In an interview to CNBC TV-18's Latha Venkatesh, Jose Vinals, Chairman of Standard Chartered PLC spoke about the rising protectionism in global markets.
In an interview to CNBC TV-18's Latha Venkatesh, Jose Vinals, Chairman of Standard Chartered PLC spoke about the rising protectionism in global markets.
Talking about trade war, Jose Vinals siad, "Now I think it is very important not to confuse these with a trade war. I think what we are seeing now are trade frictions . But we are very far fortunately from a trade war. "
"These trade frictions maybe part or a long term process of negotiation where the United States and China sort of realign their trade to make it more even. But I think that is some of the things we are seen are going to be with us for some time. It is not what I think is the best for the world because I think that either trade frictions or trade war ultimately which I don’t foresee lead to no winners and to all losers." He further added.
"We are in Mumbai and I love this monument Gateway of India. I think that Standard Chartered, we want to be a Gateway of India into the world and a Gateway of the World into India because of this special role that we play in financing, trade and investment cross-borders," said Vinals.
Below is the verbatim transcript of the interview.
Q: How would you look at the global problem today? We appear to have an issue with global trade. Do you think this protectionism is something that will pass and nations will understand the importance of bilateralism and global trade or do you think this is going to escalate?
A: We are seeing something different. In the last year to year and a half as a result of some of the political changes that have taken place in particularly after elections in the United States but also in the other places. I think we have gone from, what I would say an environment of open globalisation to an environment of sort of manage globalisation where you let some parts of globalisation flow freely but whenever there are parts of globalisation which you think are adverse to you, you try to manage them and that is what we are seeing now in the United States where there is a search in protectionist stock so to least that is the case and also some recent action in terms of imposing tariffs. Now I think it is very important not to confuse these with a trade war. I think what we are seeing now are trade frictions. But we are very far fortunately from a trade war. These trade frictions maybe part of a process of longer term process of negotiation where the United States and China sort of realign their trade to make it more even. But I think that is some of the things we are seen are going to be with us for some time.
It is not what I think is the best for the world because I think that either trade frictions or trade wars ultimately, which I don’t foresee, lead to no winners and to all losers.
Q: I take your point that we are nowhere near a war and even the events of the last few days indicate that both China and the United States are willing to sit down and talk. The United States tariffs are riddled with exceptions. So, they are not applying to many countries that is true. But there is an underlying trend, I mean what was Brexit if not a bit of a resistance to globalisation as well even when the United States is talking peace with China probably that government is refusing to okay judges to the WTO. So do you think the thaw of the last few weeks or last few days will not last and we may see a resurgence in some form?
A: I do hope, let me tell you what is my hope and what would be my expectation? My hope is that these things abate and that we will continue to support multilateralism as far as international trade is concerned. I think that the World has benefited tremendously not only from having a multilateral trade environment but also from having multilateral institutions and I think we need to preserve this going forward.
In the case of the United States and China, which is the main one, if you look at the impact of the tariffs that the United States has imposed, the niche of tariffs on steel and aluminium, we Standard Chartered had looked at these things and what we have concluded is that this is something that will have an impact on China, which is about 0.2 percent of Chinese gross domestic product (GDP). But with the equivalent with retaliation from China this is something that will have an impact on the Unites States slightly smaller on GDP of 0.15 percent of GDP. So, those are very small numbers. They are very small numbers.
But if we were to go to the USD 60 billion tariff that the Unites States has been talking about this is something which is depending on whether this is just tariffs or goes beyond this is something that will have the more meaningful impact on China which could exceed 1 percent of GDP.
But indirectly this is something, all of these tariffs hurting the Unites States because of many of the industries in the Unites States which use Chinese products as inputs for their production will be hurt. Simple example is the beer manufacturing sector. You carry to impose the tariff on aluminium, then the beer cans are more expensive to manufacture in the United States, so you kept increasing the price for consumers, so American consumers get hurt and the US manufacturers are hurt.
The other thing which is very important is that the United States exports goods to China and when China exports other goods to United States, many times they have a US component and in fact the United States is a number two country in terms of importance in the content of Chinese exports to the United States. So, again even that will be hurt.
Q: So hopefully therefore it won’t get too bad. Let us discuss the global economy itself. You have long watched it as an economist. Do you think that finally we are hitting synchronised global growth and 2018 might be the best year of growth in probably the last 10 years?
A: 2017 already was a best, 2018 is expected to be and so far it is slightly better than 2017 and a global economic recovery is a stronger. It is certainly broader reaching out most countries in the World and it is also healthier because it is underpinned by higher trade and investment done in the past.
This is very important for the health of the recovery. Now what is critical is that now the global trade is growing faster than global GDP that we do not do things, which undermine trade because if we undermine trade we are also going to undermine one of the pillars of the economic recovery and we could break the back of this recovery that we have now and which is so important that we maintain it, sustain it and strengthen it going forward.
Q: I want to take that word you said healthier economy, is it healthier? In the sense we could see three more rate hikes from Fed, it is quite possible or at least two more. We could see of course according to their own chart three more next year. Do you think at some point in some place and some asset class there could be bubbles that will destabilise? After all credit has been cheap for so long do you sense trouble when the Fed goes down that path?
A: The fact that the Federal Reserve board and also going forward maybe the European Central Bank and so on, are contemplating or actually acting to normalise monetary policies. I think that this is a sign that the economy is now in a much better position and therefore doesn’t need the degree of monetary accommodation which was necessary until now. I think that this is a healthy symptom. It would be very bad news if we were to remain with low or zero interest rates in advanced economies for many more years. That I think would be not certainly good news.
Q: What about the pockets that have got used to cheap rates?
A: The good news is that this normalisation is happening. The normalisation signalling a recovering US economy that means that the United States now can place stronger growth in leading global growth, which I think is something which was lacking a few years ago. So, I think this is good news.
Now I think the important question is whether the pace of increase in interest rates in the United States is going to be gradual and markets are expecting a number of hikes, five hikes, let us say between this year and next year – five to six hikes - and if this is something which proceeds are expected I think that this should not lead to any big convulsions, certainly it is a case that long term interest rates are going to increase and their assets would be re-priced but as long as these happens on top of a strong economic fundamentals I think that this overall is going in the right direction and we shouldn’t worry too much.
However, I think it is also the case that if interest rates in the United States were to end up rising significantly more rapidly than what is built now on market expectations that this is something which could cause some trouble. I think that this trouble could be in those asset categories, which maybe slightly overvalued like some equity markets. But also in terms this could have implications for capital flows to emerging markets. And emerging markets which have weaker fundamentals could suffer. So this why it is very important that every policy maker in emerging markets they look other fundamentals and they ask the question what if these scenario were to happen are we prepared and if not because there is still time what else we need to do in order to strengthen our capacity to resist the winds of capital outflows and how to best protect or economies from those potential risks.
Q: Indian banking is in a very interesting situation. There are some problems with a lot of corporate lenders largely public sector banks which have a lot of bad assets and then recent there was also a fraud in one of the banks not very big compared to the size of the Indian banking but still this is raising questions as to whether public sector or running banks in the public sector is a good idea? What are your thoughts?
A: There is no one size fits all. I think that the international experience shows that public sector banks can function well but for that to happen you need to have in all cases proper corporate governance and that decisions are made in a way that are prudent and that achieve the sort of goals of these public banks but also ensure the return of their loans in order not to have a non performing assets (NPAs) down the road. So I think that the criteria of prudent banking applies to either private banks or to public banks.
Q: Fear is that there could be more political interference in public sector banks or even if there is no political interference, can you sun modern banking as a government department? It is a deficiency question I am asking you. There is the other side, which believes that he private sector banks have not covered themselves with glory all the time. As a person who has seen banks in many countries what would your opinion be?
A: I think that the international trend is for a larger scope for private banks and narrow scope for public banks. But that doesn’t mean that public banks cannot and should not play role. Even if you look at advanced economies, you have public banks playing a role. Public development bank you have them in Germany, you have them in Spain, you have northern countries. If you look at United States which is the paradigm of the most sophisticated financial market in the world, what you can see is through government’s sponsored enterprises Fannie Mae and Freddie Mac those play a very important role in the mortgage sector and in mortgage financing. So, you always have, or you also have this public banks there.
The important thing is that these banks are run properly and that they do not take risks, which may compromise your future that is a critical thing. So, that is why I emphasise the issue of corporate governance in having a prudent risk management framework been adopted so that the decisions do not ultimately undermine the stability of these institutions because that is negative.
So, again there are good and bad examples. I think that compared to 50 years ago, the role of public banks is now much narrower but even with this narrow role if they are well run, they have a role to play. Also the global financial crisis showed that private banks or commercial banks or investment banks when they run in a way which is not prudent, they can get themselves and their countries and the world in the lot of trouble.
Q: We were of course hoping in India that as we have more digital payments, we could data mine and give more loans to unbanked segments. India has only recently extended banking services to practically the entire population. So, we are very hopeful of digitisation. Do you think before we get there the world may actually get some aversion to digitisation? The way in which we have had these Facebook and stocks performed because of the problems you think we are already troughing out?
A: I think there are two things – one and if you think of India in particular these are countries with an extraordinary dynamic demography. So, young people are more and more important. That happens also in many of the parts of the world. Young people, the millennials, and so on they relate to the world by use of technology. For them digital technology is the key. So we really need to make sure that we use digital as a way of banking the new generations.
I think that the fact that you have had problems with Facebook may tell you something, it is not saying that digitisation is bad or that technology is bad what it is telling you is that when you have big companies, which have access to data, these data needs to be better protected and regulated.
We as banks we get a lot of data from our customers but we protect that data. We do protect that data. If you come and you want a loan from us and we know a lot of things about you, we are not going to let this data go in to the public domain. This is absolutely confidential information. That hasn’t happen in the case of Facebook.
What you have now is that these big companies, they are global companies, they are companies which are not subject, they are doing a lot of banking services they are not subject to appropriate regulation unlike banks. They are not subject to appropriate competition regulation unlike any other company and even in terms of taxation, it is unclear whether they pay taxes or not and then there is data protection issue so this is telling you that technology, digitisation is critical but we need to review some of the aspects of digitisation to make sure that they do not comprise consumer protection or the safety and soundness of the financial system. For instances, some of these big companies or the cloud are providing services to a number of financial institutions simultaneously so they become a new sort of too big to fell institutions and therefore they have attracted the attention of regulators lately. So digitisation yes but with some safety standards that I am sure will be forthcoming.
Q: What do you see as Standard Chartered’s role in India?
A: We are in Mumbai and I love this monument Gateway of India. I think that Standard Chartered, we want to be a Gateway of India into the world and a Gateway of the World into India because of this special role that we play in financing, trade and investment cross-borders.For us, India is a very important market. We have been here for 160 years. In fact Standard Chartered was the merger of two banks one of which was a Chartered Bank of India, Australia and China so we were born here. Half of the bank was born here. This has been an economy with such an outstanding growth performance, which I hope, will enhance in the future through their appropriate policies being pursued by the government. A country which is now in terms of purchasing power parity, the fourth largest economy in the world and in terms of market exchange rate the seventh economy in the world and with these tremendous demographic dividend which if the young people are properly educated would be tremendous source of strength for Indian economy. This is the market where we are very committed and we are investing and developing new things all time so that we can help India continue to develop, take the true place in the world and India success is our success.