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CNBC Transcript: Oliver Bäte, Chairman & CEO, Allianz SE


Following is the transcript of a CNBC Exclusive interview with Allianz SE Chairman & CEO, Oliver Bäte at the China Development Forum in Beijing. The interview was broadcast on CNBC's Capital Connection on 26 March 2018.

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

Interviewed by CNBC's Martin Soong.

Martin Soong (MS): The risk of a trade war erupting,I know that early this morning you were on a panel with some other business leaders engaging with the Chinese leaders and they apparently wanted frank and honest views from people like yourself and some of the frank and honest views were forthcoming. What did you as a group tell the Chinese leaders?

Oliver Bäte: We have various perspectives of different industries. There was healthcare, there was financial services, there was industry. I think the key message is that China can play a continuous role to foster growth on a global level and not have short term instinct and react to populism that is growing with short term measures. So it's very important that we avoid sort of retaliation to measures that are not really clever and just escalate the problems because all people will suffer. Some companies will suffer first, but the most important thing our populations will suffer from reduced growth, reduced employment.

So I think the difference to other countries, the leaders in China are very long term thinkers and they hear the message. Now there are trade imbalances, there are industries where pricing is not reflecting cost of capital and cost of production. So we need to look at that on a global basis and saying Is there fair competition? And the other thing is beyond the economics and they have to be carefully analyzed what is the political mood and why are governments doing what they are doing, in order to sort of move electorates. I think the leaders in China are very good in understanding that and listening very carefully, by the way I think better than some other governments.

MS: Do you think the Chinese government then, are you confident that China understands that potentially is happening with the Trump administration is very short term, very political, it's about upcoming midterm congressional elections in November, possibly even the presidential cycle a few years after?

Oliver Bäte: Well my personal opinion is this is not just the U.S. midterm elections. It's a global phenomenon. When you look, country after country you have more and more populous governments. They are playing more attuned to short term electoral outcomes. They're listening to people what really moves them rather than making long term oriented policies. And it has become a fact and it's in the middle of Europe you see the same. In Eastern Europe you see that now in Italy, and the reason is really because they are parts of society that are left behind. Whether the young people in the south of Europe, we have very high youth unemployment, they have no perspective. And then you get the knee jerk reaction that you had the last 40 years whenever that happens.

People say it's about globalization, it's about unfair trade, it's polarization of society where you have more rich people and more less rich people. So we need to address the underlying issues. We cannot treat it as an electoral issue. It's really the underlying phenomenon, we are hollowing out the middle class in many areas without having good recipes.

Now, the right recipes not to appeal to populist instincts in the electorates and say you know we're going to give you money for free we are going to raise trade barriers because we know from history. It doesn't work.

MS: You know Germany is a case in point where this whole rich poor gap hasn't materialized really and populism hasn't emerged to the extent it has in other places, let's say the political mess that Italy's in right now I mean France last year managed to dodge the bullet. That's good. By and large you know do you think that this a wave of nationalist populism in Europe right now, is it gaining ground or losing ground?

Oliver Bäte: It depends on the country. We have a couple of underlying factors that are pushing societies to do more reforms and be more proactive and if you don't do the reforms properly you actually get populism as an outcome. So the key concerns we have is long term. So access to high quality education is uneven in society. And we have in Germany, because you asked about it, been for a long time focused on making sure we have access to education, higher education and in Germany is still not good enough but it's much better than in other countries like Italy.

The second thing that is very important is to make sure that we have employment, and high quality employment, also in the manufacturing sector. That's one of the success factors of the German economy. But there is nothing will stay there unless you reinvest. And the second concern therefore we have there is a very low level of long term investment, and this is not for lack of funds as we see you know cost of capital is very low. But there's more a lack of idea and to be honest lack of public support and policy, to really make investment work. Because many many many bureaucratic hindrances in order to invest in infrastructure and in technology and we need to remove them in Europe.

MS: Would you agree that over the last 10 years because central banks around the world have been engaged in unprecedented monetary easing and accommodation. What's happened is a lot of the world including corporates have become maybe too used to it. Markets certainly have become maybe too used to it. And we have a situation where in normal circumstances you'd have business cycles you would have companies starting account next cycle one of those decisions are being held back not so much because of central banks but increasingly because of politics and populism.

Oliver Bäte: Yes and we would agree with that, and also certainly not cost of capital or lack of funds, it is lack of structured reforms and to reduce barriers to entry, reduce barriers for innovation and to be honest it's a very short term return focus. People looking forward to high capital returns over the short term. So let's look at the puzzle on productivity. All our economies and economists are telling us that all this investment and technology and the productivity is not going up. This is because of the so-called J curve effect. It just takes a long time for technical revolution to show itself in higher revenues and higher profitability. But the pressure from shareholders and capital markets have been give me more return faster, give me higher dividends, give me share buybacks and it's just utterly wrong to support a long term investment.

MS: You've been quoted very widely saying the risk is absolutely, totally mispriced. Certainly the case even before this these trade tensions broke out. But even after the trade tensions broke out in just the last couple of days I've been noticing at best when you take a look at let's say the U.S. 10 year it's still at about three percent. What does that tell you? And conversely what does the way that the stock market sold off tell you?

Oliver Bäte: Let me start with the latter one. Equity markets have really been buoyant for a long time now and valuations are extremely high, higher then you can actually justify based on fundamentals. And we believe it can stay this way. And you saw after the actions now that markets are starting to get jittery. And we would expect a more severe correction over the medium, to long... Now, the problem is if I knew when markets correct and how, I would be very rich I am not. And people should see Allianz doesn't speculate on market cycles but we really believe that risk is severely mispriced so we are being very very careful.

So I think the credit risk is mispriced, it's not just equity risk but credit risk is severely mispriced and because of the wrong capital allocation after many, many years of quantitative easing.

MS: The risk of a trade war erupting now does that potentially bring that correction point even nearer to us now?

Oliver Bäte: On timing, I don't really know, but it's certainly not helping to stabilize markets. And what you have described around populism, constantly going against the economy, erecting trade barriers, going after the companies, not fostering innovation but really discussing things that do not move jobs and productivity is not helping. It's not really helping. What do we really need is to think through where innovation work how can we create jobs and how do we bring innovation and productivity into the economy.


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