Huang Qifan: The essence of finance can be summarized in three sentences.

The essence of finance is threefold:
First, managing wealth for the wealthy and providing financing for those in need of funds;
Second, the core of financial enterprises lies in three aspects: credit, leverage, and risk. It is crucial to master these three aspects and their proper balance;
Third, the purpose of all financial activities is to serve the real economy.
These three fundamental characteristics should be kept in mind by financial practitioners at all levels.

First, managing wealth for the wealthy and providing financing for those in need of funds. For example, banks allow ordinary people to deposit money, and businesses to obtain loans for development. Banks act as bridges, intermediaries, and service providers in this process.
For instance, insurance is essentially a way for people to use surplus funds to safeguard against unexpected events like illness or death when they are healthy and secure. It is a self-balancing process that can also provide funding sources for businesses.
The securities market is similar: ordinary investors take certain risks to buy stocks, with returns possibly coming from corporate profit distributions or capital gains. It ultimately serves as a bridge for managing surplus funds.
Leasing works the same way: companies convert large one-time investments into long-term leasing expenses and daily operating funds, generating more benefits and playing a role in financing.
In summary, whether it’s the capital markets issuing bonds in the direct financial system or commercial banks and non-bank financial institutions in the indirect financial system, all are methods of wealth management and intermediation, fundamentally aimed at managing wealth for the wealthy and providing financing for those in need.

Second, credit, credit, credit; leverage, leverage, leverage; risk, risk, risk. The reason for emphasizing these through repetition is because “credit,” “leverage,” and “risk” are extremely important. First, credit is the foundation of finance; it is the lifeline of the financial industry.
This is reflected in three aspects: financial companies must have credit; enterprises engaging in borrowing and lending with financial institutions must have credit; and various financial intermediary service companies must also maintain credit.
Next is leverage.
Credit is the basis of leverage; only with credit can overdrafts occur, which in turn influence the leverage ratio.
For example, a bank with 1 billion yuan in capital that can lend out 10 billion yuan has a leverage ratio of 1:10.
A leasing company with 5 billion yuan in capital that can lease out 50 billion yuan also has a leverage ratio of 1:10.
Finally, risk.
Without leverage, there’s no finance; but excessive leverage can lead to financial risks—this is a dialectical relationship. All financial innovations aim to find ways to amplify leverage step by step.
High leverage ratios are the source of bad debts, risks, and financial crises. At the enterprise level, this manifests as bad debts; at the industry system level, it becomes risk; and on a larger scale, it leads to financial crises.
The only solution is “deleveraging.”
True wisdom lies in designing a leverage system based on good credit and low risk—this is the essence of finance.

Credit, leverage, and risk are also interconnected. Good credit means lower leverage ratios, which naturally results in lower risk.
High leverage ratios tend to reduce credit quality and increase risk.
All financial innovations revolve around these three aspects, and it is crucial to master their proper balance.

Although these fundamental principles are common knowledge in finance education, they must be taken seriously. Whether you are a bank president or an administrative clerk, you should think about them daily, monthly, and yearly, because all financial risks stem from deviations from these basic principles.