Transformation Time China's Fictitious Economy Begins To Grow In Leaps And Bounds

After adopting the reform and opening up policy, our central government resumed the issuing of national debt. Fund-raising system by stock first emerged from the township and village enterprises and gradually expanded to the State Owned Enterprises (SOE) in cities. With the reforming of national investment and financial institution and financial system, Stock Exchanges have been established successively in Shanghai and Shenzhen; the reform of the joint-stock system in SOEs has been ongoing at an increasing speed; and China's fictitious economy has started developing in leaps and bounds.A Survey of the Theories of Fictitious EconomyBefore Marx, observation had been made that fictitious capital and actual capital constitute a pair of categories. Marx started his study of fictitious capital from credit and combined his value theory and monetary theory through the analyses of bill, national debt and stock. According to Marx, fictitious capital is an interest-bearing bond that has a dual character. On the one hand, it facilitates the capital concentration and socialization; on the other hand, it is divorced from the actual capital and gives rise to the speculation. The soaring of price caused by the speculation in turn causes the divorce of fictitious capital from actual capital and the credit inflation induces the economic crisis. Hilferding pointed out that when entering the monopoly stage, the financial capital becomes the new form of fictitious capital. He broadened the scope of fictitious capital. Other scholars made the discussion about the relations among the bill, national debt, stock and actual capital from different perspectives as well.The Mechanism of Fictitious Capital's Influence upon the Actual Capital The quantitative change of fictitious capital gives rise to a new category—fictitious economy, which exerts a more and more profound influence on actual capital. Through researching the issue and circulation of bonds, the function of interest rate, and the investment behavior, the western mainstream economists expounded the internal relations, influence mechanism and action ways between fictitious capital and actual capital. Keynes believed that the interest rate is the core factor to influence the investment and financial behavior of the economic subjects, thus affecting the actual economy. His view of economic management cycle brings state interference into economic activity. As Keynes's follower, James Tobin regarded the stock price as a direct yardstick of investment and actual economy. With the emergence of the stagflation in the 70s, Keynesianism began to lose its dominance. The theory of Friedman, a representative of Monetarism, was adopted by the government. He believed that the monetary transmission mechanism (MTM) not only exists in the commodity market, but also in the financial assets market. The profit-oriented behavior of the investors produces the assets readjusting effect as well as the wealth effect. The macro-regulative tools utilized by the developed countries have provided valuable experience for us to achieve the optimal result in regulation.The Great-Leap-Forward Development of Chinese Fictitious Economy China carries out gradual reform in the transitional period. With the reform of property right system, production scale's expansion and the direct financing needs of the micro-subjects stimulated the use of bills and the issuing of stock. As the government restored the national debt system, national debt became an instrument to cover the deficit. Bills can regulate the supply and demand as well as structure of social commodities; and like national debt, it is a tool employed by the central bank to adjust the interest rate. In order to handle the deflation problem, the government has issued enormous national debt since 1998. This benefited the economic growth and remedied the deflation. After the adoption of these measures, our national financial system began transforming from the economic construction type to a public one. Stock financing grows rapidly; the markets of bill, stock and securities have been established. The financial system has been improved step by step and financial innovation has been brought in steadily. The great-leap-forward development of Chinese fictitious capital is demonstrated by the fact that the development of capital market exceeds that of the money market. Yet the development of fictitious capital in developed countries follows a different sequence. The reason for this difference lies in the promotion of the external conditions: the government has provided the institutional supply for the marketization of investment and financing behavior. The national income is distributed preferentially to citizens, thus providing sufficient funds for the great-leap-forward development. The rapid growth of monetary supply and the development of securities market foster the fictitious economy. The national debt futures business is an initiative exploration of the marketization of interest rates. It leads to the financial deepening in our country. An Empirical Analysis of the Development of Chinese Fictitious Economy Issuing the stock by high premium prices helps the listed companies raise huge sum of funds. The fact that it promotes the capital accumulation and upgrading of industrial structure can be verified by mathematical models. China has become the world's production center of the primary products, a veritable"workshop of the world". With the stock market attracting huge sum of funds, the speculative needs of money is the source of stock index's deviation from the economic growth. The exchanges of stock index futures can not eliminate the stock market bubbles. The issuing of an increasing amount of national debt expands the monetary supply and leads to inflation. By analyzing the extent to which fictitious economy deviates from the actual economy based on Harold's Economic Growth Model, we can reach the conclusion that the influence of excessive monetary supply on output has reduced and money has become a weaker driving force in the growth of actual economy. The circulation of an increasing amount of speculative funds in financial system makes the fictitious economy deviate from the factual economy. The huge amount of foreign exchange reserve becomes a new cause for the possible inflation and speculation. Against the background of economic globalization, monetary liquidity surplus makes the central bank's control on monetary demand by interest rate adjustment decrease. Thus it is urgent for the relevant policies to be improved.The Lesson Drawn From the Development of Fictitious Economy in Foreign CountriesThe fictitious economy in U.S. developed with the socialization of capital and the evolution of enterprise institution promotes the corporate merger and fosters the structure of monopoly market. The U.S. securities market becomes the site of investment for the whole world and bolsters up the U.S. economy. Nevertheless, it also gives rise to economic crisis. In 1929, the U.S. government issued an excessive amount of loans. The ensued stock calamity caused an overall economic crisis. In 1987, the inflated junk bonds caused another round of stock calamity. In 2001, the NASDAQ internet stock collapsed. Japan relied on the export-oriented growth pattern when it was economically prosperous. The continuous trade surplus led to the excessive accumulation of monetary capital, which, plus the state-directed financial system and low market interest rate, pushed the scale of the bank loans beyond control. The appreciation of Japanese yen sped up the emigration of industries and an excessive amount of money competed for the limited assets, resulting in the increased stock and land prices. The accumulation of assets bubbles resulted in the bubble economy, which dragged the whole nation into economic recession. As a home country to emerging industries, Thailand attracted foreign investment with a high interest rate and opened its capital programs. However, the financial crisis was triggered when the industrial pattern of export processing was shocked by the reduced export, the overvaluation of currency and the all-round, multi-level reinvestment of international capital. Evidence has shown that under the background of economic globalization, we should reconsider the procedure and path we followed in reforming the financing mode and financial institution.The Supervision in the Development of Chinese Fictitious EconomyThe securities markets were established under the government's institutional supply, which weakened the market mechanism. Therefore, the function of the government should be transformed to strengthen the supervision on the markets of stock and bill as well as on the circulation of national debt. In the total sum of securities financed, fund-raising by national debt used to receive more emphasis than enterprise bonds. This practice should be changed. The amount of enterprise bonds issued should be increased and the national debt should be regarded as means of macro-regulation. Regarding the structure, as the right to license and approve the financing bills lies solely in the government, and the bill market in our country still lags behind in development, the financing cost is high. National debt took too small proportion, while too much emphasis was attached on the market abroad in fund-raising by stock. By the end of 2006, the aggregate price value of stock market in our country has approached 50% of the GDP. Therefore, the information revealing mechanism and quality of listed companies should be enhanced; the interests of the small and medium-sized investors should be protected in accordance with the law; the institutional investors should be nurtured. The financial function of the national debt should be improved to boost the development of the securities market. A short-term market interest rate should be established by the central bank's open operation of the market, and by the national debt futures price. The scale of bank credit should be readjusted and an early-warning mechanism should be established to warn the investors against the fluctuation of market interest rate. Only when these measures are implemented, can China's fictitious economy develop healthily.