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Business

Morgan Stanley eager to grow in increasingly open China

CEO Gorman sanguine about global growth and 'exciting' Japanese recovery

James Gorman, chairman and CEO of Morgan Stanley, speaks with Nikkei in New York.

NEW YORK -- Morgan Stanley looks to take control of its Chinese joint securities venture as Beijing relaxes rules on foreign ownership, said Chairman and CEO James Gorman, who sees "many, many years of strong growth" to come in the world's second-largest economy.

In an interview with Nikkei, Gorman called Japan's return to growth after years of stagnation "exciting" and expressed enthusiasm for New York-based Morgan Stanley's partnership with Mitsubishi UFJ Financial Group, saying the two financial conglomerates will be "partners for decades." He sounded optimistic about the U.S. economy as well, showing confidence in the Federal Reserve's ability to rein in any overheating caused by the recent tax overhaul.

Edited excerpts from the interview follow.

Q: China's government plans to ease limits on foreign ownership in the financial services sector. Does Morgan Stanley plan to raise its stake in its Chinese joint venture or increase investment to expand business there?

A: Definitely. We've taken our stake [in Morgan Stanley Huaxin Securities] from 33% to 49%, and we would like to quickly go to majority ownership in China. If China wants to be a true open market and operate on a global basis, it has to let international companies operate as they would in other parts of the world.

Q: How do you see the Chinese economy itself?

A: It appears to be very strong. It's growing at 6.9%, I think. It's nearly an $11 trillion economy. That's extraordinary growth for an economy that size. They still need to build out more domestic consumption. The savings rate is very high, and they're very dependent upon exports still. So they need a more domestic-driven economy.

And given the population size in China -- 1.4 billion -- and the urbanization of that population, there remain many, many years of strong growth in China.

Q: Some are still worried about bubbles in China. Should we be concerned?

A: I think people are always concerned when you have growth at 6%, 7%, 8%, because it means the banks are lending a lot of money. There's a lot of debt around.

On the other hand, the Chinese have navigated the last 20 years of economic growth very well. So I think it's prudent to be concerned, but I wouldn't be panicked about it.

Q: What do you look for, and how do you hedge against that risk?

A: I think you look for the rate of growth of credit. You look for how the financial sector is being managed, what sort of capital requirements the banks have. You look for nonperforming-loan changes year to year. You look at the nonfinancial sector. You try and look at the engines that stimulate the growth, and [whether they're] being managed.

And I think the size of the economy means there's an enormous amount of growth being financed. You want to make sure that within that financing, it's being done with discipline, with good paperwork. Obviously the government has decided that certain companies have been growing just too fast, and they've become too leveraged. You've seen that in the press, that those companies have been either taken over by the government or constrained. And that, to me, is a very good sign. That's recognizing that being successful is not enough. Being successful over the long term is what the Chinese leadership is looking for. And I think they're managing it, and they're managing it very well.

I think you're always prudent when you see a very fast-growing economy. You're even more prudent when it's a very fast-growing, very big economy. It doesn't mean you don't think that it makes sense -- you've just got to be thoughtful.

Q: What is your view of the Japanese economy?

A: It's very exciting. Japan's economy is growing for the first time in a few decades. The efforts in both monetary policy and some fiscal reform are starting to take hold. Of course, Japan still needs some structural reform, which will take some time to put in place, but I'm encouraged.

I think Japan's two biggest challenges are population decline and the political will to make structural reforms. But in order to address structural reform, you have to address the fiscal and the monetary. And that's what [Bank of Japan Gov. Haruhiko] Kuroda-san, who just got reappointed, is doing on the monetary side. In order to address population decline, obviously you need a higher birth rate and you need more open borders, more immigration. That's a long-term issue Japan's society has to confront if it wants to grow.

Q: How is Morgan Stanley committed to Japan?

A: We have the biggest financial partnership with any Japanese institution. We have two jointly owned businesses with one of the greatest banks in the world, MUFG. We visit Tokyo every year, and often many times a year. We have a joint steering committee with MUFG. We do a number of transactions around the globe in partnership with MUFG.

The Japanese economy is the third-largest economy in the world. It's a $5 trillion economy. It's a massive market for financial services, and a lot of Japanese corporations that are looking to grow, particularly consumer businesses, are growing by going around the world [because of population decline in Japan]. We can help those corporations find companies to buy, to merge with and so on.

Q: Is there any room to expand the partnership with MUFG?

James Gorman, chairman and CEO of Morgan Stanley.

A: I think we have to be realistic. It's already an extraordinarily large partnership. MUFG owns about 22% of Morgan Stanley. Two of the directors sit on our board. We have two joint ventures in Japan -- the securities businesses. We've worked on something like 500 transactions together around the globe last year. So [we can expand the partnership] if sensible opportunities come up for further things we can do together, but we're probably not going to do more structural things. I think the ownership stake is not likely to increase, but it's not likely to decrease. We'll be partners for decades.

Q: Are you comfortable with MUFG's 20%-plus stake?

A: I think it's wonderful. We're partnered with the most significant financial institution in the third-largest economy in the world. And they're a world-class partner.

Q: If I were management at MUFG, I would hope to have a bigger stake in Morgan Stanley.

A: Well, yes, but then you get in all sorts of complications around the limits to what your size can be before it triggers certain changes in corporate structure and ownership structure. You'd have to talk to MUFG, but I think they're very comfortable with the level they're at, and we're very comfortable with that level.

Q: How would you describe the situation in the U.S. economy and markets? We saw market turmoil in early February.

A: The economy is strong. You've got 3% [gross domestic product] growth, you've got unemployment close to 4%. You've got tax reform, which is certainly helping corporations. You're starting to see the beginnings of inflation. There's a lot of positive things about the economy.

The market turmoil is not because of the economy. The market turmoil was because of the concern around future changes to the economy. As the Federal Reserve is moving to a more hawkish position, the market is trying to absorb what I call the normalization of interest rates. The president's [Donald Trump's] tariff -- which I guess we're about to hear about, the final decision -- that creates unsettling things for the market.

Q: So was it a healthy correction?

A: In the moment, they never feel healthy because nobody likes a correction. But if you don't have corrections, you will eventually have a crash. So it's certainly healthy.

Last year, the market was very broad-based -- everything went up. This year it's much narrower, much more sector driven. Some of the technology companies -- I think Amazon is already up 30%. The Nasdaq is up 5%, the S&P [500] is basically flat. Most of the global markets are flat to down.

Q: So is there a bubble situation, like before the financial crisis?

A: No, it doesn't remotely resemble the pre-financial crisis [situation].

Q: Some say the sweeping tax reform risks overheating the U.S. economy and triggering an early recession.

A: I don't think that's likely. I think the Federal Reserve has the mechanism to raise rates to offset [the impact] if the tax reform is too stimulative. If we were in a high-interest-rate environment and you had to raise rates even higher, I would be more concerned. But we're in a very low-interest-rate environment. So [the Fed] can use their power to normalize and to ensure that there isn't a major response to some of the corporate tax stimulus.

Q: The Fed continues to tighten its monetary policy. Can we overcome the bond bubble created by the global central banks?

A: My general position is not a very exciting one. It is that we're not about to have a crash, we're not in a bubble. The markets are not reflective of unknown factors, they're reflective of things we know. The economy is doing well. We have growth in Europe, we have growth in Japan, we have growth in China, we have growth across Southeast Asia, and we have growth in the U.S. The combination of global growth -- so-called synchronized growth -- is very unusual.

The geopolitical landscape is pretty stable. North Korea is the obvious area of concern. But most of the world is relatively stable. So the uncertainties are more political uncertainties. Brexit, tariff wars, things like that are frankly of governments' own doing.

Q: What do you make of the Trump administration's upcoming import tariff policy? Should investors worry about U.S. protectionism? Could protectionism damage the synchronized global expansion?

A: Yes, it could, eventually, if it goes too far. And I think it's a bad idea. The U.S. [has] a net surplus for services. It's in a trade deficit for certain goods. Part of that is because there are lower-cost manufacturers outside the U.S. That's fine. Part of it is because the dollar is strong. That's fine. And part of [it] is because some countries are not complying with their trade agreements. That's not fine.

I would focus on where countries don't comply with trade agreements -- a very narrow focus, and not a broad-brush sort of path to protectionism. The U.S. economy is 25% of the world's GDP, but the U.S. population is 5%. So the U.S. does well with global trade.

Q: Could you comment on the new Fed, especially Chairman Jerome Powell? He's not an economist, and some are a little concerned about his background.

A: The Fed has had businesspeople leading it before. There are seven governor positions on the Fed board. Undoubtedly some of them will be filled by world-class economists. And then [there's] the important role of the New York Fed, which I sit on the board of, and as [President William] Dudley has announced, he's retiring.

Chairman Powell is not an economist, but he is a very seasoned and very thoughtful markets-related person, and he's sat on the Fed board now for a number of years. And I think his knowledge is exemplary. So it does not give me cause for concern.

Q: Morgan Stanley has posted stronger growth than many competitors, including in fixed-income, currencies and commodities trading, with well-balanced growth among your key business pillars. Your market cap is now higher than Goldman Sachs' for the first time this decade. Why is Morgan Stanley's business so favorable now?

A: I think the market has responded to two things. One is that we have been very clear about the direction we're taking Morgan Stanley, and we've laid out very specific goals. Each year that we've hit those goals, it builds confidence in investors that we're heading in the right direction. Number two: Our business model is designed to do fine when markets are tough, and well when they are very strong. Others may have business models that will do better when the markets are strong and not as well when they're tough.

I think the markets like the stability that comes from our business model, particularly our wealth management business. We have, for 10 years, been very stable. We've had very little management turmoil. We haven't had any major problems that have been created post-crisis -- we obviously had a number of problems in the crisis. And I think the market is seeing that steadiness as a positive.

Q: How will the end of the low-rate environment affect your businesses? Once market volatility comes back, that's probably positive for your trading business, but it might be negative for your wealth management business.

A: I don't think that's necessarily true. The wealth management business doesn't do very much transaction activity -- most people have their money managed in funds. It also has a very large bank and mortgage business. So it has stable revenues that are unrelated to the market. [The end of low rates] will affect it, for sure. Investors don't like extreme volatility. But I don't think it's a cause for alarm.

Q: Your wealth management business has enjoyed strong growth over the past year, while Japanese banks still face difficulties due to the ultralow-rate situation in Japan. How were you able to build up your strong position?

A: The brand of Morgan Stanley is something that investors respond very well to. They look to us for providing them with intellectual capital and products that fit in their portfolio. And because we underwrite so many transactions, we have a great source of product which a lot of investors want. We have great intellectual capital through our world-class research, and we have great scale in the business. It's very big. So we cover our fixed costs easily.

These are businesses where you need scale to be successful, but big is not enough. You've got to be big and smart. I think that Morgan Stanley's intellectual capital is a key differentiator.

Q: It seems there will be less regulatory easing than initially hoped for the big banks.

A: There is unlikely to be significant easing. And I'm not sure I would make significant changes. The financial system needs its banks to be stable, and it really needs its big banks to be stable. So I haven't asked for major changes to the bank regulatory world, but I have asked for some modest -- what I call sensible, practical changes. I think maybe 80% of the regulation makes sense and 20% needs to be changed.

Q: Could you talk a little about technology? You've said robots won't replace human advisers. But global financial institutions are rushing to introduce new technologies. Morgan Stanley seems to have been a little slower in this area. As you've mentioned, you emphasize humans over robots.

A: We're in a business [where] we deliver very complicated advice. Robots might be good for helping somebody with $10,000 to invest. They might be good for processing credit card transactions. They're not so good at providing M&A advice.

These are very sophisticated, complicated [deals]. Legal, tax structuring, financing, management roles, pricing, understanding what the investor reaction is going to be, how boards are put together, whether it creates antitrust issues -- these are not things that robots can do. We're in complicated parts of financial services.

That said, we've made huge investments in our technology, so I disagree with you that we are somehow behind. We spend nearly $4 billion on technology every year. It's our second-biggest expense [behind personnel]. We have a major cyber technology effort, we have a major automation [effort], artificial intelligence, digital -- we have rolled out a digital platform. Electronic trading.

A lot of the transaction part of our business is being driven by technology. But a lot of what I call the value-added, advisory part of our business is being driven by people and their brains.

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