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Without further ado, this is what the image looks like:

Next, I will interpret each branch in turn, but before that, there are two points that need to be clarified:

Firstly, this image provides a macro overview, capturing the main links while omitting the details.

Secondly, and most importantly, in this image, all money is compared to water. Why this metaphor? First, we need to understand the true meaning of money; money is merely an intermediary for the exchange of goods.

In the center of the image is a large circle, with residents on the left and enterprises on the right. The enterprises in the image represent all companies that can produce goods or services, which can include factories, supermarkets, intermediary companies, etc. Therefore, the flow of water in this circle represents residents using money to purchase goods or services from various enterprises. After receiving this money, enterprises continue to produce goods or services, with the goods and services represented by water flowing back and forth between the two.

However, during this cycle, all residents do not spend all the money they have; each person tries to accumulate wealth little by little. Subsequently, part of the accumulated wealth flows into the housing market. Due to the high value and low liquidity of houses, the housing market has become a huge reservoir.

Additionally, part of the wealth accumulated among residents is saved, forming a savings reservoir. Now, most residents' money is stored in banks, and the water from the savings reservoir flows into the banks.

However, banks are profit-making institutions and will not simply help depositors store money. Therefore, the money in banks is lent out in the form of investments, flowing into the hands of certain residents or enterprises that need funds. Since enterprises usually require substantial financial support for production, it can be said that each enterprise has its own reservoir. When these reservoirs are aggregated, they form the stock market.

From this perspective, the birth of the stock market aims to promote the efficient circulation of goods and services in the large circle in the middle. By evaluating relevant enterprises through individual investors and financial institutions, extracting the essence and discarding the dross, what remains are well-managed enterprises, allowing more goods and services to flow into the large circle in the middle.

If the stock market lacks efficient and transparent regulation, then a considerable portion of the water in the stock market will flow into the reservoirs of certain individuals rather than into the large circle of goods and services circulation, which would be detrimental to the overall development of society.

Moreover, in addition to injecting production vitality into society through the stock market, bank funds can also adjust the flow of water in the middle circle through corresponding monetary policies under the leadership of the central bank. Common monetary policies include adjusting credit scale, controlling currency issuance, regulating market interest rates, open market operations, etc.

After understanding that the "savings-bank-investment" cycle can promote the circulation of goods and services in society, there is another essential cycle that is government-led.

In the continuous circulation of goods and services in the middle circle, residents and enterprises will gradually accumulate wealth and expand their reservoirs. As a result, with more water in the reservoirs, there will be less water circulating in society, so the purpose of taxation is to return the water from private reservoirs to the public, which is the main idea of the "taxation-government-finance" cycle.

In summary, the means employed by a government to regulate the economy can be divided into two main points:

Through fiscal revenue, that is, the process of wealth redistribution via taxation, and through fiscal expenditure to provide goods and services to society, maintaining stable economic operation. Fiscal expenditure can be further divided into two parts: direct market injection through government bonds and public expenditure for infrastructure investment led by the government. The combination of fiscal revenue and expenditure is collectively referred to as fiscal policy.

I believe everyone has guessed that the circulation of goods and services between residents and enterprises is the most crucial link; it is the center of social economic operation and the foundation for achieving national wealth. Whether it is the monetary policy adopted by banks or the fiscal policy led by the government, all policies are actually aimed at enhancing the operational efficiency of goods and services in society.

So how can we ensure that water flows continuously like rivers and seas between residents and enterprises? First, the flow of water cannot stop; stagnant water becomes dead water. Looking back at history, we can see that every financial crisis has been triggered by the stagnation of water along the "bank-investment-stock market" route, and the subsequent Great Depression was a manifestation of the near exhaustion of water flow between residents and enterprises.

The economy is the sum of numerous transactions, and each transaction is quite simple. Transactions involve buyers and sellers, where the buyer pays money (or credit) to the seller in exchange for goods, services, or financial assets. A large number of buyers and sellers exchanging the same type of goods constitutes a market. For example, the wheat market includes various buyers and sellers with different purposes, engaging in different transaction methods. Various transaction markets make up the economy. Therefore, the seemingly complex economy in reality is merely a combination of numerous simple transactions.

Economic entities can be divided into three main categories: government, enterprises, and households (residents). The government acts as both a coordinator and manager to ensure the smooth operation of the national economy, as well as a purchaser of goods and services, a provider of public services, and redistributing national income between households and enterprises through taxation and transfer payments. Enterprises are economic organizations that allocate scarce resources and engage in production and business activities, obtaining profits by continuously providing material products and services to the market. Households (residents) are providers of production factors such as labor and capital and are also the main consumers. In the national economic circulation system, economic entities provide products or services to each other at acceptable prices to maximize social welfare. As shown in Figure 1, the operation of the national economy in the real world includes both internal and external cycles.

The internal cycle, also known as the domestic cycle, refers to the transfer and allocation of goods and production factors within a country or region, where the prices of goods and factors depend on the supply and demand conditions of the country or region. The internal cycle can be simply understood as self-production and self-sale, where the entire process from production to sales to consumption is completed domestically. The external cycle, also known as the international cycle, refers to the flow of goods and production factors across national or regional borders, where the prices of goods and factors are influenced not only by domestic supply and demand conditions but also by the overall supply and demand conditions of the international market. Due to the inherent expansionary nature of market economies, under the influence of competitive mechanisms, enterprises will inevitably continue to expand their market space to reduce costs, scale up, and improve efficiency, thus driving economic activities to break through geographical limitations and form a trend of economic globalization.

The main system includes: central banks, financial regulatory agencies, the State Administration of Foreign Exchange, policy-oriented financial institutions, and commercial financial institutions.

Since the establishment of the China Securities Regulatory Commission in 2003, China has formed a financial regulatory framework of "one bank and three commissions," which continues to this day. Currently, China's financial industry implements a system of segmented operations and segmented regulation. The management of financial institutions in China is mainly reflected in the following three aspects: First, institutional management: including market access, establishment of branches, approval and termination of personnel appointments, etc. Second, business regulation: all aspects of financial products (price, target audience, governance mechanisms, etc.). Third, operational monitoring: various types of off-site and on-site supervision based on compliance and risk prevention.

The current overview of the financial system and the market adjustment of monetary policy tools

(1) The People's Bank's method of market adjustment: When the market needs more funds, the People's Bank injects currency into the market. The main methods include "rediscounting" and "re-lending" to commercial banks, as well as purchasing government-issued bonds in the open market. When there is a surplus of funds in the market, the People's Bank adjusts using monetary policy. Monetary policy tools are divided into: general monetary policy tools, special monetary policy tools, and other monetary policy tools, as detailed below:

Market adjustment of fiscal policy tools

(2) The government's method of market adjustment

The government's funding sources mainly include taxes, state-owned enterprise income, administrative fees, and debt. An important source of government funding is also national and local bonds. The government can use fiscal policy to adjust total demand; currently, China implements an active fiscal policy and a prudent monetary policy.

The main methods of fiscal policy are as follows:

1. National budget. Mainly achieved through determining the scale and balance of budget revenues and expenditures, arranging and adjusting the structure of revenues and expenditures to achieve fiscal policy goals.

2. Taxation. Mainly determined through tax types and rates to ensure national fiscal revenue and adjust the distribution relationship of social economy.

3. Fiscal investment. Adjusting industrial structure through national budget allocations and guiding the flow and volume of off-budget funds.

4. Fiscal subsidies. Directly or indirectly implementing fiscal assistance through fiscal transfers to achieve stable economic development and social stability.

5. Fiscal credit. A means of redistributing fiscal funds based on the principle of compensation, including issuing public bonds and special bonds domestically, issuing government bonds abroad, borrowing from foreign governments or international financial organizations, and implementing paid use of budgetary funds.

6. Fiscal legislation and enforcement. The state legally recognizes fiscal policy through legislation to ensure the achievement of fiscal policy goals.

7. Fiscal supervision. The state inspects and supervises the implementation of fiscal policies and fiscal discipline by state-owned enterprises, institutions, and their staff through fiscal departments.

The China Investment Corporation and Central Huijin Investment Ltd. (referred to as "CIC") was established on September 29, 2007, in Beijing. It is a wholly state-owned company approved by the State Council of China, engaged in foreign exchange fund investment management, belonging to the Ministry of Finance. The company's registered capital is 200 billion yuan, sourced from the Ministry of Finance through the issuance of special government bonds, amounting to 1.55 trillion yuan, making it one of the largest sovereign wealth funds in the world. The original intention of the company was to invest China's accumulated foreign exchange reserves abroad, ultimately used to reshape China's financial system. With the establishment of CIC, the company fully acquired Central Huijin Investment Ltd. from the People's Bank at the end of 2007, making Central Huijin a wholly-owned subsidiary, thereby granting CIC control over major banks in China. Central Huijin Investment Ltd. (referred to as "Central Huijin") was established on December 16, 2003, approved by the State Council, as a state-owned investment holding company. Its main function is to invest in state-owned key financial enterprises, representing the state in exercising investor rights and fulfilling investor obligations within the limits of its investment, without engaging in any other commercial activities or interfering with the daily operations of the state-owned key financial enterprises it controls. Central Huijin's controlled financial institutions include the China Development Bank, Industrial and Commercial Bank of China, Bank of China, China Construction Bank, China Everbright Bank, China Reinsurance (Group) Corporation, China Jianyin Investment Ltd., China Galaxy Financial Holdings Co., Ltd., Shenwan Hongyuan Securities Co., Ltd., and Guotai Junan Securities Co., Ltd.

The banking system includes:
Five major state-owned commercial banks (ICBC, ABC, BOC, CCB, and BOCOM), three policy banks, twelve medium-sized banks, one postal savings bank, 147 urban commercial banks, 85 rural commercial banks, 223 rural credit cooperatives, 63 trust companies, a series of financial and auto leasing companies, currency brokerage companies, financial companies, 40 local foreign bank subsidiaries, and four large asset management companies. The market share of the five major state-owned commercial banks (ICBC, ABC, BOC, CCB, and BOCOM) holds 59% of government bonds, 85% of central bank bills, and 44% of all corporate debts. They provide 32% of interbank lending and fixed-income financing for other banks and offer 76% of financing services for non-bank financial institutions such as insurance companies and trust companies: the five major banks hold 58% of household savings, 50% of corporate savings, and their capital accounts for half of the entire financial system.

The market share of the other twelve medium-sized commercial banks (such as CMB, CITIC, etc.) holds 17% of government bonds, provides 21% of corporate financing, and 25% of interbank lending: they hold 29% of corporate savings, 9% of household savings, and their capital accounts for about 10% of the entire financial system.

According to the list of China's top 500 financial institutions published in 2014, the total asset scale of the top 500 has reached 170.41 trillion yuan. China's stock of financial assets is primarily dominated by banks, holding an absolute advantage, although there has been a downward trend in the past decade, it still reaches as high as 90%. This shows that China remains a bank-dominated financial system.

The major banks, ranked by total assets, are: ICBC, CCB, ABC, BOC, China Development Bank, BOCOM, CMB, and Huaxia Bank. The total assets of the top ten amount to 92 trillion yuan, accounting for 61% of the industry.

The major trusts, ranked by managed trust assets, are: CITIC, CCB Trust, Industrial Bank, Zhongrong, Zhongcheng, Chang'an, Huatai, Ping An, and Yingda. The total assets of the top ten amount to 2.9 trillion yuan, accounting for 39% of the industry.

The major securities firms, ranked by total assets, are: CITIC Securities, Haitong Securities, Guotai Junan, GF Securities, Huatai Securities, CMB, and Shenwan Hongyuan. The total assets of the top ten amount to 978.1 billion yuan, accounting for 47% of the industry. The major fund management companies, ranked by managed fund size, are: Tianhong Fund, Huaxia Fund, Harvest Fund, Southern Fund, ICBC Credit Suisse Fund, E Fund, GF Fund, Bosera Fund, and Huitianfu Fund. The total assets of the top ten amount to 2.08 trillion yuan, accounting for 57.3% of the industry.

First, the stock of bank assets accounts for over 90% of the financial industry's assets, with the five major state-owned banks accounting for 43% of the total assets of the banking industry, meaning that the total assets of the five major state-owned banks account for about 40% of all financial assets in society.

Second, the Ministry of Finance and Central Huijin jointly control the four major state-owned banks and the China Development Bank with absolute dominance, controlling BOCOM and Everbright as the largest shareholders. This means that over 50% of China's financial assets are jointly controlled by the Ministry of Finance and Central Huijin.

Third, Central Huijin was originally regulated by the central bank, but now it has been transferred to a subsidiary of CIC, with the chairman of CIC being the deputy minister of the Ministry of Finance, indicating that Central Huijin and the Ministry of Finance act as consistent actors, with the central government controlling half of China's financial industry through the Ministry of Finance.

Fourth, local governments and state-owned enterprises control most of the remaining financial institutions, controlling the other half of China's financial industry.

Fifth, historically and currently, joint-stock banks are mostly established by local governments and state-owned enterprises, and most are still actual controllers.

Sixth, historically and currently, urban commercial banks and rural commercial banks are often the cash cows of local governments, and since the wave of banking reforms, local governments remain the actual controllers of urban commercial banks and rural commercial banks. Central banks, foreign capital, and private capital have shared in this feast, but most have not yet gone public, and exit channels remain unclear.

Overview of financial institutions

1. The equity structure distribution of trusts, securities firms, and funds is basically similar, closely resembling that of joint-stock banks, mostly established by state-owned enterprises and local governments. After years of equity changes, the transfer of shares among private capital, local state-owned capital, central enterprise shares, and foreign capital has led to a relatively diversified shareholding structure. However, local state-owned capital and central enterprise investment holding companies still firmly control China's major trusts, securities firms, and funds.

2. Insurance companies vary in size; large insurance companies have a shareholding structure similar to that of state-owned commercial banks, controlled by the Ministry of Finance and Central Huijin, while small insurance institutions are similar to securities firms.

3. Private enterprises represented by Anbang Insurance have begun to emerge in the financial market, venturing into banks, securities firms, and other institutions, with some institutions achieving full licenses for banking, securities, and insurance. Unlike Anbang, they do not publicly stake claims in the capital market but instead form consistent actors through dispersed shareholding or multiple companies, such as the Tomorrow Group led by Gang Jianhua.

4. The most important financial market infrastructure is almost entirely controlled by the government. Although secondary important institutions are membership-based or corporate, the membership meetings are nominal, and the main leaders are appointed by the government.

The People's Bank decided to lower the benchmark interest rates for RMB loans and deposits for financial institutions starting from August 26, 2015, to further reduce the financing costs for enterprises. Specifically, the one-year benchmark interest rate for financial institutions was lowered by 0.25 percentage points to 4.6%; the one-year benchmark deposit rate was lowered by 0.25 percentage points to 1.75%; and the benchmark interest rates for other loan and deposit categories, as well as personal housing provident fund loan rates, were adjusted accordingly. At the same time, the upper limit for interest rate fluctuations on time deposits of more than one year (excluding one-year deposits) was relaxed, while the upper limit for interest rate fluctuations on demand deposits and time deposits of one year or less remained unchanged. Starting from September 6, 2015, the reserve requirement ratio for RMB deposits of financial institutions was lowered by 0.5 percentage points to maintain reasonable liquidity in the banking system and guide stable and moderate growth of monetary credit. Additionally, to further enhance the ability of financial institutions to support "agriculture, rural areas, and farmers" and small and micro enterprises, the reserve requirement ratio for rural financial institutions such as county-level rural commercial banks, rural cooperative banks, rural credit cooperatives, and village banks was additionally lowered by 0.5 percentage points. The reserve requirement ratio for financial leasing companies and auto finance companies was lowered by 3 percentage points to encourage them to play a good role in expanding consumption. Since November 2014, the People's Bank has successively lowered the benchmark interest rates for loans and deposits four times, guiding financial institutions to continuously reduce loan interest rates and effectively alleviating the high cost of social financing.

Since November 2014, the People's Bank has lowered the benchmark interest rates for RMB loans and deposits for financial institutions four times, with the one-year benchmark loan interest rate lowered to 4.6% and the one-year benchmark deposit interest rate lowered to 1.75%.

The macro economy currently faces a situation of unstable fundamentals and significant downward pressure. As one of the important tools of monetary policy, lowering deposit and loan interest rates aims to further reduce financing costs for enterprises to stabilize economic growth while intending to send positive signals to the capital market, serving an expected guiding function. Historical experience shows that interest rate cuts mean a loose funding environment for the stock market, which is a substantial benefit. After the interest rate cuts, A-shares tend to rise more than fall; from February 21, 2002, to May 11 this year, there were 25 interest rate cuts, with the Shanghai Composite Index rising 14 times. Interest rate cuts directly benefit high-debt industries and stimulate residents' credit consumption for housing and automobiles to some extent. Industries such as real estate, infrastructure, non-ferrous metals, coal, and securities will benefit, as the favorable stock market reduces the pressure of capital flowing into the bond market, clearly alleviating the risk factors for downward bond yields, and the steep bond yield curve will be significantly corrected. As the intention to reduce financing costs becomes clearer, medium- and long-term bond yields are expected to decline significantly.

Current financial policy: loosening liquidity - new monetary tools

Credit asset pledge re-lending: On October 10, 2015, the People's Bank announced that based on the replicable experience formed from the pilot projects of credit asset pledge re-lending conducted in Shandong and Guangdong, it decided to promote the pilot of credit asset pledge loans in nine provinces (cities) including Shanghai, Tianjin, Liaoning, Jiangsu, Hubei, Sichuan, Shaanxi, Beijing, and Chongqing. Credit asset pledge re-lending allows banks to pledge existing credit assets (loans already issued) to the central bank to obtain new funds.

Essentially, this belongs to debt collateralized subprime loans. Recently, the central bank has used various new monetary tools, such as MLF (Medium-term Lending Facility), SLF (Standing Lending Facility), and PSL (Pledged Supplementary Lending), to loosen monetary liquidity, reduce social financing costs, and support the real economy. Credit asset pledge re-lending is primarily aimed at hedging the downward pressure on real estate and traditional industries, while structurally providing momentum for economic transformation. This is achieved by setting different discount rates for credit assets, for example, setting a higher discount rate for credit assets that meet the requirements of economic transformation for small and micro enterprises and agriculture. Credit assets with higher discount rates can obtain more base currency, providing positive incentives for financial institutions to lend to small and micro enterprises. Additionally, credit asset pledge re-lending helps solve the relative shortage of qualified collateral and high bad debts for local financial institutions, supplementing liquidity for small banks, such as urban commercial banks and rural credit cooperatives, preventing systemic financial risks, and holding strategic significance.

In early October 2015, the Ministry of Finance, together with ten institutions including China Construction Bank, Postal Savings Bank, Agricultural Bank of China, Bank of China, Everbright Group, Bank of Communications, Industrial and Commercial Bank of China, CITIC Group, Social Security Fund, and China Life Insurance, jointly initiated the establishment of the China Government and Social Capital Cooperation (PPP) Financing Support Fund. The total scale of the fund is 180 billion yuan, which will focus on supporting the development of PPP projects in the public service sector, improving the accessibility of project financing. The establishment of the fund is an important measure for the central finance and financial institutions to implement the "Guiding Opinions on Promoting the Government and Social Capital Cooperation Model in the Public Service Sector" issued by the General Office of the State Council (Guo Ban Fa [2015] No. 42). It is also an important exploration for deepening cooperation between finance and fiscal policy, jointly supporting the development of PPP projects, innovating fiscal and financial support methods, optimizing the financing environment for PPP projects, and promoting the development of the PPP model. According to reports from the "Hua Xia Times," the Ministry of Finance has established a 2 billion USD sovereign loan mainly for the preliminary expenses of PPP projects and has solicited opinions from various provinces. Additionally, the National Development and Reform Commission issued a public consultation on the "Interim Measures for the Management of Special Subsidy Funds for Preliminary Work of Government and Social Capital Cooperation Projects" on September 28, seeking public opinions. In the future, the preliminary work expenses of compliant PPP projects will receive special budgetary support from the national budget.

Since the launch of the PPP project over a year ago, the central and local governments have promoted over 1,800 PPP projects, with an investment scale of 3.4 trillion yuan. PPP is expected to become the project development model and investment direction in the coming years.

Industrial Fund - Basic Elements

II. Main Financing Forms for Enterprises#

II. Main Financing Forms for Enterprises

II. Main Financing Forms for Enterprises

1. Corporate Bonds

Corporate bonds refer to securities approved by the National Development and Reform Commission, which enterprises publicly issue according to legal procedures and agree to repay the principal and interest within a certain period. Corporate bonds are divided into ordinary platform bonds, special bonds, project revenue bonds, and credit-enhanced collective bonds for small and micro enterprises, among others. Corporate bonds are mainly issued and listed in the interbank bond market, with investors primarily being commercial banks, insurance companies, securities investment funds, securities firms, and corporate annuities.

Under certain conditions, corporate bonds can also be issued and listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange and can be issued to individual investors. Advantages of corporate bonds: large financing scale, long financing period, and relatively low financing costs.

Disadvantages of corporate bonds: the issuance process takes a long time, and there is a long cultivation period for the bond-issuing entity, including high requirements for building the asset scale and optimizing the asset structure and income structure.

Funds circulate among these six major entities, endlessly. Next, let's clarify the functions of these six major entities and their interrelationships to see how money operates among them:

1. Banks

Referred to as the central bank, or what we commonly call "the central mother," is our national bank, led by the State Council, with the state as the investor.

There have been questions about the central bank, such as why no one has ever seen anyone deposit money in the People's Bank. Now it is clear that the People's Bank is different from other banks; it is not profit-oriented, but it is the source of "money." Simply put, the People's Bank acts like a financial manager for the state, overseeing the normal circulation of all the country's money, functioning like a "money printing machine" and a "money shredder." When the market needs funds, the People's Bank activates the "money printing" function to inject currency into the market; when there is an excess of currency in the market, the People's Bank activates the "money shredder" function to withdraw currency.

The People's Bank is the "bank of banks," the government bank, and its main methods of injecting money into the market are through "rediscounting" and "re-lending" to commercial banks, as well as purchasing government-issued bonds in the open market. Thus, the People's Bank mainly plays a role in regulation, supervision, and service.

2. Government

The government is similar to a company; it also needs funds to maintain daily operations and requires investment to build infrastructure such as railways and roads. Where does the government's funding come from? The main sources are taxes, income from state-owned enterprises, administrative fees, and debt. Taxes are well known; enterprises pay corporate income tax, and individuals pay personal income tax. State-owned enterprises dominate various monopolistic industries and have good income. Administrative fees include various charges from administrative units, such as fines for illegal parking, as well as national and local bonds.

3. Commercial Banks

Commercial banks are the banks we usually deposit money in, such as Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of Communications, and China Construction Bank. The essence of commercial banks is also a company, but they operate with currency rather than ordinary goods.

Commercial banks mainly engage in accepting public deposits, issuing loans, and handling settlements. People deposit their savings in commercial banks, and the banks lend that money to enterprises, earning interest while giving depositors a smaller interest. It's that simple. Now, due to low interest rates, fewer people are saving, but with the real estate boom, banks are lending to developers on one side and providing loans to homebuyers on the other; this has become the banks' main business.

4. Financial Institutions such as Securities Firms and Fund Companies

Due to low bank interest rates that cannot keep up with inflation, more and more people are investing their money in financial products with higher returns, such as stocks and funds. Securities firms and fund companies play a significant role in investment activities, and their business is becoming increasingly diversified. For example, securities firms help companies go public (investment banking), assist investors in buying stocks (brokerage), manage wealth for the wealthy (asset management), and trade stocks themselves (proprietary trading), making their business busier!

5. Enterprises

The goal is not to enrich securities firms but to make enterprises and individuals wealthy. Enterprises are the foundation and symbol of economic prosperity in developed countries. They contribute 65% of GDP and solve 75% of urban employment.

Enterprises cannot function without funds, which usually come from the founders' initial capital and profits generated from operations. Enterprises require manpower, thus addressing employment issues. Enterprises are heavily taxed, facing various taxes such as value-added tax, corporate income tax, and urban construction tax, so their surplus funds are relatively limited. To seek large-scale development, they often need to rely on financing.

Enterprise financing generally occurs through bank loans, venture capital institutions, and the stock market, which can be divided into equity and debt. By attracting equity investment, the company's current shareholders need to give up shares of the company, allowing investors to become new shareholders. The advantage is that there is no need to repay the money, and there is no debt pressure. Attracting debt investment is essentially borrowing money, which must be repaid with interest, but the advantage is that shares will not dilute.

6. Individuals

That’s you and me. We work hard, and it’s not easy to earn money. Part of our money is used for consumption; buying houses, cars, and groceries are all forms of consumption.

The essence of finance is the flow of funds, which gathers surplus funds in society to support the development of advanced industries, creating more social wealth. This is what we usually refer to as the primary market, which connects initial investors with initial investment targets. As the world economy continues to develop, the layers of financial markets and trading methods are also evolving rapidly:

After the primary market, a much larger secondary market has developed, which is a market where investments are traded among each other to profit from price differences;

Following the primary and secondary markets, a derivatives market has emerged for hedging risks. At the same time, with the development of world trade, investment targets have expanded from bulk commodities, real estate, and enterprises to the massive international foreign exchange market and sovereign debt market.

M is the total amount of money, V is the circulation speed; P is the price of goods, Q is the quantity of goods. The function of money itself is to better facilitate transactions, thereby improving transaction efficiency.

Modern currency is backed by "national credit." Modern currency is credit currency, and the fluctuation of currency value entirely depends on a country's strength and other countries' confidence in that country. The state and banks together reshape the concept of currency. The state controls the entire society's credit scale and economic temperature through the banking system. A deposit of 100 dollars, with a 10% reserve requirement ratio, can ultimately allow the total money circulating in society to reach 1,000 dollars. In the news, we often hear about base money (M0) and broad money (M2). In this example, 100 dollars is base money, and 1,000 dollars is broad money; the currency issued by each country is called base money.

The patience of a country's production capital determines the supply of funds, and the investment opportunities in society determine the demand for funds. The interaction between these two determines the entire society's borrowing costs. In the issuance of these government bonds and municipal bonds, what were once difficult to transfer and trade non-standardized "debt contracts" gradually transformed into transferable and tradable "standardized contracts," which has an immeasurable impact on the development of human society. In the evolution of bonds, financiers have transformed cumbersome, illiquid debt contracts into easily tradable, smaller-denomination, highly liquid debt instruments in the capital market. Today, this process is referred to as securitization.

The world's first bond was issued in the 12th century in Venice, Europe. Venice was involved in a war at that time, and as we know, war is very costly. Venice's tax revenue was limited, making it difficult to bear such a large war expense. So what to do? At this point, the Venetian government thought of a way to innovate financially, forcing each citizen to lend money to the government based on their inherited wealth, while promising to pay 5% interest annually, which would be drawn from future tax revenues. This gave rise to the embryonic form of bonds:

The debtor promises to pay the bond's interest from a future income source. This transforms a point-to-point, one-sided "IOU" into an institutional, standardized debt contract that is homogeneous for everyone.

The scarcity of all items is eternal, while shortages and surpluses are the results of price manipulation. When prices are too low, people have to compete for the goods they need through means other than price, leading to shortages. Conversely, when prices are perceived to be raised, sellers must resort to means other than price to sell their goods, leading to overcapacity.

The impact of price manipulation on the market leading to shortages and surpluses:

1. Price controls inevitably lead to the dissipation of resource value.

2. Humans are animals that seek to minimize losses.

Interest is compensation for delayed consumption, and the consequences of regulation manifest in three ways:

1. People are unwilling to lend money to others.

2. The underworld emerges.

3. People will choose indirect ways to pay interest. This increases transaction costs.

The emergence of high transaction costs between individuals is alleviated by enterprises, which significantly reduce the cost of cooperation between people. Transaction costs limit the scale of enterprises; the larger the enterprise, the higher the internal costs. Of course, the team effect is immeasurable; this is the power of cooperation.

When economic conflicts arise between different countries, there are two choices:

1. Cooperative competitive relationships. 2. Mutual threat relationships.

Typically, countries experiencing a debt crisis need several years to recover. The next round of a healthy economic cycle will exhibit the following characteristics:

1. Income and consumption will rise after one or two years.

2. Economic vitality will recover from the bottom to the average level, taking about three years.

3. Initially, the exchange rate stabilizes, and the real exchange rate is undervalued (approximately 10% undervalued based on purchasing power parity), and the currency remains cheap.

4. Exports will slightly rebound (increasing by 1%-2% of GDP).

5. After several years (averaging 4-5 years), capital will flow back. Stocks priced in foreign currencies will also take about the same time to recover.

From a brief inflationary recession to a deep abyss of hyperinflation:

1. The emergence of hyperinflation: currency devaluation → inflation → money printing, and this cycle continues to escalate, ultimately leading to failure.

2. During hyperinflation, investment should follow several basic principles: short the currency, transfer money abroad as much as possible, purchase bulk commodities, and invest in commodity sectors (such as gold, coal, and metals).

3. Hyperinflation will cause the currency to lose its role as a medium of exchange. A typical approach to hyperinflation is to issue a new currency with a solid foundation while gradually phasing out the old currency.

War Economy

Through asset purchases or significant currency devaluation, actively promote debt monetization, leading to higher public opinion economic growth rates and nominal interest rates, thus creating an economic turning point.

Implement stimulative macro-prudential policies, provide targeted protection for systemic important institutions, and stimulate high-quality credit growth.

Allow non-systemically important institutions to fail in an orderly manner.

Governments balance between default, policy tightening (suppressing economic growth), and debt monetization, currency devaluation, and fiscal stimulus (promoting inflation).

The "three low-leverage" debt relationships between social organizations are a necessary but insufficient condition for maintaining stable structural operation, and they are also the root cause of traditional society's "de-financialization." The "debt spiral" leads to increased stability costs for society, until the current regime becomes unbearable.

In enterprises, everyone's income varies, and there are many different industries in society, each with different wages. We need to view this rationally. The explainable reasons include:

1. An employee's bargaining power depends on their opportunities elsewhere.

2. Marginal contributions determine the income levels of team members.

3. The level and pace of wage income are determined by market factors.

Banks, bonds, stocks, and all monetary instruments help humanity accumulate scattered, point-like funds and invest them where they are most needed. Individuals, enterprises, wars, and the rise and fall of cities are all fundamentally driven by financial power, which helps us break through the limitations of time and geography, enabling rapid and effective capital aggregation to achieve unit goals.

To keep the economy running, savings must be used for investment—this is something everyone can understand. Banks earn money from the interest on loans minus the interest on deposits. Once they take public deposits, they naturally need to lend them out, for example, to earn the interest spread.

However, their analysis also indicates that this practice can be influenced by rumors. For example, if a rumor spreads that a bank is in trouble, a large number of depositors may rush to withdraw their money simultaneously, which could turn that rumor into a self-fulfilling prophecy—resulting in a bank run and the bank's collapse. What was initially fine could become problematic. Therefore, providing deposit insurance through the government and acting as the last lender of resort can prevent this issue.

The principle of national money printing is interconnected.#

How does printed money circulate around the world?

One route is that ordinary American people use this money not only to buy domestic goods but also to purchase items from all over the world, buying from wherever it is cheapest. For example, in China, our foreign trade companies earn dollars, and after converting those dollars into yuan, they spend them domestically. Our massive foreign exchange reserves are earned this way. It is worth mentioning that foreign exchange reserves serve as collateral when converting to yuan, so they are not owned by the central bank and cannot be used freely; they must maintain liquidity.

Another route is that many wealthy individuals take their money to invest globally, going wherever the returns are high.

They can only buy goods or invest internationally. However, this reserve also serves as collateral and must maintain a certain level of liquidity. Aside from purchasing some goods, the remainder must be invested in liquid financial products, with most being limited to buying U.S. Treasury bonds. Americans pay you interest, and your money returns to the U.S. This is akin to you working hard to produce goods to sell to them, while they borrow money from you to buy your goods; that’s the idea.

The second route involves investment money. When U.S. interest rates are low, wealthy Americans frantically borrow money from banks and invest it in countries with higher returns to earn interest rate spreads. When U.S. interest rates rise, the money is pulled back to the U.S. When dollars flow in for investment, domestic assets continue to rise. When dollars flow back, assets will decline. This is the reason many emerging countries experience financial crises.

5. How does the dollar affect the domestic economy? First, the yuan that is exchanged for foreign exchange reserves leads to an increase in domestic yuan, while the yuan cannot run freely around the world, which correspondingly causes the yuan to depreciate.

Second, foreign investment money. Foreign investors, as mentioned earlier, seek interest rate spreads, so they will go wherever the returns are high, thereby amplifying the effect. For instance, if housing yields well, they will buy houses, driving up housing prices. If stocks perform well, they will buy stocks, pushing up stock prices. When they exit, everything declines.

6. The core is that the dollar is the world currency, and the dollar is tied to oil. Every country's development must rely on oil, and oil-producing countries in the Middle East only recognize dollar transactions due to U.S. military power. Therefore, other countries must hold dollars. The way dollars come into existence is through domestic production of goods sold to the U.S. The U.S. prints money, meaning that the U.S. can obtain goods for consumption simply by operating the printing press, allowing domestic residents to buy goods from other countries at very low dollar prices. This is the first wave of shearing sheep. The U.S. instructs Middle Eastern countries to raise oil prices, initiates wars in the Middle East to reduce oil supply, and oil prices rise. Other countries then need more dollars, while domestic currency increases, triggering inflation. The domestic currency depreciates, and the exchange rate becomes one dollar to seven yuan. At this point, the U.S. implements quantitative easing and lowers interest rates, allowing U.S. companies to enter foreign markets with large amounts of money to invest and purchase assets. For example, spending 100 dollars to buy 700 yuan worth of assets. After purchasing, they wait.

As oil prices recover, other countries find themselves holding too many dollars, while domestic over-issuance of currency also becomes excessive, necessitating a reduction in currency supply to curb inflation. Subsequently, the exchange rate stabilizes at one dollar to five yuan. At this point, the Federal Reserve begins to raise interest rates, and dollars start flowing back to the U.S. Five hundred yuan can be exchanged for 100 dollars. In this process, the U.S. effectively gains 200 yuan for free. This is the second wave of shearing sheep.

After other countries develop for several years and earn more money, the U.S. can repeat the same model to continue shearing sheep. It can also be said that for every 100 units produced by other countries, they must pay 50 units to the U.S. The U.S. can use this money for massive investments in research and development, leading to significant outputs, continuing to crush the technology of other countries.

The concept of petrodollars should include two points: the first point refers to the requirement that oil must be priced and settled in dollars in international trade.

The second point refers to oil-exporting countries purchasing bonds and other investments in the U.S. after selling oil for dollars.

Oil tycoons around the world sell their resources for dollars, but having cash is not enough; they must spend it. Thus, they rush to buy U.S. Treasury bonds or find other ways to return their cash to the Americans. Once the Americans receive the dollars, they soon buy oil from the oil tycoons again. Oil becomes dollars, dollars become U.S. bonds, and ultimately, U.S. bonds turn back into oil.

How the economy operates: "Transaction-based understanding method"

The economy is the sum of numerous transactions, and each transaction is quite simple. Transactions involve buyers and sellers, where the buyer pays money (or credit) to the seller in exchange for goods, services, or financial assets. A large number of buyers and sellers exchanging the same type of goods constitutes a market. For example, the wheat market includes various buyers and sellers with different purposes, engaging in different transaction methods. Various transaction markets make up the economy. Therefore, the seemingly complex economy in reality is merely a combination of numerous simple transactions.

For a market (or for the economy), if you know the total amount of money and credit spent and the quantity of goods sold, you know everything about understanding the economy. For instance, since the price of any good, service, or financial asset equals the total expenditure (total $) by all buyers divided by the total quantity sold (Q), to understand or predict the price of a good, you only need to forecast total expenditure ($) and total quantity (Q).

However, each market has a large number of buyers and sellers, and the motivations for these buyers and sellers to trade are inconsistent. Nevertheless, the main motivations for buying and selling are always easy to understand, making it less difficult to consider and understand the economy. This can be illustrated with a simple chart. This perspective of explaining the economy is easier to understand than traditional explanations, which are based on the supply, demand, and price elasticity of goods.

Important concepts you need to know in the economic framework are: expenditure ($) comes from two sources—money (money) or credit (credit). For example, when you go to a store to buy something, you can pay with cash or use a credit card. If you pay with a credit card, you create deferred payment credit (as long as both parties agree, credit can be generated immediately). If you pay directly with cash, no credit is created.

In simple terms: different markets, different types of buyers and sellers, and different payment methods constitute the economy. For convenience, we group them to summarize the economic operation framework:

• All changes in economic activities and fluctuations in financial market prices stem from: 1) changes in the total amount of money and credit (total $) and 2) changes in the quantity of products, services, and financial assets sold (Q), where the former ($) has a more significant impact on the economy than the latter (Q) because changing the supply of money and credit is relatively easier than anything else.

• For simplification, buyers can be divided into several major categories: the private sector and the government sector. The private sector includes households and enterprises, whether domestic or foreign; the government sector mainly includes: the federal government (which also spends money on goods or services) and the central bank, which is the only entity that can create money and use it to purchase financial assets.

Compared to goods, services, and financial assets, money and credit can more easily increase or decrease due to supply and demand relationships, leading to economic and price cycles.

Capital System

Economic participants buy and sell goods, services, or financial assets and pay with money or credit. In a capitalist system, this exchange occurs freely. In this free market, buying and selling can be based on each party's interests and purposes. The generation and purchase of financial assets (i.e., loans, investments) are referred to as "capital formation." Capital formation is possible because both parties believe that the transaction is beneficial to each other. Creditors are willing to provide money or credit based on the expectation of recovering more.

Therefore, the premise for this system to operate well is the presence of a large number of capital providers (investors/lenders) and a large number of capital recipients (borrowers, sellers of equity). Capital providers believe they can obtain returns greater than their investments. The central bank controls the total amount of money; the amount of credit is influenced by monetary policy, but credit can be easily generated as long as both parties agree on the credit terms. The emergence of bubbles occurs when too much credit is created, making it difficult to fulfill repayment obligations, leading to the bursting of the bubble.

When capital contraction occurs, the economy also shrinks because there is not enough money and credit to purchase goods. This contraction commonly manifests in two forms: recession (more common) and depression. Recession occurs within the short-term debt cycle, while depression occurs during deleveraging processes. Recession is easy to understand because it happens frequently, and most people have experienced it; depression is relatively harder to understand because it does not happen often and is less experienced.

Short-term debt cycle: also known as the business cycle, the cycle arises from:

a) Growth in consumer spending or money and credit ($) outpacing growth in production (Q), leading to rising prices.

b) Rising prices prompt monetary policy tightening, reducing money and credit, initiating a recession.

In other words, a recession is caused by the central bank's tightening of monetary policy (often to combat inflation), suppressing the increase in the private sector, leading to economic slowdown. As the central bank loosens monetary policy, the recession also ends accordingly.

To end a recession, the central bank lowers interest rates to stimulate demand growth and increase credit because low interest rates can: 1) reduce repayment costs, 2) lower monthly payments, thus stimulating related demand, and 3) due to the discounting effect of lower interest rates, raise the prices of income-producing assets (such as stocks, bonds, and real estate), generating a wealth effect that stimulates consumer spending.

Long-term debt cycle: occurs when debt grows faster than income and money until it can no longer grow because the cost of debt has reached an extreme point, typically when interest rates can no longer be lowered. Deleveraging is the process of reducing debt burdens (debt/income). How to achieve deleveraging? Mainly through the following combinations:

1. Debt restructuring to reduce or eliminate debt.

2. Tightening belts to reduce spending.

3. Wealth redistribution.

4. Debt monetization (government purchases of debt to increase credit).

Each path can reduce the debt ratio, but they each have different impacts on inflation and economic growth. Debt restructuring and reduced consumption will lead to deflationary depression, while debt monetization may cause inflation. Wealth redistribution appears in various forms, but its extensive application during the deleveraging process cannot have a substantial effect. The completion of deleveraging depends on the application of these four methods.

Monetary technology acts like a time machine we build; it expands our ability to imagine and calculate the future, shaping a quantifiable, tradable time dimension, making us increasingly become creatures of time.

Several real factors that influence monetary expansion:

1. The willingness of banks to lend.

2. The amount of cash held by individuals and enterprises.

3. The export trade of goods needed by the country.

4. The reserve requirement system is an important link in the banking system and the expansion of monetary credit.

5. The reserve requirement is the amount of funds that banks need to retain to meet depositors' withdrawal demands.

The higher this ratio, the weaker the ability for monetary expansion; the lower this ratio, the stronger the ability for monetary expansion.

3. The reserve requirement ratio regulates the entire society's credit scale and economic temperature.

4. The willingness of banks to lend and the amount of cash held in society will affect the effectiveness of our monetary credit expansion.

Raising interest rates can regulate an overheated economy, but if overdone, it can lead to "too little water," causing severe drought in the economy.

Lowering interest rates—stories of bubbles in various countries:

1. The most important function of modern economies is credit expansion, and the banking system plays a key role in this. Residents and enterprises have investment needs and need to obtain loans from banks. This demand is closely related to the level of bank interest rates.

2. Adjusting the benchmark interest rate level regulates the entire society's investment demand to control the economy's temperature. Lowering and raising interest rates are the most important tools.

3. The scale of raising and lowering interest rates is very difficult to grasp; excessive interest rate hikes may lead to a sudden economic collapse, while excessive interest rate cuts may lead to economic bubbles.

There has never been an independent micro-financial phenomenon in the world; behind it, there must be some macro-level logic or driving force.

The economic strength of a country and its credit are the forces behind the value of a country's currency (the storage power of materials and the trade needed) and are no longer a status of world currency but exist as an investment commodity.