JPMorgan to continue China investment despite U.S. friction: COO

JPMorgan Chase is expanding its overseas businesses, including Asia. While the political tension between the U.S. and China remains high, the company continues to increase its number of employees in China. In a recent interview with Nikkei, President and Chief Operating Officer Daniel Pinto explained their business strategy.

Edited excerpts of the interview follow.

Q: The confrontation between the U.S. and China has been prolonged. Why do you continue to invest aggressively in China?

A: Aggressively is probably the wrong word. China is a big country, the second biggest country in the world. Comparatively, the size of the country versus the size of the business that we do in the country are very misaligned. We have a relatively small business for the second largest country in the world. It’s a country that will continue to be relevant for years to come. What we are doing is continuing to gradually invest in a very prudent way. It would be unwise for us not to invest in China given the size of the country and the potential. We will do it at a conservative pace to make sure that we don’t take risks that are unacceptable.

Q: What do you think about the future of the confrontation between the U.S. and China? Do you think the benefits of expanding into China are greater than the risks?

A: When you’re talking about the two superpowers in the world, there’s always going to be a degree of pressure. Sometimes the friction will be higher and sometimes it will be lower. This is not something that it will go away. It will continue. Our strategy has to factor in that friction, what it means for our business and inform the way we make investments.

Q: You have made a joint venture in the securities business in China a wholly owned subsidiary. Are you seeing any business benefits from this?

A: Our joint ventures were extremely useful to learn from, but there is a point where you want to really own 100% and control your own destiny. The benefit of our investments won’t be fully visible in the next couple of quarters. It’s really in the long, long term. As financial services and the financial markets in China continue to develop, companies like JPMorgan can contribute a lot of know-how to the maturity of solid, reliable capital markets. We will gradually continue hiring to complement the business that we do. We need to staff up all the new entities. But not just in China, in Japan too and in Asia in general. Asia has been a big area of growth for us.

Q: In China, domestic banks hold a large share of the investment banking business. Can you compete with them?

A: Chinese banks do a good job. What we do is bring international clients into China, and the expertise of the best investment bank in the world into the country to help Chinese companies do international business. We aren’t challenging the big Chinese banks. We think that we’ll continue to grow and help in the segments in which we focus. China is a relatively young market. The size of the market will grow and the types of products will grow. By bringing our international expertise into that market, we feel that we can help our Chinese clients and the development of the market overall.

Q: The Securities and Exchange Commission has imposed strict rules on IPOs of Chinese companies in the United States. Will it hurt your business opportunities?

A: We can help companies list on many exchanges. We have a very active investment banking operation in Hong Kong, and now we can participate in the Chinese equity capital markets. On top of that, you have payments, custody and other investment banking products. It’s not just about IPOs.

Q: How about your business in Japan? Do you think there still is a room for growth?

A: Our Japan business is a very solid business. It’s been growing over the last number of years. Of the international banks, we are the biggest corporate and investment bank in the country and the one that has the most complete set of services, from custody to payments, to trading, to investment banking. We have over 1,000 people in the country, and the idea is to continue growing. We will continue to hire bankers to grow, but it is a very competitive business.

Q: Citigroup is selling oversea consumer franchises, but you are going the other way, like purchasing U.K. digital wealth manager Nutmeg Saving and Investment. What is your strategy?

A: First, we are not buying branches or banks. We are going digital. We have an amazing consumer business in the United States, and historically we felt it was very difficult to grow outside. Now due to technology development and changes in digital consumer habits, we saw that it was a good opportunity to start thinking about diversifying our business beyond the U.S. Obviously, our objective is not just to be in the U.K., and to grow the number of services and products. That’s why, for example, we bought Nutmeg. Over time, we hope to expand into other parts of Europe. And then from there, we will see.

Q: How do you expect the Federal Reserve will act against the current inflation?

A: What we think at the moment is around four or five hikes this year. The inflation this year will end up around 3%, and probably in the years to come between 2% to 2.5%. Now it feels it will be orderly that the Fed is in control. They started acting when they saw inflation pressure going up, and changed the rhetoric of their comments on inflation, and the market started pricing in more hikes.

There is a risk that the Fed goes gradually and then inflation continues to accelerate, which is not my core view. In that case, Fed will have to do a lot more and a lot faster. There are no indications of that, but if you look at history, I think that this cycle looks like a mix of what happened in the 1960s and in early 80s.

Q: Do you expect the inflation in the U.S. will slow down?

A: If I look at the inflation in the United States, you can explain the bulk of it by three or four components. One is the car supply, autos. The second piece is housing, rentals, and the value of rent plus the implied value of rent of the people who own the housing. The third topic is airlines and the sectors that have pent-up demand from the pandemic. The fourth is the consumption of durable goods. People in the United States were consuming 25% more than they were in 2019.

On the other hand, the labor market is very hot. That component is a bit concerning because we think that the unemployment rate will get to around 3.3% by the end of the year. That is below the equilibrium or what we think would be the equilibrium of the Fed equilibrium of around 4%.

That will continue to put pressure into inflation. The combination of those factors make us think that inflation will remain elevated, but trend down. We think that inflation by the end of the year will get very close to 3% from where it is now.

Author: TAKENORI MIYAMOTO, NIKKEI Asia