“The Chinese stock market bubble? More than a bubble, it seems to me a firecracker due to its roar but also its inconsistency. I really don't think it will affect China's growth and affect other financial markets." Franco Bernabè, one of the most famous international top managers, has a deep knowledge of China, where he was on the board of PetroChina for 15 years and has just returned from Hong Kong and Shanghai at the conclusion of one of his periodic missions business for Barclays, of which he is senior advisor after leaving the presidency of Telecom Italia. He is the right person to try to understand what is really happening in China and on its markets but also for an overview of the other major international issues that are inflaming the summer: from the Iranian nuclear deal to the crisis in Greece and the Eurosummit agreement. The interview that Franco Bernabè granted exclusively to FIRSTonline reserves many surprises, especially on the Greek debt but not only.
FIRST online – Dr. Bernabè, the bursting of the Chinese stock market bubble is one of the events, not just financial ones, that most impressed the world and the international financial community. You have just returned from Hong Kong and Shanghai, what situation did you find and how do you see the Chinese scenario?
Bernabe – More than a bubble it seems to me that a firecracker has burst. The bubble is a long incubation process as seen in the early 35s in America with the dot.com bubble. This is not the case in China, where there has been a drop in share prices of the order of 150% in one month but after a XNUMX% rise in the last twelve months. It seems to me that at the origin of the stock market fall there is a single factor, which is the strong passion of the Chinese for gambling: when they discovered the stock market they thought it was like a casino and started buying debt securities, but in the end many of them got burned and when the sell-off began for some investors it was a catastrophe, fortunately with limited effects.
FIRST online – He will admit that the Chinese case remains unique on the financial but also international political scene: never before has a state and a communist party sponsored the Stock Exchange so blatantly and then resorted to all the weapons of state interventionism and dirigisme to extinguish the fire. But now the problem is to understand whether what happened will have effects on the real economy and whether or not it will affect the other financial markets: what do you think?
Bernabe – Certainly, financial regulation in China still has limits and the problems associated with the role of large public enterprises and that of monetary policy appear unresolved, but what happened on the Stock Exchange is a more marginal event than it seems in the West and above all it has no effects systemic both on the economy and on the markets.
FIRST online – For the new Chinese generations, who have been accustomed to double-digit growth, even a small slowdown in GDP can generate anxiety: are there any fears about the future of the economy in China right now?
Bernabe Not in the way we think. In reality, the Chinese are fed up with excessively accelerated growth which has devastated the environment, making the air unbreathable and polluting food and rivers. And the new five-year plan testifies that the Chinese state is aware of the need to reorient growth in a more balanced and more environmentally conscious way, remedying the ravages of decades of spasmodic growth. The truth is that China is changing its development model along the way, which will be less export oriented and more attentive to domestic consumption and quality of life.
FIRST online – In the same days in which the stock market turbulence in China was taking place, another epochal event took place in the world with the Iranian nuclear deal: it is a "historic agreement" as President Obama says or a "tragic mistake" as he claims Israel?
Bernabe – Nobody knows. Say what you like about the agreement, but only the future will tell whether it was really a "historic agreement" or a "tragic mistake". Much will depend on the Iranian ruling classes and the consequences on the dynamics of a very complex area of the world. It would be schematic to think that the agreement will only change relations between Shiites and Sunnis because the dialectic between the two camps is very strong and the distinctions and contrasts between the United Arab Emirates with respect to Qatar as well as between Egypt and Turkey are quite evident. No one can predict today whether the Saudi-Egypt axis will prevail in the Sunni camp or the much more ambiguous one made up of Turkey and Qatar in relation to the threats from ISIS.
FIRST online – However, the future will also depend on America and Israel.
Bernabe - Certainly. But for now it is difficult to understand whether the agreement is really the result of a long-term turning point in the American establishment or the expression of the legitimate peace ambition of an outgoing President like Obama. Only the future will tell whether it was a right choice or not, but let us hope that the agreement will make Iran evolve in a direction more favorable to the West and that the secular and reformist part of its ruling class will erase decades of obscurantism and finally take the upper hand. But we also hope that the West does not repeat the dramatic mistakes made in Iraq or Libya.
FIRST online – You were also the managing director of ENI for a long time: beyond geopolitics, what effects will the Iranian agreement have on the oil market?
Bernabe – In the short term, the effects will not be striking because today the proliferating market is conditioned by three elements: 1) the resilience, far beyond expectations, of the production of shale oil which brings American production closer to the threshold of 10 million barrels per day; 2) the growth of Iraq's crude oil production; 3) the maintenance of production levels in Saudi Arabia in part so as not to lose market share and in part to feed internal demand.
FIRST online – But for the big western oil companies like ENI, does the Iranian agreement present more advantages or more risks?
Bernabe – It will depend on conditions and prices, but certainly the possibility of new explorations gives hope for business growth.
FIRST online – The Greek crisis, together with China's financial turmoil and the nuclear deal with Iran, is the third element that shook the markets and the international community in this hot July: on the new agreement between Europe and A lot of criticism has rained down on Athens and certainly the limits are evident, but is having avoided Grexit and finally starting Greece on the path of reforms really a result to be despised?
Bernabe – Quite the opposite, especially given how things turned out in that dramatic Eurosummit of 12 July. It was an almost incredible story for the superficiality with which it was conducted and for this very dangerous reason. The general lack of rationality and foresight of the various protagonists in the field risked causing disasters and destroying the euro. Luckily at the Eurosummit there was also a person like Mario Draghi who has never lost his lucidity and who has a very clear vision of the problems. And in the end there was a flicker of common sense that led to a successful conclusion between Europe and Greece, albeit somewhat casually.
FIRST online – As the IMF and the ECB have pointed out, the cumbersome problem of the Greek debt remains on the table: cancel it, cut it or restructure it? How will it end?
Bernabe – There is a big misunderstanding on the Greek debt which, at the point we have reached, is essentially a false problem. With average rates at 1%, much lighter than those that Italy pays on its debt, and with an extension of maturities to 2042 and a possible further extension, the Greek debt is in fact already restructured. The problem is only one of representation in the financial statements of the Monetary Fund and the ECB because the real value of Greek debt, if it were calculated with the mark to market criterion, is much lower than the 350 billion nominal value. Greek debt relief is already in the works. If anything, the big problem is another.
FIRST online - That means?
Bernabe – The Greek case but also that of migrants has clearly shown that Europe has fearfully gone back to the time of the peace of Westphalia which excluded any interference and any true integration in relations between sovereign states. The utopian thrust of a new Europe that characterized the second post-war period has dissolved and today we are witnessing the Europe of the homelands of which De Gaulle spoke. There are many poles on the continental chessboard: there is Germany, there is Great Britain which is rowing against Europe in line with its history, there is Russia but there is no longer Europe.
