Supporting China from the perspective of a foreign bank

Transcription

1 Supporting China from the perspective of a foreign bank Speech by Douglas Flint Group Chairman, HSBC Holdings plc Cass Business School Dean s Lecture London, 17 September 2015 It is an honour to be invited to deliver the Dean s Lecture here at the Sir John Cass Business School. Let me start by congratulating our hosts on the high quality discussion so far this evening, which is befitting the Cass Business School s reputation as the intellectual heart of the world s leading financial centre. I should also congratulate you on the foresight with which this event is being held. With China one of the foremost issues currently on everyone s minds for obvious reasons, the Chancellor of the Exchequer due to lead the latest economic and trade mission to China this weekend and President Xi Jingping set to visit the UK next month, it is difficult to imagine how this event could have been more immaculately timed. Seven years after the financial crisis, it is easy to forget that we continue to live in extraordinary times. We have become used to monetary conditions that, in historical terms, are highly abnormal, and we have started to take for granted the fact that low growth in developed markets can be compensated by high growth in the emerging world. Over the course of the next five years and beyond, we will need to adapt to new conditions which do not resemble those that we have experienced in recent years and months, and we have had a foretaste of how unforeseen conditions can impact global markets with recent events in China. In recent years China has done more than any other country to support global growth. In 2013, China accounted for only 12 per cent of nominal global GDP, but was still responsible for half of all global growth. If Chinese infrastructure investment had not surged, commodity prices would not have recovered as quickly. Emerging nations would have been short of export revenues and some would have been faced with a balance of payments crisis. If the renminbi had not been allowed to appreciate, currencies in much of the rest of the world would not have depreciated, monetary conditions would have been tighter, and deflationary pressures more intense. Having helped the world manage its imbalances, China is now addressing its own. This was never going to be an easy process, and the stock market sell-off and depreciation of the RMB that followed reform of its fixing mechanism are just two examples of the kind of fluctuations that have occurred. As China continues to open up its financial system, there will inevitably be more to come. This is normal in a market-oriented economy. Rather than undermining the case for reform, today s challenges underline the need to continue along the path of reform with both caution and conviction to arrive at what the Chinese leadership term the new normal. None of this diminishes the fact that China continues to face significant challenges as it attempts to shift from a period of exceptional growth to a more sustainable model in a way that no other country has tried to do before. PUBLIC 1 Copyright HSBC Holdings plc 2015 ALL RIGHTS RESERVED

2 But even in the current challenging conditions, China retains the necessary levers to manage the shift to a more sustainable model of economic growth. It has the room to cut interest rates to boost domestic demand. It can cut reserve ratio requirements to increase bank lending capacity. And it can deliver strong fiscal support for growth. The data suggests that China will stage a modest recovery in the coming quarters, with full-year growth of around 7 per cent. We should also remember that even 5 per cent growth this year would add more to world output than 14 per cent growth did in This is the current context in which foreign banks are operating in China, but HSBC s involvement in supporting China s economic growth dates back much longer. As you will most probably be aware, HSBC s roots lie in Hong Kong and Shanghai. Founded there in 1865, we have had a continuous presence in China ever since. When I look back, our outward expansion was very similar in geography and strategy to what we are seeing from the major Chinese banks. The only huge difference is we were very small when we began not like the global giants of the China banking system today. Like all foreign banks at the time, HSBC was initially focussed on trade and investment. The rapid growth of international trade in Asia had created demand for more sophisticated banking facilities, and it was the provision of trade finance which drove the expansion of our Asian network. From there, we developed an international reputation through our involvement in government finance. Prior to the establishment of a Chinese central bank in 1928, HSBC acted as a financial agent, depository, adviser and underwriter for the Chinese government. We handled China s first ever public loan and most public loans thereafter, including for the construction of railways and other infrastructure. Until 1935, the daily exchange rates published by HSBC in Shanghai served as China s official exchange rates, and we were even responsible for handling Imperial Maritime Customs and the Salt Tax, one of China s main sources of public revenue. It was the ground-breaking economic reforms in the late 1970s that laid the foundations for the modern-day Chinese economy and for the modern-day HSBC in China. By allowing us to expand the range of services we offer and the number of locations we operate in, HSBC became the largest foreign bank operating in China. Today we have 175 outlets in 57 cities, covering 23 provinces and municipalities including all those with free trade zones, and more than 90 per cent of China s GDP. So our roots are in China, our growth has been directly linked to China s economic growth, and our future success will be driven in part by our success in supporting China s continued financial reform. In reflecting on the opportunities and challenges facing a foreign-based bank like HSBC in China today, it is worth putting that within the context of our overall strategy. Our strategy is aligned to two long-term trends. Firstly, the world economy has become ever more connected, with growth in world trade and cross-border capital flows likely to continue to outstrip growth in average gross domestic product. Over the next decade we expect 35 markets to generate 90% of world trade growth with a PUBLIC - 2

3 similar degree of concentration in cross-border capital flows. Secondly, of the world s top 30 economies, we expect those of Asia-Pacific, Latin America, the Middle East and Africa to have increased by around four-fold in size by 2050, benefiting from demographics and urbanisation. By this time, they will be larger than those of Europe and North America combined. By 2050, we expect 18 of the 30 largest economies will be from Asia-Pacific, Latin America or the Middle East and Africa. Leading countries in the world, like China, will connect through trade and investment to all these regions. For an international like HSBC bank to take full advantage of these trends requires having both an international network and the global product capabilities to capture revenue opportunities from international trade flows and movements in capital. Decisions taken throughout our history have given us the global reach and the range of services to put us in a strong position to serve clients as they grow from small enterprises into large multi-nationals and expand geographically. We have two home markets Hong Kong and the UK and have a meaningful presence in over 70 other countries. We never forget we are therefore seen as a foreign bank in most of the places we operate. We aim to turn that to our advantage by delivering the capabilities of our international network through our domestic presence, often in conjunction with local partners, to the benefit of locally based customers. We are at a point in history where the role of foreign banks is very different from the past; no longer in most markets and certainly not in China is it possible for foreign banks to offer domestic banking services that trump the capabilities of local banks in serving the mass market; but their differentiated position in overseas markets may bring product capabilities, market access or connection with customer bases that complement local capabilities in supporting the financial needs of domestic customers or of inward investors. That is how we and indeed other foreign based banks can support China s growth opportunities. Let me expand on what this means in practice. Through developing tailored services in corporate banking, trade finance and international payments foreign banks connect Chinese corporates with international markets as they pursue outward investment. We expect China to be a net exporter of capital in the very near term so access to foreign financial market skills, experience and connections is important to that investment flow. For HSBC specifically, we support outward investment through a network of China desks 20 currently staffed by senior Mandarin speaking bankers, who are there to help Chinese enterprises identify new business opportunities, deal with local regulatory and investment procedures and access the necessary financial and other services they require. Feedback confirms that access to a local Mandarin speaking presence, cultural familiarity but with local market and regulatory knowledge really does ease connecting to foreign markets. The China desks are also able easily to liaise with the home bases of outward investing companies. On top of this HSBC s co-operation with our associate bank in China, Bank of Communications, is evidence of the transition taking place from sharing best practice and training, to sharing client opportunities and making business referrals. Chinese outward investment is now well established and already highly influential in a variety of sectors, including IT, automobiles, PUBLIC - 3

4 food and even airports and nuclear power; and household brand names and national symbols from Weetabix to Thames Water and the London black cab are now owned or partly owned by Chinese companies. As China moves from reliance on manufacturing to increasingly high tech services the need to expand internationally to gain market access, talent and technology is ever more evident. For Chinese companies already invested overseas, foreign banks support their foreign currency needs and cash management needs for example for one of China s largest international companies we have helped to establish its regional treasury centre. On a broader theme, foreign banks have a critical role to play in supporting the internationalisation of the renminbi. From a standing start, the renminbi is now the world s number two trade currency. Since 2010, the proportion of China s total trade settled in renminbi has increased from 3 per cent to 22 per cent. We expect it to top 50 per cent by Last year, the renminbi broke into the top five payment currencies in the world for the very first time. And 35 central banks have now invested or expressed an interest in holding RMB as part of their currency reserves. History teaches us is that change in a currency s role is inevitable when an economy is both strong and sizeable and when its trading pattern internationally is significant. It also guides us that change takes time, has to be carefully planned and requires significant investment in financial market infrastructure and development. This has unquestionably been the case in China, where Beijing is attempting to shift from exceptional growth rates to a more sustainable model whilst undertaking a comprehensive programme of financial reform. As it is, Beijing has managed a gradual deceleration from double-digit growth in a measured and controlled way. It has avoided uncontrolled reform and quietly but steadily opened China s markets to outside investors. And it has started the transition from an economy built on the power of the state to one that relies increasingly on the private sector. As the Economist magazine pointed out only last week the private sector is responsible for around two-thirds of all economic output today and almost all of the 250 million plus jobs created in cities since As a result, the barriers to the expansion of the renminbi s importance are falling faster than many commentators thought possible. And this is where foreign banks are contributing from acting as RMB advocates in their own markets, encouraging corporates to use the RMB for trade settlement by ensuring keen pricing and plentiful liquidity, to working with the designated RMB settlement banks to link with local markets, to encouraging central banks to establish swap lines to enhance RMB liquidity and by encouraging leading corporates and governments to issue in RMB to reinforce market acceptance and establish offshore yield curves. Foreign banks are also working with the Chinese authorities to advising on how best to grow China s capital markets to offer additional financing options. China s onshore bond market will play a huge role as a key funding channel to support China s long term economic growth and the establishment of a modern pension system. One thing for certain is that more foreign issuers and investors are needed to participate in the onshore market. The establishment of the Shanghai-Hong Kong Stock Connect is helping to facilitate this process and foreign banks are working together with both public and private channels in China to engage the international issuer and investor PUBLIC - 4

5 community, share best practices to further support China s onshore capital market development. And foreign banks are linking international investor demand to tailored product potentially of great importance to China as it develops its capital markets. For example, green bonds are growing in popularity and significance. Last year saw a tripling in their issuance, from USD 11 billion to USD 37 billion, and we expect this to reach USD 100 billion this year. This added an important asset class to the RMB and marked its entry into a sustainable finance market that is expanding in size and scope and of potential great relevance to China as it seeks to build its infrastructure sustainably. McKinsey estimates that the global infrastructure demand will have reached USD 57 trillion by 2030, of which USD 16 trillion will be from China alone. Global infrastructure spend is currently estimated at USD 9 trillion so there is a massive financing gap to bridge. China s Silk Road Fund backed by 40 billion US dollars of investment is designed to help revive intercontinental land routes through central Asia and maritime links through southeast Asia. China and 56 other countries including the UK are also establishing a new Asian Infrastructure Investment Bank to help fund it. Some have already labelled this as China s Marshall Plan, in comparison with the widescale economic support provided by the US to rebuild and modernise European economies after the end of the Second World War. Whether this description is fair or not remains to be seen, but it does reflect perhaps even underplays the level of ambition in China to provide the infrastructure that will accommodate billions of new consumers and commuters, and to establish a global influence reflective of its position as the world s second largest economy. A further major source of opportunity is the expansion of the Pearl River Delta in Guangdong. The Pearl River Delta already has a population of nearly 60m, a GDP of nearly US$900bn which is equivalent to approximately 35% of the UK GDP, and trade flows of more than USD1trn which is similar to that of the UK. More open borders and improved transport connections will create a single metropolis, which in time could potentially represent another Hong Kong. And finally both with the regulatory and public policy communities as well as with our peer institutions, foreign banks and indeed organisations like the IIF are keen to share best practice, offer training and secondment opportunities, engage in international regulatory reform analysis and discussion of importance to China s banking system. In this last regard we recognise that what might work for the US or European banking systems might not translate well to China and so unintentionally constrain support for economic growth. We don t want to see this happen. None of this is altruistic we all benefit from a strong and growing Chinese economy. So to sum up, foreign banks working with their counterparts in China, share a great opportunity to satisfy an evident and growing client demand for the broader range of financial services and product innovation that will further drive China s economic growth in a sustainable way. Even five years ago, the programme of internationalisation that China s leaders proposed for the renminbi and the going out policy for its businesses were regarded by some as highly ambitious in both scale and scope. Yet few could have expected these to move so far, so fast. PUBLIC - 5

6 Inevitably there will be obstacles along the way. But the long-term drivers of growth remain sustainable and the opportunities are great. To share in the benefits of China s expansion and the internationalisation of the renminbi, foreign banks have to share China s ambition and work together to combine our experience and expertise with the inexorable demand for exposure to China s economic and investment flows. And if we succeed together, the benefits will accrue not just to China but to investors and businesses all over the globe, and the global economy more generally. Thank you for your attention. PUBLIC - 6