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| Credit and Capital: A Development Finance Research |
| CHEN Yuan
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| Chairman of China Finance 40 Forum Executive Council |
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Abstract Capital is a critical factor to the current and long-term development, and credit is the key to realizing the transformation of wealth to capital. This paper studies the relationship between credit and capital from four dimensions.
First, the paper discusses the emergence and evolution of credit. Credit is a special form of value movement conditional on debt repayment and is closely related to commercial economy. The emergence of credit is inseparable from two necessary conditions: the accumulation of wealth and the formation of legal and institutional framework. Accompanied with the development of capital, credit is a catalyst for the transformation of wealth into capital, and is making capital internalization sweep the world. Credit evolves as it coexists with capital, and they are highly dependent on the three stages of wealth creation: the primary form of credit and capital are mainly to satisfy the demand for the subsistence stage; the intermediate form of credit and capital are mainly to satisfy the demand in the well-off stage; and the advanced form of credit and capital are mainly to satisfy the demand in the wealth accumulation stage.
Second, this paper discusses credit's nature and functions. In terms of the nature, credit is a special form of social relationship. At the country level, credit forms the basic structure of society, and is the most extensive and universal communication tool and language in the economic sector; at the international level, credit serves as the general rule and standard governing international conduct, but has not yet been fully globalized. Different countries are in different stages: countries in the first stage do not have fully-built sovereign credit and need to rely on the credit of developed countries in their domestic market, showing a pattern of credit colonization; countries in the second stage have developed their own credit in their domestic market, but still rely on the credit of developed countries internationally; countries in the third stage are essentially developed economies, and with their credit dominating the world they export their credit to the rest of the world to absorb and occupy worldwide wealth.
In terms of the function, this paper discusses the basic functions of credit, such as facilitating transactions of goods and capital, promoting capital formation, and other financial functions. On this basis, the securitization function and the financial market construction function of credit are discussed in detail. Regarding the securitization function, the paper points out that the credit-based capital formation is the prerequisite for securitization; the separation of the three rights of credit, i.e. the right to ownership, the right to income and the right to use, is the basic condition for securitization; and the nature of securitization is determined by the goals and functions of different types of credit. The paper then discusses about personal credit, corporate credit, sovereign credit and international credit. Regarding the function of financial market construction, the paper underlines the abundant resource of savings and the massive demand of investment in China, which, combined together, can promote the transformation of corporate credit-centric market into sovereign credit-centric economy, giving credit a greater role in the social and economic development.
Third, the paper discusses the new challenges and issues about the current credit system. Many countries, including China and its East Asian neighbors, started out as export-oriented economies, attracted a great deal of foreign investment and earned foreign exchange reserves to pay off their international balances—￣a necessary choice for countries at the stage of capital shortage. Meanwhile, a large quantity of US dollar credit poured into the international market, and China as well. China's foreign reserves, in a sense, is a securitized form of savings backed by the dollar's credit and is a component of the global credit dollarization. But the harmful effects of the dollars emerge when countries no longer suffer shortage of wealth and capital. They try to extricate themselves from the dollar trap and seek for new carriers for wealth and capital. The paper also proposes possible solutions to the problems from the perspective of deepening the use of sovereign credit, and puts forward the tentative idea of issuing equity securitization tools based on sovereign credit.
Fourth, in the review and summary section, the paper proposes that the form of credit will continue to evolve with the development of capital, and its evolution direction maybe from individual level to enterprise level, from country level to international level, and from debt credit to equity credit (i.e. fate credit), even to international equity credit that has yet to emerge. In the future, advanced forms of credit will enhance the function of the existing capital markets and enable credit to play a greater role at both micro and macro levels.
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Received: 25 February 2020
Published: 30 June 2020
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