we're all used to wanting to manage everything, to intervene in everything, to make it all more orderly. Letting the invisible hand do the work simply won't do. Which is why I now put special stress on how crucial general education is, and general education in finance above all. A big reason China's capital markets and stock market don't work is that engineering thinking still plays the lead, not financial thinking or market thinking.

Q: What have you been thinking about lately?

Chen: Mostly what we've already touched on. One subject is the history of how the wealth gap has changed across human society: from more than 10,000 years ago to today, has the wealth gap actually worsened, or improved? Another is how human society coped with risk before financial markets existed. So I've been writing about the origins of superstition, how superstition has changed, and so on. These are foundational questions about the history of human civilization, thought through from a financial angle, of course — from the angle of how human beings cope with risk. Which is what I stress in Chen Zhiwu's General Course on Finance: finance doesn't just supply a set of tools, it supplies a way of thinking, a lens for looking at human culture, human civilization, and the course of human history.

Lead image courtesy of Zhongnan Boji Tianjuan; banner image courtesy of pxhere.