Macau Business Daily, Aug 28, 2014

MOP 6.00 Closing editor: Sara Farr Publisher: Paulo A. Azevedo Number 614 Thursday August 28, 2014

Exit Mechanism

A

Year III

n ‘exit mechanism’ is in the works. And the target is imported labour. Electoral members are pushing Chief Executive candidate Fernando Chui Sai On to ‘safeguard’ locals’ jobs. Construction workers would be most vulnerable to the exit mechanism. Although Chui says the axe would only swing in times of crisis.

Meanwhile, analysts warn that between 2015 and 2017 Macau will need up to 55,000 additional workers

www.macaubusinessdaily.com

Page

Profits in freefall

HSI - Movers

More passengers flew with Air Macau in the period. But the local flagship carrier’s profits plummeted 74 percent in the first six months of the year to 27 million patacas. Air Macau operates more than 20 routes. Mostly between here and major cities in mainland China.

The airline operates 15 aircraft, with an average age of 11.39 years

Name

3

August 27

Page 4

%Day

Henderson Land Deve

4.09

China Mengniu Dairy

2.01

China Mobile Ltd

1.28

China Resources Ente

1.19

China Shenhua Energ

0.90

CNOOC Ltd

-1.56

MTR Corp Ltd

-1.90

China Overseas Land

-1.96

Hong Kong & China G

-2.08

Want Want China Ho

-2.12

Source: Bloomberg

I SSN 2226-8294

Brought to you by

Melco Crown profits up

2014-8-28

2014-8-29

2014-8-30

25˚ 31˚

26˚ 31˚

26˚ 32˚

Profits were up 4 percent to 20 billion patacas in the second quarter of the year. Melco Crown has also announced its revised budget for Studio City.

Some US$2.3 billion will now be injected into the Cotai project

Page

6

HK stocks drop as casino shares decline

Work for all

Au revoir 2015?

Just about everyone’s in work. In the May-July 2013 period, Macau’s unemployment rate was 1.9 percent.

It’s since stablised at 1.7 percent. At the end of July, the ‘recreational, culture and gaming’ industry accounted for 23.2 percent of the workforce. Hospitality and construction soaked up about 14 percent each

Las Vegas Sands Corp has secured the necessary government approvals. It will resume work on Parisian Macao sooner than expected. Originally slated to open in late 2015, the company is being coy about whether the stoppage will affect the launch date

Page 2

Page 7

Page 6

China further loosens foreign ownership of hospitals Page 10

2

August 28, 2014

Macau opinion

Economic future

Unemployment rate at all-time low Sara Farr

sarafarr@macaubusinessdaily.com

José I. Duarte Economist

R

eading the economic policies section of a government programme is seldom the best imaginable start to a day. That is the case in Macau and just about everywhere else. When it comes to a campaign political programme where the winner is chosen in advance and the incumbent runs unchallenged, one may even ask: What’s the point?

Well, if for no other reason, to gauge what the present and future CE thinks is important at this juncture in our collective life; or, even if it doesn’t require our votes for him to keep his job (he can in the end do very much as he pleases) what he wants us to believe that he wants. In other words, one looks for insights into the frame of mind of the administration, to spot its probable – hopefully plausible - objectives and to guess the most likely consequences of all that with regard to our daily lives. It’s not exactly mind-reading but it’s as close as one can get. Of course, one cannot claim any scientific basis on the conclusions or comments made hereafter, or any privileged access to the inner workings of the government.

The focus here will be on the issues that directly affect the productive activities of the companies based in this city. What does the CE want to tell us about his future plans for the economy? On a positive note, truth be said, the corresponding part in the political programme is easier to read, less repetitive and more clear in its statements than is usually the case. This is a positive sign, hinting at a more objective and structured approach. One can well do without the usual profusion of adjectives substituting for actual content.

The first two headings in the economic development section deal with gambling and the ‘creation of a world leisure and tourism centre’. Not much need to dwell longer on that matter here: gambling is the pillar and engine of growth, now and well into the foreseeable future. It will happen anyway, barring any disastrous event that, in most cases, will be beyond our power to control or influence. So, gambling aside, what does the programme tell us?

Diversification is the continuous mantra; and some rather specific statements have been made.

Four priority areas are specifically highlighted and, in a way, confirmed: conventions and exhibitions or the MICE industry; the cultural and creative industries; pharmaceuticals; and traditional Chinese medicine (TCM). Add to this potpourri a clear statement of support for the creation of an environmental protection industry and we have the basis for an ambitious industrial policy to be carried out over many years to come.

Such a programme will be complemented with the support of the development of local brands, “designed and made in Macau”, an intention that is followed by the promise to “create a preferential mechanism for local products in public procurement”.

How such a programme fits with the usually professed ‘laissez-faire’ approach is open to question. To that we may add that a preferential treatment for local products is an obvious form of protectionism that may run contrary to other legal obligations. Therefore, it would be helpful if a bit of additional detail on how to achieve these objectives was forthcoming. But let us proceed, anyway.

The document includes an important section on small and medium enterprises (SME’s). It puts forward a very strong case for the government’s responsibility to “support SME’s, promoting their development, modernisation and expansion”.

As a ‘dirigiste’ programme, one could hardly go further. But on this topic we get the feeling that things were less than thought through. The several hints about how that objective is to come about appear less structured and coherent, and how they articulate with other policy objectives does not even seem to have been pondered. It all looks more like a list of wishes to satisfy assorted business sectors than a basis for a clear policy mix.

Unfortunately, rents and workforce - the two main issues strangling SME’s, and possibly the main obstacles to any meaningful diversification - are not brought into the discussion. That omission, in many ways, weakens the otherwise grand commitments made.

M

acau’s unemployment rate remained unchanged at 1.7 percent between May and July. While there were more people entering the job market, the majority of whom were first job seekers, the city’s unemployment rate has remained stable for the past seven consecutive quarters, or from that of a year ago.

In the period between May and July 2013, Macau’s unemployment rate was 1.9 percent, and has since decreased and remained stable at the current 1.7 percent.

Still compared to that of the previous period, the unemployment rate dropped slightly by 0.2 percentage points, however, with the overall rate remaining unchanged at 1.7 percent,

while the underemployment rate dropped 0.4 percentage points.

By contrast, the labour participation rate has been increasing steadily from the 72.6 percent registered in the May-July 2013 period to 73.8 percent in the same period this year. That is a 1.2 percentage point increase.

The latest figures from the Statistics and Census Service Bureau (DSEC) show that underemployment rate dropped by 0.1 percentage points to 0.3 percent compared to the AprilJune period.

Total employment rose by 3,400 to 387,000, with employment in the construction sector increasing by 3,100 to 54,000. Also, between May and July the hospitality industry added 1,400 new jobs, all of which have been filled.

At the end of July, the industry employing the most people was that of ‘recreational, culture and gaming’ at 23.2 percent, followed by hospitality at 14.1 percent and construction at 14 percent.

The overall labour force in Macau was 393,000 with a participation rate increase of 0.4 percentage points to 73.8 percent from the period April to June.

A total of 6,700 individuals were registered as unemployed between May and July. That’s 200 more than in the previous period. Fresh graduates made up the majority of these by joining the labour market and searching for their first jobs.

According to figures released yesterday, the number of first job seekers increased by 3 percentage points to account for 18 percent of the total unemployed.

Fitch upgrades Banco Weng Hang

F

itch Ratings has upgraded the Hong-Kong based Wing Hang Bank (WHB) Long-Term Issuer Default Rating, and its whollyowned subsidiary in Macau, Weng Hang Bank, to A+ from A-, it was announced yesterday. According to the rating agency the outlook for both banks is ‘stable’.

According to Fitch, ‘WHB is likely to become OCBC’s (Oversea-Chinese Banking Corporation) wholly-owned subsidiary once the latter completes the compulsory acquisition of the remaining shares within the next two

to three months’.

The credit agency also explained that the upgrade reflects the classification of ‘both entities as strategically important subsidiaries to OCBC’.

Fitch believes that WHB’s businesses, customers and network complement OCBC’s and underpin its importance to the parent. For the rating agency, WHB’s franchise in Hong Kong, the rest of Greater China and Macao will supplement the parent bank’s Southeast Asia-biased network, providing an important

platform for OCBC’s expansion strategy in Greater China.

The credit agency also stresses that the fact that WHB’s operations focus on the SME and retail sectors enables OCBC to diversify its customer base from large corporate and also creates opportunities for the cross-sales of products.

WHB will be renamed OCBC Wing Hang Bank Limited and use the new branding incorporating the parent’s name from October 1, 2014 both in Hong Kong and Macau.

J.F.

3

August 28, 2014

Macau

Chui floats ‘Exit Mechanism’ for imported labour Urged by electoral members from the labour field to protect the employment opportunities of the local labour force, the sole candidate in the CE election says an ‘exit mechanism’ for imported labour can be established. This is expected to work best for the construction industry. Academics agree with such a policy Kam Leong

kamleong@macaubusinessdaily.com

A

n ‘exit mechanism’ is likely to be established for imported labour during the next term of government to shore up the employment opportunities of local workers, the Chief Executive candidate Fernando Chui Sai On intimated yesterday when meeting with Electoral Committee members of the third sector.

“Imported labourers must [serve] as a supplementary [resource] to the lack of a local labour force, without damaging the benefits of the local labour force,” Mr. Chui told members representing the labour, social service and religious fields.

It is believed that the ‘exist mechanism’ will cut down the numbers of imported workers by putting off or slowing down the renewal or release of their working visas to protect local workers when there is a necessity, such as an economic crisis.

Mr. Chui said that such an issue will be an important subject for the next term of government. He thinks that this is worth studying to prepare for a crisis as “all good things must come to end”.

“We have discussed it for a certain [period of] time . . . When there is a crisis, we have to withdraw imported labour first and keep the local workers [in order to] offer them chances,” the candidate said Currently, the mechanism is not yet a written law or regulation, although the government decelerated the number of foreign workers during the 2008/2009 financial crisis, according to the associate professor of economics and international finance at the University of Macau, Ricardo Siu Chi Sen. On the other hand, the incumbent Chief Executive said that the Secretary for Economy and Finance Francis Tam Pak Yuen has commissioned the Macao Polytechnic Institute to study if Macau needs imported drivers despite the fact that he had stressed that the government will maintain its stance that there will be no imported dealers or drivers.

“The study will show clearer the situation of the demands [for imported drivers] here,” he explained.

Local construction workers protected Mr. Siu, a scholar, told Business Daily in a phone interview that he thinks such a mechanism, especially for construction workers, is reasonable and feasible.

He believes that the mechanism will protect local construction workers during the completion of the construction of the six gaming corporations’ new projects on the Cotai Strip between 2015 and 2017, when the construction industry will not have as high demand as now for construction workers.

Mr. Chui also said during the meeting that he understood the importance of such an issue as well as the management

150,000

imported workers, July 2014

law for imported labour. He cited the 2008 financial crisis as an example, indicating that five of the six gaming corporations had to suspend their works due to the crisis.

According to the official statistics of the Public Security Police Force, the total number of imported workers at the end of July had surpassed 150,000, of which 40,184 are construction workers. The numbers of construction workers has more than doubled in a year from the 18,812 construction workers recorded last July. That number reached 40,184 at the end of last month.

Foreign labour climbing While Mr. Siu expects that the number of construction workers will decline between 2015 and 2017, the total number of imported workers may not follow the trend.

Imported workers must [serve] as a supplementary [resource] to the lack of a local labour force, without damaging the benefits of the local labour force Chui Sai On, Chief Executive candidate

British bank Barclays predicted this week that following the completion of the projects, the city will need 55,000 extra workers, with 35,000 foreign workers in nondealer positions.

In addition, the multinational bank believes that the increase of imported labor will pose a challenge for the infrastructure of the city.

Such a problem can only be eased if the government opens a 24hour crossing in both Zhuhai and Hengqin borders, which may allow low-paid imported workers to live and commute to work through these borders, the bank said.

On Monday, the central government gave the green light to make the Cross Border Industrial Zone immigration point available for both Chinese nationals working in the city and Macau residents to cross 24 hours.

4

August 28, 2014

Macau

Air Macau profits plummet Despite growth in passengers handled, the city’s flagship carrier posted a large decline in its profit for the first half of this year Stephanie Lai

sw.lai@macaubusinessdaily.com

T

he city’s flagship carrier Air Macau Co Ltd saw its net profit decline year-on-year by 74.4 percent in the first half despite growth registered in the number of passengers, a further slide when compared with the same period last year.

Air Macau, a subsidiary of state-owned mainland China operator Air China Ltd, saw its net profit decline 74.4 percent to 21 million yuan (US$3.4 million, MOP27.2 million).

These latest results reveal a further pinch in profits for the flagship carrier as it had already registered a 15.2 percent drop in net profits for the first half of last year to 82 million yuan.

The first half results of Air Macau - released on Tuesday night - were only briefly mentioned in the half-year financial report by its parent company Air China.

Business Daily approached Air Macau for comment on the profit decline but had not received a reply by the time the story

went to press.

Total Air Macau revenue in the six months to June rose 5.5 percent to nearly 1.315 billion yuan – the majority of the revenue, 1.311 billion yuan, was derived from the aviation business.

For the first half of this year, Air Macau’s passenger numbers surged by 19.7 percent year-on-year to 1.02 million. The carrier’s average seat occupancy rate, however, only inched up by 1.08 percentage points to 67.97 percent.

The local flagship carrier recorded revenues of nearly 11.3 million patacas from its cargo traffic in the first half of the year, a rise of 19.4 percent when compared to that of a year earlier.

Air Macau operates more than 20 routes, of which most ply between here and major cities in mainland China.

As at June 30 this year, Air Macau operated 15 aircraft. During this sixmonth period, the carrier had added one new aircraft to its fleet, which has an average age of 11.39 years.

Fewer MICE events in Q2 The number of event participants, however, has increased by 139 percent between the end of March and end of June Sara Farr

sarafarr@macaubusinessdaily.com

A

s many as 227 MICE events were held in the second quarter of the year, down slightly by one percent from a year ago. While less events are being held in Macau, the number of participants and attendees has just surpassed the half a million mark to reach 522,000, a 139 percent jump compared to that of a year ago. Official figures released yesterday by the Statistics and Census Service Bureau (DSEC) show that each event lasted an average of two days.

Of the total, 209 fell into the ‘meetings and conferences’ category, with the number of participants totalling 22,000 in the second quarter of the year.

Seventy-five percent of these participants participated in the ‘conferences and corporate meetings’ of such events.

As many as 18 exhibitions were organised between April and July, 10 more than a year earlier, with the number of attendees increasing to half a million.

Sixteen exhibition organisers were surveyed and

figures reveal that six were holding an event for the first time in Macau, while six had been here last year. These 16 exhibition organisers employed a combined total of 208 full-time staff, with receipts reaching MOP71.8 million patacas in the second quarter of the year, up by a staggering 104 percent compared to the same period a year prior.

Not only were receipts larger than in the previous year, expenditure also increased by 102 percent to MOP53.1 million, of which production, construction and decoration services accounted for the largest spending at 25 percent, followed by publicity and public relations at 22 percent and accommodation and food at 19 percent.

Of the 989 exhibitors, 38 percent were from Hong Kong and 32 percent from Macau.

‘Professional visitors totalled 55,502, coming mainly from Macau [at 49 percent] and Hong Kong [at 23 percent]’, say the Statistics and Census Service without explaining what ‘professional visitors’ are.

Of the exhibitors that were here, 172 were surveyed and said 86 percent of receipts generated came from the sale of products. Of the expenditure, 81 percent was primarily on the rental of space plus decoration and construction services.

Mixed report card Overall, exhibitors were satisfied with the services provided by staff in Macau.

Seventy percent said they were pleased with the language skills of the venue staff, while 66 percent said they were satisfied with the staff’s level of professionalism. These two were a slight 2 percentage point improvement in the second quarter of the year over that of the previous quarter.

Nonetheless, 20 percent still said that events need to be better promoted and enhanced, while 17 percent said event organisation needed improvement. The level of dissatisfaction in these two categories was up by 9 percentage points quarteron-quarter.

Ginza Plaza basement sale boosts CSI Properties warchest The Hong Kong property investor owns space in two shopping malls here, with one generating a profit of about HK$80 million from its sale Stephanie Lai

sw.lai@macaubusinessdaily.com

H

ong Kong-listed property investment firm CSI Properties Ltd has gained about HK$80 million (US$10.3 million) in profit from the sale of a basement shop space in the downtown Ginza Plaza shopping mall. This move fuels the company’s plan to invest in both commercial and high-end residential projects in the city.

CSI Properties Ltd Chairman Mico Chung Cho Yee told Hong Kong media on Tuesday that the firm has made about HK$80 million net profit from a ‘shopping mall’ it purchased earlier in Macau. The commercial property was sold for about HK$290 million.

Business Daily learned

from industry sources familiar with the deal that the ‘shopping mall’ referred to was the 20,000 square foot basement shop space in Ginza Plaza, a mall located in Rua de Pedro Nolasco da Silva – the street adjacent to the S. Domingos district tourist shopping destination in downtown Macau Peninsula.

The property investment firm also owns the two-storey ‘Broadway Centre’ shopping mall in Rua do Campo, which is also located in downtown Macau. Mr. Chung told media that this mall was expected to be sold by the end of this year following the renovation of the building.

Mr. Chung added that the firm was optimistic about the property market in Macau

against the backdrop of robust gaming development and the stronger purchasing power of its residents. The group is also interested in developing high-end residential projects in the city.

CSI Properties Ltd management noted in its annual results in late June that the firm, which has long been active in property projects in Hong Kong and Shanghai, would target the Macau market in the coming one to two years.

The firm saw profits decline to HK$815.5 million for the year ended March 31, 2014 from the HK$902.7 million reported in the previous financial year due to a decline in property sales.

5

August 28, 2014

Macau

Emperor Watch posts fall in Macau sales The Hong Kong-listed luxury watch and jewellery retailer’s drop in first half earnings here reflects general sluggish retail sentiment Stephanie Lai

sw.lai@macaubusinessdaily.com

R

etailer Emperor Watch & Jewellery Ltd posted a fall in its first half year income from its Macau outlets and a group-wide net profit decline, a result reflective of the more sluggish luxury retail sentiment of the period.

Net income from Emperor Watch & Jewellery’s six Macau outlets for the first six months of this year declined 15.9 percent year-on-year to HK$26.4 million (US$3.4 million) the company said in unaudited results submitted to the Hong Kong Stock Exchange after trading hours yesterday.

The revenue from the retailer’s Macau operation also dropped by 16.4 percent year-on-year to HK$195.5 million for the first half, a fall in sync with the overall decline in sales of jewellery and watches in the city during this period.

For the first half of this year, sales of jewellery and watches here reached 9.58 billion patacas, down 5 percent compared to a year ago. The jewellery and watches sales in the second quarter has shown a sharper year-on-year drop of 22 percent to 4.2 billion patacas, data from Statistics and Census Service shows.

The retailer’s overall first half net profit declined by 33.2 percent to HK$104.7 million from HK$156.7 million a year earlier, a fall that is mainly due to ‘an uprise of rental pressure’, the firm said in the filing.

Gross profit of the retailer decreased

by 3.6 percent to HK$770 million with gross profit margin improved to 25.1 percent.

Accounting for the enhanced gross profit margin, the retailer said that it was attributable to the fact that ‘the pricing environment of watches

has been gradually stabilised’, and that ‘the price hikes of several watch brands were exercised’.

The operation in Macau accounted for about 6.4 percent of the company’s revenue at HK$3.07 billion in the first half, of which the Hong Kong market is the company’s key earnings driver.

‘Despite the sluggish demand in luxury consumption, the watch segment was relatively resilient and its revenue decreased slightly by 2 percent to HK$2.49 billion (1H2013: HK$2.54 billion) which accounted for 81.3 percent of the group’s revenue and continued to be the key revenue contributor’, the retailer remarked in the filing.

As at the end of June, the retailer said it had no bank borrowings, and it had ‘available unutilised banking facilities’ of about HK$852.8 million – a debt-free position that allows it to ‘retain high flexibility for future development’.

The retailer announced an interim dividend of HK$0.40 per share which is payable by September 26 – an issuance that shows a decline from the HK$0.68 per share of a year earlier.

6

August 28, 2014

Macau Brands

Trends

Selfies for all occasions Raquel Dias newsdesk@macaubusinessdaily.com

Studio City budget increased to US$2.3bln Melco Crown announced in its second quarter results that the budget for the casino resort in Cotai has increased

by US$300 million. In the first six months of the year, the net revenue of Melco Crown reached US$2.56 billion João Santos Filipe

jsfilipe@macaubusinessdaily.com

W

e’ve seen it on the news, we’ve seen it all over Facebook and we’ve even done it ourselves. It’s crossgenerational and international.

These days we all take selfies . . . how many we take depends largely on how linked up we are to social networking. Lately, we’ve even seen people who died - literally - to take one.

Although it’s undeniable that we all love them it’s also true that the Asian market has a special connection with photography in general and with the selfie in particular.

Which explains, perhaps, why Asian brands are putting up products specially designed for this effect. Cataloguing your personal life just got easier in the digital world; with this latest gadget it’s even easier.

The first must-have is Canon’s PowerShot N100: it goes a step further than other easyto-connect-to-social-network cameras. In essence, it lets you take photos simultaneously so that you can superimpose the selfie on the corner of the main image. The tiltable touchscreen display can be flipped up to only 90 degrees, not 180 degrees, which would make it more convenient for a selfie, but other than that it’s quite manageable. It also has a ‘story-telling’ concept with features like a Story Highlights mode that automatically uses your photos and videos to create a video montage by choice of faces, themes or dates.

If you want something even more portable, Sony has the perfect option for you. Splash out about MOP3,000 and you can now get the Xperia C3, allowing you to enjoy the Selfie craze full-screen, as it were.

The highlight feature of the Xperia C3 is its 5-megapixel front-facing camera, with a 25mm wide-angle lens with an 80-degree field of view plus soft LED flash. Whereas most mobile phones have a focus on the rear camera, this will give you first class photos in the front-facing camera.

T

he total budget of Studio City from Melco Crown Entertainment in Cotai has increased to US$2.3 billion (MOP18.4 billion) from the original planned cost of US$2.0 billion (MOP16 billion).

However, this cost may not be final, according to the filing sent by the company to the Hong Kong Stock Exchange.

‘This cost estimate may be revised depending on a number of variables, including receipt of all necessary governmental approvals, the final design and development plan, funding costs, the availability of financing on terms acceptable to us, and prevailing market conditions’, it was stated.

Studio City will be a large-scale integrated entertainment, retail and gaming resort that is slated to open by the middle of next year. The date may be changed due to delays such as governmental approvals.

In the filing, the company - a joint venture between Stanley Ho’s son Lawrence and Australian billionaire James Packer - revealed that as at June 30 a total of US$862.5 million (MOP6.9 billion) had already been spent on the development of the resort.

Studio City is a project by Melco

Crown designed to attract more of the mass market segment, the importance of which has been increasing for the company’s results. Melco Crown has expectations that the new resort will further expand its exposure to the mass market segment due to its ‘unique, cinematically-themed design and numerous interactive attractions’.

The company said in addition that the location of Studio City, which will occupy a plot of some 130,789 square metres adjacent to the Lotus Bridge immigration checkpoint, is ‘a key competitive advantage’.

US$2.56 billion net revenue During the first half of the year, total net revenues of Melco Crown reached US$2.56 billion (MOP20.4 billion), a four percent increase that totalled US$116.9 million (MOP933 million) in comparison with the first six months of 2013 (US$2.44 billion, MOP19.4 billion). According to the documents sent to the Hong Kong Stock Exchange, this increase was ‘primarily driven by improved group-wide mass market table games revenues’.

‘Market-wide gross gaming

revenues for the first six months of 2014 increased 12.6 percent from the comparable period in 2013, to a record US$24.1 billion. The mass market table games segment remains the major driver of marketwide growth rates, expanding 35.6 percent on a year-over-year basis’, the company explained.

Melco Crown net revenue, as expected, is highly dependent upon casino revenues. Of total net revenues, 97.3 percent (US$2.37 billion) was produced by its casinos. Non-casino revenues only accounted for 2.7 percent (US$ 66.2 million).

However, not all the news related to casinos is good. Altira Macau registered in the first six months of the year a decrease in revenues of 24.9 percent to US$133.6 million.

As for City of Dreams, its revenues increased 13.5 percent year-on-year to US$236.1 million.

Worker injured in on-site accident A mainland Chinese employee was injured yesterday at the fourth gate of Studio City construction site, after he fell from the 31st floor onto the 30th of the resort, according to the Public Security Police Force. The 43-year-old man injured his back and was transported to a nearby hospital. The Labour Affairs Bureau told Business Daily that works on the casino resort were not affected by the accident.

Construction on Parisian Macao to resume this week

L

as Vegas Sands Corp, the parent company of Sands China Ltd, announced yesterday that it has received the permit needed to resume construction of its US$2.7 billion (MOP21.6 billion) Cotai project from the Macau Government.

The works are set to restart this week.

The construction of Parisian Macao was halted in June following an on-site accident. The Special Administrative Region ordered the casino operator and the contractor to suspend the works and improve its safety standards. The company

had announced earlier that such a permit would only be guaranteed in October. However, the decision was made more than a month earlier than expected.

In yesterday’s press release, it was also announced that Las Vegas Sands will have to apply for more licences in order to conclude the construction works.

“The company said additional permits will be necessary as the development continues but after undergoing a brief work stoppage this approval enables work on the

critical podium structure to restart immediately”, the statement reads.

Asked by Business Daily whether the suspension would delay the opening of the Cotai gaming resort, Sands China declined to make any further comments on the issue.

Parisian Macao is expected to open in late 2015 and will feature some 3,000 rooms, suites, gaming space, retail mall and a replica of the Eiffel Tower. In addition, MICE space and food, beverage and entertainment options will be available.

J.S.

7

August 28, 2014

Macau

HK stocks drop as casino shares decline Stocks declined a second day missed estimates, putting pressure on policy makers to boost stimulus.

“Investors don’t have a reason to push the market much higher,” Steven Leung, director for institutional sales at UOB- Kay Hian Holdings Ltd in Hong Kong, is quoted as saying. “We are watching Chinese data closely to confirm whether the momentum of the economy is still there or whether further stimulus is needed from the government.”

Shanghai link

H

ong Kong stocks fell, with the benchmark index capping its biggest two-day drop in almost three weeks, as investors weighed earnings and casino shares slid.

Galaxy Entertainment Group Ltd lost 1.5 percent after Morgan Stanley cut its forecast for Macau gaming-revenue growth. Guangzhou R&F Properties Co, a mainland homebuilder, sank 3.6 percent amid analyst downgrades after reporting first-half earnings. China AgriIndustries Holdings Ltd tumbled 11 percent after the producer of biofuel predicted a net loss in the seven months through July 31.

The Hang Seng Index fell 0.6 percent to 24,918.75 at the close, erasing gains of as much as 0.3 percent. The Hang Seng China

Enterprises Index, also known as the H-share index of mainland stocks traded in the city, slipped 0.5 percent to 11,074.31, reversing an advance of 0.9 percent.

“Some stocks are showing tiredness from recent gains and it’s bound for some profit taking,” Francis Lun, the Hong Kongbased chief executive officer of Geo Securities Ltd, is quoted by Bloomberg as saying. “After recent gains we need to take a breather.”

The H-share index traded at 7.7 times estimated earnings yesterday, compared with 11.6 for the Hang Seng Index and 16.7 on the Standard & Poor’s 500 Index Tuesday.

Investors are weighing whether the rally will continue after China data from factory activity to credit growth

A link connecting bourses in Hong Kong and Shenzhen has been submitted for approval, Caixin reported Tuesday on its official microblog, citing Xiao Zhijia, deputy director of development of the Shenzhen Municipal Government Financial Services Office. Separately, Hong Kong Exchanges & Clearing Ltd said this week it issued draft amendments to its trading rules ahead of an equity link with Shanghai.

Casino operators declined after Morgan Stanley halved its 2014 Macau gross gaming revenue growth forecast to 6 percent, implying a 1 percent year-on-year drop in the second half. Galaxy slipped 1.5 percent to HK$59.20. Sands China Ltd lost 0.8 percent to HK$52. MGM China Holdings Ltd dropped 1.5 percent to HK$26.25.

Guangzhou R&F Properties sank

3.6 percent to HK$9.68. Brokerages including Bank of China International Ltd and UOB- Kay Hian downgraded their ratings to sell after the company Tuesday reported a 26 percent decline in first-half net profit and cut its sales target.

China Agri-Industries slumped 11 percent to HK$3.19 after predicting a net loss of HK$664 million (US$86 million, MOP688 million) in the seven months to July 31.

Among shares that advanced, automaker BYD Co rose 5.9 percent to HK$53.90 as China was said to be considering providing as much as 100 billion yuan (US$16 billion) to build electric-vehicle-charging facilities.

China Oilfield Services Ltd. surged 8.5 percent to HK$21.80 after the oil drilling services provider posted firsthalf profit that beat analyst estimates.

Futures on the S&P 500 added less than 0.1 percent yesterday. The U.S. equity benchmark advanced 0.1 percent Tuesday to close above the 2,000 level for the first time as reports showed a record jump in durablegoods orders and an unexpected increase in consumer confidence.

Durable goods jumped 23 percent in July as bookings surged for commercial aircraft. The Conference Board’s consumer confidence index rose to 92.4 in August, the highest since October 2007, from a revised 90.3 a month earlier, the private research group said.

Bloomberg

The Most Prestigeous Golf in MacaU OCTOBER 10th 2014

The Asian Outpost of the International Golf Circuit Grand Prix of the City of Lugano L u cky N u mb er 8 Edi t ion 2 014

Charity Golf & Gala Night

For Sponsorship and Team Entries write to golf@macaubusiness.com or visit www.macau-event.com Business Daily Half Page Ad August 25th.indd 1

8/25/2014 5:59:10 PM

8

August 28, 2014

Greater China Air China shares lose early gains

New investment formulas China foreign investment pattern changes as challenges grow Pete Sweeney

Shares in Air China slipped in Hong Kong yesterday after the flag carrier reported a 55 percent drop in firsthalf net profit. Based on international accounting standards, the company recorded 510.4 million yuan (US$82.9 million) in net profit for the first six months, it said in a filing to the Hong Kong exchange, where it is listed.

Although revenue grew 8.5 percent year-on-year to 49.9 billion yuan in the first half, passenger yield -- a measure of the average fare paid per mile by passengers -- dropped 3.33 percent to 0.58 yuan from a year earlier, it said.

Second European hub for yuan trading Bank of China Ltd. has invited German banks to use its yuan-clearing service and named Deutsche Bank AG as its first client. “Our doors are open now for German banks,” Bernd Meist, who heads Bank of China’s Frankfurt operations, said at a press conference in the city after Deutsche Bank announced that it has signed a memorandum of understanding with the Chinese lender. The announcement marks the next step in creating a second European hub for yuan trading after London. Frankfurt, Germany’s financial capital, prevailed over Paris and Luxembourg as the euro-area location earlier this year, joining global financial centers seeking to tap the offshore market.

C

hina’s foreign investment mix is changing, with portfolio investors buying more stocks but foreign direct investment falling to a two-year low on a slowing economy, rising business costs and antimonopoly probes and crackdowns on foreign firms.

Foreign direct investment (FDI) in China fell in over the first seven months of 2014 compared with a year earlier, while the offshore funds flowing into mainland stocks hit the highest in more than two years last month.

A plateau in foreign investment could be a challenge for China, as it offers manufacturers an alternative source of capital to the banking system. Any shortfall is unlikely to

be made up by portfolio flows, which favour more liquid stocks and are limited by quotas.

“Foreign capital coming here needs to get a lot more discriminatory,” said Gary Reischel, founder of venture capital firm Qiming Venture Partners in Shanghai, referring to overall investment.

The stock market has risen for the past six weeks, its longest streak since March 2012, after being among the worst performers in the first half of the year.

Investors are drawn to Chinese shares by low valuations for largecap shares after a four-year slump, a rallying yuan, and the prospect of a pilot project to allow foreigners to

buy yuan-denominated stocks on mainland exchanges.

FDI falls Non-financial foreign direct investment was US$7.81 billion in July, the lowest in two years, and fell an annual 0.4 percent in the first seven months of the year.

Chinese regulators have warned against reading too much into a single monthly FDI figure, and many economists agree.

Still, in the context of July data that included softness in manufacturing, lending, housing prices and fixedasset investment, the numbers have prompted some debate.

Hong Kong shuts 14 beaches Hong Kong closed 14 beaches in the New Territories after a sewage treatment plant was forced to discharge 95,000 cubic meters of household waste, enough to fill 38 Olympic-sized swimming pools, into the sea. The Pillar Point sewage plant at Tuen Mun reported a malfunction in its sieving devices, or waste-separation units, at 3:30 p.m. on Tuesday, the Drainage Services Department said. An investigation is under way, the department said. All 14 beaches in Tuen Mun and Tsuen Wan in northern western Hong Kong were closed, according to the Leisure and Cultural Services Department. The beaches will only reopen when tests show the water is safe.

E-commerce giant is born China’s privately-held Dalian Wanda Group is set to launch a 5 billion yuan (US$813 million) e-commerce joint venture with domestic internet giants Tencent Holdings Ltd and Baidu Inc, said two sources familiar with the investment. The e-commerce venture, which will be 70 percent owned by Wanda and 15 percent held by Tencent and Baidu respectively, is set to be announced later this week, the people said. The venture will unite three of China’s most powerful nonstate companies. For Wanda, the tie-up with Tencent and Baidu opens the door to new opportunities in the world’s biggest e-commerce market as the rise of smartphones creates new business opportunities.

East and South China Sea disputes need creative diplomacy John Kemp

C

hina and the United States appear headed for a damaging confrontation over the extent of China’s territorial claims in the South and East China Seas.

Now that China has become the world’s largest importer of oil, and energy more generally, the country’s need to develop more indigenous energy supplies has become urgent.

Expecting China to put the South and East China Seas off limits to exploration and production until disputes over sovereignty can be resolved through some undefined legal or diplomatic process is unrealistic.

Part of the problem is that western analysts and policymakers still fail to appreciate the strategic importance of these areas. It is common to hear maritime disputes between China and its neighbours characterised in terms of uninhabited islands, submerged reefs, historic fishing grounds and unfinished business from World War Two.

In reality, the disputes centre on control over areas which are thought to contain substantial quantities of oil and gas, which could be vital to the economic development of all states in the area.

U.S. diplomats were reportedly dismayed when China started to claim the South China Sea was among the country’s “core national interests” along with Tibet and Taiwan.

But given the potential for developing substantial oil and gas fields in both the South and East China Seas it should have been obvious that they could not be treated as unimportant claims that could be deferred indefinitely.

Unfrozen conflicts U.S. diplomats sometimes appear to want to freeze the disputes, a position which is both unhelpful and dangerous.

According to U.S. Defense

Secretary Chuck Hagel, the United States takes “no position on competing territorial claims” in both seas, but wants disputes peacefully resolved “in accordance with international law.”

At a regional security conference in Singapore in May 2014, Hagel singled out what he termed China’s “destabilising, unilateral actions asserting its claims in the South China Sea,” without apportioning blame to other countries, a one-sided approach that drew a furious protest from China.

Subsequently, General Martin Dempsey, the top US military officer, has become the first chairman of the joint chiefs of staff to visit Vietnam since 1971, fuelling China’s suspicions about encirclement and quiet U.S. backing for neighbouring states over maritime disputes.

The United States has also refused to recognise China’s self-declared Air Defence Indentification Zone in the East China Sea and insisted the

9

August 28, 2014

Greater China KEY POINTS Foreign direct investment on the slide Offshore funds flowing into stocks hit two-year high

scheme had net inflows of 8.2 billion yuan (US$1.3 billion) last month, the highest since December 2012 and nearly doubling from June, according to Morningstar data.

Launched in 2011, RQFII enables institutions to use offshore yuan to invest in the mainland’s securities markets.

The net inflow in July was the equivalent to 14.5 percent of assets under management. A year earlier, there were outflows equivalent to 9.9 percent of assets under management.

Hostile environment

The FDI slowdown was led by a sharp decline in investment from Japan, which plunged 45 percent in the first seven months of 2014; Europe, down 17.5 percent; and the United States, off 17.4 percent.

“There are other geographies in Asia that are definitely more attractive for manufacturing,” said Matt Koon, consulting manager at Tractus Asia in Shanghai.

At the same time, there has been an increase in funds flowing into stocks via exchange-traded funds (ETF) in Hong Kong from foreign investors, who cannot yet invest directly in mainland equities.

ETFs under the Renminbi Qualified Foreign Institutional Investor (RQFII)

disputed Senkaku-Diaoyu islands are covered by its mutual defence pact with Japan, even while U.S. officials insist they do not take a view on the underlying issue of sovereignty.

This strategy (expressing no view on sovereignty while trying to freeze the status quo pending an unlikely diplomatic resolution of the disputes) is dangerous and threatens to worsen the standoff because the status quo is not remotely stable.

Oil and gas potential Western analysts and policymakers tend to downplay the potential oil and gas resources of the disputed areas, but this probably understates the amount of energy which could be recovered if the areas were thoroughly developed.

Both the South and East China Seas contain sedimentary basins with thick layers of mud, silt and organic material deposited on the floor of ancient seas and lakes. Both have already seen significant oil and gas discoveries.

The South China Sea is ringed with known oil and gas fields off China’s Pearl River Delta, Hainan Island and the coasts of Vietnam, Thailand, Malaysia, Indonesia, Brunei and the Philippines.

In 2010, the United States Geological Survey (USGS) estimated the South China Sea contains about 11 billion barrels of oil and 145 trillion cubic feet of natural gas that have yet to be discovered.

In global terms, these are relatively modest amounts. For China, however, they are much more significant.

FDI has risen each year since China joined the World Trade Organization in 2001, hitting a record US$118 billion last year, with manufacturing a main destination.

But Beijing’s plans to make the economy more reliant on domestic consumption could not only temper the inflows, but change the composition.

Indeed, FDI in manufacturing fell in the first seven months of 2014 while it rose in services.

Many economists argue that China is losing attractiveness due to reasons such as persistently increasing costs for labour, relatively higher prices for energy and expensive industrial property.

Coincidentally or not, the slowdown in FDI this year follows a campaign pillorying foreign firms for crimes including bribery, discriminatory pricing, monopolistic behaviour, and poor quality control - which has led to massive fines and detentions by police.

“The more aggressive stance of Chinese regulators is doubtless galling to foreign executives, but it is unlikely to eliminate their interest,” Arthur Kroeber, economist at Dragonomics, wrote in a research note, adding some firms had made so much profit that they can “easily afford to pay the fine and go on its merry way minting money in the Middle Kingdom.”

Beijing probes top official of China Resources unit

C

hinese authorities are investigating the president of Hong Kong blue-chip stock China Resources Power, the company said, as a corruption probe into its state-owned parent expands.

Prosecutors in the eastern province of Jiangsu are investigating Wang Yujun, prompting him to be suspended from his post, the company said in a statement issued late Tuesday.

It gave no reason for the investigation.

State media said in April that authorities had removed the chairman of the firm’s parent conglomerate China Resources, Song Lin, for “serious violations of discipline and law” which typically refers to corruption.

China Resources, a Fortune magazine Global 500 company in 2013, has five listed units in Hong Kong, with utility China Resources Power -- a constituent of the benchmark Hang Seng Index -- considered the flagship.

Company chair Zhou Junqing had assumed Wang’s duties as president, said the statement, which insisted the issue would not affect its business operations.

Wang remains an executive director, it added.

State media also reported this week that police had detained the former audit director of China Resources, Huang Daoguo, for allegedly obtaining state secrets by providing Song with information from the National Audit Office.

A journalist with the Economic Information Daily newspaper has accused Song of accepting bribes, laundering money and keeping a mistress.

Chinese President Xi Jinping has pursued a highly publicised anti-graft drive since taking office, vowing to go after both senior “tigers” and low-level “flies”.

AFP

Reuters

The assessment focused exclusively on coastal areas and did not include potential resources in the deeper waters in the centre of the sea around the islands and reefs which are at the heart of the dispute.

The South China Sea remains comparatively unexplored and there is the potential for substantial additional discoveries. China’s oil companies believe the area has strong hydrocarbon potential and they have published resource estimates which are an order of magnitude higher than western analysts.

The hydrocarbon potential of the East China Sea is even less well known. But there are good reasons to believe that it could hold significant quantities of recoverable oil and gas.

Several oil and gas fields have already been found in sea areas claimed by both China and Japan.

The sea borders on the Songliao and Bohaiwan basins have been in production for decades and account for most of China’s current oil and gas output. There is therefore a high probability more oil and gas could be found further offshore in the East China Sea itself.

Law of the sea With advances in ultra-deepwater drilling the potential for far offshore exploration and production has never been greater and the dispute over sovereignty in the East and South China Seas is unlikely to remain frozen.

U.S. diplomats have suggested the disputes could be resolved

through international law, norms and diplomacy, without outlining how that might actually be achieved.

In its maritime boundary dispute, the Philippines has filed a claim against China under the United Nations Convention on the Law of the Sea (UNCLOS) with the Permanent Court of Arbitration.

UNCLOS is cited by many outside observers as a suitable legal framework for resolving disputes between China and its neighbours.

But UNCLOS is not really relevant to the dispute because the core of the disagreement concerns ownership and sovereignty over the islands and other outcrops.

Once sovereignty has been established, UNCLOS can help assign rights and responsibilities to all the parties, including control of shipping, fishing and oil and gas drilling.

But UNCLOS cannot resolve the underlying disputes about sovereignty in the first place.

China has already rejected the arbitrators’ jurisdiction, which suggests the process is headed for failure.

Creative diplomacy The parties to the various disputes are all now raiding their archives for ancient books, letters and artefacts to bolster their claims to historic control over the disputed islets.

Such historical research is unlikely ever to resolve the claims persuasively (just look at Britain’s and Argentina’s unresolved dispute over the FalklandsMalvinas).

The only real solution is diplomatic. The coastal states around the South and East China Seas will have to agree to divide, share or pool their sovereignty in the interests of security and to permit the peaceful exploitation of the resources.

There are plenty of examples of such shared resource development, ranging from the Spitsbergen Archipelago in the Arctic to the Neutral Zone between Saudi Arabia and Kuwait.

Before the recent flare up, China and Japan had agreed jointly to develop the Chunxiao gas field, which straddles the maritime boundary.

The challenge for diplomats, especially from the United States, is to help the parties discover creative solutions that benefit all the coastal states.

Instead, U.S. diplomats have encouraged all parties to harden their positions and suggested the entire dispute can be frozen until some illdefined legal process runs its course.

This strategy will not work and is escalating rather than defusing tensions in the area, encouraging coastal states to pursue maximal claims rather than compromise and negotiate common solutions.

It is time that western policymakers recognised that hydrocarbon exploration is both necessary and desirable in both the South and East China Seas.

Oil and gas exploration must be a stabilising force for cooperation, rather than a source of conflict and competition.

Reuters

10

August 28, 2014

Greater China Dangerous games

Upgrading health care China further loosens foreign ownership of hospitals

C

hina will allow foreign investors to wholly own hospitals in seven cities and provinces, further opening up the country’s fast-growing private hospital sector.

The cities of Beijing, Tianjin and Shanghai and the provinces of Jiangsu, Fujian, Guangdong and Hainan will take part in the pilot test that was launched in July, the Ministry of Commerce said in a statement yesterday.

The private healthcare sector is a magnet for investors with the number of private hospitals shooting up in the last decade as Beijing looks to take the pressure off its hard-hit state run system.

China’s healthcare spending is set to hit US$1 trillion by 2020, according to McKinsey & Co, a major draw for hospital operators such as Singaporebased Raffles Medical Group Ltd , Malaysia’s IHH Healthcare Bhd and U.S.-listed Chindex International Inc. Beijing has been slowly opening the door to overseas money, previously allowing foreign investors to own 70 percent stakes in hospital joint ventures. Full ownership had been allowed in areas including Hong Kong, Macau and Taiwan.

The attraction is clear. There were 11,300 private hospitals in China last year, a massive rise from just 3,200

Taiwan fighters chase China jets a week after U.S. incident Adela Lin

in 2005, according to a Deutsche Bank report in June. It added that a further 8,000 public hospitals were likely to be privatised over the next 5-10 years.

Approvals for foreign-owned hospitals will be overseen by provincial governments, the Ministry of Commerce said, adding that only investors from Macau, Taiwan and Hong Kong can practice traditional Chinese medicine (TCM).

The Ministry of Commerce announcement did not include any requirements for a minimum size of foreign investment.

Chinese hospitals suffer from a lack of funding and a steep gap between urban and rural care, often leading to high rates of bribery and simmering tension between patients

and doctors.

Widespread graft has made it harder for China’s poor to get access to healthcare, despite Beijing ordering hospitals to not turn away patients who need emergency treatment.

The move is also part of sweeping plans to reform the world’s secondlargest economy to give private and foreign investors greater access to enhance efficiency, technological know-how and coverage for basic services such as healthcare.

China had promised earlier this year to relax limits on foreign investment in hospitals on the mainland in a healthcare reform plan for 2014. In May, the government also eased restrictions on foreign investment in joint-venture hospitals.

Reuters

Time to invest in clean cars

Barrel roll

of the purchase tax. Developing newenergy autos is important for spurring innovation, promoting energy savings and reductions in emissions, and will help to drive domestic demand and nurture new avenues of growth, according to the notice.

The government is also considering allowing non-carmakers to manufacture electric vehicles to foster more competition, the China Automotive Technology and Research Center, which helped draft the new initiative, said in June. That would pave the way for the likes of Wanxiang Group Corp., the Chinese auto-parts maker that owns Fisker Automotive, to build electric cars in the country.

China’s central government last month set a target for electric cars to make up at least 30 percent of government vehicle purchases by 2016. The ratio will be raised beyond 2016, when local provinces are required to meet the target.

While sales of electric vehicles in China have lagged behind government targets, BYD, the electric automaker partially owned by Warren Buffett’s Berkshire Hathaway Inc., earlier this month cited favorable government policies for helping the company’s new-energy vehicle sales to jump sixfold during the first half.

On Aug. 19, a Chinese fighter jet in international waters flew within 20 feet of a U.S. Navy surveillance aircraft and did a barrel roll over it in what the White House called a provocation.

The U.S. plane, a Boeing P-8 Poseidon submarine surveillance aircraft, was flying 135 miles (217 kilometers) east of Hainan Island, China’s main submarine base.

The Chinese navy fighter jet carried out a routine identification and verification operation, and U.S. claims that the Chinese action was provocative were “groundless,” Yang Yujun, spokesman for China’s Ministry of National Defense, said in a statement posted on the ministry’s website on Aug. 24.

Yang called on the U.S. to scale back its submarine surveillance in the area to avoid further incidents.

Chinese and U.S. officials will meet this week to discuss a military code of conduct for the region as part of an existing plan to avoid such incidents, China Daily reported, citing China’s defense ministry.

“Under no circumstances and under no rubric of military relations is it acceptable to fly a jet fighter around a reconnaissance airplane the way that was done,” Rear Admiral John Kirby said at briefing yesterday in Washington. “That said, that doesn’t meant that the relationship isn’t still worth pursuing, and we continue to look for avenues to try to increase the dialogue and the cooperation and the understanding and the transparency between our two countries.”

Bloomberg

Bloomberg

China said to consider US$16 billion for electric-vehicle chargers

C

hina is considering providing as much as 100 billion yuan (US$16 billion) in government funding to build electric-vehicle charging facilities and spur demand for clean cars, according to two people familiar with the matter.

The policy will be announced soon, said the people, who asked not to be named because the discussions are private. The people declined to provide further details of the plan such as how long the program would last or whether the chargers would be compatible with cars made by Tesla Motors Inc. Increased state funding would be a tailwind for carmakers coping with consumer concerns over the price, reliability and convenience of electric vehicles. It would also build on efforts by China, the world’s biggest carbon emitter, to fight pollution and cultivate its local EV industry,

which includes BYD Co. and Kandi Technologies Group Inc. Kandi rose 4.5 percent on Tuesday to US$19.09.

“Charging infrastructure and EV growth is a chicken-and- egg situation,” said Ashvin Chotai, managing director of researcher Intelligence Automotive Asia. “It’s got to be a gradual process to scale up both EV sales as well as charging infrastructure. EVs are still not very attractive when compared with conventional-powered cars.”

Two calls to the news office in the Ministry of Finance went unanswered after regular business hours yesterday.

A fax seeking comment from the ministry didn’t get an immediate reply.

More competition Among recent government initiatives, China will exempt newenergy vehicles -- defined as electric cars, plug-in hybrids and fuel-cell vehicles -- from a purchase tax starting next month, and has ordered government departments to buy such vehicles for their official fleets.

Supporting a strategic and emerging industry like new- energy vehicles is a “win-win” for industrial development and environmental protection, the central government said last month in the statement announcing the waiver

T

aiwan sent fighter jets to tail two Chinese military planes that entered the island’s air space, a week after a close encounter between a U.S. and Chinese jet.

“We responded immediately, asking them to leave,” Taiwan Defense Minister Yen Ming said in an interview in Taipei. Taiwan dispatched fighter jets to warn the Chinese surveillance aircraft, each of which entered Taiwan airspace twice yesterday, to leave, David Lo, spokesman for the Ministry of National Defense, said by phone yesterday.

Tensions remain between China and Taiwan even as economic relations have strengthened since Taiwan President Ma Ying-jeou took office in 2008. The two sides have been governed separately since China’s Nationalist government fled across the Taiwan Strait to the island during a civil war with Communist forces.

China still claims Taiwan as part of its territory and has indicated it will take it back by force if necessary.

As China increases its economic and military muscle, encounters with other nations’ militaries have been on the rise. U.S. aircraft had two at least two previous run-ins with Chinese jets this year prior to last week’s encounter, and Japanese and Chinese planes and ships regularly tail one another around disputed islands in the East China Sea.

11

August 28, 2014

Asia

More caution needed on next tax hike Tetsushi Kajimoto

J

apan’s government needs to be more cautious about a coming decision on raising the national sales tax than it was on the previous hike as the economy reaches a “makeor-break point,” a senior government official said yesterday.

Vice Economy Minister Yasutoshi Nishimura told Reuters he was concerned that the drag on consumption from the April 1 tax hike is proving prolonged, saying the government stands ready to roll out fresh fiscal stimulus to support the economy.

Prime Minister Shinzo Abe is to decide around the end of the year whether to proceed with a plan to raise the tax to 10 percent next year after raising it to 8 percent from 5 percent in a bid to curb Japan’s runaway government debt.

Nishimura said he hopes that the Bank of Japan would decide on further monetary easing as appropriate, adding that it is too early to debate exit from its massive monetary stimulus given that deflation has not been conquered yet.

“Our view on the economy’s trend remains unchanged that it is making steady progress toward a 2 percent inflation target, in other words beating

deflation,” Nishimura told Reuters in an interview. “I’m very concerned about private consumption’s trend in July and August ... It seems that the pullback in demand after the sales tax hike is being prolonged.”

The Bank of Japan is likely to keep its bullish inflation outlook even as it cuts its economic growth forecast for this fiscal year in October, suggesting that the BOJ will not ease policy further at least until the end of 2014.

judgment will be needed than the previous one, because raising 5 percentage points over a year and half would deal a considerable blow to the economy,” Nishimura said.

“The economy is at a make-orbreak point on whether it could enter a virtuous cycle and return to sustained growth by overcoming the pullback in demand.”

Tax headwinds The tax hike pushed the economy into its deepest slump in April-June since the March 2011 earthquake and tsunami, as consumption unwound from a surge earlier to avoid the higher tax rate. A recent run of soft data - including factory output and exports - has cast some doubt about the strength of an expected rebound in the current quarter.

Abe is due to decide in December whether to raise the sales tax to 10 percent in October 2015, after assessing the third-quarter GDP data and other indicators.

“Our basic stance is to raise.

But I personally think more careful

KEY POINTS Worry about prolonged impact of April tax hike on consumption Govt ready to roll out stimulus, hopes BOJ to act as appropriate Economy trend intact, making progress towards inflation goal

Nishimura flagged risks such as falling real wages, and sluggish exports despite a weakening of the yen.

Wages generally lag price rises by 1-2 years, and they are expected to increase over the coming year thanks to labour shortages and government efforts to intervene in labour negotiations between unionists and businesses, Nishimura said.

Given sluggish exports caused in part by structural changes - notably a shift of production overseas - Nishimura said Japan needs to pursue domestic demandled growth by encouraging privatesector innovation through the “Third Arrow” of Abe’s reflationary policies dubbed Abenomics.

But that does not mean that the first two arrows - monetary and fiscal stimulus - are no longer needed, Nishimura said, adding that it’s too early to debate exit from the BOJ’s stimulus.

“As for monetary easing ... I hope the BOJ would decide as appropriate ... we will also respond as needed with flexible fiscal policy ... we will always respond with three arrows.”

Reuters

12

August 28, 2014

Asia OCBC to sell United Engineers stake Singapore’s Oversea-Chinese Banking Corporation (OCBC) and its insurance arm said they are in exclusive talks with a company controlled by Thai billionaire Charoen Sirivadhanabhakdi to sell their stake in United Engineers Ltd.OCBC and related companies own around 36 percent of United Engineers, valuing their combined stake at about US$514 million at the stock’s current price. News of the possible deal first broke last week.

A potential sale would also trigger a takeover offer for United Engineers, which has a market value of about US$1.4 billion. Under Singapore rules, a company that acquires a stake of 30 percent in a listed firm must make a mandatory offer for the remaining shares.

S.Korea’s regulator probing local banks South Korea’s anti-trust agency is investigating the country’s four largest commercial banks on suspicion of collusion on interest rates, news agency Yonhap reported yesterday.Yonhap said investigators from the Fair Trade Commission visited Kookmin Bank, Woori Bank, Shinhan Bank and Hana Bank on Tuesday and Wednesday.Earlier, people with knowledge of the matter had told Reuters the regulator was investigating at least four banks for possible interest rate collusion.A FTC spokesman declined comment.

Kookmin, Woori and Hana declined to comment, while a spokesman from Shinhan Bank could not be immediately reached.

Taiwan company eyes Philippine bank Taiwan’s Cathay Financial Holding Co is in talks to acquire a 20 percent stake in medium-sized Philippine lender Rizal Commercial Banking Corp amid plans to expand in Southeast Asia, people with knowledge of the discussions said.The stake could be worth around 14.3 billion pesos (US$327 million) using Rizal’s current share price.Rizal Bank stocks jumped nearly 6 percent yesterday after media reports on Cathay’s interest in the lender, which is named after 19th century national hero Jose Rizal. Taiwan’s financial regulators are encouraging banks to expand in Asia as the home market is over-crowded.

The Financial Supervisory Commission said last week it will ease rules for banks, insurers and brokerages to make acquisitions in Asia.

Turbulence After disasters, stricken Malaysia Airlines staff brace for job cuts

Al-Zaquan Amer Hamzah and Siva Govindasamy

A

s bodies from downed Flight MH17 were brought home last week, a group of Malaysia Airlines flight attendants, in black mourning headscarves contrasting with their pink and turquoise uniforms, sobbed and clung to each other in grief.

The 19,500 staff of Malaysia Airlines (MAS) now face a new ordeal - a quarter of them may lose their jobs at the unprofitable airline, hit by two jet disasters this year. Flight MH370 remains untraced since its disappearance en route from Kuala Lumpur to Beijing in March.

Deep job losses, route cuts and a change of leadership are expected to feature in a restructuring plan being prepared by Malaysia’s government for announcement as early as Thursday, when MAS also reports second-quarter results. Likely the last before being de-listed, the numbers are expected to show plunging ticket sales and heavy losses even before July’s shooting down of MH17 over Ukraine.

As state fund Khazanah Nasional, the majority owner, prepares to take the company private and inject efficiency into the airline, it must tackle crumbling staff morale and win over the powerful main labour union if turnaround efforts are to succeed.

“MAS is suffering from an image problem and a problem with the staff,” said Nik Huslan, former chief pilot at MAS. “They have to find someone the staff can respect and rally behind.”

Even before the lost aircraft tragedies, airline insiders said staff discontent had been growing for years due to strategy U-turns, leadership changes and poor career prospects.

One of the region’s most prestigious and fastest-growing airlines in the

1990s, MAS has steadily fallen behind high-end rivals such as Singapore Airlines and been battered by the rise of Asia’s budget carriers like AirAsia.

The company hasn’t made an annual profit since 2010.

This year’s twin disasters have caused new stresses. A total of 186 MAS flight crew quit between January and July, many of them due to family pressure not to fly after the crashes, MAS says. Over 5,000 MAS staff work as cabin crew or pilots and the airline says the resignation rate has now returned to normal.

About a quarter of MAS staff are likely to lose their jobs under Khazanah’s plan, a source with direct knowledge of the matter told Reuters.

The pill is likely to be sweetened with costly redundancy packages and offers of jobs at other state enterprises.

Union muscle The company has cut fares on most of its routes in an attempt to lure back nervous passengers, though it is too early to gauge its success. It has almost doubled its commission payments to Australia-based travel agents to revive sales there, according to Australian media reports.

Malaysia Airlines executives told Reuters that the tragedies had served as a wake-up call to staff, and even to recalcitrant union bosses, that drastic change could no longer be avoided if the 42-year-old company is to survive.

“There needs to be a change in the mindset, and people are coming around to that,” said one senior executive. “People must realise that they may need to work differently - the crew may have to work longer shifts or they may have shorter layovers.

The engineers may have to work a

bit longer or clear aircraft faster.”

But such demands would also have to be leavened with incentives to encourage staff, or at least a convincing message that they will eventually see benefits, the main union has warned.

“We want to see things in total, and what the long-term plan is,” said Mohd Jabarullah Abdul Kadir, executive secretary of the Malaysia Airlines Employees Union (MASEU), which represents 13,000 of the carrier’s staff.

“If there are retrenchments, they cannot cut staff numbers without basis.”

For Prime Minister Najib Razak, who chairs Khazanah, the plan will be seen as the latest gauge of his credentials as a reformer in Southeast Asia’s third-largest economy.

State firms are used as one tool to reinforce affirmative action policies

Thai military junta head and newly appointed Prime Minister General Prayuth Chan-ocha (R) bowing in front of a portrait of King Bhumibol Adulyadej

editorial council Paulo A. Azevedo, José I. Duarte, Mandy Kuok Founder & Publisher Paulo A. Azevedo | pazevedo@macaubusinessdaily.com Newsdesk João Santos Filipe, Luciana Leitão, Luis Gonçalves, Michael Armstrong, Sara Farr, Stephanie Lai, Óscar Guijarro, Kam Leong GROUP SENIOR ANALYST José I. Duarte Brands & Trends Raquel Dias Creative Director José Manuel Cardoso Designer Francisco Cordeiro WEB & IT Janne Louhikari Contributors James Chu, João Francisco Pinto, José Carlos Matias, Larry So, Pedro Cortés, Ricardo Siu, Rose N. Lai, Zen Udani Photography Carmo Correia, Manuel Cardoso Assistant to the publisher Laurentina da Silva | ltinas@macaubusinessdaily.com office manager Elsa Vong | elsav@macaubusinessdaily.com Agencies Bloomberg, Reuters, AFP, Xinhua, Lusa, Project Syndicate Printed in Macau by Welfare Ltd.

Business Daily is a product of De Ficção – Multimedia Projects Address Block C, Floor 9, Flat H, Edf. Ind. Nam Fong Av. Dr. Francisco Vieira Machado, No. 679, Macau Tel. (853) 2833 1258 / 2870 5909 Fax (853) 2833 1487 editor editor@macaubusinessdaily.com newsroom newsdesk@macaubusinessdaily.com Advertising advertising@macaubusinessdaily.com Subscriptions sub@macaubusinessdaily.com

13

August 28, 2014

Asia

The appeal of luxury

KEY POINTS Up to a quarter may be axed in government restructuring

Gucci’s Philippine retailer profits as IPO nears

Raising morale seen crucial; some flight crew have quit

Ian Sayson and Clarissa Batino

New CEO needs charisma, communication skill - ex-staff

S

Royal Malay Regiment army personnel carry a coffin with a victim of the MH17 plane crash at the Kuala Lumpur International airport in Sepang

favouring majority ethnic Malays over other races and are heavily intertwined with Najib’s long-ruling United Malays National Organisation (UMNO). The main union at MAS has close ties to UMNO - and has successfully resisted previous restructuring attempts.

‘Same circus, different clowns’ Crew who have worked at the airline recently complained about a lack of opportunities to progress in their careers. Cabin crew are typically offered five-year contracts, they said, after which they start from scratch with a new five-year deal.

“There’s always uncertainty for your career because of this arrangement,” said one former crew

member, who was with the airline for nearly three decades from the mid1980s and recalls the “exciting” early days of the airline’s rapid expansion.

Huslan, the former chief pilot, blamed “poor talent management” for high attrition rates among pilots and engineers. “They leave for better prospects because they don’t see it in MAS. This has been on the rise,” he said.

To reverse that, the most vital ingredient of the turnaround plan may be a new chief executive who can effectively communicate the new strategy, execute the plan, and win over doubters.

The sober demeanour of current chief executive Ahmad Jauhari Yahya, who relaxes by competing in triathlons, is a stark contrast to

Thailand in trouble Thai exports unexpectedly fall in July y/y, imports drop a 13th month

Orathai Sriring and Kitiphong Thaichareon

T

hailand’s exports unexpectedly slipped in July, a reminder that the military government faces a tough task revving up growth because a key pillar of the economy remains weak.

Exports declined 0.85 percent from a year earlier, Commerce Ministry data showed on Wednesday, compared with the forecast of a 4.0 percent increase in a Reuters poll, and against June’s 3.9 percent growth.

Imports dropped for a 13th straight month, though the decline of 2.86 percent was much smaller than June’s 14 percent slump. The Reuters poll forecast a 9.1 percent fall in July.

Exports, which account for about 60 percent of the Thai economy,

have long been weak. The annual increase in June, the first full month after the army seized power to end a political crisis, had raised hopes that the second half could bring a significant improvement.

In the first seven months of 2014, exports have edged down 0.42 percent from a year earlier. The government continues to forecast full-year growth of 3.5 percent.

Many of Thailand’s imports are materials which are assembled into completed products and shipped out again, so the steady drop could mean a continuing struggle to raise shipments.

For the first time in four months, exports rose in June, the first full month that the country came under

the brash showmanship of Malaysia’s most famous airline boss, Tony Fernandes of budget carrier AirAsia.

“Airlines are about image,” said Huslan. “If you cannot carry an image, well that’s the end of the story for you. You cannot have a humble and shy CEO.” Others say previous changes in the carrier’s management have failed to wipe out inefficiencies, while breeding scepticism among staff that new leadership can bring lasting improvements.

“Every time somebody new steps in there’s a pretence of change,” said the former MAS cabin crew member.

“We have a famous saying among the staff: ‘It’s the same circus, with different clowns’.”

Reuters

military rule.

In July, Thailand recorded a trade deficit of US$1.1 billion, compared with June’s US$1.79 billion surplus.

Also yesterday, Bank of Thailand Governor Prasarn Trairatvorakul said the central bank’s forecast of 1.5 percent growth this year is still “highly” possible.

Thailand averted a recession by having slight on-quarter growth in April-June after shrinkage of a revised 1.9 percent in the first three months of 2014.

KEY POINTS Customs-cleared exports -0.85 pct y/y in July, poll expected +4.0 pct July imports -2.86 pct y/y vs poll forecast of -9.1 percent Central bank gov says 1.5 pct GDP growth in 2014 ‘highly’ possible

SI Group Inc., the Philippine retailer of Hermes shoes and Gucci handbags, said rising incomes will accelerate profit growth this year as it prepares for an initial public offering.

SSI, which retails more than 100 brands through 655 stores, expects to post record earnings this year amid record overseas remittances and a booming outsourcing industry, President Anthony T. Huang said in an interview. SSI, based in Manila, plans to open as many as 188 outlets this year and 115 more in 2015. The company and its stockholders target to sell as much as 12.4 billion pesos (US$283 million) of shares in an IPO in October, “We’re at this incredible point in our economic life cycle where consumerism is really going strong,” Huang, 43, said recently. “Our historical target market has always been the upper market segment that continues to thrive as the economy continues to improve.”

Huang is betting demand for luxury products will climb further in a nation projected to remain among the world’s fastest-growing economies through 2016. SSI’s first-half profit jumped 65 percent, spurred by consumer spending that expanded more than 5 percent for an 11th quarter in the JanuaryMarch period.

“It’s in a segment that is expected to do well in a growing economy and when incomes are rising,” said Allan Yu, first vice president at Metropolitan Bank & Trust Co. in Manila with US$7.5 billion in assets under management. “The luxury sector is said to be able to hold on its own even when the economy isn’t good because high-end consumers have high discretionary income.”

Per-capita income The Philippines’ per-capita income increased to US$2,765 last year from US$1,832 in 2009, according to World Bank data.

The US$272 billion economy probably expanded 6.1 percent in the second quarter, according to the median estimate of 22 economists surveyed by Bloomberg. The government is due to announce the data at 10 a.m. today. Gross domestic product growth unexpectedly slowed to 5.7 percent in the first quarter, the weakest pace since 2011.

Consumer spending in the Philippines rose 5.8 percent in the quarter ended March. Consumption accounts for 84 percent of the Asian economy, exceeding Indonesia’s 68 percent and Thailand’s 67 percent, according to World Bank data.

The number of rich is also rising.

The country will have 272 people with US$30 million or more in assets excluding their principal residence by 2023, a 59 percent jump from last year, according to a Knight Frank LLP report in March.

Bloomberg

14

August 28, 2014

International

Stronger dollar

KEY POINTS

13-month high as euro struggles on ECB easing expectations

Dollar index hits fresh 13-month high

Ian Chua and Masayuki Kitano

Upbeat U.S. data in contrast to dour euro zone outlook

T

he dollar hit a 13-month peak against a basket of major currencies yesterday, with the euro still struggling amid expectations of further policy easing from the European Central Bank.

Data on Tuesday showed orders for U.S.-manufactured durable goods posted their biggest gain on record in July, while consumer confidence rose in August to its highest level since October 2007.

The eye-catching U.S. data, albeit driven by a huge jump in aircraft orders, only served to bolster long dollar/short euro positions - a trade embraced in earnest after recent dovish comments from European Central Bank President Mario Draghi.

“Clearly markets are increasingly digesting the comments of Draghi... and interpreting it to mean that there’s a risk of some sort of action in the near term, in the next meeting

Ooh La La, it’s expensive!

Decline of French language could cost half a million jobs –report

A

decline in the number of people worldwide who speak French could cost France 120,000 jobs by 2020 and half a million by 2050, due to missed economic opportunities, a report commissioned

by President Francois Hollande said on Tuesday.

“Unless there is a major effort, we could witness a retreat (for French speaking),” the report’s author, veteran economist Jacques Attali, said in a foreword.

“This decline could lead to a loss of market share for French companies, a collapse in the use of continental law to the benefit of the Anglo-Saxon business law, and a decline in attractiveness for universities, culture and products from France and in French.”

Once the international language of royal courts and diplomacy, French has lost ground to English in recent decades, but the report said the right policies - in education and industry could increase the number of French speakers from an estimated 230 million today to as many as 770 million by 2050.

The number could decline to fewer than 200 million by 2050 if unchecked, it said.

Hollande had asked Attali, a former adviser to President Francois Mitterrand, to

or so,” said Mitul Kotecha, head of FX strategy Asia-Pacific for Barclays in Singapore, referring to the possibility of further monetary easing by the ECB. The euro fell to as low as $1.31525 on trading platform EBS earlier yesterday, its lowest in almost a year, bringing into play the Sept.

6 trough near US$1.3104. It last traded near US$1.3166, steady on the day.

Euro-selling against currencies such as the Canadian dollar and the Australian dollar helped drag the common currency lower, said Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore.

There was also some euro-selling aimed at taking out option barriers at US$1.3150, but there were also bids for the euro at that level, Halley said.

Earlier yesterday, the euro touched its lowest level in nearly 10 months versus the Australian dollar

find ways to harness the French language’s global reach in ways that might drive economic growth, which was zero in the first half of 2014.

Economic stagnation and record unemployment are behind Hollande’s decision this week to appoint his third government team in two years.

Attali’s report cited research that found countries with linguistic connections do 65 percent more business with each other than those that do not.

There are 37 ‘francophone’ countries where French is either an official language or is spoken by at least one in five of the population - making it an “enormous and insufficiently exploited” economic resource, the report said.

Adding data from a further 41 nations with big French-speaking minorities, such as Israel, or with neighbourly links to francophone countries, such as Nigeria, the report put the number of French speakers worldwide at about 230 million, including 130 million for whom it is their main language.

Euro hits lowest in about a year, euro/Aussie sets 10-month low ECB easing expectations weigh on euro

at A$1.4109 . Against the Canadian dollar, the euro set a nine-month low of C$1.4365.

With Draghi having rekindled prospects of more monetary stimulus, all eyes are on the ECB’s policy meeting on Sept. 4.

“We now expect the ECB to take some further policy steps at next week’s meeting,” analysts at JPMorgan wrote in a note to clients.

“While we still do not expect the

ECB to actually deliver a sovereign QE programme, we think that the likelihood has increased substantially and that things could move very quickly.”

The greenback took a breather versus many other currencies after its recent run higher. Against the yen, the dollar eased 0.1 percent to 103.96 yen, staying below Monday’s seven-month peak of 104.49 yen.

Apple planning 12.9-inch iPad for 2015

Reuters

A

pple Inc is preparing to roll out a larger, 12.9-inch version of its iPad for 2015, with production set to begin in the first quarter of next year, Bloomberg cited people with knowledge of the matter as saying.

The report comes as Apple struggles with declining sales of its 10-inch and 7.9-inch tablets, which are faltering as people replace iPads less frequently than expected and larger smartphones made by Samsung Electronics

Co Ltd and other rivals encroach upon sales.

Apple has been working with its suppliers for over a year on larger touch-screen devices, Bloomberg cited the sources as saying.

It is expected to introduce larger versions of its 4-inch iPhone next month, although the company has not publicized plans for its most important device.

Apple was not immediately available for comment.

Reuters

15

August 28, 2014

Opinion Business

wires

Leading reports from Asia’s best business newspapers

Europe’s fitful financial integration

BANGKOK POST Despite a sharp fall in gold prices since last year, the precious metal is expected to regain its sheen in the latter half of the decade on the back of demand from China, India and central banks, says American Precious Metals Advisors Inc. The Chinese and Indians have traditionally collected gold, and once the per capita income of those countries rises, their demand for gold will increase, he said, adding that central banks’ higher demand for gold will increase, he said, adding that central banks’ higher demand for gold assets in their foreign reserves could also lend support to the precious metal’s price in the long run.

Howard Davies

Former Chairman of Britain’s Financial Services Authority, Deputy Governor of the Bank of England, and Director of the London School of Economics, is a professor at SciencesPo in Paris

CHINA DAILY Chinese police have seized over 30,000 tons of tainted chicken feet, common on restaurant menus in China, in the latest food scandal to hit the country. Authorities have detained 38 people involved in the sale of the chicken feet in provinces including the eastern province of Zhejiang, the official Xinhua news agency reported on Tuesday. The arrests followed raids on nine supplier factories in nearby Jiangsu, Anhui, Henan and Guangdong provinces, Xinhua said, adding police found that excess hydrogen peroxide was being added to the meat.

THE STRAITS TIMES Many listed companies need to look at beefing up their financial reporting, Senior Minister of State for Finance and Transport Josephine Teo said on Wednesday. Mrs Teo noted that a study of 257 listed companies with a total market capitalisation of about $230 billion found that only about half of them had prepared their accounts well enough such that their accounts needed just a few adjustments by auditors.

Even then, the total audit adjustments that they needed came up to a whopping $34 billion.

MANILA BULLETIN The Philippine economy will accelerate in the second-half of the year, First Metro Investment Corporation (FMIC) and University of Asia and the Pacific (UA&P) Capital Markets Research revealed. According to the report, the country’s economy will be driven by the “detailed” recovery plan for areas hit by super typhoon in November last year. “With clearer signs of a recovery in second quarter and detailed reconstruction plans for typhoon Yolanda-hit areas ready for implementation, we are quite confident that the economy will accelerate back towards the 7% growth path in the second-semester,” the report said.

T

he well-publicized troubles of Portugal’s Banco Espírito Santo this summer have reminded us that the eurozone’s financial problems are by no means resolved. There are, no doubt, idiosyncratic factors behind the bank’s problems, stemming from its exposure to other parts of the Espírito Santo family’s empire. But when the bank announced a first-half loss of €3.6 billion (US$4.7 billion), the sudden collapse of confidence was alarming, and nervous investors are asking whether there are similar time bombs ticking elsewhere.

All eyes are now on te European Central Bank’s asset quality review, due to be completed in the next couple of months.

The AQR is the key element in a “comprehensive assessment” of Europe’s banks before the ECB formally takes on supervisory responsibility for more than 80% of the eurozone banking system in November.

The ECB, quite sensibly, wants all of the potential horrors to be visible before the takeover – so that it cannot be blamed. With national supervisors, who are often inclined to present a rosy picture of their countries’ institutions, no longer in charge, we can hope that the assessment will be more robust than the earlier stress tests carried out under the auspices of the European Banking Authority (EBA). Those tests, unlike their equivalent in the United States, failed to rebuild confidence. Several banks that passed with flying colors were soon obliged to raise new capital.

But the creation of the European banking union has not been the only important change to Europe’s financial regulation since the crisis. The events of 2007-2009 made it clear that there were serious gaps and inconsistencies that needed to be addressed. So, following the recommendations of a report

prepared in 2009 by former IMF Managing Director Jacques de Larosière, the European Commission created three new pan-European authorities charged with ensuring “consistent application” of European directives.

The deal was done with a large helping of political fudge: the three biggest European Union economies – the United Kingdom, France, and Germany – were persuaded to cede some control to the center, but only if each could host an authority. Thus, the EBA was established in London, the European Securities and Markets Authority (ESMA) is located in Paris, and the European Insurance and Occupational Pensions Authority (EIOPA) found a home in Frankfurt.

Collectively, they are known as the ESAs (European supervisory authorities).

The road to pan-European regulation over the last two decades has been winding and rocky. In the early stages, it was assumed that the single financial market could work on the basis of mutual recognition: each country would accept the others’ regulation as broadly equivalent to its own and allow cross-border business to proceed on that basis. That proved inadequate, as standards and rules remained very different from country to country, and gave way to an approach based on minimum harmonization, whereby core rules were to be the same across Europe, but local variations and additions remained permissible.

When that, too, proved ineffective at promoting competition, as countries used their national rules to block new entrants, the emphasis switched to maximum harmonization, with directives spelling out exactly how local rules must be applied across the EU. That caused great concern in the City of London, but has been grudgingly accepted. Since the global financial crisis, London

The well-publicized troubles of Portugal’s Banco Espírito Santo this summer have reminded us that the eurozone’s financial problems are by no means resolved

has become less able to argue that it is special and must be left alone.

Now, with the establishment of central regulatory authorities, the EU has moved to the next stage of financial integration.

But, so far, these agencies’ responsibilities are very limited.

ESMA supervises rating agencies directly; but, outside banking, national authorities retain their dayto-day oversight responsibilities.

Integration-minded officials at the European Commission clearly do not regard this as a satisfactory end-state. So they commissioned a thoughtful review of the three ESAs from Mazars, an accounting firm, which was published earlier this year. The verdict, roughly, was “so far, so good.” Now the Commission has followed up by publishing its own assessment.

The Commission was perhaps unlikely to be hypercritical of its own creations, and it is not. Its

report maintains that the ESAs have “quickly established wellfunctioning organizations aimed at contributing to restoring confidence in the financial sector,” and that market participants seem broadly satisfied with their work.

But the report’s authors believe that there is a need to expand the current mandates, develop a comprehensive approach to consumer protection, and reduce further the influence of national authorities. The ESAs should have more power to impose their will in the interests of the EU as a whole. Their chairs should have wider discretion to act on their own initiative. The ESAs also need more money, which probably can come from fees levied on financial firms, and consideration should be given to merging them in a single location, presumably Brussels.

The general direction is clear.

Unless the new internal market commissioner takes a different view, the European Commission plans to move further along the road to genuine pan-European regulation. The report now goes to the European Parliament, which can be expected to push harder for more integration, as it usually does.

A single authority, or perhaps two or three working closely together, is a logical arrangement for the eurozone, and perhaps for the entire EU financial market.

It would usefully complement the ECB’s new supervisory role.

But will London fall into line this time?

The British government, after all, has embarked on a path that runs in precisely the opposite direction – reducing the functions of central bodies and repatriating powers to national capitals. Given the central role of London in EU financial markets, and its political sensitivity in the UK, there is bound to be trouble ahead.

The Project Syndicate 2014

16

August 28, 2014

Closing

A bite on Canada’s fast food Burger King buys Tim Hortons for about US$11 billion Leslie Patton and Craig Giammona

B

urger King Worldwide Inc. agreed to acquire Tim Hortons Inc. for about C$12.5 billion (US$11.4 billion) in a deal that creates the third-largest fast-food company and moves its headquarters to Canada.

Tim Hortons investors will receive C$65.50 in cash and 0.8025 a share of the combined entity for each share they own, the companies said in a statement yesterday. The transaction, which is backed in part by Warren Buffett’s Berkshire Hathaway Inc., values each Tim Hortons share at C$94.05, based on Burger King’s closing price on Tuesday.

The purchase brings Burger King the biggest seller of coffee and doughnuts in Canada, which it can use to grow internationally. The deal also lets the burger chain push into the grocery business by selling packaged coffees at supermarkets in North America.

The combined business would create a fast-food network with US$23 billion in sales, including franchisees, and more than 18,000 restaurants in

100 countries.

“There’s value to be extracted and there are international growth opportunities,” said Will Slabaugh, an analyst at Stephens Inc. in Little Rock, Arkansas. “I think it’s going to be a well-received deal.”

The acquisition also moves the merged entity’s global headquarters to Canada, potentially taking advantage of lower corporate taxes. When the companies disclosed the talks on Aug. 24, it heightened debate over American businesses shifting to other countries in search of lower tax bills. President Barack Obama criticized the practice in July, and his aides said that the administration would take action to stop the trend.

3G capital 3G Capital, the investment firm that owns about 70 percent of Burger King, will convert that stake into roughly 51 percent of the new company. Berkshire Hathaway has committed US$3 billion of preferred equity financing, according to the statement. Berkshire will

Attack on shadow banking

earn 9 percent annual interest on its investment, which allows the company to deepen its relationship with 3G. Omaha, Nebraska-based Berkshire won’t participate in managing the restaurant business.

3G, which was co-founded

by Brazilian billionaire Jorge Paulo Lemann, joined Buffett last year in a US$23.3 billion takeover of HJ Heinz Co. Buffett bought half the ketchup maker’s common stock for about US$4.25 billion and invested US$8 billion for preferred shares that pay a 9 percent annual dividend and gave Berkshire warrants to buy an additional 5 percent stake.

Lemann’s firm is known for making cost cuts at the businesses it acquires, including Heinz. After 3G’s takeover, the ketchup company embarked on a plan to fire more than 1,000 workers and close plants in North America, though a group of Ontario investors said in March that they would keep open a Canadian tomato-juice factory.

“3G does a magnificent job of running businesses,” Buffett

said in May at his company’s annual meeting in Omaha.

“We’re very likely to partner with them, perhaps on some things that are very large.”

Burger King, the secondlargest U.S. burger chain, has struggled to boost North American same-store sales and compete with McDonald’s Corp.’s breakfast fare. Buying Tim Hortons would give Burger King a coffee brand that’s coveted by Canadians, as well as some Americans.

There are no current plans to combine brands or sell Tim Hortons coffee at Burger King, the companies’ executives said today.

Burger King plans to help expand Tim Hortons restaurants in the 98 countries where it operates.

There may be supply-chain, marketing and administrative cost savings as well.

Separate chains Within the new parent company, the two chains will remain stand-alone businesses and maintain their current headquarters. Burger King is

Google buys Zync to boost cloud tools

C

hina’s banking regulator is preparing rules aimed at making commercial lenders get a tight grip over their off-balance sheet financing activities, the latest move by authorities to try to rein in shadow banking.

The government has been trying to control off-balance sheet lending, which has jumped since 2010. It is worried that funds are being used to roll over bad loans as well as to worsen assetprice bubbles in real estate and create industrial overcapacity. Under the draft rules, published on the regulator’s website yesterday, banks will need to “comprehensively” supervise risks stemming from financing activities though securities firms, insurers and trust companies in the form of entrusted loans or wealth management products (WMP).

Banks will also need to apply the same risk control practices for each of their subsidiaries, the draft rules said. Off-balance sheet assets will need to be categorised by levels of risk and capital cost, they added. Shadow banking may involve up to 27 trillion yuan (US$4.39 trillion) of assets, which would be equivalent to one-fifth of the country’s formal banking sector, according to a report by the Chinese Academy of Social Sciences.

Reuters

run from Miami, while Tim Hortons is based in the Toronto suburb of Oakville.

Daniel Schwartz, Burger King’s chief executive officer, will become group CEO of the merged company, as well as remaining head of the fast-food chain. Tim Hortons CEO Marc Caira, meanwhile, will continue to run that chain, which has about 4,500 locations. Alex Behring, a managing partner at 3G who has served as Burger King’s executive chairman, will continue in that role for the new global company.

Schwartz said he will spend the majority of his time in Canada and still have a desk in Miami. The new global headquarters of the two companies will house functions such as accounting, legal, human resources and corporate strategy. For now, no one at either company will be losing their jobs, Schwartz said in an interview.

“We don’t have any planned layoffs,” Schwartz said. “But we do expect there to be some overlap and some synergies with these two companies.”

Bloomberg

IMF Lagarde under investigation

G

oogle Inc. is acquiring Zync Inc., a visual-effects software company for film and TV studios as the biggest Web-search service expands its cloud-based offerings.

The Boston-based startup’s Zync Render technology lets studios create enhanced scenes and graphics for movies -- such as such as “Star Trek Into Darkness” and “Looper” -- via the Internet. Terms of the deal weren’t disclosed.

“Creating amazing special effects requires a skilled team of visual artists and designers, backed by a highly powerful infrastructure to render scenes,” Google said on its website.

“Many studios, however, don’t have the resources or desire to create an in-house rendering farm, or they need to burst past their existing capacity.”

Zync’s graphics-rendering tools have been used in hundreds of commercials and more than a dozen feature films, the company said. The startup provides access to computing power and digital storage using cloud computing and was founded in 2011, according to its LinkedIn profile.

Bloomberg

I

MF chief Christine Lagarde has been placed under formal investigation by French magistrates yesterday for her alleged role in a long-running political fraud case, a source close to the former French finance minister said.

The source said Lagarde, who earlier was questioned by magistrates in Paris under her existing status as a witness, considered their decision to investigate her for alleged “negligence” was unfounded and would appeal it. A French judiciary source also confirmed the step.

In French law, magistrates place someone under formal investigation when they believe there are indications of wrongdoing, but that does not always lead to a trial.

The inquiry into tycoon Bernard Tapie has embroiled several of former president Nicolas Sarkozy’s cabinet members including Lagarde.

Tapie - who supported Sarkozy in the last two elections - was awarded 403 million euros in a 2008 arbitration payment under Sarkozy’s presidency to settle a dispute with the now defunct, state-owned bank Credit Lyonnais over a 1993 share sale. Lagarde was finance minister at the time.

Reuters