Financial innovation vital for reform

Zhang Chengliang/China Daily

China has achieved phenomenal economic growth over the past 30 years and during that time it has learnt many valuable lessons from both developed economies and developing nations. At the same time, the country has a long, rich history and has learnt considerably from its own successes and failures.

Chinese leaders understand the importance of financial markets and started designing, creating and regulating financial markets many years ago. Now that China has accomplished its first phase of economic growth, it seems to be turning to finance to catapult itself to the next stage.

But there is no doubt China has to, and probably will, keep learning from the rest of world, too, when it comes to financial markets. Its people are smart enough to know that instead of simply copying existing institutions or products, it has to learn about the fundamental principles and mechanisms of its own financial system, and not just rely on short-term market fixes.

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Behavioral finance and economics are particularly important to the current Chinese financial markets, which have achieved unprecedented growth in the past couple of decades.

But such learning can be difficult, and involves both individual learning and cultural differences.

Individual learning is not only about how investors learn about products, but also about ability.

Cultural learning, perhaps even more important, is about how society and markets learn from their history.

Only if a society learns from its own mistakes can it ensure it does not repeat them.

For example, many state governments in the United States defaulted on their bonds during the 1840s, causing many to pay closer attention to the fiscal soundness of local government, especially state-level administrations.

That set a precedent and to this day many government constitutions in the US require that state governments be careful with borrowings.

Frequently in the past, the problems and crashes have set important lessons for society and proved beneficial to long-term growth.

After the founding of the People's Republic of China in 1949, China severed its ties to capitalism and capital markets for about 30 years and effectively whatever had been learnt in history was lost, as was much of its recent cultural learning.

As a result, all of its early financial investors, participants and regulators had to learn from scratch.