President Xi right to focus on real economy

China’s President Xi Jinping was right on the mark when he stated at the recent National Financial Work Conference that “serving the real economy is the bound duty and purpose of the financial sector”.

The national economy comprises two sectors - the real sector and the financial sector. Metaphorically speaking, the former is the body of a dog and the latter its tail.

In a healthy economy, the body wags the tail, not the other way around. In other words, the financial sector should serve the real sector as the lubricator of the real economic activities (production, distribution, consumption) by maintaining a well-functioning payment system, serving as the custodian of the assets of the people, and providing financial risk management tools.

The tragedy of many western economies that suffered financial crises in recent years was that their economic and financial policymakers forgot or misunderstood the intrinsic role of finance. They allowed the tail (eg. Wall Street) to wag the dog (the real sector) by letting what Adair Turner, former chairman of Britain’s Financial Services Authority, aptly called “socially useless activities” (rampant financial speculations) ruin the national economy. It is gratifying to note that China’s policymakers are wise enough to see the danger of the ephemeral value-added created by the unchecked financial industry’s make-work and make-belief practices.

As President Xi wisely said, “guarding against systemic financial risks is the eternal theme of financial work and the government should make a stronger effort to monitor, warn against and deal with the risks in a timely manner”. For no other reason than that, the economy, including the financial sector, exists for people, not vice-versa. Economic and financial choices and institutions must be judged by how they protect or undermine the life and dignity of the human person, support his or her family, and serve the common good. At a minimum, policymakers should avoid the worst-case scenario that lets financial speculators privatize their gains and socialize their losses by bailing them out with taxpayers’ money.

The writer is a professor of finance and international business of Seton Hall University, New Jersey, and recently served as visiting professor at the University of International Business and Economics, Beijing.