Asian emerging markets will remain attractive in 2014

Chairman of Lloyds Banking Group Sir Win Bischoff says that despite political tensions in South East Asia and between China and her neighbours, Asian emerging markets will continue to remain a major draw for western financial markets in 2014.

Sir Win, who announced in May 2013 that he will step down from his role in April this year, was at Asia House on 8 January 2014.

Speaking to Asia House exclusively after a private breakfast briefing for Asia House Corporate Members, the City grandee said China would continue to see growth this year and Japan would emerge from decades-long sluggish growth.

Sir Win is credited with turning the part-nationalised bank’s fortunes around and overseeing its return to prosperity and a radical restructuring after it was rescued in 2008 by the UK Treasury from the verge of collapse. The Treasury bought 43 per cent of its shares.

Sir Win took the role of Chairman up a year later and has steered the bank through a difficult period in which the financial sector has been plagued by various scandals and thousands of jobs at Lloyds have been cut.

Last year Sir Win announced he would retire from the now 32 per cent of UK taxpayer-owned bank before the shareholders meeting in May 2014. He has not revealed what his future plans are.

At the private invite-only briefing, held under the Chatham House Rule, Sir Win’s perspectives on the changing environment for financial institutions both in the West and in Asia and the impact of regulatory reform in the financial services industry were discussed.

It was attended by representatives from Asia House’s corporate members, including Standard Chartered, Herbert Smith Freehills, EY, KPMG, Harvey Nash and Eversheds.

After that meeting, in a separate interview with Asia House, Sir Win said: “Eighty per cent of growth in the world economy is still expected to come from emerging markets”

Africa also becoming attractive to Western investors

He said these markets were not confined to Asia but also included Africa, particularly Central Africa, as well as Nigeria, South Africa and Egypt (which he thinks will bounce back in spite of current political turmoil) and other North African countries.

“Africa is small but it’s been left behind for so long that it has become quite attractive,” he said.

He said Asian emerging markets would remain attractive to western financial markets “due to their faster economic growth rate and greater ability to make things happen,” even if some of their institutions might not be as well developed and the region was facing some political tensions.

Growth rates of Asian economies “would be tempered to some extent” by the continued tapering of quantitative easing in developed markets and some hot money would flow out, he said, but it would be balanced by an increase in exports from emerging markets as developed markets would provide better markets to the emerging market goods. Tapering would not take place unless developed markets were growing, he added.

Japanese economy to bounce back and India & China to continue to see growth

Sir Win was optimistic about growth prospects this year for recession-prone Japan, saying: “Japan is going to show some growth again. I think Japan is an interesting economic experiment. I don’t think anyone knows whether Abenomics is going to work. Some of us feel it deserves a chance because if it works other countries might want to copy it.”

He was also optimistic that India would continue to see growth but that the growth would not take off until after the spring general elections. “India is still an attractive market,” he said. But he conceded India would not see the same high growth it had seen during the past decade.

China would see “fast growth by everyone else’s standards” but “moderate growth” by her own standards, he added.

Sir Win said he thought the reforms announced at the Third Plenum in Beijing would have a “positive impact” on foreign investment in China “not hugely because people are looking at those reforms, but because people are looking at China as a whole very positively. These reforms may give some comfort to those that will want to invest in China,” he added.

But Sir Win was not persuaded that the recent shadow banking reforms announced by the Chinese Government to regulate and supervise non-bank lenders would do much to help rebalance the debt to GDP ratio yet.

“These kinds of reforms won’t do that immediately,” he said.

He said by, traditional measures, Chinese debt to GDP ratio was low “but we don’t know how large the shadow banking sector is. I think shadow banking to the extent that it becomes a large factor in China needs to be regulated in some form and that is what the government is doing.

“But I think it would be disastrous if it was totally dismantled because it would remove some types of legitimate credit. Regulation is something that needs to be looked at and the Government is doing that.”

Shadow banking is estimated to be a multi-trillion dollar industry in China but there are concerns it has fuelled an explosion in debt with some commentators estimating the debt to GDP ratio in China to be more than 200 per cent, comparing the risks to  the US sub-prime crisis that led to the 2008 financial crisis.

As for ASEAN’s impact on the Asian region, Sir Win said “it is not a political construct.” But he added: “Of all the Asian countries, the economic case for them integrating is strong,” he said.

“Whether ASEAN will become a force to be able to deal with India and China on an ASEAN basis rather than countries doing so bilaterally, we will just have to wait and see. There are signs that it is becoming more of a voice. I don’t think it’s becoming as important as a bloc yet. The economic side of it is fairly clear for the component countries of ASEAN but the political side of it and the ability to speak as one voice is uncertain.

“Economically I don’t think that the Indonesian presidential elections will have an impact on the other Asian countries but there is of course a hope, just as even in Europe, the elections in Germany have an impact on the EU, but economically many of these countries still stand on their own.”

He then spoke about the mis-selling and other scandals that have blighted UK retail banks in recent years.

Bankers that have brought the profession into disrepute must be punished 

“One of the things that I think is very important to the public at large is that those people who have brought banking into disrepute are punished,” he said.

“Banks also need to make sure that banking services are not offered in ways which  are only profitable for bankers. It is not right to sell inappropriate services or products without looking at what the needs of their customers are.”

Commissions connected to sales of products and services should be made very transparent to the public but the public also had a responsibility to improve financial literacy. He said the public “needed to understand that they do not have to sign up for credit cards and inappropriate products.”

He added: “Punishment needs to be brought in by regulation not just via internal sanctions. I don’t think we have been very good at telling the story of what the banks are doing but the public perception is that not enough has been done, unlike in other professions like accountancy. In my view it should not just be done by the banks by themselves,” he said suggesting the Financial Conduct Authority is taking a robust role in investigating the activities of bankers engaged in unethical practice and holding them to account.

naomi.canton@asiahouse.co.uk

The Public Policy series, which consists of private briefings with high-level political figures, is open exclusively to Asia House’s corporate members.
Click here for more information about corporate membership.