Davos 2019 - Rethinking Global Financial Risk

good morning ladies and gentlemen thanks so much for joining us this morning we are thrilled that you're here and we are honored to be among the first kickoff panels for this year's World Economic Forum Davos 2019 we have an esteemed panel this morning talking about rethinking global financial risk we are assessing the global story in terms of economic growth and looking at what the worries are today including debt first let's take a look back at 2018 and how do you began the new year kicked off with a much better tone than the end of 2018 as the CEO of the largest US bank told me investors overreacted to negative headlines by year-end sentiment went from kind of global synchronized growth to maybe you'll be bad maybe go into recession so it doesn't look to me like that taking place dying markets are overreacting to short-term sentiment around a whole bunch of complex issues head-spinning moves and uncertainty gripped the globe last year with expectations of synchronized growth changing to expectations of a synchronized slowdown the stock market rocked with wild moves up and down but sadly for investors it's been more down than up in Europe brexit on the brink I continue to believe that we can leave with a good deal and that this is in Paris in pieces citizens rioting over a new gas tax designed to curb carbon emissions all this as America's economy is humming in ways not seen in years the president's tax plan kicking in January first helping to send second quarter GDP north of four percent and the unemployment rate all the way down to three point seven percent the fact that a business can write off a hundred percent of an investment is an enormous incentive to get people to make capital investment and that capital investment creates more jobs blue-collar workers having their best increase in many many years the American economy is crushing it but the euphoria faded by mid year as the president's America first policy meant renegotiating old trade deals President Trump telling me in April that the United States will not back down until it has better terms with the rest of the world notably China where you went back down on the terribly no no China wants to make a deal and so why but it's got to be a fair deal for this country the administration calling out China over IP theft the forced transfer of technology spying on Americans and lopsided protectionist tariffs but while doing so global growth worries persisted president Trump also calling out his own Federal Reserve Chairman for raising interest rates making a mistake they're so tight I think the pen has gone crazy high rates and the China tensions roiling the equity markets by year's end with a big hit in the fourth quarter the business world also still roiled by the me2 movement including media mogul les Moonves of CBS fired and deprived of a massive severance package after an investigation uncovered years of alleged sexual harassment it was also a year of big challenges for big tech we didn't take a broad enough view of our responsibilities it was my mistake and I'm sorry the Facebook Cambridge analytic data scandal revealed at Cambridge analytical took the personal data of millions of people's Facebook profiles without their consent and it was used for political purposes Facebook stopped taking a beating and others such as Google under the microscope for privacy issues leading to calls for tighter regulations 2018 saw a big change for the internet that very few noticed net neutrality was repealed by the Trump administration despite promises of doom the internet seems to work the same as before but it is not the same as before for believers of Bitcoin a year ago the cryptocurrency riding high near $20,000 but by year-end crashing below 5,000 the year-end midterm election set the tone for the year ahead with new uncertainty with the Democrats in the majority in the house creating new questions over what can get done legislatively security 2019 begins with a new Congress and a divided government that traditionally has been good for business and the stock market but the US will need to ratify the new trade deal with Mexico and Canada as well as come up with a new health care plan and in this era of a non-traditional president where business and politics overlap you can be sure that more surprises are in store for 2019 and we have a wonderful panel to address all of the above in particular the global expansion joining us right here on stage is Fang Shanghai he is the vice chairman of China Securities Regulatory Commission the People's Republic of China with us this morning is Jean kayuu professor of economics London School of Economics Ray Dalio is the founder chairman and coach chief investment officer at Bridgewater associates USA and alex Weber is the chairman of UBS you so much everyone for joining us and after Fang let me kick it off with you given the prominence and implications and impact that China has on the world how can you assess the global story today how would you say China is doing economically speaking I think it's a it's certain that the Chinese economy will slow down a little bit this year and that's because you know because of trade because of slowing down of the real estate market which is very much needed by the way but you know it's slowing down in China is not it's not a collapse right so so last year we grew at 6.6 percent this year perhaps you know something around six percent let's say and six percent is not you know very slow pace now the Chinese mackerel policies are a very data dependent I put it this way so at this point the government has already readied quite that strong of fiscal policy as well as monetary policy but you know if things continue to to be challenging going forward on the fiscal side there's a lot loom to expand some people worry about you know the ovo that in China I think that to the corporate sector is a little bit too high but the government sector can still leverage a lot and you're already seeing the local government issuing more what we call project bond the central government hasn't done so and the ability for the central government to borrow more is also very very large so the bottom line is that you know China is slowing down but it's not going to be a disaster so what what areas would you say are seeing the most slowdown and because you make such an important point it was the slowest pace of growth in three decades in 2018 and yet any country on the globe would love to say it is growing 6% so can you identify the specific industries that you believe are actually leading that slowdown well export is you know one example the data from December for exports was not very encouraging and we will see I mean maybe it's a response to you know to the trade dispute with the United States it could be also an indication of a global slowing down and we will see how this will unfold on the consumption side last year actually did quite well but then I mentioned you know the real estate market because housing prices are perhaps too high and that squeezed a lot of money out of households in a squeezed consumptions right so we need to do a lot about housing and infrastructure is another areas a lot of infrastructures were done in China by local governments and in the last few years you know China has tightened up the implicit debt that local governments could borrow but we've expanded it explicit that that the local government can borrow so there's a loom there you will see how how the slowdown of infrastructure spending is that with this year but again you know the Chinese macro policy is very I would say very responsive and also is data dependent so as things unfold we will respond accordingly and the capacity for the Chinese government is to respond to the economic slowdown is still very high if anything you know we should not overreact radio you have to allocate capital regardless of the environment as the backdrop and you've been doing that for years very effectively in fact even just in 2018 you were up almost 15 percent in the face of all of what we're talking about increasing debt levels global slowdown and so many other things tell us how you see the backdrop and how you do allocate capital in this environment well let's see the backdrop may be I start with a template I think over a period of time there's productivity and the growth rate of productivity is the most important thing you learn more you invent more you've become more efficient and that Rises then we have cycles around that we have a normal business cycle short-term debt cycle and then there is a longer-term debt cycle which has to do with the capacity of leveraging up being limited when you approach zero interest rates or limitations in terms of the effectiveness of quantitative easing so that framework is what I use when I'm looking at China when I'm looking at any country I think we make a bigger picture I think we are in the later stages of the short-term debt cycle meaning maybe within the seventh or eighth inning of that and that there was an inappropriate mistaken desire to tighten monetary policy at a level that was faster than the capital markets could handle and as a result we had a correction we had 70 basis points change in rates we had a an important change in Fed policy regarding that what the direction of Fed policy will be in that tightening but we're a little later stages of the cycle when asset prices are fully were fully priced and still are somewhat fully priced I think the key question like a woman look at each country we look at China look at Europe look at the United States we will be a nice slowing economic environment that growth rate will slow and in it probably in a self-reinforcing process I think but the question really is whether the monetary policy is denominated one's own currency these are all cycles the cycle like in China they I agree it's it's one of those cycles people pay attention to but they have the power the debt is in their currency they can handle that's that cycle but there is a weakening there there is a slow a slowing certainly a substandard growth rate in Europe and in the United States there will be a significant slowing in that particular period which warrants an easier monetary policy the bigger issues so these are the cycles and then there's constraints of monetary policy for being able to deal with that then the bigger issues are really connected to politics and and the economic policies associated with that for example when we cut corporate taxes and we also made interest rates low enough that it was attractive to borrow to met by financial assets particularly by companies having mergers and acquisitions that caused a lot of growth in corporate debt and that growth in corporate debt was used to finance those purchases which so supported the financial markets so that is going to be less so I think that probably next year the slow up and then the beginning of thinking about politics and what that might affect economic policy beyond something like the talk of the 70 percent income tax for example will play a greater role so I think that that's if I'm covering the world us and we live in a world economy us Europe China all of those will be experienced a greater level of slowing probably a greater level of disappointment and I think there's a reasonable chance that by the end of that that the monetary policy and fiscal policy will be have to become easier relative to what is now discounted in the markets yeah I think you make such an important point because for a decade we had such low interest rates zero and you know such easy monetary policy not just in the United States but across the world as you see that being removed it has to be disruptive right and I think at the end of the year markets were reacting to the unwind of the Federal Reserve's balance sheet as much as the raising of interest rates so I ask you do we even have the wiggle room if you will in terms of cutting rates where they are no I think you could look at the level of interest rates and compare that to zero and think about that times the duration of the and that is the power that you can have in having financial assets impacted by easing a monetary policy then you have to ask yourself in terms of the balance sheets how much can the balance sheets be increased what would be purchased and so on so we what scares me the most longer-term is that we have limitations to monetary policy which is our most valuable tool we have important limitations to the effectiveness that at the same time as we have greater political and social antagonism so what the next downturn in the economy worries the me the most I think that there are a lot of parallels with the late 1930s you know 1929 to 32 we had a debt crisis interest rates hit zero then there was a lot of printing of money purchases of financial assets drives financial asset prices higher creates also a polarity a populism and an antagonism we also had then at that time the phenomenon of a rising power like China China dealing with the conflict of an existing power these types of political issues are now very connected to economic issues and policy so I think that that's the character of the environment we're in dr. Webber you ran the Bundesbank for a time I want to get your take on central bank policy as well we also want to get into your assessment of China in December your firm announced you can in fact own a bank in China you announced this in December so we'll get back to that but first assess the story as you heard ray discuss in terms of central banks and the ability to react to a slowdown at this juncture so array made the very important distinction between structure and business cycle I think that's important structurally interest rates in most of the Western world as we bounce back from the you know financial crisis were very low for very long and markets have gotten used to that I think actually raids for at least for the better half of the last five years have been too low for the environment for the economic environment we've been in but of course ray mentioned the other point that central bank's waited very long time is keeping rates low because they were not gearing monetary policy towards the expected state of the economy and to the rebound of growth but they were in a kind of insurance policy where they wanted to mitigate any tail risk and therefore kept rates longer just to eliminate tail risks to the economy of course when they started lifting rates they tightened rates in a late cycle stage so the impact of that is that if you look at monetary policy easing which is if you look at the room to maneuver the only central bank that has any room to maneuver is actually the Federal Reserve if you look at traditional policy moves by the Fed they lower rate very frequently relatively large steps of 50 basis point the Fed can do a number of interest rate steps down if need be so I'm not worried about room to maneuver short-term but as Ray also said given that we've had so long rates for long the market hasn't really priced in much higher rates if anything the Fed has come to watch neutral they're not quite at neutral but they're close to it and so going back down is an emergency measure they can take but I think it's more likely if you look at the year ahead that they're on pause now I think we're going through a soft spot in the economy numbers have weakened both in emerging markets and in developed markets over the searle in the fourth quarter we'll probably see a soft spot continuing into the first quarter of this year and then after the middle of the year we have some hope that you know that stuff but might be behind us and that's not the point where monetary policy moves from tightening to easing that's the point where monetary policy takes a pause where they become data dependent where they move into a wait-and-see attitude I still have penciled in one or two rate hikes by the Fed over this year but I think they'll take a pause now they'll look at the data and if and when they resume in my view it won't be perform it year and then I think the rest really much depends on how the current conflicts that we haven't yet talked about the tail risks like the trade war and some of the other terrorists brexit how that affects the global economy what the spilled bag is back into the US and how monetary policy should react to that in the United States so I think central banks are on hold the downside of central banks being on hold is the ECB will never even leave negative territory if they don't start raising rates this year we still think there is some expectation that towards the end of the year they might do a twenty five twenty basis point rate hike but the chances with the European data also coming in weaker French data are looking weak a German data are looking reader eurozone doesn't look very strong the expectation is still most more likely to postpone that into next year so I think in general monetary policy normalization is not an issue for this cycle it's for the next cycle they won't get it done this time because the economy is weakening and so I think it will be mission aborted they will look at normalizing rates in the next cycle and they react to a slow in the economy over the next year or two by a more muted and more cautious more data-driven approach should the Fed slow down on the unwind fifty billion dollars a month is what the Fed had signaled in terms of selling securities I think the unwind is is less of an issue in the United States than it is in other constituencies because you look structurally the Fed used to have a balance sheet that was around 750 billion long term I don't think the Fed will go back to its old size of the balance sheet the central bank's balance sheets will be a much more central part of financial markets and they be a multiple of what we saw in central bank balance sheets then I think the what the Fed needs to do is really look at sort of is that different role that central banks now have in the global economy where markets are looking very much for monetary policy as very often the only game in town is that the position central banks want to be in our Chinese friends just said the right thing if you look at macro policies a monetary policy can react quickly because it's done by a baroque by a committee of elected bureaucrats the real bigger impact you get from fiscal policy it reacts slower it needs to go through Parliament decision likes are longer but it's much more impactful and then the structural policies don't forget to supply-side China is at the moment reacting with demand side measures both easier monetary and fiscal policy to cushion the economy against cooling but the more important measures that China is taking is all the supply-side reforms in open market that creates a lot of cross potential that creates productivity enhancements and so along what Ray said we're too focused on managing demand and managing sort of you know cyclical movements we should be lot more focus on longer-term structural issues in getting those right because I think the other stuff is very much a distraction you can't spend time and money to cushion the economy against the downturn but it's much better to enhance the gross potential of the economy so that the downturn doesn't really lead to such a big reset every time it happens and it happens time and again yes let's stay on this point for a moment in terms of China and the structural changes that we're seeing and the impact on the rest of the world Keio your thoughts let us be reminded that only two years ago China's was considered to be a ticking financial bomb so what we're seeing as a recent slowdown is simply a consequence of the government government's very successful effort to deleverage so if we look at the kind of deleveraging the different sectors financial sectors deleveraging has been quite successful most of the debt to assets have stabilized household debt is increasing but household debt was very low and one can argue too low for a while in China so these efforts have made China financially much safer and as a consequence there will be a slowdown in economic growth part of it is of course kind of triggered by external factors but much of this is the deliberate effort of the government to slow down the credit growth etc now of course growth has now become more of an issue the government is always treading the between the line between financial risk and economic growth and now they're shifting their focus more on revamping the growth and they as you know dr. Fong has mentioned China has a whole set the Chinese government has so whole set of tools that are not normally available to other economies whether it's the massive assets on the government balance sheet or the huge amount of saving in China or just a simply coordination coordination of different state-owned banks and state owns you know local governments all these things matter that said despite the fact that there are a lot of instruments to work with I think China's main challenge is really how to unleash the real potential of the real economy right now monetary policy is expanding you're injecting more liquidity you're you know pushing for proactive fiscal policy reducing taxes but the credit gets stuck in the financial sector if it actually goes into the real economy we are confident that there are real big forces of you know positive changes for the Chinese economy whether it's entrepreneurship its innovation the fact that services are rising service productivity is rising organization but the trouble is really the financial system and how to match the investment and the savers and also give the household more ability to consume right if you're if the real interest rate on bank deposits which you know most of the saving is stuck is earning zero in the last 10 years or 20 years while the economy is growing at you know 6 to 8% you are not giving that potential to the households into the private sector so it's all about unleashing the latent dynamism in the private sector do you think the opening up of markets do you think this trade issue with the United States will in fact impact the real economy in China I think that trade war has come as a benefit in disguise because it is serving as the external pressure for China to undertake some of these really important reforms and as XO has mentioned financial services has opened up or is really kind of on schedule to open up vastly consumers are now able to purchase many more goods from the US and from the rest of the world China needs competition so the financial sector needs competition it needs to be injected with new blood and it is such things that will help with that so opening up in general which is consistent with China's longer-term goals is simply accelerated by the recent trade war dr. Fong do you want to say something yes you know Dr Weber had a very good point and that is as China right now seems to focus on you know macro demand management the supply side policy has not been stopped and if we continue to push forward for supply side well because the price is structural reform and I'll give you a few examples you know open up the financial sector for more international competition is one example that labor can say to that in a manufacturing sector path BASF in the region today was given the opportunity to establish a hundred percent own massive petrochemical plant in China it used to be a 50:50 JV requirement now this requirement is gone China has reduced input duty in a very substantial way so there's more competition in the consumer market so you know the supply side policy continued and that's very important point and you know just to this audience I want to say another word that is that China's vision in the for the economy is to make it open and large in the competitive so it's not only an opportunity for the Chinese companies but you know it will also be a huge opportunity for all the companies from the world well you well you've been in China for 30 years you've been visiting there for 30 years axle your firm just announced you now own a financial institution that you own 51% of is that right yes we were the first bank that was offered a 51% stake in a joint venture and we've executed that in December and we now are the majority owner we already had man and control and we're now free to increase that stake further I think eventually as we invest in China and since our major partners are the municipalities of Beijing and Shanghai which is likely gonna happen some dilution of our partners and we're looking into ways of raising capital also locally so there is some welcome discussion between you know the Chinese authorities not just with Hong Kong on the Shanghai Hong Kong bond connect but also there was an ongoing discussion with London I know that dr. Fang is talking to the Swiss authorities so the more we can connect stock markets the more we can actually be super connectors as international financial institutions to bring international investors into the Chinese economy and help Chinese investors invest in the rest of the world and it's it's absolutely right what what our Chinese colleagues have said the Chinese economy needs competition and they work and I think on three legs of that first this state-owned enterprise reform and I think that is very important and we've all gone through that in Europe in the 90s of having former official sector conglomerates move to the private sector the second one is competition between state-owned enterprises and private enterprises in China and the third one is an authority so far it's been more cautious opening up the Chinese economy for international competition because that will really be a major contribution to increasing the competitiveness of companies and of course we as international experience investors can help in that process and actually can help both Chinese investors internationally and international investors in China just to give you an example banks like UBS we have a 24 percent share on the northbound traffic of the Asia market in the Hong Kong Shanghai Stock Connect so we're kind of the go-to Bank for a quarter of the investors into mainland China internationally or market share in for Chinese investors southbound is below 1% we're not to go to bank for international investments for Chinese citizens and as we're granted majority rights as we're investing in our business we just doubled our headcount in China over the last few years we will become a major go-to partner also for Chinese investors in the global economy but that will happen at a more measured pace because there is some concern in China that this will impact on the exchange rate so the opening up process is more controlled but it's happening you know don't mistake speed for direction the direction is very clear the speed I think has been really sort of increased recently actual was just in China in the first weekend the constructive dialogues we had with Chinese Authority is really on a totally different page today than it was a few years ago so I'm very confident about this process let's not forget out of the top 20 banks in the world the top 5 are Chinese right well you you mentioned I've been there 30 years and I've watched it evolved and I think there are two types of things that are going on let's call them the short term in the long term right I said as I say productivity is the big thing in the short in the long term and that's the real big thing and then they then you have these short-term debt cycles and you have these short-term thing so the two things that are happening short-term is that you're having a de leveraging that you just articulated el twith there was an over leveraging and and there was a development of the financial markets when I've not long ago it was really five or six years ago five major banks loaned money to state-owned enterprises and the money was clogged at the top then there was the development of the shadow banking system and liberalisation of that and then now put into place regulation whenever you're having a deleveraging that is something that makes the country healthier because your D leveraging but it has a short-term effect but it has a long-term positive so there's the deleveraging happening it's a short-term thing and then there's the trade issues associated with that which is also a short-term thing but if you take productivity growth if you take the approach and I think it's it really has to be admired as you know Chinese characteristics as its described you know it's a certain top-down it's a cultural challenge for the for the West but there's a top-down way of setting a mission for 2025 plan or a plan and working those things in it down way with unique resources available that has produced in the time that I've been there you know an increase of 20 times in incomes the movement of it used to be the below poverty level is 88% of the population was below poverty level today it's less than 1% there is an ability to produce productivity but it's a very it's a culture clash with the West because in some ways because there as one of the leaders described it to me the United States is a country of individualís an individual is working that up China is more of a country of that is an extension of the model of the family things he described he said there's the word country in China represents state family and if you go back to Confucianism and how it is run top-down and that is where there's an element of a culture clash at the same time when you look at that productivity and the policies and things it's a very effective place so I would say it's important to distinguish the short-term influences from the longer term productivity influences and then recognize that we're now in a world where there is a competition and that can mean conflict in different dimensions between the two countries that means I think the trade issue is a manageable issue I think the way of being issue is a challenging issue because you can't expect Americans can't expect Chinese to operate in a way that is different from that or vice versa so I think that's that's the bigger longer-term issue but I think you'd have to be very optimistic when you think of even a 5 or 6 percent growth rate and what that's going to mean and what the world will look like in 10 or 20 years it'll be quite a different world in which China is going to be I think a lot stronger so I think that's the picture not let's not confuse the short-term with that bigger picture evolutionary picture but what about the picture of yet I mean how worried should we be about debt particularly I mean the US has to sell debt China obviously one of the biggest most significant holders of the u.s. is debt are any of these issues dr. Fang in terms of the trade spat in terms of slowing growth in China are they impacting capital flows you know China will continue to be a what we call a saving surplus country for some time although the saving is kind of declare a declining but it will be a saving a surplus country so we have to invest abroad and you know the US government bond market turns out to be a good place to invest so I I don't think China will you know in any way significantly reduce its investment into the US government bond market but now the other hand in terms of capital flow you know we we do open up we want more companies you know from different sectors to come into China so that should increase capital inflows we want to increase you know both way and I want to but we I want you know at one point to what radar you just said about the cultural shock I am China does have sort of a different approach to economic management and I think in this world perhaps we should you know learn from each other a little bit and I want to give you one example about how we manage our financial risk over the last 40 years in which China hasn't had a very significant financial crisis for example and that's very rare among the developing world and I used to work for the World Bank and you know we have financial crisis in the developing countries a lot and how China has been able to avoid financial crisis right in the last 40 years well we have a very kind of top-down approach to financial risk management and that is the central government constantly is in touch who is the financial sector you know gets information from the financial sector in the timely manner and if there's any risk accumulating in the system the government you know will step in and and order the risk to be reduced now of course sometimes we will still miss something right so occasionally we have certain financial jitter ease in the market but once we have that financial jittery you know our system is able to react to these jitter ease in a very quick way and we move quickly to contain the risk so that the risk does not spread into the entire system and it does not create panic in the system and then as the economy grows right the risk ill is diluted going forward so that's how we have been able to grow our economy by so much and grow the financial system by so much without you know incurring a major financial risk so there's some lesson there I think that you know the rest of the world perhaps should take a look at I think there's if I may there's also a point of no return in this whole thing about opening up for China because you have to look at China's weight in the global economy has really increased massively China is bordering on to you know at least 20 percent weight in the global economy if you look at exports if you look at global growth still today most of the growth that we see globally is generated by China's inclusion into the world economy now that is reflected by now putting China a lot more into portfolios because you can't just have a big part of the global economy be Chinese and investors completely have zero exposure to that growth in their portfolio so China gets inclusions into indices like the MSCI in the equity indices or in the bond indices like the Bloomberg index our estimate is over the next quarters there will be 250 billion of capital inflows into China basically just by this 4 percent weight that China will get now so far raise absolutely right China debt is not a problem because it's largely domestically helped domestic policies and redistribution of that debt can easily be engineered by policymakers international investors if they invest in China debt or equity they want different standards they want Accounting Standards they want very clear solid products to invest in so what is happening is that we'll raise the standards and the bars for equity markets in China because you need to bring international investors in and you also need to allow because you just don't want a big inflow into the Chinese economy that puts upward pressure on the exchange rate you need to open up in sync international investments for your citizens to invest in the rest of the world so you create capital outflows so in the future the whole debate about queue fee and QDI quotas will be a lot more inter linked because you know large banks like us who compete at the top level for Chinese clients will have to do both only if our action is not just one-sided by bringing international capital in but also I have in Chinese invest abroad we will not have an impact in what we do on you know policy preferences like you know no impact on the exchange rate so I think there is a point of no return where you simply once you open up you get included in these index you get drawn into the global economy and that's where I think you really need to do these supply-side reforms to do that in a more resilient matter so I'm not worried about the sort of credit cycling in China at the moment because the Chinese central bank can really create a lot more monetary stimulus without even touching interest rates reserve requirements are at you know 23 percent I think it's the last number I saw you can massively reduce reserve requirements for domestic banks and create credit origination without really doing anything through the interest rate Channel but the main reason is that opening up is is good for China you know you mentioned the Asia inclusion into the MSCI index and the effect of that inclusion is already felt in the Chinese market in terms of raising the quality of the market because we now have to respond to the demand of the international institution investors so just give you a very concrete example in the Shanghai Stock Exchange we used to calculate you know the the closing price of a stock by its last trade and that's not very good you know for international investors I'll be according to their request we have a change that into the average price of the last three minutes in a you know concentrated trading manner and now it's much better according to the international investors so this is just very in a small example of how opening up has been good for China and we will continue to do that I would like to push back on a little bit at this point um if we look back you know maybe 200 years back this century financial history might well be written by China now it's not just a question whether China is ready or not for opening up and here we're talking not just about opening up to trade but opening up capital accounts and exchange rate flexibility the question is is the world ready let us be reminded that china is still a developing country with a financial system with a whole array of issues because of the weight it is it has an economy because even so far it hasn't opened up you know the financial linkages but when it does all of its volatility in China will transmit to the world and much greater proportions that we've seen 2015-2017 these were small movements in China and they sent jitters to the financial markets now imagine a really open Chinese market the point behind this is should China not consider domestic financial reforms sort its domestic issues first before thinking about really wide scale opening up in which case the financial linkages which be much stronger so the world also needs to understand that the second largest economy in the world and the ones that's going to be transmitting the volatility is still a developing country that's that's the first point the second is we've talked about how you know most of us agree that the debt problems in China are within you know management I would agree I would say definitely the same but it's really about how this debt is used and how you know how this credit is used in since 2009 the 40 trillion 4 trillion RMB fiscal stimulus has led to a gross misallocation of resources so it's not so much about the level of debt the amount of credit in the economy but where it is going is it just going too big SOS low productivity firms infrastructure product you know projects or is this credit channel to productive parts of the sector now if a misallocation of resources can be reduced then there is enormous potential for China to continue as well lastly I want to point to two facts that we've recently seen for the first time in decades in the first half of 2018 China is now importing more from the world than it's exporting it's running a current account deficit that has huge implications now the two gentleman on my left have talked about low interest rate about you know challenges to monetary policy both in Europe and the US China will source as serve as a main source of aggregate demand where aggregate demand as we have seen is very lacking in the rest of the world inflation has not come up interest rates are still at record low levels China will potentially be an important source of aggregate demand going forward now that it's importing more so pushing for divorce with China is not necessarily a good idea I just want a sorry I think ooh you reminded me as a regulator of our responsibilities right because as China chose more capital into its financial market the jitters inside China can have a huge impact in the international world and we have to raise our capabilities or do a better job I think we also have to look at what's happening in the light of the rises and declines of reserve currencies in the world and the normal patterns and if you if you look at it from the Dutch Guilder the British Pound and the US dollar and now China and and how countries evolve and you look at those patterns over a series of history history we know that first of all technology is the leading reason for the developments we know that each of those countries has to go global with their currency in their banks we know that they have to be developed their financial markets every one of those has had a financial center Amsterdam was London was New York was and now in in China they must have their financial markets we know that that opening up helps their balance of payments and it also helps the development of the redevelopment of the renminbi as a reserve currency the going global of China that will happen that's an inevitable part of the development simultaneously though we have to look at the United States and we have to think of its implications there was a cycle that this happens the rises of these reserve currencies happen because the company countries become more competitive technologies and all of those things balance of payments and they go global the declines of world reserve currencies happen quite often because they have reserve currencies there's a lot of lending to them and in the United States we have to talk about the United States and the United States debt a government debt that we're talking a lot about China but but and that that's part of that puzzle a big part of that puzzle but we also have a real problem in terms of the quantity of debt that we're going to have to sell to the rest of the world over the next few years we've experienced a lot of stimulation because of a combination of the tax cuts and the stimulation where if you do the projections the proform of projections and think who's going to buy that amount of debt and the amount of debt that we have to sell I think that that's going to be an issue so when we're talking about the balance I think the normal evolution will be globalization in which I would characterize China as basically allowing a very free markets in many ways within boundaries and then not to let it go outside of that boundary of volatility so if I was taking foreign exchange policy you will have more freedom but you'll have boundaries so it can't go beyond those boundaries which i think is a good thing and then but you're going to have that globalization you're going to have the development of the currency and there is a problem or a challenge in terms of debt internet which relates to the currency issue because a a bond is a promise to deliver a lot of currency it's just basically a pile of currency spread over a period of time and I would say that if you were to take a longer-term perspective two or three or four years that that's going to be an issue and so I do think the capital flows and the nature of that balance of payments issue is going to be a factor in the years ahead you want to comment on that dr. fiying before we move on I want to get the questions from the audience and I do want to turn back to Europe but first can you respond to it what ray just presented yeah you know essentially what ray said is that you know the Chinese economy is so large so whatever happens in China it has a lot of impact on the world and as we do capital in there will be capital flowing out I think one of the lessons that you know China learned over the last few years is that we know that the large economies are impact on the rest of the world is something that we have to take into account and we make policies so we want to make sure that you know the policy changes in China as well as the economic variable changes in China is not so large you know because if it's very big oh it's kind of a very steep it's gonna have a very big impact on the rest of the world and we understand that dr. Fang let me let me ask you before we close the loop on this subject obviously opening up the markets in China appears to be a priority for the Chinese leadership chance to the rest of the world yes how much of a priority is the forced transfer of technology and IP theft I'm not an expert in this area you know we against forced technology transfer and IP that of course is not something that we would like to see I think we can sit down and talk about these things would that be something as far as far as part of a deal with the United States that you would try to make progress on those issues we are willing to talk to the United States on every issue that the u.s. raises and overall objective is to have you know a cooperative relations economics as well as in other areas with the United States this is such a rich topic we can continue talking about it but I want to hear from all of you because we have such an informed and experienced group in the audience yes sir right here please say who you are and by the way this is being live-streamed on top length World Economic Forum as well as on Fox Business you should know that I wanted to say that from the beginning please circle thank you my name is Anthony Hobley I'm the CEO of the carbon tracker initiative I guess we're mission driven philanthropically funded investment bank analysts the title of this session is rethinking global financial risk in the web survey they just came out of global risks like three or four out of the top five is climate change so why haven't I hasn't the C word or the CC word even come up in this conversation is is this what Mark Carney said it's the tragedy of The Horizon Sir Mark Carney the governor of the Bank of England we've just heard last week I think PG a now the California utility company putting itself into chapter 11 to protect itself from the liabilities from the wildfires which have been exacerbated by climate change so I guess my question to the panel is when you're talking about rethinking global financial risk and the community that makes up where thinks that's one of the biggest issues or three or four the biggest issues in the world why haven't you even raised that as part of this conversation well I think that I think there are a number of issues that we haven't raised it you know the limit in our time and there's a flow but I mean of course that's going to be a big business issue I think that's correct we didn't deal with the wealth gap or and we didn't deal with technologies and we didn't deal with artificial intelligence that we didn't deal with a whole laundry list of important things limited amount of time and I guess we became more focused on China but it's an important issue and we will touch as well on on brexit because this is another on 13 Europe how much of an issue are the the issues in Europe as impacting the rest of the world very quickly well I think it's an unfolding story and you know last year I remember and when everyone sort of felt that the sky was the limit and there was a huge sort of common believed that things could only get better this year I think the mood is a bit too gloomy I still have firm beliefs that policymakers are elected to provide solutions sometimes it's a winding road sometimes there are setbacks so this has been a pretty volatile evolving situation I think ultimately it is not in anybody's interest to have an unordered a brexit without new rules of the game being defined if that requires because they started late and they didn't gain traction and they didn't agree early if that requires more time to negotiate that's the rational thing to do I think creating domestic acceptance for a deal you're about to sign is as important as having the other side agree to that deal with you and so I think the Commission and everyone should give themselves the time in order to mitigate what is at a risk for Europe I don't see the calendar and basically triggering exit without really having the solution as a wise strategy I didn't think it that it was a wise strategy at the time we're starting to see that the clock is running out and the obvious thing for me to do when that is the case and you're not done is you should stop the clock and stop the stop negotiations only then when you got a deal I think a orderly breaks it in in nobody's interest and I take some reassurance by the fact that the British Parliament is more deeply involved now in these discussions because ultimately the Parliament has made clear that we want to move to a new stage but we want to do that in an orderly way and not doing it without a deal is not something that is the preference of you think Britain leaves the European Union but they will not do it in a hard way they will do it with a well-thought-out trade situation with with partners I've been in so many financial rescues 10 years ago they always looked a very difficult situation at one o'clock at night by two o'clock when the Japanese markets opened we needed a solution usually that last hour was where most of the things moved so I'm still you know we're we're still sort of almost 60 days away from from that March end date and I think there will be some own dynamics in this in the end I think people have to start making compromises this is you know it's okay to insist on your position if you're negotiating but in the end if you want to deal everyone needs to compromise I haven't seen the compromises on the tape let's get as many questions as we can and go ahead circle my name is Marcos Bru he's I'm the chief executive of the IFC asset management company International Finance Corporation one thing that we've seen in China is that reserves have gone down from around four billion dollars in 2014 to four trillion dollars 2014-2015 they are now below three so it's I mean it's more modern a trillion has been spent a lot of that this money has been spent through some of these sovereign and quasi sovereign wealth funds save CIC the money that went into AAA be and a lot of this money has gone to very risky markets okay I'm originally from Latin America so I've been worried when I've seen some of that money going to Venezuela which if you ask me it's going to be hard to collect let's put mildly my question to the panel is if as a result of these very aggressive investments in very difficult markets in Africa in South Asia that not all of them will go great if you will see that China will all of a sudden become beginning borrowing a little bit in the United States style in order to continue funding for example its belt and Rose initiative comment well I think three trillion we are still Stewart's try to above three children and three trillion is perhaps more than enough right as foreign currency reserve now of course we can always make better use of the foreign currency reserve that we have and you pointed out you know when it's way allow these countries are whether China is using its foreign currency reserve wisely or not well it remains to be seen I still need some more time but we can always make improvement in these aspects 15 years ago people were complaining that China was you know purchasing US Treasuries and losing money and they had to go for higher return more diversified assets and you're seeing the consequence of that yes sir my name is Gilberto Marina I'm the president of al Kamara I would like to hear some comments about if they do see some risk in Latin America especially in Brazil and Mexico great question and we will hear from the new president of Brazil at the World Economic Forum today at 3:30 comments about Latin America III think that the cycle in Brazil has been a good cycle in terms of the changes in terrible balance payments it became expensive it was Bank subsidies by the government a number of things that created a classic bounce payments crisis classic debt crisis and we then the exchange rate became very cheap and you had then the funding and it became somewhat attractive to invest in and now we're dealing with the political questions that will come out of that so I would say by and large it's in a good track but there are questions in terms of pension reforms political reforms corruption issues all of those enter into a picture of what Brazil will look like coming forward so I would say on a good track but there's a lot to be seen and we'll see what mr. Bush sodaro says today from here in Davos yes sir Jacob thank you I'm Jacob Frenkel chairman JPMorgan Chase International first of all it was a fantastic panel and it was taken for granted that the u.s. is ahead of the game in terms of recovery but I want to make sure that we recognize that it's not just a cycle and we just need to wait and everything else will happen it was the results of policies there is a consensus the reason why the u.s. performance has been so positive it reflects the corporate tax reform it reflects policies concerning the trapped capital it reflects the deregulation it reflects their attitudes toward business and the like so it's not a political statement but is a statement that says you want to see results you better do some policies and it is the corporate sector that does the growth therefore it needs to be not be the enemy but the partner having said all of this and given that there are so many other sessions still there is one overwhelming subject of risk that we do not have a good systemic answer to and it has to do with the cyber we do not have the international agreements about it and alike and that's something that all of us are really losing sleep about thank you so much take up as we wrap up let me just reiterate some of the points that were made on this panel it does appear that we are in a slowing economic environment although dr. Fang mentions that sick percent growth is still quite attractive and also K you made the point that China will ultimately be the solution for the world in terms of demand and the place that we will see many imports coming in China is now importing more last year than it actually exported Ray Dalio made a very important point in terms of capital flows and and and what your expectation is in terms of as this deleveraging goes on in China what the impact will be on the dollar it sounds like you will have concerns there you made the point under exit and the point on the European situation is what that you believe brags it will take place but you do believe calmer heads will prevail and it will not be a hard exit at least I hope so [Music] you never know I mean but I think it would be completely irrational to let this situation get out of hand Europe has been challenged over the last decade with homemade problems if you look at France if you look at Germany there are major leadership issues in all of our countries and adding brexit as a uncontrollable risk to that mix we just said your back for you know years to come so I think it is nobody interest to really hate you know do a hasty exit without an organized deal so yes I hope and I believe that policymakers will have that consult thank you ladies and gentlemen thank you which our esteemed panel have a good day [Applause]

Channel: World Economic Forum

Views: 54,264

Rating: 4.75 out of 5

Keywords: automation, future, World Economic Forum, 4IR, AI, WEF2019, tech, Davos 2019, finance, education, democracy, technology, economy, work, news, leadership, Davos, politics

Id: tyTav9sYhd8

Length: 60min 54sec (3654 seconds)

Published: Sun Feb 10 2019