Nicolas Aguzin, chairman and CEO of J.P.Morgan, Asia Pacific, in this wide-ranging interview, discusses the steady progress in China’s financial liberalization efforts; challenges global banks face with already-huge Chinese players in the electronic payment space — like Tencent; why India’s Aadhaar system (biometric iris and fingerprint scanning), with 98% of the adult population registered, may become a game-changer for world credit markets; and how J.P. Morgan’s is spending $3 billion a year on new technologies, $600 million of which is earmarked to meet the fintech challenge. Aguzin said his bank can now be considered a tech company in its own right. His comments came during a break at the recent 2017 Wharton Global Forum in Hong Kong.
An edited transcript of the conversation follows.
[email protected]: What will be the highlights of banking growth and innovation in Asia over the next two to three years?
Aguzin: Looking across the region I am very optimistic about China, India, Indonesia and the Philippines. I would say these countries are going to continue to be interesting — most are growing at over 6%, and have substantially higher populations than any other country in the region as well as internationally.
[email protected]: Which sectors will see the most growth?
Aguzin: Each region is different. For example, China’s capital markets are very exciting. They are big and have great potential. Recently, index provider MSCI decided to include China in their index weightings, which means that 222 Chinese stocks will be part of the index and a lot of investors will now have to buy those shares.
Its domestic equity markets have a market cap of between $8 trillion-$10 trillion depending on when you measure it. That’s really big. And in terms of international banks like J.P. Morgan, being able to directly participate in this market it would be fabulous.
Another statistic that provides an idea of the scale of this market is that fees paid to investment banks for equity underwriting are about $2.5 billion, which is the size of Europe. So it’s a very, very significant and exciting market. We look forward to owning our own securities firm, which will allow us to participate directly in this market. It is the same with the bond market. The bond market is about $10 trillion, which is huge, and so we are very excited about the possibility of doing more domestically. We have just been awarded a bond underwriting license for China, which will help us grow.
And then there is everything that surrounds that. If you look at any of the business areas, that will also carry a lot of trading sales. Private banking is also a great opportunity. Half of the people that became billionaires in the last 12 months came from China. Even though today [the percentage of] billionaires from China is under 20%, it’s growing fast … they are all coming from China.
“We look forward to owning our own securities firm [in China], which will allow us to participate directly in this market.”
When you look at China, every single sector seems to be exciting. You look at outbound M&A from China — it’s just amazing what is happening. Last year, ChemChina bought Syngenta, for $43 billion. That requires lots of financing, capital-markets advice, hedging, risk management — all types of activities.
[email protected]: Regarding China opening up its markets more to integrate with the global financial system — some say that’s been a little bit slow.
Aguzin: The direction has been consistent…. Yes, they’ve introduced some controls in terms of speculative outflow of money, but in terms of our business, our possibility of acting and doing business in China, the direction has been consistent. We’ve been able to do more and more over time.
It’s true that today we cannot own 100% of our own securities company in China. We believe China has to change that, and I believe they know that, and they will. But overall the direction will continue to be one of more openness, more participation by international players, and we welcome that.
[email protected]: How long might that take?
Aguzin: Overall, I don’t think we can put a time scale on it because China will never be exactly the same as the U.S. as they will have their own model of democracy and their own model of capitalism. When will foreign securities firms be allowed to own over 50% of a securities firm? It could be one year, it could be five years but it will happen. But over the last year and a half, we have seen the introduction of the Shanghai-Hong Kong Connect and Shenzhen-Hong Kong Connect, where investors in one market can trade equity shares in the related market using local brokers; and Bond Connect, which allows non-mainland investors to trade Chinese corporate bonds. And while we are still not able to buy 51% [of a Chinese securities company] the amount we can buy has increased from 33% to 49%. Progress is going in the right direction.
[email protected]: How about when it comes to private banking, wealth management, the ability for the Chinese to take their money out of the country and invest it more freely — there are lot of limits on that now…. Do you see that opening up in the same kind of timetable?
Aguzin: It is happening and has been happening. It takes a bit longer now to be able to take money out of the country but investors can take money out, and invest in international products. Then you also have insurance companies, which can invest up to 15% of their assets under management internationally. Right now they are investing 4% or 5% of their assets overseas, so if they wanted to invest more they can. They are starting to expand.
It’s similar when you look at the money coming into China. International investors invest about 1% to 2% into both the domestic bond and equity markets, which is very small. But as more money flows out of China, more money will flow in. In addition the renminbi will become fully convertible and that will also lead to greater cross border investment flows.
[email protected]: One hiccup we’ve seen is in the IPO market – it has opened and shut….
Aguzin: That is correct if you are referring to domestic IPOs. If a company wants to do an IPO in Hong Kong, they are free to do an IPO in Hong Kong. That hasn’t been limited. What has been limited are domestic companies issuing IPOs in the domestic market for domestic investors.
[email protected]: The U.S. has dropped out of the Trans-Pacific Partnership. And at the same time you see China cranking up investments, or making money available to other countries with the One Belt One Road Initiative. Do you think the U.S. is losing some preeminence in Asia?
Aguzin: Anything that increases interaction between companies and promotes globalization is good — a positive for the world. Obviously, it has to be done in a logical way and China is clearly on its front foot in terms of trying to increase trade and activity among a group of countries along what they call the One Belt One Road corridor. It’s a pretty big area that covers two thirds of