AmCham biz.hk Apr 2016 by The American Chamber of Commerce in Hong Kong

JOURNAL OF THE AMERICAN CHAMBER OF COMMERCE IN HONG KONG

April 2016

www.amcham.org.hk

NORMALIZATION OF US FED POLICY April 2016 • VOLUME 48 NUMBER 4

JANET YELLEN

US FEDERAL RESERVE CHAIR

STANLEY FISCHER

US FEDERAL RESERVE VICE CHAIRMAN COVER SPONSOR

INDUSTRY FOCUS:

BANKING & FINANCIAL INSTITUIONS

April 2016

Contents

Vol 48 No 4

Publisher

Richard R Vuylsteke

Editor-in-Chief Kenny Lau

Managing Editor

COVER STORY

The Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by a quarter percentage point in December. Despite considerable progress in restoring jobs and incomes of millions of Americans and an expectation of further economic improvement, FOMC expects economic conditions will evolve in a manner that only warrants gradual increases in the federal funds rate

Leon Lee

Assistant Advertising Sales Manager Tom Chan

AMCHAM NEWS AND VIEWS 04 ERP Embarks “Smart City” Development

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) 3753 1206 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 Tel: (852) 3596 8466 Email: ray.chau@overa.com.hk Website: www.overacreative.com ©The American Chamber of Commerce in Hong Kong, 2016 Library of Congress: LC 98-645652 Single copy price HK$50 Annual subscription HK$600/US$90

The Electronic Road Pricing Pilot Scheme is an excellent first step towards realizing the vision of a sustainable model of quality living by utilizing analytics and data for urban planning, transport efficiency and traffic control

06 New Business Contacts 31 executives join AmCham’s business network last month

07 New Member Spotlight Each issue, biz.hk highlights a recently joined AmCham member. For this issue, we speak to Dawn Soo, Chief Wellness Officer and Head of Hong Kong Office, CXA Group

64 Mark Your Calendar

COVER STORY 08 Normalization of US Fed Policy: Liftoff of Interest Rates via Unconventional Means The Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by a quarter percentage point in December. Despite an expectation of further economic improvement, FOMC expects economic conditions will evolve in a manner that only warrants gradual increases in the federal funds rate

FINANCE & ECONOMICS

16 The Hong Kong Stock Market: A Year in Review Despite a 25 percent fall of the Hang Seng Index, 2015 was a year of extraordinary trading activities of historic volumes, with a daily average of nearly HK$104.6 billion in total turnover value on the Main Board of the Stock Exchange of Hong Kong

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16 FINANCE & ECONOMICS Despite a 25 percent fall of the Hang Seng Index, 2015 was a year of extraordinary trading activities of historic volumes, with a daily average of nearly HK$104.6 billion in total turnover value on the Main Board of the Stock Exchange of Hong Kong

TRADE & INVESTMENT As Burma continues to become a part of the international community with abundant investment opportunities, US Ambassador to the Republic of the Union of Burma Derek Mitchell provides an inside look of what the future might hold

ADVOCACY

22 An Engine of Trade beyond Asia In spite of recent downgrades of Hong Kong’s outlook from “stable” to “negative,” the city will continue to play a critical role in opening up China’s economy to the global market – as sectors engaged in finance, trade and investment are well-positioned to be an important link

TRADE & INVESTMENT

26 The Economic Impact of Taiwan’s New Leadership

Rupert Hammond-Chambers, an expert on Taiwanese political and economic issues who serves as BowerGroupAsia’s managing director for Taiwan and as President of US-Taiwan Business Council, shares his thoughts on the latest elections

30 Open for Business With an economy having grown beyond projections and an anticipation of participation in TPP, Vietnam has emerged as an attractive destination for international businesses, especially in manufacturing and investment

34 History in the Making As Burma continues to become a part of the international community with abundant investment opportunities, US Ambassador to the Republic of the Union of Burma Derek Mitchell provides an inside look of what the future might hold

38 Myanmar: Opportunities & Challenges for Businesses The investment outlook should be one of cautious optimism as investors may have to navigate a complex web of multiple ministries and local governments

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34 INDUSTRY FOCUS

Financial News Briefs: The latest development of international banking and financial institutions in a global market of low oil prices, highly volatile stock performances, slower economic growth in China, and record low interest rates

INDUSTRY FOCUS

41 Financial News Briefs

The latest development of international banking and financial institutions in a global market of low oil prices, highly volatile stock performances, slower economic growth in China, and record low interest rates

CHINA BUSINESS

50 Business Reporting Line among MNCs in China A Heidrick & Struggles survey of some 100 senior executives of MNCs responsible for business operations in China examines how well various models of reporting line structure in relation to their global headquarter function

EDUCATION

54 The Case for a Quality Education Through the comprehensive case method of teaching, Ivey Business School has risen to become one of the top business schools in the world with its EMBA and executive education programs. As the market continues to grow in Asia, it is set to grow along with it

CORPORATE SOCIAL RESPONSIBILITY 60 Glitz, Glamor and Sustainability Leveraging its influence as a market leader, Luxury goods group Kering aims to set a different trend of to tackling social and environmental issues through incorporating initiatives into an overall business strategy

Board of Governors Chairman Vice Chairman Treasurer

Walter Dias Steve Lackey Sara Yang Bosco

Executive Committee Evan Auyang, Sean Chiao, John (Jack) E Lange, Alan Turley, Jennifer Van Dale Governors Donald Austin, Owen Belman, Elaine Cheung, Diana David, Sean Ferguson, Robert Grieves, Matthew Hosford, Clara Ingen-Housz, Michael Klibaner, Simon Ogus, Seth Peterson, Anna-Marie Slot, Catherine Simmons, Eric Szweda, Patrick Wu, Lennard Yong Ex-Officio Governor President

Peter Levesque Richard R Vuylsteke

Chamber Committees Apparel & Footwear Ball China Business Communications & Marketing Corporate Social Responsibility Education Energy Entrepreneurs/SME Environment Financial Services Food & Beverage Hospitality & Tourism Human Resources Information & Communications Technology Insurance & Healthcare

Mark Green Sara Yang Bosco Diana David Devin Ehrig Lili Zheng Oliver Rust Pat-Nie Woo Virginia Wilson Rick Truscott Cynthia Chow Laurie Goldberg Jim C Taylor Steven Chan Veronica Sze Mark Kemper Peter Liu Benny Lee

Rebecca Harrison Hanif Kanji Gabriela Kennedy Intellectual Property Jenny Wong Chiann Bao Law Jessica Bartlett Joyce Wong Pharmaceutical Edward Farrelly Real Estate Robert Johnston Terrance Philips SelectUSA Lili Zheng Philip Cheng Senior Financial Forum Bianca Wong Senior HR Forum Ivan Strunin Taxation Barrett Bingley Trade & Investment Gavin Dow Transportation & Logistics Jennifer Parks Women of Influence Jennifer Wilson Michael Harrington Young Professionals

biz.hk Editorial

ong Kong has become a society of affluence over the decades. With rising disposable household incomes, private cars have also been a big ticket item among the people of Hong Kong – an encouraging sign of a vibrant economy. There is one problem: road traffic congestion has gotten so bad that the traveling speed of motor vehicles across Hong Kong is slowing down significantly. On major roads of Hong Kong Island, 10 km/hour is as fast as a car can travel during peak hours. That’s a speed not much faster than the average walking speed of 5 km/hour. People not only have to put up with decreasing mobility, connectivity and livability, but are also “adversely affected” by repressed economic output and poor air quality as a result. It is a critical issue government efforts are being spared to tackle with a recommendation of 12 short- and long-term measures by the Transport Advisory Committee. The “Electronic Road Pricing” pilot scheme in Central District – based on the “user pays” concept similar to counterparts in Singapore and London – is a welcome move to lower traffic congestion by supporting fair use of public roads. For a solution to be effective, it needs to correspond to Hong Kong’s specific conditions – based upon “demand-side management,” ERP seems to be a good fit for better management of the use of private cars and, hence, of traffic flow. The challenges of road traffic congestion and competition of road space, after all, can be tackled through a re-balance of supply and demand for the purpose of prioritizing “Pedestrian First, Mass Transport Second, and Private Cars Last.” To incentivize the use of green means of transport and reduce emission, certain types of cars other than emergency vehicles, namely

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ELECTRONIC ROAD PRICING EMBARKS A JOURNEY OF “SMART CITY” DEVELOPMENT electric vehicles, could be allowed some concession in the scheme. Of non-electric public vehicles, green minibuses and franchised buses on a fixed route are a second category of road users for which either an exemption or a reduced level of fees should be made – as not to reduce the financial attractiveness of public transport for commuters. The ERP pilot scheme does raise some concerns over the protection of privacy, especially in terms of the use of such information by government agencies and private entities – an issue to be addressed by relevant government bodies, including the Privacy Commission, Information and Technology Bureau, Transport and Housing Bureau, and the Transport Department, with guidelines on reasonable use of information and a consistent and integrated privacy policy. The scheme should also be evaluated vis-à-vis its effectiveness from three specific sets of indicators: overall traffic management – whether it shows measurably less congestion instead of a shift of traffic congestion from the ERP zone to areas immediately outside; private car management – whether it indicates a decline of the use of private cars; use of public transport – whether it leads an increased use of public transport in the pilot district and adjacent areas. And, of course, the level of fees should be reviewed periodically and adjusted where necessary in order to maintain the effectiveness of ERP. More important is an extension of the

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Central District pilot area to cover the cross-harbor tunnels and other roads across the city. The choice and procurement of technology for the pilot area, therefore, should be taken into account. Once the ERP pilot scheme based upon overseas experiences in Singapore, London, and Gothenburg is found to be successful, it could go a step further and provide drivers with real time and automatic data to calibrate travel on optimal routes for efficiency, convenience and safety. In the meantime, amid the implementation of ERP in Central, Hong Kong should expedite the efforts in bus route rationalization and addressing illegal parking. As a world-class city, Hong Kong needs world-class vision for transportation, together with expert planning and execution. In the current digitally disruptive day and age, it only makes sense that wireless technology be leveraged to bring about higher productivity and efficiency. Hong Kong’s global and regional competitiveness hinges upon its “Smart City” development. The vision goes beyond being “smart” and livable but must envisage and invest in essential hard and soft infrastructure for a sustainable model which promotes quality living. The ERP Pilot Scheme is an excellent first step towards realizing that vision utilizing analytics and data for urban planning, transport efficiency and traffic control.

New

Business Contacts The following people are new AmCham members: AlixPartners Hong Kong Limited Lian-Hoon Lim Managing Director

Autism Partnership Hong Kong Toby Mountjoy Associate Director Rachel Ho Head of Marketing and Services Program Kathleen Man Principle, Aoi Pui School

Immersive Education Academy Ltd Octavian Cheung Chief Executive Officer

Leon Wheatley Asia Representative

Rachel Farrell Head of Sovereign and Institutional, Asia Pacific ex Japan Kam Shing Kwang Senior Country Officer, Hong Kong

Virginia Tam Partner

Lan Kwai Fong Holdings Ltd

Didier Bensadoun President

DHL ISC (Hong Kong) Ltd

Modern Terminals Limited

Matt Terranova Director, Business Development

Eddie Bauer Asia Mark Sandquist Managing Director

EY Eric Young Partner

Foodpanda HK (Rocket Food Ltd) Jakob Kronbichler Head of Corporate

Harvest Global Investments Limited Rosana Hoyan Head of Legal

TMF Hong Kong Limited Caroline Lacocque Director of Client Services

UA Global Sourcing Limited

Michael Cassidy Deputy Director of Property Development Marc Miesing Operations Director

Delivery.com

Jan Frederic Eger Head of Financial Services, Government and Regulatory Affairs

J.P. Morgan

K&L Gates BVI House Asia Limited

Thomson Reuters Hong Kong Ltd

Keith Saunders Managing Director - Hong Kong

Andras Kish Director of Manufacturing Excellence

WE Communications Emma Richards General Manager, VP - Hong Kong Annie Ho Technology Director Michael Jones Greater China Region Consumer Lead Henry Wood VP, Studio D Asia Pacific Lead

Payless ShoeSource Charles Brown VP Operations - Asia

Philips Lighting Hong Kong Limited Iyer Mahesh CEO Jo Shum Group General Manager Rowena Lee Senior Vice President

PricewaterhouseCoopers Ltd Daniel Loffi Director, PwC Advisory Harry Wang Senior Manager

View our other members at: www.amcham.org.hk/memberlist

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New Member Spotlight

Dawn Soo Occupation: Chief Wellness Officer and Head of Hong Kong Office, CXA Group Industry: Insurance Member since: February 2016

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Why did you join AmCham Hong Kong? Given Hong Kong is a relatively new market for the company and with our China office opening this year, joining AmCham Hong Kong was a natural decision. We believe being part of the Chamber will help us get better connected with the local business community and provide opportunities to network with both clients and partners. Can you tell us a bit about CXA? CXA is an Employee Benefits firm. We operate Asia’s first insurance wellness marketplace that transforms a company’s existing healthcare spend into an integrated benefits and wellness program that rewards employees for becoming healthier. Employees can allocate their employer contribution between insurance coverage and wellness services from CXA's benefits marketplace to suit their individual needs. CXA also manages all benefits-related administration for HR and provides the ROI data to help improve workforce health and cut claims costs. We currently have brokerage operations in Singapore and Hong Kong with plans to expand across Asia. How is business so far? Since our Hong Kong launch in January this year, we have received tremendous support from the local and regional HR community. The initial feedback from clients and their employees has been very encouraging and a significant number of companies have requested for our regional services in Greater China.

Why did the company choose to expand to Hong Kong as opposed to other cities? Hong Kong and Singapore are very important markets for us in Asia. Many local and regional decision-makers are based in these two countries hence it is essential we are able to provide comprehensive end-to-end solutions in these markets. What are the advantages of doing business in Hong Kong? It’s definitely the ease of doing business and recruiting talent. What about challenges? Being new in the Hong Kong market, we have had to dedicate time and resources to building up brand awareness within the local business community. Some of our early customers have become advocates for the company which is really amazing. Joining the local chambers such as AmCham is also one of our many initiatives to build brand awareness. What are the company goals for 2016? This year we are focused on continuing to provide great service to our clients, further developing the Hong Kong market and establishing our China office. What’s your favorite aspect of Hong Kong? The outdoors. I love how lush greenery, nature trails and absolute solitude are a mere 30-minute MTR ride away from the city center.

COVER STORY

Normalization of US Fed Policy: Liftoff of Interest Rates via Unconventional Means The Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by a quarter percentage point in December, marking the end of a seven-year period during which the federal funds rate was held near zero in a sustained effort to support recovery of the US economy from the worst financial crisis and recession since the Great Depression of the 1930s. Despite considerable progress in restoring jobs and incomes of millions of Americans and an expectation of further economic improvement, FOMC expects economic conditions will evolve in a manner that only warrants gradual increases in the federal funds rate

By Kenny Lau

Janet Yellen

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Stanley Fischer

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he US economy has recovered substantially since the “Great Recession” following the global financial crisis of 2008 which prompted a market-shattering domino effect of collapses among large financial institutions and caused a chain reaction of business failures and panic selloffs in an economic meltdown ignited by an over-leveraged US housing market in the mid-2000s. Today, after nearly a decade of recovery, US economic output as measured by inflation-adjusted GDP has increased steadily, with unemployment falling from ten percent in 2009 to 4.9 percent in early 2016 – a remarkable achievement by any measure. The “considerable improvement in the labor market” became a foundation upon which the US federal funds rate – the interest rate for overnight loans with reserves of a depository institution at the Federal Reserve to another depository institution on an “uncollateralized basis” – was increased by 25 basis points (0.25 percent) in December, lifting the target range to a bracket of 0.25 to 0.5 percent. It was a historic decision because US interest rates had been kept at near zero since December 2008 following a rapid downward drive from a peak level of 5.25 percent in August 2007. “The economy has made further progress toward the objective of maximum employment,” US Federal Reserve Chair Janet L Yellen highlights in a testimony earlier before the Congressional Committee on Financial Services of the US House of Representatives. “In the labor market, the number of nonfarm payroll jobs rose 2.7 million in 2015, and posted a further gain of 150,000 in January of this year. The cumulative increase in employment since its trough in early 2010 is now more than 13 million jobs.” With the anticipation of moderate economic growth over the medium term accompanied by further labor market improvement, current projections for US economic growth, unemployment and inflation are little changed from the time of the rate increase in December, she points out. “A key factor underlying such modest revisions is a judgment that monetary policy remains accommodative and will be adjusted at an appropriately gradual pace to achieve and maintain our dual objectives of maximum employment and 2 percent inflation.” The pace of rate increases, however, is now expected to be somewhat slower “in light of global economic and financial developments since December, which at times have included significant changes in oil prices, interest rates, and stock values,” Yellen says. The median of the Federal Open Market Committee (FOMC) participants’ projections for the federal funds rate is now only 0.9 percent for the end of 2016 and 1.9 percent for the end of 2017, both half a percentage point below the medians in December.

The US economy’s “neutral” real rate – the level of an inflation-adjusted federal funds rate deemed neither expansionary nor contractionary in an economy operating near its potential – is now likely close to zero. And the current real federal funds rate is even lower, at roughly minus 1.25 percentage point. “The current stance of monetary policy, thus, appears to be consistent with actual economic growth modestly outpacing potential growth and further improvements in the labor market,” Yellen believes.

Recovery along a bumpy road The strong gains in the job market last year were accompanied by a continued moderate expansion in economic activity. US real gross domestic product – although negatively affected by restrained US net exports as a result of the appreciation of the US dollar and subdued foreign growth particularly evident in the fourth quarter of last year – is estimated to have increased about 1.75 percent in 2015, Yellen points out. Nevertheless, “household spending has been supported by steady job gains and solid growth in real disposable income – aided in part by the declines in oil prices.” One area of particular strength, she notes, has been the purchases of cars and light trucks by consumers – sales of motor vehicles in 2015 reached

a record high. Although sharp declines in oil prices have caused companies in the drilling and mining sector to “slash jobs and cut capital outlays,” business investment continued to rise over the second half of last year, including those in homebuilding in spite of “a level of new construction well below the longer-run levels implied by demographic trends.” The US labor force participation rate, however, remains somewhat below most assessments of its trend, and an unusually large number of people who would otherwise prefer full-time employment are only doing part-time work, Yellen cautions. “The numbers suggest some slack in labor markets remains, and there is still room for further sustainable improvement” – a reason for the decisions in January and March to maintain the target range of US interest rates at 0.25 to 0.5 percent, despite earlier hints of forthcoming rate increases throughout 2016. Recent financial conditions in the US, she adds, have also become less supportive of growth: declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the US dollar. “These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset. Still, ongoing employment gains and faster wage growth should support the growth of real incomes and, therefore, consumer spending.”

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Volatility in the global market – including uncertainty about China’s growth prospects and its policy on currency exchange rate – is an enormous risk to US economic growth, Yellen stresses. “This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth, although recent economic indicators do not suggest a sharp slowdown in Chinese growth.” “Although the baseline outlook has changed little on balance since December, global developments pose ongoing risks,” she says. “Readings on the US economy since the turn of the year have been somewhat mixed – while the labor market has added a monthly average of almost 230,000 jobs over the past three months, manufacturing and net exports have been hard hit by slow global growth and significant appreciation of the dollar since 2014, weighing on business investment by limiting expected sales and reducing demand for capital goods.” “These growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the prices of oil and other commodities,” she further points out. “In turn, low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging market economies, and for commodity-producing firms in many countries. Should any of these downside

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risks materialize, foreign activity and demand for US exports could weaken, and financial market conditions could tighten further.”

The role of inflation The decision to raise the US interest rates in December was based on the “substantial improvement” in labor market conditions but also an expectation that inflation would rise over the medium term, in accordance to a congressional mandate “to pursue a monetary policy that fosters maximum employment and price stability defined as 2 percent inflation.” Deflation, in economic terms, delays consumer spending and business investment because it leads to an assumption of price drops, repressing money markets and propelling a vicious cycle of dampened economic activities. A problem facing the Fed in its effort to “stimulate” the US economy is the current level of inflation – which remains stubbornly below the FOMC’s longer-term goal of 2 percent. The price index for personal consumption expenditures (PCE) was only up by 0.5 percent over the 12 months ending in December. This is largely due to the declines in energy prices and non-oil import prices as well as further declines in commodity prices. A stronger US dollar in the foreign exchange market and a “slack” in labor markets are also key reasons.

“Inflation ran well below our target last year, held down by the transitory effects of declines in crude oil prices and also in the prices of non-oil imports. Prices for these goods have fallen further and for longer than expected,” US Fed Vice Chairman Stanley Fischer reiterates. “Once these oil and import prices stop falling and level out, their effects on inflation will dissipate, which is the main reason we expect inflation will rise to 2 percent over the medium term, supported by a further strengthening in labor market conditions.” There was little change in food prices during the second half of 2015 after “edging down” during the first six months of last year. The level of consumer food prices in 2015 was a reflection of “falling food commodity prices” as a “source of downward pressure on consumer food price inflation…but futures markets suggest that these commodity prices will flatten out, implying that this is likely to wane.” The PCE price index excluding food- and energy-related items is a “better indication of future inflation,” but it, too, remained subdued, increasing by 1.5 percent over the same period. Actual inflation as a result of “wage- and price-setting decisions” is heavily influenced by market expectations, and market expectations “have drifted down a little since the middle of last year” and are “near the lower ends of their historical ranges,” as indicated in University of Michigan’s Surveys of Consumers on

expectations over the next five to ten years and Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters on the annual rate of increase in the PCE price index over the next ten years – a deviating trend from past survey measures of longer-term inflation expectations which, until recently, had been “stable” over the past 15 years. Market-based measures of inflation compensation, meanwhile, are also down. The difference of medium(5-year) and longer-term (5-to-10-year-ahead) inflation compensation between yields on nominal Treasury Securities and yields on Treasury Inflation-Protected Securities has further narrowed over the second half of 2015 following a closing gap between mid-2014 and mid-2015. In other words, inflation is a non-risk in money markets today, although “the decline has largely been driven by movements in inflation risk premiums and liquidity concerns rather than by shifts in inflation expectations.” Increased concern about the global outlook, particularly the ongoing structural adjustments in China and the effects of the declines in the prices of oil and other commodities on commodity exporting nations, appeared to have triggered volatility in global asset markets early this year, Fischer notes. “If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the US. But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy.” “I would note that our monetary policy remains accommodative after the small increase in the federal funds rate adopted in December,” he adds. “And, at the time of our January decision, my colleagues and I anticipated that economic conditions would evolve in a manner warranting only gradual increases in the federal funds rate, and that the federal funds rate would likely remain, for some time, below the levels that we expect to prevail in the longer run. I should emphasize, however, that that was an expectation, not a decision. Our future policy actions are by no means predetermined.”

Redistribution of assets Over the spring and summer of 2014, participants of the FOMC – well aware of the fact that conventional means of implementation of monetary policy will no longer be effective – started discussing for a plan to “normalize” the stance of US monetary policy, formulating steps to raise the federal funds rate and other short-term interest rates more aligned to pre-crisis levels. And there are two major challenges: a “superabundant” level of reserve balances in the banking system and the Fed’s enormous balance sheet of securities holdings.

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The FOMC in the past was able to set and achieve a target rate effectively “through small purchases and sales of securities in the open market” in what is called “open market operations.” That is, by driving up or down the level of excess reserves – remainder of balances after all reserve requirements are met – which depository banks would normally keep to a minimum because of its non-interest-bearing nature. Essentially, FOMC could effect a rate change by refilling or draining banks’ “extra” reserve balances through buying or selling securities. Today, circumstances are quite different: reserve balances of the banking sector have increased exponentially since the financial crisis, from an aggregate total of US$15 billion (and excess balances of less than US$2 billion) to more than US$2.6 trillion (and excess balances amounting to all but about US$90 billion of the total) by December 2014, largely because the Fed started paying interest on excess reserves (IOER) in September 2008 and incentivized banks to deposit their reserves at the Federal Reserve. It was a critical step allowing policymakers to “increase the level of reserves and still maintain control of the federal funds rate” as the Fed became “a lender of last resort” and needed a large amount of liquidity to support stability of the US financial system – an amount much greater than the total required reserves of depository institutions at the time. IOER can be described as a double-edged sword: it provided a new liquidity facility to save the US economy from complete annihilation but also made it difficult to move the target funds rate up because of extraordinary downward pressure. The reversal of “reserve scarcity” among banks, likewise, came from a series of large-scale asset purchase programs (LSAPs) between November 2008 and October 2014 when the Fed purchased in the secondary market about US$1,690 billion in Treasury securities, US$2,070 billion in agency mortgage-backed securities (MBS), and US$170 billion in debt issued or guaranteed by government agencies. The Fed, less than a decade ago, had assets mostly of Treasury securities holdings worth about US$791 billion and liabilities in the form of reserve balances of about US$15 billion. The purpose of LSAPs and IOER was to “counteract the devastating effects on the US economy of the financial crisis and the subsequent Great Recession.” But they also created a Fed portfolio of securities holdings nearly 5.5 times their pre-crisis level and liabilities in reserve balances amounting to US$2.6 trillion. As such, “small” transactions of securities and reserves by the Fed are no longer sufficient tools for adjusting the federal funds rate, particularly in an environment where banks and financial institutions have a record level of excess reserves.

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A return to historical norm The FOMC, instead, will continue to leverage IOER to “move the federal funds rate into the target range by adjusting the interest rate it pays on excess reserve balances” during normalization. In attempts to drive the federal funds rate up, it would create upward pressure by paying higher interest on reserves, thereby also allowing the Fed to place a “floor” on the federal funds rate. That’s because banks now have an incentive to borrow in the federal funds market at rates below that of IOER and then make a deposit at the Fed for a profit. Conversely, they have little incentive to lend at rates below IOER. An overnight reverse repurchase agreement (ON RRP) facility is another unconventional supplementary tool being employed by the Fed for the purpose of

Federal Reserve assets and liabilities Assets

Trillions of dollars — — — — — — — — — — — — — — — — — — —

Other assets

Credit and liquidity facilities

Agency debt and mortgage-backed securities holdings Treasury securities held outright Federal Reserve notes in circulation Deposits of depository institutions

Capital and other liabilities

Liabilities and capital 2008

2009

2010

2011

2012

2013

2014

2015

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 0 .5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

2016

NOTE: “Credit and liquidity facilities” consists of primary, secondary, and seasonal credit; term auction credit; central bank liquidity swaps; support for Maiden Lane, Bear Stearns, and AIG; and other credit facilities, including the Primary Dealer Credit Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, and the Term Asset-Backed Securities Loan Facility. “Other assets” includes unamortized premiums and discounts on securities held outright. “Capital and other liabilities” includes reverse repurchase agreements, the US Treasury General Account, and the US Treasury Supplementary Financing Account. The data extend through February 3, 2016. Source: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.”

“causing a temporary decline in reserve balances in order to put upward pressure on the federal funds rate.” In the past, it was only done occasionally with a group of institutions known as “primary dealers.” Today, it is conducted on a daily basis with a pre-announced offering rate for a broader set of counterparties as an option of investment, effectively increasing “reserve scarcity” on a much large scale. “The FOMC has indicated that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively – which will require us to reduce the size of our balance sheet substantially. But that statement leaves open the question of when we should begin that process,” Fischer explains. “Because payment of interest on reserve balances and the overnight reverse repurchase facility can be used to raise the federal funds rate independent of the size of the balance sheet, we have the flexibility to adjust the size of our balance sheet at the appropriate time.” The plan in short, according to the FOMC, is to adjust the payment of interest on excess reserve balances of financial institutions, continue to increase the scarcity of reserves in the banking system through ON RRP operations, reduce securities holdings in “a gradual and predictable manner” by ceasing to reinvest repayments of principal on securities held in the System Open Market Account (SOMA) managed by the Federal Reserve Bank of New York. The Fed, however, does not anticipate selling agency mortgage-backed securities as part of the normalization process. “Removing monetary policy accommodation by the traditional approach of raising short-term interest

rates is preferable to selling longer-term assets because such sales could be difficult to calibrate and could generate unexpected financial market reactions,” Yellen rationalizes. “The FOMC is continuing its policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities until normalization of the level of the federal funds rate is well under way.” “Maintaining our sizable holdings of longer-term securities should help maintain accommodative financial conditions and reduce the risk that we might need to return the federal funds rate target to the effective lower bound in response to future adverse shocks,” she explains. “With the federal funds rate near zero, we can respond more readily to upside surprises to inflation, economic growth, and employment than to downside shocks. It is appropriate to be more cautious in raising our target for the federal funds rate than would be the case if short-term nominal interest rates were appreciably above zero.” “However, we must also take into account the well-documented lags in the effects of monetary policy,” Yellen cautions. “Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.”

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FINANCE & ECONOMICS

A Year in Review The Hang Seng Index experienced a 25 percent fall in a year of minimal economic growth, high inflation and a stubbornly sluggish stock market following a crash of Chinese stocks on the Mainland in the second quarter of 2015. But it was also a year of extraordinary trading activities of historic volumes, with a daily average of nearly HK$104.6 billion in total turnover value on the Main Board of the Stock Exchange of Hong Kong

By Kenny Lau

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t only seemed like yesterday when Hong Kong was caught in a stock market crash. Ever since the financial crisis of 2008 during which stocks listed in Hong Kong collectively lost two-thirds of value within a 12-month period, market volatility has remained vigorous and continual that fewer investors today have the appetite to sit through what others may call an ordinary investment cycle. Risk aversion appears to be the name of the game, and market confidence is, arguably, nowhere near the pre-crisis level. The stock markets in Hong Kong from late 2011 to early 2015 can be described as a period of high volatility in which stock prices gauged in the Hang Seng Index (HSI) swung more often within shorter timeframes and wider brackets (although in a slightly upward trend overall) than, notably, in any other periods. But they are, by comparison, not major stock market crashes, unlike the turmoil during the financial crises in 1998 and 2008 when the HSI dropped 60 and 65 percent, respectively. The Hang Seng Index – which includes the largest and most liquid stocks listed on the Main Board of the Stock Exchange of Hong Kong (SEHK) – recorded several drastic market declines in the past 30 years: the Black Monday in 1987 (dropping 52 percent); the fall amid rising interest rates in 1994 (42 percent); the Asian financial crisis in 1997/98 (60 percent); the 9/11 attacks and SARS outbreak in early 2000s (54 percent); the global economic meltdown in 2008 (65 percent); and the tumble in 2011 due to concerns about US and Chinese growth prospects (35 percent). The most recent market correction in Hong Kong came in the spring of 2015, and it followed a crash of Chinese stocks on the Mainland in the second quarter when they lost a total value of around 40 percent at one point. The result throughout the year was a slide in the HSI from a peak of 28,442 on April 28 to a bottom of 20,556 on September 28 – a 25 percent drop. The HSI was further down at the beginning of 2016, flirting with a new low of just above 18,300 points in mid-February before regaining some territory.

Market performance Despite minimal economic growth amid high inflation and a stubbornly sluggish stock market in Hong Kong, behind the stock indices was a year of extraordinary trading activities with historic volumes. The annual total turnover value on the Main Board of SEHK in 2015 was more than HK$25.8 trillion, with a daily average of nearly HK$104.6 billion in any one of the 247 trading days throughout the year – an 80-percent increase over the combined numbers of 2013 and 2014. The number of trade deals in 2015 reached a yearly record of well over 349 million, meaning more than 1.4

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Hang Seng Index, daily movement (2015) Index 30000

28442.75 (28/04)

29000 28000 27000 26000 25000 24000 23000 22000 21000

20556.60 (29/09)

20000 01/15 02/15

03/15 04/15 05/15 06/15 07/15 08/15 09/15 10/15 11/15 12/15

Daily Movement

10 MAV

50 MAV

Source: HKEx, Hang Seng Indexes Co Ltd

million transactions were completed on a daily basis – an increase by 50 percent and 35 percent compared with 2013 and 2014, respectively. It also means each trade deal in the past year was, on average, larger in terms of turnover value than those in the previous two years. The bad news, however, was the total market capitalization: HK$24.4 trillion at the end of 2015, or a loss of HK$46.7 billion from the previous year. In comparison with 2014, the number of listed companies on the Main Board increased by 104 to reach a total of 1,644, while the number of listed securities decreased slightly to 8,792. Of the 1,644 listed companies, 728 are incorporated in Cayman Islands, 473 in Bermuda, 206 in Mainland China, and 203 in Hong Kong. Other places of incorporation, although only a handful, include the US, British Virgin Islands, Singapore, Canada, England, Japan, Jersey, Luxembourg, Italy and Brazil. By the end of 2015, industry sectors by market capitalization according to the Hang Seng Industry Classification System comprised: Financials (29.4 percent), Properties & Construction (14.41 percent), Consumer Goods (11.44 percent), Telecommunications (9.24 percent), Information Technology (8.6 percent), Consumer Services (6.26 percent), Utilities (5.98 percent), Conglomerates (4.71 percent), Industrials (4.67 percent), Energy (3.54 percent), and Materials (1.76 percent). The 50 leading listed companies by market capitalization on the Main Board as of end 2015 had almost 60 percent of equity market total (among all listed

Market capitalization, 1986 – 2015 HK$Bil 24,892 24,426 23,909

26,000 24,000 22,000 20,000

17,769

18,000 16,000 12,000 8,113 6,629 5,478

8,000 6,000

17,453

10,254

10,000

2,000

21,872

13,249

14,000

4,000

20,942

20,536

2,975 1,332 419 420 580 605 650 949

3,476 2,085 2,348

4,728 4,795 3,203

2,662

3,885

3,559

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: HKEx, Hang Seng Indexes Co Ltd

companies); the top 10 as a group had a share of well over 32 percent. These were China Mobile Ltd, Tencent Holdings Ltd, China Construction Bank Corporation (H Shares), HSBC Holdings plc, AIA Group Ltd, Prudential plc, Industrial and Commercial Bank of China (H Shares), CK Hutchinson Holdings Ltd, CITIC Ltd, and CNOOC Ltd.

Global investment Hong Kong is a renowned financial center and very comparable in status to those of New York and London. A key characteristic of the Stock Exchange of Hong Kong – which is owned and operated by Hong Kong Exchanges & Clearing (HKEx) – is that of a truly international trading market of stocks and securities. It is the sixth largest global institution of stock exchange by market capitalization, behind the New York Stock Exchange (NYSE), NASDAQ, London Stock Exchange, Japan Exchange Group, and Shanghai Stock Exchange. According to HKEx’s Cash Market Transaction Survey 2014/15 – which covered trading in the securities market during the 12-month period from October 2014 to September 2015 – local investors and overseas investors as two distinctive groups each had a share of about 39 percent of “contribution to total market turnover value,” with slightly more from the international markets. The remainder (22 percent) came from “exchange participants” (EPs) – registered broker-dealers with a brokerage business for products available on HKEx.

Among all “local” investors, half were at the retail level and the other half as institutional investors, each comprising 19 percent of distribution of market trading. The makeup with overseas investors, however, was drastically different: 31 percent from institutions and 8 percent from individuals. Retail online trading in which “orders are entered directly by retail investors and channeled to the brokers via electronic media such as the Internet” constituted 44 percent of total retail turnover value (and 12 percent of total market turnover value). The origins of “overseas” investors in the Hong Kong market as indicated in the survey were mostly large economies. The UK was the top place from which 27 percent of total overseas investor trading came, followed by the US with 22 percent. Mainland China had an almost identical market share as the US, trailing very closely behind, while Europe excluding the UK had 8 percent. Together, Asian investors contributed 36 percent to the total trading volume among overseas investors: Mainland China (22 percent) and Singapore (8 percent) were the leading countries in the category.

The derivatives market In the derivatives market of financial “futures” and “options,” 51 percent of the total contract volume were transacted through exchange participants’ principal trading, including market maker trading and proprietary trading; overseas investors (mainly institutions) contributed 28 percent and local investors 21 percent, according to the Derivatives Market Transaction

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Distribution of cash market trading value by investor type (Oct 2014 – Sep 2015)

Local retail investors

22%

Local institutional investors

19%

19% 31% 8%

Distribution of overseas investor trading value in cash market by origin (Oct 2014 – Sep 2015) 1% 7% 3%

22%

EP principal trading

UK Europe (excluding UK)

Japan

Overseas retail investors Overseas institutional investors

Mainland China

22% 27% 1% 8%

Taiwan Singapore Rest of Asia# Australia

Note: Numbers may not add up to 100% due to rounding

Others* Source: HKEx

Survey 2014/15, compiled with trading data in the HKEx derivatives market during the period between July 2014 and June 2015. Stock options accounted for 55 percent of the total market volume during the period, and the majority (71 percent) of turnover was done through EPs, who also played a large role in the trading of Hang Seng Index (HSI) Options, Mini-HSI Options and H-shares Index (HHI) Options – all well over 50 percent. Overseas institutional investors, on the other hand, were the majority of participants in the futures markets of Hong Kong, with the exception of Mini-HSI futures for which overseas institutional investors and local retail investors were both essential supporters (37 percent each). In the trading of financial futures and options, retail online trading was even more prominent than in securities, making up 68 percent at the retail level. Moreover, US investors (32 percent) were the largest single group among overseas investors, followed by those of the UK (26 percent) and other European countries (21 percent). Similar to the securities market, Mainland China (10 percent) and Singapore (4 percent) were top countries within Asia from which overseas investor trading had the highest volumes.

Individual investors HKEx has also recently published the latest statistical profiles of individual investors in the Hong Kong stock market with data from its Retail Investor Survey 2014. The results: 34.5 percent (roughly 2.1 million people) were stockowners; 36.2 percent (2.3 million) as

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stock investors; 3.6 percent (223,000) as investors of “warrant” or Callable Bull/Bear Contracts (CBBCs); 1.6 percent (100,000) derivatives investors; and 36.4 percent (2.3 million) as stock or derivatives investors, or both. The average Hong Kong retail stock investor as of end 2014, according to the survey, was a tertiary-educated 47 year-old with a monthly personal income of HK$22,500, who made six transactions (same as 2011) in a 12-month period for an average value of HK$50,000 each. The typical retail derivatives investor, on the other hand, was five years younger with an income of HK$35,000, who also made six transactions (down from 12 in 2011). The median number of warrant/CBBC transactions was also six (down from 10 in 2011), with an average value of HK$13,000 each. A large majority of investors traded stocks and derivatives through online platforms (73 percent and 84 percent, respectively). Online stock traders had a far higher tendency to trade more frequently than their “non-online” counterparts, each averaging ten transactions as opposed to six in stock investment; likewise, online derivatives traders also had a median of ten transactions, 2.5 times more than non-online derivatives traders. Among the stock traders, 24 percent conducted trading mainly through broker firms and 75 percent primarily through banks, while the remaining one percent relied on the service of broker firms and banks simultaneously. In contrast, derivatives traders were of the complete opposite, with 72 percent through broker firms and 28 percent through banks.

Key Developments of the Hong Kong Securities and Derivatives Markets in

2015

The four clearing houses of HKEX – HK Securities Clearing Co Ltd (HKSCC), HKFE Clearing Corp Ltd (HKCC), SEHK Options Clearing House Ltd (SEOCH), and OTC Clearing HK Ltd (OTC Clear) – were officially recognized by the European Securities and Markets Authority (ESMA) as third-country central counterparties (CCPs) under the European Market Infrastructure Regulations (EMIR).

June 15 –

February 13 –

The SFC has granted the London Stock Exchange (LSE) regulatory approval which allows the LSE to accept SFC-licensed Hong Kong financial firms as its members.

The stamp duty waiver for all exchange traded funds (ETFs) listed in Hong Kong went into effect.

APR 27

FEB 13

JUN 15

MAR 02 26

JAN 30 January

April 27 –

February

March

MAY 15 26 April

May

June

January 30 –

March 2 –

May 15 –

Amendments to Securities & Futures Commission’s (SFC) Code on Unit Trusts and Mutual Funds took effect in a move to give public funds greater flexibility in determining the means for making public their offer and redemption prices, net asset values and notices of dealing suspension.

HKEX launched short-selling of eligible Shanghai-listed A shares under Shanghai-Hong Kong Stock Connect.

CSOP SZSE ChiNext ETF was listed on the SEHK as the first exchange traded fund (ETF) in Hong Kong which tracks stocks listed on ChiNext of the Shenzhen Stock Exchange (SZSE). This ETF is a dual-counter stock available for trading in both HK dollar and renminbi (RMB).

March 26 – The US Commodity Futures Trading Commission (CFTC) issued an order to allow corporations licensed by SFC in Hong Kong to deal directly with US customers in relation to trading of futures or options products on exchanges under the SFC’s oversight without having to register as futures brokers in the US.

May 26 – FTSE Group, the index provider owned by London Stock Exchange Group (LSE Group), announced the start of its transition to include Mainland A shares in its global indices with the launch of two transitional emerging market indices.

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July 1 –

September 30 –

November 26 –

The scheme of MainlandHong Kong Mutual Recognition of Funds (MFR) was officially launched.

HKMA and SFC jointly launched a two-month consultation on introducing the first phase of mandatory clearing and the second phase of mandatory reporting under the new over-the-counter (OTC) derivatives regime.

SFC signed an MOU with the European Securities and Markets Authority (ESMA) to facilitate information exchange in relation to derivative contracts held in trade repositories in Hong Kong and the European Union.

July 9 – The Hong Kong Monetary Authority (HKMA) launched a new cross-border linkage with the Mainland through the Central Moneymarkets Unit (CMU) Fund Order Routing and Settlement Service, in support of the MRF initiative.

HKFE, HKFE Clearing Corp Ltd (HKCC), London Metal Exchange (LME), and LME Clear Limited (LME Clear) signed an non-binding MOU for the proposed development of the “London-Hong Kong Connect” – a trading link between HKFE and LME and a clearing link between HKCC and LME Clear.

SEP 30

JUL 01 09

November 30 –

October 21 –

OCT 21

Two new stock option classes (Cheung Kong Property Holdings Ltd and CGN Power Co Ltd) and 18 new stock futures contracts were introduced for trading in Hong Kong.

NOV 26 30 DEC 14 18 23

AUG 3 July

August

August 3 – HKEX reduced the corresponding fees in relation to Northbound trading of A shares via Shanghai-Hong Kong Stock Connect, along with the fee revisions by the Shanghai Stock Exchange (SSE) and China Securities Depository and Clearing Corporation (ChinaClear) on A-share transactions.

September

October

November

December

December 14 – HKEX introduced futures contracts for trading in its derivatives market with London Nickel Mini Futures, London Tin Mini Futures, and London Lead Mini Futures.

December 18 – SFC gave authorization for the first batch of four Mainland funds under the Mainland-Hong Kong Mutual Recognition of Funds (MRF) initiative for public offering in Hong Kong, while China Securities Regulatory Commission (CSRC) reciprocally approved the first batch of three Hong Kong funds for public offering in the Mainland market.

December 23 – An MOU between SFC and the US Commodity Futures Trading Commission (CFTC) was signed for the exchange of information in the supervision and oversight of regulated entities that operate on a cross-border basis in Hong Kong and in the United States.

Source: Hong Kong Exchanges and Clearing Ltd (HKEX)

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ADVOCACY

An Engine of Trade beyond Asia Despite recent downgrades of Hong Kong’s outlook from “stable” to “negative,” Hong Kong’s institutions will continue to support the status of a leading international financial center and will play a critical role as a strategic partner in opening up China’s economy to the global market – as sectors engaged in finance, trade and investment are well-positioned to be an important link in the chain of global economic development

By Queenie Tsui

arlier in March, Hong Kong’s outlook was downgraded from “stable” to “negative” by two prominent international credit rating agencies, suggesting that Hong Kong would see “muted” economic growth in the short run largely due to its close political, economic and financial ties with China

whose economy is plagued with slowing growth, overcapacity and a number of imbalances. In response to one of the credit outlook downgrades that caused a big angst in the local business community, Hong Kong’s Financial Secretary John Tsang subsequently rebutted the claims that Hong Kong is on a slippery slope and called them “speculative and

subjective statements.” He highlighted Hong Kong’s close ties with China are, on the contrary, an “opportunity” for the city to benefit from the economic transformation of Mainland China. While the downgraded outlook of Hong Kong’s credit ratings signifies a growing risk which should not to be taken lightly, it is equally important to note that Hong Kong’s current rating

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remains in the top tier, “supported by significant fiscal buffers, as evidenced in low government debt, sizeable fiscal reserves, and large foreign exchange reserves which lend credibility and stability to the linked exchange rate regime.” The strength of Hong Kong’s institutions continues to support the city and its status as a leading international

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financial center, and will play a very critical role as a strategic partner in opening up China’s economy and facilitating its integration to the global market – as reflected in China’s 13th Five-Year Plan announced by the National People’s Congress in Beijing. The sector engaged in global trade and investment, meanwhile, remains key to the overall economy of Hong Kong.

A strategic hub With the launch of the Asian Infrastructure Investment Bank (AIIB) and “One Belt One Road” (OBOR) initiatives, Hong Kong is well positioned to be a key player in the economic development beyond the region. The fact that Hong Kong has been “chosen” to be a

strategic financial hub and to take part in the growing economy of China is evident in a series of development policy – some initiatives, including efforts to liberalize the Chinese currency, date back to the early 2000s. The Qualified Foreign Institutional Investor (QFII) program – which makes Hong Kong as China’s premier offshore renminbi (RMB) business center and allows global institutional investors to invest in RMB-denominated capital markets – is a fine example. In operation for over a decade, QFIIs has expanded from US$20.7 billion in 2011 to nearly US$80.8 billion in 2016. By the same token, the number of licensed foreign institutions has also increased from 103 to 279 during the same period. Moreover, China’s State Administration of Foreign Exchange (SAFE) in February further loosened control over foreign investment by abolishing the requirement for QFIIs and allowing licensed institutions to obtain approval of investment quotas with simplified rules. The Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, launched in late 2011, has further expanded Hong Kong’s role as an offshore RMB center: overseas investors can invest in mainland capital markets through renminbi-denominated funds established in Hong Kong by Chinese financial firms. Its success paved the way for Chinese regulators to widen the scope to include international banks and asset managers with a presence in Hong Kong for participation in the scheme. The Shanghai-Hong Kong Stock Connect is the first-ever securities trading and clearing connection between the Mainland and Hong Kong. Since 2014, this ground-breaking initiative has provided an unprecedented channel of mutual market access for international investors looking to tap into the Chinese capital market, and vice versa. Per China’s 13th Five-Year Plan, a core objective is to further open up the Chinese economy and to establish a mutually beneficial relationship between China and the world. It is crucial that Hong Kong can be

leveraged for its financial expertise and professionalism, for its experience in the Mainland’s financial community and for its proximity to a market undergoing an extraordinary process of financial reform.

All eyes on Southeast Asia But there is more: notwithstanding the increasing significance of China to Hong Kong’s long-term success as a global financial center, regional partnerships with countries in the Asia Pacific region are becoming increasingly important as a way to strengthen Hong Kong’s competitiveness and to further accelerate economic growth in a sustainable and comprehensive manner. The Asia Regional Funds Passport (ARFP) – a multilateral framework led by Australia, New Zealand, South Korea and Singapore and similar to the UCITS system of the European Union – will “facilitate the cross-border marketing of a managed funds across participating economies in the Asia region” and provide participating states with economic benefits. These include opportunities for better management of portfolios among investors and meeting their objectives, an increased level of attractiveness of the region in project financing, enhanced liquidity in the financial markets collectively, and strengthened competitiveness of the region’s financial markets and fund management industry on the international stage. Although not yet a signatory of the ARFP, Hong Kong stands on a somewhat privileged ground following the launch of the Mutual Recognition of Funds (MRF) with Mainland China, which is an exclusive access allowing Hong Kong fund managers to offer retail funds domiciled in Hong Kong to Mainland investors, and vice versa. Since the statement of intent signed in 2013, more economies including the Philippines, Thailand and Japan have become members of the passport group after signing a statement of understanding in September 2015. Hong

Kong, hence, should not be left out of the pact poised to create a large industry-specific alliance amid discussions on whether Hong Kong would benefit from AFRP. There are, however, challenges with the ARFP from Hong Kong’s perspectives. For one, Hong Kong remains an attractive destination for global fund managers because of the MRF and access to Mainland’s retail fund market, even as a non-member of the Passport group. More importantly, many have questioned the fund regime which promises to harmonize regulations and streamline procedures over its effectiveness in reality. The reported failure of the mutual recognition of cross-border offerings of collective investment scheme between Australia and Hong Kong in July 2008 may explain the cause for such concern. The lack of a common currency and vastly different tax policies points of consideration that may dissuade Hong Kong from participating in the regime. However, Hong Kong should not be discouraged from joining ARFP which could potentially create 170,000 jobs in the region and save Asian investors US$20 billion per annum in fund management costs. Hong Kong’s membership will be critical for the development of a large-scale market for collective investment schemes in the region as well as the promotion of sustainable economic development by facilitating the region’s savings toward productive investment.

Proactive engagement Whether Hong Kong will participate in the pan-Asian funds scheme, active engagement with neighboring markets is certainly a key step for maximum access to financial markets in the region. It is an encouraging sign that Hong Kong is looking into becoming a regional asset and wealth management hub as well as promoting growth and development, particularly in an era of global economic uncertainties. And proactive engagement does not limit to financial services only but

should also be extended to all industries. AmCham Chairman Walter Dias, in recent interviews with HKTDC and RTHK, reiterated that Hong Kong is an extraordinary regional and global hub of business and, more importantly, that the city can leverage its enormous expertise and experience in pillar industries to capture opportunities in trade and investment. In a world of increasing globalization, regional partnerships, trade agreements and multilateral initiatives including AIIB and OBOR will be the future of economic development – propositions that Hong Kong cannot afford to miss. Likewise, Hong Kong ought to consider joining the Trans-Pacific Partnership (TPP) as a non-sovereign party or as an observer in what is dubbed a sophisticated global trade agreement of the 21st century covering 40 percent of global GDP. In fact, emerging markets and opportunities in trade and investment continue to be a focus of MNCs and SMEs alike in the business community of Hong Kong – a focus AmCham has particularly emphasized through advocacy works as well as a series of public events and seminars highlighting the development of emerging markets in Southeast Asia. The Chamber, so far, has hosted US Ambassador to the Republic of the Union of Burma Derek Mitchell (see page 34 for story), Vietnam Consul General in Hong Kong Hoang Chi Trung (see page 30), and, more recently, Minister and Special Advisor to the Prime Minister of Ethiopia Arkebe Oqubay since the beginning of the year. Hong Kong’s participation in global trade can certainly be a legacy in a liberal environment of best practices. Lastly, it is very interesting to point out the trend that companies, especially those in the trading and manufacturing sectors, are already expanding their investment footprints to the sub-Saharan region of Africa as governments in African countries have developed plans to strengthen their local industries of various types of manufacturing and to transform their economies into a green, sustainable hub of international commerce.

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Private Events AmCham Feb 2016.pdf 1 3/3/2016 11:13:15 AM

TRADE & INVESTMENT

The Economic Impact of Taiwan’s New Leadership With the victory of Tsai Ing-wen and her Democratic Progressive Party in the latest elections, what will it mean for cross-border investment and international commerce in the region as well as the Trans-Pacific Partnership? Rupert Hammond-Chambers, an expert on Taiwanese political and economic issues who serves as BowerGroupAsia’s managing director for Taiwan and as President of US-Taiwan Business Council, reveals his thoughts on the issues

By Leon Lee

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n January 16, Taiwan elected a new president as incumbent President Ma Ying-jeou will have served the limit of two consecutive four-year terms later this year. Tsai Ing-wen of the Democratic Progressive Party (DPP) garnered 56 percent of the votes to become the first female president of Taiwan as her political party also regained a simple majority in the legislative branch. With the change of leadership comes a great deal of concern about its impact on Taiwan’s economic policies. Rupert Hammond-Chambers, an expert on Taiwanese political and economic issues, shared his analysis on the election and what it means for cross-border investment and international commerce in the region as well as the Trans-Pacific Partnership (TPP).

The election outcome In the latest Taiwanese elections, not only did Tsai score a resounding victory in the presidential election, the

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DPP also secured 68 out of the 113 seats in the Legislative Yuan – making her political party the majority since 2008. The Kuomintang (KMT), Taiwan’s other major political party, now have 35 seats, the lowest number they have ever had in the legislature. Another sign of KMT’s diminished presence in the elections is the fact that their presidential candidate Eric Chu received only 31 percent of popular votes compared to Tsai’s 56 percent – an outcome with the widest gap between the two major parties in any of the three presidential elections since 1996. “At the legislative level, the [DPP] did a very good job choosing candidates that were appealing to local constituencies and did a nice job of tactical [campaigning] in a way that ensured the DPP would secure the majority it was looking for,” says Hammond-Chambers. Hammond-Chambers, who serves as BowerGroupAsia’s managing director for Taiwan and as President of US-Taiwan Business Council, believes that the 56 percent of votes is a good indication that Tsai is well-positioned for two terms as President. But, while it does seem like she has the people’s support, the 59-year-old president-elect faces a number of fairly formidable challenges in her new role. For one, Taiwan’s economy is in danger of heading towards recession as growth is modest.

Rupert Hammond-Chambers

Challenges ahead Last year, Taiwan only recorded a GDP growth of 0.85 percent. Its GDP in the last quarter of 2015 fell 0.28 percent year-on-year, after experiencing a 0.63 percent decline in the third quarter. With an export-driven economy, it is highly influenced by the declining markets in the countries where a large portion of Taiwanese exports are bound, including the United States and Mainland China. “Therefore, I don’t believe that Taiwan, in the next year or two, is going to see any dramatic change to its economic fortunes that would have an impact on its GDP growth rate,” Hammond-Chambers says. Another challenge the country is facing is the lack of mergers and acquisitions of businesses. HammondChambers points out that Taiwan isn’t as innovative as it used to be. There aren’t as many new businesses starting locally as the entrepreneurial spirit for which Taiwan was once well-known for seems to be missing, and it could result in the further loss of talent to economies abroad. “In the absence of that, I can see young, smart Taiwanese men and women looking at the broad spectrum of opportunities in front of them

[elsewhere]. That’s a real concern for [the Taiwanese economy],” he explains. “Tsai needs those young, capable twenty-somethings to stay in Taiwan and build businesses there. And they have to make it more attractive,” he adds. “It’s not just about getting the business culture right, it’s also about making housing affordable so they will not have to live with their parents anymore. It’s also other things as well.” Besides access to affordable housing, other issues that Tsai was elected to address include stagnant wages, underemployment, unemployment and infrastructure development.

TPP candidacy Hammond-Chambers believes Tsai is well-prepared for the challenges as she has Taiwan’s five domestic pillar industries, namely energy, pharmaceutical, cyber, defense and IC tech, as economic engines well covered. She has people with expertise and a good understanding of those sectors to drive further development but might need time before success can be realized. At the same time, trade liberalization is an area where she is going to be influential and looking closely to effect some change. “The TPP, in my view, will be her primary external goal for her first term,” Hammond-Chambers believes. “And I want to be clear: I am not suggesting that at the end of four years, Taiwan will be a member with all its bilateral and multilateral negotiation complete and moving down to the phase of application.” “What I do believe she wants to achieve is a commitment from the TPP that Taiwan will be in the second round of negotiations. Or, at the very least, it will have launched negotiations that would allow Taiwan to accede.” The implication of TPP will bring about reforms to the Taiwanese economy with potential opportunities for trade which it strongly needs across the spectrum. Its candidacy to be a part of the trade agreement would strengthen with the support of the

United States. Therefore, according to Hammond-Chambers, Tsai has it in her mind to address the ban on US import of pork this year. Currently, Taiwan bans the import of US pork containing ractopamine, a US Food and Drug Administration-approved leanness enhancer. The US has been asking for the ban to be lifted, and if it happens, it will help Taiwan’s chances into the TPP – albeit strong opposition from local pig farmers and related industries. “The TPP is a high standard agreement, and Taiwan’s going to have to make some very unpleasant changes. There is a recognition, at least at the ruling class level, that membership in the TPP is essential for Taiwan’s future fortunes, particularly if Korea gets in and Taiwan doesn’t,” Hammond-Chambers explains. Taiwan currently has free trade agreements with New Zealand and Singapore so there shouldn’t be any opposition from these countries; based on the political relationships with Australia, Canada, Mexico, and Vietnam, it suggests that those countries would support Taiwan’s candidacy as well. In a congratulatory message to Tsai on her victory, Japan’s Prime Minister Shinzo Abe mentions that his country supports Taiwan’s inclusion in the trade agreement. Things, however, are not as clear with the remaining countries currently engaged in the TPP negotiations: Peru and Chile are key exporters of large quantities of agricultural goods to China, and they may see some risks in supporting the inclusion of Taiwan in the TPP.

Cross-strait relations Over the last eight years, President Ma Ying-jeou has worked to expand cross-strait economic ties with Mainland China. With a newly elected president, there is a fear that cross-strait relations could be headed towards a different direction – a major issue since the very beginning of the election campaign. In a speech at the Center for Strategic and International Studies (CSIS) in Washington, DC last June, Tsai highlighted, “While I advocate for constructive exchanges and dialogues with China, I will ensure the process is democratic and transparent, and that the economic benefits are equitably shared.” She also stressed at the time that once elected, she would “push for the peaceful and stable development of cross-strait relations.” During the presidency of Ma Ying-jeou, cross-strait ties have strengthened. “We’ve just had an unprecedented period in which Mainland China and Taiwan have cooperated. Ma Ying-jeou is about as good as an interlocutor the Mainland could have hoped for,” says HammondChambers.

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He anticipates Tsai will strike a responsible balance. “She wants a broad spectrum of consideration in respect to how the two sides can engage one another. And I think she may try and do something to express and demonstrate that it’s not going to be ‘no, no, no’ all the time.” One of the key initiatives is to push through a piece of legislation in the Legislative Yuan for fast-track authority on potential trade deals with the Mainland – a demonstration that Taiwan’s new leadership is not against doing business. Hammond-Chambers believes Tsai will seek opportunities to show that engagement can still take place.

The way forward This year’s election was Tsai’s second run for president after having lost to Ma in 2012. Between then and now, she has evolved into a more polished and more comfortable politician, according to Hammond-Chambers’ observations

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over the years. With the background of an academic and a lawyer by trade, she was part of more than one previous administration of the executive branch. “One of the challenges that [former president] Chen Shui-bian faced in the early years of his first term was the fact that his party had never run a government before,” HammondChambers says. “They didn’t understand how to run the inter-agency processes.” “When I look at the people around Tsai right now, I see a lot of people with executive branch level experience from the Chen era,” he says. “From a process standpoint, certainly we’re going to see people in leadership positions who understand what it is to be at a senior level in government.” “Whether we agree with the policy priorities is a separate conversation,

but I do believe, from what I have seen and heard from the people I’m interacting with, there is considerable experience at the top level,” he adds. “That should benefit her.” It will be interesting to watch what happens with the KMT,” Hammond-Chambers notes. “The party truly is in disarray. They are short of next-generation leaders, short of a clear message, and some distance is in place between the outgoing Ma government and the party itself.” “It is important for Taiwan that the KMT be a strong and relevant party with good policies. At the moment, the party does not appear to have those things.”

Open for Business While the economies of China, Japan and other ASEAN countries have slowed down considerably, Vietnam has stood out as one of the countries in Southeast Asia with a growing economy above expectation. Over the past several years, it has emerged as an attractive destination for foreign businesses, especially in the sectors of manufacturing and capital investment. Today, its economy not only has quickly grown beyond projections but also looks to continue to do so with participation in the Trans-Pacific Partnership and other free trade agreements

By Leon Lee

biz.hk 4 â&#x20AC;˘ 2016

hirty years ago, Vietnam was one of the poorest and least developed countries in the world. In 1986, the government introduced a set of economic reforms and policies called Doi Moi to turn the nation’s economy from a centrally planned one to a market-oriented one in order to stimulate growth. “Over the past 30 years, we have reached some achievements. The economy has been growing at almost six to seven percent per year. It has grown 30 or 40 times since three decades ago. It is much bigger now than in the 1980s when Vietnam began to open its economy and move towards a market economy,” Hoang Chi Trung, Vietnam’s Consul General in Hong Kong, highlights while speaking at a recent AmCham event. “For the last few years in particular, Vietnam has enjoyed growth. Especially last year, it grew higher than expected. For this year and the next few to come, we expect the economy to grow at higher rates than before.” Vietnam’s GDP in 2015 reached US$198.8 billion – a growth of 6.68 percent, surpassing the government’s target of 6.2 percent. In the first three months of 2016, its economy rose 5.46 percent compared with the same period from a year earlier. The Vietnamese economy depends greatly on exports and, in 2015, exports went up by 8.1 percent from 2014 to US$162.1 billion. In the first quarter of 2016, exports rose 4.1 percent compared with the year before.

TPP and other free trade agreements Vietnam’s continuing economic growth will be given a big boost if the Trans-Pacific Partnership (TPP) gets passed by the 12 participating countries. Experts have projected that, because of the agreement, the country’s GDP could grow 11 percent by 2025 while exports have the potential to grow 28 to 30 percent. “Vietnam has an open economy which focuses greatly on exports and

biz.hk 4 • 2016

Photo: Thinkstock

Gross Domestic Product (GDP) of Vietnam from 2005 to 2015 $200 B

$186.2 Billion $198.8 Billion

$180 B

$155.8 Billion

Gross Domestic Product (USD)

$160 B

$171.2 Billion

$140 B

$115.9 Billion

$120 B

$135.5 Billion

$99.1 Billion $100 B

$106 Billion

$80 B

$63.4 Billion

$60 B

$77.4 Billion

$57.6 Billion $40 B $20 B $0

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: The World Bank

investments, and we’ll benefit immensely from the TPP,” Trung says. If passed, the agreement would remove an estimate of 18,000 tariffs amongst the 12 countries. It would make Vietnam an even more attractive trade partner with countries with bigger economies such as the United States, Australia and Japan while also attracting more investments from other countries. The country is particularly strong in the apparel, footwear, textile and garment industries. The manufacturing sector makes up 24 percent of Vietnam’s GDP. According to the Eurasia Group, apparel and footwear exports may see a 50 percent increase in 10 years. Vietnam is also the world’s second largest export of coffee and rice, and is one of the biggest exporters of fruits, seafood, rubber and cashew nuts. Besides tariff reductions, the agreement would also bring stronger enforcement of intellectual property and patent protection. Dispute settlement provisions would improve as international arbitration institutions could be used to resolute legal disputes among international investors. However, there are several challenges that comes with the TPP. There are strict rules-of-origin on materials to

follow in order to qualify for the tariff reductions as per the agreement. It has a yarn-forward provision, meaning everything from the yarn in any product must be produced in one of the countries within the agreement in order to be eligible for duty-free status. The privatization of state-owned companies is another requirement as it ensures fair competition for businesses – it is one that Vietnam is working hard to meet. Trung says that it is, in fact, one of the major targets of the government. Perhaps the biggest challenge is whether the TPP will ultimately be

passed. Although all 12 participating countries have signed the agreement in February after five years of negotiation, they must all agree to ratify it. If this doesn’t happen before February 4, 2018, it’ll only be put into force if at least six countries, which must have a combined GDP of more than 85 percent of the total GDP of the 12 nations, agree to ratify the trade agreement. Currently, it seems like the United States as the largest economy among all TPP participating countries, won’t come to a decision until after the presidential elections in November. However, Vietnam is not just waiting

biz.hk 4 • 2016

idly for that to happen. They are moving forward with the preparation of the provisions of the TPP requirements which can take some time to apprehend. “Vietnam might be the first to ratify it,” states Trung. Delegates have already discussed and agreed to the ratification of the agreement at the 11th Party Central Committee in January 2016. The TPP is actually just one of the many free trade agreements that Vietnam is a part of. According to the Consul General, the country has free trade agreements with about 55 countries. Among those include the European Union in the EU-Vietnam Free Trade Agreement, the EEU (Eurasian Economic Union) which consists of Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan, and VKFTA with South Korea when it was signed in May 2015.

Increasing investments The economic reforms and free trade agreements have collectively helped open Vietnam to enormous waves of foreign direct investments which the government welcomes in all sectors including the prominent industry of apparel and footwear. Some of the other sectors include telecommunications, air and sea transportations and infrastructure. Trung points out that while in addition to a great deal of infrastructure built in the last 20 years, there are still many on-going large projects such as the construction of the new Long Thanh International Airport near Ho Chi Minh City. It is scheduled to be operational by 2020 and is estimated to cost US$7.8 billion. According to a report from Vietnam’s Foreign Investment Department, FDI into the country reached a record high of US$14.5 billion, up 17.4 percent year-on-year. In the first two months of 2016, there was an 80 percent increase in FDI compared with the same period a year ago. Seventy percent of the new foreign

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investments come are directed to the manufacturing industry. Due to rising wages and increasing costs in China, businesses have become more reluctant to rely on the country as the only manufacturing and have instead set up facilities in Vietnam in a “one-plus-one” strategy. According to the International Labour Organization, the average monthly wage in Vietnam in 2013 was US$197, while it was US$391 in Thailand and US$613 in China. Besides lower labor cost, Vietnam’s population also ranks the second youngest in Asia, with seven percent of its people over 65 years old. Besides garment, apparel and footwear manufacturing, Vietnam has also attracted investments from high-tech and electronic companies including Samsung, Intel and Hewlett-Packard (HP). In 2012, HP built its first R&D center in Southeast Asia in Ho Chi Minh City. In the same year, Samsung established one in Hanoi and has recently announced plans to build a US$300 million replacement in the city, the company’s largest R&D project in Southeast Asia. And according to Vietnam News Agency, Apple is looking to invest up to US$1 billion to build an Asia-focused database center and R&D center in the country.

Challenges ahead For 2016, Credit Suisse projects FDI into Vietnam at US$13 billion and its GDP to grow 6.3 percent. While both of these figures are below the numbers from 2015 because of sluggish global growth, plenty of foreign businesses remain interested in entering the country. Although the future certainly looks bright for Vietnam, Trung sees several challenges for the government to tackle in order to manage its growth over the next five to 10 years. “The first challenge is to enhance competitive capacity of local enterprises. There will be a lot of competition as we further open the economy to foreign companies,” he says. Two particular industries that are most likely to be affected by this are the

Hoang Chi Trung

retail and agricultural industries as they lag behind their foreign counterparts in efficiency and technology. Another challenge is the privatization of state-owned enterprises – an essential step that if not done correctly and fairly it would create monopolies which could hurt the competitiveness of the market. While it is beneficial that the economy is growing, Trung says it is also important to pay attention to social issues such as education and healthcare. “They also need a lot of capital. On the one hand, you want to invest in economic growth but, on the other, you still have to care about the lives of more than 90 million people.” There is also a growing gap between the urban centers and the mountainous areas when it comes to economic development, partly because businesses are not particularly interested in the mountainous regions for an apparent lack of people, resources and existing infrastructure. But, regardless of the challenges, Vietnam’s goals for the future are quite clear. “Vietnam’s target is to build the country into an industrialized country. With the TPP and other free trade agreements, we hope that we will enjoy the best and favorable conditions to complete our industrialization process within 10 to 20 years,” Trung says. “And then Vietnam will reach its target of becoming a middle-income country by that time.”

History in the Making Things are looking bright in Burma as political and economic reforms have led to sweeping changes in what was previously a military-ruled country. As the country also known as Myanmar continues to become a part of the international community with abundant investment opportunities, US Ambassador to the Republic of the Union of Burma Derek Mitchell provides an inside look of what the future might hold

By Leon Lee

n 2011, Burma began adopting a series of political and economic reforms and has since made significant progress in opening up the country for trade and investment. Its people have seen an increase of political and civil liberties as the country, also known as Myanmar, works towards becoming a democratic state. In November 2015, the nation held

its first openly contested general elections in 25 years. Revered Burmese icon Aung San Suu Kyi and her party, The National League for Democracy (NLD), won the absolute majority of seats in the two chambers of the national parliament â&#x20AC;&#x201C; meaning a candidate representing the NLD would become the new president of Burma. As the country continues to become a part of the international community,

there seems to be a wealth of potential opportunities available for foreign businesses in the largest country (by geographical area) in Southeast Asia. How will the Southeast Asian country continue to transform itself and become a destination of foreign investment? US Ambassador to the Republic of the Union of Burma Derek Mitchell provides an inside look of the opportunities and what the future might hold.

biz.hk 4 â&#x20AC;˘ 2016

MYANMAR'S GENERAL ELECTION TIMELINE

2015 April 30

Deadline for registering political parties

Early August

Deadline for announcing an election date and designating constituencies

August

Candidate registration period (lasting 2 weeks)

Early September

Start of campaign period (likely to last 60 days) Photo: Thinkstock

Asia’s greenfield Since July 2012, Mitchell has been the top US official to the country he describes as “very close to his heart.” While he acknowledges the abundance of assets including natural resources in what could potentially be the last greenfield of Asia, he cautions that businesses do their research properly

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and understand the country before deciding to make investments in Burma. “It seems deceptively straightforward when you look at the place,” Mitchell explains. “But you have to understand just how amazingly complex the country is.” “If you don’t understand the context or the country, what it’s going through or how they think, you may

November 8 Election day

2016 January 30

Expiration of current legislative term and handover to new parliament

Early February

Presidential Electoral College meets to elect president

March 15

Htin Kyaw is elected as the President

March 29

Current administration's term ends

End of March

New administration takes power

Source: The World Bank, FTI Consulting

have a hard time navigating through enormous challenges. And these difficulties can be exacerbated all around you if you don’t realize that it is not as green and simple as it appears on the surface,” he stresses. “It is about one of the most complex countries you will ever face because of the various layers of challenges.” One of the challenges foreign companies looking to do business in the country need to understand is just how diverse the country of 51.5 million people is. There are eight major national ethnic group throughout the vast country, and they don’t necessarily see eye to eye. Burma has been fighting the longest running civil war in the world for 70 years. While democracy is making progress, how the country will be able to hold together peacefully is a much more important question to be addressed, Mitchell points out. “I tell [businesses] that the worst thing you can do in an environment where [different groups of] people have their own identities and are alienated from the rest of the country is to go in and say ‘the central government said we should come in here and build a road. So we’re going to build a road.’” “You’ve already lost because you’ve demonstrated you don’t understand the context, you don’t understand that people at local levels need to be respected,” he explains. “They need to be consulted and they need to have some buy-in in what you’re going to do.” “So, what looks like a greenfield has all kinds of potential problems as you focus on not just what you want to do, but how you go about doing it in the country.”

Imminent reforms With monumental events like the NLD’s election victory, a wave of reforms seems to be on the way. However, market expectations could be tempered and may head in a different direction because it is a long road ahead. The military, while no longer a majority in government, retains much

Myanmar: An Ethnically Diverse Country

7% 9%

Burman Other

16%

Shan

68%

Karen

Myanmar: Theravada Buddhism Dominates 4%

Buddhist Christian Muslim 89%

Other

Source: The World Bank, FTI Consulting

influence in the country, and the structure of the country’s systems remains unchanged. Aung San Suu Kyi, despite her popularity and position as president of the NLD, is ineligible to become president of Burma according to the country’s constitution, which prohibits such undertaking when a candi

-date’s spouse, children or spouses of children are foreign passport holders. Her late husband and two sons are British citizens. Although Suu Kyi herself cannot hold the office of president, she is poised to lead the country. She has been appointed as the head of the Ministry of Foreign Affairs and Ministry

biz.hk 4 • 2016

of President’s Office in the new government. Htin Kyaw, elected to become Burma’s first civilian president in over 50 years, is a close ally of Suu Kyi and was quoted saying, “This is sister Aung San Suu Kyi’s victory.” In conversations with Suu Kyi, Mitchell has gotten a sense of her priorities in the coming five years: getting rid of the rampant corruptions following five decades of military rule and pushing agricultural productivity – an integral role for the country’s development, especially in the rural areas. “When you’re trying to cultivate peace and develop a country, people have to feel that democracy delivers for them equitably,” Mitchell says. “So thinking about equity in the agricultural sector can be very useful for that, and it’s a natural first step.” The Burmese people are feeling optimistic and hopeful as they believe the new government can make a difference, regardless of some aspects short of expectations. Mitchell point outs it is important for everyone to manage their expectations of the new government as it will take time to strengthen the regulatory environment and to tackle issues like land tenure and rights. So far, the signs are looking positive for Burma. Its economy grew by 8.5 percent in real terms between 2014 and 2015. Growth is projected to be moderate at 6.5 percent in 2015-2016 because of floods. Economic reforms have backed investor and consumer confidence. The Yangon Stock Exchange, Burma’s first modern stock exchange, began trading at the end of March this year. Almost 113,000 shares of First Myanmar Investment (FMI), the country’s first listed company, were traded on the first day. However, poverty is a nationwide issue, especially in the rural areas. Less than one-third of the population have access to electricity, and facilities of communication technology as well as logistics are still behind. Hence, investment and business opportunities

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are plentiful for companies who approach them the right way with its people.

In the near term Burma’s abundance of natural resources in oil, natural gas and other precious materials such as jade and rubies will potentially be a revenue stream to support the development of infrastructure, healthcare and education through investment channels. Some businesses have been critical of Suu Kyi’s lack of economic policy; others about the lack of a successor and of a strong party base. But people should not worry too much because she has access to good advisors, Mitchell believes. “She has asked her economic committee team to work very closely with reputable economic advisors from the outside, thinking about economic policies and what signals can be sent to businesses to attract them.” Internationally, Burma is going to have to figure out a strategy to work with China which borders the northern and eastern parts of the Southeast Asian country. It will depend on how China plans to engage Burma for a number of political and economic reasons, Mitchell notes. Burma also faces sanctions imposed by the United States since 1997 because of human rights and political reasons. “The sanctions that are in place were imposed, for better or for worse, in order to concur with American policy’s way of trying to have leverage on the military, saying ‘we’re going to voluntarily withdraw from engaging with a regime that does this to its people,” Mitchell explains. “We do not and will not make money on the backs of the average Burmese.” However, in light of the reforms, the United States began to moderate on certain financial and investment sanctions in 2012. In November of that year, sanctions on US dollardenominated transactions were lifted to promote commerce into the country. However, companies and lawyers

US Ambassador Derek Mitchell

were still wary of investing into the country at the time, and many did not take the risk. The US government is looking into making further changes to the sanctions in a step-by-step process, Mitchell acknowledges. “We do feel it is important to know who you’re working with. One of the dangers when you just open things up quickly is that you will simply empower those who have an advantage. We’re trying to do this in a way that we’re not empowering an unjust system that has been in place for some time.”

Myanmar: Opportunities and Challenges for Businesses By Romain Caillaud

he 2015 landslide victory of Myanmar’s National League for Democracy (NLD) ushered out more than 50 years of direct military rule. After winning a decisive majority in the upper and lower houses of Myanmar’s parliament, the party is now a large part of a new government. The change will bring about new opportunities and challenges for companies that want to invest in what many consider Asia’s last economic frontier. Although the win is a watershed moment for the NLD and its famous founder Aung San Suu Kyi, investors need to be aware that the military will remain a force in the government. It has a constitutional right to 25 percent of the seats in parliament and has

The NLD wants to change this and to continue with economic reforms while expanding civil rights. For example, the party already has announced its intention to release political prisoners and fight corruption. As of March 2016, NLD leaders have appointed the heads of all key ministries, including Finance, Commerce and National Planning. Many ministerial and other official positions are expected to be filled with the party’s ranks; each will have a background in political and social activism. But, collectively, they will have little experience governing a country or supporting local or overseas businesses. This lack of expertise certainly will create new roadblocks and bureaucratic “snafus.” But it also presents a chance for

amassed power and influence over the years. And beginning in 2011, the military embarked on a series of economic reforms – critical to the country’s survival – that were championed by former President Thein Sein.

Historical background Myanmar once was the envy of Southeast Asia. In the 1950s, for example, Singaporeans went there for medical training. But after the 1962 military coup d’état, the country closed itself off from much of the world and became a pariah and economic backwater. Today, only about 25 percent of the population has access to electricity. Only about 50 percent of the citizens have a cell phone.

Comparison of Key Indicators between Myanmar, Thailand and Vietnam Ease of Doing

TI Corruption

Business Index

Perceptions

(2015)

Index (2014)

Global Competitiveness Index (2014-2015)

FDI Gender

Human

Inequality

Development

Index (2013)

Sector Contribution to GDP (2014, %)

2014 GDP per capita (current US$)

2013 FDI net

inflows

(current US$)

(as a % GDP))

Agriculture

Industry

Services

Myanmar

177th

156th

134th

83rd

150th

1,198

2,254,603,972

37.10%

21.3%

41.6%

Thailand

26th

85th

31st

70th

89th

5,561

14,305,004,118

42.00%

12.00%

46.00%

Vietnam

78th

119th

68th

58th

121st

2,052

8,900,000,000

39.00%

18.00%

43.00%

Source: The World Bank, Transparency International, UNDP, FTI Consulting

biz.hk 4 • 2016

those interested to engage with the country’s leaders. The NLD is pragmatic. It came to power via elections, not uprisings. There is every reason to believe that the party will be as receptive to advice from outsiders as the former government was. For instance, under Thein Sein, Myanmar sought advice from professionals at major oil companies to help determine the best policies and approaches for the country’s energy sector. Developing productive relationships with government officials will be essential to a foreign company’s success in Myanmar.

The bottom line Myanmar offers tremendous possibilities for investors that do nurture collaboration with the country’s government and business leaders. With a population of approximately 52 million, Myanmar will be a significant market for many goods and services. Moreover, as the country modernizes, there will be huge opportunities to build infrastructure such as roads and power supplies. State-owned organizations such as Myanmar Oil and Gas Enterprise will be a vital part of the economy for some time to come. In addition, large conglomerates in key industry sectors

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Myanmar’s Growth Rate Superior to Average 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00%

Myanmar

0.00%

2013

East 2014E

Source : TheWorldBank

such as finance and mining are controlled by oligarchs with military and government ties. These elites will remain part of the landscape, and, in industries that still are protected, it will be necessary for foreign companies to know the important players and work with them. The investment outlook should be one of cautious optimism. Processes likely will become increasingly complicated, and investors may have to navigate a complex web of multiple ministries and local governments. Thus, understanding those who took

Asia and Pacific 2015F

Developing economies 2016F

2017F

Source: The World Bank, FTI Consulting

the reins in March, and engaging with them, will be the critical factor for success.

Romain Caillaud is a senior director of FTI Consulting’s Global Risk & Investigations Practice, a part of the firm’s Forensic & Litigation Consulting segment. He is currently based in Singapore after having spent seven years providing strategic advice to investors entering the frontier market of Myanmar.

www.amcham.org.hk

AMCHAM Means Business

Members Directory

Over 500 pages in three major sections, including a complete guide to chamber services, corporate sponsors and AmCham Charitable Foundation. This directory lists about 1,400 members from about 700 companies and organizations. ISBN 978-962-7422-33-4

LC 98-645651 NON-MEMBER PRICE Local Delivery HK$1500 Overseas Delivery US$195 Shipping costs: Local HK$45 (per copy) US/International US$50 (per copy)

MEMBER PRICE HK$800 US$104

AmCham Member Name: Title: Company: Address: Tel: Fax: Email: Website: copy(ies) of Members Directory Total: HK$/US$ (postage inclusive) payable to The American Chamber of Commerce in Hong Kong check# Bank: Charge to AMEX (US$) Diners (HK$) Visa (HK$) Master Card (HK$) Cardholder's Name: Card# Expiry Date: Issuing Bank: Signature: (Not valid unless signed) The American Chamber of Commerce in Hong Kong 1904 Bank of America Tower, 12 Harcourt Road, Hong Kong. Tel: (852) 2530 6900 Fax: (852) 3753 1208 Email: hchung@amcham.org.hk

MD2016 in-house Adv 210x285.indd 1

28/1/2016 14:57:44

6 14:57:44

INDUSTRY FOCUS

Financial News Briefs: The Development of International Banking and Financial Institutions

By Kenny Lau

AB Recent research by AB shows a continued decline in defined contribution (DC) plan participants’ understanding of investing in general and target-date funds (TDFs) in particular, reflecting a lack of financial literacy among US workers as confidence in saving enough for retirement among workers “Research shows a decline remains chronically low in retirement confidence and few participants see a comfortable retireamong US workers.” ment as a reality. Key findings include: 42 percent of workers say they’re not saving enough money for retirement to live as they do now. A quarter of them plan to delay retirement, while 32 percent say they will continue to work part-time. Less than half say they want to select their own mix of individual funds or are comfortable deciding how much to invest in each fund.

American Express Approximately 42 million of Americans plan to move in 2016, an increase from 12 percent to 17 percent, according to AE’s Spending & Saving Tracker. Of those relocating in 2016, 53 percent will rent rather than buy, and only 40 percent plan to purchase a home in 2016, a decrease from last year’s 46 percent. Nearly a third of “More Americans plan millennials are said to to move in 2016 be moving but they are not quite ready for a but will rent rather mortgage: 55 percent than buy.” plan to rent and 41 percent plan to buy – similar to figures in 2015. A majority of millennials anticipate the market will be prime for a purchase in a year or two.

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Apax Partners PVH Corp, a global apparel company, has entered into an agreement to acquire the 55 percent interest in TH Asia Ltd (a joint venture for Tommy Hilfiger in China) that PVH did not already own. The purchase price for the transaction is approximately US$172 million, net of cash of approximately US$100 million, subject to adjustment. The closing, which is subject to customary closing conditions and “PVH Corp to acquire regulatory approvals, is remaining shares of expected to occur early in Tommy Hilfiger China.” the second quarter of 2016 and is expected to be slightly accretive to PVH’s 2016 earnings on a non-GAAP basis. The deal is advised by Apax Partners.

ASIFMA An annex for transactions with payments denominated in offshore renminbi as part of the Global Master Repurchase Agreement (GMRA) – which is based on the ISDA Additional Disruption Event Provisions for an Offshore Deliverable CNY Transaction and modified as appropriate for the GMRA to harmonize the alternative “ASIFMA’s offshore settlement mechanism – was launched a year ago. renminbi annex for It is an alternative of transactions reaches settlement provisions when anniversary.” using RMB as the funding currency and is designed to support the growth of offshore RMB centers as well as promoting overall liquidity of the market. It adds another currency to the REPO markets where settlements are usually conducted with the US dollar, British pound and EU’s euro.

Banco Santander Banco Santander registered attributable profit in 2015 of EUR 5,966 million, a three percent increase compared with 2014. Underlying profit excluding the effect of non-recurring results grew an additional ten points, by 13 percent, and reached EUR 6,566 million in a year marked by global uncertainty with record low interest rates. Both lending and “Spanish banking group customer funds increased by six percent and seven records rising profits and percent, respectively, growth in business.” resulting in the growth of commercial revenues by eight percent and underlying profit by 13 percent. Growing businesses allowed the bank to distribute a dividend per share of EUR 0.20 (EUR 0.16 in cash, 79 percent more than in 2014).

Bank of America NA An automated US dollar cross-border cash pooling services for corporations operating in the Shanghai Free Trade Zone has been launched, allowing for US dollar payments and collections centralization and netting arrangements amid policy liberalization announced by the State Administration of Foreign “Automated US dollar of China. cross-border cash pooling Exchange Supported by BofA services launched in Merrill’s Global Liquidity Shanghai FTZ.” Platform, which allows corporates in China to leverage automated balance-sweeping capabilities, supports lending and borrowing quotas and enables regulatory reporting across multiple jurisdictions, it creates an approach more in line with the global enterprise cash management practices of entities by reducing cross-border payment fees, building efficiencies in cross-border settlement, and standardizing processing flows.

Bank of China (Hong Kong) The Group’s profitability continued to increase in 2015, with profit attributable to the equity holders reaching a new high of HK$26,796 million, up by nine percent. Earnings per share was HK$2.5344. The growth was mainly driven by a strong increase in non-interest income. During the year, net fee and commission income delivered broad“BOC Hong Kong delivers based growth of 26.1 percent to reach record results and an HK$11,465 million. increase of equity holders.” As of the end of 2015, assets of the group totaled HK$2,367,864 million, an increase of 8.2 percent compared with the amount in 2014. Return on average total assets (ROA) and return on average shareholders’ equity (ROE) were 1.19 percent and 14.51 percent, respectively.

BlackRock With the acquisition of FutureAdvisor, a provider of digital wealth management solutions with mobile and web applications as well as other technology-enabled capabilities, BlackRock has combined critical abilities to “serve the mass affluent in a convenient, scalable way,” thus improving the investment “BlackRock combines experience of a range of technology-enabled platform institutional clients. and investment solutions.” The newly created platform will enable financial institutions – including banks, insurers, large and small broker-dealers, 401(k) platforms, and other advisory firms – to grow their advisory businesses by leveraging technology to meet a growing consumer trend of engagement through technology and to gain insights on their investment portfolios, particularly for making critical decisions around retirement.

BNP Paribas In a new partnership, BNP Paribas Securities Services has been become AIA’s OTC derivatives operations provider in Hong Kong and Singapore, and will provide trade management, collateral management and trade repository reporting under the mandate. BNP Paribas has been operating in Hong Kong since 1958 in the market of institutional and private investors, corporates, “BNP Paribas partners and financial intermediaries. with AIA for OTC AIA Group Limited and derivatives operations.” its subsidiaries comprise the largest independent publicly listed pan-Asian life insurance group, and are currently in 18 markets across the Asia-Pacific region. It leads the market in Asia Pacific (ex-Japan) based on life insurance premiums, with total assets of US$172 billion as of May 2015.

BNY Mellon BNY Mellon, a 230-year global banking institution, showcases the power of employee engagement in a series of multi-media stories covering 50,000 staff across 35 countries in a first-ever People Report - how to attract, engage and retain employees, exceed client expectations, enhance shareholder value and improve lives through sustained investment. “People Report showcases The 2016 report talent strategy of powering specifically explores the business performance.” issue of talent management in six areas: leadership to move people beyond, support to drive powerful outcomes, knowledge and innovation for transformative results, delivery of global insights and expertise, collaboration as a unified force with shared values, and confidence in the form of trust, quality and integrity.

biz.hk 4 • 2016

BVI House Asia The British Virgin Islands Financial Services Commission, an autonomous regulatory authority responsible for the regulation, supervision and inspection of all financial services in the territory, has unveiled new procedural guidance for data filing particulars of businesses, with additional information on the format required by the Registrar for the filing of “Particulars of directors of BVI business companies particulars of directors of BVI business companies. to be made public.” This is in accordance to Section 118B (11) of the BVI Business Companies Act (as amended). Filing of particulars of directors of BVI business companies with the Registry of Corporate Affairs will be facilitated using the FSC’s VIRRGIN system. Filers must now explicitly make the directors details part of the public record of companies.

Charles Schwab Nearly half of US investors make use of the tax season to address their broader wealth and financial situation, according to a survey of more than 1,000 investors. In the survey, 46 percent say they approach tax time with their total financial situation in mind, and 40 percent say they review their overall “Tax planning plays a financial plan coincident major role in forming with tax preparation. wealth management plans.” Some 59 percent of survey respondents also expect to receive a federal tax refund this year. Of those: 49 percent will use tax refund for savings; 34 percent will pay off debt; 27 percent will invest (stocks, mutual funds and ETFs are most popular); and 23 percent will buy something special for themselves or someone else.

CITIC Pacific CITIC Limited has announced the sale of a 100 percent equity interest in its subsidiary company CITIC Real Estate as well as the sale of the mainland residential property assets of another subsidiary CITIC Pacific. The estimated “CITIC repositions its value of the transaction property business in with China Overseas Mainland China.” Land & Investment Limited (COLI) is approximately RMB31 billion upon initial appraisal. Upon completion, CITIC will hold roughly a 10 percent equity stake in COLI, receive additional assets whose value is estimated to be approximately RMB6 billion and nominate a non-executive director to COLI’s board. The transaction is contingent upon approval by the relevant authorities and by COLI’s shareholders.

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Credit Suisse The sixth annual Emerging Consumer Survey by the Credit Suisse Research Institute – a detailed study profiling consumer sentiment and its drivers across the emerging world – indicates a drop in confidence, largely due to challeng“The trend of a growing ing market conditions middle class in emerging and the global economic markets remains on track.” environment of 2015. The mega-trend of a growing emerging middle class, however, remains on track, particularly in India, China and Saudi Arabia. With a fast growing consumer culture driven by a rapidly growing young middle class and access to technology as well as improving investor sentiments in emerging markets and currencies stabilizing, it is a “timely focus” on investment opportunities that exist in the emerging economies.

DBS DBS Group’s net profit rose to a record SGD 4.45 billion in 2015, with fourth-quarter earnings up 20 percent to SGD 1.00 billion. Excluding one-time items, net profit increased by 12 percent to SGD 4.32 billion, while total income “DBS full-year net crossed the mark of SGD profit rises to a record 10 billion for the first time, SGD 4.45 billion.” rising 12 percent to SGD 10.8 billion from higher net interest margin and broad-based non-interest income growth. Return on equity rose from 10.9 percent to 11.2 percent. In terms of asset quality, specific allowances for loans rose slightly to 19 basis points of loans. The non-performing loan rate was unchanged (at 0.9 percent) while allowance coverage of non-performing assets remained at 148 percent.

Deutsche Bank AG Deutsche Bank has developed a new effective exchange rate (EER) index for the renminbi and an associated set of sectorfocused EER indexes. The new EER index, adjusted for supply-chain effects to bring a layer of analysis that goes beyond traditional trade-weighted indexes, is particularly “A new exchange rate useful for gauging China, index for renminbi where nearly 30 percent of gauges appreciation.” imports are destined to be assembled and re-exported. The Deutsche Bank index currently indicates a more modest appreciation of 19 percent, compared with the Bank for International Settlements’ REER index showing an appreciation of 31 percent for China since 2010. China’s loss of competitiveness from currency appreciation is, therefore, more modest than assumed.

Dun & Bradstreet Global supply chain risk increased in the fourth quarter of 2015, according to the latest Chartered Institute of Procurement & Supply (CIPS) Risk Index by Dun & Bradstreet. The result reflects the general “Global volatility heightens unease about the state of the global economy with operational risks in global an increase in operational supply chains.” risk and a slowdown of the Chinese economy. Key highlights from the index: supply chain risk in Asia Pacific continued to rise due to worsening economic conditions in New Zealand, Australia and China; sub-Saharan Africa’s supply chain risks fell slightly; and supply chain risks in the Middle East and North Africa (MENA) remain high despite optimism about Iran’s re-entry into the global supply chain.

East West Bank Net income of East West Bank in 2015 climbed to US$384.7 million, or US$2.66 per diluted share, an increase of US$38.8 million (or 11 percent from million in 2014). “Yearly results highlight US$345.9 Total loans receivable also sixth consecutive year of increased to US$23.7 billion record earnings.” (from US$21.8 billion as of end 2014), driven by increases in commercial real estate loans, commercial loans and consumer loans. Total deposits in 2015 grew to a record US$27.5 billion (from US$24.0 billion in 2014), with a 17 percent increase in noninterest-bearing demand deposits, a 31 percent increase in interest-bearing checking deposits and a 10 percent increase in money market deposits. Nonperforming assets totaled US$128.4 million (US$132.4 million in 2014).

Euler Hermes The number of overdue payments among UK businesses reached a two-year high in the final quarter of 2015, with increases reported in 14 out of 17 major industry sectors, according to Euler Hermes. It was a rise of 12 percent “UK businesses see from the third quarter, and late payments rise 12 one in six firms reported percent in Q4 2015.” cases of customers failing to pay for goods and services on time – suggesting challenging times ahead. The Quarterly Overdue Payments Report – which analyses reported debtor payment incidents from 250,000 UK businesses – shows late payments were particularly acute in the construction sector, surging 26 percent year-on-year in 2015, while payment delays in automotive and electronics sectors fell 12 percent and 15 percent, respectively.

EXS Capital The energy sector has been under tremendous pressure as oil prices touched below US$29 a barrel in January this year from a price of US$100 a barrel in September 2014. While prices of oil and gas have tumbled and “A spotlight shines on made headlines energy-related ETFs amid around the world, it low oil prices.” can be an asset class some investors find attractive. Getting access to this asset class is easy, but vetting and choosing the right type of Exchange-Traded Funds (ETFs) based on volatility, structure and fees will require deeper analysis, according to EXS Capital in a recent discussion on the Energy Select Sector SPDR ETF.

Franklin Templeton Research Analyst of Franklin Equity Group Grant Bowers argues that a disconnect exists between the relatively strong fundamentals of the US economy and the weak performance of the stock market so far this year, leading to an extremely high level of market pessimism in the first few weeks of “Volatility is not an 2016. indicator of US Global concerns about recession.” growth in emerging markets and collapsing energy prices have led to the fear of another US recession despite generally positive domestic economic data. The US economy, in his view, is performing well and will likely surprise the global market with modest growth in corporate earnings, strong consumer spending and GDP growth between two and three percent.

General Electric Following a previous announcement in September that it would explore opportunities to sell its investment management arm to another firm, GE has agreed to an acquisition by State Street Corp of GE Asset Management (GEAM) for “GE announces sale of up to US$485 million. The investment management sale is part of GE’s transforarm for up to US$485 mation to focus on its million.” industrial core. The acquisition is also expected to increase State Street Global Advisors’ (SSGA) assets under management by approximately US$100 billion as it assumes responsibility of managing the assets related to GE’s primary benefit plans currently managed by GEAM – including the GE pension plan – in addition to those of GEAM’s thirdparty client base.

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Global Payments Global Payments has entered into a definitive agreement to acquire Heartland Payment Systems for US$4.3 billion. The transaction will expand “Deal combines businesses to Global Payments’ direct small- and mediumcreate integrated technology sized enterprise distribuof payment solutions.” tion, merchant base and vertical reach with Heartland’s strengths in direct sales and technology-led distribution. The combined company is expected to serve nearly 2.5 million merchants globally and generate in excess of US$3 billion of adjusted net revenue (and US$1 billion of EBITDA) annually. As a result of the transaction, Global Payments anticipates raising its cycle guidance to high single-digit organic adjusted net revenue growth, up to 75 basis points of cash margin expansion annually and mid-teens cash earnings per share growth.

Goldman Sachs Goldman Sachs, as announced in late 2015, will expand its clean energy target from US$40 billion (set in 2012) to US$150 billion in financings and investments by “US investment bank increases clean energy 2025 in the Environmental Policy Framework, estabtarget to US$150 billion.” lished initially in November 2005 as a road map for continued environmental progress across each of the firm’s businesses. Specifically, it will strive to be the first US investment bank to be carbon-neutral across its operations and business travel, target a US$2 billion green operational investment seeking to source renewable power for all of its global electricity needs, and deploy clean energy solutions to underserved markets to facilitate more equitable and affordable access.

Hang Seng Bank The Hang Seng China H-Share Index Fund – one of the first northbound funds to have obtained approval from the China Securities Regulatory Commission under the Mainland-Hong Kong Mutual Recognition of Funds (MRF) initiative – is now publicly available to investors “Hang Seng Investment’s in Mainland China. The Fund as a feeder first northbound fund fund solely invests in the debuts in Mainland.” Hang Seng H-Share Index ETF through which Chinese investors can capture the performance of the H-share market. Established in 2003, it had assets under management (AUM) totaling HK$950 million as of January 2016. Under the rules of the MRF initiative, the value of units in the Fund sold to investors in the Mainland shall not exceed 50 percent of the Fund’s AUM.

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HSBC According to HSBC’s Expat Explorer Survey of women expatriates, Hong Kong (63 percent) is a good place for career development among female expats, with “Hong Kong named best China (59 percent) and place for career development Singapore (56 percent) among expat women.” following closely behind. Well over half of female expats in Hong Kong are able to earn more than in their home country. Women expats in China say they are able to save more (63 percent) and they feel right at home within six months (38 percent). Top occupations for women working abroad are education (19 percent), marketing, media and creative jobs (12 percent) and financial services (12 percent).

Jefferies Jefferies LLC and E*TRADE Financial Corp have formed a retail alliance to provide E*TRADE customers with access to Jefferies’ underwritings of municipal securities. It builds on an existing alliance in which E*TRADE customers have access to Jefferies’ underwritings of US IPOs and follow-on equity offerings, expanding to offerings originated by “Jefferies forms alliance for the Jefferies Municipal underwritings of municipal Securities platform. securities.” Jefferies, a whollyowned subsidiary of Leucadia National Corporation, is the world’s only independent full-service global investment banking firm engaged in a full range of sales, trading, research, and strategy across the spectrum of equities, fixed income, foreign exchange and wealth management across the Americas, Europe and Asia.

JP Morgan A new suite of indices called JP Morgan Asia Diversified (JADE) has been introduced to the market to provide investors with a benchmark that tracks local currency government bonds issued by emerging and developed Asian countries. It is an approach to accomplishing a broad inclusion of “JP Morgan launches Asian countries as well benchmark to track as a balanced allocation government bonds in Asia.” of weights. The two main composite series of the index comprise the JADE Broad and the JADE Global. The JADE Broad contains all eligible countries within Asia, excluding Japan, given they meet the index criteria regardless of capital controls. The JADE Global excludes countries with capital controls as well as those inaccessible to foreign investors.

KKR Asia Investment firm KKR has recently announced the final closing of KKR Special Situations Fund II (KSSF II), with backing from public and corporate pensions, “KKR Closes US$3.35 sovereign wealth funds, Billion Special insurance companies, Situations Fund.” foundations, endowments, private banking platforms, family offices and individual investors. It is a US$3.35 billion global fund primarily focused on credit-oriented, deep-value investing in distressed or event-driven situations. The firm believes the pricing environment for risk is meaningfully more attractive than in prior years as the number of credit assets trading at distressed levels has been increasing steadily for several months, coupled with the wave of redemptions in the distressed and opportunistic credit fund space.

MasterCard Asia Pacific MasterCard has come up with a solution called MasterCard IQ series, designed to reduce the rising number of card transactions being falsely declined today, and a service called Automatic Billing Updater (ABU) which securely communicates account changes from banks and merchants to ensure a seamless experience for cardholders’ recurring payments. The new solutions – available to issuers and “Real-time fraud management merchants globally – are solution and automatic part of an approach to billing updater released.” tackling safety and security while delivering uninterrupted payment services. The value of false declines per year has hit US$118 billion – more than 13 times the total amount lost annually to actual card fraud (US$9 billion), according to research by Javelin.

Moelis & Company Moelis & Company had the best quarter of revenues since inception: it reported fourth quarter 2015 revenues of US$174.8 million, an increase of 21 percent year-on-year, reflecting growth in M&A-related activity “Record year of revenues for during the second half of the year and an active investment firm since restructuring business. inception in 2007.” Adjusted Pro Forma net income for the quarter was US$30.7 million or US$0.55 per share (diluted). Revenues of fiscal year 2015 also reached a record, increasing by six percent to US$551.9 million, with adjusted Pro Forma net income of US$91.9 million or US$1.66 per share (diluted) for the year, compared with US$94.4 million or US$1.72 per share (diluted) for the same period in the prior year.

Natixis Natixis Payment Solutions is partnering with CopSonic, a tech start-up, to create SwipeSonic, a secure payment device using ultrasound technology to encrypt information within music and voice and to transmit data entirely inaudibly to the human ear, making online purchases faster “New secure online payment and easier while system to make use of safeguarding security. ultrasound technology.” The new technology is also fast: secure online payment can take as little as 20 seconds from start to finish, without having to copy the 16-digit number, expiry date or three-figure security code of credit cards. Because it makes use of a one-time password or authentication code for each transaction, card details are not divulged to the online store.

Northern Light Venture Capital Northern Light Venture Capital (NLVC) has a new addition to its portfolio of investment: it has recently become a part of a US$15 million financing package for “Venture capital firm invests Savioke’s Relay Delivery in Relay Delivery Robot Robot – designed for technology.” use in the hospitality industry – along with investors Intel Capital and EDBI, the corporate investment arm of the Singapore Economic Development Board. The latest round of funding has raised the total amount to US$17.6 million for the project following seed investment from Morado Venture Partners, AME Cloud Ventures, Google Ventures, and other individual investors. To date, NLVC – a China-focused venture capital firm targeting TMT, advanced technology and healthcare opportunities – has backed more than 100 companies.

Principal Financial Group A new asset management and pension partnership is to be formed between Principal Financial Group and China Construction Bank (CCB) to jointly create business platforms for product development and market exploration in China, expanding on the existing relationship with CCB Principal Asset Management formed between Principal and CCB in 2005 for the China market. Under the agreement, “Principal grows pension Principal will provide and asset management CCB – which received an business in China.” approval from the China State Council to set up a pension company in November 2015 – with assistance beyond asset management and share its expertise in pension investment, operations, product design and other areas in the development of the new organization for China’s growing pension market.

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Prudential Group performance highlights of 2015: IFRS operating profit of £4,007 million, up 22 percent; EEV new business profit of £2,617 million, up 20 percent; underlying free surplus generation (after investment in new business) of £3,050 million, up 15 percent; and net cash remittances from business units of £1,625 million, up 10 percent. In terms of capital “Broad-based growth and dividend: IFRS and increased cash shareholders’ funds of generation in 2015.” £13.0 billion, up 10 percent; EEV shareholders’ funds of £32.4 billion, up 11 percent. Operating profits of business units: £1,324 million, up 17 percent, for Asia life and asset management; £1,691 million, up 10 percent, for Jackson life; £1,167 million, up 60 percent, for UK life; and £442 million, down 1 percent, for M&G.

Societe Generale Societe Generale has entered into a share purchase agreement to acquire 100 percent of Kleinwort Benson and Kleinwort Benson Channel Islands Holdings Ltd, the UK and Channel Islands’ wealth management business of BHF “Societe Generale agrees Kleinwort Benson Group to buy Kleinwort Benson SA, a company recently from Oddo & Cie.” acquired by Oddo & Cie. Kleinwort Benson will be acquired and eventually combined with Societe Generale Private Banking Hambros (SGPB Hambros) in a move to expand the private banking business with for the markets in Europe, the Middle East and Africa. Both companies share a similar history of wealth management services in the UK dating back to the 1800s.

Standard & Poor’s McGraw Hill Financial has agreed to the sale of Standard & Poor’s Securities Evaluations, Inc (SPSE) and Credit Market Analysis (CMA), “Sale of S&P’s Securities two business units within S&P’s Global Evaluations Inc and Credit Market Intelligence Market Analysis agreed.” division, to Intercontinental Exchange (ICE), an operator of global exchanges, clearing houses and data services. Under the terms of the agreement, ICE can elect to satisfy its payment of the purchase price due at the closing of the upcoming transaction in either cash or shares of ICE’s common stock. Other terms of the agreement were not disclosed. The transaction is subject to customary closing conditions, including required regulatory approvals.

biz.hk 4 • 2016

Standard Chartered Bank Results of a year-end Standard Chartered study on expectations of market performance are consistent “Diversification may be with the challenging conditions experienced key to positive returns in the first quarter of on investment.” 2016, with a conservative view to a “lackluster” market environment throughout the year among half of the 500 survey respondents. Half of the investors surveyed, however, managed to make positive returns on their investment in 2015 through diversification. In 2016, investors are generally cautious about investment and tend to focus more on wealth protection, with a strategy of making investment in phases, holding more cash and opting for products with regular returns.

State Street Bank & Trust Co According to data of the State Street Investor Confidence Index (ICI) for March 2016, the Global ICI increased to 114.6, up 8.0 points from February’s revised reading of 106.6, indicating a renewed appetite for risk among investors across all regions, with the North American ICI increasing from 109.4 to 123.6, European ICI from 90.2 to 95.3, and “Index shows increased Asian ICI from 111.5 to appetite for risk among 112.2. investors across regions.” The Investor Confidence Index measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors. The greater the percentage allocation to equities, the higher risk appetite or confidence, with a reading of 100 as neutral.

Tricor Services Tricor Group, a member of The Bank of East Asia Group and a provider of integrated business, corporate and investor Services, has officially opened a new office in the Cayman Islands under the name of Tricor Services (Cayman Islands) Ltd for Cayman-incorporated businesses, in relation to entity formation, transfer agency, registered office-related “Tricor Group opens a facilities and other local new office in Cayman corporate compliance Islands.” formalities. The new office will cater to companies incorporated in Cayman Islands and with securities listed on the Hong Kong Stock Exchange, offering services available on location, including company incorporation, acting as principal share registrar and providing registered office facility as well as corporate secretarial services.

UBS AG In a white paper titled Extreme automation and connectivity: The global, regional, and investment implications of the Fourth Industrial Revolution, UBS reveals that economic flexibility is vital to succeeding in 2016 and “Developed economies likely beyond amid the extreme levels of automation and to benefit from Fourth connectivity, with the Industrial Revolution.” potential of dramatically changing the course of economic development and global distribution of wealth. Specifically, low- and middle-skilled jobs will increasingly come under threat of replacement, further polarizing labor force and increasing income inequality. Extreme connectivity will heighten cybersecurity threats and increase geopolitical tensions, while US’ competitive advantages and reserve currency status may lead to a stronger dollar and pose a challenge for dollar-linked developing markets.

United Overseas Bank United Overseas Bank’s (UOB) renminbi deposits in Singapore have doubled over the year of 2015 as a result of growing trade ties between China and Southeast Asia. During the year, nearly half of UOB’s client companies – mostly in the real estate, trading, natural resourc“China’s trade & investment es as well as consumer products and services with SE Asia fuels growth of sectors – expanding into RMB deposits.” Southeast Asia were from China. Corporate clients from China are increasing their RMB deposits in Singapore for trade, settlement and working capital in a bid to reduce foreign exchange conversion and hedging costs. Institutional clients, similarly, are diversifying their funding base as the Chinese currency becomes more widely accepted following IMF’s inclusion of the RMB in the SDR basket.

Vanguard Investments Vanguard Investment Strategy Group puts the probability of an outright US recession over the next six months at roughly 10 percent – an outlook less bearish than is indicated by the financial markets, given the underlying momen“US economy will bend, tum in the labor market. not break, Vanguard’s A slowdown in US job research says.” growth and a raise of US interest rates to one percent are far more likely than a recession in 2016. The key takeaway: all recessions come with a stock correction, but not all stock corrections lead to recession. Likelihood of a US recession – as indicated in the current slope of the US Treasury yield curve – remains low.

Visa Hong Kong Ltd In Visa’s eCommerce Consumer Monitor Survey, 64 percent of Hong Kong consumers cite quality of products and services as their top concern when shopping online, followed by high shipping costs or hidden charges/taxes (59 percent) and payment security (53 percent). “Hong Kong online shoppers Nearly half (47 concerned about product percent) of all shoppers in quality over security.” Hong Kong begin shopping online in one of four categories: bill payments, movies, travel and fashion; and 42 percent buy online in more than five categories. Devices for online purchases: 62 percent prefer to use a desktop or laptop; 30 percent prefer a smartphone; and eight percent prefer a tablet.

Wells Fargo Bank The current market pessimism as a result of disappointing news out of China offers potential opportunities for investors with a disciplined approach to meeting their financial objectives, says Well Fargo’s Head “Despite pessimism and Global Market Stratesources of economic risks, a gist Paul Christopher. The reason: despite crisis in China is unlikely.” China’s rising debt level (mostly among gov’t-owned entities), bond yields do not suggest a crisis, in part because China has a high savings rate. Secondly, RMB devaluation is only part of a long-term strategy to open China’s financial markets to global trade while China moves from a manufacturing economy to a services economy. It is depreciating to realign with the dollar; it is not weakening against a broad group of currencies.

Willis Global Wealth Solutions Remuneration among CEOs in Swiss Leader Index (SLI) companies increased slightly in 2015 in comparison with the previous year, on average by one percent “Remuneration to reach CHF 5.83 of Swiss CEOs million (CHF 5.75 increased slightly million in 2014), Willis’ CEO Remuneration in in 2015.” the SLI in 2015 reveals. But SLI companies with the highest market capitalization do not always feature top earners. CEOs as top earners in direct remuneration: UBS (CHF 14.0 million), Roche (CHF 11.4 million) and Novartis (CHF 11.3 million). The CEO of Swisscom earned the least at CHF 1.6 million. Data of Richemont whose CEO ranked top in 2014 has not been made available.

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The Structure of Business Reporting Line among MNCs in China Part of an ongoing research project for a better understanding of the China market, a Heidrick & Struggles survey of some 100 senior executives of predominantly US, European and Asian multinational companies (MNCs) responsible for business operations in China examines how well various models of reporting line structure in relation to their global headquarters function. The study also focuses on the factors driving their decision of either retaining an existing protocol or adopting a new plan more aligned to the needs of giving their China leaders a more direct line of sight to their global CEOs

By Seth Peterson

o operate at their best, global cross-border companies require clear and effective regional reporting lines for senior leaders. This is particularly true for multinational companies (MNCs) operating in China, given the country’s size and complexity as a market as well as its outsized importance as a source of revenues and future growth. Yet determining the best reporting relationship structure is a tricky proposition. Indeed, a Heidrick & Struggles survey finds that companies in the region choose a range of reporting structures for their China heads. The survey, part of an ongoing research project for a better understanding of the China market (for more, see What China’s ‘new normal’ means for multinational companies on heidrick. com), is an examination of the various reporting-line models employed by MNCs and how well these function. Although respondents are largely satisfied with their current chains of command, those who see a need for change overwhelmingly cite structures that give the China leader a more direct line of sight to global leadership and the CEO – one of the key findings of the survey of 100 senior executives in the Asia Pacific (APAC) region who oversee or are deeply involved in their company’s operations in China. Roughly 90 percent of survey respondents represent US, European or Asian MNCs headquartered outside of China. These respondents are predominantly from companies in the industrial, consumer, technology, and healthcare sectors, with nearly half providing goods or services to both China and overseas markets. In terms of scale, 70 percent of the respondents’ companies reported worldwide revenues last year of more than US$3 billion; and 80 percent of the organizations in the survey have been established in China as either wholly foreign-owned or joint-venture entities for more than ten years.

MNCs in China Almost 40 percent of the respondents reported that China as a source of business revenue represents anywhere from 10 percent to 30 percent of their company’s total global earnings, while nearly six in ten said China contributes more than 40 percent of their income within Asia Pacific (APAC). This importance is underlined by the fact that 42 percent of respondents said their company’s China leader sits on the global executive committee, or its equivalent. While half of the business leaders of MNCs heading operations in China are indicated to report directly to their company executives who are managers responsible for all of Asia/APAC, 26 percent of the companies surveyed have a “flipped” structure, meaning their leadership teams in China oversee Asia/APAC operations.

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Meanwhile, nearly 30 percent of respondents said their company’s China boss reports directly to global leadership (either the CEO or the global head of a business unit). In the analysis of the responses to the survey, there seems to be a variety of reasons why some MNCs do not give their China heads oversight of operations covering the entire Asia/APAC region. The most commonly cited – by 65 percent of respondents – was the desire to avoid steering the focus of the company’s China leadership team. While 44 percent of respondents said that their leadership team responsible for operations in China may not be the best qualified personnel to lead the entire region, 26 percent said the proportion of regional revenue generated by China is not large enough to justify such a reporting structure. Of those companies with their China leader in the regional driving seat, 57 percent noted the fact that revenues in China make up the majority of their Asia/APAC total, and just over 28 percent said it was because of the effectiveness of their China heads in this role.

Question: What is the approximate proportion of your company’s global revenues represented by operations in China? 41% to 50% 51% to 60%

31% to 40% 21% to 30%

2%2%

10%

52%

29%

A change coming? Although 44 percent of the respondents surveyed said their reporting structures had been in place from the very beginning of their company’s involvement in China, 69 percent said it was unlikely that these would be changed in the coming two to three years. Yet, there was a striking pattern among 17 percent of respondents who indicated that a change is likely. Notably, every one of these respondents was in an organization where the China head currently reports to the Asia/APAC head, and every one of them said their company plans to adopt a reporting line that is more directly connected to their global leadership teams. Among the reasons given for this change are the need to acknowledge China’s status as a strategic market, the belief that direct communication between China and global headquarters will be more effective, and the fact that it can be time-consuming and cumbersome to juggle and cater to the business needs of China and the rest of the APAC region together. Despite only 17 percent of respondents anticipating changes in their company’s reporting lines within the next two or three years, 29 percent of those questioned weren’t satisfied with their company’s existing structure. In other words, 12 percent of respondents indicated they have suboptimal reporting lines, yet reported no plans to amend them. The survey, in a deeper dive, also discovered a range of factors driving corporate decisions on whether or not companies plan to change or retain their current structure of reporting lines. It revealed that an array of issues, including those associated with cost, communication, and organizational efficiency, are often cited by respondents as

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Less than 10%

10% to 20%

Note: Figures may not sum to 100% because of rounding. Source: Survey of 100 senior executives in Asia Pacific region, Heidrick & Struggles, January 7–14, 2016.

Question: What is the approximate percentage of your company’s China revenues as a share of Asia Pacific revenues? Less than 10%

70% and above 14%

9% 7%

61% to 70% 7%

51% to 60% 15%

17%

10% to 20%

21% to 30%

9% 21%

31% to 40%

41% to 50% Note: Figures may not sum to 100% because of rounding. Source: Survey of 100 senior executives in Asia Pacific region, Heidrick & Struggles, January 7–14, 2016.

Question: Who does the head of your China operation (the China CEO or equivalent) report to?

North Asia regional head 4%

Other

Asia/APAC regional head

18%

50%

29%

Global head

Note: Figures may not sum to 100% because of rounding. Source: Survey of 100 senior executives in Asia Pacific region, Heidrick & Struggles, January 7–14, 2016.

Question: Is the China leadership overseeing the rest of your Asia/ APAC operations?

Yes 26%

74%

Source: Survey of 100 senior executives in Asia Pacific region, Heidrick & Struggles, January 7–14, 2016.

disincentives to establishing direct reporting lines between China and their respective global headquarters. For instance, a number of respondents said their companies are keen to avoid duplicating costs, in their finance and product-design departments. Some respondents believed their China revenues have not – and in the medium term will not have – reached a sufficient scale to justify such independent status within the next two to three years. Others observed that their global headquarters have too little understanding of China to add value through direct input.

Talent pool Conservative corporate culture was another factor cited by respondents as inhibiting change, as was the shortage of local talent capable of taking up leadership roles for China and Asia/APAC. Such findings are consistent with what many MNCs have experienced in the region, where many of the top MNC executive roles in Asia are still filled by expats. The localization of senior leadership roles in Asia from a business perspective remains a challenge. This is partly due to the high turnover rate of talent in Asia, and partly because of the weaker communications skills of some local executives who may not be “globally savvy” enough or may lack an “expansive” perspective to interface with headquarters effectively. Still, after more than two decades of development of international buisness and commerce, there is a pool of qualified MNC leaders in China from a local perspective, and top companies have had programs of talent development in place for some time. These often involve the recruitment and integration of employees overseas before their reassigment to Asia and periodic overseas rotations to help burgeoning leaders develop their internal networks. In the longer term, these issues can be addressed with training and through opportunities to gain a broader range of experiences. In fact, for some leaders who have spent their careers operating only within the specific demands of the Chinese market, the opportunity to work abroad can be particularly eye-opening. Those multinationals who prioritize cross-cultural training and exposure will reap the benefits of having a local Chinese team of leadership that is more prepared to engage with the global CEO in terms of strategic thinking.

Seth Peterson is a partner in the Industrial Practice in Heidrick & Struggles’ Hong Kong office, serving manufacturing businesses in the region across the C-Suite and main functions. He earned an MBA from Washington University’s Olin School of Business in St Louis and a Bachelor’s degree in Chinese Studies and International Relations from Grinnell College, Iowa. He studied Chinese in Taiwan as well. He serves on the board of the American Chamber of Commerce in Hong Kong and co-chairs the board of the non-profit AFS Intercultural Exchanges in Hong Kong.

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Winner Announcement

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EDUCATION

The Case for a Quality Education Through the comprehensive case method of teaching, which emphasizes discussion and application of knowledge in the classroom, Ivey Business School has risen to become one of the top business schools in the world with its EMBA and executive education programs. As the market continues to grow in Asia, the school is set to grow along with it

By Leon Lee

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hen the Ivey Business School opened the Cheng Yu Tung Management Institute in the Hong Kong Convention and Exhibition Centre in 1998, it was the first international business school to establish a permanent campus in Greater Asia. Since then, 8,500 professionals and executives have been trained by the school. Since the beginning, they offered an executive MBA program that was identical to the one offered on the main campus in London, Ontario, Canada. They would fly their faculty into Hong Kong from Canada to teach the courses. While their EMBA program continues to be well-received, they have developed other programs to cater to changing needs of corporate clients and the business environment. “Over the last few years, we’ve really developed our executive education, non-degree business to be pretty significant. It’s about equal to the size of the EMBA now,” says Robert Kennedy, Dean of the Ivey Business School. “We run executive development programs in Hong Kong as well as in Mainland China. Now a lot of the work we do in China is not only for Chinese companies, but also for a lot of Hong Kong and multinational companies with significant footprints in China. So for the last few years, those have been our two main lines of business.”

Executive education

Photos: Ivey Business School

biz.hk 4 • 2016

While an EMBA is a comprehensive education that could take up to two years to complete, executive education tend to be more focused and help companies achieve more immediate business and talent objectives. “These are two really different value propositions. An executive MBA typically cost about US$80,000 to US$100,000 and a two-year commitment, which is a major investment in the person. “A company can say, ‘this person has high potential so we’re going to spend $5,000 to send him to a marketing program or $10,000 to send him to a couple of modules on change management’. It is less financially costly and time consuming but has clear performance objectives,” Kennedy explains. Ivey offers two main types of executive education programs in Asia – open enrollment programs and custom programs. The open enrollment programs tend to be functionally orientated with focuses on particular skill sets and professional development. For example, the school offers a consortium program where

around 10 companies send three to four people each to attend different modules on a variety of topics such as financial management, change management, marketing, etc. Kennedy likens the program to “almost like a mini-MBA”. The school has recently entered into a successful partnership with the University of Hong Kong to offer a four-module open enrollment program on Data Analytics and Big Data. Custom programs are typically general management-related programs for executives, whose companies have identified to have high potential for advancement in the company. “Such custom programs place high potential middle managers in a functional area and develop them with specific career or professional objectives in mind, for example, innovation, entrepreneurial thinking, influence and persuasion, executive presence, collaboration and cross boundary leadership, etc. Many of such companies conduct talent review and development processes to identify gaps, based on which Ivey would design and deliver outcome-focused custom programs.” Dean Kennedy believes the market for executive education is very healthy in both Hong Kong and China. There is a large demand for senior executive development from both Western firms operating in China and Chinese firms who have expanded abroad. Year on year, Ivey’s clientele has grown by 20 percent in recent years.

“There are many firms based in Hong Kong or China that would like to be more global and therefore they want to make sure their people have the skills and acumen to operate in Europe or North America. And for some of these Hong Kong-based companies, we actually run global programs,” Kennedy explains. Ivey’s Associate Dean in Asia, Professor Chris Chan, is currently delivering a program for executives of a Hong Kong-based company. Then, he would travel to North America to run the same program with their executives based in those countries. This way the core talent of the company receives the same training worldwide.

The case method However, regardless of EMBA or executive education programs, they would be taught with the case method. It utilizes case studies based on real-life scenarios to promote learning through discussions among students. Ivey is only one of four business schools to exclusively use the case method of teaching, others include Harvard Business School and University of Virginia’s Darden School of Business. “It is sometimes called participant-centered learning. A lecture is a lot of one-way communication but it’s not active participation. The idea with a case study is, first of all, there’s no necessarily

Professor Chris Chan

biz.hk 4 • 2016

Dean Robert Kennedy

right answer. A case is a story or a platform around which people can grapple with issues and debate them and really illustrate the uncertainty,” Kennedy explains. He believes there are three types of learning students should receive from business school. But only one can be achieved through lectures which is learning technical skills such as how to price a bond or segment a market. However, knowing those skills doesn’t necessarily mean students know how to apply that knowledge. The case method has a strong emphasis on putting information into action. The third type of learning is what the Dean calls process learning. It involves picking up skills such as the ability to present arguments clearly and concisely, working effectively in a team, and knowing how to disagree and putting your point across without offending teammates or co-workers. “Using various different business cases, we put the students into decision-making positions and then they have to look at and weigh the trade-offs, do the analytics, challenge the assumptions and operate well in a team-based discussion rather than one single person making the entire decision. So all of that enables students to make better decisions under uncertainty,” Professor Chan adds.

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Professor Chan also observes that first-time students who are used to the traditional way of lecturing might take a little time to get used to the teaching method but they quickly come to appreciate it. For the last two years, Bloomberg Businessweek has named Ivey’s MBA program as number one in its international rankings (schools outside of the United States). Employer satisfaction is weighed heavily in the survey, which Ivey scored the highest. “When we talk to recruiters, any MBA has got to have the basic tools, but it’s those other things – working in teams, communicating effectively, being decisive even without complete information – those are really the things that distinguish our graduates. We think that case method learning is much better at teaching those things. Sometimes you proceed a little slower but you’re learning at a much deeper level,” Kennedy says.

Supporting growth The school’s success and expertise with case studies have led to another business line. Ivey is the second-largest case study producer in the world with about 15 percent market share globally, only behind Harvard Business School. It has the largest collection of China and India cases locally-sourced with about 600 translated into Chinese.

Kennedy expects the new case center to produce 10 to 12 cases in the beginning, while working with Hong Kong and Chinese business schools on receiving submissions from them. “We anticipate about 40 to 50 cases from China last year but we think that number will go up as well. So we’ll write a few and then we’ll publish many more from others. Ivey has a very good brand presence in Asia now and we think the case center will strengthen it,” he says.

Moving ahead

More and more Chinese business schools are utilizing case studies in their classrooms so besides selling cases to them, Ivey also run threeto four-day workshops on case writing and case teaching for the schools. In June of this year, Ivey will launch a case center for Asia in Hong Kong to support its growing business. Previously, the business was supported by overseas staff based in Canada. “Going forward, the case center is going to do three things. They’ll write a significant number of new cases, they will provide service and support for our Chinese and Asian customers, and third, they’re going to take over responsibilities for the case writing and case teaching workshops,” Kennedy explains. “The needs [of Chinese business schools] are fairly distinctive. They need a lot more support. A lot of these schools are just adopting the case method so they don’t know how to write and teach cases. To provide the necessary support, it makes sense to have a local presence and resources in Asia.” The Dean believes offering such services and support distinguishes the school from other business schools that normally just offer programs. Through this, Ivey can work more closely with local schools and form partnerships that are beneficial to both parties. Another aspect that sets Ivey apart from its peers is that besides creating case studies, they also accept submissions from faculty of other schools. Faculty can send their case studies to Ivey where they would undergo a stringent review process. If accepted, the cases would be edited to fit the school’s standards. Last year Ivey registered about 150 cases written by their own staff and another 250 submitted from around the world.

Over its past 18 years in Hong Kong, Ivey has expanded from only offering an executive MBA to running executive education programs and developing case studies. It is the Dean’s vision that Ivey will continue to grow and become more multidimensional. It is beginning to look into incorporating more innovations into the classroom. “We’ve grown our undergraduate program and reformatted the MBA so we’re really thinking hard about how do we innovate. Can we use digital tools to take some of the basic things out of the classroom and then make better use of the classroom time? So you can learn about booking debits and credits at home and then we use the classroom time more effectively to think about how do you apply those things,” Kennedy says. And as more business issues are becoming more globally-oriented, the school plans to increase their global presence. However, this doesn’t necessarily mean they’ll be building new school campuses, but rather through mutually beneficial partnerships with schools to offer Ivey’s programs at their facilities. “[The case studies] are a core competence for us and that is a competence that a lot of people want to tap into. We feel there is a need and interest in that from a lot of potential partners.”

biz.hk 4 • 2016

CORPORATE SOCIAL RESPONSIBILITY

Glitz, Glamor and Sustainability Luxury goods group Kering is used to setting fashion trends with its stable of famous designer labels like Gucci and Stella McCartney. Leveraging its influence as a market leader, the organization aims to set a different trend through incorporating initiatives to tackle social and environmental issues into their business strategies for all their brands

By Leon Lee

Carlo Imo

biz.hk 4 â&#x20AC;˘ 2016

Photos: Kering

ver the past two decades, people have become increasingly aware of the potential negative impact of their actions on the environment and society. As the threats of global warming and other potential catastrophes become more real, they are making changes in hopes of helping the situation and preventing it from getting worse. In the last couple of years, many corporations have talked about sustainability and doing their part. However, few have taken the issue of sustainability as extensively as luxury goods group Kering has and made it an integral part of their business.

Trendsetter Sustainability is much more than a marketing tool for Kering and its stable of luxury brands such as Gucci, Bottega Veneta, Alexander McQueen and Stella McCartney. Kering’s chairman, Francois-Henri Pinault, made the decision to approach it as a strategic driver to the group and its operations. It is at the core of the business strategy for all their brands. “The reason why Mr Pinault have pushed sustainability as a core strategic driver for the

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business is multi-faceted,” Carlo Imo, President of Kering Asia Pacific, explains. “First of all, we believe it’s going to bring innovation into what we do. To move toward smarter practices requires innovation and outside-the-box thinking. It’s also going to be a source of new business opportunities and cost reductions in term of what we do and what we produce.” As a leading luxury goods and apparel organization, quality and durability are of utmost importance which links to sustainability. “In particular to the luxury field, I think we have a major responsibility because we set trends. As an industry leader we influence society hence it is our mission be a change-maker for the environment,” Imo says. In 2003, Kering established a sustainability department on the corporate level and created an environmental reporting platform. Four years later, a sustainability department was established on the group level and reported directly to the Chairman and CEO of the organization. Furthering their commitment, in April 2012 Kering set a list of sustainability targets to be achieved by this year, targets which Imo believes might be one of the company’s most ambitious steps in driving sustainability throughout the group.

“It’s a long list of targets we set and committed openly and publicly to work on. They focus on all our supply chain across our brands: raw material sourcing, production process or supplier performance. Those targets are recognized from the very beginning as being particularly serious,” the president explains. “Because looking at the nature of the targets, you can easily see they really focus on the way we do business and the way we do manufacturing and distributing.” Some of the targets are to have 100 percent PVC-free collections, paper and packaging materials sourced from forests certified to be sustainably managed with a minimum of 50 percent recycled content and a 25 percent reduction in the company’s carbon dioxide emissions, waste and water usage from the production of products and services.

Ahead of the game According to a report published in mid-2014, they are making good progress on reaching each of the targets. PVC (polyvinyl chloride) was found in less than two percent of the group’s goods. An overall total of 57 percent of its hazardous and non-hazardous waste were recycled or reused, while waste production by the group dropped by 10 percent. Eighty-eight percent of organization’s paper consumption was either sustainably certified or recycled. Brands under Kering have been using various technologies and tools to achieve the goals. Fashion designer Stella McCartney is a vegetarian and fierce animal rights advocate so her

collections do not feature any fur or leather. Instead, they use organic cottons and wools for their bags, shoes and apparel, relying largely on technology and innovations to develop materials as a replacement. Gucci has been working to develop technology to tan leather without using any heavy metals and to reduce the amount of water consumption during the process. In 2013, Kering founded the Materials Innovation Lab (MIL) in Milan, Italy to help identify, catalogue and make available sustainable raw materials to all of its brands. In two years, the lab has an archive of over 1,500 samples of certified sustainable fabrics. “When designers, creative directors and development teams are working on products, they can check with MIL in term of source materials which have been tested and verified by MIL as sustainably viable,” Imo says. One sustainability target that Kering has already met was the implementation of the Environmental Profit & Loss account (E P&L) across all of its brands. Developed with PricewaterhouseCoopers, the E P&L measures and monetizes the costs and benefits generated by a company’s environmental impact. “We are weighing the impact of our operations and supply chain on the environment. It’s very interesting because it’s going to move the way we do business and where and how we structure our supply chain based on environmental concerns such as water and land consumption,” Imo says. However, rather than being a method of environment reporting, it aids in putting environmental impact into business terminology which can then be used in comparisons and

Bottega Veneta’s artisan workshop in Montebello Vicentino, Italy has received Platinum LEED certification, the first luxury company to do so

bag

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McCartney’s Eco-Alter Nappa collection

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analysis. Kering has made the E P&L methodology publicly available in hopes that other companies would follow suit to measure their actions.

Empowering women Besides being environmentally sustainable, social sustainability matters to the group as well. “When we look at sustainability, we look at that in a broader scope so socially for us, gender equality and women empowerment falls into that,” Imo points out. It also serves as a business imperative as women make up 80 percent of Kering’s customers and 60 percent of their employees. In Asia, they have recently launched a one-year mentoring program, pairing 10 sets of women within their organization. They have partnered with The Women’s Foundation for their advice and experience to develop the content of the program as Kering hopes to help the growth of the mentees’ careers. “I think the ultimate goal is to make [Kering] an employer of choice for women. That’s what we’ve been working on and that’s one of the key drivers for our HR actions in the region,” Imo reveals. In other areas, Kering has taken steps to address gender inequality in the movie industry. The group has a five-year partnership with the Cannes Film Festival, and they hosted a series of debates for their Women in Motion series last year. Actress Salma Hayak spoke about sexism in Hollywood and Frances McDormand spoke on pay disparity. The organization hopes events like these will promote more debate and awareness of the issues. “There were only four women nominated for Best Director for the Oscars and out of them, only one, Kathryn Bigelow has won the Oscars for Best Director in 2010. And in term of top five movie characters most played by women, 89 percent nurse, 81 percent secretary, 57 percent teachers, 53 percent waiters and waitresses and 40 percent cashiers,” Imo says. “So what that means is that clearly women are massively underrepresented in term of roles. But when we are talking about Women in Motion, we are also looking at the presence of women as directors and producers where their presences in those fields are even more scattered and rare than acting roles.” In January of this year, Kering announced a new collaboration with the Sundance Film Festival in New York. They will sponsor a fellowship program and provide year-long support such as special training and workshops to six female

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filmmakers. Imo says the group will also be exploring something in Asia. In 2009, the Kering Foundation was established with the mission to fight against violence on women. In the United States, the foundation focuses on tackling sexual violence, in Europe it’s female genital mutilation and in Asia, the focus is on domestic violence. The foundation has partnered with several NGOs in China to support projects to help women who were victims of domestic violence. In Hong Kong, they are looking to do the same with local NGOs.

Global recognition In order to promote sustainability throughout the group, it is necessary that everyone is clear on the direction of the company throughout the organization. Imo and his team have work out a road map of priorities and actions for the group for the next three to five years. He understands the importance of engaging people to share common objectives, address challenges and overcome them as a team. “This exercise in working on and rolling out a road map has been extremely healthy because it’s a way to look into the way we operate, what our objectives are, how we relate internally and externally to drive those,” says Imo, who became President of Kering Asia Pacific in December 2014. His previous experience as an in-house counsel for almost 20 years offered much insight to his current role. “The role of an in-house counsel, in my view, is horizontal and holistic at the same time. It’s horizontal because you work cross-functional so you work looking at your organization as a whole and it’s also holistic because you need to have the ability to look at and have a helicopter view on the business to assess risk and to advise properly. Those skills are quite important on management,” Imo explains. The group’s extensive plan on sustainability has resulted in global recognition. Last year, Kering was recognized as an industry leader in the Textiles, Apparel & Luxury Goods sector in the 2015 Dow Jones Sustainability Indices (DJSI) World and Europe for the second consecutive year. In January of this year, it was named in the Corporate Knights’ Global 100 index at the World Economic Forum in Davos. It was Kering’s first time on the list, and they are the only luxury corporation to be included in the widely-recognized index for the world’s most sustainable corporations.

MARK YOUR CALENDAR Apr New Competitive Advantages -

Leveraging Business Analytics and Big Data for Any Industry

Sam Olsen, CEO, Lamplight Analytics Professor Haipeng Shen, Faculty of Business and Economics, the University of Hong Kong Professor Chris WH Chan, Associate Dean, Ivey Business School in Asia (Moderator) Sam Olsen, Professor Haipeng Shen and Professor Chris Chan will deep dive into how business analytics and big data offer opportunities for senior executives for macro decision making across a range of industries. The session includes an in-depth look at how to uncover key business insights through transforming data to raise productivity, improve decision making, and gain competitive advantage. Demonstration and discussion will be offered through enterprise company case study examples in digital social media, consumer analytics, workforce management, healthcare, retail analytics, and so on.

Apr

Michelle Sun, Founder, First Code Academy Peggy Chan, Managing Director and Executive Chef, Grassroots Pantry Anne Copeland, Director and Sustainability Advisor, Copeland & Partners Ltd. Gregor Miller, Director, Visions Learning HK Ltd. (Moderator)

Apr Launch of the Hinrich Foundation Sustainable Trade Index Christopher Clague, Senior Editor, Economist Intelligence Unit Steve Olson, Research Fellow, Hinrich Foundation A country’s prosperity may depend on whether it is participating in the international trading system in a sustainable manner, and whether it will be able to continue to do so. To be sure, there are economic conditions that are crucial to sustainable trade, but increasingly government, business and the general public are focusing on the social equity and environmental outcomes of trade. Together, these three pillars — “profit, people and planet” — constitute the now broadly accepted triple bottom line for sustainable development. Against this background the Hinrich Foundation commissioned The Economist Intelligence Unit (EIU) to build an index to measure the capacity of various countries to participate in the international trading system in a manner that supports the long-term domestic and global goals of economic growth, environmental protection, and strengthening social capital. Merle Hinrich, founder of the Hinrich Foundation, will introduce the topic and put it in the wider context of why this research is needed in Asia, Chris Clague of the EIU will provide a briefing on the results of the index and Steve Olson of the Hinrich Foundation will discuss the policy implications. The audience will be invited to provide feedback and thoughts on the index and its findings.

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

Tel: (852) 2530 6900

Time: 12:00 - 1:45pm (Sandwiches & beverages included) Fee(s): Member: HK$280 Non-member: HK$400

Venue: Conrad Hong Kong Kennedy Room, Level 7, Pacific Place 88 Queensway Admiralty, Hong Kong

Joint Chamber Breakfast Seminar Women Entrepreneurship Panel: Starting, Scaling and Leading Successful Organizations (Members Only)

Hear the success stories of three inspirational female entrepreneurs who have set up their own businesses in Hong Kong at a breakfast seminar co-hosted by AmCham Women of Influence Committee, Canadian, Dutch, Finnish, French and the Italian chambers. Find out how they did it, what were their challenges and inspirations, and you can do it too. The presentations will be followed by an opportunity to ask questions during the panel Q&A session.

Venue: The American Chamber of Commerce in HK 1904 Bank of America Tower 12 Harcourt Road Central, Hong Kong

Time: 8:00 - 10:00am (Breakfast included) Fee(s): Member: HK$280

Venue: Asia Society Hong Kong Center Jockey Club Hall 9 Justice Drive Admiralty, Hong Kong Time: 12:30 - 2:00pm (Lunch included) Fee(s): Member: HK$650 Non-member: HK$750

Fax: (852) 2810 1289

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April 2016 • VOLUME 48 NUMBER 4