The free air of "Financial Internet +"

Author: Qin Yifei , Chairman of Jingu Investment MOM and Chief Economist of Asian Financial Risk Think Tank

"Whether a person is free or not does not depend on the size of the choice range, but on whether he acts according to his own will!"

—— Hayek, The Constitution of Liberty

The Internet and Decentralization

     Economist Hayek said that freedom has two meanings. First, freedom has a range. The size of this range does not make any essential difference. The key is that within this range, we should have the power to fully choose according to our own wishes. This is the essence of freedom. Chinese Premier Li Keqiang said that "anything is allowed unless prohibited by law." This is the solemn commitment of the Chinese government to the freedom of citizens. It is also the "basic agreement" for citizens to legally exercise their rights, social and economic operations, and industrial innovation. This is another meaning of "freedom" mentioned by Hayek.

     How to understand the "basic protocol" of free representation? From the perspective of quantum computing, Feynman designed a simple physical model with only a single molecule. This physical model can be roughly understood as a physically closed box, with 0 and 1 representing the left and right boundaries, in which molecules perform various regular or irregular movements. Feynman's very simple model is the basic protocol that enables humans to complete various complex calculations and artificial intelligence. The theory of evolution discovered by Darwin 100 years ago is nothing more than the discovery that the evolution of the universe follows a basic protocol - survival of the fittest. Adam Smith's "The Wealth of Nations" 300 years ago laid the foundation for economics by discovering that human society has a basic protocol, which is the law of market operation.

     The contrast between China before and after the "reform and opening up" is full of clear attitudes towards this basic agreement: from rejection at the beginning, to half-hearted acceptance, and finally to open arms. Therefore, the prosperity and value brought by such a basic agreement are self-evident, otherwise this country may never be prosperous and strong. Joining the WTO is a milestone in accepting and participating in the basic agreement of the world market.

     In the Internet age, even if Kim Jong-un and Obama have different values, they can still transmit information freely and equally. The basic protocol is TCP/IP. Its significance is that our freedom of choice is guaranteed in the form of code for the first time, because our basic protocols in the past were actually interfered by some central forces, that is, centralization.

     The most straightforward phenomenon is taxis. In the past, there was a taxi management office, which issued a license for taxis to operate. Of course, it also collected various fees and set prices. We were grateful for this office and thought that if there was no such office, the price of illegal taxis would have risen to an unknown level. But now Uber has emerged. It has only some simple basic protocols to optimize the resource allocation between the nearest car and the user, and the price is often cheaper than that of a taxi.

     It not only solves the intractable problem of taxi hailing in major cities around the world, but also restores the essential identity of customers as the gods of the market, all because of this basic agreement. Of course, everyone knows that the various forces are still in the game, and those offices representing the central forces are still suppressing Uber. Not only China, but New York has also declared it illegal, because the traditional central forces are too reluctant to give up the power of monopolizing the market and the huge rent-seeking space.

     However, with the existence of such a basic protocol, especially with the Internet's code form protecting our freedom, the center has no way to continue to deprive us of this freedom without limit, so Shanghai issued the world's first special car operating license. This is the "center" being forced to comply with the basic protocol, and it is also an anti-basic protocol behavior that attempts to continue to maintain and consolidate the power of the center, but this move undoubtedly promotes the further completion of the basic protocol. This marks that we have entered an era of code protection, and also an era of decentralization.

Data chain and "Financial Internet +" innovation

     Nowadays, people often talk about big data, but what is big data and how to define it may be unclear. According to the results of our previous communication with Mr. Hu Benli of the World Data Management Association, data in a broad sense can be divided into big data, medium data, small data and micro data. The important source of data is the basic protocol mentioned above. We can figuratively call all related organic combinations including big data the concept of "data chain".

     Concepts including big data are becoming increasingly popular, but the value of new concepts lies in their application rather than in speculation, and currently the only solution to the application of data chains is innovation.

At present, the application of data can be roughly divided into four levels:

The first layer is direct trading of basic raw data, which is the direct sale of raw materials. For example, the previous case of collusion between banks, telecommunications, and travel websites to sell customer information is also a high-incidence area for data trading crimes;

The second layer storage and trading platform, such as the Guiyang Big Data Exchange, has begun to generate the basic protocols for big data;

The third layer is the various reports and basic data products or indirect applications generated based on the data chain, which we can call industrial products of processing with supplied materials;

The fourth layer is a direct application product that is deeply developed on the basis of the third layer. For example, it has extensive and direct applications in the medical and financial fields.

     Taking the financial products we are most familiar with as an example, if we know the big data of consumption, credit assessment data, and financial management data of all JD users, we can infer the micro-data required for various targeted financial products. In other words, the more complete and sufficient the data chain is, the more direct and valuable the application products we can get. It can be seen that the essence of the data chain is also decentralized.

     Based on the above complete data chain, we can design targeted investment and financial products for various types of users and layers of JD.com; on this basis, we can further design personalized products with subtle differences for each investor. This step not only opens the private banking function with a threshold of more than one million to the poor, but also makes it more personalized and targeted than private banking. This is the value of product application of deep mining of data chain. So how is it achieved specifically?

     We know that financial products are an organic system composed of various system models such as all-round research, strategy configuration, risk control, product design, etc. Through the in-depth application of data chains, the efficiency and stability of the model can be greatly improved, and the overall stable yield of financial products can be improved, bringing long-term stable personalized returns to investors.

     This is difficult to achieve in general product models, but we can reasonably achieve it by using MOM (management by fund managers)'s multiple fund manager portfolios, multiple strategy allocations, and multiple investment portfolios. At the same time, we use a macro strategy that links the three-tier market and multi-level capital markets to lock in various long-term and short-term returns for investors.

     Furthermore, we can use the Internet as a channel for so-called "decentralization", where investors and fund managers' investment teams can communicate directly online, product models can be modeled in real time, and research, risk control, and transactions are all completed in the background through data chains. The core elements to complete this step include a complete data chain, personalized financial products with stable returns, and a high value-added rating system, including a comprehensive rating system for investors, investment advisory teams, and fund products.

Data Link and Financial System Security

     We all know that the core elements of finance are credit and leverage. These two functions are concentrated in money, which we also call monetary economics.

     After humans entered the era of credit currency, credit became the cornerstone of social and economic development and wealth growth. The internal factors of social development are manifested in credit expansion. It can be said that all means to promote economic development are for the maximum credit expansion; and the outward manifestation of credit expansion is the expansion and contraction of leverage, that is, the so-called "leverage" and "deleverage" in two completely opposite directions. A complete economic cycle is marked by the market's complete digestion and adaptation to the two stages of "leverage" and "deleverage".

     For example, there have been rumors recently that China's version of QE3 plans to release 7 trillion yuan of money. Whether it is true or misunderstood, the government's intention to increase monetary liquidity to expand credit and increase leverage is obvious. The central bank's available ammunition has basically been exhausted, and starting the printing press seems to be the only "correct" choice at present. However, we must be very cautious. Once the printing press is turned on, there are three possible consequences:

The first is ideal deleveraging, which involves increasing money printing, moderately increasing currency depreciation, increasing overall competitiveness, turning credit contraction into expansion, and starting the next round of economic operation;

The second problem is that social credit remains sluggish. When credit deflation deviates from monetary leverage expansion, it means that society has fallen into a deflationary depression, and no matter how much liquidity is added, it is difficult for it to enter the real economy.

The third result is that everyone is unanimously bearish on the local currency, so a large amount of the newly issued liquidity will be exchanged for foreign currency. This situation will aggravate the depreciation of the local currency and cause an inflationary depression.

     The United States has experienced a complete cycle of deleveraging and then leverage since 2007, and the recovery trend is strong. The Federal Reserve is about to raise interest rates. What will be the result of China (and other countries at similar levels) and other countries' leverage behavior that is almost counter to the US cycle? The future is uncertain and there is no room for optimism.

     At the same time, the high level of debt in the whole society caused by excessive leverage behavior cannot be ignored. In addition to the local debt problem that has attracted much attention before, the high debt of the central government will also become one of the trigger points for a hard landing of the economy. Although the current interest rate level in China's domestic bond market has hit a new low in recent years, it is all thanks to the fact that liquidity expansion cannot enter the real economy; but at present, the overseas financing costs of Chinese companies have further increased, and the three major international rating agencies have all unanimously predicted the decline, which has indirectly pushed up the overall debt cost in Asia.

     The current financial systemic safety coefficient of countries around the world, except the United States, is lower than that of the 2008 financial crisis, not higher. This is because after the gold standard and the collapse of the Bretton Woods system, the basic agreement of the monetary system no longer exists, and the credit currencies of almost all countries have built their own barriers and established their own centralized currency markets. Although there are capital flows and currency circulation in the global capital market as a whole, centralization is not weakening but strengthening in essence. Even with the active expansion of the internationalization of multiple currencies, including the RMB, the risk of a global systemic financial crisis has not actually been reduced.

     Looking at the future development trends from the perspective of data chain, basic protocol and decentralization, we suggest that monetary authorities of various countries should adopt a positive attitude of inclusiveness, openness, cooperation, co-construction and sharing towards electronic currencies including Bitcoin, innovative monetary systems such as quantum currency and vector currency, and innovative means such as payment tools and methods derived from currency, rather than tying themselves up in knots and missing out on opportunities for development and reform.