 Welcome to this World Economic Forum, a session jointly developed with East High Media Group. My name is Yang Yanqing. It's my great pleasure to moderate a session and our focus today is China's capital market. Before we begin the session, a very friendly housekeeping reminder that if you want to share the sessions through a social channel, you should use the hashtag WEF20. And we all know that China has advanced to open up its financial markets in the last few years by encouraging higher foreign stakes and also even Vofi, at the same time expanding cross-border investments through QFI, RQFI, Stock Connect and also Bond Connect and other different types of the schemes which has been highlighted in the recent signed China and the United States trade agreement. But more importantly, all this reform agenda has been on China's roadmap to the future, which will benefit China's financial and also economic strengths enormously in the long run. So our focus today will be what does a more open and more international Chinese financial markets in for the domestic players and also in the international players in the rest of the world. So we have a wonderful panel today here and next to me Mr. Sergio Ermotti. He is the group CEO of the UBS. He is also on the International Business Council of the World Economic Forum. And next to him Mr. Fang Xinhai. He's the vice chairman of the CSRC, China Security Regulatory Commission of China. And also next to him, Madame Carmen Reinhardt, a very famous economic professor in the international financial system of the Harvard Kennedy School of the government in the United States. And last but not least, Mr. Zhang Yichen. He's the chairman of the and chairman and also CEO of the CITIC Capital of Hong Kong, SCR in China. So we will focus on the opening up of the China's financial market. And seems to me there are two aspects of the opening up to the China's financial market. The first one is the institution. And China has encouraged a higher share from the international investors for a while. And also the timetable has been, has been ahead of the, ahead of schedule from time to time. So which is very good news to the international investors. But I also talked with quite some of these kind of international institutions. And they also very much eager to have a bigger room, also a big contribution to China's market. But it's interesting that after almost two decades of the opening up of the China financial markets to the foreign institutions, and they, their share in China's markets do very low. It's almost two or three percent, which is a very, very low compared to international standards. So my first question, I want to direct it to Chairman Xinghai. Why, why do you think that after so many times of the opening up, they only have a so small share of the, of the market power? So what kind of the opening up and regulatory framework we should have to support them to have a bigger room in China? Our purpose is not to increase the market share of the foreign players in China. Right? We want to, you know, level the so-called level of the playing field. So high quality foreign players can do a bigger business inside China. And one of the key decision that we talked last year, which will be implemented starting from April 1st this year, is to allow the foreign companies like, you know, Sergio's company to own a hundred percent of their operations in China. And that should remove a lot of restrictions for the foreign companies. So going forward, you know, foreign companies, I expect their share in the China business to increase, but again, they have to compete. Yeah, that's true. But at the same time, they are eager to compete in the, in the fair and good way in terms of the, if they are the institution in China, maybe they think that they should be regarded as a global financial institution instead of a legal person and a small one in China. So I'm not sure if Sergio agree with me that maybe you are eager to have a bigger in China, but a regulation framework is kind of maybe more tailored to domestic players, but not for you. Well, first of all, I guess if we look back into the last few years, I think there has been a huge amount of progress in opening up the markets also for foreign institution. And then we had a good track record 12 years ago. We were the first bank to be allowed to manage a local securities business and still by only owning a quarter of it. And we were the first international bank to be granted the license to control 51%. And so I can see that if you look at, you know, along from a longer time standpoint of view, we had, you know, there has been good developments. Now, if you look fundamentally, you touched on a couple of points, but most fundamentally, although Chinese financial markets are is the third largest in the world in terms of size. And you know, if you look at the equity markets, the bond markets, the penetration and the diversification of the participants in the market is is still very skewed towards a retail. In the equity market, 80% of the volume is retail. And actually, it's very unlikely that you are always ever going to have a foreign institution being able to capture a large size of business in terms of domestic, domestic pure business. At the end of the day, foreign institutions scope and mandate, as far as we are concerned, is to do two things. First of all, helping these developments of the financial markets and the capital markets in China by bringing foreign investor into China. And over time, taking Chinese investor outside China. So we have a very defined role from our strategic standpoint of view that we are not necessarily there to compete on pure domestic business in areas where, you know, scale and broader, even potentially physical presence, particularly in the last few years was necessary. Of course, now you could argue that through technology, you would be able to catch up. The true of the matter is that there are already many incumbent, sophisticated tech players that already took that market share. So as far as I'm concerned, and UBS is concerned, we are really focused to help develop the capital markets in China by taking foreign investors into China and vice versa over time. And in that respect, I think that there is a lot of scope for improving. Having said that, it's true that the fragmentation of legal entities that we have through the asset management, securities, wealth management is not an efficient way for us to operate. And maybe there are ideas on how to streamline and allow us to use resources, financial resources, human resources more horizontally and being able to operate as a group. Yeah. I think it's not easy for the chairman found to make this kind of very good regulatory framework for the for institutions because the CSRC, CBRC and CBNC, CBIRC and also the SAFE and PBOC. So all the regulators and the central banks are involved in. So how would you coordinate with other regulators to shut, to shape a more friendly, more fair playing of the field for the for the foreign institutions? Regulation certainly evolves, right? And as we welcome more foreign players like UBS into our market and as more foreign institutional investors invest into the Chinese market, regulation will have to adapt. And we have constant consultations with, you know, foreign firms and their concerns are valid. But changes always come gradually, right? And so on one hand, I think in our regulation will adapt, it will change. On the other hand, it will evolve gradually. Yeah, I think a lot of improvements have been made. So maybe one point. If you look at our activities in the US, we are active through an intermediate holding company. And we are regulated in the US by the Fed, the OCC, FDIC, ESCC, just to name four. So at the end of the day, I don't think that there is any issue for a global group to be regulated by multirregulators in the same country, as long as we have a clear coordination and defined business model. Yeah, I think Chairman Fang is absolutely right that the regulation is very important, but the market player is even more important. So Mr. Zhang Yichen as a leader for the domestic financial institutions, do you think you are capable enough to compete with the international compilers? Because we are saying that the wolf is coming, wolf is coming for two decades. Do you think this time is a real, they are coming? I'm not competing with them. In fact, Sergio and I are going to catch up right after because we're actually their customer. So anyway, we are in this fundamentally, especially in alternative investment, mainly in private equity. So a vibrant domestic capital market is instrumental to our business in two ways. One is clearly it's the exit for our investments. Second, in many cases, if it's well functioning market, then there should be opportunities to buy companies to privatize as well. We have done that in many other markets in the world, in the US, in Hong Kong, and we certainly have listed companies as well. We invested our portfolio companies on the issue. So from our perspective, we have a very close sort of a hands on experience in terms of the pros and cons of various markets. And I agree with Sergio that over the last couple of years, we see clear progress in China, mainly in the form of I think there's more transparency. There's more in terms of more stricter enforcement of the rules. And last but not least is the institutionalization, which I think the regulators have been advocating for a long time. But I think finally, I think after retail investors suffered through the market downturns made through in the towel and they start buying funds instead. But one thing we have now seen is actually leveraging on the Asian market to find deals because there are very few companies that can be delisted. At the end of the day, having a listed vehicle is such a co-edited resource in China, and very few people want to give it up. Let me add on what Yicheng and Sergio have just said about who are the real players in the Chinese capital market. The Chinese capital market, particularly the stock market, used to be dominated by retail investors. And Yicheng just mentioned that actually things are changing. And I have a few numbers. So at the end of last year, institutional investors market cap in the Chinese stock market was 20.6%. And it went up from 17.5% at the end of 2018, an increase of 18%. And among these institutional investors who increased their China investment most is the following institutional investors who came through the two connects as well as the QV and RQV. So their market cap was 3.1% at the end of 2018, but it went up to 4.2% at the end of 2019, an increase of 35%. And as a result of these changes, the Chinese stock market has become a lot more institutionally determined market. And pricing, in my view, has become also more efficient. So for example, last year, the overall market index, the Shanghai Composite Index went up by 22%. And MSCI stocks went up by 44.8%. Now, we have a very interesting index in China which tracks the price of these not so good stocks. We put an ST on them. So some of them may have incurred a loss. Some of them may not have performed well in terms of information disclosure and so forth. So these kind of problematic stocks, they also have index. That index declined by 14%. So that's exactly what it should be. Now, in a retail dominated market, that may not be the case. The ST stocks also went up when the entire market goes up. So this is a very positive development in the Chinese stock market, which means that stock market going forward will become a lot more resilient in the sense that it will be able to withstand external and internal shocks because institutional investors have a much better view about the stock that they invest in. And they will not be so jittery. And the market will also become a lot more vibrant in the sense that there will be a lot more IPOs. The market can take up these IPOs without problems. And I need to mention that the value of a listed vehicle, right? The value of a just enlisted vehicle should not be very high. And I think it used to be like around three billion RMV per vehicle, which is obviously quite ridiculous. And I think going forward, you know, the market will be a lot more rational in terms of pricing a vehicle as well. So overall, I just want this group to know that the Chinese stock market is undergoing some very positive change. And the size is already very big. So the quality is also rising. And it should be a big place for institutional, particularly foreign institution investors to make investment in. Yeah, I think they are more positive and healthy changes brought by the international financial institutions to China will will will continue to come. If we look at the data, German foundation, the 4% of the China's security... 4.2%. Yeah. But actually, if we look at the all the tradable shares, then it's 8%, which is even higher. So when they're optimistic that they will bring more kind of positive culture and the the new style of the value investment for the market, a lot of new things. But we will touch on that deeper on that a little later. And now I think that we should go to Professor Carmen Reinhart and Professor actually published a very, very interesting paper in NBER working paper on China's role in the global financial markets. Also, you're right, that is a two way traffic. China's go out to the global financial market. Also, global financial market come into China. So how do you look at China's role in a big picture? And how do you look at the China can continue to speed up the role of the R&B in the rest of the world down the road? So let me go back also to your initial question of why after, you know, number of years talking about the desire of bringing in more foreign ownership, the numbers are still low. The starting point has to be currency convertibility. Yeah, that that, you know, for we can talk about, you know, changing investor participation, more integration, domestically, simplifying the rules of, you know, regulatory, but in the end, also currency convertibility is is critical. It's not important. It's very important for foreign participation to know that you can get out. And so that's sort of a general point. But going back to to the other point that you made about the work that I've done on China's role in capital markets. Let me first highlight that that role I think is under way underestimated. There's a, you know, no ending the discussion and in the literature on China's large footprint on trade, but not really that much on China's large global footprint in finance. Now, I would note that the global footprint in finance is primarily on almost exclusively official, meaning it is outward flows. And they're largely outward official flows. And these began with China's growth surge. They began in earnest in the early 2000s. This is foreign asset purchases. They're, you know, China being at one point no longer, I think it's Japan is now the largest holder of US Treasury securities. But for very long period of time, China had the record. And then, of course, China's external lending to well over 100 countries, mostly developing countries, but now increasingly in the more recent period also Europe. So two points about that, we haven't seen perhaps as much change as one might have expected in inward flows, but we've certainly seen huge changes in the last 20 years in outward flows, both in terms of asset purchases again, official PBOC and direct lending to emerging markets. This is not just an African phenomenon, it's really global. I would note however that and perhaps the members of this panel can clarify this my reading of the internationalization efforts is that it's been far from constant that in the period of very rapid growth when China had double digit growth when the PBOC was accumulating reserves and large inflows, there was a big push to have to speed up the internationalization of the PBOC. And that came to a screeching halt in 2015, as the economy began to slow down, inflows became outflows and capital controls by the end of 2015 were not lifted, they were strengthened. These were controls on outflows. So I think we may be now, and this is conjectural, but I think we may be now on the cusp of another quickening. With the trade agreement, I think importantly also with the more general perception that the global markets and investors have absorbed the message that growth is no longer averaging over 10%, but that is more likely to average 6%, that that transition was made and that China is really looking now to possibly reactivating the speed at which it's open capital markets. But I also want to hit on points that have been raised about regulation in the internal markets. I think given the size of China's economies, we're really discussing two things. One is we're discussing how Chinese capital markets can become more efficient, can become more developed, and so on. But I think also behind that, and with that, is how do China's markets take a lead, possibly becoming, given the size of China's economy, another global reserve currency. And apart from the remark that I've already made on the need for convertibility, I think what makes or breaks, and we can go back to this time permitting, whether a country or a reserve currency succeeds as a reserve currency, is having a well integrated, highly liquid domestic debt market. And I think China, I would love to hear how China is moving towards having, it certainly has to scale for a very impactful global domestic debt market, a la U.S. treasuries, which has been a setback for the euro, which you have one currency, but many debt markets in Europe. But I think we're really, in this discussion, have been talking about two things. One is the development of the capital market, just to make it more efficient, make it more international. But the other is really to, does it go beyond that to reserve currency status? Yeah. Thank you, Professor, just we appreciate China's opening up of the capital market into more broader kind of the landscape. The bond market in China is so important, and also internationalization of the U.S. is important, and also convertibility of the capital count is also important. So maybe we can patch on them one by one if we have enough time. So first to Sergio, if you have business in China and you have a parent's company in Europe, and sometimes you need to cross border capital flows, and you will face some kind of their difficulties. So how do you see the urgency for China to have maybe push a little further in terms of capital count and to nurture you to have a bigger role in China and also make China's capital market, including bond market, also equity market is more open and more resilient and also more integrated into the global financial markets. Yeah. Well, first of all, let me tell you that if I look back in the last few years and as of today, we never really faced a situation in which we or our clients were not able to take out any investments from China. So I think it's the discussion is all about because the limits that we have right now are sufficient to accommodate today's business. The discussion has to be about what do you expect going forward and if there is a time in which limits per se need to disappear because they are no longer complying with free spirit of convertibility because there is a limit and a limit is always something that psychologically is going to impair the situation. Now, if I can touch about a very important point, even if you look at the situation as of today, as I mentioned before, China has the third largest equity market and the third largest bond market in the world. The situation, although it's very similar to Europe in that respect, because if you look at how the economy is funded, 70 percent of the economy is funded through in the credit process through banks, like in Europe. While if you look at the US, in the US, you have only 30 percent through the banking system and the rest of the markets. So the real opportunity for China is two-fold. I believe having a more diversified access to credit or to financing in each part of the capital structure, it's the only way to really make yourself agile and more flexible going forward and to be attractive for both domestic and international investors. If you do that, you also create less dependence on the banking system. In a sense, you can take advantage of that. So in a nutshell, I think that there is an opportunity for China to make sure that it doesn't repeat the problems and the errors of Europe of not creating a broader and more comprehensive capital market infrastructure to fund the future growth. And of course, we saw a higher penetration of institutional investors coming into the market, many of them foreign, because of the inclusion on the MSCI, which was a meaningful movement. But there is a point in time in which institutional investor in China needs to be able to go more outside through a higher QDI quota and so that the inflows are compensated. Provide more business for your company. Absolutely. Now, let me just add on this internationalization question. I think China has adopted a clear policy to make IMB more internationally used. And at some point, it will become one of the reserve currencies in the world. But that takes a lot of work. So you mentioned the capital account compatibility. You mentioned that China needs a large and liquid capital markets, particularly the bond market. And these markets have to be unified, open to international investors and so forth. But these things are not going to come together in a very short period of time. So it's all natural. The internationalization sometimes goes a little bit faster, sometimes goes a little bit slower. And in all this process, one overriding concern for China is that we want to make the entire financial system stable. So you don't want to create unnecessary risks in the process of internationalization. And in any case, without a very large unified, liquid and open capital markets, the IMB will never be a real international currency. So the first step, in my view, is that let's concentrate on making these capital markets, including bond and equity market, large, vibrant and open. And then when that infrastructure, almost like the infrastructure is there, the pace of IMB internationalization will quicken. But let me say that, actually, to me, the slow down from 2015 made sense. You actually, the time to aggressively pursue capital account opening is not when you have the potential for capital outflows. It's when you're getting inflows. So you open up in the best of times when things are more likely to not trigger an overshooting and end up with more capital outflows as a consequence. So the quickening or the pace of liberalization is, I understand that. I would like to point out, though, that another dimension that, and this is more AFI, right? I mean, what is private and what is public? In China, I noted that, I mean, the amount of China's lending outstanding to the rest of the world, it's about 6% of global GDP. That's very substantial. But it's largely official. So the part that According to your that very good paper, it is very clear that the public money actually from the import and export bank and also for the China Development Bank. And it's kind of, it's not a real public money, it's kind of mixture development money. So it is very difficult to define what is the public and what is private. But put them together. What is your suggestion for China to have this kind of investment in the emerging market, especially in the one by one road? Do you think that more transparency is needed and also maybe more mobility of the commercial lending is more important or China model is still has some some good reason they're good rationale there in your view? I think it may be too early to tell, but what I'm sensing is look, in terms of China's lending to the rest of the world, as I said, it really began with the central bank, the PBOC, buying foreign securities that that was the first. So it was a very much a portfolio, an official portfolio fall, then it expanded to development lending and trade finance to mostly low income countries. But in recent years, we've seen it moving more and more towards middle income and more recently to high income. And I think that is where we're seeing more joint ventures between or at least a bigger blurring between what is official lending and what is private lending. I think the private sector is playing a bigger role in lending to Europe. Yeah. So what I'm saying is that that may be it may be too early to say, but I think that is organically happening already. Yeah, I think it's very important the lot of the issues we need to touch upon. But still, we don't have enough time. But I think, Mr. John, maybe you want to talk a little bit on the currency R&B convertibility in terms of the China's capital capital market opening up because you are based in Hong Kong and you can have a very good sense of that. How important the convertibility of the currency of R&B, if it can play a bigger role in the rest of the world and also Hong Kong is a good bridge there. But still, yeah, we manage both R&B funds and the dollar funds. So for us, given the investment we actually make, it's counted as foreign direct investment. It's FDI. So that is totally there's no limit to it. So and we have never encountered any trouble in terms of expatriating the capital like, you know, Sergio appointed out. So I do agree with I think the general direction is for R&B to become more international. But at the end of the day, you cannot rush the process. I actually believe, you know, I think Carmen pointed out it was largely driven by capital flow, the initial sort of foray. And at the end of the day, I think in order for internationalization of R&B to stick, instead of two steps forward and one step back, it's fundamentally there has to be real usage, real demand for R&B. And we are still quite far from that. And the second, even in terms of the overall structure of the capital markets, you know, Sergio pointed out that the, you know, China is at this point, it's more based on the European or Japanese model is a bank dominated financial system. In fact, you know, China is even more, China we are actually talking about 90% of financial asset is in banks. And clearly, it's a stated goal of the government for as far as I know, I think it's almost at least almost 17 or 18 years since 1993, that this has been talked about, you know, change, you know, shifting from a bank dominated sort of indirect finance capital to a direct finance sort of a capital market. And I think the issue is that clearly China has now made a lot of progress on that front, largely because I think they're just much more comfortable with the banking system because it's at government direction. I mean, the issue you pointed out about, you know, all the overseas lending tends to be public funded because it's very natural. You look at all the banks in China. I mean, they all own, you know, by the government or various levels of government. So, so that I think China clearly needs to make headways on that front. The ultimate model is going to be more like the US. I actually have doubts because more capital market dominated financial system does not actually mean it's better you clearly there's a there's a you need to strike a balance because more capital market dominated tends to be unstable but at the same time, it adjusts very quickly. So the same reason you don't see Japan, you know, fall into a deep financial crisis, despite of the stagnation for two decades, mostly because it's a bank dominated system. Now there's a pros and cons to each side. Maybe also why they have a stagnation for exactly. Exactly. But you know, but the the issue is, can you afford that sort of downturn? In the case of Japan, they can because of social harmony and you know, general sort of lack of wealth polarization, the US made you know, clearly went through a financial crisis and ended up with a lot of political problems. China cannot afford a deep downturn. So, you know, that's I think tomorrow. Yeah, tomorrow very interesting. Thank you for each mention of that. One is the Anglo sex model, which capital market play a bigger role. And another is kind of continental model and also including Japan and Korea and China, which banking sector play a bigger role. And the former one Anglo sex model needs a very good legal system, common law system. And for the continent is another system of the law. So I think that two model has the historical origins, but still has some pros and cons, I think each and also Sergio is absolutely right. So the question is for Chairman Fang, do you think how China can strike the balance between the two models? No matter how you view it, China needs a bigger capital market, right? Capital markets right now is just, you know, too small. And in terms of providing financing for the economy, the capital markets as each one pointed out, perhaps only provides 10% of financing right now. So whatever you know, the advantage or disadvantage that the two models have, the direction for China at this point is very clear that direct financing, what we could direct financing has to be bigger than it is today. Particularly equity based direct financing should be a whole lot bigger than it is today. Yeah, I have to make this observation. I don't think there's any conclusive evidence to suggest that a larger capital market is either produces more crises or deeper ones. If we look at the rate of recovery from the 2008, 2009 crisis, the average number of years it's taken Europe to recover lost GDP is approximately twice what it was for the U.S. So I think, you know, I wouldn't push the idea. I'm not disagreeing with you. You are definitely the leading expert. I read your book on that. But the thing is, I think about the social stability point, which is how when you have a deep drop as a developing country like China with so many other social problems, can you afford it? That is the issue. I'm not talking about the ideal structure of the... Yeah, I think we need another two or three hours to debate and discuss on China's future capital market and all the trend and problems and issues. But we have to wrap up now. So I would like to wrap up by asking our panelist a final question. In your view, what is the best news in China's capital market in 2020? And also, what would be the Black Swan event in China's capital market in 2020? Maybe from Sergio first. Well, first of all, we already have a good development. Personally, I don't believe that you need to be under percent owner in order to drive the business. But the fact that on April 1st, we're going to go through officially another phase of the ownership structure is a very good news. The great news will be, as I mentioned before, if foreign firms are allowed to act in a more coordinated way within the same legal entity ownership framework. So... Maybe more ambitious? No, I think that the reason is what one has to do step by step. And so I think that we need to be able to continue to invest in a sustainable way and balancing future growth with the need also to see some economic benefits. The Black Swan, I personally think that it can only be not necessarily a Chinese Black Swan. I believe it's more a geopolitical event that drives maybe an acceleration of a slowdown in the global economy. And then in that sense, you could see maybe these developments of opening up of the markets in the globe, but particularly in China's slowing down. Yeah, but for the Black Swan, the possibility is very low, so it's still okay. But you asked me for a Black Swan. Yeah, right, yeah. Right, exactly. Chairman. As a regulator, obviously, you know, I watch out for Black Swan events, but I cannot say anything about it. I agree. The good news that I expect from the capital market is that, you know, if the market becomes even more driven by institutional investors, if, you know, both domestic and foreign institutional investors started to play a bigger role in determining the price, in trading, and in driving corporate governance as well, that would be the good news that I'm looking for. Yeah, thank you, Professor. I think barring the new health threats the year started, you know, in a pretty upbeat note in terms of renewed stability towards higher growth and so on. So that's a good setting for capital market, you know, capital market performs for financial, moving forward on a financial agenda. In terms of Black Swan, I have to bring up Hong Kong. I mean, that is, you know, the big unknown. Yeah, but Hong Kong's situation is improving. Yeah. The trend is good. Mr. Zhang. Sure. In terms of capital markets in China, I think we are cautiously optimistic this year mostly because I think it was the deleveraging of the last three years. The results have been mixed. There are some, you know, positive achievements, but by and large, the leverage does not really go down by that much. Fundamentally, it has to do with the companies, the micro economic entities that's, you know, with vitality that can generate cash flow. That's the fundamental way to deleverage. And now that capital markets is more transparent and the institutional investors tend to focus on value, they would encourage companies to focus on their bottom line, improve their ROE, and fundamentally, that would be the right way to deleverage by improving cash flow. Yeah, thank you very much. We're looking forward to more good news down the road in China's capital market. And also, obviously, we are well-prepared for the Black Swain event and eventually the Black Swain event will not come at all. Okay, thank you. Please join me with a big applaud for our panelists and thank you so much.