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CNBC Transcript: John Zhao, CEO, Hony Capital


Following is the transcript of a CNBC interview with John Zhao, CEO, Hony Capital. The interview was broadcast on CNBC on 20 March 2017.

All references must be sourced to a "CNBC Interview".

Interviewed by Eunice Yoon, Beijing Bureau Chief, CNBC at China Development Forum 2017.

Eunice Yoon: When President Xi and President Trump meet for the first time, what do you hope will happen?

John Zhao: I hope that the two leaders will talk about the new version of global economy and global governance and world order. Because U.S. is number one, and China economically is number two. If these two countries, and their leaders agree on things, the world will prosper, and that's where the high expectation is.

EY: So what will that new globalization look like?

JZ: Well I think, as I said, globalization is a phenomenon of the market and the economy. And, it's very, very clear that it is a good thing for mankind. In the last 30 years all countries together, you know globally, have created a lot of wealth, a lot of jobs, a lot of prosperity. But as anything that is good, when you go for a while along all the good things, there are problems. One of the problems that is becoming very, very obvious and we need to confront, is how we distribute the wealth that we are so efficiently creating. So I think that's what the new version of globalization should be addressing. Luckily, we have a lot of good things going to solve that problem. Number one, U.S. is continuing very strong, and the U.S. is one of the countries in terms of economic term… very, very vibrant and very, very innovative and China now number two is catching up very quickly. And also China has played out this, what we call the economic miracle, lifting hundreds of millions of people out of poverty in a very, very short period of time. So it's got a lot of experience in managing economic affairs. So when these two countries and its leaders get together and talk about constructively moving forward, I think that good things will follow. The other thing is participation now between, you know what we had 20 years ago and now… very interesting thing is that everybody literally, has a smartphone. And they read and they get to know information from any corner of the world from people that they don't know and they will participate. So when we come to resolve the problem of continuing to create value but also distributing the wealth more fairly, not only we have global leaders to come out, we can also count on people's participation.

EY: How seriously are you taking some of that talk about a trade war between China and the U.S.?

JZ: Very seriously. But I'm an eternal optimist. You need to identify problems. So all of these you know debates and you know this rhetoric about, this is unfair, that is not good, and…and if you don't do this my way I'm going to go start this. Constructively, I think that's revealing what's the pain point for each party. Once we uncover all the problems as we were doing investments then we're ready to solve the problem. So I don't want to look at that as all and you know problematic. We can't avoid problems we must confront them.

EY: Is there one protectionist measure that you think would be the most damaging?

JZ: Well I think you know if the states and countries start to think about, you know, protecting their borders, doesn't matter if, you know, a border tax or some kind of curfew on the flow of information, people and money; that all set back, you know, sort of efficiency. But I do recognize, you know, each country has a different political system. You know, they have their internal issues to sort through and it takes time. But I think at the end of the day, it's just like previous arguments lead to compromises and new order, and I'm very, very optimistic that this time we'll be able to reach that as well.

EY: If the U.S. and China relationship soured would you keep investing in the United States?

JZ: Well I think it's the other way around. We've been very actively investing in China and the U.S.. Hony Capital manages about $10 billion fund. The fund comes from US., Europe and China. We invest in predominantly China-based companies, but most companies we invest, we invest in global companies that are China based. So we are inherently in the flow. So my view is that China and the U.S. relationship will not sour because there is too much interdependency building already. There are issues; the two countries represent a different political system, different history, heritage, people in terms of culture are also very different. But we've been very successful being you know, in working out the differences and finding common ground. Why not this time? So I think U.S. and China's relationship, with debate, sometimes argument, will strength(en) versus weakening.

EY: So none of that talk about a trade war has been discouraging you from investing in the U.S., just that the whole protectionist attitude that you're seeing in this rise of this economic nationalism, that hasn't deterred you in any way from looking at the U.S. as an investment?

JZ: Strategically no. In the long run, I think, the U.S. and China will learn how to work together constructively for the betterment of you know, prospective countries and global. Tactically yeah, we're careful because a lot of these things could take some time. When you are… you investing today, you need to be aware of policy shifts and, you know, short term phenomenon. So we're very careful there. But, all in all we are very, very positive about continuing our investments cross-border.

EY: Where do you see the best places to invest these days?

JZ: We are a China manager, so we are a country expert investing in China. So I typically follow what's the (ins and outs) of the Chinese economy. China emerged as a poor country and made the first bucket of wealth by being the very efficient world's manufacturer. And now China, as a result of that, on top of that, is emerging as a world's market. There are fast growing middle income households here who want to better their lives, better their quality of living. And China, you know, hasn't produced all the brands and services and concepts for domestic consumption. That's the opportunity. So what we're doing is, we are investing in foreign companies that have a long history of branding, good service concept and technology and bring them to China. And the reverse, China, being one of the largest economies has nurtured some of the most efficient manufacturing in certain areas, like high speed rail. So we're also taking that strength to the world as a financier. Cross-border works, and that's what we're focusing on.

EY: Well as a company that focuses on cross-border transactions, how has the clampdown on capital outflow affected you?

JZ: Well, immediately it has some setbacks, you know when the money doesn't flow, the deal stops. But I think that's a temporary measure. Again, you know there's an old Chinese saying that in anything that you're trying to do that is new, you cross the river by touching the river bed. So there're advancements, and there're setbacks. I think in all of these adjustments are really meant for better development. But then, as a tactician you need to be aware of that. So the money flow restriction has had an impact to the deals and things have slowed down, and we'll just see what happens.

EY: How temporary a setback do you think it is? Do you see this is a long term policy? Do you think it could last throughout the year? Longer?

JZ: Absolutely not. If you listen to President Xi, he made a remarkable speech at Davos and he is advocating globalization, addressing some of the problems past globalizations had cost, and if you listen to that blueprint, it's all about more trade, more globalization, and I'm sure that whatever, once that has to do or discuss, you know, about protecting, some of the problems are temporary. In the long run, as I said you know everybody has benefited from previous globalizations and we just need to figure out what's the better version of it.

EY: Well as you said, China has had a blueprint to try to expand its companies' influence overseas. At the same time it still isn't quite maybe where Beijing wants it so. So what more needs to be done to try to support Chinese companies to get them to expand and become global champions overseas?

JZ: Well, you know there are some frictions and sometimes even clashes, although a lot of that are actually misunderstandings. Look, historically China has been the recipient of global orders and benefitted from that, you know, joined WTO. China now, with its size, sophistication and its newly gained confidence and experience, is participating in New World Order rule-setting. It gets some used-to, for foreigners to get used to. China now is not just the taker, you know, have to be a responsible large country. China is very experienced in doing this. So China also needs to learn, and learn how to play this responsible global power role. So I think that you know a bit of friction, even some setbacks is to be expected. But the trend is very clear. That China will play a very important role in new world order alongside with other countries like states. And with the experience China, developing economy, and now with what's going on with the Internet, you know, lifting a lot of innovation, China has a lot to contribute as well. So I think good things will happen.