Research On Financial Pilot Strategy During Industrialization Process In China

This paper is guided by Financial Pilot Theory and Financial Coordination Theory,which are put forward by Professor Kong Xiangyi. First, through historical exploring theprocess of industrialization of the countries in the world, this paper summed up threetypes of industrializing mode: natural evolution mode, catch-up mode and financial pilotmode. Earlier industrialization belonged to natural evolution mode, of which thesuccessful examples are the United Kingdom and some Western European country.Entering the19th century, the natural evolution mode giving way to newcomer catch-upmode, of which are the United States, France, Germany, Russia, and so on. Up to the endof nineteenth century, financial pilot mode began to come up to reality, and popularizedafter World War II, of which are Japan, Singapore, Hong Kong, China, Taiwan, SouthKorea, and the Federal Republic of Germany’s industrial reconstruction.Second, this paper summarized the process of industrialization in China, whichincluded the Westernization Movement and three wave of industrialization from lateQing Dynasty to the Republic of China. After the Liberation, in help of the former SovietUnion, China began to industrialize in the catch-up mode, and acquired extraordinaryachievements. However, under the error command of “catch up with the United Statesand surpass Britain”, Chinese industrialization suffered a great setback. After Reform andOpening, industrialization of financial pilot mode had begun in China. Financial reformprovided a steady stream of financial support for the new industrialization climax, andbrought high growth in economy more than30years in China.(b)Why is Financial Guidance able to overcome the economic crisis, and cause theeconomy achieving steady and rapid growth? Through proving the Necessary andSufficient Conditions of the financial pilot strategy, this paper found that there is Inherent Frequency in any economic system. The writer not only uses graphics to demonstrate thephenomenon that economic system fluctuates when it is disturbed, like a spring, but alsoestablish a mathematical model to prove the Inherent Frequency in economic systemstrictly, and draw out a analytical expression of oscillation amplitude of economic system:y=y+(y y βt1t010)(). The discipline of this regulation is: beforeindustrialization, the economic system is in a low-level equilibrium. When it’s beginningto industrialize, lots of advanced technologies are fetched in. Then, the introduction oftechnology becomes a disturbance source to economic system. This disturbance issignificantly more than other random disturbances in the amount, so it becomes the maindirection of disturbances to economy system, constituting a significant impact in Positivedirection. It causes economic system cyclical fluctuations: introducing technology�'income increases�'demand for money increases�'interest rate increases�'investment declines�'income declines�'demand for money reduces�'interest raterises�'investment increases�'income increases again.This paper studied the cyclical fluctuation’s orbits of economic system under theimpact caused by Positive disturbances (such as technological innovation) and bynegative disturbances (such as war). This paper also studied the damping effect of avariety of endogenous variables acting on economic fluctuations, scilicet proving theprinciple of "economic stability". And this paper studied the function of invention ofpaper-money system, which makes the money supply change from endogenous variableof economy to inside-and-outside-symbiotic variable of economy. Under theManagement Monetary System, a country’s monetary authorities can buffer fluctuationsin the economy by changing the money supply, namely, they can insert a sector of“money supply” in the process of “demand for money increases�'interest rateincreases”, and change is into “demand for money increases�'money supply increases�'interest rate unchanges or declines”, which makes the investment no longer decline,and then the income no longer reduce, finally economy re-equilibrate at a new height. Thus the economy crisis occurrence can be avoided.(c)China is a newcomer country, and Shanxi is a backward area in China. In order toachieve industrialization, lag countries or regions must use Financial Pilot strategy tosolve following four problems. First, provide a positive disturbance to the backwardeconomy. This problem can be solved by introducing and innovating technology. Second,the conductive mechanism of positive disturbances can be smoothly acted to aneconomic system. That’s the Inherent Frequency Model come into existence. Thisproblem can be solved by improving the Market Economic System. Third, before thepositive disturbance effects economy, the government need provide a range of financialarrangements to meet impacts of the positive disturbance, which is the implementation ofthe Financial Pilot Strategy. This problem can be solved by establishing Market FinancialSystem. Last but not least, exorbitance or scarcity of Financial Pilot must be avoided.This problem can be solved by coordination between Financial Pilot and Real Economy.Therefore, our policy recommendations are to implement technology-based CountryStrategy, to improve the Market Economic System, to establish Market Financial System,to count and monitor the Economic Bubble Rate, and integrate it into the intermediatetarget system of Monetary Policy. Then, specific suggestions have been proposed toimprove the economy in some backward provinces and to realize industrialization inChina.(d)There are some possible innovations in this paper:(1) Inherent Frequency has been found in modern economic system, which wasproved by logical, graphical and mathematical methods. Under the action of variousexternal disturbances, the economic system should do the natural cycle vibrationaccording to their Inherent Frequency. The analytical expression of amplitude,y=y+y y-β)t1t0(10)(, has been brought forward by calculating. In this paper, it has been discussed that the economic system cyclically fluctuates under the impacts ofpositive disturbances and negative ones. It has been examined that various endogenousvariables have obvious damping effects on economic system. A proposition has beenproved that the invention of paper money makes Money Supply transform fromendogenous variable to endogenous-and-exogenous variable. At the same time, this paperhas explained that economic crisis moderates after world war II, and certified that Moneyis neutral under “Pure Metal Currency System”, but it is non-neutral under ManagementCurrency System.(2) The distinction between economic functions and social functions of depositshas been found. Based on this evidence, National Clearing Center System has beenbrought forward, which is better than Deposit Insurance System to protect interests ofdepositors. Depositors can put transactional money and precautionary money in NationalClearing Center to avoid risk.(3) The concept of “Modern Collective Ownership System” has been proposed,which is collective limited corporation. Socialist Public Ownership includes WholePeople Ownership and Collective Ownership. The Whole People Ownership hastransformed state-owned limited corporation in the contemporary, similarly, CollectiveOwnership should evolve into collective-owned limited corporation. Based on the aboveconcept, we propose that state-owned company should exit the field of competitiveindustries, and replaced by a large number of the collective-owned company. In this way,we can resolve those troublesome problems, which include monopoly, enterprisescorruption, rent-seeking, income gap widening, and so on, as well as to ensure thedominant position of the socialist public ownership.(4) In a unified market, the finance should be deepened, but between twofundamentally different markets, the finance should be repressed. In other words, theunified market has come into being in a country or between two countries, which areunder same technologic condition, so capital should free flow in these countries.However, between two countries, whose productive levels are obviously different, if capital flow is unloosed, wealth will transfer to more developed country. Thus, weadvocate that finance should be deepened fully in domestic market of developingcountries, but repressed in international market of them.In addition, what have been analyzed in this paper are four major characteristicsthose are distinctions between our current financial system and Market Financial System.Those are not fully market-oriented financial relations, not completely independentfinancial business, not indirectly macro-financial control methods, and not fully legalfinance operations. Nine harmful consequences of the current financial system in Chinahave been put forward, such as bank management alienation, monopoly, credit structuralimbalance, the spread of interest rates too large, and so on. Seven specific measures toestablish Socialist Market Financial System have been proposed. These references mayalso have a certain degree of innovation.