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na GUI nc D ial E T Se O rvi ce s

Journal of The American Chamber of Commerce in Hong Kong

www.amcham.org.hk

June 2012

COVER SPONSOR

Member’s Price

HK$200

ble a l i a v A

NOW

Your Best Guidebook for Settling in Hong Kong Living in Hong Kong is a compendium-style all-you-need-to-know guide for newcomers to

school, getting settled when arrived and enjoying life in Hong Kong. This consumeroriented book is designed as a sort of “hotline” with useful phone numbers and contacts to other sources of help.

Living in Hong Kong bookshops in Hong Kong. AmCham members often buy the book for their relatives and Americans), the book is one of the best-selling publications for AmCham.

Contact: AmCham Publication Department Advertising Manager: Regina Leung Direct Line: 2530 6942 Email: rleung@amcham.org.hk

June 2012 Vol 44 No 06

Contents

Richard R Vuylsteke

Editor-in-Chief Daniel Kwan

Managing Editor Kenny Lau

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08

16

COVER STORY

CHINA CONFERENCE

ENTREPRENEURS/SME

CHINA BUSINESS

A report on the US Foreign Account Tax Compliance Act: scope of coverage, impact on US individuals, compliance requirement of foreign financial institutions, challenges of tax information sharing across different jurisdictions, among other legality and enforcement issues

A one-day interactive discussion on China’s on-going economic and social changes and Hong Kong’s unique role in the transformation of China’s national economy, with insights from two keynote speakers and 28 senior executives in six discussion panels

Owners of small- and medium-sized enterprises in Hong Kong gather to talk about the art of entrepreneurship, business strategies for market share in an increasingly competitive environment, and how they can upsize their business in a downsizing world

Mary Gallagher, Associate Professor of Political Science and Director of the Center for Chinese Studies at the University of Michigan, discusses how labor unrest has strengthened the bargaining power of Chinese workers and reshaped China’s policies

Publisher

Advertising Sales Manager

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Regina Leung

biz.hk is a monthly magazine of news and views for management executives and members of the American Chamber of Commerce in Hong Kong.

Its contents are independent and do not necessarily reflect the views of officers, governors or members of the Chamber.

Advertising office 1904 Bank of America Tower, 12 Harcourt Rd, Central Hong Kong Tel: (852) 2530 6900 Fax: (852) 2537 1682 Email: amcham@amcham.org.hk Website: www.amcham.org.hk Printed by Ease Max Ltd 2A Sum Lung Industrial Building, 11 Sun Yip St, Chai Wan, Hong Kong (Green Production Overseas Group) Designed by Overa Creative Co Unit 1613 16/F, Workingbond Commercial Centre, 162 Prince Edward Road West, Kowloon ©The American Chamber of Commerce in Hong Kong, 2012 Library of Congress: LC 98-645652

AMCHAM NEWS AND VIEWS

CHINA CONFERENCE

04 Chairman’s Memo

16 AmCham’s Value-Added China Conference

James Sun highlights AmCham’s recent high-profile events including the 2012 China Conference and an inaugural SME Forum, and thanks sponsors who generously participated in a Silent Auction at the annual Ball and raised HK$282,850 for AmCham’s Charitable Foundation

A one-day interactive discussion on China’s on-going economic and social changes and Hong Kong’s unique role in the transformation of China’s national economy, with insights from two keynote speakers and 28 senior executives in six discussion panels

CHINA BUSINESS 28 Tales from the Frontline: Saving Face in China French business consultant and author Anne-Laure Monfret shares her insights on the complex subject of Chinese business culture and offers practical day-to-day advice on business etiquette and customs in China

30 China: A Labor Movement in Progress?

07 New Business Contacts

ENTREPRENEURS/SME

46 executives joined AmCham’s business network last month

22 Upsizing in a Downsizing World

33 Mark Your Calendar

Small business owners in Hong Kong gather to talk about the art of being an entrepreneur and business strategies for growth in an increasingly competitive environment as well as their personal experience and best practices

COVER STORY

08 You Do Know About FATCA, Don’t You? A report on the US Foreign Account Tax Compliance Act and what information US individuals and other foreign financial institutions will be required to disclose to the US Internal Revenue Service

INFORMATION & COMMUNICATIONS TECHNOLOGY 24 Cybercrime: The New Frontier of Corporate Security

14 What You Need to Know about FATCA Jim Calvin, Global Tax Managing Director (Asset Management) of Deloitte & Touche LLP explains the practical and immediate issues foreign financial institutions are likely to face in a journey towards compliance

Andrew Valentine of Verizon discusses findings of the 2012 Data Breach Investigations Report, an analysis of more than 850 breaches using data from a number of national law enforcement agencies around the globe

Mary Gallagher, Associate Professor of Political Science and Director of the Center for Chinese Studies at the University of Michigan, discusses how labor unrest has strengthened the bargaining power of Chinese workers and reshaped China’s policies

FINANCIAL SERVICES 34 Mapping Investment Strategy in Times of Uncertainty What financial service advisors have to say about the current global economy and why investors are strongly advised to play it safely and focus on risk-aversion longer-term strategies

36 Is Art a New Asset Class?

A volatile stock market and rising property prices are sending some investors to seek an alternative less conventional as a way to mitigate the effect of volatility in a more diversified portfolio

For comments, please send to biz.hk@amcham.org.hk Single copy price HK$50 Annual subscription HK$600/US$90

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COVER SPONSOR

Chairman’s Memo

Board of Governors Chairman James Sun Vice Chairman Richard Weisman Treasurer Peter Levesque Executive Committee Janet De Silva, Frank Lavin, Anita Leung Philip Leung, Belinda Lui, Alan Turley Governors Evan Auyang, Sara Yang Bosco, Brian Brenner, Tom Burns, Nicholas de Boursac, Walter Dias, Rob Glucksman, Toby Marion, Thomas Nelson, Andrea Richey, John Sigalos, Colin Tam, Elizabeth L Thomson, Frank Wong, Shengman Zhang Ex-Officio Governor President

Robert Chipman Richard R Vuylsteke

Chamber Committees AmCham Ball Apparel & Footwear Business Briefing China Business Communications & Marketing Corporate Responsibility Energy Entrepreneurs/SME Environment Financial Services

Kay Kutt Andre Leroy Donald Meyer Frank Wong Susan Reingold Benjamin Grubbs Robert Grieves

Dominic Yin Donald Austin Bradley Punu Catherine Simmons Brock Wilson Food & Beverage Veronica Sze Hospitality & Tourism Damien Lee Human Capital Janet De Silva Peter Liu Information & Communications Technology Rex Engelking Insurance & Healthcare Owen Belman Hanif Kanji Intellectual Property Gabriela Kennedy Amy Lee Law Clara Ingen-Housz Pharmaceutical Stephen Leung Real Estate Alan Seigrist Senior Financial Forum Alvin Miyasato Senior HR Forum Jacqueline Algar Sports & Entertainment Raymond Roessel Taxation Evan Blanco Trade & Investment Patrick Wu Transportation & Logistics Brian Miller Women of Influence Jennifer Van Dale Young Professionals Sherry Lin

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Dear Fellow Members: As anticipated, our 2012 China Conference was a great success. Not only did we have a great turnout, our speakers and panelists were truly terrific. His first time to speak at the Chamber, Charles Li of Hong Kong Exchange and Clearing delivered a stimulating opening keynote address, and then handled a broad range of questions with candid aplomb.

Charles shed new light on China’s future reforms and Hong Kong’s future role as a regional and global city. Likewise, our luncheon keynote, John Rice of General Electric, was equally impressive. John explained why China holds such strategic importance to MNCs such as GE. The Conference will be back next year, and I urge you not to miss out. I want to add a sincere thank you to all our sponsors and

supporting organizations for making this AmCham signature event possible.

Very sincere thanks as well to all of you who participated in the Silent Auction at our annual Ball. It was the first time we tried a silent auction, which was a new format for us, and the result was superb. In total, we raised $282,850 from the auction; all of the money goes to the AmCham Charitable Foundation. Your donations have already been passed to six worthy local charities, chosen under the stewardship of the AmCham Foundation Trustees, which is made up of past AmCham chairmen. A portion of the funds will also be utilized to support education-related exchanges between Hong Kong and the US. The success of the Silent Auction was just another indication of the wonderful job done by this year’s Ball Committee. With your support, we have further improved on what was already a highly successful signature event. Thank you for a job well done!

For those who may worry about the vitality of small- and medium-sized enterprises, there was reason for optimism at AmCham’s inaugural SME Forum held in late May. I was impressed by the strength and never-give-up spirit of the speakers and participants at the forum. A significant portion of AmCham membership is composed of SMEs, and we are serious about supporting those members. We will continue to organize more events and workshops catering to SMEs and start-ups, either through our various committees or the Chamber as a whole. Stay tuned and we will keep you posted. Many thanks to Don Austin,

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Chairman of the SME/Entrepreneur Committee, and to Elizabeth Thomson, Board Liaison, for their strong planning, support, and execution of this event.

This month, I will be leading a delegation to Washington for our annual Washington Doorknock. Again, we have a fully packed schedule, with a full week of meeting top officials, Congressional leaders and staffers, and think tank scholars. Top on the agenda are issues such as FATCA (for a detailed discussion of the controversial legislation, see the cover story of this issue) and improving competitiveness of American companies and individuals abroad. We will report to you next month about our meetings and discussions.

We are now half-way through the year. June means different things to different people. For kids, it means play and fun. For those running businesses, it could mean the time to step on the pedal and work harder in order to achieve the annual targets. And for many, June means taking a break. But for AmChamers, summer is never a break. At AmCham, we don’t sleep, we only take naps!

James Sun Chairman

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New

Business Contacts The following people are new AmCham members: Akin Gump Strauss Hauer & Feld LLP

Hongkong and Shanghai Hotels, Ltd, The

NTT Com Asia Limited

Gregory Puff Partner

Ming Chen Senior Manager, Business Development & Investor Relations

David Wong Executive Vice President

w w w. a m c h a m . o r g . h k

AlixPartners Hong Kong Limited Brent Carlson Director

ASAP Transaction Processing Corporation Limited Kylie Kwan Senior Vice President, Sales & Marketing

Brink's Asia Pacific Limited Gilad Glaser President for Asia Pacific

International SOS (HK) Ltd Paul Blinkhorm Security Director, Travel Security Services

ITW Graphics Ltd Lettie Yan Vice President of Sales, Asia Andy Yuen China General Manager Celine Chow Business Unit Manager

OHL (Hong Kong) Limited William Sim Managing Director, China and Hong Kong

Proquest Charles Horton SVP & Managing Director

PVH Far East Limited Mark Green Executive Vice President, Eastern Hemisphere

Communication Group Ltd, The

Over 500 pages in three major sections, including a complete guide to chamber services, corporate sponsors and AmCham Charitable Foundation. This directory lists nearly 1,900 members from over 700 companies and organizations.

Madeleine Behan Director Kieran Behan Non-Executive Director Anthony Behan Managing Director

ISBN 978-962-7422-03-7

Control Risks Pacific Ltd

LC 98-645651

Dmitri Hubbard Vice President Ben Wootliff GM - HK/Director - Corporate Enquiries, Greater China and North Asia

Jacobson Global Logistics (Hong Kong) Ltd JasonPun Business Development Director Desmond Gay President Jason Woo VP, Business Development, Asia

Jarden Consumer Solutions

Michael Yong-Haron Managing Director

Francis Cheung Chief Financial Officer Formula Lai Corporate Counsel Mahmoud Ismail Managing Director, Asian Operations

Damco Hong Kong Ltd

Kelly Services Hong Kong Ltd

Credit Suisse (HK) Ltd

Raquel Haj Wong Transpacific Trade Lane Manager

Fried Frank Harris Shriver & Jacobson Victoria Lloyd Partner

General Electric International, Inc Shane Fitzsimons CFO Global Growth & Operations

Hong Kong Adventist Hospital Brenda Mak Assistant Director of Marketing Rachel Yeung Medical Program Administrator Wendy Lo Fund Raising Manager

Alan Wong General Manager

Ken Lee Medical Centre

Recall Hong Kong Liz Hope General Manager

Sinclair Communications Matthew Stender Digital Strategy Manager Leona Ng General Manager Kiri Sinclair Director

Talent2 Hong Kong Ltd Gina McLellan Managing Director, Asia

Thomson Reuters Hong Kong Ltd Jean-Luc Gustave Managing Director, North East Asia Henry Fu Director, World-Check (A Thomson Reuters Business)

Steve Wang Director Denise Lee Director

Tripod Advisors - D.A. Schlesinger Ltd

Modern Testing Services (Global) Ltd

US Consulate General

Byung Won Park Managing Director

David Schlesinger Managing Director

Joshua Gillespie Assistant Officer In Charge

Norton Rose Hong Kong

W L Gore & Associates (HK) Ltd

Qian Guo Associate

Pete Kubizne Asia Pacific Regional Leader

View our other members at:

http://www.amcham.org.hk/index.php/AmChamMembers.html

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COVER STORY

T

he English phrase ‘long arm of the law’ is usually defined as the “ability of the police to find and catch people who commit crimes” or “the far-reaching power of the law.” In the realm of worldwide tax compliance and reporting, that phrase will have a whole new different meaning when the US Foreign Account Tax Compliance Act (FATCA) comes into force next year.

“The first question is: ‘Is it legal?’” said Joseph Field, a registered foreign attorney with law firm Withers Worldwide, about FATCA. He said the legislation means compliance and legal staff at overseas banks and financial institutions would have a whole lot more reporting to do.

“FATCA will discourage Americans from investing abroad and foreigners from investing in the United States. It’s potentially one of the most serious cases of over-regulation we’ve seen,” Field said. He was speaking at a recent event in Hong Kong hosted by the BFI Capital Group, a Swiss wealth management advisory.

The US Foreign Account Tax Compliance Act (FATCA), which will come into effect next year, will have profound impact on individuals and foreign financial insti institutions with business ties with the US. But its substantial compliance cost, enforcement challenges and implications over future information sharing standards around the world are not yet fully understood by most people. Ajay Shamdasani talks to lawyers and experts who shed new light over the controversial legislation

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What’s FATCA FATCA aims to lower US tax evasion by enabling the Internal Revenue Service (IRS) to obtain information on US persons’ income earned through Foreign Financial Institutions (FFIs). The legislation was enacted in 2010, but its proposed new implementation regulations were only issued in February. They outline comprehensive new US tax compliance obligations. A final set of implementation regulations is expected from the US Treasury soon.

The scope of compliance obligations imposed by FATCA on non-US financial institutions is very broad. Under the proposed regulations, FATCA compliance obligations apply even when there is minimal risk of US tax evasion. Under FATCA, a 30 percent withholding tax will be imposed upon certain US-sourced income and principal of non-compliant entities. All payers — American and foreign — making payments to foreign institutions affecting deposit accounts, custody and investment will be ensnared by the Act. FFIs concerns stem not only from FATCA, but in the deluge of American legislation affecting foreign institutions and corporations since the tragic events of September 11, 2001, such as the Patriot Act

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Richard Weisman, AmCham Vice-chairman, recently led a tax delegation as part of the Chamber’s annual Washington Doorknock to express concern over FATCA. While in Washington, DC, the Hong Kong contingent met with senior US Treasury officials and staffers of the Finance Committee of the US Senate and the Ways and Means Committee of the House of Representatives.

“The message I carried was how business on the ground was impacted by US tax rules.

Specifically, how such rules undermine the competitiveness of US individuals and multinational corporations,” he said.

In meetings with US officials, Weisman stressed many of the issues and concerns Hong Kong’s government and financial sector had already conveyed in writing to the administration regarding broader American tax law and policy.

(particularly its anti-money laundering requirements), the Sarbanes-Oxley Act (SOx) and, more recently, the Dodd-Frank Act, and the longstanding US Foreign Corrupt Practices Act (FCPA). Concurrently, there have been growing concerns about the obstacles facing Americans abroad seeking to invest and open bank accounts in Asia, as they wish to capitalize on the region’s growth.

Some multinational corporations and banking and financial institutions in Richard Weisman the territory have reported that the new legislation and its related regulations will severely raise the cost of doing business for foreign financial institutions (FFIs). They also fear that relative to US institutions, their competitive positions in the US have been impaired — thereby making it tougher for them to do business in American financial markets.

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Burden of proof According to Richard Weisman, AmCham Vice-chairman and a tax lawyer with Baker & McKenzie in Hong Kong, the compliance cost with FATCA is substantial. “There are no estimates about the global cost of [FATCA] compliance, but it will be a substantial burden,” he said. (details on implementation of FATCA on page 14) “The penalties are so severe that all institutions will choose to comply,” Weisman noted. “This imposes reporting obligations on every financial institution around the world and the stick is the loss of a third of the US-sourced income and principal of non-cooperating institutions. No institution can refuse to comply.”

“Hong Kong financial institutions now face a complex and onerous compliance burden in order to meet the FATCA requirements,” he warned.

Tim Clough, a partner with PwC in Hong Kong, pointed out that both US and foreign entities would face many of the same FATCA compliance burdens. “They [FFIs and US institutions] will be impacted in similar ways, but their timelines are somewhat different,” he said.

According to Clough, FATCA compliance costs would vary depending on an institution’s size and there would not be a one-size-fit-all solution. “Senior management will have to deal with FATCA and that’s going to involve a massive amount of time and be an interdisciplinary, multi-party project,” he said.

For example, technology professionals would have to add new data fields to an institution’s customer database, their legal department would need to amend their policies and agreements to ensure they were FATCA-compliant, whereas compliance staff would need to have adequate controls in place for sign-off.

“FATCA will also affect product and business heads at FFIs; they’re the people who deal with customers. It’s not just a tax compliance or technology project,” said

Clough.

A significant problem for compliance personnel — particularly in the wealth management sector — was when relationship manag managers had additional informa information that compliance did not possess, Weisman said.

“That’s where Asian institutions are vulnerable Tim Clough because to the IRS; if your relationship manager has it, it’s deemed that you [the institution] do.”

“This is going to affect the industry in Hong Kong in ways they don’t fully understand, yet,” Weisman said.

His advice to institutions was to start screening accounts — corporate or individuals — containing more than US$1 million.

Another difficulty was proving whether an account holder had any US investments, Weisman said. “To be completely ‘FATCA-free,’’, you can’t have any US-sourced income. For the majority of major institutions, that’s not an option, only for niche entities,” he said.

He added that many overseas Americans mistak mistakenly assumed that using trusts and different structures allowed them to evade US taxes. “It’s an illusion for a US person in 2012 to think the IRS will not access information on their financial investments.”

Irrespective of the costs, Clough pointed out the costs of non-compliance with FATCA would be greater than compliance costs — aside from the tangible 30 percent automatic withholding of US sourced income that the IRS might impose against recalcitrant institutions.

“You’ve also got to factor in the intangible costs like reputational loss and relationships with your customers, financial clients and other third parties,” he said.

“You’ve also got to factor in the intangible costs like reputational loss and relationships with your customers, financial clients and other third parties.”

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Competitive disadvantage “FATCA is one of the most draconian laws the US has passed in recent years,” said Frank Suess, BFI’s chairman and chief executive in Zug, Switzerland, at the recent event in Hong Kong. He added that previously, such regulations applied to banks but under FATCA, trusts and insurance companies were covered, too.

Suess likened such rules to an implicit form of capital control by Washington. “Maybe [US] investors will now think that all overseas investments and accounts are now illegal,” he said, suggesting some American citizens may opt to play it safe and not invest abroad.

Similarly, Field warned: “US companies may not send executives abroad if they can’t open bank accounts.”

Speaking on condition of anonymity, one US taxpayer and financial law scholar at a Hong Kong university, said US citizens overseas tended to face more scrutiny in opening bank accounts if they were new arrivals. “I've been based here for a while, so FATCA poses less of an issue for me to open an account,” he said.

America’s system of worldwide taxation for citizens and permanent residents was created long before globalization of the world’s economy. According to attorney Jay Krause, head of Asian wealth planning with Withers in Singapore, it puts US persons at a competitive disadvantage relative to their foreign peers from countries with a residency-based tax system.

“US persons working outside the US have tax obligations at home which do not apply to their Asian, European or Latin American counterparts. They also must meet extensive and costly information reporting obligations and are typically effectively restricted from investing outside the US in anything other than the most straightforward of directly held stock portfolios,” he said.

“Ultimately, US individuals abroad will feel their lives are made more complicated and difficult as a result of FATCA,” said Weisman. While Asian institutions could adopt a policy of not accepting US customers, that was only part of the challenge. “You must still prove who’s a US customer and that requires screening and monitoring processes.”

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While Weisman conceded that in many instances, the legislation and its regulations offered much guidance and “bright-line” rules, he emphasized that it won’t be routine compliance. “There will be frequent difficult judgment calls and complex evaluation on an ongoing basis [for FFIs],” he warned.

Jay Krause

Long arm of the law According to Field, it was conceivable that FATCA would face judicial challenge. Yet, he added, a key factor in bolstering FATCA’s legal standing was the recent tax information agreements that Washington had reached with several key European countries.

The US, UK, French, German, Italian, and Spanish governments released a “Joint Statement” simultaneously with the issuance of the proposed regulations in February. Ireland has also announced it was in discussions to do so. The announcement of FATCA partner agreements between the US and the European countries represented a “seismic shift in international information sharing,” said Krause pointing out that the joint agreement signaled a change from information exchanges “on request” to an automated worldwide regime. (Switzerland and Japan have both recently entered into similar agreements with the US setting up a bilateral framework to implement FATCA – Editor’s note) “These countries have agreed to adopt FATCA as the international standard throughout the Organisation for Economic Co-operation and Development (OECD) and the US is widely rumored to be in similar discussions with many other countries,” said Krause.

“Two-party [tax information exchange] agreements solve the legality issue to a great extent,” said Field. “Instead of reporting to the US government, they report to their own national government which will pass the information on to the US and vice versa.”

Clough cautioned that although the Joint Statement was three-page long, “the US government has not yet disclosed all the details”. He stressed that

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the policy rationale was to improve taxpayer information exchange.

“FATCA is just the tip of the spear on such exchanges,” he said. “Around the world, governments want to reduce tax evasion and boost revenues and FATCA’s reciprocal agreements with other governments.”

Although the US was committed to FATCA’s goals, Clough said it was unclear if American law permitted US authorities to disclose banking information of foreign taxpayers US accounts to their national governments. “There may be need to have local legal and regulatory changes,” he said.

Clough also noted that the US was committed to the process and that if more countries entered into similar agreements with Washington, it would become the de facto standard.

“If multiple countries wish to go in this direction, it will bring uniformity,” said Weisman too. He added that the OECD was working on achieving precisely that aim.

Tit-for-tat In terms of enforceability, FATCA’s reach might depend on whether China and Canada agree to Washington’s demands for information on US taxpayers. Thus far, it appears that Beijing has been more apt to drag its feet on the matter, Weisman said.

“FATCA could be very destructive, but it will

Karl Egbert

depend on how many [nations] subscribe to FATCA’s requirements,” said Field.

Likewise, the academic source suggested that it was only a matter of time before a large player in the global economic system — specifically China — pushes back against the worldwide overreach of US regulation.

“Only a player of China’s size can push back against this initiative [FATCA].

We’re fortunate to be part of China … the US is going to have to relent because otherwise, China might start withholding income from US corporations and [financial] institutions,” he warned.

Co-Teaching helps develop bilingual and global-minded future world citizens

“FATCA is just the tip of the spear on such exchanges, around the world, governments want to reduce tax evasion and boost revenues and FATCA’s reciprocal agreements with other governments.”

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F

oreign financial institutions face serious challenges in order to comply with FATCA. Kenny Lau talks to Jim Calvin, Global Tax Managing Director – Asset Management of Deloitte & Touche LLP (Singapore) about some of the practical and immediate issues

biz.hk: What is now the timeline for compliance under FATCA? Calvin: Foreign financial institutions (FFIs) must go-live with new onboarding processes that incorporate FATCA requirements by July 1, 2013. The last day to enter into an agreement with the IRS to avoid withholding on new accounts is June 30, 2013. Accounts opened after that date become subject to the new onboarding procedures.

There is no “grandfathering” of existing accounts; instead, pre-existing accounts will be subject to procedures to identify, document and eventually report US account holders. Earlier timelines apply to financial institutions in the US. US FIs must go live on January 1, 2013. biz.hk: Are we likely to see a postponement?

Calvin: There is a slight possibility of a delay in certain aspects of FATCA. There is little the US Treasury and IRS can do to postpone FATCA because the effective date is set by statute as January 1, 2013. To move the effective date would take an act of Congress. Treasury and IRS are, however, given broad authority to make rules, and have exercised that authority by deferring certain aspects of FATCA to ensure an orderly and effective transition. biz.hk: What is the scope of FATCA? Do all FFIs need to comply?

Calvin: FATCA affects all financial institutions. As a practical matter, there is no legitimate way to avoid compliance. An FFI, entity, or individual which does not comply with FATCA becomes subject to a 30 percent withholding tax on the gross sales proceeds (and income) of US passive assets. Any direct or indirect exposure to US assets will subject the recipient to withholding and hence is good cause to comply.

Compliance is accomplished, in the case of an FFI, by entering into an agreement with the IRS. In the case of individuals, they must provide documentation proving their US or non-US status. Failures to provide such information will subject that individual to the

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Jim Calvin

withholding tax.

USFIs and major FFIs will not transact with FFIs which have not entered into an FFI agreement with the IRS. Thus, even FFIs with limited or no US asset exposure will be drawn into FATCA compliance. biz.hk: Who are the FFIs? Calvin: FFIs include banks, brokers, custodians, insurers, and investment funds. There are some exceptions for smaller or local FFIs but those are so restrictive as to be almost useless. Real estate investment funds that receive rents rather than security income will be a special case and subject to what are called non-financial foreign entity rules.

Trusts as defined for US tax purpose (such as family trusts for the conservation and preservation of property) are treated as FFIs. This means that the beneficiaries will be treated as account holders, and subject to reporting. biz.hk: Will FFIs be reluctant to open accounts for US clients?

Calvin: It makes no difference whether an FFI has US accounts or not. It is US asset exposure that causes FATCA to apply. Thus, FFIs that prohibit US account holders are not out of FATCA. From a business perspective, prohibiting US account holders may mean forgoing high-net worth clients now and other high-net worth individuals poised to become US permanent resident status, as US green card holders are subject to reporting under FATCA. Prohibiting US account holders will cost an FFI business and likely save it little money as it only means that the FFI need not install a reporting system; however, reporting is one of the “cheaper” aspects of FATCA. biz.hk: Can FFIs remain in “business as usual” without entering into an agreement?

Calvin: They cannot continue business without an agreement. They will be pariahs in the capital markets.

The US is working on intergovernmental agreements

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(IGAs) with five western European countries, now also Ireland, and we understand about 45 other countries are in discussions with the US. The IGAs are intended to resolve conflicts of law that would prevent FFIs from entering into agreements.

The IGAs are not an exemption. The IGAs are generally a positive development; however, they indicate that FATCA will go bilateral and possibly multilateral.

This is not just a US phenomenon; US took the lead and many other countries were waiting to join with the US. That has now become apparent.

Countries that do not enter into IGAs, or delay doing so, will put their financial institutions at severe competitive disadvantage and virtually all major countries are expected to enter into IGAs. Eventually, we may see a global database which countries may data mine (subject to privacy and confidentiality) for offshore accounts held by their taxpayers. I think that is where we’ll end up in five to 10 years.

Examples: Identify accounts based on search criteria and determine documentation to be requested based upon indicia of ownership.

biz.hk: What is likely the impact of FATCA on FFIs? Calvin: In general, FFIs will be required to modify onboarding processes, remediate pre-existing accounts, and implement withholding and reporting processes. The extent to which these processes are internalized or outsourced by FFIs will generally be driven by the scale and scope of the FFI. Certain FFIs, for example investment funds, may outsource some or all of the processes to third parties such as transfer agents, administrators, or their accounting firms. Larger FFIs, such as regional or larger banks, are more likely to develop or enhance systems and processes.

One of the major problems that perpetuates is a failure to fully understand the technical complexity of FATCA. It is not simply a self-contained set of rules that one can mechanically implement. The proposed regulations make it quite clear that FATCA cannot be self-contained; instead, it imports many aspects of the US Internal Revenue Code, depends heavily on existing US information reporting regulations, and relies on many US tax definitions and terms of art.

biz.hk: What does the IRS announcement on February 8 say about exemption?

Calvin: The governments of the United States, United Kingdom, France, Germany, Italy, and Spain released a “Joint Statement” simultaneously with the issuance of the Proposed Regulations (Ireland has also announced it is in discussion). The Joint Statement notes that FATCA “has raised a number of issues, including that FFIs established in these countries may not be able to comply with the reporting, withholding and account closure requirements because of legal restrictions.”

Under a FATCA implementation agreement, a partner country would commit to seek necessary legislation to enable FFIs in the partner country to comply with the obligation to report the information required under FATCA and the agreement.

The Joint Statement contemplates an exemption from foreign passthru payment withholding on payments made by an FFI in a partner country to FFIs in other partner countries; and the Proposed Regulations contemplate that a FATCA implementation agreement may exempt an FFI from withholding on passthru payments to recalcitrant account holders.

In addition, the Joint Statement provides that the US and the five partner countries would commit “to develop a practical and effective alternative approach to achieve the policy objectives of passthru payment withholding that minimizes burden.”

biz.hk: How are FFIs now preparing?

Calvin: Prior to the release of the final regulations, FFIs cannot begin detailed work to comply. The regulations are not yet sufficiently stable to begin implementation work.

However, account onboarding must go-live on July 1, 2013, and the specifics provided in the proposed regulations for identifying payees are sufficient to identify effects (“impact assessments”), and identify general requirements for onboarding processes (“gap assessments”).

In addition, FFIs must remediate preexisting high-value US and prima facie FFI accounts by June 30, 2014, and the specifics in the proposed regulations are sufficient to identify a superset of affected accounts and begin to remediate documentation of those accounts.

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biz.hk: What are the proposed regulations?

Calvin: The proposed regulations are part of the regulatory process and are intended to provide an opportunity for comment. These precede the final regulations, which according to the IRS will be issued at the end of the summer.

Major guidance is still needed and has not been addressed in the regulations. The regulations focus primarily on banking type institutions. We still need considerable guidance for other financial entities and there are major gaps in guidance for non-financial entities.

The first draft of the FFI agreement is likely delayed until the release of the model IGAs, which we hope to see soon.

biz.hk: What is the likely approach towards “identification of payee?”

Calvin: There are seven criteria for identifying US individuals. These include US addresses and US telephone numbers. It is likely these will be modified at least, we hope, for US telephone numbers because Caribbean and Canadian phone numbers are similar.

15

CHINA CONFERENCE

AmCham’s Value-Added CHINA CONFERENCE

The 2012 AmCham China Conference was by all accounts a resounding success. Over 200 movers-and-shakers met on 18 May at the Four Seasons Hotel to interact with some of the most informed minds in town on the status of China’s reforms and Hong Kong’s expanding role in China’s development

By Daniel Kwan

A

mCham Hong Kong’s one-day 2012 China Conference featured two keynote speakers and six separate discussion panels with a total of 28 senior executives sharing their insights on the conference theme “China’s Economic Reform: Crossroads or Roundabout?”

The theme underscored the significant economic and social changes that are happening in China as well as Hong Kong’s expanding strategic position and unique role in mainland’s transformation, indicated in part by the chapter on Hong Kong in China’s 12th Five-Year Plan.

Emphasis on interaction The conference planners decided to avoid the “string of speakers” approach and focused instead on creating an environment that encouraged frank, interactive dialogue among speakers, panelists, and the audience. The two keynote speakers left 20 minutes each for candid Q&A, and the remainder of the day was broken into six different panels,

16

Kong Exchanges and Clearing Limited, and John Rice, Vice Chairman of General Electric, and President and CEO of GE Global Growth and Operations – emphasized that the changing – and somewhat risky – times still offer new opportunities for business development.

Li is the first mainlander to lead the Hong Kong Exchange and Rice, who first visited China in 1989, is now based in Hong Kong representing the US powerhouse company whose products range from medical equipment to turbines and locomotives.

AmCham Chairman James Sun pointed out in his opening remarks at the conference that while Hong Kong historically functioned as China’s window to the outside world and a gateway for foreign companies seeking to invest in China, Hong Kong is now playing an increasingly important role in channeling Chinese investment abroad. Pointing out that it was a “watershed year with great economic uncertainty and political challenges in China and around the world”, he said the conference discussions provided an opportunity for business leaders to reassess risks and opportunities going forward.

Charles Li, Chief Executive of Hong Kong Exchanges and Clearing Ltd, believes Hong Kong could reposition itself to better capture opportunities from China's transformation

Crossroads or roundabout

AmCham chairman James Sun gives welcoming remarks at the 2012 AmCham China Conference

three of them concurrent breakaway panels. All panel sessions included substantial Q&A sessions.

The conference was held against the background of a highly volatile world market environment, with Europe steeped in her worst financial crisis in decades and the US recovery remaining fragile. And China, while still experiencing healthy economic growth, is also showing signs of a slowdown. Issues such as China’s

soaring wages, changes in global supply chains, and the practical implications of the 12th Five-Year Plan for China-Hong Kong economic and business integration are on the agenda for many businesses – both MNCs and SMEs – in the region. These and related topics were at the heart of the conference proceedings.

The two keynote speakers – Charles Li Xiaojia, Chief Executive of Hong

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Charles Li, the morning keynote speaker, energetically analyzed Hong Kong’s historic success as a “broker” bringing foreign capital to China, and then urged the city to reposition itself in order to capture the vast opportunities brought by China’s transformation.

“What’s lying ahead transformatively is a very different trend,” Li said.

“That trend – if we capture it – will guarantee another 30 years of prosperity for Hong Kong. That trend in China is now massively shifting from the capital import story to a capital export story.

Anybody who is able to structure yourself into that and you will become the winner.”

“We are no longer brokers,” Li said. “If we continue that way, we are just brokers and we’ll not have a future anymore. In this new era, we need to be

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Panel 1 (from left): Tom Gorman of FORTUNE China, Minggao Shen of Citi Investment Research and Analysis (China), Andrew Sheng of Fung Global Institute, Jon Parker of KPMG, and John Hoffmann of XRG-Exceptional Resources Group

Panel 2 (from left): Jason Tam of Desktop Ltd, Bill Foudy of Adidas Sourcing Ltd, Glen Burrows of Dell Inc, and Sara Yang Bosco of Emerson Electric Asia-Pacific

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John Rice, President and CEO, GE Global Growth and Operations, points out in his speech that China remains an important market

Panel 3 (from left): Stanley Jia of Baker & McKenzie LLP, Zhen Feng of China Merchants Group, Wensheng Peng of China Int'l Capital Corp Ltd, and Lili Zheng of Deloitte

Panel 4 (from left): Steven DeKrey of HKUST, Jack Lau of Perception Digital, Robert Lee of Achievo Corp, and Allen Yeung of Hong Kong Science and Technology Parks Corp

18

a broker, dealer, and market operator.

We need to create the infrastructure, the market, the customers, and the eco-system where the money wants to be here and wants to stay here and wants to make money here.”

Li, who grew up in China and later became a banker in the US before he came to Hong Kong to lead the Exchange, stressed that Hong Kong needs to re-examine its relationship with China, and especially needs to jettison the idea that it can thrive solely by relying on the mainland for “favors.”

“Generally speaking I am more worried than happy to see Hong Kong people constantly talking about policies, benefits, privileges, gifts when we are dealing with the mainland,” he said.

“All of these are premised upon a broker relationship with China – that we need a favor and we need you to help us.”

He called for Hong Kong’s further development into a wealth management center for mainland companies and individuals – to be “China’s Switzerland.” In addition, he said Hong Kong needs to sharpen its edge by amending tax laws, invest more in technology, and improve its regulatory environment.

The Exchange chief also addressed the question of “crossroads or roundabout.” He said Hong Kong needs to present itself as a “roundabout” instead of “crossroad” to China because the former means an abundance of opportunities and flexibility while the later often implies making choices and an “either-or” scenario.

“The reason I talk about creating the proper infrastructure, technology, and eco-system is that it would provide such a wonderful roundabout or a series of roundabouts, so when China’s money needs to come out, they don’t need to think,” Li said. “They just come to Hong Kong first, and then they can figure out what to do…and if needed, you can always change your mind.”

On the subject of internationalization of the Chinese currency, Li rejected worries that Hong Kong would face competition from cities like Singapore and London as trading of the Renminbi picks up momentum worldwide.

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“Do we consider them [London and Singapore] to be a threat?” he asked.

“Not at all! We’re talking about the internationalization of a currency.

What’s a currency? Currency basically is something that everybody would like to use. How can you internationalize a currency when you monopolize that and only the people in Hong Kong can use it? That’s ‘Hongkongnalization’ of Renminbi. That’s not what we are interested in.”

“I would love to have London and Singapore to be international centers of Renminbi,” he said. “That’s a blessing for Hong Kong. If that happens, all the money will go through the Hong Kong ‘roundabout’ first before they get to the other centers. I don’t care where the money train goes as long as the first stop is in Hong Kong.”

Panel 5 (from left): Jun Ma of Deutsche Bank, David Wong of Bank of China (HK) Ltd, John Tan of Standard Chartered Bank (HK), Mark McCombe of BlackRock and AmCham President Richard Vuylsteke

China risks John Rice of General Electric powerfully articulated his company’s China strategy and future investment plan.

Acknowledging that there were concerns of a China bubble and slowdown, he said the risk of not being in China outweighed such worries.

Rice recalled how he first visited China more than 20 years ago and witnessed the tremendous changes that have transformed the country. He also recounted how General Electric’s journey in China has changed from sourcing to selling in China, and then to manufacturing and now to joint venturing with Chinese companies.

According to Rice, General Electric now has 17,000 employees in China and 28 joint ventures. He expected that his company would have twice as many joint ventures there in about five years, although finding the right talent to manage them would be a challenge. Rice, who runs General Electric’s global operations from Hong Kong, said the company will “sell more, buy more, and make more” in China.

Rice also pointed out that China presents risks too, and it’s not an easy market. Although he expressed some concern about the future of foreign investment in China, Rice was upbeat about China’s future. He cited a recent joint report

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Panel 6 (from left): Jim Thompson of Crown Worldwide Group, Thomas Nelson of VF Corp, Tim Smith of Maersk Line, and Jonathan Beard of GHK Hong Kong Ltd

by the World Bank and China’s National Development and Reform Commission, which emphasized China’s need to complete its transition to a market economy.

Interactive Panels Focused on current topics tied with China’s reforms, the six conference panels were moderated by a number of past AmCham chairs and other industry experts to facilitate effective exchanges between the panel members and attendees.

The opening panel, for example, was moderated by Tom Gorman, AmCham past chairman and Editor-in-Chief and Chairman of FORTUNE China. The panelists discussed Hong Kong’s role in China’s 12th Five-Year Plan. The panelists included Jon Parker of KPMG, Andrew

Sheng of Fung Global Institute, Shen Minggao of Citi Investment Research and Analysis, and John Hoffmann of Exceptional Resources Group (XRG). They pointed out that China’s demographic changes and gradual shift from an exportcentered economy to a consumptionfocused one would bring many new opportunities to businesses, in particular for sectors such as health care and senior care.

One panel, held in Putonghua, focused on Chinese companies “Going Abroad.”

The panelists – Zhen Feng of China Merchants Group, Peng Wensheng of China International Capital Corp, and Zheng Lili of Deloitte – examined some practical issues faced by Chinese state-owned enterprises in investing abroad and reviewed how their investment strategies have changed over the years.

The panel was moderated by Stanley Jia

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AmCham Governor Philip Leung (right) greets John Rice of General Electric

Antony Leung of The Blackstone Group (left) and Jun Ma of Deutsche Bank

Jim Thompson, left, chairman and founder of Crown Worldwide Group, speaks about Hong Kong's role as a strategic logistics hub

Tom Gorman, Editor-in-Chief of FORTUNE China magazine, leads a discussion on emerging business opportunities from Hong Kong's role in China's 12th Five-Year Plan

of Baker & McKenzie.

Two panels were held concurrently with the “Going Abroad” one and they both focused on China’s push to move up the value chain, but from two different perspectives. One panel – moderated by Professor Steve DeKrey of Hong Kong University of Science and Technology – discussed China’s efforts to stay competitive by promoting technology and innovation; and the other – chaired by Sara Yang Bosco of Emerson Electric Asia-Pacific – held a lively discussion on how foreign brands were adapting to the changing manufacturing landscape by restructuring their production instead of relying on China alone.

Two high-power panels were held in the afternoon. The first was on the most talked-about business subject in town – internationalization of the Renminbi – and the second one on the city’s future as a transportation and logistics hub.

20

Moderator of the RMB panel was Antony Leung of the Blackstone Group and the panelists included some of Hong Kong’s best-known speakers on the RMB issue - Ma Jun of Deutsche Bank, Mark McCombe of BlackRock Asia-Pacific, John Tan of Standard Chartered Bank, and David Wong of Bank of China (Hong Kong).

At the meeting, the panelists discussed how Hong Kong could strengthen its role as the offshore center for RMB trade. They suggested that the Central government could simplify rules for companies’ use of RMB for trade settlement and investments.

The sixth panel – moderated by James Thompson, past AmCham chairman and Chairman and founder of Crown Worldwide Group – focused on logistics. The panelists included Thomas Nelson, Vice President of VF Corp, who talked about the daunting challenges he

faced in coordinating his company’s global sourcing and procurement needs.

Tim Smith, Chief Executive of Maersk Line North Asia Region, gave an overview of the shipping industry and suggested what Hong Kong could do to stay ahead of the game as competition heated up in the South China region. For example, he cited the Fair Winds Charter – an industry-led program to encourage ocean-going vessels berthing at Hong Kong to switch to low-sulphur fuel – as a case of where Hong Kong can demonstrate its leadership to spearhead positive changes in the industry for the region.

AmCham’s China Conference will continue to be an annual signature event, but it also kicks off a planned series of smaller scale China-focused seminars and talks to be scheduled throughout the year. Stay tuned for more China-Hong Kong insights.

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21

ENTREPRENEURS/SME

Executives’ skill set

Upsizing in a Downsizing World

By Daniel Kwan

F

or many Small- and Medium-sized Enterprises (SMEs) in Hong Kong, one of the pertinent questions has always been – what should we do to get to the next level?

That was the top agenda issue raised at the inaugural SME Forum held by AmCham at the Richard Ivey School of Business in May when about 50 entrepreneurs from a wide array of small businesses gathered to discuss and share experiences about the challenges they faced. Two speakers – Alan Nielsen of AdAlta Group and David Goldsmith of Goldsmith Organization – offered practical tools as to how SMEs can scale up – and without breaking their bank at the same time.

Donald Austin, Director of Austin Pacific and chair of AmCham’s Entrepreneurs/SME Committee, kicked off the meeting by pointing out that size does matter for SMEs in Hong Kong but many small entrepreneurs often lack the support needed in climbing up the business food chain.

“This meeting is to give you some tools and advice that’s hard to get when you are smaller companies,” Austin explained the rationale behind the forum. “When you are big companies, often you have a lot more resources.”

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The people At a panel discussion, panelists Rob Glucksman of Witgang Far East, Jennifer Liu of Sir Hudson International (caffe HABITU Group) and Alan Seigrist of The Executive Centre shared what they saw as the key challenges to growth for their business.

Although their businesses are very different in sizes, all three panelists agree that “people” is a priority concern. “Getting, finding, training, managing and keeping good people is unquestionably hard,” Glucksman told the audience. “The issue of Hong Kong is that smaller companies are not on the radar of most university graduates and many people prefer to work for a large company because they want the name and they want the name card.”

“They want the tiny cubicle in a big fancy office. They don’t necessarily want to be forced into a more flexible position where there might be a lot of different responsibilities,” he said. With offices in Hong Kong, China and Vietnam, Witgang sells fertilizers in the region and employs over 30 people.

“You can find good people; you can train them up and you can make them feel welcomed. You can help develop them. And then keeping them becomes

an issue,” Glucksman told the panel which was chaired by Elizabeth Thompson, founder of ICS Trust – a service provider which provides private clients with professional commercial services.

Liu of Sir Hudson said her headache was not so much about qualification but the availability of people. “I agree with Rob that human resources or recruiting the best personnel has always been the top challenge especially in my trade which is all about people,” she said.

“While Rob is probably talking about senior executives, I am having problem hiring cleaners and dish washers because of the minimum wage in Hong Kong. A lot of people prefer to take much easier jobs and they don’t want to be dish washers and cleaners,” she explained. “This is presently one of biggest challenges in my business.”

For HABITU – a coffee chain Liu started in 2003, Hong Kong’s ever rising commercial rents have been another “constant” limiting its growth potential, according to Liu. “Managing the rents and the landlords – explaining to them how a home-grown Hong Kong brand has a lot of fans and supporters – has taken more than 50 percent of my time,” she added.

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Seigrist of The Executive Centre – which leases premium offices in Hong Kong – echoed that personnel was the most critical issue SMEs faced especially for those in the executive ranks.

“From my perspective, it has been true from the first day and it is still true today.

Probably the biggest challenge in terms of getting the good people has been the executives,” Seigrist said. “We can find good sales people, and bring in great accountants and operation people to make things work. But to actually have people who can think strategically and implement [changes], that’s the biggest thing.”

“A lot of that has to do with the fact that businesses in Asia are always charging forwards. It might take a step back for six months and then it just starts charging forward again.”

“Executives’ skillset in Asia is hard to retain because there is always some other big pay checks or money around the corner and therefore executive skillset is something hard to find.”

Alan Nielsen, managing director of AdAlta Group Ltd, explains ways to boost sales volume within an organization

Sales processes One tool that may help small businesses in getting and keeping the right people is by establishing effective sales process, according to Nielsen.

“When you are setting up a sales process, you are effectively developing a framework which is based on the most effective behavior you’ve seen in your organization. We now have different ways of measuring performance of your staff.

It’s not just that you make the revenue by

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Success stories of entrepreneurship: (from left) Alan Seigrist of The Executive Centre, Jennifer Liu of Sir Hudson Int'l, Rob Glucksman of Witgang Far East, and Elizabeth L Thomson of ICS Trust

the end of the year. Now it’s about ‘have you identified the right prospects, are you targeting at the right level, are you getting the right meeting,’” Nielsen said.

“It’s about investigating how do we talk as an organization, set up common language so that everybody has a similar understanding; identify who in your organization are doing the best in order to create your best internal process; and from there you develop your roadmap to share among your staff.”

Such processes help to build the team as a whole and can play an instrumental role in staff training and retaining people, according to Nielsen.

As for recruiting, Nielsen, who has decades of experience in sales, says looking for people who have the right experience is far more important than making the selection based on the candidates’ character traits.

“I like to look at what is needed to be successful in my organization. So I look at what are the kinds of things that the people I have hired that are successful do. So I ask situational-based questions to see if the people in front of me have experienced the same type of situations that my successful people handle very well,” he said.

Forecasting

Approaching the growth issue from a different angle, Goldsmith said that many SMEs overlooked the importance of forecasting and planning.

“In the world of marketing or strategizing, there are three components: order qualifiers, order winners and forecasted winners,” Goldsmith said.

Order qualifiers refer to the basic

characteristic of a product or service that is required in order for the product/service to even be considered by a customer. While order winners are what make the deals today, the forecasted winners are those who are ahead of the game with their unique offering of product/service.

“Forecasted winner is something that you perceive in the future will end up being something that people want,” he said. “That’s where management should be looking.”

“If you build order winners today, tomorrow they will become qualifiers.

Someone will copy that and they will offer the exact same service.”

“The reality is that in order to win in business, execution is not your role [as leaders]. Your primary role is to think but we spend so little time thinking that we are so concerned about getting to the market first and we lose opportunities.”

“Don’t go to action first; slow down …

We are so ready to move that we often don’t realize we are losing opportunities every time we move so quickly.”

Goldsmith offered two different approaches for making business forecasts – the activity-based forecasting and what he called “pentaility” of forecasting. The former breaks down the forecasting process into “activities” so that the business managers can have a more accurate and precise understanding of the nature and development of the business activities in making the forecasts.

The later looks at different target groups in analyzing their future actions.

“Pentality” however is a word created by Goldsmith to highlight the five elements of the forecasting method.

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INFORMATION & COMMUNICATIONS TECHNOLOGY

Andrew Valentine of Verizon’s Investigative Response Team discusses findings of the 2012 Data Breach Investigation Report (DBIR), an analysis of more than 850 breaches using data from the US Secret Service, Dutch High Tech Crime Unit, Irish Reporting and Information Security Service, Australian Federal Police, and London Metropolitan Police

By Kenny Lau

remain critical channels through which cyber criminals extract valuable information illicitly from organizations on a global scale. Many attacks, the report notes, continue to thwart or circumvent authentication by combining stolen and guessed credentials to gain and retain access.

“In most cases, organizations were attacked either because they got their doors open or because they were fully targeted by those wanting to get into these organizations,” Valentine points out.

“We do see both types of cases year to year.”

Findings in the DBIR show that 79 percent of victims were simply targets of opportunity and that 96 percent of attacks were not highly difficult.

Andrew Valentine Often, “target selection is based more on opportunity than on choice,” the report says. “Most some organizations are simply slow at victims fell prey because they were found noticing data breaches when they occur. to possess an easily exploitable weakness These are common problems we see rather than because they were from year to year.” pre-identified for attack.”

“While at least some evidence of “The things that lead to data breach breaches often exists, victims don’t occurring are always very basic, simple usually discover their own incidents,” he things that nobody ever fixes, like changadds. Of all data breach cases surveyed in ing a default password to a more secure the report, 85 percent of the incidents password,” Valentine points out. “And took weeks or more to be discovered and

or data breach are, more often than not, closely linked to financial gains. The bottom line is that “most data thieves are professional criminals deliberately trying to steal information they can turn into cash.”

The cyber world is becoming more of an optimal target of opportunities because it is often an easier, safer and more profitable environment in which to commit illicit activities.

“When someone goes up to a counter and robs a bank, they can only take so much cash at any one time,” says Valentine, who is a specialized security professional trained in computer forensics, evidentiary procedures, investigative techniques, and expert witness testimony. “So, it is not surprising that they are using the cyber channel to steal money from the entire bank.”

Lucrative targets

A

s organizations become increasingly digitally connected to the outside world, their risks of falling prey to online thefts of data as well as other financial assets increase substantially. Cases of data breaches are evidently increasing and causing more disruption than ever in a range of businesses worldwide, and businesses are now finding themselves in a new frontier of corporate security fighting fiercely against hacking or malicious software (malware) developed solely for the purpose of compromising others’ information assets.

According to the 2012 Data Breach Investigations Report (DBIR) by Verizon, an analysis of more than 850 breaches (where 174 millions records were compromised) with data on cyber crimes from multiple law enforcement agencies in the US and Europe, “external

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agents” or “outsiders” are found to be culprits in 98 percent of data breach cases while “internal employees” or “insiders” are involved in only 4 percent of cases; and 58 percent of all data theft are tied to activist groups.

The year 2011 was a year of social unrest, and the online world became a platform which “was rife with the clashing of ideals, taking the form of activism, protests, retaliation, and pranks,” the report notes. “While these activities encompassed more than data breaches, the theft of corporate and personal information was certainly a core tactic.”

Hacktivism “The most significant change in 2011 in terms of online security is the rise of ‘hacktivism’ against larger organizations worldwide,” notes J. Andrew Valentine, Managing Principal

(Investigative Response) at Verizon.

“Instead of just defacing a website against an organization that an activist is politically opposed to, they have stolen data as well.”

Although hacktivist cases or data breach cases where malicious actors claimed a political affiliation were less frequent than purely financiallymotivated cyber crimes, they resulted in the theft of more records than any of the financial crimes.

“While 95 percent of the cyber crimes were financially motivated, hacktivists on average stole twice as much data in each of the breaches,” Valentine points out. “The other part of the story is that ideological dissent took a more prominent role across the caseload, yet good old-fashioned greed and avarice were still the prime movers.”

Motives of computer-related crimes

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Financial institutions remain lucrative targets among cyber criminals because that is where the big money is. The industry groups with the highest percentage of breaches, however, are accommodation and food services, most notably in restaurants and hotels, as well as the retail trade industry. Finance and insurance sectors follow closely behind.

Among all the breaches analyzed in the DBIR, most cases involved some form of hacking (81 percent) while others incorporated malware (69 percent). They

Threat agents over time by percent of breaches External

98% 86% 78%

Internal

72%

70%

Partner 48%

39%

33%

11% ‘04 –’07

6% 2008

6% 2009

12% 2010

2%

4%

<1%

2011

Source: 2012 Data Breach Investigations Report, Verizon

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more than 90 percent of them were discovered by a third party.

“Organizations have a tough time protecting their data when they do not fully grasp what their data environment looks like,” Valentine explains. “There are cases of data breach where they did not even realize they had that data until they went through a process of re-examining their systems or doing a search of what valuable information they may have.”

“They can’t ever effectively move to protect their data if they know what that data is or how their systems are facing the outside world,” he stresses. “Many organizations are not too familiar with their own data infrastructure. That is a challenge that you will see over and over again in different cases.”

In some breach cases, it is hugely easy simply because “the door is not even closed, let alone locked.” In others, it may involve more sophisticated, fully customized malicious software designed to steal specific types of data from specific organizations, Valentine notes. “We see a range of cases; but if they can do it to steal data, they will, whether it is easy or difficult.”

Motive of external agents by percent of breaches within external Financial or personal gain

96% 71%

Disagreement or protest

3%

Fun, curiosity, or pride

2%

Grudge or personal offense

25%

23% 1% 2% All Orgs

Larger Orgs

Source: 2012 Data Breach Investigations Report, Verizon

Quick fixes In turn, there are some “obvious” measures that organizations should be employing to tackle the threat of potential loss of data, Valentine recommends.

One is to change administrative passwords on all point-of-sale systems, as hackers are constantly scanning the Internet for easily guessable passwords; the other is to implement a firewall or access control on remotely accessible services to deny unauthorized access.

There are certainly security solutions in terms of software as well as hardware appliances available to protect against data theft, but technology alone is not a sole solution. “New and bold technologies will only solve part of your security problems,” Valentine cautions. “The key is to understand the very basic things of security that bad guys exploit.”

“In every single one of these breach cases, every affected organization at some level is not doing something they think they are to protect their data,” he says.

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“Are you doing enough to protect your assets? Is your policy up-to-date, being followed, and audited? Do you have a detailed diagram of your data systems?” says Kenny Lee, Verizon’s Principal Consultant for Investigative Response in Asia. “These are questions organizations need to bear in mind.”

“Sometimes, it doesn’t even require any extra tools to enhance your security,” he adds. “It is about figuring out what you think you have, what you truly have, and what to do with them. Our job is to help organizations come up with a policy according to their requirement and to provide training.”

“It is just not enough to hand you a manual and tell you to do certain things,”

he says. “We have to walk you through to make sure you understand what security is all about and how to respond to security-related issues.”

“Most of the breaches are avoidable with a simple fix that will not cost a lot of money to implement,” Valentine says.

“97 percent of breaches were preventable through simple or intermediate controls and 63 percent of measures that would have prevented these breaches were very simple and cheap.”

“If organizations can go through the effort of truing up what they think their security practice looks like with what it actually is, they will be able to more effectively prevent breaches from happening.”

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CHINA BUSINESS

you have to consider all the people involved (the employees, the company, the client…). Let’s say you contradict Mr Wang during a meeting. You not only personally hurt him and his pride, but, more importantly, Mr Wang risks losing his social position with others. Furthermore, you will have to repair the relationship not only between you and him, but also between him and the persons who witnessed the loss of face.

Tales from the Frontline: Saving Face in China

U

Anne-Laure Monfret

biz.hk: What inspires you to write this book?

Monfret: Misunderstandings! As a business management consultant, I’ve always been fascinated by cross-cultural topics and communication. When I was in China, I realized that there were a lot of communication problems and misunderstandings between the Chinese and Westerners that came from “saving face” and “losing face” issues. Even if everyone was aware that “face” was a cultural key in doing business in China, the meaning of “face” (mianzi) was, quite surprisingly, often misunderstood or misinterpreted

by Westerners. So I decided to do extensive research. And I interviewed many businessmen and women working in China to share their real life experiences with everyone confronted with the same difficulties. biz.hk: Why is the problem so complicated?

Monfret: What is most difficult for Westerners to understand, even after

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nderstanding Chinese business culture has always been more an art than science.

Unlike what most of us are used to in the West, Chinese see the issue of “face” differently. In her new book entitled Saving Face in China, A First-Hand Guide for Any Traveller to China, French business consultant and author Anne-Laure Monfret shares her insights on the complicated subject and offers practical day-to-day advices for western executives about business etiquette and customs in China

many years working with the Chinese, is how face often takes priority over other business aspects. Even if it is a universal notion, Westerners don’t value face as much as the Chinese do. Face challenges our innermost Western values and convictions. For instance, if a Chinese partner avoids saying something or even tells a “white lie,” an American may understand that his partner is probably trying to preserve face (his own face, others’ faces or even the American’s face.) However, it still remains difficult for the American to assimilate the importance of face since, in his own Western culture, the value of speaking directly trumps ruffling feathers. biz.hk: What’s the difference between face and pride/honor/respect – in a business context?

Monfret: That’s the million-dollar question. Face is similar to honor but it shouldn’t be mistaken with the Western chivalric sense of honor. Face is not just a matter of personal pride or self-respect.

Rather face is more about reputation or social shame. What is important to understand is that it is not simply a

biz.hk: Many young Chinese business executives are educated in the West. Do they see the issue of “face” differently from their parents? If yes, in what ways?

Monfret: Sure. The young business people pay less attention to strictly obeying the rules, and they seem to be direct, as is the “American way,” in their corporate communication. Recently, one young Chinese executive offered a clock to a Chinese client. He didn’t know, that in China, you cannot give a clock as a gift, since it is thought to bring misfortune (the Chinese word for clock is “zhong” and it also means “being on one’s death bed.”)

He should have had read my book!

However, even if China is changing very quickly with globalization and the loss of some traditional Chinese customs, young executives still attach a lot of importance to “face”, more specifically, in their respectful attitude towards their bosses and high-ranking executives. biz.hk: Can you give an example of how

personal affair or a matter of individual slight but also concerns the group and social position.

In a business context, that means that when you cause someone to lose face,

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causing a Chinese partner/client to lose face can affect business in each of these situations: 1. you are managing a business in China; 2. you are trading with a Chinese business? And what are your suggested remedies?

Monfret: Let’s say you berate one of your Chinese sales managers in public by pointing out a mistake he has made. He may quit because of the loss of face he has suffered (this often happens.) Moreover, you risk losing your credibility in the eyes of the other employees who find your lack of tact inconsistent with being a good manager who knows how to stay in control.

In any case, your business will be affected.

If you are trading with a Chinese business, a loss of face to your trading partner translates into a loss of money for you. The Chinese are prepared to lose a new contract or stop doing business with you only because they have suffered a loss of face. It is because “face,” essential to a good relationship, is the key to maintaining business in China.

The remedy is to avoid causing a loss of face in the first place! If you awkwardly insist on saying “I am very sorry about what I said or what I did,” this will often make matters worse. However, in some very serious situations, you will have to apologize. And in this case, the apologies will have to be given publicly, in front of those who witnessed the incident and in a formal manner. Another way is to give face back to your partner. Among other ways, you can compliment your

“If you are trading with a Chinese business, a loss of face to your trading partner translates into a loss of money for you. The Chinese are prepared to lose a new contract or stop doing business with you only because they have suffered a loss of face. It is because “face,” essential to a good relationship, is the key to maintaining business in China. ”

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employee’s work in front of others or invite your trading partner to a good dinner. By giving them face, you re-establish the balance. biz.hk: In your book, you explain that Chinese see humor differently. In business conferences and meetings, making jokes as a way to “break the ice” is very common. In your opinion, should foreigners make jokes (humor) in business meetings with the Chinese? And how to overcome the problem of translation?

Monfret: It all depends on the kind of humor. If you make a joke, there’s always the chance that your joke is misunderstood and it will make everybody feel ill at ease. Ironic or sarcastic humor can be risky not just because of potential problems with translation, but it may be perceived by the Chinese as criticism, thus causing a loss of face.

Generally, the Chinese, in fact, appreciate and use humor as a way to break the ice or lighten the mood. So, let them make the jokes. As for the problem of translation, may I suggest that you learn to tell a joke in Chinese? biz.hk: In your experience, what are the taboos for Chinese in business conversation?

Monfret: It’s better to avoid sensitive issues such as human rights and internal Chinese politics. For reasons of face, the Chinese are very sensitive to any criticism of their country. Sometimes Western businessmen question the work conditions in a manufacturing plant. Emphasizing such a topic at the onset even before raising more specific business matters – or trying to build a relationship – may really offend the Chinese. Generally speaking, you can offer a quality product or a fantastic service, but your Chinese partner will not even consider that product or service if you haven’t laid the groundwork of a sound business relationship by paying attention to the importance of face.

Editor’s note: Saving Face in China, A First-Hand Guide for Any Traveller to China is now available online from Amazon and Barnes and Nobles.

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China: A Labor Movement in Progress?

Over the past several years, labor conflict – formal legal disputes, strikes and demonstrations – have increased in frequency and intensity in China. More protective employment laws have coincided with shifting demographics, generational changes in migrant workers and increased rights consciousness of the citizenry.

The result has been an unprecedented spike in disputes since 2008 – high-profile strikes such as the automotive strikes of 2010. There has also been heightened global attention to the conditions and concerns of Chinese workers.

Mary Gallagher

In a conversation, Mary Gallagher, Associate Professor of Political Science and Director of the Center for Chinese Studies at the University of Michigan, who has written extensively on China’s social, economic and political development, discusses how labor unrest has strengthened the bargaining and market power of Chinese workers and at the same time reshaped China’s overall labor policies

biz.hk: Do we really have a labor movement in China today?

Gallagher: It is highly debatable whether or not there is currently a labor movement in China. On the one hand, some people would argue that there is a bona fide movement because of the increase in strikes and labor disputes; on the other hand, some would say this is not a movement because it is not as unified from a traditional sense. Strikes in China are still very spontaneous and

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loosely organized, while leaders of the strikes often try to discard themselves.

In many cases, there is not a clear connection among these individual strikes for the most part, and it means a movement has not truly formed yet. biz.hk: How would you differentiate labor strikes a decade ago and those of recent times in China?

Gallagher: The strikes in 2002 happened at the end of a period of state

owned enterprises restructuring; the strikes in Liaoning Province were quite different from those that are occurring now. In every case, there are significant differences in the demands of workers, types of workers protesting, and how they organized themselves.

The workers of state-owned enterprises in Liaoning were mainly older workers and were striking for subsistence issues. They wanted to maintain things like pension and, in

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some cases, some kind of housing at the workplace. They were really trying to retain a type of work and a lifestyle that no longer existed.

The more recent strikes, such as the one at Honda manufacturing plants and those that came after, are more about interests and demands that labor laws do not address. Workers were looking to improve wages and social benefits, and in some cases, a better work or dormitory environment. All of those are workplace issues that workers were trying to address while fully intending to continue on the job.

The counterparties of the state-owned enterprise workers were mostly local state agencies responsible for these local enterprises, which in some cases have gone bankrupt or simply had no more money to pay their workers. The strikes at the Honda facility and factories of other companies were targeting the employers. biz.hk: How did the government respond to those strikes? Were the approaches different?

Gallagher: They were different, and different for more than one reason. But, one reason that the government was harsher on the protesters in Liaoning was a fear that the issues of state-owned enterprise reform in one province could easily spread to another in China.

Although the interests of the workers

across different state-owned enterprises under restructuring were pretty much the same, there was a variation in how they were treated; it had to do with how much money each of the local areas had.

In the case of Honda, the pressure for increases in wages from workers dovetailed with the government’s attempt to increase wage, domestic consumption, and consumer demand.

In fact, Chinese Premier Wen Jiabao said during the strike as it was happening that wages should go up in China, sending a very clear signal that this has become a goal of the central government. biz.hk: Why are these strikes occurring the way they are?

Gallagher: From a historic perspective, all labor movements are political at some point. The link between concerns over wages and politics comes when workers realize that there are no institutions functioning well enough for them to collectively make claims about wages.

Above and beyond things like not paying the minimum wage, which is illegal, when you have a group of workers, in the case of Honda, who demand to get paid as much as their Japanese counterparts working at the same factory, there are no channel for them to raise the issue. Some enterprises have them internally, but in

terms of a legal and administrative infrastructure, they don’t exist. When they come to a point where they have a conflict of interest with their employer and want to do something about it, it is often then that they realize there is no mechanism for them to be represented.

It becomes a political issue. biz.hk: Will there be more directly elected representatives of trade union in China?

Gallagher: Trade unions in China are controlled by management at the enterprise level, and are controlled by the party at the local and region and national level.

It’s been announced by the trade union in Shenzhen to push for more direct elections. Direct elections have happened before but really didn’t go anywhere. It is quite possible that direct elections could change how enterprise level unions work. But that’s only when elections are truly direct and “unfeathered.”

If you look at direct elections in other institutions in China, you can often, even at the village level, have free elections, but the candidate list is controlled. In other words, you may have a direct election, but management is given some discretion over the candidate list, in which case the impact simply would not be as big. I would expect to see some governments at the local level

“From a historic perspective, all labor movements are political at some point. The link between concerns over wages and politics comes when workers realize that there are no institutions functioning well enough for them to collectively make claims about wages.”

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that allow for control in an election. biz.hk: What is the future of All-China Federation of Trade Unions (ACFTU)?

Gallagher: The ACFTU in the current political system is unlikely to make any major reform without the approval of the party. From what we can see right now, there isn’t any major changes happening at the institutional level. However, ACFTU should be more confident about its ability to maintain its position when a major breakthrough such as the rise of independent trade unions was permitted. A good example is Russia where the legacy union is still quite strong even after a period of political transition. biz.hk: How effective are Chinese labor laws?

Gallagher: Chinese legislation has had a huge impact, partly because some of the regulations are quite strict and much more protective than labor laws in some other countries. However, Chinese regulations sometimes cannot fulfill their goals as originally intended because there is a lack of implementation or enforcement not just by employers but also by workers.

Take work overtime as an example, China’s regulation on overtime is quite strict, but many migrant workers often want to work more. They will look for employers who will allow them to work illegal overtime. Take social insurance payment, which are a large percentage of a wage bill, migrant workers still don’t have confidence that they will be able to enjoy the benefits of paying, and they would prefer an employer who doesn’t pay social insurance. There are problems in the law that come partly from the law’s very high aspiration. biz.hk: What does it mean for foreign investors or doing business in China?

Gallagher: If all of the reforms that have been discussed, including direct election of trade union, leadership and management in enterprises as well as collective bargaining, are implemented

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very strictly, it will quite possibly increase the risk of investing in China and also the cost of doing business in China, because of uncertainty. biz.hk: What happens if SOEs move even closer towards privatization?

Gallagher: What’s interesting is that a large number of state-owned enterprises rely on subcontracted labor. It’s been reported that in some cases two-thirds of the workforce at major state-owned enterprises are subcontracted. It means there is inequality between subcontracted workers and formal workers as formal workers in the state sector enjoy very good work condition and compensation. If private equity comes in to SOEs in a big way, they will probably find a lot of inefficiencies and compensation structures that don’t necessarily match productivity.

If a large percentage of the workers are not formal workers, it is not so much a problem of redundancy or anything like the old system where 30 million people would have to be laid off. But those workers, for whatever reason, have gotten these jobs are probably well connected. It does become difficult when you are trying to restructure and

change the compensation scheme of people who are well connected. biz.hk: What should consumers around the globe understand about the labor conditions in China?

Gallagher: Consumers, particularly in America where there are complaints about competition with China, don’t realize how much they benefit from Chinese production in terms of lower product prices. Most people, while they say they want to buy products that are made under fair conditions, don’t appreciate the fact that it will also mean higher prices.

Those prices that we have enjoyed for a long time are not going to be there forever because Chinese workers are being paid more and that wages and living standards are going up in China. It also means China’s competitive advantage can no longer be based on cost only.

American people who are worried about manufacturing in the US should take more confidence that Chinese consumers as they can buy more are very interested in buying high quality products because the longer term benefits are worth the additional cost.

“If all of the reforms that have been discussed, including direct election of trade union, leadership and management in enterprises as well as collective bargaining, are implemented very strictly, it will quite possibly increase the risk of investing in China and also the cost of doing business in China, because of uncertainty.”

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he developing debt crisis in the euro zone, coupled with the economic slowdown in China and stalled growth in the United States, has cast a shadow over investors’ sentiment worldwide.

No concrete resolutions to the current euro zone’s economic crisis are likely to emerge until after summer, according to Steve Wang, a Research Specialist at REORIENT Financial Markets Ltd. In the next few weeks, there will be a lot of meetings among leaders of the euro-zone countries to mitigate the impact of the turmoil.

Market turbulence is expected to persist. “The euro zone is shrouded by fog. It is difficult for individual and institutional investors to have a clear picture,” he notes.

In China, the Central Government has announced that it will not repeat its 4-trillion renminbi stimulus package, adding to the uncertainty over its economic growth prospects for the short term.

When uncertainties in the financial market prevail, investors tend to shift their focus to simpler, easy-tounderstand wealth management products with a higher level of transparency. “They have become more prudent and pay more attention to managing the risks in their investment portfolios. They would rather sacrifice some returns to have a more risk-adverse approach to their investment strategy,” says Edwin Cheung, an associate director at Convoy Financial Services Ltd.

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As the euro-zone countries are mired in economic difficulties, the United States is barely out of the woods and China’s growth has moderated, financial service advisors recommend that investors should play safe and focus on risk-aversion long-term strategies. Wilson Lau reports

China’s A-share market

As the current economic conditions in China are on a stronger footing than 2008, the Chinese Government is resolved to continue its economic restructuring initiative instead of launching another round of stimulus package in the same scale as the one in 2008. Intent on rebalancing the economy, the Central Government has made good progress in this direction. Although Beijing has announced that it would not repeat the stimulus package, investment made to boost the developments in the infrastructure and energy efficiency sector has been underway. Meanwhile certain industries have been going up the value chain by adopting more advanced technologies, Wang of REORIENT says.

“We have learnt of anecdotes that even though some less competitive companies in Guangdong have been forced out of business, there is no news about any massive unrest caused by the laid off workers … Industries have been undergoing consolidation, which is what the government wants.”

In its balanced approach to liquidity management, the Central Government also encourages commercial banks to increase their support to small- and medium-sized enterprises, especially those with projects that are in line with Beijing’s overall development strategy. The typical beneficiaries of this current stimulus package include energy vehicles and corporations in the cultural and service sectors, Wang says. REORIENT Financial

Edwin Cheung

Markets was established by HSBC, Hang Seng Bank and the Far East Bank. It is a subsidiary of REORIENT Group Ltd, a global financial service provider.

China can avoid a hard landing as long as it maintains stable economic development. It also needs to sustain gross domestic product growth at a decent rate that will allow new jobs to be created to absorb laid-off workers, Wang points out.

Wang’s view is shared by Cheung of Convoy, who believes investors’ fears about a hard landing would gradually ease.

“A decline in GDP growth does not necessarily lead to lower stock market returns. With an increased Qualified Foreign Institutional Investors (QFII) quota and the RMB Qualified Foreign

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Institutional Investors (RQFII) arrangement, investors have more ways to directly access the A-share market by choosing one of the many RQFII and QFII funds now available in the market,” Cheung says.

“The RQFII funds give investors access to invest in China’s securities markets as they can invest RMB directly in China’s bond and equity markets. This will provide investors a new channel to invest in RMB bonds and bond funds issued in China as RQFII funds must be invested at least 80 percent in fixed income investment. Investors can capture the appreciation of RMB, which is up approximately 0.25 percent to date and is expected to grow between 2 and 3 percent this year.”

For the first four months of 2012, the A-share market in China rose close to 9 percent. Despite the rally so far this year, the China A-shares are still trading close to its historic low valuation. For instance, Shanghai A-shares is currently trading at a price to earnings ratio of around 12. “This presents a good upside potential for investors,” Cheung notes.

Increased liquidity in the market has emerged as the People’s Bank of China took steps to cut interest rates and reduce the required reserve ratio for banks. The incremental easing in the monetary policy is likely to give the market a strong positive boost. A causal effect may play out following the central bank’s strategic moves: the adjusted reserve ratio will boost lending and the increased lending will likely boost investment and growth in the coming months.

Developed markets Performance of the US stock market sometimes does not reflect the state of the country’s economy, Wang says, pointing out that the stock market in the US has posted positive gains. It also appears that the world’s biggest economy is on its track to a rebound: a 2.5-percent annual economic growth is expected for 2012.

“The US economy has a high resilience,” he notes.

From an investor’s point of view, certain sectors in the US have remained highly attractive. In the US, technology stocks outperformed many other indexes

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in the first quarter of 2012, posting a return of over 21 percent in the S&P 500 Technology Sector index. Cheung attributes the strong performance of technology companies to the soaring demand from the emerging economies, particularly China.

“Technology companies have strong balance sheets, with high cash balances and little debts. For example, Apple’s cash level is at US$100 billion. And despite the strong return this year, the valuation of the technology sector is near all-time lows relative to the rest of the market, meaning that the technology sector is still trading at very attractive prices,” he adds.

Meanwhile the bonds and bond funds related to the US Treasuries have become popular among investors in search for alternatives to reduce risk in their portfolios. The US Treasuries have recorded an inflow of over US$4.6 billion in the first three weeks of May 2012 alone. “For most investors looking for a decent return on their investment in bonds, the high-yield bond market provides good investment opportunities. Compared to historic level, high yield corporate default rate is close to historic low levels,” Cheung says.

“The US corporate balance sheets are in solid shape, including strong cash flows and stable profit growths. They have ample cash level to cover short-term debt requirements. With high yield spreads remaining above historical average, the high yield bond market is currently providing a better investment opportunity for investors,” he notes.

Long the bastion of ‘aspirational’ luxury products, Europe has been able to ride on the stable profit growth of luxury brands due to the industry’s high entry barrier, strong brand loyalty, and increasing demand from emerging markets such as China and India. Revenues for global luxury goods market has been increasing year on year, and reached 191 billion euro in 2011. Over the past 16 years, the luxury goods market has grown almost three-fold from 7.7 billion euro to close to 20 billion euro in 2011.

The fast-growing middle class in the emerging markets has provided a remarkable impetus for the rise in demand for luxury goods. Demand from Asia (excluding Japan) is especially high,

Steve Wang

accounting for 19 percent of the global luxury sales in 2011 and nearly doubling from just 10 percent back in 2005.

“China and India are especially showing strong demand. In light of this trend, many luxury goods company, such as Bentley and BMW, have formulated aggressive expansion plans for these countries,” Cheung points out. “The luxury goods sector is also currently trading at below average valuation levels, providing an attractive opportunity for investors.”

Risk control The investment environment will remain volatile for the second half of 2012. The market is highly volatile and there are great uncertainties that could have an effect on the market, including the US presidential election in November, China’s leadership reshuffle, and the continued saga of the European sovereign debt crisis.

“It is important for investors to take good risk control on their investment portfolios. They can look at reducing risks by increasing holdings of regional funds versus single country funds, and choosing a fund manager that have a good track record and have performed well in volatile markets,” Cheung suggests.

“Another way to reduce risk is to invest through the dollar cost averaging approach, which will help investors to take advantage of the fluctuating prices in a volatile market,” he adds.

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She was influenced by her late father and founder of the gallery, Manfred Schoeni and his appreciation for Chinese contemporary art. Nicole Schoeni took over the gallery’s leadership after her father’s tragic murder in the Philippines in 2004.

Paying dividends

Visitors look at a painting by Chinese artist Zhang Xiaogang titled “Brother and Sister” during the soft opening of the Hong Kong International Art Fair in Hong Kong on May 16, 2012. The event known as Art HK featured works by top international masters from Picasso to Chinese artists Ai Weiwei and cementing Hong Kong’s status as a global art hub.

Photo: GettyImages

Is Art the New Asset Class?

If you consider buying art purely for investment purpose, perhaps you should look at other asset classes. But if you have a passion for art and are committed advancing art appreciation that may lead to ‘intelligent’ acquisitions, art may bring some handsome return on your investment over time, along with considerable personal enjoyment. And you do not need to look any further than Hong Kong for creative contemporary works by budding artists from around the world, writes Wilson Lau

T

he volatile stock market and skyrocketing property prices in Hong Kong have sent jittery investors to mitigate the impact and diversify their portfolios by seeking out less conventional asset classes, including contemporary artworks by artists based in Asia.

“The value of well-chosen pieces, which carry historic and social significance, should be able to keep up with inflation,” says Georges de Tilly of 10 Chancery Lane Gallery.

The rule of thumb is: the rarer the piece is, the stronger the demand and the firmer the price will be. Collectors and investors should consider art as long-term investment and the timeframe for return on investment should not be shorter than

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10 years. “The longer it is, the better,” de Tilly stresses.

“For well-chosen pieces that have been kept for 30 or 40 years, let’s say even the small return over [annual] inflation of between 1.5 and 2 percent that has been compounded over time, it makes for extremely good return on investment,” adds de Tilly, whose wife Katie de Tilly owns 10 Chancery Lane. A former investment banker, Georges de Tilly is involved in the business side of the gallery and is also a hedge fund manager.

Director of Schoeni Art Gallery, Nicole Schoeni, meanwhile says her first priority is to buy pieces she loves. Putting aside the importance of monetary value, it is the aesthetic value of art which sets it apart from stocks. It is also something tangible.

“When individuals look at investment in art, they should have some sort of passion for it,” says Schoeni, who was raised in an environment embracing art.

Compared with equities, shares and bonds, the great “dividends” in art investment lie in the pleasure in the discovery of great artists, the pursuit of works one is passionate about, and the advanced appreciation of the works’ significance in the historic and social context. For individuals with great interest in art and substantial disposable income, art can be a good way to diversify their investment portfolios, de Tilly says.

“There is a lot of fun in building an in-depth understanding of one’s acquisitions. Art is great for the admiration of families and friends,” says de Tilly. “It is something to be part of family’s heirloom and passed down the generations.”

Constant self-education through frequent visits to exhibitions, museums and galleries, and learning about art appreciation are the crucial building blocks specially when there is such a broad selection of artworks available in the market. “Not every artist will become a big success in financial terms.

But if you collect artworks from artists that you get the pleasure from, sometimes it does not matter if the value does not double or triple,” Schoeni notes.

The buzz The record-breaking prices fetched for the works by some contemporary Chinese artists have attracted a lot of attention and created a lot of buzz surrounding the contemporary art scene in China. However, it may be unrealistic for individuals to expect that the 1,000percent price jump for works by certain contemporary Chinese artists between

Nicole Schoeni

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1995 and 2005 will ever repeat itself again.

Schoeni points out that some of the contemporary Chinese artists who have done well in the past decade, including Yue Minjun, are in a unique position. “[In the early 1990s] there was no market and little appreciation for Chinese contemporary art. The infrastructure for them, such as galleries, museums and publication did not exist,” she says. When it was established in 1992, Schoeni Art Gallery was among the first galleries which represented budding Chinese contemporary artists.

“There is a lot of fun in building an in-depth understanding of one’s acquisitions. Art is great for the admiration of families and friends,” says de Tilly. “It is something to be part of family’s heirloom and passed down the generations.”

Nowadays the young, up-andcoming artists in China enjoy more opportunities by comparison. There might be another Yue Minjun, but the prices for these young artists’ artworks are more established than Yue’s works 20 years ago, making phenomenal price hikes less likely.

Nevertheless, young promising artists are a good way for beginners to

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start an art collection. “They should be sensible and constantly educate themselves about the market and the artists. Do research about the artists they like and build a relationship with the galleries that represent them,” Schoeni advises.

“As a collector myself, I think [purchases] depend on individual unique circumstances and budgets. For me the excitement comes from working with young artists who have not been featured in auction yet. Once their works are on offer at auction, they have reached a certain sphere and they already have a market base and clientele who would seek their works at auctions.”

“If you want to start art investment, it makes sense to begin with young artists.

Their works are more reasonably priced. Collectors can also share their experience in building a career and a bigger market, which come along as their reputation grows. This is more fun,” Schoeni notes. “Established artists who sell through auctions are safer bets, as there is already a market for them.”

Overshadowed by the headlinegrabbing sales of some ‘flagship’ Chinese contemporary artists is a group of very good but lesser known Chinese artists. “These artists have exhibited all over the world and have been featured in a lot of publications. Their works are part of the major collections in highly revered museums,” de Tilly points out.

“Art pieces by these artists, such as Wang Keping and Huang Rui, are the key elements in a proper collection and the prices have remained reasonable.

These artists pioneered contemporary art movement in the late 1970s and made an impact on their generation.

They represent the breadth and depth of China’s contemporary art scene.”

Where to start It looks like there is no better place than Hong Kong for individuals who want to seriously start building an art collection. There is a thriving art gallery sector supported by a well-developed

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Georges de Tilly

infrastructure. The city has played host to hundreds of art galleries from around the world at the annual Art HK exhibition in recent years. Sales of contemporary art by international auction houses in the city have broken records. Several ‘blue-chip’, or highly influential, contemporary art galleries, such as Gagosian Gallery, have opened their branches in Hong Kong, adding more glamour and gravitas to its already burgeoning art scene.

Contemporary art enjoys a great deal of attention in Hong Kong and draws droves of prospective collectors from

around the world, Southeast Asia and Mainland China. Contemporary art owes its attractiveness to the fact that it is created by exciting artists who continue to innovate, reflecting our lives here and now. It resonates with a lot of art collectors, particularly the younger generation.

“In terms of trend, the traditional range of ink on paper has been expanded to include sculptures, multimedia objects, videos, installations and photography.

All these media are unventured and exciting,” Schoeni says.

In recent years, galleries in Hong Kong have significantly broadened their selections and represent many up-andcoming artists from emerging economies in the Southeast Asian region. Schoeni Art Gallery has held exhibitions for artists based in Mongolia while 10 Chancery Lane features works by budding artists from Cambodia.

When it comes to selling one’s art collection to realize the return on investment, sales through auction houses are always one avenue. Private sale on the Photo: GettyImages secondary market is another. Many galleries help clients reevaluate their artworks based on current market trends. Schoeni helps collectors resell works originally sold by the gallery to other collectors. “Some collectors prefer this method as there is less transparency,” Schoeni adds.

“Art pieces by these artists, such as Wang Keping and Huang Rui, are the key elements in a proper collection and the prices have remained reasonable. These artists pioneered contemporary art movement in the late 1970s and made an impact on their generation. They represent the breadth and depth of China’s contemporary art scene.”

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Hong Kong – Asia’s art hub?

Judging from the fact that several ‘blue-chip’ international galleries have opened their branches in Hong Kong, the city is likely to maintain its status as the hub for art trading and investment.

“These galleries bring to the city blue-chip Western artists who Mainland buyers will begin collecting once they have established the relationship with the galleries,” Schoeni says.

In addition to its favourable tax regime, sound infrastructure, and local galleries with expertise in packaging and marketing, Hong Kong needs non-commercial art institutions, like the much-talked-about M+ Museum in West Kowloon, for a better developed art scene, she says.

In de Tilly’s opinion, Hong Kong has a support function for China and Asia in terms of economic activities in much the same way as London to Europe or New York to the United States. “The city attracts a lot of wealth. The great movement of affluent people and the presence of an international community make it an ideal hub for arts, similar to London and New York.”

overheated economy, art buying by wealthy Mainland Chinese has remained active, Schoeni notes. “They have become more selective and savvy now.”

De Tilly agrees that affluent Mainland Chinese buyers have driven up prices of some art pieces, especially those considered fashionable and are in demand. This is not just limited to sales

Mainland buyers Mainland buyers have made significant impact on the art market in Hong Kong. Their presence at auctions is getting stronger. Over their past decade, their purchases have shifted from traditional art objects and antiques to contemporary art. Mainland Chinese art buyers are largely responsible for the escalating prices of the works created by some artists in the 1990s. “Contemporary Chinese artworks created in the 1990s are arguably recognized as the most creative. They are available only on the secondary market like galleries and auction houses. Some have fetched record prices at auctions,” Schoeni says.

Despite the current Central Government’s measures to cool the

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at auction houses but at galleries as well.

Strong prices notwithstanding, de Tilly does not see the local market in any danger of speculative activities. “Ninety nine percent of the art collectors in the local market look for reasonably priced works. It does not look like they borrow money against their purchases. Few are interested in reselling their acquisitions any time soon,” he explains.

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John French Country President Hong Kong, Taiwan and Macau

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BEA is the operator of one of the largest branch networks in Hong Kong. In addition, the Bank operates one of the largest networks of any foreign bank in Mainland China, with more than 100 outlets in major cities nationwide.

Overseas, the Bank maintains an active presence in Southeast Asia, the United Kingdom, and the United States. In Southeast Asia, the Bank serves customers through its branches in Singapore and Labuan, Malaysia, as well as through its representative office in Kuala Lumpur. In the UK, BEA operates branches in London and Birmingham while in the US, the Bank operates branches in New York and Los Angeles.

Worldwide, including Hong Kong and the rest of Greater China, BEA operates more than 220 outlets.

Year Established 1919

Staff size Over 100 employees (Hong Kong) Over 16,000 employees (Worldwide)

Tel: (852) 3191 6800 Fax: (852) 2560 3565 Email: Inquiries.HK@acegroup.com

www.aceinsurance.com.hk

Adrian David LI Man-kiu Deputy Chief Executive Brian David LI Man-bun Deputy Chief Executive Samson LI Kai-cheong Deputy Chief Executive & Chief Investment Officer TONG Hon-shing Deputy Chief Executive & Chief Operating Officer

Year Established 1918

Staff size (as of 30th April, 2012): Hong Kong: over 5,700 employees Worldwide: over 12,200 employees

Tel: (852) 3608 3608 Fax: (852) 3608 6000

ACE Life Insurance Company Ltd.

www.hkbea.com

(Incorporated in Bermuda with Limited Liability)

33/F, Windsor House, 311 Gloucester Road, Causeway Bay, Hong Kong

Key Personnel

Company Activities/ History

Anthony Mak Country President

ACE Life Insurance Company Ltd. is part of the ACE Group of Companies, one of the world’s largest multiline property and casualty insurers. With operations in 53 countries, ACE provides commercial and personal property and casualty insurance, personal accident and supplemental health insurance, reinsurance and life insurance to a diverse group of clients. ACE Limited, the parent company of the ACE Group, is listed on the New York Stock Exchange (NYSE: ACE) and is a component of the S&P 500 index.

ACE has been present in Hong Kong for more than 90 years through its general insurance arm – ACE Insurance Limited. ACE Life Hong Kong offers a comprehensive array of quality life and medical insurance products and services which are designed to meet the financial protection and security needs of a broad range of customers. Additional information can be found at www.acelife.com.hk.

ACE Life, ACE Group of Companies and ACE Limited are registered trademarks of ACE Limited.

Year Established 1988

Staff size Over 100 employees (Hong Kong) Over 16,000 employees (Worldwide)

Tel: (852) 2881 0688 Fax: (852) 2577 0866 Email: Enquiries.HKLife@acegroup.com

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Wealth Management & Finance Services Provider Banque Privée Edmond de Rothschild SA Hong Kong Branch

Zurich Insurance (Hong Kong) 24 – 27/F, One Island East, 18 Westlands Road, Island East, Hong Kong

50th Floor (Suite 5001), One Exchange Square, 8 Connaught Place, Central, Hong Kong

Key Personnel

Year Established

Bruce VonCannon Chief Executive Officer

Representative Office 1989 Hong Kong Branch September 2011

Annie Tam Senior Manager

Company Activities Banque Privée Edmond de Rothschild offers comprehensive wealth management and estate planning solutions for wealthy individuals and their businesses. Investment solutions feature expertise in portfolio management, investment advisory and research, structured products, foreign exchange, commodities and trust services. The bank is considered a pioneer in hedge funds dating back to 1969 and received the 2010 InvestHedge Group of the Year Award, 2011 Banco Swiss Hedge Funds Award, 2011 IAIR Award for excellence in Investment Management, and 2011 European Fund of Hedge Funds Awards for Best Overall Group.

Having had a presence in Hong Kong through our Representative Office for 22 years, Banque Privée Edmond de

Rothschild proudly established a full branch in the Territory in September 2011, following the granting of a full banking license from the Hong Kong Monetary Authority.

Key Personnel

Zurich Insurance (Hong Kong)

Ted Ridgway CEO Global Life Hong Kong

Being part of Zurich Insurance Group, Zurich Insurance (Hong Kong) offers a full range of flexible life insurance and general insurance products for individuals as well as corporate customers, catering to their insurance, protection and investment needs. Our presence in Hong Kong dates back to 1961. We are one of the top ten insurers in Hong Kong.

Our business in Hong Kong mainly covers the following areas:

Eric Hui CEO General Insurance Hong Kong

Company History The Rothschild name in finance spans over 200 years dating back to the late 1700s to the present day headquarters in Geneva. Edmond de Rothschild merged the bank under Swissbased La Compagnie Financiere Edmond de Rothschild (LCF) in the 1960s. Listed on the Swiss Stock Exchange since 1987, today the bank has assets under management exceeding USD 100 billion and boasts one of the highest capital adequacy ratios in the wealth management industry. It maintains a global presence with 33 offices across the globe.

Year Established 1961

Staff size 700

Global Life Global Life is a key growth engine for our Group. We help our customers feel confident about their financial future by offering leading life insurance, savings, investment and protection solutions.

General Insurance

Tel: (852) 3765 0600 Fax: (852) 2877 2185 Email: marketing@bper.hk

www.edmond-de-rothschild.ch

Tel: (852) 2968 2222 Fax: (852) 2968 0988 Email: enquiry@hk.zurich.com

www.zurich.com.hk

With a strong concentration on technical and underwriting excellence, we provide tailored and focused solutions to commercial and corporate customers, and mid-sized enterprise customers, as well as a wide range of personal line products to individual customers.

Charles Schwab, Hong Kong, Ltd Suites 1607-1611, 16/F, ICBC Tower, 3 Garden Road, Central, Hong Kong

Key Personnel

Company Activities/ History

James Sun Managing Director

Charles Schwab, Hong Kong, Ltd., a subsidiary of the San Francisco-based Charles Schwab Corporation, is registered with the Securities & Futures Commission (“SFC”) in Hong Kong. We offer comprehensive US investing products and services, including US stocks, fixed income, market research, a world-renowned online trading platform and financial consultants in Hong Kong.

The Charles Schwab Corporation (NYSE: SCHW) has been a leader in financial services in the United States for more than three decades. Through its subsidiaries —including Charles Schwab & Co., Inc., Charles Schwab Bank, and Charles Schwab, Hong Kong, Ltd.— Schwab manages client assets exceeding US$1.68 trillion as of December 31, 2011, with 8.6 million client brokerage accounts, 1.49 million corporate retirement plan participants and 780,000 banking accounts.

Mr. Charles R. Schwab’s vision of providing the most ethical financial services continues to lead us to be a reliable source of financial services, a trusted provider of help and advice, and a stable firm committed to delivering great value.

With Schwab Hong Kong, you will have access to your investments and US market insight through our web site www.schwab.com.hk, telephone access (+852-2101-0511) and local office.

Year Established 1997

Tel: (852) 3198 4200 Fax: (852) 2506 4756 Email: asia@schwab.com.hk

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2012 July

Mark Your Calendar Jul Social Media, Sales and Social Good

01

Ali Bullock, Digital and Social Media Marketing Manager, Cathay Pacific Airways From a revolution in Egypt to Nestle changing its billion dollar palm oil buying strategy, we are all facing new challenges at a speed never seen before thanks to social media. In this presentation Ali Bullock who is responsible for Cathay Pacific's global social channels explains his thinking behind the headlines and what real changes social media is having upon the industry.

Mr. Bullock will cover: • Sales, sales, sales - Thoughts from the marketing guy • Long term thinking and planning in a short term world • Engaging your audience and why • CSR and social good in this new world - Everyone can do more • Wasting time on social media, the hype, the wasted efforts and the fails • Where every company needs to be right now Ali Bullock has been involved in the fast evolving world of digital marketing since before many of us had even sent our first email. His experience has taken him from London to Hong Kong, working for many global companies including KPMG, Kellogg’s, Samsung, and Motorola to his current position leading digital marketing at Cathay Pacific’s global head office based in Hong Kong.

Jul Business Corruption and the Foreign Corrupt

23

Practices Act in China

Brent C. Carlson and Chen Zhou, AlixPartners In effect since 1977, Foreign Corrupt Practices Act (FCPA) was a sleeper issue for most of its existence. However, over recent years – in line with increased anti-corruption initiatives globally – the FCPA has since become a top enforcement priority by the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). The stakes are now even higher with bounties available under the SEC’s new Dodd-Frank whistleblower program and the DOJ’s increased prosecutions of individuals.

Brent Carlson has nearly 20 years of China business experience in senior management roles including Chief Representative, COO/Deputy General Manager, CFO/Treasurer, and Compliance Officer. As a Certified Fraud Examiner, he has conducted internal investigations in China for companies into FCPA-related matters arising from whistleblower allegations, merger and acquisition due diligence, and compliance assessments of ongoing operations.

Chen Zhou has over twelve years of work experience in the areas of financial/operational audit, mergers and acquisitions, interim management, dispute and forensic consulting. His dispute and forensic consulting experience includes a range of financial investigations, regulatory compliance review, pre-acquisition due diligence, fraud risk assessment, commercial dispute analysis and litigation support.

Jul Learn How to Unleash Potential by

24

Sean Dineen, Principal Consultant, Right Management With culturally diverse teams, virtual teams, multiple generations in the workforce, and an increasing need for talented, mobile, agile performers who have a true “global mindset”, the gap between skilled talent and demand is widening.

This session will establish the current state of the “Human Age” as is impacts talent management. Specifically, the concept of “talentism” will be defined and used as a base to practical options for identifying and developing top talent by taking a “whole person” and “one-size-fits-one” approach to leadership development.

Sean Dineen is a principal consultant with Right Management and is a leadership and organizational assessment subject matter expert. Sean’s area of expertise includes the design and implementation of both individual and organizational assessment instruments.

His areas of focus are on the development and interpretation of organizational surveys and individual assessment instruments, helping clients translate data into meaningful action to drive sustainable behavioral and organizational change.

Tel: (852) 2530 6900

Time: 12:00pm-2:00pm (Sandwiches and Beverages included) Fee(s): Member Fee: HK$250 Non Member Fee: HK$350

Venue: AmCham Office 1904 Bank of America Tower 12 Harcourt Road, Central Time: 12:00pm-2:00pm (sandwiches and beverages) Fee(s): Member Fee: HK$250 Non Member Fee: HK$350

Venue: AmCham Office 1904 Bank of America Tower 12 Harcourt Road, Central

Investing in the Whole Person

For information, see website: www.amcham.org.hk

Venue: Chinese University HK MBA Town Center Emerald Room Unit B, 1/F, Bank of America Tower, 12 Harcourt Road, Central

Fax: (852) 2810 1289

Time: 8:00am-9:30am (light breakfast included) Fee(s): Member Fee: HK$150 Non Member Fee: HK$250

Email: kalau@amcham.org.hk

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