China's transition to global power of innovation and technology

I held the opening address at UBS's 17th Greater China Conference in Shanghai earlier this week. This year's event focused on China's transformation. China's economy is no longer just about labor, as it emerges as a global power in innovation and technology.

The 17th UBS Greater China Conference in Shanghai brought together executives from more than 187 leading companies in China and Asia Pacific, with over 2000 senior representatives across the financial industry, both international and domestic.

Below some key extracts of my speech. Please let me know your thoughts.

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We are here to talk to about China’s transformation.

And about how it will continue its remarkable development. And what that might mean for those, like you, who provide and allocate the capital that will underpin its future shape. Let's look at the short term first.

In our Year Ahead research, we estimate that global economic growth should continue at the high rate of 3.8% witnessed in 2017. UBS sees China's GDP growth slowing modestly from 6.8% in 2017 to 6.4% in 2018 and 6.3% in 2019. Even so, China is still outpacing the rest of the world. It's clear that no other large economy in the world will post a comparable rate of economic growth.

And China is now focusing on quality of growth, which means future growth prospects will be even more sustainable. Speaking of which, I think current Chinese equity markets valuations look sustainable given expected stable global growth, moderately rising global yields, China's efforts to contain systemic risks, strong southbound flows, and last but not least, the MSCI A-share inclusion.

Looking at the Chinese bond market, this has grown rapidly in recent years and is currently the world's third largest at USD 9 trillion. Over the next 5 years I believe it will double in size and become the second largest, behind the US.

To sum it up – it's clear to me that China will continue the strong upward trajectory we have seen over the last 10 to 20 years. And while the road ahead to growth may be a bit bumpier, from a UBS perspective, we see a sweet spot of four trends converging to create momentum.

First, supportive government policy. As I said a couple of years ago, having a stable and consistent government has been key for the success of the country. You only have to look at the 2025 roadmap to see that. To realize the potential that is obviously here, the path has been set for the next phase of ‘high-quality development’.  

Secondly, a supportive market ecosystem. With a growing and increasingly wealthy domestic consumer base to sell to and learn from.

Thirdly, education. I think one thing not well appreciated about China’s demographics is that while the population is ageing, the new workforce is far better educated, which will provide what we might term an ‘engineer dividend’ for the next decade. China creates nearly 3 million science and engineering graduates a year, five times more than the US.

Finally, China’s national savings have served her well over the last few years. As financial markets develop, more of this capital is finding its way into venture capital and other types of early funding. We estimate around $100 billion of venture capital over the last two years alone. There will be continued measured reform in the financial sector. We particularly welcome the opportunity for increased participation by foreign firms.

We recently celebrated the 10th anniversary of UBS Securities and under the new regulations we would like to increase our stake to 51 per cent. Beyond the financial sector, we will also see continued reform of the State-Owned Enterprises and a focus on world-class, globally competitive firms. 

The Belt and Road Initiative will continue to build connectivity and relations with the rest of the world. It will pay dividends in both trade and relationships. What does this mean for UBS, and what are we doing in China?

Well, UBS comes from Switzerland which is ranked the most competitive country by the World Economic Forum. And we see the value of innovation as a key component of economic growth and sustainable competitiveness. That bodes well for China. 

Continuity has also been the secret of success in the country I come from…. this combined with an open mind and the ability to adapt to an evolving environment.

Swiss banking has a long tradition and is known worldwide for quality, commitment and safety. UBS with its more than 150-year history including more than 50 here in Asia, is a major part of that tradition and shaped the evolution of modern Swiss banking across the globe. So, when UBS entered China in 1989 with a representative office in Beijing and Shanghai it was clear for us that we are here to stay.

The reason is clear. Take wealth creation in China. The number of billionaires in Asia overtook the US for the first time last year. We expect the wealth of Chinese billionaires to overtake the US some time in the next decade. At the same time China’s affluent segment is forecast to grow at around 13% per annum over the next 5 years as the middle class grows and becomes wealthier.

In this respect, we were delighted to announce last month the establishment of a joint venture with Qianhai Financial Holdings Co. Ltd to develop innovative wealth management related business in Qianhai. Together, we aim to build a Hong Kong-Shenzhen wealth management center serving clients across China.

 100 million people bought a financial product online last year. We expect the market to grow at double-digit rates. And China’s onshore bankable assets in the affluent segment alone will grow to over $3 trillion over the next five years and an increasing proportion of that will be managed online.

In asset management, a growing and more affluent population will also drive growth. I have seen forecasts that China’s market will increase fivefold by 2030 to $17 trillion, accounting for half of the net inflows to the global industry. Between our wealth and asset management businesses, we already manage half a trillion dollars in Asia.

And finally, investment banking. As capital markets develop and deepen, and as China’s vibrant private sector grows and requires funding, we believe that foreign firms like UBS can continue to bring expertise and resources to help develop the financial sector.

In research, we have many of our leading analysts here today. And as Kathy mentioned, we are delighted that UBS was just ranked number one for research in Asia by Institutional Investor for the first time in living memory. We remain confident that China's success story will continue.

Therefore we continue to invest. When I was here two years ago, I outlined plans for us to double our headcount in China as part of our 2020 vision. We are on track to do so with well over 1,000 colleagues here and we continue to recruit. We have achieved a series of milestones of our own over the past 18 months many of which I've already mentioned. All of this is evidence that we remain committed to China and to serving our domestic and international client base.