Following is the transcript of a CNBC Exclusive interview with Douglas Peterson, CEO, S&P Global at the China Development Forum in Beijing. The interview was broadcast on CNBC's The Rundown on 26 March 2018.
All references must be sourced to a "CNBC Interview'.
Interviewed by CNBC's Martin Soong.
Martin Soong (MS): Mr. Peterson we can't avoid it, we have these, with tariffs. So now it's what everybody's talking about and also worried about, that this thing could spin out of control and turn into a full blown trade war. What are S&P's thoughts on this?
Douglas Peterson: Well first of all when I look at what's been proposed and look at what's happening in the global trade system, clearly there are aspects to access to the Chinese market that people have been frustrated with. On the other hand, I don't know if this is really the right approach to have a unilateral. The United States coming unilaterally to put in place tariffs and sanctions on trade.
When I look at this I take thoughts of what we're hearing from the Business Roundtable, from the U.S. China Business Council, from our own view as S&P Global, we think that this needs to be bilateral-multilateral approach, where you talk to the Europeans, you have a really professional dialogue with the Chinese, as opposed to just coming in with these, with this blunt force instrument all at once, right up front.
MS: So sit down and everybody sort it out all at once is what you're saying? But what hope do you have that that could actually happen? And who do you think could actually take point on this who could provide leadership in this? Is it, should it be the United States?
Douglas Peterson: Well if you look at this right now it should be, the United States has a view clearly with the administration that's in place right now and they want to express that view, but I really think it would be valuable to get involved with the Europeans, potentially the Japanese. But this should be a multilateral approach to this question. Now, one of the things I'd like to mention since I've been here the last couple days is, I'm really pleased with the way the Chinese have been approaching this. And in this meeting right here we've heard no recriminations, people are being gracious about it. They understand that the business community, the American business community in particular, wants to have a constructive approach to this.
And I believe also from the speeches that we've heard the last couple of days that the Chinese understand that this is an issue that's open and they're going to need to deal with it. So I've been very pleased that we're seeing a gracious response from the Chinese government, at least in this very formal setting.
MS: Let's talk about the market reaction. We've obviously seen what's happened in equities. We've seen run to safety into treasuries into the yen, and obviously the euro as well. In terms of pricing of risk, people have been talking about how risk had already been maybe significantly mispriced before this whole tariff thing started. But the reaction let's take a look at the 10 year still even hasn't even hit three. What does that tell you? Is the situation even more mispriced now?
Douglas Peterson: Well the way I look at it is, if you go back the last couple of years, VIX was trading very low, VIX was very steady, very low, little peaks and valleys but kind of in a range of six to 15, and then about a month and a half ago it spiked up to 25-26 and since then we've seen a lot more volatility. But if you take a step back and look at what are the kind of the underlying conditions that would be implied in different sort of volatility risk. You look at the interest rate levels, the United States is starting to raise theirs, I expect that Europe and Japan are going to continue with very low interest rates for a while, we're seeing a little bit of easing off in Europe but that would be one of the underlying conditions, with more in the United States rates starting to come up.
You look at growth, growth has been strong. You look at factors like commodity prices - they've been pretty steady. We had a period where they were very volatile, those have been very steady, so the overall conditions in the economy are pretty benign. They're pretty positive. There's a lot of tailwinds generally speaking. So you do see though when people find a changing conditions that have been pretty benign and pretty positive they get a little bit jittery and there's been some people have been jittery about interest rates going up the United States, they're jittery about potential trade wars or tariffs coming into the markets.
And so I believe that we're going to see people react, they're quite nervous about conditions have been so positive, will they really last, and they're looking for signals that could change those conditions.
MS: Seems to me like you're saying that the metrics that you ran through are basically saying - look tariffs, that's OK, we can have it, everything else is pretty good shape. Fair?
Douglas Peterson: Yeah things are in pretty good shape, if you go back from where we were in the financial crisis, the banks have strong capital, they have strong liquidity, the global economy has recovered pretty well and almost every major economy in the world.
There's still some European countries that have high unemployment levels, but unemployment levels are low generally around the world. You've seen commodity price have been abated, they're quite stabilized. So there's a lot of positive conditions. Clearly when you take a step back there are underlying conditions that people are talking about – inequality, that's one that we've talked about here in the CDF as what are some of the conditions in China itself to see an economy that's going to be continue to create opportunities for people that are still struggling or are still poor.
And so you do have a lot of different conditions. But going back to the economy, I think that the conditions are pretty positive, but there are these triggers which people get worried about.
MS: And somebody we talked to I think yesterday was telling us that you know ironically in terms of the timing of all this tariff stuff, that's probably actually good that it is starting to hit now. Because now with synchronized global growth and all this kind of stuff the fundamentals will be pretty strong, it's a good buffer in case things go south.
Douglas Peterson: Well despite having a very strong economy, synchronous growth, there's no good time for tariffs and a trade war. I don't think there's ever a good time for that. I believe that we've benefited tremendously from global trade flows, from global capital flows, from free market economies and the trade system that we've had for the last 30 years.
I think that everywhere in the globe we've benefited. And I really am disappointed that we're seeing this unilateral approach and I wish we'd move to more multilateral approach to fixing some of the some of the areas where we could do better.
MS: Let's get down to business if we could Mr. Peterson. You just picked up Kensho for a little over half a billion dollars, not so long ago. AI this is really sort of futuristic stuff. What are your plans for Kensho and integrating it into what you already do?
Douglas Peterson: Well first of all we have a view that to be successful in the information sector that we're in, we're serving markets, financial markets, commodity markets, that we need to really up our game in technology. And one of the types of technology relates to artificial intelligence and things around that robotic process, automation, visualization, search, these sorts of things. And Kensho has that has the expertise, they've been delivering things, they have customers, they have revenues. So they're not just an idea, they're actually an innovative company. And we were working with them already, we'd invested in them when they were doing projects for us and we felt that it was really perfect fit for were heading in the future.
MS: And this is not going to be the last deal of that sort?
Douglas Peterson: I don't know if it's a last deal or not, but there's not necessarily anything in mind but we've been making small investments in the fintech community the last few years. And the way we see it is there's a combination of that Kensho expertise and capabilities benefiting us, ourselves in how we bring in data, how we process it, how we deliver it, how it's searched et cetera. But also they'll continue to be a product and a service that they provide to the companies that they're already working with. We're going to run Kensho as a standalone entity. We're not going to integrate them into our company.
MS: You don't see synergies though?
Douglas Peterson: We see a lot of synergies but the synergies are going to be in how we operate. But we believe that their culture and the way they work is so different, being a startup, being in Cambridge in Boston with a very different approach to how the work, that we want to preserve that part of their culture. And we are going to be working very closely to ensure that there are certain policies and procedures that they follow. But we want to preserve that very innovative culture and we're going to ensure that that we can keep that.
MS: Companies like Kensho and AI-related, Fintech-related companies, I mean they're in demand now, are premiums getting a little rich? Is it getting harder to find value if you want to go down that route?
Douglas Peterson: The value in these kinds of companies is really in the talent, and most of the startup, fintech or AI companies don't necessarily have the revenue stream that you can value them the way you would value an ongoing mature company. You really have to dig in and understand what is the quality of their team, what's the quality of their talent, have they delivered things – is it just a good idea or are they actually in the market delivering products. And so the valuation isn't necessarily the same that you'd use to look at a mature company.
MS: Fair enough. I want to get your thoughts on what's happening here in China, with obviously the economy slowing, yet again the dealing with this mound of debt, and trying to figure out what to do with it. In terms of risk here in China, debt risk, how are things looking?
Douglas Peterson: Well there's a couple of issues on the debt. First of all, this market continues to be dominated by banks. So it's a banking system market. You do have some shadow banking as well, where there's other types of debt that are coming up that are not in banks balance sheets. But generally speaking as opposed to other markets where you have a capital market, where you've got a much broader set of players in the market and it would be my expectation and also hope that over the next few years we see conditions where you start getting more funds going to pension funds and insurance companies and you start seeing capital markets, the debt markets and the bond markets start developing, which gives you more ways to finance companies, to understand what would be the evolution of different kinds of investment products, you see more venture capital, you see more long term investing. And so this to me would be where we believe China should be going and it's also what we're hearing from the regulators and the people that have been speaking here the CDF.
MS: Indeed so broader deeper capital markets, I get that and also basically a more robust sort of capital structure. I want you I want to get your comments real quickly on something that happened during the recently concluded NPC, and that is a move to push companies like Evergrande, like Anbang, like HNA, which have become huge conglomerates, hugely acquisitive as well, but the way that they funded their acquisitions I think raised a lot of eyebrows. The government said look guys if you own stakes in banks let's say, especially for now private commercial banks of in excess of five percent, you've got to get rid of them within a year I think was. Is that the way to go and what does that tell you that they had to do that, to intervene that way?
Douglas Peterson: Well first of all I'm not closely familiar with those situations to give you a diagnostic about those, but what I would take a step back and talk about is the importance of strong governance. You should, we should be seeing an economy where governance is valued and the quality of the board of directors, the quality of the oversight, the quality of the accountants, the way you get kind of independent outside checks on companies like that.
A second would be on funding models. I understand that some of these companies are almost taking like consumer deposits in a way that they were acting almost as if it was a bank deposit, but really it was almost like a bond or a debenture, as opposed to really a bank deposit. So I think that the importance of governance, the importance of clearly delineating and defining what kind of an instrument somebody investing in, these are the sorts of opportunities that China has to have a more mature and a more sophisticated financial market.
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