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Jack Ma: We must do away with pawnshop mentality
Transcript of the speech delivered by the tech billionaire at The Bund Summit
The Asset 13 Nov 2020

On October 24, Jack Ma delivered a speech at The Bund Summit in Shanghai, in which he called for a new financial system that is designed for the future and a credit system that is based on big data to replace the “pawnshop mentality” of banks. 

The speech, which was heard by some of the country’s top regulators and financial leaders, came just as his Ant Group was about to launch the largest initial public offering in history. Days later, after a meeting with regulators, the fintech giant announced that the IPO was being suspended indefinitely, sending shockwaves across the financial world. Below is a transcript of that speech, translated into English.

In 2013, also in Shanghai, at the Lujiazui finance summit, I shared some views on internet finance, which were seen to be too unrealistic.

Seven years have passed, as a non-professional not carrying any official titles, I am back today at the Bund Summit in Shanghai to share some other views. I hope those views, after this speech, you all can think about them further. 

To be frank, I’m so torn between whether to come here and give this speech today. But I think it is an inescapable responsibility for our generation to think about the future. Although the world has provided us with a lot of opportunities, only one or two opportunities are crucial. Now we have come to the most crucial juncture.

Which is why I have come here to share my thoughts and views, which were drawn from our 16 years' practical experience. Plus, I'm honoured to co-chair the United Nations High-Level Panel on Digital Cooperation and work as an advocate on the UN SDG. These roles enable me to discuss and research with scholars, experts and people who have put ideas into practice from all around the world.

I think I'm sort of retired. At this unofficial event and as a non-financial professional, I am happy to share whatever I would like to say. Some of the views can be unprofessional.

Luckily, I found that many professionals do not talk about professional topics anymore.

Here I have three points of view for all of you to think about. They might be immature, inaccurate or even be laughed at by the experts. You can listen to them, not taking them seriously, and forget about them if they make no sense to you. 

First of all, we tend to get stuck in conventional thinking. For example, in order to get in line with international standards, we tend to think that China has to fill in the so-called gaps which refer to the things we don’t have but already exist in the developed western countries. We tend to take this as our goal.

But I think this concept of “filling the gaps” is incorrect given the situation nowadays.

We cannot say what the western countries have achieved are all advanced and we need to do the same.

Given the current situation, we don’t have to be fixated or obsessed with getting in line with international standards or eliminating some certain gaps and following the standards of some certain countries.

What we have to think about nowadays is how to get in line with the standards of the future, and how to fill the gaps with the future. We have to figure out what the future will be like and what we want to do actually. Then we look at what other people do.

If we always repeat the language of others and discuss the topics chosen by others, not only will we be lost in the present, but we will also miss the opportunities of the future.

After World War II, the task for the world was to restore economic prosperity. The creation of the Bretton Woods system was a huge driving force for global economic growth.

Risk control

After the Asian Financial Crisis, the focus became increasingly on risk control, which was what the Basel Accords is about. The accords soon became the operation standard of risk control.

Now, all over the world, there is an increasing focus on risk control only, and a lack of attention to development. Very few people talk about opportunities for the younger generation and what are the opportunities of developing countries.

In fact, these are the origin of the many problems we are facing nowadays. Today, we can see that the Basel Accords have very much restricted innovation across the Europe in areas such as digital finance.

The Basel Accords are somewhat like an elderly club. It aims to solve the issues of obsolescence of the financial systems that have been in place for decades.

These European financial systems are extremely complex. But the situation with China is just the opposite.

In China, we do not have a systemic risk, because basically there is no system in China’s financial industry. In reality, the real risk is “the lack of a financial system”.

China’s financial industry is the same as the emerging ones in the other developing countries. We are still young in terms of financial industry development. The ecosystem is neither sophisticated nor fully functioning.

There are many large banks in China, like big rivers or arteries. But today we actually need more lakes, reservoirs, small streams and rivers, and all kinds of marshes and swamps.

Because of the lack of these components, we drown in times of flooding and die of thirst in times of drought.

In other words, our country is facing the risk posed by the lack of a healthy financial system.  We need to build a sound financial system and it is too early to talk about systemic risk.

So it’s like two completely different diseases. Take, for example, Alzheimer’s disease and poliomyelitis. They look the same but are two completely different diseases. A child who has taken medication for treating Alzheimer’s disease will suffer from not only from an old people’s disease, but also many strange conditions. 

The Basel Accords tackle the elderly diseases which can have over-complexity issues and an ageing system.

But we have to think about what we can learn from the elderly. We must understand that the old and the young generations have different concerns. For example, young people may care about whether there are schools in a city, while hospitals matter more for the elderly.

Ant Group's IPO

So today, the world has witnessed some very magical and rapid changes. I’m proud to announce that last night in Shanghai, we priced Ant Group’s IPO.

This is the biggest IPO in human history. Furthermore, for the first time ever, it was priced in a city other than New York. No one dared to imagine such a thing five – or even three – years ago. But a miracle has happened in such a way.

Secondly, there is always a cost associated with innovation. Our generation must take the responsibility.

President Xi once said, “Success does not have to hinge on me.” I see this saying as a kind of responsibility. It is about shouldering the responsibility for tomorrow, the future, and the next generation.

Many problems in the world – including those in China – can only be solved through innovation. However, there is no one to guide real innovation – there has to be trailblazers who can do the hard work. Because innovation comes at a cost of making mistakes. The question is not how to avoid mistakes; it is whether we can correct and improve ourselves and persist with innovation after making one.

Innovating without taking risks is actually discouraging innovation. There is no risk-free innovation in the world. Very often, eliminating the risk entirely is the biggest risk itself. 

Looking back on the Battle of Red Cliffs, Cao Cao chained all his warships from stem to stern. In my opinion, this was the first conception of an aircraft carrier in China as well as in the entire world. But the chained warships were burned down to ashes, and then for a thousand years, no one in China dared give it another thought. With that big fire in mind, who would have had the courage to think about building a bigger warship? Who would have persisted with such systematic thinking?

Seven or eight years ago, I proposed the idea of internet finance when I was also in Shanghai. We have always been emphasizing the three core components of internet finance. First, internet finance has to be based on an abundance of data and information. Second, there is a need for a risk control technique backed by big data. Third, internet finance must have a credit system backed by big data.

Under these criteria, P2P lending is absolutely not internet finance. However, we cannot negate internet’s role in financial innovation simply because of the crash of P2P lending.

In fact, let us think about it this way: how could thousands of internet finance companies be set up in a matter of several years in China? Shouldn’t we inspect the reasons behind the emergence of thousands of such companies, whether you call them P2P lending companies or internet finance companies?

Monitoring and controlling

Supervision on the financial market is very difficult, indeed, nowadays; it is very difficult in any part of the world.

Innovation mainly comes from the market, the grassroots, and young people, and this poses increasingly serious challenges to the regulators. 

But in fact, regulation (监管) includes two things, monitoring and controlling, and they are entirely different things. Monitoring is about watching and paying attention to your development, while controlling is about taking charge when something goes awry or is predicted to go awry. However, we now have a situation in which we are too good at controlling but lack the capability of monitoring. 

Good innovation can coexist with regulations, but not regulations in the old-fashioned way. We cannot manage an airport the way we manage a train station, nor can we manage the future the way we manage the past.

“Monitoring” and “controlling” are different, just as policies are not the same as paperwork. Prohibition should be stated in documents, whereas policies are the building of mechanisms; their goal is to encourage development. Today the world – especially China – needs a lot of “experts in policies”, not experts in paperwork.

Policy making requires technique. In fact, when it comes to solving the complex systematic issues, I think I can share with you how we did it at Taobao. 

Seventeen years ago, we didn’t have technology nor information. Our predictions about the future were not accurate. We came up with lots of rules banning this or that.

But now we are capable of solving the problems through technology. We are now able to solve such systemic problems. However, many young people nowadays, just like the regulators, are keen on issuing all kinds of new documents prohibiting this or that.

Then I came up with a solution called “one-in-three-out”. When you added one new rule, you had to take away three existing rules. Hence, our documents can become shorter and shorter. If we had not taken out some rules, our rulebook would have become thicker and thicker. That would have been no different from forcing everyone to break the rules and people would get confused.

A theory is different from a system. An expert is different from a scholar. In our country, we sometimes do not distinguish scholars from experts. People become experts through real practices and experience. They are good at getting things done, but not necessarily good at summarizing their experience. 

Many scholars do not have on-the-ground experience, but they are able to summarize all those real-life experience and make theories. Only by bringing experts and scholars together, or incorporating real practices into the theories, can we innovate and solve the problems of today and tomorrow. In my opinion, we need theories coming from practice, rather than getting things done guided by theories.

In many ways, P2P lending originated from practice summed up by armchair theorists. I think we should understand the big lessons we have learned from P2P lending.

We are not trying to negate internet technology. Even more importantly, professionals should not be guided by armchair theorists.

Pawnshop mentality

I have noticed another phenomenon. While many regulatory bodies around the world have become risk-free themselves, their economy – as well as society as a whole – has become risky. The competition tomorrow will focus on innovation, not regulatory capabilities. Now all countries are vying to be the most ruthless regulator – when it comes to development, there is just empty talk, but when it comes to prohibition, the rules are as sharp as razors. 

As far as I know, “Improving the governance capability”, as mentioned by President Xi, is about maintaining healthy and sustainable development under orderly regulations. It is not about having no development under regulations. It is never a difficult thing to regulate. What is difficult is achieving regulations that are aimed at maintaining sustainable and healthy development. Regulations are all about achieving healthy development. 

Third, finance is about credit management in nature. We must do away with the “pawnshop” mentality within the financial industry today. We must rely on credit system development.

Banks today still hold a pawnshop mentality. A pawnshop is about pledges and collaterals, which was an advanced idea in the old days. Without innovations such as pledges and collaterals, there would be no financial institutions today, and the China’s economy would not have developed over the past 40 years to the point where it is now.

However, it can go too far if we purely rely on assets and collaterals. As chairman of both the China Entrepreneur Club and the General Association of Zhejiang Entrepreneurs, I have exchanged views with a lot of entrepreneurs. I have found that the pawnshop mentality is a serious problem in China and has affected a lot of entrepreneurs. This becomes extremely serious when entrepreneurs have to pledge all their assets. They are under huge pressure, and what they do becomes distorted. There are also people who borrow like crazy, building up the debt and leverage to a high level.

We all know that when someone borrows 100,000 yuan from the bank, the borrower is the weaker party, but when someone borrows 10 million yuan, the lender becomes the weaker party.

Banks also have a habit of lending to quality corporates and those who do not need loans. They try as hard as they can to lend. As a result, many of these quality corporates become unhealthy ones – because they have too much money, they use them to do all sorts of investments, and some of the investments in all sorts of investments. In some cases, the money is even spent on things completely irrelevant to the business of these companies.

Too much money can create a lot of trouble. 

It is impossible for the pawnshop mentality to support the financial demand of global development over the next 30 years. We must leverage our technological capabilities today and build a credit system based on big data, to get rid of the pawnshop mentality.

80/20 rule

This credit system should not be based on conventional IT infrastructure or acquaintance society. Instead, it should be based on big data to ensure that credit can be the equivalent to wealth.

In fact, even a beggar needs to have good credit. It is impossible even to beg for food without good credit. I think every beggar does need to have good credit.

Lastly, I think today’s world is expecting a new financial system designed for the future.

The current financial system is a product of the industrial era and was created to address industrialization and satisfy the 20/80 rule. What is the 20/80 rule? It is about making a 20% investment to solve 80% of the problems. The 80/20 theory in the future is to help 80% of small enterprises and young people so as to improve the well-being of the remaining 20%.

The past practice of people and corporations looking for money must be transformed and replaced by a new practice where it is the money that will be looking for people and quality corporations.

The only criterion for assessing this new system is whether it is inclusive, tolerant, green and sustainable. Big data, cloud computing, blockchain and other technologies at the forefront which support the new system, can shoulder enormous responsibilities today.

After World War II, people had the vision to design a good financial system for the next generation and for the future. Today, we have the responsibility to think and build a financial system for this era that is truly designed for the future and belongs to young people and the next generation.

It is not that we cannot do that today – we just choose not to do it.

Technological development today completely enables us to do that. However, it is a shame that many people are unwilling to do that.

The world’s financial system today must be reformed. If we fail to do so, not only will we lose opportunities, but the world could also be plunged into even more chaos.

It is normal that innovation comes before regulations. However, when innovation is very much ahead of regulations and the richness and depth of innovation are far beyond the imagination of regulations, the situation is abnormal, and the whole society and the world will be in chaos. 

Digital currencies

Take, for example, digital currencies. If we are to build a financial system in the vision of what the world needs 30 years later, digital currencies can be a very important core component. It is true that digital currencies are not necessary in today’s financial industry. But they will be necessary tomorrow and in the future. The numerous people in developing countries and young people will need them. We should ask ourselves: what are the real-life problems in the future that can be solved by digital currencies?

In ten years, the digital currencies might be fundamentally different from what we see today. We should try not to look for such new digital currencies from history, from the perspective of regulations, or from research institutions. We should look for them from the markets, from the demand side, and from the future. This is important.

Our research institutes should not be policy makers. Nor should policy makers rely merely on their own research arms.

Digital currencies are very technical, but they are not just about technology. They are more of a solution that can solve the issues in the future.

Digital currencies could redefine currencies. While the main functions of currencies might be retained, digital currencies will definitely redefine currencies in the way the iPhone has redefined cellphones, so much so that making a call is just one of the functions now.

It still has a long way to go to see digital currencies which are setting standards. Now is the time for digital currencies to create value and for us to think about how to create a new financial system through digital currencies. We have to think about the future on behalf of the whole world. We have to think about how international trade should be done. The world should have digital currencies based on technologies that stand the test. It is necessary to solve the problems with regard to sustainability, environment and financial inclusion in international trade. 

This is why I believe human society has reached the most critical juncture today. We must not underestimate the pandemic. As a critical driving force, it has prompted social progress, and as such, it is no less important than World War II. 

From a financial point of view, as the United States keeps pumping liquidity into different countries in the world and Wall Street, every country has followed suit. Have we ever thought about the consequences? The immense consequences far exceed the issues at the technical level that we have been discussing nowadays.

We should not simply oppose many organizations in the world. Instead, we should think about their value today. From the United Nations, the [World Trade Organization] to the [World Health Organization], which I have all worked with, they have their own issues. However, eliminating these organizations will not solve the problem. We should consider how they can reform and re-position themselves in the future.

Forming a new financial system is the direction to future developments. It will arise no matter whether we are happy about it or not.  If we are not building it, someone will do it.

In the future, I believe reform will come with sacrifices. It will come at a cost. Our generation must undertake these sacrifices and costs so that the next generation may see the results.

Our generation will be those marching ahead, shouldering heavy responsibility. This is the opportunity and the responsibility presented by history. Over the past 16 years, Ant Group’s development has revolved around environmental green, sustainability and financial inclusion. If you say the kind of financial service that is environmentally friendly, sustainable and inclusive were a mistake, we would repeat that mistake till the end.

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