A New Approach to Rectifying Capital from Real to Virtual: Asymmetry Based on Market Structure

Abstract

The report from the 20th National Congress of the Communist Party of China underscores the imperative of prioritizing the real economy for sustained economic development. Emphasizing the need to leverage real economic growth to propel national economic progress, the report recognizes the challenges posed by a constrained space for capital investment and the escalating difficulty of technological advancement amid narrowing international technology differentials. Despite the imperative to optimize capital allocation as a catalyst for high-quality economic development, the prevailing trend sees capital heavily favoring the fictitious economy. This divergence results in a pronounced siphoning effect on the real economy, a phenomenon colloquially referred to in the academic community as capital “shifting from real to fictitious”.

This article delves into the causes and governance of the issue of capital “shifting from real to fictitious”. It focuses on exploring strategies that mitigate or eliminate the investment income gap between the real and fictitious sectors, aiming to eradicate the inherent driving force of capital “shifting from real to fictitious”. This lays a solid foundation for the formulation of policy recommendations in the future.

To operationalize this strategy, the article employs data from the Wind database, “China Statistical Yearbook”, “China Economic Network Statistical Database”, and the “OECD Database”. Using dynamic optimization methods to maximize social welfare, it derives the optimal profit margin calculation formula for each sector. A comparative analysis, spanning 1998 to 2020, examines the quantitative relationship between the optimal and actual profit margins in various departments in China, the United States, Germany, and other countries. The empirical results show that the actual profit margin of real economy products in various countries is generally lower than the optimal profit margin, while the actual profit margin of manufacturing products in China is even lower than that of other countries. The growth of fictitious economy real profit margins in the United States and Germany has not led to a relative (relative to optimal) decline in their real economy real profit margins, while China has experienced a relative decline in real economy profit margins. Joining the WTO is the starting point for China’s capital to shift from real to fictitious.

Diverging from previous literature, this article innovatively measures the strength of the “shifting from real to fictitious” driving force by evaluating the difference between actual and optimal profit rates. Dynamic optimization methods derive formulas for calculating optimal markup rates, providing a nuanced perspective on capital inflow and outflow. The article demonstrates that a significant gap between actual and optimal profit margins signals a strong driving force for capital outflow, offering a more nuanced understanding than previous industry-based assessments. This perspective unveils the intricate capital allocation dynamics across economic sectors, elucidating the disadvantaged position of the real economy and enhancing the precision and efficacy of policy recommendations.