This excerpt is taken from the book "Strong Country and Prosperous People: Renmin University's Experts Interpret China's Development," published by China Renmin University Press. The article delves into the common sense and logic of finance from four aspects: what is finance, how to understand financial risks and financial crises, the direction in which the financial structure will change, and the shift of finance from virtual to real, helping us to return to the essence of finance to view today's economic and financial issues.

Over the 40 years of reform and opening up, some changes have occurred in financial common sense.

1. What is common sense?

What is financial common sense? The author has guided a doctoral student in law who came to study for a postdoctoral degree in finance. He has worked in the Supreme Court for many years and is a judge there, with a profound understanding of the law.

The author once asked him, what is the common sense of law? He thought for a long time and said that this question is difficult to answer. This indicates that common sense is not simple.

The author's understanding is that the common sense of law is: the spiritual starting point of law must be goodness, it must punish evil and promote good, and only with goodness can fairness and justice be deduced.

The law must uphold such a basic value: the law must protect people's basic rights; the law must be a mechanism that praises justice and maintains social fairness and justice.

In the author's understanding, this is the essence of the law.

To put it more simply, the law must reflect goodness and conscience. If the law deviates from these common senses, it may slide towards evil.

The law must reflect equality for all, and equality for all is the basic value of the law. The law must construct a normative system that reflects the progress of society, a normative system that embodies goodwill. If I were a legal scholar, my heart would be filled with this kind of emotion.II. What is Finance?

Why do we discuss the common knowledge of what finance is? Because in practice, we often deviate from the common sense of finance and disrupt its normal patterns, making the understanding of common sense particularly important.

As long as common sense is respected, society will definitely move forward. In other words, the driving force of social progress comes from respecting common sense.

What is the essence of finance? Some may answer that the essence of finance is "financing." This answer is not wrong.

Financing can be said to cover the basic points of traditional finance. However, as finance has developed to the present day, it may have new meanings and functions because the forces affecting finance have changed. Merely looking at financing is not enough; we must also consider the manner in which financing is carried out.

While financing is indeed important, the intertemporal allocation of risk may also be very important. This is understood within the framework of modern finance.

The essence of finance is risk; every financial activity has inherent risk. This is essentially telling people that financial risk cannot be eliminated because finance is inherently risky.

Attempting to eliminate risk and control it at its inception completely goes against the common sense of finance.

A profound understanding of this common sense allows for the formulation of policies and legal norms that conform to the patterns of modern finance. The essence of finance is inherently risky; risk can be allocated, but it cannot be eliminated.

III. How to Understand Financial Risk and Financial Crisis?Some people are very afraid when they talk about financial risks, and even more so when they talk about financial crises.

Risk is inherent in finance, and there is a complex and lengthy process from risk to crisis. Sometimes it may just be the seed of risk, and it may not necessarily become a risk.

How to view financial risks becomes very important.

From risk to crisis, there must be at least several stages: individual risk, local risk, systemic risk, and a full-blown financial crisis.

Theoretical research must identify the nodes in the risk derivation process and understand at which nodes the risk multiplier will be amplified.

These crises have typical significance in the history of global financial crises. Studying these crisis cases is very interesting, as each crisis has a different logical derivation process because each country's economic development model is different, and the degree of dependence on external capital varies.

If these examples are thoroughly studied, China will have reference experience once it encounters such a situation.

Logically, we need to sort them out and study them by categories. However, the process and lessons of the financial crisis in Southeast Asian countries may have limited reference significance for our country because these countries are too small, their economic dependence on the outside world is very high, the proportion of foreign capital is high, and their economic development model is overly dependent on foreign capital.

Japan needs to be studied, and the United States needs to be studied even more. The situations that have occurred in these two countries have important reference significance for China.

China has cultural similarities with Japan. The real estate bubbles in Japan and China are very close in terms of craziness, but China's finance has adopted a segmented model. Although there is such a large real estate bubble, the finance is generally safe.The Japanese model of cooperation between banks and enterprises, characterized by mutual business penetration and cross-shareholding, is considered by some to be an excellent model.

The author has always opposed this model. We must isolate the risks of the real economy from the financial system. Separation should occur in terms of property rights and control rights to prevent crises in the real economy from affecting the financial system.

It is not terrible if problems arise in the real economy; when an industry or a company encounters issues, the power of the market will fill the gap. However, if the financial system experiences a crisis, it will have profound and immense destructive power.

China's finance must have a risk isolation wall, which is the most correct thing our country has done in the financial field over the years.

There was a period when we blindly worshipped the Japanese bank-enterprise model, which is actually unsuitable for China.

Although there is a huge bubble in China's real estate, finance is safe; despite the stock market experiencing such a huge crisis, our financial system remains safe. This is due to our country's segmented regulation and segmented development model.

This model is still appropriate for China at that time and even today.

We must study the American financial system and its structure. As a financial powerhouse, the United States has a financial system and structure that are worth studying, as there is much to learn from them.

Objectively speaking, the American financial model is quite scientific, with a structure that is highly resilient and efficient in handling risks, and it possesses strong regenerative capabilities.

The 2008 financial crisis only had a brief impact on the United States for two or three years, and the problem was resolved through several rounds of quantitative easing. By 2018, the American financial system had recovered to become the most competitive in the world.When a major financial crisis occurs, and the financial system still possesses such strong competitiveness a decade later, we must investigate the subtleties within.

The future financial system in China must have structural flexibility and follow a market-oriented model and an open path. A closed financial system is inevitably fragile.

If the degree of marketization is not high, and all financing and financial activities have to be completed through traditional commercial banks, it is impossible to build a modern financial system in China. After studying these examples, a series of conclusions can be drawn to understand which links need to be controlled.

Looking at Japan and the United States, real estate bubbles are the triggers for financial crises. If real estate bubbles continue to amplify within the financial system, a crisis will arrive soon.

What is the so-called "Minsky moment"? It refers to the moment when the return on assets falls below the cost of debt, and a crisis will quickly follow. Japan began to experience a crisis when the returns on real estate collateral were significantly lower than the debt yield.

The stock market crisis of 2015 also confirmed this principle. The process from financial risk to financial crisis is lengthy, and the transformation of potential risks into actual risks also takes time.

Many risks will naturally perish within the financial system; there is no need to fear them. We need to deeply understand every node from risk to crisis.

IV. In what direction will the financial structure change?

The progress of a country's finance lies in the transformation of its structure, not in the expansion of its total volume.

As mentioned earlier, financial assets have grown from less than 300 billion yuan 40 years ago to 360 trillion yuan now. Compared to the change in total volume, what is more important is that the structure has changed.The proportion of securitized financial assets is increasing, and their scale is expanding. Structural changes can alter the functionality of a country's financial system, making it more resilient.

This resilience stems from reforms and adjustments in the financial structure. China's financial structure is evolving towards a market-oriented direction, with the proportion of securitized financial assets continuously rising, which is an inevitable trend.

Why is this considered common sense or financial logic? This is because there are frequent reports of strong concerns when people observe a decline in residents' savings deposits in commercial banks, thinking that there is a problem with finance, without realizing that this is the correct direction.

If residents' savings deposits grow at a rate exceeding their income, it means that an increasingly smaller portion of residents' new income will flow into the capital market, making the country's financial system more traditional, backward, and lacking in flexibility.

Only with this common sense can we correctly view the changes in the distribution of residents' assets. When residents' assets are increasingly invested in non-savings deposits, it signifies that the country's financial system is moving towards marketization, with a more flexible structure, which is the right direction.

Some people lack such awareness and theoretical judgment.

The diversity of financial forms is a fundamental trend. China's financial forms cannot be confined to a single form, nor can finance be entirely returned to traditional commercial banks.

There was a time when the author had different opinions on financial regulation, which seemed to push all financial activities back to commercial banks. This is not feasible! It would cause finance to regress.

In fact, after the growth of residents' income, their demand for financial services increases, and it is necessary to provide a variety of financial services through a diversified range of financial forms. A single financial form can no longer meet the demands.

The middle and low-income groups also have wealth management needs. Although the entry threshold for the wealth management market has been lowered, there are still certain minimum requirements.Only when one yuan can also be managed is the best wealth management service, which requires the corresponding financial industry to be realized.

The author has high expectations for the new financial industry, which has done many things that traditional finance cannot do, but there are always some people who want to besiege it. They do not understand that digital payment and digital wealth management have done "pioneering" things, allowing the middle-income group to have value-added functions even if there is only 1,000 yuan left after deducting consumption every month.

Whoever can provide value-added services for 1,000 yuan is the best financial service. Chinese finance cannot always focus on people like Wang Jianlin and Jack Ma, and cannot only think about how to serve the wealthy class, but must improve inclusiveness and serve the middle and low-income groups.

Most people are in the middle and low-income groups, and corresponding financial services should be provided for them, which is inclusive finance.

The core essence of inclusive finance is that everyone has the opportunity to obtain financial services, including payment, wealth management, financing, etc.

Low income is not a reason for not being able to obtain financial services, so new financial industries must be created. If you take 500 yuan to let a large bank manage your wealth, the large bank will not do it because the cost is too high; but some new financial industries can manage your wealth even if there is only one yuan.

Why not support it? Many people take out 1,000 yuan, 2,000 yuan for wealth management, and the total amount may reach tens of billions, hundreds of billions.

In fact, our country is very high in inclusive finance, but it is not well done. Once it is implemented, for example, the development of third-party payment, some people will come up with high-sounding reasons, suppressing financial industry innovation in the name of national financial security.

Will providing financial services to the middle and low-income groups affect financial security? The author does not think so. Let the new financial industry serve the middle and low-income groups, and the regulatory authorities can supervise the transparency of the new financial industry.

There are often many people who put forward many big slogans and big hats to scare people. What evidence is there that digital payment has made the national finance unsafe? It is not easy to break through the Chinese financial system, and the new financial industry is rare to break through the traditional thinking and technical obstacles.Finance should be inclusive, not serving only large enterprises or the wealthy. Of course, the wealthy can receive customized services.

For instance, the wealthy may go to Milan to have a pair of shoes custom-made for 50,000 yuan, but producers cannot make shoes worth 50,000 yuan exclusively for the wealthy and neglect to make other types of shoes. The majority still need to wear shoes priced at 100 yuan or 200 yuan.

It is clear that finance must serve these middle and low-income groups, which necessitates financial innovation. Only through financial innovation can the inclusive mission of finance be accomplished, hence the need to view financial institutions correctly.

Without a diverse range of financial institutions, there can be no rich variety of financial services. Just as in academia where there is a saying "a hundred flowers bloom and a hundred schools of thought contend," finance is the same; having only a few banks is not sufficient.

Diversity in financial institutions is a prerequisite for providing a variety of financial services and is also the fundamental path to achieving inclusive finance.

Five, on the issue of finance shifting from the virtual to the real economy

Scholars have a habit of thinking about the logic behind issues. There is a term that is frequently mentioned, "shifting from the virtual to the real economy."

The original meaning of this term is that finance should serve the real economy; without serving the real economy, finance does not have much necessity to exist.

The vitality of finance comes from the real economy, and the prosperity of finance comes from the prosperity of the real economy, which is common knowledge.

Scholars also ponder why funds tend to flow towards asset management, private equity (PE), venture capital (VC), and insurance. Why is it that some parts of the real economy lack funding?In theory, if a country's market economy is highly developed and the market possesses a balancing force that can achieve equilibrium in resource allocation, then the so-called "shift from the real economy to the virtual" should not occur. This is because, in a market economy, capital is profit-seeking, and through the power of the market, a relative balance can be achieved across various fields.

If a company has growth potential, it can attract capital; if it does not, capital should not be invested in it, as such companies are the targets of supply-side reform. Enterprises that pollute the environment or have excess capacity will not receive funding.

Does Huawei lack capital? Do "unicorn" companies lack capital? They do not. Venture capital (VC) and private equity (PE) are attracted to them, as are bank loans, because risk capital understands that these companies have growth potential.

Capital is profit-driven, and the movement of capital or funds is calculated based on the rate of return and the level of risk. This is the law of capital movement.

Both commercial banks and market capital will go through such a risk assessment process. Do not subjectively assume that financial institutions or the market must lend money to companies that lack capital. Who would be responsible if the company fails to repay the loan? We should not overly trust the subjective role of a particular department or institution, thinking that because they stand high and see far, they must see clearly. Instead, we should trust in the power of the market.

The essence of a market economy lies in the market's ability to strike a balance between returns and risks.

If the understanding is incorrect, policies will be distorted. Such reforms could bring many problems in the future.

For example, some issues have arisen with P2P lending, and some argue that this is due to the shift from the real to the virtual economy. There are bad actors within P2P who use the guise of internet finance and P2P to commit fraud and deception, and these individuals should be severely punished according to the law.

However, it is true that some legitimate P2P platforms lost their liquidity and could not survive after strict regulation. Why did crises suddenly erupt in a concentrated manner for a period? There are some policy reasons for this.

Understanding financial logic is crucial for the formulation of financial regulatory policies. We must follow the laws of financial development and formulate policies that are conducive to stabilizing financial expectations.Please provide the text you would like translated into English.