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tv   In Conversation With Douglas Flint  Bloomberg  December 27, 2016 2:30am-3:01am EST

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only xfinity gives you more to stream to any screen. download the xfinity tv app today. yousef: good morning. right and sunday in dubai. here are the top stories, kicking off with toshiba. the company says it might have to book a write-down on its u.s. nuclear operation, amounting to several billion dollars. the company says it expects it will have an impact on earnings. earlier shares suffer third-biggest decline in more than a year. the italian government invests 6.3 billion euros in monte dei paschi, according to the newspapers. struggling bankshares will remain suspended today on long stock exchange.
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european central bank said monte dei paschi may need a capital increase of 8.80 -- 8.8based on results billion euros, based on results of a stress test. barack obama said he beaten president-elect donald trump if he had run. hada said hillary clinton perhaps played it to save during the election campaign. don't fire back on -- trump fired back on twitter, saying no way. shares in china rising 14.4% from a year earlier, compared with a 9.8% increase in october. the material producers led those gains with prices of products such as coal and metals continuing to advance. consumer prices dropped for a night straight month in november, falling 0.4% from a year earlier. ,ousehold spending fell 1.5% worse than zero .1% that had
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been forecast. the data underscores the ongoing challenge the bank of japan is facing in stoking inflation. this check in on the markets, starting with the futures, with the w eif funds. there is a little bit of europeancreeping into industries. you can markets are shot. picture.ets, a mixed note as well some of the other markets we are watching this morning. the msci asia-pacific index. the markets are currently slightly to the downside. is stilltenure paper holding those gains a little bit. a quick note on the dollar strength. it has creeped back in the last few hours, pushing dollar-young slightly higher. brent crude still at $55 and $.11 a barrel. it had extended the longest running streak in more than four
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months. we will see whether that continues. $109 an ounce -- 1139 an ounce.$ this is bloomberg. francine: ♪ francine: hello, i'm francine lacqua. hsbc is europe's largest bank, with more than 235,000 employees across 71 countries. douglas flint is the bank's chairman, a role he has held for more than six years. during hisenure, flint has helped guide the bank during its political and economic realities, and this year's rise of populism has brought a raft of new political realities. in an exclusive interview, i sat down with douglas flint and asked him how he would rate 2016. mr. flint: very interesting year.
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a lot of things that were unexpected. we have achieved a lot of things in 2016. we've finalized our decision in domicile at the beginning of the year, which was very important. pretty turbulent market at the beginning of the year, then things quieted down a bit, and we have these two unexpected political events, the brexit referendum, we had the presidential election of the united states, which produced results that were not expected. and that led to some volatility and certainly a great deal of thinking about what the implications would be, but we closed 2016 with both those events being factored in really quite a lot better than people expected. so it has been a very interesting year. lots of surprises, but i think one of the great things was how well markets and institutions within the markets coped. francine: what will 2017 bring? more of the same? we don't -- is there a sense of not being able to trust the polls and not knowing what is next? mr. flint: we're sort of leaving the honeymoon period and you get
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to the hard realities of what we do now and find out if the -- what we do now, and how will the markets react, and find out if the promises can be delivered or whether they will be changed. we have got, three, four, five or six really important elections in europe next year, which could add to clarity or could add another element of uncertainty, so i think it will be an interesting year. we have finalization of the basel framework to be announced hopefully sometime in january, so from a baking perspective to too, aing perspective lot of things have been bubbling for a year that will get finalized. francine: what can you tell me of 2017? more volatility? mr. flint: more volatility, i think, which in many respects is good for banking business in the sense that people think carefully about what they need to hedge and how they should position themselves and what kind of contingency facilities they need. but on the other hand, it's bad for economics to the extent it slows down people making
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investment decisions and sort of holding back on strategic options because they do not quite know what will happen next. francine: douglas, it's hard to argue that it has not been difficult being a baer given -- being a banker -- you have low rates, a low in the -- low rate environment, low growth around the world, you have regulation. what is the biggest risk in 2017? mr. flint: the biggest risk must be something that you haven't fully factored in. i mean i think it has been a , period of unusual uncertainty, but to an extent, you factor all that in at the moment. so something that would be completely unexpected would be what you fear more than anything else, and that's why i think businesses and indeed banks are pretty cautious about their financial position, to make sure that that unexpected event can be catered for. you know, i think one of the great advances since the financial crisis has been the depth of the stress tests that have been mandated by regulators around the world that have supplemented what we did
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already. so that you -- you have gone through many, many stress events in theory, but it gives you confidence that if it came to the real thing, even if it wasn't what you planned for in the stress test, that you have a lot of levers you can pull and a lot of reserves you can draw on, so i think that is one of the positive things. but we are entering a period of uncertainty in the political sphere, which is very difficult to call, because it is not modelable. francine: does that impact banks, or are you thinking of something more systemic? another lehman brothers-type of moment that we have not factored into models? mr. flint: i think you saw the markets react very well to individual institution events in 2016. and i think one of the extraordinary features of the referendum in june was people went to bed that night with the markets, the commentators, the pundits, the pollsters,
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the bookmakers all predicting one result and woke up in the morninwith a different outcome. marketolumes were six times normal, though huge volatility. banking stocks predominantly based in europe with european customer bases suffered 20%-30% declines, commodity prices were all over the place, and everything worked. you know, everything settled. you know all the trades could be , executed. there was liquidity to do everything. and i think you stand back and -- stand back from that after it is over and say, there is an ecosystem that has been built that can withstand something, so that gives you confidence that the system in aggregate is a great deal more resilient than was. francine: what worries you now about brexit? mr. flint: just the period of uncertainty. i mean, i think you can -- you can model almost every option that you think might happen. the sooner there is some clarity and direction of travel and what
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the ambition is, where we get to, you can get to means you can to, thatwe can get means you can discard some of the options and get on with prosecuting the others to make sure that for our clients and for our staff that are impacted, they can begin to find their affairs and it can be business as usual. the sooner we get to some kind of element of clarity -- francine: what kind of clarity? for example, a buffer? we know mark carney has been working on modeling some kind of buffer or transitional agreement. would that be the most helpful thing for banks? mr. flint: it would be helpful to know if that is in the planning. we think it needs to be. in the sense when you think of the regulatory reforms we have been through, when the reforms are finalize, there is a two-year period of implementation so people can collect the information and present it being required. it's difficult to think about something as significant as changing the relationship with europe, you can hardly say day -- that you can sort of say on day zero, we're move from the system and day one, you can accommodate everything that has
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changed within your system, so i does your systems and reporting everything that has changed within your systems and reporting and so on, so i think there has to be some period of transition. and again, in terms of the planning, if there's not a belief that there will be some sort of transition, you have to plan for the fact that there might be none, and that accelerates decisions. francine: and you have not got any assurances from the bank of england or the government that they an expectation, that they have a transitionary phase they are planning for? mr. flint: nobody has clarified that, but at the same time, everybody recognizes the importance of making sure the arrangements on both sides of the equation are as smooth or -- for customers as possible. its not about the financial system, per se. we are a reflection of what is happening to our customers, so if our customers find things awkward and ugly, that will affect economic activity, which is not good for the economy. so i think it is in everyone's interest to make it as smooth as possible. one of the ways of making that smooth would be some element of transition, as i said, i think is necessary. francine: what do you think the
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government need to do today? do they need to give assurances to e.u. workers that they can stay in the u.k.? would that be a first step? mr. flint: i think that would be a good step, but all these things are known. and it is a question of at what point you finalize your approach, your negotiating position, all of the factors you want to take into account before you lay them out. i agree in the sense that you do not do it piecemeal. you need to work out what your underlying framework is going to be and then you've got something you can talk about. francine: up next, hsbc chairman douglas flint weighs in on president-elect donald trump and his plans to deregulate wall street. ♪
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francine: welcome back. i'm francine lacqua. the u.s. president-elect donald trump has made financial deregulation a priority, promising to roll back on dodd-frank. in my exclusive and rare conversation with hsbc chairman douglas flint, i asked about trump's plans for wall street
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and what that could mean for european banks. how much will president trump, when he gets inaugurated january 20, deregulate wall street? mr. flint: no one knows. no one knows. i think -- i don't think there is a chance anywhere in the world of regulation going back to light touch. francine: really? mr. flint: no. you know, that was not a good period. the banks our biggest risk is , our industry. you do not want a part of the world where people can do more things with much less capital than is economically advisable. because we are all exposed to each other. so light regulation and competing with who can have the lowest standards is a really bad form of banking, and i don't think it would help. -- it would happen. what we might see is some moderation of reporting rules, which are onerous in terms of capacity, systems, and so on, and there are multiple different ways of reporting around the world.
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we haven't got a harmonized set yet. we might see some relaxation of volcker. that's what people talk about. whether that is on his mind, i don't know. i guess he's got a lot of things to think about, and that would not necessarily the first. -- be first. francine: if it is on his mind, does it impact european banks and put you in a much worse position? do you think regulators in europe would look at what is happening in the u.s. and soften? mr. flint: i don't think they will soften, and i don't think they should. i think europe has to make a decision as to what kind of an investment banking capability it wants, or whether it simply wants to import the skills that exist in wall street and say, "that's fine. we would rather not have the risk of the activity if that is the way it's judged." i would think that would be a mistake. i think one of the other issues that is interesting, particularly in the context of brexit, is we are entering a
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world where in wholesale activities, the u.s. and the european union are -- have agreed that they are equivalent, which is important in terms of doing business in each other's markets. the u.k., of course, is in europe at the moment, so it is a but you could have a scenario :. where the u.k. has left europe and over time moves away from european regulation. i think unlikely, but possible. the u.s. could change its regulation and therefore no longer be equivalent. you have now got three systems instead of one and that would be a pity. the fragmentation of the global framework would be i think expensive for our customers and it would be systemically riskier than bringing everything together in the way it has been done successfully since 2008. francine: do you think that global growth will increase in 2017? mr. flint: yes. i mean i think --
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francine: coming from where? mr. flint: i think two things. i -- things. i think the measures president-elect trump has talked about in relation to using fiscal capacity, reflating, building infrastructure, beginning to tighten the tax code to bring money that is sitting offshore back home. -- home are things that people have talked about for some time, and he is saying let's have a go at doing it. i think china is beginning to reflate again, and those are the two most important economies in the world. so i think we will see an uptick in growth in 2017. the difficult one to predict is europe because you have so many elections. there's all this discussion around brexit and whether that is -- you know encourages , activity to take advantage of conditions that exist today, or if people hold back and wait to see the lay of the land going
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-- the land might be going , forward. francine: are you concerned u.s. may stoke inflation worldwide? mr. flint: there are those who would argue that is a good thing, so theoretically, it should stoke inflation. again, thatw, should mean that interest rates would begin to rise, and there are many who think it is time interest rates rose because zero or near zero rates are difficult from a policy perspective because you have no flexibility, and you begin to get a risk curve again and the savers begin to see some reward for their savings. so you can argue both sides, and economists do. francine: talk to me, douglas, a little bit -- you were mentioning europe and the fact you are more concerned about the economies of europe. is there anything politicians can do to stave off -- i don't know if you want to call it a wave of populism or be more in touch or placate voter anger, let's call it that.
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mr. flint: i think what people -- look i'm not a politician or , social scientist, but it does seem to me that people react badly to uncertainty in their own position. they want to believe that the future will give them more opportunities, they will be able to do more for their families, their kids will have a better life than they have had and so on and so forth, and i think that means giving some confidence to populations about the kind of work that will be available in the future. i mean, we are entering a period of enormous technological change, where technology will transform many of e industries , particularly service indtries, that have been less touched than manufacturing. that is going to have a big impact on the job market, so what our governments going to do to reassure people that they will invest in the retraining, the rehabilitation of people whose jobs are going to be affected by the digitalization and artificial intelligence and all these things that are coming down the road, which will be
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, you know very positive in many , ways but also will impact some of the job sectors that exist today. so how do we retrain people? so how do we make sure the benefits of technology change as well as the global industry and -- as well as and get distributed more fairly by taking the value of the benefits and using them to retrain and create opportunities for those who have then affected? francine: isn't this, isn't this what president-elect trump is trying to do is reflate the economy through infrastructure spending and bringing back america to its manufacturing glory days? does this not almost go against what you have said, the need of retraining for more advanced technologies? mr. flint: i think there is an element. i think the rhetoric around bringing jobs back is a popular one, but the extent to which some industries can come back to higher wage economies is doubtful. some will, but as a general
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statement, it is going to be difficult to see that. and you can see economies specializing in certain industries and then exporting that across the world. and i think that is unstoppable. i mean we are in a world where , the way people consume is not based on states at all. it's based on the internet. and they go online and they click on something, and it arrives the next day. they have no idea where the order was fulfilled or where it was manufactured. and we can't see that unwinding. so, again, there is a bit of consumer preference to take into account as well. francine: next, in my conversation with douglas flint, we will talk about the possibilities of trade wars in 2017 and doing business in china. ♪
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francine: welcome back. i am francine lacqua. now hsbc makes most of its
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profits in asia and plans on beefing up its presence in asia. its presence there. -- its presence there. president-elect donald trump has already sparred with china, and the policies could be of particular concern to hsbc. now in my conversation with douglas flint, i asked him if he sees trade wars in 2017. mr. flint: i think we will see a lot of dialogue between the countries of the world as to how the benefits of globalization should be shared, particularly in a world where it is less about where you manufacture and where the intellectual property is and how that is rewarded. i don't think we will see a major trade war, because we're in the situation i think with three major trading zones in the world, europe, the united japan, nafta, and asia -- n countries.
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they are so intertwined that it's difficult to see that you could have a trade war without massively impacting the firms in your own country and the investors and your consumers who are able to get goods and services from the other part of the world that are extremely good value, so it is a double-sided coin. francine: you believe the u.s. and china are both fully aware of that? mr. flint: absolutely fully aware of that, yes. francine: there's not a risk in your eyes because of your exposure to asia and china, that something happens between donald trump and the president of china the president of china in 2017? mr. flint: both sides are fully aware of the implications, so i think that is very unlikely. francine: what worries you in china? mr. funk: i think the worry is -- it is not a worry. i think the issue in china is, with an economy of that size and complexity, can you make the transitional change from a heavy infrastructure-led, export-led
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economy to a consumer-driven, technology-savvy, research and development economy smoothly. i mean, the transition is under way. big steps have been taken. you know heavy restructuring is , under way. the population is supporting the transition, and that is reflected in political support. so, you know -- but it is a massive undertaking to transition the economy, but you can see the research side, the consumer side, the tech side is going very, very strongly. and the chinese firms are beginning to invest in lower wage economies in the same way that other businesses used to invest in china, so they are going into vietnam, myanmar, they are going into africa, and effectively replicating the stage of development that they
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went through in other countries and building infrastructure to create trade flows, trade corridors. so, you know, as ever when you are trying to do something very ambitious, you worry, can something interrupt it, but i think china has managed it extraordinarily successfully so far. francine: how many non-performing loans do you think chinese banks have? mr. flint: you can see what they report. many think there may be other elements of loan books there in the investment companies that are yet to be recognized. i actually think it is less relevant what the quantum is -- is less relevant. what the quantum is is how they are managed. managing impairment is about can you manage it in a smooth way without causing disruption. china has not borrowed heavily from the rest of the world, so it is an internal issue. can you manage it in a way that
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you have the capacity to do it without causing disruption and and rest and an economic slump? -- and unrest and an economic slump? so far, they have done it. i'm relatively confident they will continue to do it. and i think, their model is different from ours, and it's difficult to say that you could -- they will not do at the same way as it would be done in the u.s. or europe, but they know exactly what they have to do to manage the recycling of capital efficiently, but they have the capacity to do it. francine: markets worry about something ugly. do you think investors are underestimating the perils of bank asset qualities in china? mr. flint: he in a way. the volume of an asset, simply put, depends on the cash flow that asset can generate. that more than anything in many economies depends on successful economic policy and no disruption to that. so, you know if you suddenly , have an economic event like the explosion of shale gas in america that disrupts a market or the decision in germany to
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move away from nuclear power, you have a disruption to people's expectations of the future. if you don't have disruption, then asset values should be broadly around where people expect them to be. so it is those disruptive events which are more around political events than economics that are unpredictable. francine: how do you think they should stabilize the chinese trinity of the reserves, currency, and the outflows. mr. flint: it clearly is a complex equation. china is now a net exporter which is important for the rest of the world and the diversification of the chinese savings pool. clearly, they want to regulate it in a way without severe volatility in the currency or in reserve movements that makes people nervous about their ability to control things. and they've got a combination of market tools and regulatory tools and so on to do that.
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i think, again, from outside, we tend to extrapolate single-month movements much more dramatically than they would internally, but you are absolutely right. it is a challenge to manage all these things, but china is becoming one of the major investors in the world, and i think that is a very positive thing for, you know, globalization in its good form. francine: douglas, thank you so much for giving us so much of your time. mr. flint: you are welcome. it has been a pleasure. ♪
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yousef: good morning. you are watching bloomberg. kicking off with the italian spendment who is set to 6.2 billion euros on monte dei paschi. -- theuggling think -- itling bank's share may need a capital increase based on the results of aim recent stress tests. to says it may have to book a write-down to its u.s. nuclear operation. the company says it expects


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