Note:In 2021, the author opened a new column in the”Financial Expo” magazine, preparing to write some essays that are not very professional. The article is about 2500 words. This is my first new column, published in the first issue of”Financial Expo” 2021. Please be sure to indicate the source for reprinting.
Human history has experienced many great plagues. For example, the Athens plague in 430 BC, the Black Death in the 14th century, and the Spanish flu during the First World War. In the Athens plague, it is said that nearly half of the population of Athens died as a result. During the Black Death, the death toll in Europe exceeded 25 million, accounting for one third of the European population at that time. In the Spanish flu, the death toll reached 30-40 million, far exceeding the death toll of the World War I.
After the Second World War, with the advancement of science and technology, especially the advancement of medical technology, the average life span of human beings has been continuously extended, and the probability of a global epidemic has dropped significantly. There was a time when there was a view that technological progress and globalization have eliminated the possibility of a global pandemic.
The SARS that broke out in 2003 is just a reminder to the world. Before the SARS virus suddenly disappeared, there were about 9,000 people infected worldwide. But SARS is a severe infectious disease, and the final mortality rate is as high as 11%.
The new crown epidemic that broke out in 2020 is a major plague that has truly swept the world and is comparable to the Spanish flu a century ago. As of December 12, 2020, more than 71.19 million people have been diagnosed with new crowns worldwide, of which more than 16.51 million have been diagnosed in the United States alone. The number of deaths due to new crowns worldwide is about 1.5 million. Affected by the new crown epidemic, the global economic growth rate may shrink by 4.4%in 2020, which is the deepest recession in the world in peacetime after World War II.
There is a view that the plague seems to be an ingenious mechanism designed by nature. This mechanism is to forcibly achieve a balance between the number of organisms and the natural environment. Mankind used to conceited that the development of science and technology was sufficient to finally eliminate the threat of the plague. However, the outbreak of the new crown epidemic reminded people that this may still be an unattainable wish. Human beings should still maintain sufficient awe of nature.
There is also a view that with the advancement of medical technology, human beings will eventually overcome cancer, leukemia, organ failure and other diseases, and may even achieve immortality. However, so far, nature does not seem to have evolved such a species. Perhaps, immortality is just a conceited idea of people. In the end, the balance mechanism of nature will still limit the number and lifespan of human beings through various channels or mechanisms or crises?
For a long time after entering the 21st century, China’s consumer price index (CPI) is largely driven by changes in food prices, and food prices Changes have been largely driven by changes in pork prices. This phenomenon of pork price changes driving CPI changes is called by economists”the pig cycle“.
For example, from 2006 to 2018, according to the method from trough to trough, China had three complete pig cycles. In each cycle, the volatility of pork prices is significantly higher than that of food prices, and the volatility of food prices is significantly higher than that of CPI. More importantly, changes in pork prices seem to be ahead of changes in food prices and changes in CPI, which is considered an important feature of the pig cycle.
However, if you compare the three pig cycles from 2006 to 2018, you can find the following interesting feature, that is, in these three cycles, over time, the price of pork The cumulative rise and fall are getting smaller and smaller, and a complete pig cycle lasts longer and longer. In other words, the pig cycle seems to be gradually being smoothed out by time.
The mainstream explanation for this phenomenon is that China’s domestic pig raising model is undergoing structural changes. In the past, China was dominated by farmers’ free-range farming, with pig farms or companies purchasing them. With the passage of time, pig farms with larger and larger scales are gradually replacing individual farmers. With the increase in the concentration of pig raising, pig raising companies will be more rational and farsighted than farmers. This will overcome the limitations of the past spider web model, gradually reduce the fluctuation of pork prices, and gradually weaken the pig cycle.
So, did the pig cycle finally disappear? No, no. Between 2018 and 2020, there has been one of the most”magnificent” pig cycles in history. At the top of the cycle, even if measured by official data, pork prices grew at a rate close to 240%year-on-year. This increase dwarfs the previous three pig cycles (the previous peak was 180%). This round of pig cycle not only has a huge increase, but the cycle duration is significantly shorter than the previous cycle.
There are roughly two reasons for this abnormal pig cycle. One of the reasons is that a large area of African swine fever broke out in the country in the past two years. The raging epidemic of this disease has hit many large pig-raising provinces and caused a shrinkage on the supply side. The second reason is that the environmental protection policies in some places are said to be too”one size fits all”. For the sake of environmental protection, pig farms have been artificially closed, or sows have been slaughtered in advance. Of course, this policy was adjusted in time. However, for a certain period of time, this has further increased the shortage on the supply side.
The story of the pig cycle can also be extended to the global economic cycle. Since entering the 21st century, the world has entered the so-called”Great Moderation” period (the Great Moderation). The past economic cycle seems to have disappeared. After the outbreak of the global financial crisis, the global economy fell into a so-called long-term stagnation and entered a new era of three lows and one high (low growth, low interest rates, low inflation, and high debt). Has the business cycle (inflation) disappeared? Or is it accumulating power that will re-attack in a more turbulent way in the future?
The biggest problem facing finance is how to overcome the information asymmetry between borrowers and lenders, so that loan interest rates can better reflect the time value and potential default risks. This is also the fundamental reason why financing for small and medium enterprises is difficult and expensive under the traditional financial system dominated by commercial banks. First, it is difficult for SMEs to provide sufficiently attractive mortgage assets. Second, SMEs usually lack long-term and stable credit records. This means that commercial banks will naturally prefer large enterprises or state-owned enterprises in terms of loan objects, and will naturally discriminate against small and medium-sized enterprises.
Internet finance seems to be a very tall concept. In theory, Internet companies that have accumulated rich big data through various Internet scenarios can fully understand the companies up and down the industrial chain through good algorithm design (artificial intelligence), so as to more accurately identify credit risks and be more targeted. Pricing loans in a flexible manner makes risk prevention and control easier, thereby reducing the bad debt ratio. In other words, Internet financial institutions seem to be able to solve the financing problems of SMEs once and for all.
However, reality is always more magical than imagination. In the past cycle, we have seen a series of chaos in the development of domestic Internet finance, the most typical of which is P2P. There are many P2P companies that not only do not use big data, cloud computing and artificial intelligence to price loans and manage credit risk, they even lack the traditional of ordinary financial institutions. The risk management and control mechanism finally turned into a scam that used various excuses to raise funds from the public, arbitrarily lend out, and eventually become insolvent or even abscond.
An Internet finance model worth promoting is to use its own capital and funds raised from formal channels (such as issuing ABS or ABN) to lend to upstream and downstream companies on its own platform (supply chain finance) , At the same time, it uses various borrower data collected on its own platform for fund pricing and risk management. However, in this round of P2P wave, each of the above-mentioned links has either been subverted and forged, or has been left in vain.
Finance is finance. Technological finance or financial technology has not changed the core issues of finance. Credit, leverage, and risk, these core key words of finance, will not be solved once and for all because finance is covered by technology. If you deliberately ignore something, these things will come to you in the end. Those who come out will pay them back sooner or later.
The stories of the new crown epidemic, the pig cycle, and Internet finance can be described as different routes to the same goal. They explained a truth:some laws will travel through time and cycles and continue to play a role in a longer dimension. However, humans tend to overestimate the power of technological progress, industrial progress, and financial innovation, thinking that the latter will change the entire world and change all laws.”This time is different” (This time is different) optimism will always prevail again and again, but this optimism will eventually be ruthlessly dispelled by history. History will not repeat itself, but it will always have the same rhyme. Believe it.
(The author is the deputy director of the Institute of Finance of the Chinese Academy of Social Sciences and the deputy director of the National Finance and Development Laboratory)