Market mood ‘too pessimistic’ says UBS chairman Axel Weber

UBS chief economist Dr Arend Kapteyn said the trade tensions would reduce Chinese economic growth by 80 basis points, but policy stimulus would add back about 40 basis points. That would result in an overall reduction in the growth rate from 6.5 per cent to 6.1 per cent.

Mr Weber said he expected the Chinese central bank to come to counter the economic impact.

“They have a number of additional levers they can move on the monetary policy side. They need to intelligently look at monetary policy stimulus, such as adjusting minimum reserve requirements.”

Mr Weber also said there was probably room for China to “manoeuvre on fiscal policy.”

As US and Chinese trade delegations extended talks held in Beijing stock markets have lifted amid optimism that an agreement may be reached. Mr Weber appeared hopeful that a resolution will be found.

“It is in the interest of the trading partners to actually move to a resolution of these tariff and trade-related risks and the two presidents have given a clear signal that they want these disputes resolved.”

He added that he was quite positive on the long term outlook for China even if trade tensions simmered, and said trading relationships within the Asia Pacific region and the European Union could be strengthened.

“There is a lot of trade diversification that can take place by diversifying away from the US as a trading partner.”

The 61-year-old Mr Weber served as the chair of the Bundesbank from 2004 to 2011 before becoming the chairman of UBS, the Swiss based wealth manager and investment bank.

As central banks re-evaluate monetary policy in the midst of volatile markets, Mr Weber said the European Central Bank, which ended its €2.6 trillion ($4.1 trillion) net asset purchase programme in December last year, was “clearly in wait-and-see” mode.

“The amount of uncertainty and volatility is a factor monetary policy has to look at.”

But he said, uncertainty had been at a “record low” and was “normalising” as monetary policy itself was itself returning to more normal settings.

Mr Weber alluded to what he described as a “cliff risk” that the ECB will need to solve by 2020.

That is when over €700 billion of loans extended as five year Long Term Refinancing Operations, or LTROs extended to European bank is due to refinance.

A withdrawal of that quantum of funding could have negative impacts for lenders that tapped those loan facilities, but the terms of the extension could also send a negative signal as to the health of banks reliant on the facility.

The ECB strategy on how to deal with the maturing LTROs “is not yet well defined and needs to be looked at in the circumstance of when it will actually happen,” Mr Weber said.

Mr Weber has also recently argued in favour of consolidation in the European banking sector, as the region’s lenders have struggled to achieve consistent levels of profitability.

Aside from BNP Paribas and HSBC, Mr Weber said there are few European lenders that have achieved the size and scale of some of the larger American banks, putting them at a disadvantage.

“If you look at the size of European banks, many of them are trading well below book value and so relative to the US banks, size increasingly matters because it’s a fixed cost play.”

In Germany, government officials were reported to be considering brokering a merger between Deutsche Bank and Commerzbank to strengthen the so-called national champion bank so that it can fund German companies

“There’s a lot of [consolidation] talk and a lot of planning going on and people positioning themselves, but this is all planning,” Mr Weber said.

But Mr Weber has argued that in order for European banks to compete with the big American banks, it should be easier for cross border mergers to take place.

“My view is a European champion is what we need.”

The author travelled to Shanghai as a guest of UBS

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