I understand you are a big fan of Asia.
Yes, I have been coming to Asia for a long time. The world is moving Eastward. In the 19th century London was the hub of all financial thought; then New York in the 20th century. I used to joke with the team that ran the LA Times and say, someday you'll be regarded in the same way as the people that now run the New York Times.
In this century it is going to continue to move this way.It's population-driven and also driven by economics. So I have been a big fan, and when I lived on the West Coast I tried to get heavily involved in forums out here, and also get Asian figures to stop in California when they were coming to the US. I was on the first Singapore-US business council that was formed.
We also created an Asia Business Forum about five years ago, here in Hong Kong. The thought was to replicate the Business Council in the US - which comprises the top 75 CEOs and involves them meeting three times a year. The Asia Business Forum used to be more heavily driven by the US participants, but I am pleased to say it is now driven by the Asian participants.
After the Asian crisis, there was a tremendous backlash against all things Asian. Would you agree that Asia is starting to be perceived more favourably again?
Yes, we are starting to get more reasonable economic news out of places like Korea, Singapore and Taiwan, as well as China. Gradually, we are seeing basic economics prevail and people outside Asia are taking a saner view.
What sort of percentage of JPMorgan's investment banking revenues ought to come from Asia?
Today, it is about 10% of the total corporate revenues. But bear in mind, before I answer this question that I have only been running investment banking for JPMorgan for about eight days.
That number - 10% - is clearly going to grow. The strategic challenge is how do we pace it. It's hard to say I think it will be 25% five years from now , but it will certainly grow. The challenge will be how much fixed income and equity capacity we put in local markets, and how much do you try to regionalize. It is a question of how much of the business will be local versus cross-border.
I know it will go up.
The other key issue is China. Everyone who comes through town normally goes goggle-eyed at the mention of China. How realistic are you about what is achievable in China?
You're right. Everyone has gone goggle-eyed and it really has been an investment in the future - for the past 10 years. But the pace of activity in China is definitely picking up. So we are seeing an increase in M&A, and through Jardine Fleming we are trying to start the first open-ended investment funds.
We're seeing the beginning of a rates and credit market; although it is a fixed income market where the rates and the exchange rate are administered; so you're not going to see much volatility.
And we're also beginning to see some equity capital markets activity. That will continue.
One of the real benefits of the Chinese economy is that, in many ways, it is self-contained. We have seen that over the past two years. There can be plenty of growth in China based on their own supply and demand needs.
The evolution of the fixed income and equity markets within China will take time. With some of these things it is very hard to leapfrog.
When we look at the financial system in the US, the regulatory environment is very well developed - in spite of some of the debates we've been having about accounting. You can't build that type of infrastructure overnight in an economy like China or India. You can shorten the learning process.
I remember looking at a transaction in China where a guy wanted to become a McDonalds franchise. Instead of starting with one, he wanted to open 50 in five cities overnight. As a banker, you look at that and think, this is unlikely to work. That's because one of the things that has made the McDonalds franchises work is people buy one, put all the sweat equity in, really learn how to run the business. Then they broaden to five. And the reason they can run five, is because they understood what it took to run one, and all the things that went wrong and all the things that didn't. So it's unlikely he can go from zero to 50. I think the same thing is true of the evolution of the equity and fixed income markets in China.
The regulatory infrastucture that will make the system work has to live through some problems. I don't think it's going to take 50 years. But it's not going to be two either.
Often when people come to Asia, they are very excited about China, but less so about India. Do you share that view?
I have flip-flopped a bit on this. Three or four years ago, I thought India would grow faster than China. But think back. At that point you had India opening up the economy for the first time in a long time. It was allowing foreign investment. Then the regulatory structure did a complete flip, in terms of business receptivity.
Now of course you have some political issues.. But you did have some good things going for India - the English language, a regulatory structure that appeared more predictable, a legal structure. So with that infrastructure there was reason to think India would grow faster.
I would probably not draw the same conclusion today. China has a middle class that's very entrepreneurial. And that class is getting bigger and bigger. And you are seeing some positive things on the regulatory front.
In Asia there is a lot of pressure on investment banking fees. Does this make it more likely that a universal banking group strategy is likely to win in this part of the world?
I do think that wholesale financial services begs a strategic question. It is about whether you are a full service player, with a big balance sheet behind you a la JPMorgan.. Or are you a more focused player without a big balance sheet.. That's basically the debate. That game is playing itself out and customers will vote.
I don't think it is necessarily a matter of fees. In the end there is something intuitively unsatisfying to me of subsidizing one product with another. Maybe I am a mathematical economist at heart. For years we thought the Japanese were going to win with that strategy, and it proved to be pretty inefficient.
I am not a believer in slicing fees to get business. We have this debate a lot. We have a hurdle rate that we have to make for our shareholders. I don't think you win on the basis of subsidizing business.
I think you win based on intellectual capital. I want to have more intellectual capital than the people I am competing with.
The bulge bracket always say they have more intellectual capital.
I don't think they do. When I look at the talent we have at JPMorgan today, I think we are equally competitive. My agenda is stimulating intellectual capital and creating innovation.
