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Below is the transcript of a CNBC Exclusive interview with Jose Vinals, Group Chairman, Standard Chartered Bank. The interview was first broadcast on CNBC's Squawk Box Asia on 7 June 2019.
All references must be sourced to a "CNBC Interview'.
Interviewed by CNBC's Nancy Hungerford
Nancy Hungerford: As a bank that is largely exposed to emerging markets also listed in London and Hong Kong, you are no stranger to the geopolitical and trade headwinds that are out there at the moment. It's not officially on the G20 agenda that's being discussed here at the IMF meetings but certainly it's part of the discussion behind closed doors. How is it impacting the way you do business today?
Jose Vinals: Well I think that the trade tensions and the trade conflict that we're seeing between the United States and China is not good news at all for the global economy. In fact it's already having an adverse impact because it is taking a toll on confidence. It is also taking some toll on the markets and this is something which is being reflected in a worsening economic outlook. Now if you remember for example the forecasts that for instance the IMF provided a few months ago, it was a growth would be in this year 3.3% three decimal points lower than last year but that we would be moving upwards to 3.6% again in 2020. Now this rate conflict is clouding the picture. And what we can see overall is a softening of economic conditions in the second quarter. The last quarter of last year was not too good. And then there was stabilization in the first quarter and some improvement. Now we see a gain some loss of momentum in the second quarter. This is something which is widespread in many emerging markets but also it's happening in advanced economies like in Europe. You saw yesterday the decisions taken by the European Central Bank in terms of lower for longer even more interest rates not to increase until at least the middle of next year and that again tells you what the impact is.
Nancy Hungerford: Is this the right move for the ECB to be making when it comes to flagging this forward guidance or as a banker are you saying enough is enough with this era of low even negative interest rates?
Jose Vinals: Well you know all the things equal we would like to see interest rates going higher because that's something which helps profit margins. But also I think it's very important that central banks do what they feel they need to do. The ECB is seeing uncertainty increasing going forward and they want to provide more confidence. I think that increasing the forward guidance in terms of interest rates not pricing at least until the middle of next year I think is something that I can fully understand.
Nancy Hungerford: It did seem that Mario Draghi and his comments in that press conference was suggesting there seems to be a disconnect between what the markets are predicting in the way of something almost worse than just the trade tensions we have today. And I think he may be referring to what's going on in the bond markets versus the data the fundamentals that they see today not looking quite as bad as perhaps the markets seem to be implying when you look at your business around the world. Would you agree?
Jose Vinals: Well I think that markets always tend to exaggerate a bit and what we're saying is a bit of a [inaudible] between bond markets and stock markets and recently stock markets have been coming down and bond markets have been rallying and interest rates have been coming down especially at the long end. But I think that overall bond markets have been more pessimistic than the stock markets and I think the truth may be a little bit in the middle. So I mean there is no fear now there could be a global recession. But for instance the trade tensions between the United States and China are leading to a downward revision of some forecasts. And if we look at the analysis that different bodies may like international organizations or private sector what we estimate is that about half a percentage point of growth next year may be cut as a result of the tariffs which have put in place or this issue we put in place by the United States and China. These are data just released by the IMF. Our own calculations to that Standard Chartered are very similar. And this is something which is certainly not good news at all for the global economy.
Nancy Hungerford: And one thing that has really changed over just a few months. I remember being at another banking conference in Hong Kong where I spoke to your CEO Bill Winters and he and so many others were of the opinion that both the U.S. and China wanted to do a deal because really it's in their own interest and that sentiment seems to have shifted. People are almost waking up to the reality that perhaps neither side does want a deal because of their own realities not just on economics but on national security. Is that your opinion are we not likely to see a deal between these two at least at the G20 meeting?
Jose Vinals: Well it is very hard to know what will happen and there is still the G20 summit later on this month and I think that what we have seen is marked shift over the past couple of months of the mood. Two months ago, everybody was thinking there is going to be a deal. Right now expectations are it's going to be very hard for a deal to be there. Now I want to be hoping that there will be a deal but it's true that the recent moves on the part of the United States and China make this a less likely prospect than a few months ago.
Nancy Hungerford: What does that mean for your business in China? What are you seeing right now in the way of impacts from the slowdown there or any changes to the way you do business?
Jose Vinals: Well interestingly enough our first quarter in China has been really very good. In fact China has been the country doing best of the business that we have in great duration northern China. So far we haven't had a negative impact on the business. But going forward there would be an impact not just on China but on Asia in emerging markets. Even some advanced economies in terms of confidence. Now one thing that we have going for us is that given our footprint if there is some redirection of trade flows from China out of the United States into other countries in our footprint or from the United States out of China towards other countries in our footprint we're well prepared to capture those. So we have a significant degree of hedging in terms of our trade finance business. So that's something which is important and in any way the direct trade financing we do of the bilateral trade between the United States and china is something which is no more than 2 or 3 percent of our total income. So it's not that a big deal for us but the overall confidence issue. It is important for any company in the world.
Nancy Hungerford: And in terms of the trade finance business you do let's say with companies who are reorienting supply chains has that already benefited you in terms of the business demand you're seeing are you helping companies to redistribute the way they do business in the region?
Jose Vinals: Well we are helping our clients to satisfy their corporate needs. And already over the last couple of years there has been a shifting more in their shifting of production in the Asian supply chains from China to other countries and Vietnam has been a particularly important country receiving those investments from China and setting up production to export. So that is something which is already happening to some extent. And my impression is that this is something which is going to continue intensifying if these trade tensions continue.
Nancy Hungerford: And that is one area in which we talk about the winners of this trade fight the trade war. Even if you want to call it that but others we spoke to Robin Brooks the IIF chief economist yesterday and he was saying look the fact is these emerging markets face significant downside risks from the trade tensions and there is a belief out there that with the fed pivot. Perhaps that good news can help offset some of these headwinds that he didn't think it was enough. Do you think it's enough with the central banks with the Fed having their pivot and then central banks and a lot of the emerging markets saying ok we can follow that will it be enough to offset the negative downside?
Jose Vinals: Well I think that monetary policy can do something to offset some of the negative consequences. But at the end we're talking about something which is very detrimental which is this trade conflict because this is undermining one fundamental pillar which we had built our economic prosperity over the last four years which is global open markets. So I think that who are the winners and who are the losers in terms of specific countries we need to think whether the world is winning or losing. And I think that the world as a whole is a loser. And when that happens central banks are going to be under pressure and this means that the lower for longer is going to be even more accentuated in that entails aside consequences in terms of risk to financial stability. So the normalization of monetary policies could be further postponed as a result of this conflict and the world economic recovery undermined. And this is something we choose which is bad news for the world.
Nancy Hungerford: Is it bad news for a buildup of debt around the world?
Jose Vinals: I think it's bad news for everyone (Nancy: for a prolonged period of easy money) yeah, including for the holders because even if it's true that interest service may become or may remain low it's still the case that the ability to have revenues improving also comes down because if economic growth is more subdued then the sales of firms and the incomes of everybody households or companies is going to be adversely affected so it's not good.
Nancy Hungerford: Let's pick up on that theme of openness and how it pertains to China at the moment. You have a very good view as to what's going on in the way of China trying to open their capital markets and on the lines of the internationalization of the renminbi or the efforts to internationalize the currency that was part of the discussion here with governor Mark Carney and Axel Weber yesterday. What do you think the impact of the rift with the United States if it leads to more of an East vs. West tension economically and on security grounds will mean for the opening of capital markets in China. What are you seeing today? Any changes?
Jose Vinals: Well, I think that China has already made the decision to open up their capital markets and we're seen already elements of that in terms of opening up to foreign investment granting more licenses to international banks. We are international bank in China. We've been there for a 161 years and we are second to none in terms of having licenses to operate in capital markets as an international bank. So what we see is that China has made an unmistakable commitment to continue moving in this direction. Now it is true that geopolitics complicates everything and something that I think would be very detrimental to the world is if we were to move from the present state where we have seen the globalization process be quite you know holistic in the world to a sort of bifurcation of globalization where you have some countries and companies doing more business in operating in sort of the half of the world, which is globalized along the western lines. In the other half, in the part which is globalized along the Eastern lines. So I think that by vocation of globalization I think would be very detrimental for companies and would be very detrimental for countries in for regions.
Nancy Hungerford: Do you think it's coming?
Josey Vinals: Well I hope it's not. But this is something which is a more likely prospect now than it used to be a few years ago. And I think that it's a very adverse reality if it eventually materializes.
Nancy Hungerford: Another area of reversing some openness if you will open up the borders that hits home for you at Standard Chartered will be the Brexit discussions at the moment. And now it does seem as though many are increasing their own bets on the likelihood of a hard Brexit with Prime Minister Theresa May stepping down. We spoke to Martin Gilbert yesterday at Standard Aberdeen and he thinks as much of a 60 percent chance of a hard Brexit. Would you agree and what would that mean for your business?
Jose Vinals: I wouldn't want to put probability because I don't feel I know enough about that but I think it's true that the chances of a hard Brexit have gone up as have the chances for all the things that were not contemplated even a few months ago. But I think that as concerns our own business. We already quite some time ago. The decision to execute our contingency planning given the uncertainty surrounding Brexit. And then we have constituted a full fledged subsidiary in Frankfurt. And we have already started operating there. So we are hedged regarding any potential outcome that the Brexit process will have.
Nancy Hungerford: Is it frustrating though to think about how much time how much money that cost to put those plans in place given all the uncertainty that's still out there. It makes me wonder if you and so many of your U.K. and European peers feel that you're losing out to the US banks in some way because you have to devote these resources to making plans around Brexit when they could be spent on technology, innovation, and other areas that need improving.
Jose Vinals: Well, of course we are. We're spending on other things but there is an opportunity cost issue and the answer is yes. If instead of doing this we have been able to use its resources for other things it would have been better but things are what they are. And given the Brexit uncertainties we have to buy insurance and that insurance you have to pay for and that's what we're having. We have to have now a subsidiary which means we have to get capital before we didn't because it was a branch we could go right out of London. And now this is a more expensive operation. But again it allows us to provide the continuity of services to our European clients and this is something that for us is extremely important.
Communications Manager APAC, CNBC International
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