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US-China trade relationship will diminish over time. This is not a world war: Jamie Dimon

Updated: Oct 22, 2019, 07.46 AM IST
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Highlights

  • US Fed is not a believer in negative rates.
  • China and US have a lot of common interests, as does India.
  • Monetary policy cannot be separated from fiscal policy?
As Washington looks at re-defining and re-setting its economic ties with Beijing, New Delhi has a rare opportunity to establish its credentials as the favoured destination for global investments. But to emerge as the perfect counterbalance to China in the shifting global economic order, South Block must build on India’s rules-based decision-making platform and drive reforms, such as the recent corporate tax cuts, to enhance New Delhi’s appeal before the global investing community, Jamie Dimon, CEO of JP Morgan, tells Saloni Shukla and MC Govardhana Rangan in an exclusive interview. Edited excerpts:

There is a lot of talk about shifting manufacturing from China to South East Asia, and some even to India. How do you read this?
Trade tensions have become worse and the outcome could potentially be worse. We are now talking about a mini-trade deal and I hope it happens, since it is more like a truce. While I don’t know what the ultimate outcome will be, it could be a plus for India. There is a reason why people come here … you have proper treatment of capital, bankruptcy laws, labour laws, real estate laws so that you can actually build and do things here you might have otherwise done in China. I would hope your government is thinking about this very carefully and has plans that particularly look at this.

Regardless of what happens in the US presidential elections, is it now clear to the US that China is the new long-term adversary and has taken the place of the erstwhile Soviet Union?
Trade is a major issue and there are legitimate concerns, and those concerns are just not American; they are European, Japanese and they need to be fixed and they are going to be fixed. If I were with you a year ago, there was a notion that there could be a big trade deal, which would have been the best but it doesn’t look that might be possible. Therefore, we will get the phase-1 mini-deal which is real and it could mean liberalising and opening-up some industries, address IP issues, halt some tariffs from increasing. But I don’t know if there will be a phase-2. There may never be a phase-2 and if there is never a phase-2, you will see a gentle decoupling. It is not a violent thing; it is just that if they feel some things are unfair, they will do things to counter it unilaterally which they have a right to do. India could do it, China could do it, or the US could do it. That is not a cold war, but an economic realignment.

China and the United States have a lot of common interests as does India - anti-terrorism, anti-proliferation, global growth. The cold war with the Soviet Union was a true cold war and potentially a hot war. There is no reason we should have a potential hot war in this situation. These are different systems and having different systems does have consequences and you see that playing around the world.

Even a gentle decoupling will be a fundamental change from the status-quo we have seen in the past decade…
The trade relationship will diminish over time. People will agree to do certain things and not other things, but life will go on. The world will be ok, the world will grow. This is not a world war.

We are seeing a shift in the global supply chain; no MNC wants to put all its eggs in the China basket. In conversations that you may be hearing in board-rooms around the world, how much does India feature, if at all?
It’s starting to. But supply lines are notoriously complicated. Each country has local laws and regulations that make it hard to do things in that country. But India is on the table as are other countries as people look to move their supply lines. If I were India, I would look at it the other way around and think about how I could attract some of the companies that are moving out from China.

The Indian government recently announced corporate tax cuts to attract investments; do you think that could be a big driver?
It will be a huge benefit. Businesses are going to look at things like taxation, the labour force, the ability to buy real estate, infrastructure, the regulatory environment, the ease of doing business …. They could also look at allowing higher foreign direct investments in some sectors. India has lots going for it but just like other countries, it has a lot to do.

We read so much about a recession but the signs are not clear. What is your reading of this?
Well, we know that one is coming we just don't know when. I don’t think it’s hugely productive to try and guess about the next recession. I have been in business my whole life and people are always trying to guess. Meanwhile, the world has doubled in size and things are fine. People rarely pick the inflection point and there is very little we can do about it anyway. We have seen global growth from being quite high to moderate (to) levels of 2.6% … at a $100 trillion global economy it is still $3 trillion global growth. We have to look at possibilities and there are multiple possibilities. While I am not making a prediction … it looks like it may just be a slowdown. You don’t have a fiscal tightening, you don’t have monetary tightening, you have a fairly complex geo-political situation, you have China-America. In America, the consumer side is doing quite well. It is the business side that feels some sort of stress of the trade.

What is your view on the recent steps by the ECB?
I am not a believer in negative interest rates. In 2010, they used them as they were trying to keep the Euro together but as a permanent policy, it doesn’t work. It has adverse consequences that we don’t totally understand; people have to save more money; they will have less confidence in the future; it is an unnatural act. Some companies have no choice but to buy 10-year bonds and governments have been buying a tremendous amount of them. I would never buy them as an individual. We don’t know its full consequences yet.

Even the US Fed is talking of another QE…
I don’t think the Federal Reserve is a believer in negative interest rates. They have cut rates once, they might cut them again, but this is just a reduction in rates; it’s not a QE programme. The Fed balance sheet grew a lot and they have reduced it and they have indicated that at some point in time, they should have a normal growth in the balance sheet.

So, is there no worry of negative interest rates in the US?
I don’t think so, but we are preparing for it even though I think it would be a terrible idea. Banks would not lend money, people will do things differently, savers have to save more money, and there will be adverse economic consequences of that. The thing about negative interest rates is that, if you are a central bank, you have to use data to make your decision, among that data is what the government is doing … but if you try to make-up for bad government policy, is that a good idea? It is the same concept with negative rates. Monetary policy cannot be separated from fiscal policy, but if you use it to make up for fiscal policy, it would lead to consequences of which we don’t know the outcome.

Last year, you were preparing for 10-year treasuries at 5%....
I still think that it is still a possibility … what we now expect is that rates will go down but someday in the future, they will go up and you will have a reversal of all the things that caused the rates to go down. So, I still think we should prepare for that.

It has been 10 years of easier monetary policy; if that didn’t get growth back, what will?
I think what will happen is very complex. The world had a lot of QE but a lot of that was a round-trip because regulations were changed and that money wasn't lent down through the system. If you look at Europe and even the US, there was a huge deleveraging in the AAAs, that might have created a safer financial system but deleveraging means lower growth - all things being equal. If you go to Europe, for example, a lot of long-term investors are restricted from buying corporate bonds. Why develop a capital market if the natural buyers of corporate credit are restricted from buying it? I think these are very complex issues and we still don’t understand what we did.

There is a divergence between the slowing economy and the equity markets are at a high … how do you marry these contrasting events?
It’s a conundrum. The equity prices tend to reflect what people think about the future. If you say there will be no recession, these prices are not that high. If you said there will be a recession next year, then the prices are quite high. On the other hand, if the 10-year rates go down the stock prices go up, but one looks like it is predicting recession and the other looks like it is predicting growth; it is really hard to tell and yet one affects the other. Central banks of the world bought $12 trillion dollar of securities that had an effect, and we don’t completely understand the effect.

What do you think about the collapse of valuation of Uber and WeWork?
I am not going to speak about a specific company. I don’t call them collapses of valuation. The fact that someone paid a higher price does not mean it was worth that. You don’t have daily price discovery like we have in the stock markets, so obviously some of these things were overvalued at the last valuation. Not all bought at the last valuation -they bought at a lot of different prices, so there is a lesson to be learnt about how big you can be, how much negative cash-flow you can have, if you have negative cash-flow, how much you can rely on the private markets. All these issues have been learnt and sometimes re-learnt.

What is your view about Facebook’s Libra?
You guys spend a lot of time on these things, but it’s not going to happen. At the end of the day, it is not about the block chain but about the crypto-currency and who controls an asset-backed crypto currency. Governments will eventually want to have a certain amount of control; they are not going to allow these things to be outside the banking system.

So, does India still stand out, or is it sailing with the rest of the economies?
You are still one of the fastest growing economies in the world. It has slowed down a little bit but if you continue to do the right things - and this government is attacking all the right things - you can even get back to 7-8% growth, which India can uniquely do for the next 20 years.

You are in India for the international council meeting, what is the agenda this year?
We meet once a year; It includes political leaders and existing CEOs … such as the former US Secretary of Defence Robert Gates, the former US Secretary of State Condoleezza Rice, former British Prime Minister Tony Blair, and former Prime Minister of Australia, John Howard. Ratan Tata has been a member. We have CEOs from around the world and we meet once a year, usually in Asia and Europe. This year, we are holding it in Delhi, considering India and China are the fastest growing economies in the world.

Shareholder value is gaining momentum from stakeholder value. Is this a paradigm shift in the way businesses will operate?
It is an evolution and some businesses already operate this way. We have stated since 1997 that the purpose of corporations is fundamentally to maintain and focus on shareholder value, and while that is true, it is also important to focus on customers, employees and communities … you can’t do one without the other. We just can’t act that shareholder value is the only component that matters because when the world hears that, it feels we are just interested in short-term profit seeking and we are not just about that. We believe it is important to portray a balanced and accurate representation of what we do. Some people feel that building shareholder value is just about yearly profits but that is not how you build corporations. When I talk to my board, we don’t talk about what the profits might be, but what else we are doing for years to come.

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