Below is the transcript of a CNBC interview with Jing Ulrich, MD & Vice Chairman of Asia Pacific, JPMorgan Chase and CNBC's Geoff Cutmore. The interview took place at CNBC's inaugural tech conference, East Tech West, in Nansha, Guangzhou.
GC: Jing, lovely to see you, thanks so much for joining us, here at our CNBC event. I just want to clear something up, before we move on. Jing, is it true that they call you the Oprah Winfrey of China?
JU: I guess-, first of all, good afternoon, Geoff, and good afternoon everyone. Great pleasure to be here, at the CNBC event, and I must say, you've got all the high-powered anchors here, so if I'm Oprah Winfrey, I should be the one asking you all the tough questions.
GC: Oh, now I'm really worried. But-, but let me ask you, they also say that you are the unofficial voice of China. What exactly does that mean?
JU: Well, Geoff, it's a great honour to be called a voice of China. So, I've been interpreting China, to the outside world, for many years, 'unofficial' meaning non-governmental, so I'm here to share with everyone our independent views on what's happening in China, or JP Morgan's views on what's happening in China, and make some projections and predictions, and hopefully we can help shed some light on what's happening, truly, in the technological world, in China and globally.
GC: Terrific. So, we had a poll at the beginning, I think we got a sense of the mood in the room. Let's see if we can help these folks in the audience make some money this year, what's left of it, at least, and next year, by setting out the stage, as you see it. And I just wanted to start off with something very news-y. We are just a few days away from a very important G20 meeting in Argentina, the stage is being set, by Donald Trump's Twitter feed, for some kind of movement towards a trade agreement between China and the United States, this is something the markets are very nervous about. Can I ask you, how optimistic, or otherwise, are you about us being able to see progress at the end of this week in Argentina?
JU: I think, Geoff, we will see some progress. The two sides hopefully will at least agree upon some kind of framework, to begin negotiations. Obviously, there's a long path ahead of us, and that path will be bumpy, but at least some sort of temporary truce will be very helpful, in the current very volatile capital market environment. So, these days, as you know, the Chinese economy is showing some signs of weakening. Even the US economy has done very well so far this year, but in 2019, given some of the headwinds that are coming, the US economy will not be performing quite as well as it did in 2018. So, the trade tension obviously has been the number one concern on the minds of corporate leaders and investors alike, so I think at the upcoming meeting, in Argentina on Friday, there should be some sort of agreement on a framework for the two sides to negotiate. Now, Donald Trump said, overnight, that it's very likely that he is going to impose further tariffs on probably $200 billion of goods. As you remember, currently the tariffs are 10%. Those tariffs would likely go up to 25% on January 1st of 2019, and then you have another $267 billion of goods, as well, right? So, it looks like, at least for now, increased tariffs are something we should be factoring in to our business forecasts and business models.
GC: When you look at how much the markets have already taken on board, it is clear that China has felt the pain, disproportionately, in capital markets. The Shanghai Composite, I think, is off over 20%, year to date, some individual stocks, like Tencent, are down over 40%, and when you look at the measurement of the premium that the US enjoys to China at the moment, on a PE basis, it's something like 51% to the Chinese market. That seems somewhat unfair, that China appears to have taken the greatest pain from this row around tariffs. Or is it about something else?
JU: Well, you know, we have had a divergence in market performance this year. The US was doing very well, up until the most recent months, and global markets, emerging markets in particular, have performed badly, because of the pressure from trade, slowing economy, capita (inaudible) flows, and also, in the case of China, the country has been undertaking the deleveraging campaign for the past two years. So, credit has been very tight, especially for private companies, and small and medium-sized companies, so you have basically a tightening environment, in terms of credit, but also, on top of that, you have sentiment issues. A lot of investors and consumers are watching the uncertainties unfold, they're beginning to reign in their spending. So, you remember, Geoff, if you look at the Chinese economy, 65% of the growth is actually coming from private consumption these days, and private consumption is the number one driver for China's growth. Now, as consumers are seeing the uncertainties unfold, they're beginning to spend a little bit less, they're spending on cheaper items, so that is going to affect the economy, going forward. Secondly, another part of GDP that's important is investments. So, investments, very simply, fall in to three categories. Investments in manufacturing capacity, investments in real estate, and also investments in infrastructure. All three areas, so far, this year, have been slowing down. In property, we know, we had obviously very high home prices, the leadership has been clamping down on speculation, real estate investments have been slowing, manufacturing, you all know, a lot of the industries are in overcapacity, therefore those investments are also slowing. Plus, infrastructure, local governments have pretty tight fiscal positions, they don't have a lot of money to spend. So, that's why a confluence of factors are contributing to the slowdown in the Chinese economy. And, very interestingly, export growth has not shown much slowdown at all, contrary to people's beliefs, and that is because a lot of the exporters are frontloading their exports, they're rushing to export to the US as much as possible ahead of the holiday season, because, come January 1st, tariffs are likely to go higher. So, that's a mix of factors that's been influencing the Chinese economy. On capital markets, we have another set of issues, of course, challenging the performance, we can go in to a bit more detail later.
GC: Just on the tech side, because I know a lot of our audience here are very technology-focused, and they would like to know just in which direction things like tech IPOs are going to go, and the opportunity to get funding for startups, and so forth. As you look at what was a very hot private equity market for funding technology startups cooling, do you think that is going to recover, in to next year? Or actually, do we have to become a little bit more rational about the kind of funding that companies can expect?
JU: Well, so far, even though the markets, both in the US and in Asia, have had a correction, the capital market is still wide open. We still have IPOs that are happening every day, here in Asia and in the US. Investors are still looking for the best companies, with the strongest business models, and projections for growth, to invest in. So, there's a lot of capital still looking to find a home, but of course, valuation has come down quite a lot, and a lot of the issuers are becoming more realistic about their assumptions, how much money they can raise, at what speed, what sort of valuation. But I would say, obviously, the bubble that we had before has somewhat deflated. Going forward, the environment will be a lot more challenging, compared to before, but I would say the best companies will still be able to raise the capital that it needs. In the technology field, China has done very well in the recent years. In some areas, China is actually surpassing, and in the future years, could be upstaging the US. For example, in the area of AI, China has done very well. As we all know, AI really thrives on a lot of data, and China, really, is the Saudi Arabia of data. If you think about oil, oil, Saudi Arabia has a lot of, China has a lot of data, right, and also, robust computing capabilities. So, the Chinese AI industry is really, really advancing very rapidly. There are many companies in this industry that will seek to raise capital in the future years. In other areas, such as payments, e-commerce, arguably, China is already leading.
But the interesting thing is, you know, we have kind of a division between the US and China, in terms of technology, in terms of the ecosystems, right? The US has FAANG, China has BAT. It appears we may be emerging in to, sort of, two parallel universes, right? One led by the US, one led by China.
GC: The question, I guess, obviously presents itself, then. AT this point, would you buy FAANG stocks that have come down in value? Or would you buy the Chinese technology stocks that have come even further down in value? Which look the better prospect, running in to 2019?
JU: The Chinese companies have corrected more, so if you look at the performance, clearly the Chinese stocks have done worse in the capital markets, compared to their US counterparts. But even looking at FAANG stocks, there are five companies in that basket, BAT had three companies in that basket, they all share-, they all actually have their own individual dynamics. It is very hard to say which individual company you would buy, among the FAANGs, or which individual companies you would buy among the BAT companies. But I would say, in the short to medium-term, given the market volatility that we have, right, people should look at valuation. The Chinese companies have come down a very long way, so valuation appears to be more attractive. But in the medium to-, to long-term, I would say, the Chinese technology sector will still make advancements, despite the trade tension. No matter where, or which direction the trade winds are blowing-, trend winds are blowing, the Chinese technology sector will still make advancements. Interestingly enough, if you think about it, right, the talk of Made in China 2025 may have been diplomatically toned down, in terms of rhetoric. The ambition, the talent in China remain, and rather counterintuitively, because of the trade tension, I think China will actually galvanize more of the national resources, to try and make even greater advancements in technology, especially in areas where the country appears to be more vulnerable today, such as semiconductor chips.
GC: Can I ask you, then, about the broader economic outlook? We'll come to China specifically in just a moment, but you mentioned, some of the other issues that are roiling capital markets at the moment, they're also raising concerns about growth momentum. We've got problems in Europe, the whole Brexit story continues to unravel, Italy is an issue, as we look at the budget, and then, elsewhere, as you focus on different parts of the world, GM just laying off workers, in the United States, some indication, perhaps, that that engine of growth for the world economy is beginning to slow. So, putting this all in a basket, does next year look like a much weaker year, globally, for growth, and capital markets will just have to reprice off that?
JU: Well, capital markets have already been taking in to account slower growth to come in 2019. That's why, in the last several months, capital markets haven't performed very well. In fact, for the entire year of 2018, 90% of various asset classes have not done very well, so that includes equities, that includes some of the currencies, as well as commodities, right? So, the market, in some ways, is already discounting slower growth in 2019. Now, in the US, of course, you know, we've had 3% plus growth, thanks to the tax cuts, and really fabulous corporate earnings growth, and gains in productivity. Some of those factors will begin to wear off in 2019, so definitely you will see slower growth in 2019 in the US. Now, looking at China, it's very interesting, GDP in China, $13 trillion, right? The US is about $18 trillion. Now, if you look at the region where we are in, you add up, okay, ASEAN, 10 countries, GDP about $2.5 trillion in total, India, $2.6 trillion, Australia, where I just came from, overnight, $1.8 trillion, Japan, $4.5 trillion, Korea, Taiwan, you throw everything in, they add up to China, about $13 trillion dollars. This means China is 50% of Asian GDP, and it is 16% of global GDP, and, most importantly, China is 35% of global growth. So, the reason why CNBC, and all the guests here, are focusing on China, is because the importance of China to global growth, right? So, in 2019, we're looking at growth to slow somewhat, from this year, 6.6%, to about 6.1%, because of the various issues we discussed, but I think the important thing to note is that the Chinese economy may be bending, it is not breaking.
GC: There is a lot of hope pinned on the government stepping in and providing self-help support for the markets here, either monetary, or fiscal, or some other form of support to the private sector, through banks being encouraged to extend loans and maintain lending lines. Some people are value hunting in the Chinese equity markets, because of that. As the unofficial voice of China, do you think the government will accede to pressure, from the banks, and from companies, and will start stimulating again?
JU: Well, we are already seeing those measures being put in to action, so in terms of fiscal policy, the leadership this year is not using so much investments, like we saw in 2009, in the wake of the financial crisis. Fiscal support is more likely in the form of tax reductions, uh, especially for individuals and SMEs. In terms of monetary policy, it is very difficult for the central bank to cut interest rates, because the US interest rates are on the rise, and there is pressure on the Chinese currency, so therefore, what the leadership is doing is to try to increase liquidity, or the availability of credit to the Chinese economy, by urging banks to lend to privately owned companies, and also, simultaneously, cutting the reserve requirement ratio for Chinese banks, giving them more liquidity. But, importantly, in terms of confidence, I think the leadership is trying to really bring back a sense of confidence for the Chinese consumer. As you know, they're the biggest spenders in the world, as they travel abroad, domestically, we have had wage growth, of course, consistently, you know, just below 10%, which is quite remarkable for such a large economy, but also, selective measures in certain city clusters, such as the Greater Bay Area, where we are in right now, right?
JU: The Greater Bay Area is really quite remarkable, you know, it's nine cities in Guangdong, plus Macau and Hong Kong. GDP is $1.5 trillion dollars, the population in these nine cities, plus Hong Kong and Macau, is 17 million people. We just had the fantastic bridge open recently, you know, that's 20 times the length of the Golden Gate Bridge, right? 20 times. It's 34 miles long. It is truly a marathon bridge, and I Think they should rename the bridge-,
JU: The Marathon Bridge. Right? So, a lot of infrastructure investments are being put in, that bridge, itself, is $20 billion, and that, of course, will help integrate the Greater Bay Area, also helping really the freer movement of capital, talent, and also technology.
GC: There is an issue of overinvestment, though, in some parts of the economy, and people are concerned about that, because that investment now perhaps means that investment won't happen in 2019 or 2020. Should people be concerned about that? Or are other programs, like One Belt One Road, going to make up for some of that reduction in capital investment?
JU: Well, there are different kinds of capital investments, right? What the Chinese leadership does, and other governments don't do as much, around the world, is basically the Chinese government invests in infrastructure which helps enable companies to develop faster. So, in-, we just talked about the-, the Greater Bay Area, in terms of the bridge, and high-speed rail linkages, right? So, what the Chinese leadership is doing, is putting a lot of money in to infrastructure, and infrastructure is an enabler of technology. In terms of other capital investments that you're referring to, in areas such as traditional industries, heavy industries, which are not earning much money, they are frankly investing a bit less, because, look, they cannot make any money. This whole supply side reform has been undergoing for a number of years now. So, those investments have been really significantly scaled back. One area I would watch very carefully is real estate, because real estate is a critically important industry. It accounts for 10% of GDP. But then it has so many other related industries, right, from commodities to construction materials, and housing prices have so much impact on people's overall investment sentiment, as well as their desire to spend. So, I would say, in the new year, the leadership will try to stabilize the property market, making sure prices don't plunge, and making sure there's a healthy growth rate in property investments, which will help spur other related areas.
GC: In your expectation, then, the property construction boom that we've seen will be curtailed, because that would help maintain prices, plus it would also fit in with the broader idea of deleveraging some pockets of risk in the economy.
JU: I think you are-, you are right. Uh. Deleveraging obviously has been an important goal of the Chinese leadership. Total leverage of the country, in terms of, uh, government debt, corporate debt, individual household debt, is 268% of GDP, so that's why the leadership really put a focus on this area, in the last two years. However, right now, I would say the number one priority for the leadership is growth and stability. So, therefore, in the coming few months, we don't think there will be such an effort to slow down the leverage. In fact, the leadership is urging the country, they're urging more credit to be disbursed, to especially small and medium-sized enterprises.
GC: And I just want to finish on the yuan. You talked a little bit about those Chinese who want to travel, who want to go to other parts of the world. Will they be doing that with a currency that's less valuable next year, than it is this year? There are some concerns, internationally, that the government is using currency weakness as a way of both fighting the trade war with the United States, but also managing its own competitiveness.
JU: Well, the currency obviously has a big impact on the Chinese consumers' spending power overseas, and Chinese people are probably the smartest at currency arbitrages, right? Remember when the Turkish Lira plunged, a few months ago, a lot of Chinese shoppers basically rushed to Turkey, to buy up the luxury goods, before the brands had a chance to increase their prices in the local currency, right? And we've seen that, time and again. So, Chinese consumers are very astute, in terms of selecting the best products, at the best prices, in the best locations, right? So, you know, this year, around 150 million Chinese people are travelling overseas, and this is a very large number, and their spending power is really the first, number one in the world, as they travel to Europe, and the US, and elsewhere, and they spend a lot of money. They have a love affair with luxury products and brands. Now, as the currency has weakened somewhat, so you think about, you know, this year, the Chinese yuan is 7%-,
JU: Depreciation against the US dollar. So, for Hong Kong, for example, products are more expensive, because the Hong Kong dollar is pegged to the US dollar, but also, the euro has weakened, so in Chinese yuan terms, the European region is not that unattractive. Also think about Japan, think about Korea, these are very favorable destinations for Chinese travelers. So, I would say, in the near-term, because of sentiment, because of the weakness in the currency, there may be some headwinds for Chinese people travelling overseas and spending a large amount, but in the medium-term, the desire to buy authentic, um, products, with high quality, with heritage, and the desire to travel overseas, not just to buy goods, but also to have a fantastic experience, and really share that on their social network, right, the Chinese travelers conquering the world, one selfie at a time-,
JU: Um. I think that's going to continue.
GC: Shall we wrap it up on the-, on the selfie? We'll wrap it up on the Chinese selfie. Thank you so much, Jing Ulrich.
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