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CNBC Transcript: Axel Weber, Chairman, UBS 


Below is the transcript of a CNBC Exclusive interview with Axel Weber, Chairman, UBS. The interview was first broadcast on CNBC's Squawk Box Asia on 17 September 2018.

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

Interviewed by CNBC's Nancy Hungerford

Nancy Hungerford (Nancy): I understand you're just off the plane from China so let's talk a bit more about your China strategy. You've been discussing just about sheer number of billionaires in fact that are coming out of Asia more broadly but China specifically as well, what does the Asian billionaire demand from a wealth manager that is different from your home base back in Europe?

Axel Weber (Axel): It's not that much different. It's just that the amount of billionaires that emerge every week is just much higher. Europe is a business that is very steady. There's a huge amount of traditional and old money in Europe. And so we have a high level of business. But in terms of growth, China and the Asian Pacific region is the main contributor to growth. And so when you look at our first second quarter numbers, first half of this year, one of the major contributors to a net new money growth has been in this region and that's because it's a vibrant economic region. China despite some slowing is still growing at 6, 6.5 percent. And for us our business usually grows at two times GDP. So with the growth of 6 percent that means we're well into double digit growth if we continue to build our business here.

Nancy: One people might notice is that billionaires are quite young as well - I mean we are talking about the news about Jack Ma announcing his succession plan and plans to take a step back from the company altogether. Do you think we will see a pattern going in that way?

Axel: Oh we will and especially with technology. I mean it's the next generation that is taking over. So not those that are born in the 60s or the 70s, it is now the 80s born generation and we see it in our client base. I mean more and more the patriarch that we talk or the founder of a corporation is no longer the only person that decides about money allocation. It's the whole family. It's his wife. It's the millennials, the children and more and more inheritance of wealth will be younger people. And that's why we are also catering our offering for billionaires into a more diverse set of investments. Philanthropy for example there was a panel just now at a summit about that or impact investing is much more popular with female wealthy clients or with young millennials. And that's an offering that we're building very, very strongly.

Nancy: When it comes to targeting clients in mainland China I mean how difficult is it? Because you talk about your strength and growth there but a lot people are trying to beat you to your own game and, of course, there's the domestic competition as well.

Axel: There is but we've been in the region over 50 years. We've had businesses and joint ventures in China for over 25 years. We were the first bank to be invited to increase the stake in our JV for asset management above 51 percent. And every time, I'm in China, I go and see the regulators. I saw the Central Bank Governor. I see the CBRC and all of our regulators and we go back with two basic asks. First can we increase the stake we have in our operations because we are fully committed to the market and we want to build that with partners well we like to be majority owner. And the second part is quotas. A lot of what we do is limited by quotas like QFII. QDII quotas, and those quotas are increasing but we could fill those quotas and do more business much more vibrantly than we do now. So our second ask is please can we do more business on the ground. And we're seeing that getting off.

Nancy: Do you think there is a willingness then when you talk (Axel: There is) about increasing your stake when you talk about maybe some of those questions?

Axel: There is absolutely so for us as a European bank. We see that there is a willingness to do that. Our business is we're a wealth management and asset manager at its core. So we don't compete with Chinese banks in retail business. We collaborate with Chinese banks and so the business to business part of what we do is what really sort of meets a lot of positive response in China. And that's why Chinese authorities also seem to become more flexible for encouraging that business for bringing stable global financial institutions and their products to the Chinese market because increasingly Chinese want to invest in the rest of the world but also in terms of partnering with local partners. It is important that as well as management becomes a bigger business in China. I've talked to three cities in China. They all want to become the hub for wealth management. So as that business is being built, it helps to have experienced partners in our case with 150 years of experience in wealth management to help that market evolve steadily and sustainably.

Nancy: And all of these elements you're talking about are part of these opening up of the financial sector. I mean we've heard a lot from Chinese President Xi just in the last few months even about this idea that China is opening, they want to be the defender of free markets but many say hold on let's look at the difference between rhetoric and reality here. If you look at the reality on the ground do you think they are making good on this promise?

Axel: I think they are making good. There is some setback I would say in the relationship between China and the US so as the US is increasingly questioning the openness of trade the Chinese are increasingly sort of asking questions about services and US firms in particular financial firms doing business in China. So you know there is a whole lot of commingling of interests at the moment and I think in terms for us as a neutral bank so to say, Switzerland is a neutral country. We feel that there is a much less political concern about the business we do.

Nancy: Are you suggesting you find yourself at a competitive advantage over your US rivals then because of this trade fight?

Axel: I wouldn't say that were competitive advantages at this point but we're clearly seeing that the Chinese discussions with the US on trade is impacting on other parts of business relationships with the United States beyond trade of goods impacting on services and that is something that we raised multiple times in discussions with the US authorities that you have to be careful because if you take a holistic picture on goods and services, trade imbalance is not as pronounced as it appears to be when you just look at goods and increasingly countries look at that holistically.

Nancy: Right and the message we keep hearing from the White House is that their focus is on tariffs, you're saying it's much bigger than that when it comes to every else and which China could retaliate on. Ultimately, how do you see this trade fight playing out? Has it entered the stage where it is a full out trade war and how does that just affect your business overall in terms of what is happening in sentiment?

Axel: It's not at a stage where it's a trade war and I think there is a good chance that sanity will prevail ultimately and that we are not going into undoing a lot of the positive benefits for both sides from globalization. But there is a risk and that risk has increased and it's increasing by the day. The holistic picture that countries will take is not just visible in China. You see it for example in Europe where one response of European corporate but also European politicians is with the external pressure on Europe, Europeans are looking much more of what is the European interest and how can we align that in a better way between the interests of America and between the interests of our eastern partners. So in a way, the pressure from the US is shifting Europe to a more neutral stance which is more balanced towards the east and the west than it has been before. But a transatlantic alliance was really very clearly established so in a way it's like in economics there are spillover effects but also spillback effects. The US behavior on trade is impacting on how other parts of economic relationships like services or the ability of US tech companies to disseminate their technology in Europe and in the US is made part of the picture rather than just focusing on the trade in goods and on tariffs for goods.

Nancy: And when it comes to any other tools that China may employ in the current situation are you not planning a trade war, many are wondering what they're going to do with the currency. A lot of concerns perhaps the yuan could weaken from here and what that means for markets. What's your view?

Axel: I don't see that as a big risk because China over the years has clearly and the new governor as well as the previous governor had reiterated that China is interested in a stable currency. If you look at investments into China from foreign investors, those foreign investors will be a lot more cautious if they feel that the Chinese currency would depreciate in a strategic or in a tactical manner. So I don't think that is part of the policy. I talk to the President of the People Bank of China, Yi Gang, and it's very clear that there are unchanged policy preferences - a stable currency is in their interest. Yes the currency has depreciated by about 7 percent over recent months since the summer. But that's part of the picture that you see in many emerging markets where there has been tensions and a sort of appreciation of the dollar relative to these currencies. But I don't think it is a new policy of the people's bank. They are interested in a stable Chinese currency and that will contribute to a stable macro environment. So I haven't seen any change in their policy stance over the last week whoever I talked with.

Nancy: In these conversations you've been having with various officials in China, do you think they too are optimistic that cooler heads will prevail in this trade situation? I wonder perhaps they are looking at the midterm elections coming up at the United States and think if we can clear that risk perhaps then we can come a deal here

Axel: I think they're less focused on the US political cycle. I think they take the current administration and the current presidency as a given for some time potentially for the next eight years. Their focus is to let us get to a reasonable level of cooperation at the global level. They're opening up they're increasingly willing to apply WTO rules and reform some of these international arrangements so I think China is moving and I think we should use the momentum that China is developing under pressure at the moment to really make that into something that is beneficial at the global level.

Nancy: Do you think we would have seen this momentum if President Trump hadn't started the conversation in the first place? Because it seems to me in some ways they're saying Europe could actually benefit from this in an odd way because it is forcing China to pivot in some areas.

Axel: No. I think China was on its way all the time and when I was sitting on the international committees like I was the German governor on the monetary fund. China wanted to play a bigger role and the international community was very slow in letting China access to these international organizations. And I think China is still on that trajectory and I think China has maybe accelerated somewhat under the external pressure. But for me direction of travel was never questionable but we should use the positive momentum that is at the moment there to really get to a new arrangement rather than keep applying pressure because I think China goes at the speed it needs to go. And China goes at the speed it can go. There's a huge amount of new people come into the labor market in China every year around 8 million graduates alone. And China needs to keep the momentum going and they've rebalanced from external driven to domestic growth. They cannot afford to have a negative impact from these trade discussions. So there is a level at which they're willing and able to negotiate. But we shouldn't push them too far.

Nancy: When it comes to the rebalancing of the economy as well I am curious about your thoughts on the sheer debt burden that China is still facing. I mean we talk about future risks on the horizon. I mean ten years to the date of the Lehman Brothers collapse. Some people I have spoken to at the Singapore Summit are still very worried about the levels of debt globally but also in China specifically. Are you?

Axel: So I'm concerned about the level of debt globally and if you look since the financial crisis the debt level in Asia Pacific in general unlike in the United States or in the banking sector, has actually risen. So sustainability of debt globally of that trend is clearly an issue. I'm not as worried about China itself because Chinese have started embarking on countercyclical measures. So I think the Chinese authorities have both the attention and the focus, the policy tools and the commitment to really not let the situation get out of hand a major downturn in China would really derail some of the labor market and they're opening up policies. So I think they do have the means to control that but yes there will be a debt workout that will not happen quickly. It will take time. So they will use the similar tools that we have. They will work off bad debt over time but I think they have all the means to do that.

Nancy: And when it comes to your concerns about debt globally, how do you see this playing out I mean could this be let's say a fault line for a future crisis?

Axel: Sure because if you look at you know academic research Rogoff and Reinhart and others have pointed out that you know once you surpass 100 percent debt to GDP level things become more difficult and I'm worried about the enormous increase in US Debt recently for example also because it's not just the tax reform that wasn't fully funded. It's also the structural policy of adding stimulus at a point in time with the business cycle is really doing well but it's not just the US. It goes beyond that Asia Pacific and really what you're doing when you're going into debt is you're basically today taking the benefits of future growth and you're somewhat allocating that out to current generations. That will leave future generations under much more pressure and because we have a global environment where in many countries demographics are not positive we need to have a lot technological progress to make those future generations equally well-off. It might happen but it's not a given. So I'm somewhat concerned that debt dynamics are pretty high even 10 years after the crisis where we should slow that process down

Nancy: You talk about this late stage stimulus in the United States, using your experience as a central banker, how difficult does this make things for the Federal Reserve, at the moment markets and investors globally seem pretty ok with the fact of how the fed intends to normalize and how they flagged it very well. I do wonder though how they navigate around the obvious risk factors.

Axel: So we see the Fed sort of going forward with another interest rate increase this year. There's going to be some questions around the December meeting on whether the impact if we really get to more tensions on trade, how that is impacting US data. My view is it might show up in some weaker data into certain fourth quarter in the US which might give the fed some reason to consider a pause but I don't think the fed is under any question that it's an independent central bank. I think they're doing what is right for the economy. They have well flagged it, hey continue to implement what they've been doing and whether they do another rate hike in December or not. For me, doesn't really change the big picture that they're normalizing. They're reducing their balance sheet. I think they're doing it right. They're doing the right thing at this part of the cycle. So I have no concerns about Fed policies at this point in time. I'm a bit more concerned that the other central banks like the European Central Bank or the Japanese Central Bank with recovering economies as well are very far off the axis of unorthodox policy in Europe sort of in the purchase program might end by the end of the year. Interest rates might start increasing September next year and that's a very slow pace to respond to an already recovering economy.

Nancy: Do you think they should have moved faster?

Axel: Well I think there is room for moving faster because the economy is doing quite well. And as we're seeing the economy globally become weaker, I think the room to maneuver might just evaporate over time because we do expect in the year 2020 that the global economy will see some headwinds because US stimulus is running out. And so European and Asian Central Banks might still be at a very unorthodox level of interest rates and policy, which gives them less room to respond to the future crisis. So I think the whole policy mix really over time should be examined.

Nancy: Do you think the ECB has any cause for concern over Italy at the moment?

Axel: I think Italy is a factor that is going to contribute volatility to the European environment. I don't think that it is a systemic risk that is going to derail the course of policy in Europe. Europe is kind of tied together in almost historical union that will continue to be challenged. We had repercussions around the Greek debt. We had some peripheral issues. Now Italy is taking center stage. But I think Europe has always been able to pull through that. So I'm not concerned that Italy causes or will be an existential problem for the union but it will be a volatility factor and it will undermine the ability of Europe to come back and grow more rigorously than it has because these internal discussions will lead money markets and financial markets, always a bit spooked about the European situation.

Nancy: Speaking of Europe's ability to come through difficulties I mean you were at the Bundesbank when we talk about what took place with Lehman Brothers and the financial crisis that not only spilled over the Atlantic but became a sovereign debt crisis in Europe too. Looking back on those days is there anything you would have done differently perhaps or do you think the ECB more broadly should have done differently?

Axel: Well I know at the time we did have some disputes about what the right measures are. I felt that a targeted support of some member countries rather than the broad based programs that the ECB has now was not the right choice but in general we know we could do very little in Europe. The real cause of the crisis because it was a crisis at the core of the financial system in the US market as you said, it spilled over into Europe. European institutions had a big exposure. And if you look at how for example Germany has navigated through that. By and large given the huge number of banks that gave came into trouble, the crisis management was in my view adequate. Where I'm more concerned is when I look forward with all the measures that we've taken do we have the right set of tools to deal with the next financial crisis if there is one. And I think some of the crises fighting tools of central banks for example have been curtailed as a result of the last crisis. We just published a report by a group of 30 that a court said and it points out some of the weaknesses in the ability to respond to the next crisis. And that's something where I'm concerned. You can't always assume that the next crisis would be like the last crisis. You know it might come from a different area and we've reregulated the banks and the core of the financial institutions deposit taking banks a lot. We have really done very little on market based finance and on what we call shadow banking. And if the next crisis hits that part of the financial system it won't help you that the banks are much more stable which they are by a multiple factor. But the financial systems as a whole might still have some fragility that were not addressed as a result of the crisis.

Nancy: Overall too with many already talking about ECB president Mario Draghi's successor I wonder if you want to see your own successor at the Bundesbank take that spot?

Axel: I think what I want is that the most able individual that Europe has will lead the ECB and I'm hopeful that Europe will move that way.


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