DBS CEO warns of China spillover

The exodus of funds from China’s stock market could hurt investor confidence across Asia and is likely to slow the pace of liberalisation in China, says DBS's Piyush Gupta.
DBS's CEO Piyush Gupta
DBS's CEO Piyush Gupta

DBS’s chief executive officer Piyush Gupta believes China's stock market turbulence has the potential to dent investor confidence across Asia.

At a media briefing held on Thursday at the bank's headquarters at Marina Bay Financial Centre Tower 3, he said the uncertainty that was being generated could spill over across the region.  

"The problem with China right now is that it’s in panic mode," Gupta told reporters. "If you get into panic mode, investor psychology is difficult to predict, you can get tail events." 

Chinese equity markets in late June and early July experienced their biggest three-week decline in more than two decades. As of Monday, the Shanghai and Shenzhen stock market indexes were still down 23% and 32%, respectively, from the seven-year highs touched on June 12. And although more than 300 listed Chinese companies have since resumed trading, according to reports, trading in about half of all shares on both markets was suspended at the end of last week.
Exacerbating the rout was margin lending. Market estimates are that securities companies had as much as Rmb2.27 trillion ($366 billion) in margin positions outstanding in June, with more in unregulated over-the-counter financing, according to a Baring Asset Management report.

Much of the outflow so far has been about Chinese retail investors charging for the exits rather than about foreign investors taking their money out. To put things into context, China's stock markets are still up about 100% compared with a year ago.

However, the recent rout could yet give investors further reason to hold off from committing more funds to the region.

“A big driver for growth in the region is investment," Gupta said. "What we need is strong investor confidence. Anything that actually dilutes investor confidence can have a material impact [on] our region.”

Outside of China, two key Asian markets India and Indonesia have struggled in recent years to attract foreign investment due to political worries and the uncertain treatment of investors. But Indonesia now has lower public debt levels and India has higher foreign reserves. So the capacity of the region to deal with an outflow of capital today is stronger than it has been in the past, he said.

From a broader regional perspective, events in China nonetheless merit watching.

Liberalisation rethink

Bouts of market volatility are to be expected as China transitions from being a centrally planned economy to one that is more market-driven and takes steps to open up its capital account and to liberalise its interest rates.

“The transition is not easy,” Gupta said, citing the potential for "massive swings".

But to control the exodus of funds from the stock market the Chinese government has intervened robustly, introducing a slew of measures to stabilise stock markets that have raised eyebrows.

The government relaxed its rules on margin financing while the People’s Bank of China said it will help to ensure that China Securities Finance Corp, the official margin lender for brokerages, has ample liquidity. Chinese state-owned enterprises have also promised not to sell their own companies’ shares.

So if anything, the official response seen so far to this summer's stock market turmoil has called into question the Chinese government's intention to push ahead with that transition. 

“One of the possible negative consequences of the turbulence could be a rethink of the pace of the liberalisation,” Gupta said.

DBS's long-term strategy in China remains unchanged for now but the bank will take some precautionary measures. "Like every sensible banker, we look at the short-term consequences of movements and make sure we align our risk management, our strategies," Gupta said. "But those are tactical, they vary from week to week and month to month," he added, without specifying.

DBS's China loan book contracted in the first quarter of this year, with trade-related loans from China falling S$7 billion ($5.18 billion) quarter-on-quarter due to lower commodity prices and the convergence of onshore and offshore rates.

Mega acquisition unlikely

DBS, which has long harboured plans to expand in the region, is unlikely to make any major acquisitions due to regulatory hurdles, Gupta said.

“Regulatory agendas are very different, country by country…Therefore bottom-line, in today’s world, I think to do a mega acquisition for example is very hard,” he said.

DBS walked away in 2013 from a $7.2 billion acquisition of Indonesia's fifth-largest bank Bank Danamon Indonesia after it became embroiled in a political tit-for-tat between Singapore and Indonesia over reciprocity of market access.

In the past, there has been speculation that Temasek-backed DBS could merge with UK-headquartered Standard Chartered, which also counts Singapore's sovereign wealth fund Temasek as a shareholder.

Gupta poured cold water on that notion. “People keep speculating if somebody will merge or buy a StanChart or something," he told reporters. "I think it’s very, very unlikely. To acquire something which is in 64 countries, [with] 64 regulators with all these issues and challenges I told you about, I think it’s not easy at all,” he said.

Instead of growth through acquisition, DBS will focus on building its digital platform. "We are really focused on trying to think our way through this whole digital transformation in this world of finance," Gupta said. "For us, the next three to five years, the game is going to be digital and you have to devote relentless attention and energy to making that transition right."

However, the bank will still be open to making smaller acquisitions that it can integrate more easily, such as its acquisition of Société Générale's Asia private banking business for $220 million last year.

"We will still look for fill outs. We can buy a wealth portfolio like we did with SocGen or we can buy specific portfolios which are small," he said.

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