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CNBC Transcript: Lorenzo Bini Smaghi, Chairman, Societe Generale


Following is the transcript of a CNBC interview with Lorenzo Bini Smaghi, Chairman, Societe Generale. 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: How big of a risk do you see China in 2017?

Lorenzo Bini Smaghi: Well, China's economy seems quite resilient, of course they have challenges because they have a large pot of savings that cannot really get out of China because of capital controls. So if it is invested, or in China, there's a risk of you know up and downs in the stock markets. If they open the capital accounts and then there is a risk of depreciation of the Renminbi. If they want to counteract that, reserves go down. So there are some trilemmas I would call, that they have to solve.

EY: And how do you think they should solve these dilemmas?

LB: Well, capital liberalization, I think it's going to happen sooner or later. In the meantime maybe they can run down the huge amount of reserves that they have - it's not used, and it's really not useful for them. But it depends how strategic they think three trillion dollars is really worth. Keep them as they are? Or can these help diversify the portfolio of Chinese investors?

EY: Well as a financial institution how easy is it for you to do business in China?

LB: Well we have been doing business in China for many years. But I think we can do much more. Precisely to help savers diversify their portfolio, reduce the volatility in the stock market, in the housing markets. The market is just too small in China and you need to help develop it. IPOs, instruments that help diversify, and have lower risk. These up and downs in the stock market in the end scare Chinese citizens, Chinese savers and lead them to try to get into foreign assets.

EY: There have been some rumors in China that that you might be selling out of the mutual fund business. Is that the case?

LB: Well we are discussing this. I mean again, I think we want to do more business. If we cannot then we have to rethink our strategy. But our underlying objective is try to be more present, to help financial institutions in China to do their business.

EY: So you think it's possible that you might be selling out?

LB: Well if we have to, we have to say that.

EY: I want to ask you about something back home, the French election. How concerned are you about this as a political risk?

LB: I think in all European countries, not only European countries actually we've seen in the U.S., there is a part of the population who is very concerned about globalization, internationalization and trying to regain so-called power, regaining at home - not clear what it means. And this also in France attracts a minority. Now we have to see what the majority does whether it goes and votes actively. If it does, then there is little chance for these extreme parties to win. If they don't, if the majority doesn't go and vote, it's a bit more risky but I would still consider that this is a view of a minority.

EY: So you're not so worried about an outcome that could, be a, deal a blow to Europe?

LB: No I think in the end, France and other countries have too much to lose from Europe falling apart. I think most French people are in favor of the euro, in favor of Europe. I mean Europe has to deal with many challenges, immigration, terrorism, the economy which is growing too slowly. I think it's a question also of politicians, mainstream politicians trying to work more on delivering for the people. That's what's been disappointing I must say.

EY: German Chancellor Angela Merkel has just met with President Trump and the meeting appeared to be a somewhat strained affair. Are you concerned that the relations between Europe and the U.S. could deteriorate?

LB: Well I think you know Angela Merkel has had to deal with the other leaders, if I think about Poland, or Turkey, I think we're lucky to have her in Europe. I think the U.S. needs to know what they want to do, I mean if they really want to go down a protectionist route, I think this really hurts American business. The U.S. is 20 percent of the world economy. If they close down, the rest of the world will develop without them. I think they just need to realize that.

EY: One of the messages that the Trump administration has already put out there is that they hope to roll back some of the regulations on Wall Street. Would that put European banks at a disadvantage?

LB: Well again we have to see in the real world, in facts. I mean these are declarations. I think we still need to keep a safe, safer system. I think the previous experience is that you can't go back and forth with regulation, you need to create a stable environment. Maybe regulation is gone, you know the pendulum of regulation has gone a bit too far, but we need to create a stable environment. And we need a level playing field for banks in the U.S., European banks in the U.S., and for U.S. banks in Europe. Otherwise, if you start treating differently then Europe will have to treat differently American banks.

EY: It seems as though compared to American banks that European banks haven't really recovered as quickly since the financial crisis. Why is that and what more needs to be done?

LB: Well partly the economy has recovered later, partly I think the U.S. has acted very quickly in intervening right after 2008. Which has not been done in Europe. In Europe we have created a single supervisor, so a banking union in 2012, so pretty late. I think it is catching up, so now we are improving. And if you look at stock prices, there is quite a huge difference, so huge opportunities I think to invest in Europe.

EY: With what we know now about Fed policy, how do you think the European Central Bank (ECB) is going to move over the next couple of months?

LB: Well again the European situation is different from the U.S. The U.S. has grown more over the last few years, close to full employment. In Europe there's still a lag and I think we are experiencing in the U.S. has shown that you know Quantitative Easing (QE) has been run through for six years and actually they got out of QE and back into QE three times. So this shows that you know if you go out from QE, if you exit QE too early you may be forced to get back in. So that's I guess a mistake the ECB doesn't want to do, and wants to be very prudent in taking decisions that may be reversed.

EY: Do you think the ECB would ever be in a situation where it would raise interest rates, even before it suspends its QE program?

LB: Well I think it's going to be difficult. I think the difference is that we have negative rates in Europe. And I think to some extent if you bring negative rates back to zero this would be less dramatic I think. I'm not expecting this to happen very soon. Although once you go back to zero I think the important thing is to taper rather than raising rates.