Macau Business Daily, Jan 9, 2015 by Business Daily

MOP 6.00 Closing editor: Luís Gonçalves

he property bubble knows no boundaries. Residences, offices and shops have all bowed to skyrocketing price tags. Now parking space is testing price limits with transactions reaching a dizzying MOP2 million-plus. Prices soared 47 pct last year, says local operator CarparKing. With a 20 pct increase on the horizon. Or 70 pct in two years. Transactions dropped 60 pct in 2014 due to gov’t anti-speculation measures. But cars outnumber parking spaces in Macau PAGE

Year III

Number 704 Friday January 9, 2015

Publisher: Paulo A. Azevedo

Park ‘n ride... to the bank

Taking too much interest

Sportswear to outpace casinos as Chinese customers earn more PAGE 7

The scams keep coming. Judiciary Police and the Monetary Authority have cracked down on an unauthorised local banking operation. At least 15 individuals sunk their savings into a 12 pct interest rate scheme. The crime carries a possible two-year prison term. Two mainlanders have been detained

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Sales of non-local properties not supervised by local law PAGE 5

Social Security Fund contribution to be raised to MOP90 PAGE 2

HSI - Movers

Blaze breaks out on Strip

January 8

Name

Another work site accident on the Strip. A blaze broke out yesterday on the roof of Galaxy Macau Phase II in Cotai. Galaxy Entertainment Group said it will not disrupt construction progress. Or the mid-2015 opening. The Labour Affairs Bureau told Business Daily it would continue to look into the incident. Construction continues

www.macaubusinessdaily.com

PAGE

Takes two to tango Xi Jinping continues his whirlwind courtship of Latin America. Saying he will invest a quarter of a trillion in its countries. China is becoming progressively more important in the economy of the region

Losing steam

ITC is already owner of 17 pct of Louis XIII | PAGE 6

Lenovo Group Ltd

4.03

Tingyi Cayman Island

2.51

Hengan International

2.46

China Resources Powe

2.46

PetroChina Co Ltd

2.45

Link REIT/The

-0.82

China Shenhua Energy

-1.06

Galaxy Entertainment

-1.56

China Overseas Land

-2.62

China Resources Land

-2.67

Source: Bloomberg

Perception is all. Consumers are slightly losing confidence in the local economy, according to the Consumer Confidence Index. The Macau University of Science and Technology (MUST) says there is good news in the other sub-indices, though. Residents give the thumbs up to employment conditions, living standards, housing purchase and stock investment. Plus the local economy in the coming months

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January 9, 2015

Macau Police find alleged illegal workers at Harbourview The city’s Public Security Police said yesterday that they had discovered the alleged illegal employment of 15 workers in the Harbourview Hotel, the first of three new hotels on the Macau Fisherman’s Wharf waterfront. The 15 workers, who came from mainland China and Hong Kong, were employed for electrical works and furnishings at the Harbourview hotel, police say. The hotel did not respond to our enquiry about the likely impact of the alleged illegal employment on the operational date of the hotel.

Galaxy Macau Phase II construction progress unaffected by fire An investment analyst suggests the fire is unlikely to delay the scheduled opening of Galaxy Macau Phase II by mid-2015 Stephanie Lai

sw.lai@macaubusinessdaily.com

blaze that broke out yesterday morning on the roof of the construction site of Galaxy Macau Phase II in Cotai resulted in the evacuation of over 6,000 workers, although no-one was injured – a work site incident that would not affect construction progress, casino operator Galaxy Entertainment Group said. Macau’s Fire Department said it received a report at 11:05 am yesterday of a fire breaking out on the roof of the as yet uncompleted 36-storey building on the Galaxy Macau Phase II site as workers were carrying out welding work. The fire, which was entirely extinguished by 11:45 am, was caused by sparks from welding works that set ablaze the construction materials on the roof of the building, a spokesman for the Fire Department noted. The department also said that an initial investigation found nothing suspicious. The Labour Affairs Bureau told Business Daily

Proposed social security hike to MOP90

he latest proposal by the Social Security Fund indicates that the contribution paid by employers and employees will be raised to MOP90 from the current MOP45 a month, said Ip Peng Kin, president of

the administrative committee of the Social Security Fund (FSS). The ratio of the contribution will remain as 2:1, which means employers would pay MOP60 while employees would pay MOP30 if the proposal were passed.

The FSS president said the proposal is still under discussion by the Standing Committee for the Co-ordination of Social Affairs. He expects that representatives from both employers and employees

that it has not yet ordered any halt to the construction works on the Phase II site, adding that it would continue to look into the incident. In an email reply to us, the Hong Kong-listed Galaxy Entertainment Group said the fire would not affect the construction progress of Phase II, slated to open mid-year. “GEG is working closely with relevant parties on further investigation related to the fire. This incident will not affect the construction progress of Phase II,” the company said. An investment analyst with Deutsche Bank AG in Hong Kong released a note following the incident yesterday saying that the fire is unlikely to cause any delay to Phase II. “From our observations, the fire was confined to the rooftop of the hotel tower under construction, and some of the outer walls on the top 2-3 floors were blackened”, Karen Tang from Deutsche Bank AG wrote.

“As the main structure of the building, including the gaming floor, most of the hotel tower and retail podium, seemed unaffected, we believe today’s fire will not delay the opening of Galaxy Macau Phase II, which is scheduled to be in mid-2015 . . . The risk is if the government asks construction to be halted for safety standard checks. But previous cases suggest this is only likely when someone is injured”. Galaxy Entertainment stocks dropped 1.56 per cent to close at HK$41 (US$5.3) per share on the Hong Kong Stock Exchange yesterday. The Galaxy fire is the second work site related accident of the week: on Monday, on Sands China’s site for The Parisian, a construction worker accidentally fell from a 10-metre high platform, sustaining a serious head injury. Work on that part of the construction area was halted, with the government requesting the contractor to improve safety checks.

would agree on the proposal within this month so that the plan can be implemented in the second half of this year. Following the hike in social security dues pensions may also be adjust upwards, said Ip Peng Kin when talking to reporters on Wednesday on the sidelines of a public event. Ip Peng Kin said that the government has spent around MOP2.5 billion in giving out pensions and subsidies but only MOP400 million was contributed by employers and employees and the fee

for employing non-resident workers. Mr. Ip said with more people becoming eligible to claim a pension, without other source of income, a great threat would be posed to the Social Security Fund, which may only last another 50 years if dues are not adjusted. Currently, the major financial source of the FSS is from the government and gaming tax appropriation. Employers and employees’ dues only account for a small proportion. J.K.

Business Daily | 3

January 9, 2015

Macau One minute’s silence for Charlie Hebdo The Consulate General of France for Hong Kong and Macau observed one minute’s silence at midday, as did the French Embassy in Beijing. The Foreign Correspondents’ Club in Hong Kong held a photoshoot yesterday of members and supporters of a free press holding up ‘Je suis Charlie’ signs. The Overseas French Association of Hong Kong held a gathering yesterday evening in the Wan Chai commercial and entertainment district to pay tribute to the victims, show solidarity against extremism. and express grief after the killing of 12 people at the Paris headquarters of satirical weekly Charlie Hebdo yesterday.

Car park prices expected to increase 20pct in 2015 The average selling price of a car park has increased 47 per cent but transaction volumes dropped 60 per cent in 2014, according to a property agent. The industry expects the market to pick up around Chinese New Year Joanne Kuai

joannekuai@macaubusinessdaily.com

more cautious stance. Some property owners even revised their prices 5 to 10 per cent down at the end of the year. The dropping transaction volume was also caused by the special stamp duty, which is 20 per cent of the transaction price if sold on within a year, and 10 per cent if sold on within two years. In October 2012, the administration extended its special stamp duty on homes to sales of commercial units and car parks. These measures led to an 80 per cent increase in car park prices in 2013. Data from the Statistics and Census Service shows that the average selling price of a parking space in the third quarter of 2014 was MOP1.29 million, with the transaction volume 709. In 2013, on average, 400 transactions of car park spaces took place every month, with the average selling price MOP1.06 million.

Increasing rent Last year, rent increased 35 per cent on average, with rent in areas

here is no brake on car park costs. Although the transaction volume dropped last year, the average selling price of a car park has increased 47 per cent, said Chan Lik Li, general manager of CarparKing Co. Ltd., a company specialising in letting and selling car parks. He also expects the market to be more active around Lunar New Year, with car park selling prices increasing 20 per cent in 2015. Mr. Chan said that in the first half of last year, car park prices increased steadily but the market experienced some turbulence in the second half. Generally, 2014 car park prices posted a better performance than 2013. Transaction records from CarparKing indicate that the average transaction value of car parks last year grew 47 per cent. In NAPE district, prices jumped nearly 71 per cent. A single car park space cost MOP2.05 million in a Taipa residential project by the end of last year versus MOP1.3 million earlier

such as ZAPA surging almost 50 per cent, according to CarparKing. The increasing rent is basically due to limited supply. Mr. Chan also said that there is still a gap between the selling price of a car park and its rent as the selling price of a car park is high but the rent is not that [relatively] expensive. However, many Macau buyers are buying car parks for their own use rather than investment. Many fear it is hard to find an ideal car park space for rent and the lease is usually signed for one year, which means the ‘tenant’ faces the possibility of a rent increase every year or even losing the spot. He added that car parks are rare property resources in the city and that there are many more cars than available car parks. Official data shows that there are around 13,800 public car parks. But there is no available data on private car parks. There were more than 114,000 licensed cars in the city as of November 2014, some 5.7 per cent more than a year earlier. The new border crossing arrangement has also impacted the car park market. The announcement of 24-hour border crossing has led to car park prices in Zhuhai increasing. Mr. Chan cited an example of the Xiuling City property project, where one car park space cost 280,000 yuan last year compared to 160,000 the year before. A parking spot near Gongbei currently costs around 220,000 yuan. More than half of the buyers are Macau residents. Mr. Chan believes, however, that the more convenient border crossing will negatively impact on the Taipa car park market since many non-resident workers living in the area will choose to move to Zhuhai, thus affecting the property market in Taipa where many nonresident workers reside.

Government of the Macao Special Administrative Region MACAU GOVERNMENT TOURIST OFFICE last year, according to CarParking. The price in a commercial centre in NAPE is about MOP1.97 million compared to MOP1.15 million earlier last year. Mr. Chan explained that the price level in the two districts was “relatively lower” in the past than places like Nam Van. Thus, these districts experienced proportionally bigger surges last year. But the car park prices peaked in the densely populated Areia Preta district at between MOP1.8 million and MOP2.6 million patacas last year. While prices surged last year, the number of car parking transactions dropped by as much as 60 per cent. The market was relatively active in the first half of 2014. But since the middle of the year, the flattening property market in Hong Kong and tough measures curbing speculation in the housing market in Mainland China cast a cloud on the car park market in Macau. The continuous drop in gaming revenue has also resulted in investors adopting a

NOTICE The Macau Government Tourist Office hereby announces an invitation to tender for the “Macau Tourism Industry Development Master Plan Service Provision”, in accordance with the approval of the Secretary for Social Affairs and Culture dated 5th of December of 2014. From the date of publication of the present notice, interested bidders may visit the Macau Government Tourist Office Reception Counter, located in Alameda Dr. Carlos d’ Assumpção, no. 335-341, “Hotline” Building, 12th floor, Macau, to view the Tender Program and Terms and Conditions of the Tender within the working hours, and pay MOP 500.00 (five hundred patacas) to obtain the copies. For any further enquiries, please visit the Macau Government Tourist Office website (http://industry.macautourism. gov.mo) to submit your enquiries starting from the day of publication of the present notice until 10 days before the tender submission deadline. All replies will be posted on the same website. The maximum price limit for the tender is MOP 20,000,000.00 (twenty million patacas). Criteria for tender evaluation and their respective percentages are as follow: - Appreciation of the planning task (35%); - Planning methods and programme of work of the phases (20%); - Price (15%); - Experience (30%). Bidders must submit the tender written in Chinese, Portuguese or English, within the working hours by 17:45 hours on 2nd of March of 2015, to the Macau Government Tourist Office Reception Counter, located in Alameda Dr. Carlos d’Assumpção, no. 335-341, “Hotline” Building, 12th floor in Macau and shall submit the provisional guarantee fee of MOP 400,000.00 (four hundred thousand patacas). The provisional guarantee fee shall be paid by: 1) cash deposit to the account of “Tourism Fund” at Banco Nacional Ultramarino of Macau; 2) bank guarantee; 3) cash, cashier’s order or mark good cheque deposit directly to the Macau Government Tourist Office, cashier’s order or mark good cheque should be made payable to “Tourism Fund”; 4) wire transfer directly to the account of Tourism Fund, at Banco Nacional Ultramarino of Macau (account no. 8003911119). The tender opening session will be held in the Auditorium of the Macau Government Tourist Office, located in Alameda Dr. Carlos d’Assumpção, no. 335-341, “Hotline” Building, 14th floor in Macau, at 10:00 hours on 3rd of March of 2015. In case of the services of the Macau Government Tourist Office are suspended owing to typhoon or force majeure, the scheduled closing date and time for submission of tender, as well as the date and time for opening the tender shall be extended to the next working day that follows immediately. According to the article n.º 27 of Decree-Law n.º 63/85/M, of 6th July, the legal representatives of the Bidder should be present during the tender opening session for any complaints and/or to explain any doubts regarding their respective tender.

Macau Government Tourist Office, on 18th of December of 2014. Director Maria Helena de Senna Fernandes

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January 9, 2015

Macau Consumer Confidence Index sends mixed signals

survey shows that consumers are slightly losing confidence in the local economy, while in general confidence has been slightly restored. In the fourth quarter of the year, consumer confidence was 87.4 from a possible 200 points, a 2.7 per cent increase on the previous quarter, according to the latest Consumer Confidence Index conducted by the Macau University of Science and Technology (MUST).

AMCM to expand scope of automobile and maritime security fund

Index scores below 100 suggest a lack of confidence while scores over 100 imply a degree of positive outlook. Of the six sub-indices – the local economy, employment, living standards, housing purchase, and stock investment - the local economy is the only indicator that has dropped compared to the previous quarter. The consumer confidence index in the local economy registered 108.6, slightly down 0.2 per cent from the third quarter of last year. By contrast, the ‘housing purchase’ sub-index increased 19.6 per cent from the previous quarter, scoring 45.8, which indicates even though Macau consumers do not have much faith in purchasing a property hope is picking up and their negativism has eased. The consumer confidence index in employment remains the highest at 124.88. Meanwhile, the living standards sub-index stood at 59.66, slightly increasing 0.12 per cent compared to the previous quarter, which suggests inflation is of concern although consumers are less worried. The survey was conducted over a week from 26 September. The survey interviewed 1,015 Macau residents aged over 18 via telephone calls. The Institute for Sustainable Development of MUST has released the index every quarter since 2009. J.K.

n responding to a written enquiry by legislator Song Pek Kei, the head of the Monetary Authority of Macau (AMCM), Anselmo Teng Lin Seng, said that the government department is to amend the scope of the Automobile and Maritime Security Fund so that traffic accident victims in economic difficulties can be granted special security assistance for their medical expenses. The Automobile and Maritime Security Fund gives compensation for death or injury arising from traffic accidents when the vehicles involved have compulsory motor vehicle insurance, when the person responsible for the accident is unknown or when an insurer goes bankrupt. In fact, according to Ms. Song, AMCM proposed expanding the scope of the fund when it was working on the amendments of the law regulating compulsory motor vehicle insurance in the city in 2009. The legislator queried the amendments, however, saying they had only ended up adjusting the minimal amount of insurance, insurance card and the template of temporary insurance certificate in 2011, while there were no updates for the fund. Nevertheless, the AMCM head wrote: “As we agree with giving special assistance [to those in economic difficulties] by paying advances for their medical and inpatient expenses during a specific

period, AMCM will submit a related draft of [the expansion to the scope] to the superior very soon”. The proposed expansion of AMCM in 2009 included giving compensation to the injured from traffic accidents, of which the vehicles involved are involved in terrorism and such vehicles are covered by compulsory insurance. In addition, it proposed advance payment for those who can prove their economic ability is not enough to afford urgent medical expenses. K.L.

Sales involving non-local properties not supervised by local law

esidents encountering ‘illegal’ sales of real estate outside the territory of Macau are not protected by the current law of the Special Administrative Region and thus the city’s Consumer Council can only transfer such suspicious cases to related organisations outside Macau, according to the Council’s reply to legislator Ho Ion Sang’ written interpellation. In its response to the legislator, the Consumer Council said the current Real Estate Agent law only regulates operation of local real estate agents which involves local properties, suggesting operations involving properties outside Macau are not supervised by the law. ‘When the Consumer Council receives complaints of property agents breaking the law, [the Council] will transfer the cases to the Housing Bureau. However, if disputes happen outside Macau, such as on the Mainland, the Consumer Council can only transfer the cases to the consumer protection organisations there, based on the current law and the co-operation agreement with the consumer organisations on the mainland’, the Council wrote. In addition, it said that it had

received six complaints and enquiries about purchasing real estate on the Mainland during the first three quarters of 2014. According to a reply from the Council to an enquiry by Business Daily recently, only one of such complaint is about the contract, while the others are enquiries about the related procedures and regulations. In fact, the legislator indicated in his interpellation that many local property agents were promoting the sale of mainland property without pre-sale permits from the mainland authorities, querying whether the government is following up on the issue as these should be classified as illegal sales. The Council, claiming that this is not under the scope of the current law, said that the Housing Bureau had reminded local real estate agents that they should obey the regulations outside Macau when they provide services involving non-local properties. The mainland authorities decree that developers can only launch the sale of property that is still under construction after obtaining a presale permit. This permit will only be issued in Guangdong Province when two-thirds and more than seven storeys of a project are completed.

Business Daily | 5

January 9, 2015

Macau

Police crack down on illegal deposit-taking The case of an unauthorised unit that claimed to offer up to 12 per cent annual deposit interest rate to members has been cracked down on, with two mainlanders arrested Stephanie Lai

sw.lai@macaubusinessdaily.com

he city’s Judiciary Police and Monetary Authority joined hands to crack down on an unauthorised local unit that absorbed savings from at least 15 individuals with the lure of high deposit interest rates, a crime that could result in a two-year imprisonment. Calling the case a “rare” one in recent years, the deputy director of the banking supervision department at the Monetary Authority, Wilson L. F. Vong, told media in a press briefing yesterday that the investigation into the unit

started in mid-December, following enquiries filed by local residents about the unit’s operation. The unauthorised unit, which has been operating since late December, offered up to 12 per cent annual deposit interest rate to lure savings from residents here. The unit also required clients to deposit at least MOP10,000 (US$1,251) upon becoming a member. Any member that could introduce new clients to place deposits with the unit could earn 0.1 per cent of the initial deposit amount,

Judiciary Police said. “We have uncovered HK$150,000 [of deposits] from the unit’s office, and another MOP10,300”, Judiciary Police spokesman Suen Kam Fai noted yesterday. “We have arrested two mainland Chinese that managed the unit, and the case has already been forwarded to the Public Prosecutor’s Office for further investigation”. The penalty for the illegal taking of savings can result in a two-year imprisonment, Mr. Vong said. So far the police have

identified 15 victims in the case who deposited savings in the unit, most of whom are staff working in the company and their relatives. Following the Authority’s crackdown on Wednesday, the unauthorised unit, situated in the industrial building Airway Block in Areia Preta, was sealed off. Mr. Chan Cho Man, acting head of the Economic Crimes Division of the Judiciary Police, noted that the police did not rule out that that scam elements were involved in the absorbed deposits at the

unauthorised unit. “As we understand so far, the maximum amount of deposits placed [by an individual victim] was only MOP20,000”, Mr. Chan said, noting that the Authority is still investigating the unit’s intended use of the deposits placed. The police also noted that they were not aware of any prior office registry of the unauthorised unit. At least one suspect operating the unauthorised unit, who is also a mainland Chinese, is still on the run, Mr. Chan added.

Ho Ion Sang slams slot machine venues close to community

egislator Ho Ion Sang filed an interpellation earlier this week saying that the law regarding the Supply System and Requirements on Gaming Machines, Equipment and Systems did not effectively steer slot machine venues away from the community. “[Following the implementation of the law], five gaming machine venues near the community were moved or closed. However, after that, a new gaming machine venue was immediately opened in the Inner Habour area, which is even closer to residential areas [as] centres of the elderly, health centre and schools are very nearby”, the legislator wrote. In 2012, the government enacted a law requiring that the establishment of gaming machine parlours only be allowed in hotels rated

5-star or above or buildings approved for non-residential use within 500 metres of a licensed hotel casino, or buildings for commercial and leisure purposes that are regarded as a tourist location but not in a high density residential area. Claiming that the

government had responded that the location of the new gaming machine venue in the Inner Habour did not break the law, as it met the requirements of locating in a single building without residential use and was within 500 metres of a hotel casino, Mr. Ho complained

that the government did not adequately consider the geographic environment of Macau when drafting the law. “[The government] did not properly consider [the situation] when they approved the operation of the gaming machine venue which led to a serious loophole in

the law. [The law] did not drive gaming machine venues away from the community, it even let them enter the community with a flat saying ‘legally approved by the government’. Such is disobeying the principle of the law”, he claimed. K.L.

6 | Business Daily

January 9, 2015

Macau

ITC Properties pays HK$95.12 million for 6.3 per cent of Louis XIII The Hong Kong-based real estate company increased its participation in the Louis XIII company from 10.6 to 16.9 per cent and is in the market for more shares João Santos Filipe

jsfilipe@macaubusinessdaily.com

n Wednesday, ITC Properties Group Limited bought 6.3 per cent of shares issued by the Louis XIII for HK$95.12 million and now owns 16.9 per cent of the total shares issued by the company. However the board of ITC Properties is in the market to expand the number of shares it controls in Louis XIII. ‘The Directors consider that the acquisition enables the Group to have a strategic investment in the hotel and entertainment business in Macau through Louis XIII and intend to account for the acquired shares as long term investments of the Group’, ITC Properties explained. ‘If suitable opportunity arises, the Group may consider acquiring more Louis XIII shares either for short term trading or long term investment purposes’, it was added. The transaction was completed in

the open market through the whollyowned subsidiary Advance Tech Limited, with the average acquisition price HK3.363 per share. ‘The group is optimistic about the prospects and development of properties, hotel and entertainment business in Macau’, the board stressed in its filling with the Hong Kong Stock Exchange. ITC Properties Group Limited is based in Hong Kong, and with the completion of this deal it will enter the hotel and resorts market in Macau. However, the company is already involved in such activities in the People’s Republic of China and Hong Kong. Nevertheless, the group has been in Macau for over 6 years, where it is engaged in property development. These activities are developed as well in Mainland China and in the

Upcoming Louis XIII Hotel in Macau

neighbouring SAR. Louis XIII is developing a luxury hotel and entertainment complex on the fringes of the Cotai Strip, which is expected to be completed mid-next year. In January 2014, the company accepted a term loan of HK$3.045 billion to be used mainly in the construction of the hotel. Also in September last year, Louis XIII reached a purchase agreement to acquire a fleet of 30 extendedwheelbase Rolls Royce Phantoms for HK$155 million. This transaction was the single largest order for RollsRoyce in history. Two of the vehicles will be the most expensive ever built by the car manufacturer. The company, co-chaired by Stephen Hung and Peter Coker, is also engaged in international engineering services in Hong Kong, Mainland China, Macau and Singapore.

Imperial Pacific cashes in HK$24 million per profit guarantee The ownership of a 5 per cent profit stream in the Macau junket operator Hengsheng Group was worth HK$24 million in 2014. However, the results can be considered disappointing as Imperial Pacific was expecting to earn an amount higher than the profit guarantee

mperial Pacific International will be paid HK$24 million because of a profit guarantee clause signed when it acquired a 5 per cent profit stream of the Macau gaming promoter Hengsheng Group last year. The only reason that Imperial Pacific International is receiving HK$24 million is because of a profit guarantee. In fact, 5 per cent of the profit of Hengsheng Group in 2014 accounted for only HK$10,7 million. The remaining HK$13,3 million is to be paid by the vendor of the profit stream, Ms. Cui Limei, as compensation for

the shortfall of results. However, this outcome is below the expectations of Imperial Pacific International when it first paid HK$400 million for the 5 per cent profit stream of the Macau junket operator. “Even if there is no growth for the year 2014 and the Junket Profit remains HK$554 million, the Target Company will still be entitled to receive approximately HK$27.7 million pursuant to the Profit Transfer, which will be more than the Guaranteed Profit Share of

HK$24 million for the same period”, it was explained when the contract was signed. This is one of the consequences of the recent slowdown in Macau’s Gross Gaming Revenue (GGR) that has been shrinking since June, which in turn led to the first-ever annual decline in revenue, in 2014. A total of HK$341.3 billion accounted for a decline of 2.6 per cent in Macau GGR. As part of the profit guarantee Imperial Pacific is due to receive an extra HK$72 million for the period 1 January to 31 December, 2017. The

contract also involves the payment of another HK$304 million from January, 2018 to December, 2029 to be paid in different periods. However if the aggregate profit stream equals HK400 million the profit guarantee will be considered terminated. As for January of last year, the Hengsheng Group had seven VIP rooms across StarWorld Casino, Wynn, Galaxy, Sands Cotai Central, MGM and The Venetian, totalling 82 VIP gaming tables targeting premium players.

Although the company did not mention how the sales translated into income, in the interim report, which was published in November, the group announced a net profit increase of 30.6 per cent to HK$20.9 million. As for the first three quarters of

the fiscal year Bauhaus International increased the number of self-managed shops by 12 from 197 to 209. Two new shops were opened in the Hong Kong and Macau market, four in Mainland China and six in Taiwan.

J.S.F.

Bauhaus increases sales by three per cent

auhaus International increased same store sales growth in the Macau and Hong Kong market by 3 per cent during the third quarter of the fiscal year of 2014/2015, the company announced in a filing with the Hong Kong Stock Exchange. However, the company, engaged in the sale of denim and accessories, did not disclose how this increase was translated in terms of financial results. In relation to the first nine months of the fiscal year of 2014/2015 the

same store sales growth has been more significant, accounting for 13 per cent, it was revealed. If on one hand the increase for the nine months was higher in the Macau and Hong Kong market in comparison to Taiwan (up 5 per cent) and the Mainland (up 2 per cent), on the other hand, in terms of the third quarter, the Macau and Hong Kong market was outperformed by both the Mainland (up 9 per cent) and Taiwan (up 9 per cent).

J.S.F.

Business Daily | 7

January 9, 2015

Gaming

Sportswear to outpace casinos as Chinese consumers earn more

portswear companies could outpace casinos in Asia in terms of floor space profitability growth in 2015, as China’s middle class takes advantage of cheaper domestic brands and an anticorruption campaign hits gaming, UBS said yesterday. Retailers are skittish about expanding in Asia as China’s 2014 economic growth is expected to hit a 24-year low - putting a dampener on prospects for consumer investors

in the region, UBS said in a report. But sportswear companies - Li Ning Co. Ltd. in particular - could be a bright spot as personal income grows in China and more and more people are able to afford branded gear like sneakers. The Chinese company, whose shares fell 38.1 per cent last year, is expected to go from losing an average of 373 yuan (US$60) for each square metre of store space in 2014 to generating a 1,147 yuan operating profit on each of those square metres

this year, UBS said. Rival Anta Sports Products Ltd. was also expected to benefit, growing its operating profit 12 per cent to 2,322 yuan on the same basis. While much more lucrative in absolute terms, gaming companies were expected to fare worse on a relative basis this year as junket operators with VIP clients forced casinos to compete on commissions and credit availability. Average profit per square metre

for gaming companies was expected to fall 6.7 per cent this year, with SJM Holdings Ltd. plummeting 13.6 per cent to 5,871 yuan and Galaxy Entertainment Group Ltd falling 9.9 per cent to 8,858 yuan. Eighty-five per cent of retailers analysed in the report were cautious about expanding this year, up from 72 per cent last year. Thirty-one per cent said they would not expand or would scale back. Reuters

Caesars creditors split from group, seeking greater recovery

group of Caesars Entertainment Corp.’s senior bondholders is holding out for more money, threatening to make it difficult for the casino owner to obtain enough creditor votes to make its bankruptcy plan a reality. Investors who say they own US$1.6 billion in Caesars first-lien notes hired law firm Debevoise & Plimpton LLP to negotiate better terms, said My Chi To, a partner at the New York-based firm. Caesars has five days before a deadline to win more support from bondholders for a restructuring agreement it struck with some creditors last month. The agreement with investors including Elliott Management Corp. and Pacific Investment Management Co. requires the company to sign at least 60 per cent - or US$3.8 billion - of first-lien bondholders by January 12 up to its plan to restructure Caesars Entertainment Operating Co. In order to win court approval for a related bankruptcy reorganisation proposal, Caesars would need support from creditors holding at least two-thirds of the bonds. First-lien bondholders owning more than 50 per cent of the debt have signed the agreement, according to two people with knowledge of the support who

asked not to be identified because the matter is private. Las Vegasbased Caesars had commitments from 39 per cent as of December 28, according to a December 29 regulatory filing.

Recovery prospects “We are motivated by improving recovery for the first-lien bonds,” To said today in an e-mailed statement. The group wants to engage with

Caesars to amend its proposal “to help the company get the two-thirds they need,” she said. Some of the investors she represents own other Caesars debt, including term loans and second-lien bonds. Debtwire reported the size of the group represented by Debevoise earlier today, without the percentage of bondholders who are now in support of the plan. The U.S. bankruptcy code requires creditors holding two-thirds of the

claims in at least one class of debt and half of the individual holders of that class to vote in favor of a reorganisation plan before a judge can approve it. Caesars’s restructuring deal proposes giving first-lien bondholders 93.8 cents on the dollar. The investors represented by Debevoise want to be paid out at par, or 100 cents, according to two people with knowledge of the matter who asked not to be identified because the information hasn’t been made public. Gary Thompson, a spokesman for Caesars, declined to comment. Caesars’ bankruptcy plan for the unit would reorganise its $18.4 billion of debt by turning it into a real estate investment trust that owns its casinos and an operating company that manages them. A third division would house Caesars Palace, its crown jewel asset in Las Vegas. Caesars, which has lost money every year since 2009, has struggled to meet its obligations after being taken private for US$30.7 billion by Apollo Global Management LLC and TPG Capital in 2008. The deal, struck before the credit crisis unfolded, was part of a buyout boom fuelled by cheap borrowing costs that spawned super-sized takeovers. Bloomberg

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Hong Kong

The mainland’s colonization of the Hong Kong economy Even as Beijing struggles to tame Hong Kong politically, Chinese companies are consuming ever bigger chunks of the city’s key sectors including real estate, finance, power, construction and the stock market

hen Xi Jinping wanted to deliver a political message to Hong Kong as protesters demanding free elections were threatening to take to the streets, he summoned the tycoons who dominate the city’s economy. The words from the Chinese leader at the September 22 meeting in Beijing were uncompromising but not surprising. He would not entertain any demand for full universal suffrage in Hong Kong, according to two people who attended. Just six days later, pro-democracy activists made good on their threat, unleashing more than two months of street demonstrations. But while Xi’s message that day in the Great Hall of the People failed to deter the protesters, in speaking directly to the city’s business and professional elite he was showing where Beijing believes real power in Hong Kong resides. And it is here, in the city’s business sector, that China is inexorably tightening its grip on the former British colony. Even as Beijing struggles to tame Hong Kong politically, Chinese companies are consuming ever bigger chunks of the city’s key sectors including real estate, finance, power, construction and the stock market. Many of these industries have for decades been dominated by the business titans who attended the meeting with Xi. Men like Li Kashing, Asia’s richest man, casino and hospitality billionaire Lui Che-woo and palm oil magnate Robert Kuok. Now they are witnessing a mainland business invasion of the city. One of the most telling signs of change is the space mainland Chinese companies lease in Central district, the heart of Hong Kong’s financial center. These firms now account for over 50 per cent of new leases

signed for offices there, according to a September report from Hong Kong-based brokerage CLSA. That’s up from 20 percent in 2012, the report said. The trend is the same in all major business districts. Mainland occupancy of 25 key Grade A office buildings, or prime office space, in the districts of Central, Admiralty, Sheung Wan and Wan Chai increased from 13 percent in 2008 to 21 percent earlier this year, according to commercial real estate services firm CBRE. “We do expect more mainland financial firms moving into Hong Kong,” said Simon Smith, senior director of research and consultancy at real estate services provider Savills Plc in Hong Kong. “They like landmark properties, high-profile buildings. They often like naming rights if it’s available.”

‘Price is not an issue’ The office directory at Hong Kong’s 88-floor International Finance Centre has a growing number of mainland companies on the list. Among them is China Development Bank International Holdings Ltd, which held its opening ceremony in 2011 and serves as the offshore investment firm of China Development Bank, the country’s biggest policy lender. “If you go to the International Finance Centre now and compare it to five years ago, it’s very easy to see that there are many more Chinese enterprises represented,” property analyst Nicole Wong, an author of the CLSA report, told Reuters. In a market accustomed to stratospheric land prices, state-owned Chinese developers this year stunned long-established local property giants with winning bids exceeding auction

forecasts by up to 20 per cent. Of the six available plots sold since the middle of last year in Kai Tak district, one of Hong Kong’s largest developments of residential and commercial complexes, two went to China Overseas Land & Investment and one to Poly Property Group. “Price is not an issue for them,” said a former senior executive of a Hong Kong-listed developer who was responsible for bidding at land auctions before he left the company in June. “That’s why they offered prices that surprised everyone.” A spokesperson for Poly said the company had no comment. COLI did not respond to questions sent by email. While it was predictable business ties would expand after the 1997 handover, Beijing has made it clear that economic integration is central to reinforcing its sovereignty over Hong Kong, which is ruled under the one country, two systems model that affords the city’s 7.2 million residents broad personal freedoms. Part of Beijing’s vision is to draw Hong Kong into a Pearl River Delta mega-economy that would also include the giant southern Chinese cities of Shenzhen and Guangzhou just across the border. In 2011, a chapter was dedicated to Hong Kong for the first time in China’s five-year blueprint for national economic development. The 12th Five-Year plan, covering the years from 2011 to 2015, lays out how Beijing wants to connect Hong Kong with the Pearl River Delta’s increasingly prosperous middle class consumers.

‘It will be like New York’ Under the plan, Hong Kong would be a leader for the region in shipping,

trade, services and distribution. In finance, Hong Kong would serve as an offshore market for the mainland currency, the renminbi. New transport links from Hong Kong now under construction, including a high speed rail to Guangzhou and a bridge across the Pearl River Delta to the mainland city of Zhuhai near Macau, would allow the rapid movement of commuters and visitors. “It will be like New York where you have people working in Manhattan and living on Long Island or in New Jersey and commuting in to work every day,” said Hong Kong entrepreneur Allan Zeman, who developed the Lan Kwai Fong pub and restaurant area popular with expatriates. “People who can’t have a home here (in Hong Kong) will live in Shenzhen and be able to come here in 10 minutes.” The mainland’s construction behemoths, including stateowned China State Construction International Holdings Ltd (3311. HK: Quote, Profile, Research, Stock Buzz), are also grabbing market share. Hong Kong’s permanent secretary for Development (Works), Wai Chi-sing, said in an interview that while mainland firms accounted for less than 15 percent of public works contracts by value in the mid 1990s, they now accounted for more than a third. While mainland Chinese companies are rapidly expanding into Hong Kong, Western banking and financial institutions still have a strong presence in the city. Global bank HSBC Holdings Plc (HSBA.L: Quote, Profile, Research, Stock Buzz) (0005.HK: Quote, Profile, Research, Stock Buzz), for instance, employed more than 28,000 people in Hong Kong at the end of 2013.

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January 9, 2015

Hong Kong For Beijing, growing economic clout has not been mirrored by increased popular support. Frustrated by Hong Kong residents’ lack of identification with the mainland 17 years after the handover, China has at times resorted to covert means to bolster its control. Earlier this month, for instance, Reuters reported that retired Hong Kong policemen were part of a mainland-led surveillance operation to tail leading pro-democracy figures in the city. Although the street protests ultimately petered out, at their height they drew tens of thousands, presenting Xi Jinping with his most serious popular challenge since he took power two years ago. While the protesters have demanded full universal suffrage, the mainland authorities insist that only a handful of Beijing-vetted candidates can stand in the next elections for the city’s political leader in 2017. Hong Kong’s current chief executive, Leung Chun-ying, got the backing of Xi and Premier Li Keqiang during a visit to Beijing last Friday, according to reports in China’s state-run media. A Hong Kong government spokesman said in an email response that economic integration with the mainland has been mutually beneficial, citing the growing number of mainland companies listed on the Hong Kong stock exchange and the city’s role as the largest offshore renminbi center. The Hong Kong and Macau Affairs Office in Beijing did not respond to questions from Reuters.

Not always amicable Rather than foster understanding, growing economic integration has at times raised tensions. One source of friction is the real estate market where wealthy mainland Chinese have bought up property in Hong Kong, helping to push up home prices that are already out of reach for many of the city’s residents. “One might have assumed that the inflow of mainland money and companies and people here, and the favorable economic policies of the mainland should have increased emotional integration rather than just economic integration but it hasn’t,” said David Zweig, chair professor of social science at Hong Kong University of Science and Technology. “For the rich people here, the heart has followed the dollar but for the middle class and for students it hasn’t.”

That’s been evident, at times, on the streets of Hong Kong. While the growing influx of mainland tourists has been good news for the city’s retailers – the number of Chinese visitors catapulted from 28 million in 2011 to 40.7 million last year – interactions between mainlanders and Hong Kong residents are not always amicable. In one incident that made headlines earlier this year, locals got into a scuffle with a mainland couple who had allowed their toddler to urinate in the street. “Hong Kong without the mainlanders would be a very small city,” says Allan Zeman, explaining the business elite’s attitude to the growth in tourism. “Ocean Park and Disney without the mainlanders would be nowhere. They’d be losing money.” Zeman developed Ocean Park, one of the city’s main amusement parks. When Xi met the delegation of tycoons and professionals on the eve of the demonstrations, he gave no indication he was worried, according to one delegation member who gave Reuters an account of the Chinese leader’s remarks. Instead, Xi appeared to signal that the city’s troubles were relatively minor compared to other problems in his in-tray. Before commenting on Hong Kong, Xi gave some of the richest men on earth a tour of China’s foreign policy challenges. He told the tycoons that China was now a major force in the world and most of his attention would be focused on ties with bigger nations including the U.S. and Russia, the delegate said. When he eventually turned to Hong Kong, Xi said Beijing had no intention of altering any of its policies and urged the tycoons to support the city’s chief executive. He also said the Hong Kong economy was falling behind those of Singapore, Taiwan and South Korea. Li Ka-shing, Lui Che-woo and Robert Kuok, three of the tycoons who were part of the delegation that met Xi, did not respond to questions from Reuters.

Downplaying the protests In an interview earlier this month, another delegate, former Hong Kong Law Society president Ambrose Lam said Xi had ruled out any departure from the guidelines already laid out for the city’s political future. Without citing the Chinese leader

directly, Lam said he didn’t think the protests were a big issue for the Chinese leadership. It would have been different, he said, if they had happened 30 years ago when Hong Kong’s economy was more important to China. But the city’s gross domestic product is now only 3 percent of China’s, he added. At the time of the handover in 1997, it was almost a fifth. Still, summoning the city’s business leaders suggests Beijing may be more concerned than it is prepared to acknowledge. The city’s business leaders were also called to the capital in the aftermath of a 500,000-strong protest in 2003 when China attempted to introduce controversial new security laws. The proposed laws were withdrawn and the then chief executive, Tung Cheehwa, was eventually forced to resign. As the mainland ponders how to contain demands for political change, its economic footprint in Hong Kong continues to expand. In retail banking, subsidiaries of mainland banks operate nearly 500 branches in Hong Kong, accounting for about 40 per cent of the total number of branches, according to figures from SNL Financial, a financial service research company. Hong Kong’s financial system has also become more intertwined with the mainland, especially as it has emerged as the premier hub for offshore renminbi business. The market in so-called dim sum bonds, bonds denominated in renminbi but issued outside the mainland, is rapidly closing on its Hong Kong dollar counterpart. The bonds, named after a popular Hong Kong cuisine, were first issued in 2007. Since then, the outstanding value of dim sum bonds has soared to around 700 billion renminbi, according to industry estimates. That’s nearly 60 per cent of the value of Hong Kong dollar bonds, according to data compiled by the Asian Development Bank. And mainland companies have long been making inroads into the local stock market. They now account for 54 percent of the companies traded on the Hang Seng Index.

Mainland giants make inroads As part of Beijing’s plan for the Pearl River Delta, Guangdong and Hong Kong will seek to integrate their transport, energy and power grid

infrastructure. For its part, the Hong Kong government is pushing to boost electricity imports from mainland China to reduce pollution and the dominance of two local utilities backed by powerful families, say industry experts who have been involved in consultations with the government. Hong Kong’s grid is not interconnected with China Southern Power Grid, which supplies electricity to Guangdong and four other southern provinces. Plugging Hong Kong into the Chinese grid would create competition for the city’s dominant local utilities – CLP Holdings, backed by the wealthy Kadoorie family, and billionaire Li Ka-shing’s Power Assets Holdings – and further strengthen Hong Kong’s ties with mainland China. The two local firms have enjoyed guaranteed returns for decades under what is known as the Scheme of Control. But the mainland grid giants are making inroads. China Southern Power Grid last year bought a 30 percent stake in CLP’s power unit Castle Peak for $1.6 billion, while State Grid Corporation of China spent about $1.2 billion to buy into the local initial public offering of HK Electric Investments, a spinoff of Power Assets, early this year. Hong Kong’s Environment Bureau said in an email response that importing electricity from mainland China was one of two options under consideration. HK Electric said via email that local power generation through the increased use of natural gas was its preferred option. CLP said it had shared its views during the government consultations. One area where mainlanders have yet to make headway is the city’s elite clubs. With the exception of some clubs like the Aberdeen Marina Club and the Jockey Club which offer hefty debentures, it is difficult for newcomers like mainland Chinese to get membership as some of these establishments have waiting lists that can be as long as 20 years. But at places like the Ladies Recreation Club (LRC) and the Hong Kong Golf Club, members say there is definitely more Mandarin being spoken. “Mainlanders haven’t quite got in any meaningful way into the clubs,” says a Hong Kong resident who is a member of three clubs. “But it is only a matter of time.” Reuters

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January 9, 2015

Greater China

Xi woos Latin America with US$250 bln investments Xi said in a speech that two-way trade between China and Latin America was estimated to rise to US$500 billion within the next 10 years Megha Rajagopalan

hinese President Xi Jinping pledged yesterday US$250 billion in investment in Latin America over the next 10 years, as part of a drive to boost Beijing’s influence in a region long dominated by the United States. Leaders of the Community of Latin American and Caribbean States, or CELAC - a bloc of 33 countries in the region that excludes the United States and Canada gathered in Beijing for the first time for a two-day forum yesterday. The forum, which also marked the first time China hosted the body, came at a time when Beijing is trying to step up its presence in the region as it clamours for more resources. Xi said in a speech that twoway trade between China and Latin America was estimated to rise to US$500 billion within the next 10 years. “I believe that this meeting will achieve fruitful results,

Chinese President Xi Jinping (L) and Venezuela’s President Nicolas Maduro (R) review an honour guard during a welcome ceremony at the Great Hall of the People in Beijing

give the world a positive signal about deepening cooperation between China and Latin America and have an important and farreaching impact on promoting South-South cooperation and prosperity for the world,” Xi said. China and Latin America are cooperating in the areas

of energy, infrastructure construction, agriculture, manufacturing and technological innovation, Xi said. China is interested in the region for resources and markets, said Deng Yuwen, a Beijing-based political analyst and former deputy editor of the Central Party School’s

journal, Study Times. “Obviously, China has the intention to compete with the U.S. for a greater sphere of influence in the region,” said Deng. “But whether this strategy will weaken U.S. influence now is hard to judge.” China, the world’s secondlargest economy, is buying oil

from Venezuela, copper from Peru and Chile, and soybean from Argentina and Brazil. In return, China has pumped billions of dollars in investments in the region. On Wednesday, Venezuelan President Nicolas Maduro said he had secured more than US$20 billion in investment from China, while Ecuador said it obtained a total of US$7.53 billion in credit lines and loans from China. “To repeat what (former) President Hugo Chavez said, China is demonstrating to the world that a country does not necessarily seek hegemony as it grows stronger,” Maduro said in a speech that was translated into English. The cooperation with the region comes even as many of them retain diplomatic ties with Taiwan. Out of the 22 states that still recognise Taiwan, 12 of them are in Latin America and the Caribbean. Reuters

Silk-road promise tested by Ningxia The region wants to pilot the provision of Muslim financial products

of regions,” he said in a December 30 interview from Hong Kong.

Close ties

Yinchuan is the capital of the Ningxia Hui Autonomous Region with deep Muslim roots

he Chinese region of Ningxia’s plan for the mainland’s first sukuk is a test run for Islamic finance, as Beijing’s efforts to channel capital west to ease poverty and social unrest fail to boost economic growth. Ningxia, an autonomous region in northwest China where a third of the 6.5 million population are Muslim and per capita economic output is 60 percent of the national average, may raise as much as US$1.5

billion selling dollar debt including Islamic notes, according to a December 25 stock-exchange filing. That follows Hong Kong’s sale of US$1 billion of sukuk last year that drew bids for almost five times the amount on offer. The land-locked area is taking advantage of an August rule change allowing Chinese local governments to raise money directly and will tap a global Shariahcompliant finance industry that Ernst & Young LLP sees

doubling to US$3.4 trillion in assets by 2018. Along with its western neighbours Qinghai and Tibet, Ningxia saw economic growth slip by more than a percentage point in the first nine months of 2014. “It makes sense for them to pilot a sukuk program in Ningxia,” said Ben Simpfendorfer, managing director of Silk Road Associates, a consultancy. “Beijing will typically run pilots across a wide number of sectors in a large number

Ningxia, whose economy is reliant on agriculture and mining, had a per capita gross domestic product of 39,210 yuan (US$6,305) in 2013, according to a December 2014 research note by Deutsche Bank AG. That compares with US$9,800 for China as a whole, U.S. government data show. Around a third of Ningxia’s population are from the predominantly Muslim Hui minority. The region has ambitions to become a base for the production of halal food and is in discussions with Dubai’s Jebel Ali Free Zone to become a trade hub connecting northwest China and the Middle East, according to a December 4 statement on Jebel Ali’s website. “The region has developed close ties with sukuk investors in the past and is better placed than most Chinese issuers to tap into the sukuk market,” Jeffrey Kirk, law firm Appleby Global Group Services Ltd.’s

head of Islamic finance, said in a December 31 interview from his base in the British Virgin Islands. “Whilst this development will encourage other potential Chinese sukuk issuers to follow suit, they may find it more challenging to do so.” Ningxia and the neighbouring autonomous region of Xinjiang are home to the largest concentrations of Muslims in China. At least 50 people were killed and dozens injured in clashes between Han Chinese and Muslim Uighurs in Xinjiang in September, according to Chinese state media. While no companies or governments from mainland China have sold sukuk, there have been yuan-denominated Islamic bond sales. Malaysian sovereign wealth fund Khazanah Nasional Bhd. sold 500 million yuan of three-year Shariah-compliant notes at 2.9 percent in 2011 and Kuala Lumpur-based telecommunications company Axiata Group Bhd. issued 1 billion yuan of two-year sukuk at 3.75 percent in 2012. Both bonds have matured. Bloomberg News

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January 9, 2015

Greater China Shanghai bans individuals from trading “junk bonds” The Shanghai exchange also ordered guarantors and underwriters of SME bonds to fully investigate the financial status of their clients

he Shanghai Stock Exchange banned individuals from investing in bonds privately issued by small and medium enterprises (SMEs), the latest in a series of steps to tighten regulatory control of the highyield, high-risk fixed income market. The ban, which comes into effect immediately, also bars institutions from selling individual investors any product containing bonds issued by SMEs, widely known in the industry as “junk bonds.” Firms established by limited liability partnerships are also banned from investing in junk bonds, according to new rules published on Wednesday on the exchange website, www.sse. com.cn. “Those above-mentioned investors who already own such bonds can hold or sell them, but they are banned from building fresh positions,” the exchange said. The SME bond market was launched in early 2012 in order to help develop China’s wider bond market and to provide an alternative financing channel for SMEs, many of which have difficulty accessing bank credit. However, analysts soon began warning that the market was distorting investors’ behaviour, as they regarded the high yield bonds as virtually risk free because local governments

Grain stockpiles to be boosted China will continue to increase its grain storage capacity in 2015 in an effort to ensure food security, a top official said yesterday. The country will build new grain-storage facilities and help farmers improve grain storage conditions, Ren Zhengxiao, head of the State Administration of Grain, said at a national conference. However, Ren did not provide any specific target for expanding storage capacity. The country’s national grain stocks have stayed at high levels due to 11 years of bumper harvest and a large volume of government purchases, Ren said.

Those above-mentioned investors who already own such bonds can hold or sell them, but they are banned from building fresh positions Shanghai Stock Exchange statement

were unwilling to allow even small, economically insignificant issuers to default. Concerned about a potential explosion in non-performing debt, Beijing has moved to systematically suppress the high-yield bond market, most recently by preventing weaker issuers from using the bond market as a refinancing tool. That has pushed investors out of low-grade bonds, widening the spread between high-grade AAA-rated bonds and lower-rated AA bonds.

Shanghai Stock Exchange building

The Shanghai bourse also ordered guarantors and underwriters of SME bonds to fully investigate the financial status of their clients and coordinate with regulators in a timely manner if problems arise. State media have noted that this move will increase funding pressure on smaller Chinese firms, “adding frost to snow,” as one underwriter quoted in the semi-official China Business News put it. However, unlike in many other countries, many Chinese SMEs are not private companies, but are small subsidiaries of state-owned firms. Reuters

U.S. supplier in food scandal takes aim at Shanghai regulator The Shanghai Food and Drug Administration called the food destroyed by the supplier “questionable” Adam Jourdan

Honda says 2014 China auto sales up Honda Motor Co Ltd and its two Chinese joint ventures sold 788,276 vehicles in China in 2014, up 4.1 percent from the previous year, the Japanese automaker said yesterday. In the month of December, Honda sold 142,157 vehicles in China, up 40.1 percent from a year earlier, breaking a streak of five months where it has seen sales decline. Japanese carmakers in China have faced the twin challenges of a slowing economy and political tension between Beijing and Tokyo over the past year.

Pilot “parallel import” for foreign cars China will allow selected auto dealers registered in Shanghai’s free trade zone to import and sell cars without the consent of foreign carmakers, according to an official. The launch of the pilot programme to allow so-called “parallel imports” of cars had been widely anticipated. The Shanghai Municipal Commission of Commerce said in a notice posted on its website late on Wednesday that dealers registered in the FTZ with at least five years of operation history and three consecutive years of profit can apply for the programme.

Ford sales up

.S. food supplier OSI Group LLC, which came under fire in China last year over allegations it used out-of-date meat, has criticised the handling of the case by the local food regulator, a rare act in China where firms are usually careful not to openly challenge the authorities. OSI’s Shanghai Husi Food Co Ltd plant came under the spotlight in July when an undercover Chinese media report showed workers using out-ofdate meat and doctoring production dates. The firm, which supplied international fast food chains including McDonald’s Corp and Yum Brands Inc., launched a sweeping recall last summer that culminated on Sunday when it said it had destroyed the products. The Shanghai Food and Drug Administration, which is still investigating Shanghai Husi over the matter, called the food destroyed on Sunday “questionable” in a routine statement, prompting the strong objections from OSI. “Without having any test results or

even having done any testing on the relevant products, and with the case still under investigation, to define the products our company has voluntarily recalled as “questionable” ... is totally without factual, scientific or legal foundation,” Shanghai Husi said in a statement in Chinese on the OSI China website. The statement said Chinese rules defined “questionable” food products as those which did not meet food safety standards or could be harmful for human health. OSI’s criticism escalated a rare war of words between a foreign company and Chinese regulators, who over the past year have closely scrutinized international firms in industries ranging from automobiles to high tech.

Microsoft Corp, for instance, has expressed deference to Chinese antimonopoly regulators looking into its software sales practices -- even while U.S. business lobbies have complained about their companies being unfairly targeted. OSI’s tussle with its Shanghai regulator also comes at a time when the central government in Beijing has acknowledged China’s struggles to regulate tainted products. China’s top food watchdog said on Wednesday food and drug safety in the country was “grim” and pledged stronger oversight in the wake of a string of food scandals which have hit the reputations of brands including McDonald’s, Yum and retailers Carrefour SA and Wal-Mart Stores Inc. The Shanghai Husi scandal, which spread as far as Hong Kong and Japan, sparked a Chinese probe into the firm and dragged down Chinese sales at KFC-parent Yum and McDonald’s. Both have since cut or suspended ties with Aurora, Illinois-based OSI. Reuters

Ford Motor Co and its Chinese joint ventures sold 1.11 million vehicles in China in 2014, up 19 percent from the previous year, the U.S. carmaker said yesterday. In the month of December, Ford sold 107,244 vehicles, up 13 percent from a year earlier. That follows a 2 percent rise in November and a 1 percent fall in October. Ford has said its growth in China has been constrained by a shortage of manufacturing capacity and is adding new plants in the country.

10-year govt bond futures in preparation China Financial Futures Exchange (CFFEX) has issued draft rules for the launch of 10-year government bond futures, a move seen as another step towards interest rate liberalisation. The futures will be based on long-term government bonds with durations of 6.5 to 10.25 years to their maturity, the CFFEX said in the draft rules published late on Wednesday in its website. The futures will have a face value of 1 million yuan (US$161,000) apiece, bearing a nominal interest rate of 3 percent, it said.

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January 9, 2015

Asia Uniqlo-owner operating profit jumps

Standard Chartered axes equities business The move forms part of a cost-cutting plan the bank announced last October that is targeting US$400 million in savings this year Lawrence White

Fast Retailing Co Ltd.’s first-quarter operating profit rose a higher-than-expected 40 percent as price hikes in Japan and strong overseas sales boosted revenue at its flagship Uniqlo brand. Asia’s biggest apparel retailer said yesterday its operating profit rose to 91.4 billion yen (US$763 million) in the September-November quarter from 65.31 billion yen a year earlier. The average forecast was for 77.71 billion yen according to a Thomson Reuters poll of four analysts. Uniqlo, which won over shoppers during Japan’s deflationary years with its low-cost casual wear, hiked prices on autumn and winter products by 5 percent at its Japanese outlets.

Watchdogs get tough Antitrust penalties rose to a record in Asia last year as watchdogs got tough on cartels and bid-rigging, emboldened by maturing competition laws across the region and growing government clampdowns on corruption. Some US$1.7 billion in penalties and fines were levied, up 47 percent from 2013, and 45 percent higher than the annual average for the previous five years, data compiled by Norton Rose Fulbright shows. The London-headquartered law firm monitors the rulings of competition regulators and courts in Asia.

Samsung Elec profit fall Global smartphone leader Samsung Electronics yesterday confirmed expectations for its first annual profit decline since 2011, although a pickup in the fourth quarter hinted that earnings may have stabilised in the short term. The South Korean tech giant lost market share for three consecutive quarters up to July-September, and analysts say the trend likely continued in the October-December period thanks to competition from Apple Inc’s new iPhones and cheaper Chinese rivals like Xiaomi. Still, expectations of healthy memory chip demand and improvements in the mobile business persist.

Myanmar expects to attract more tourists

tandard Chartered chief executive Peter Sands moved aggressively yesterday to reverse the Asia-focused lender’s fortunes by closing the bulk of its global equities business and announcing 4,000 job losses in retail banking. The bank said in a statement that it is dismantling its stock broking, equity research, and equity listing desks worldwide, leading to 200 job cuts as it exits an unprofitable business in which it had failed to build scale. In its retail banking division, Standard Chartered said it has cut or announced the cutting of 2,000 jobs in the last 3 months, and plans to axe a further 2,000 over the course of this year. The move forms part of a costcutting plan the bank announced last October that is targeting US$400 million in savings this year, as it tries to bounce back after seeing its share

KEY POINTS Around 4000 jobs to be cut in retail in 2015 Bank to exit cash equities, ECM CEO Sands taking action to cut costs price slump more than 40 percent over the past two years. The bank said the retail job cuts should save US$200 million in costs this year, while the closure of the equities business should result in US$100 million of savings in 2016. Yet, some analysts said more action may be needed to get the bank back on track.

Shares up 2.15 pct in Hong Kong

“It’s a logical step. But laying off staff is not enough to address the situation, said James Antos, a banking analyst at Mizuho Securities Asia in Hong Kong.

Japan household mood worsens The weak reading suggests Abe’s decision last November to delay a second sales tax hike did little to brighten sentiment

apanese households’ sentiment worsened in December to levels last seen before premier Shinzo Abe unleashed radical stimulus policies two years ago, a central bank survey showed, underscoring the challenges he faces reviving the economy. The diffusion index measuring how households felt about the current state of the economy stood at minus 32.9 in December, down 12.5 points from September, the Bank of Japan’s quarterly survey on people’s livelihood showed on Thursday.

That is the lowest level since December 2012, when Abe won the previous election and launched his radical programme aimed at breaking the economy free of a long deflationary phase. While the policies helped weaken the yen and boost stock prices, the effect on the economy has been disappointing as companies remain hesitant over boosting wages and capital spending. Another index gauging households’ livelihood fell 3.1 points to minus 47.2, the worst level since 2011, the survey showed.

Myanmar, among the world tourist destinations, received 3.05 million tourists in 2014, with an expectation to attract five million tourists in 2015. Of the 3.05 million tourists who visited Myanmar in 2014, 70 percent mainly came from ASEAN member countries, followed by those from Europe especially Britain and Germany. The 2014 figure was up 49.5 percent from 2.04 million in 2013, official statistics shows. Myanmar also targets to bring in over 7.5 million tourists in 2020. Myanmar’s tourism earning hit US$1.14 billion in 2014, breaking the record of last year’s US$914 million.

A negative reading means respondents who feel they are worse off than three months ago exceed those who fell better off. Many of those who replied that they are worse off complained of rising costs of living and stagnant wage growth, a sign households are feeling the pinch from a sales tax hike in April 2014 and rising import costs due to the weak yen. The weak reading suggests Abe’s decision last November to delay a second sales tax hike, initially planned for October 2015, did little to brighten sentiment. It also highlights the dilemma of the BOJ, which is printing money aggressively to achieve its 2 percent inflation target sometime during the fiscal year beginning in April. More than 80 percent of respondents expect prices to rise a year from now, roughly unchanged from September. But 83.8 percent of households consider rising prices as undesirable, up from 78.8 percent in September, the survey showed. Reuters

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Business Daily | 13

January 9, 2015

Asia The cuts come less than two months after rating agency Standard & Poor’s hit the London-based bank with its first ever downgrade following three profit warnings in less than 12 months and rising losses from bad loans. Sands, who turned 53 yesterday, had achieved a decade of record profits up until 2013 with big bets on growing the bank’s loan book in Asia and a push into commodities. But after eight years at the helm, Sands is increasingly coming under pressure from shareholders to revamp the bank, with some investors urging the bank to plan his successor. Its biggest shareholders include Singapore state investor Temasek and asset managers Aberdeen Asset Management and BlackRock. Standard Chartered said in October that operating profit for the July-September quarter fell 16 percent to US$1.5 billion in the same period a year ago.

Locked out Standard Chartered launched its equities business in November 2008 when it acquired brokerage Cazenove from JPMorgan. The division includes cash equities, research and underwriting, all of which the bank said are unprofitable. It failed to rank among the top ten banks globally for research or trading at the end of 2013, according to a survey by Greenwich Associates, and ranked just 23rd last year in equity underwriting in Asia Pacific according to Thomson Reuters data. Equity capital markets head

A Rajagopal, previously a banker with UBS India, had been leading that business since 2012, trying to build presence in a division that was traditionally not Standard Chartered’s strongest suit. “Management is continuing with their rationalization process and no unprofitable sacred cows have been left untouched,” said Christopher Wong, a senior investment manager at Aberdeen Asset Management Asia. Bankers in Standard Chartered’s equities division in Hong Kong arrived yesterday to find they were locked out of the office, while some in Singapore were escorted from their workplaces. “We came in this morning and were told the equity business was being shut down,” a woman who identified herself as an ex-employee at the bank’s offices in Singapore told Reuters, saying she had worked in research. The decision to exit equities marks a reversal in strategy for the bank, which had been hiring staff in the division as recently as October last year. Standard Chartered would be one of the first global banks to completely exit the equity capital markets business, which involves underwriting stock offerings for companies. The move comes despite a boom in equity underwritings in Asia that saw fees for the industry rise 74 percent in 2014 after a three-year decline. Standard Chartered said it would though retain its equity derivatives business as well as its convertible bond and macro economic research units. Reuters

South Korea foreign portfolio outflows at 10-mth high Foreigners bought a net 2.0 trillion won worth of Seoul stocks in November

urbulence in global markets saw foreign investors in December pull out the biggest amount of funds from South Korea’s financial markets in ten months, data from the country’s financial regulator showed yesterday. Foreigners sold a net 2.0 trillion won (US$1.82 billion) out of local bonds and stocks last month, the Financial Supervisory Service (FSS) said in a statement, the biggest outflow since February last year. The bulk of the outflows last month, a net 1.9 trillion won, were in stocks as offshore investors bailed out of riskier assets amid a rout in oil prices and broad concerns over global growth. Foreigners bought a net 2.0 trillion won worth of Seoul stocks in November. South Korean stock prices have been on a steady decline since late July last year, with sentiment also depressed by slowing growth in China and a sickly euro zone economy. Investors in the U.S. were the biggest sellers, offloading a net 0.7 trillion won worth of stocks, followed by those in the U.K. and Saudi Arabia with net sales of 0.6 trillion won and 0.3 trillion won respectively, according to the FSS data.

US$1.82 bln South Korean local bonds and stocks sold last month

The FSS data also showed foreign investors lowered their holdings of South Korean bonds for the first time in four months in December, though only by a modest 0.1 trillion won. In November, offshore investors boosted their holdings of wondenominated bonds by 0.5 trillion won. Malaysia withdrew the most money, taking out 0.8 trillion won from their investment in local bonds, FSS said, while China placed the most money in South Korean bonds for a second straight month by increasing their holdings by 0.6 trillion won. The FSS does not provide comments or explanations for the monthly changes in offshore investments in stocks or bonds. Reuters

Broker ICAP defies tide with Asia expansion A supply glut in oil and iron ore has depressed prices to their lowest since 2009, leading traders to have a shorter horizon when hedging Florence Tan and Jessica Jaganathan

ommodities brokerage ICAP plans to expand its dry bulk and energy desks in Asia to capture a likely increase in trade volume with the launch of futures contracts in the region, two senior company officials said. ICAP is going against the tide in Asia as brokerages, including rival Newedge, have downsized in the past few years as trade volumes slumped after the introduction of capital rules that prompted banks to cut back on certain trading activities. Brokers are also losing some of their revenue to electronic trading platforms on exchanges such as Intercontinental Exchange. ICAP, the world’s largest interdealer broker, has 30 staff serving Asian clients from its Singapore and London offices and could increase that number by about a third this year, George Dranganoudis, managing director at ICAP Energy Asia Pacific, told Reuters. “Singapore, or Asia energy, is going against the overall ICAP trend,” he said, referring to wider restructuring efforts at the company.

KEY POINTS Firm to increase headcount devoted to Asian clients by 30 pct Rebuilding middle distillates, crude teams, starting LPG desk To start an office in China in 2015

Singapore’s financial district

One of its priorities in 2015 will be to start an office in China to be ready for the launch of a Shanghai crude oil futures contract,

Dranganoudis said. In Singapore, the company plans to start a liquefied petroleum gas (LPG) desk as Asia is importing more

products from the United States, he said, due to the shale resources boom. ICAP will also rebuild its middle distillates and crude teams, which have seen departures in recent years. ICAP is also expanding its dry bulk division, which could capture trade from various iron ore and coal contracts launched by exchanges in Singapore, Hong Kong and China. “There seems to be a birth of multiple contracts which are vying for traction on various exchanges and it’s fairly fragmented in Asia,” said Alex Newman, ICAP’s

head of Asia-Pacific iron ore and coal. “Over time, it will become clearer for us which will gain traction and where we’ll direct our resources.” The contracts include Singapore Exchange’s ASEAN hot-rolled coil steel and Dalian Exchange’s coking coal futures, he said, adding that the team hoped to do more business in thermal coal in Asia as well. A supply glut in oil and iron ore has depressed prices to their lowest since 2009, leading traders to have a shorter horizon when hedging, the executives said. “The drop in value happened very quickly and very sharply and I don’t think many have hedged a large chunk of their forward production or consumption,” Newman said. “Many of the producers will probably step back at these levels and a number of utilities will probably step in and look at what they can secure.” In oil, more hedges are being done for 12 to 18 months ahead instead of three to four years previously, Dranganoudis said. Reuters

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January 9, 2015

International Merkel wants Greece to stay Germany’s Angela Merkel played down the chances of a Greek exit from the euro zone, but made clear she expected Athens to stick to the terms of its international bailouts after this month’s election. The chancellor addressed the issue for the first time since a German magazine said at the weekend her government had shifted its stance and was ready to accept a “Grexit” if Athens failed to meet its commitments under EU/IMF rescue packages totalling 240 billion euros.

Trade, employment data boost U.S. economy’s fundamentals Economists were little concerned by a 1.0 percent drop in exports in November Lucia Mutikani

Fed should not be in a “rate” hurry The U.S. economy is likely to continue to grow fast enough to generate continued job growth, but the outlook for inflation is “more worrisome,” a top Federal Reserve official said on Wednesday. “I don’t think we should be in a hurry to raise rates,” said Charles Evans, president of the Chicago Federal Reserve Bank, noting inflation has been running below the Fed’s target for the last six years and is unlikely to reach that target for another three to four years. Evans is worried more about the threat of too-high unemployment than too-high inflation.

Marks & Spencer’s Christmas spoiled Marks & Spencer missed Christmas sales forecasts, hit by delivery problems at its online business and raising fresh questions about chief executive Marc Bolland’s turnaround strategy for Britain’s biggest clothing retailer. The 131-year-old mainstay of Britain’s shopping streets said on Wednesday same-store sales of general merchandise, which includes clothing, gifts and home wares, plunged 5.8 percent in the 13 weeks to December 27. That was the fourteenth consecutive quarterly decline; below the 3 percent drop expected by analysts and also signalled a weaker performance than arch-rivals Next and John Lewis.

PT says no change to Oi deal vote Portugal Telecom (PT) has said next week’s shareholder meeting to approve the sale of its former assets by merger partner Oi will take place as planned, quashing media speculation the vote might be postponed and boosting its shares. The stock, which slumped over 20 percent to all-time lows on Wednesday, recovered 8 percent in early trading on Thursday after the statement from the company’s board. It was also supported by a ban on short-selling in Portugal Telecom (PT) shares declared by the market regulator CMVM for yesterday.

he U.S. trade deficit fell to an 11-month low in November as declining crude oil prices curbed the import bill, prompting economists to sharply raise their growth estimates for fourth-quarter growth. The economy’s resilience despite slowing global growth was also underscored by other data showing private employers stepped up hiring last month. “The fourth quarter is shaping up to be much better than we had anticipated,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester Pennsylvania. “The fundamentals for the U.S. are rock solid and the economy will grow quickly this year even if the rest of the world stumbles along.” The Commerce Department said the trade gap narrowed 7.7 percent to US$39 billion, the smallest since December 2013.

The inflation-adjusted trade deficit fell to US$47.8 billion from US$50.1 billion in October, prompting economists to raise fourth-quarter gross domestic product estimates by as much as 0.8 percentage point to as high as a 3.5 percent annualized pace. Before the report, many had believed trade would be a drag on growth in the final three months of 2014. Trade contributed 0.8 percentage point to the third quarter’s robust 5.0 percent growth pace, which was the fastest in 11 years.

Solid fundamentals Lower gasoline prices and a tightening labour market are providing a tailwind to the economy. The firming labour market was underscored by the ADP National Employment Report, which showed private payrolls increased 241,000

World Bank antecipates slower track for global trade engine

Weak spending on investment since the crisis, especially in the euro zone, Tesco begins fight-back has sapped trade growth Britain’s biggest supermarket group Tesco plans to cut hundreds of millions of pounds of costs and sell assets to fund lower prices in response to the biggest crisis in its 95-year-history. Seeking to recover from four profit warnings and an accounting scandal, new Tesco boss Dave Lewis unveiled his strategy in a statement that also showed a marked improvement in trading over the key Christmas period. With the company’s pension deficit and debt levels growing, Tesco said it would reduce its capital expenditure for next year to 1 billion pounds (US$1.5 billion).

lobal trade should expand more slowly over the next decade than it did in the 30 years before the financial crisis, the World Bank said, citing forecasts for slower economic growth and longerterm shifts in trade patterns. For the three decades leading up to the global financial crisis of 20072009, trade had expanded at a steady clip of about 7 percent a year. But trade growth levels have fallen to about half that for the past two years, and should only rise to about 5 percent

over the medium-term, four World Bank economists said in an essay. International trade helped the global economy tide over rough spots in the two decades before the financial crisis, when it grew nearly twice as fast as economic output. But recent data shows the trade engine is running out of steam. The authors point to the lacklustre recovery from the financial crisis, which the World Bank expects to persist. And data shows import demand levels may be a fifth lower

in December after rising 227,000 in November, The report, jointly developed with Moody’s Analytics, came ahead of the government’s more comprehensive employment report on Friday. The data, together with expectations of monetary stimulus from the European Central Bank after weak inflation figures, helped U.S. stocks to snap a five-session losing streak. The dollar hit a nine-year high against the euro. Prices for U.S. Treasury debt fell. Imports dropped 2.2 percent to a nine-month low in November. The value of petroleum imports hit the lowest since August 2009, leaving the petroleum deficit near an 11-year low. A domestic energy boom has enabled the United States to reduce its dependence on foreign oil, easing pressure on the current account deficit. In November, the quantity of crude oil imports was the smallest since February 1994, while the average import oil price was the lowest in nearly four years. Lower oil prices should help to temper the impact on the trade balance of non-petroleum imports, which are expected to surge because of firming domestic demand and a strong dollar. Economists were little concerned by a 1.0 percent drop in exports in November, which was likely related to a labour dispute at the country’s main ports on the West Coast. That dispute has been cited by businesses as causing delays in the movement of goods. “The falls in trade volumes may be linked to the on-going West Coast dock labour dispute rather than the state of global and domestic demand,” said Paul Dales, a senior U.S. economist at Capital Economics in London. Reuters

than they would be otherwise even five years after an economic crisis. Weak spending on investment since the crisis, especially in the euro zone, has also sapped trade growth. Investment is especially reliant on imports compared to other economic drivers like consumption and government spending. But deeper factors have also tamped down trade expansion. China’s reduction of trade barriers and the fragmentation of production into global supply chains boosted trade at the end of the last century, factors that would be hard to replicate now. Countries like the United States and China are also making more inputs for final products closer to home, the economists write. Policymakers are hoping farreaching regional and global trade pacts could help trade growth regain some lost momentum. The World Bank said more integration of South Asia, sub-Saharan Africa and South America into global supply chains would also help. Reuters

Business Daily | 15

January 9, 2015

Opinion Business

wires

Leading reports from Asia’s best business newspapers

Liquidity, now discounted, to show its value

THE JAPAN NEWS James Saft

The leaders of the three major business groups stressed that it is important for companies in the country to expand capital expenditure and increase wages in order to help the economy to achieve a virtuous economic cycle. Referring to “shunto” spring labour-management wage negotiations that will start later this month, Sadayuki Sakakibara, chairman of the Japan Business Federation (Keidanren) said at a joint press conference that he wants member companies to raise wages this year by just over 2 percent, as major companies did last year.

Reuters columnist

THE KOREA HERALD South Korea’s exports of information communication technology (ICT) products rose to a new annual high in 2014, partly on record exports of semiconductors, the government yesterday. Outbound shipments of ICT products came to US$173.88 billion last year, up 2.6 percent from a year earlier, according to the Ministry of Trade, Industry and Energy. The trade surplus in the ICT sector shrank slightly from US$88.6 billion in 2013 to US$86.35 billion last year as imports grew 8.3 percent on-year to US$87.53 billion. The surplus was still nearly double South Korea’s total trade surplus of US$47.4 billion in 2014.

BANGKOK POST AIS, DTAC, True Move, TOT Plc and CAT Telecom — have committed to providing new promotional packages on a per-second basis, said Takorn Tantasith, secretary-general of the National Broadcasting and Telecommunications Commission (NBTC). The agreement was signed on Wednesday after operators met with the NBTC to discuss the possibility of per-second charging. The move came after the National Reform Council on Tuesday endorsed a report by an NRC committee on consumer protection reform. The report proposed that mobile phone fees be charged per second instead of per minute.

TAIPEI TIMES Smartphone maker HTC Corp announced a strategic partnership with US sportswear and accessories company Under Armour Inc. in a bid to enter the wearable device market. HTC chief executive officer Peter Chou said the firm plans to launch an array of new products later this year. “It’s an incredibly exciting new direction for us,” Chou said, adding that the company would work closely with Under Armour to provide consumers with a range of connected health and fitness products and services.

ou don’t miss liquidity until the markets turn bad, or so investors may find out in 2015. One of the best illustrations of just how extraordinary market conditions are is the whittling down of the premium investors have historically placed on liquidity. On one key measure financial conditions are fully as relaxed as they were in 2007 before the crisis broke, and similarly an index of bond market liquidity is now about 15 percent higher. Given that some analysts give Greece about a one in five chance of exiting the euro zone, with developments to come on rapidly after the January 25 Greek general election, we have a possible catalyst which may drive volatility up and liquidity down. That’s even before we consider the impact if the Federal Reserve raises interest rates later this year, as it seems determined to do. To be sure, it is impossible to know what will happen in the euro zone, or if the Fed will be able to raise rates, but there will be plenty of opportunities for investors to want easy, low-friction access to their investments in coming months. Almost more to the point, many will finally figure out that they’ve been very poorly compensated for taking on liquidity risk. Nobel Prize-winning economist Myron Scholes, now chief investment strategist at Janus Capital, argues 2015 is going to go down as “the year of volatility.” “With greater volatility, investors should gravitate to more liquid

investments and consider increasing reserves at the margins. I would suggest paying up for liquidity at this juncture, even if it means taking a slightly lower return on those investments,” Scholes wrote in a note to clients. “Now would also be the time for investors to consider their illiquid holdings and confirm they have the appropriate time horizon to hold those investments through a volatile period.” He further argues that when things get ugly and volatility spikes, we will be surprised by how assets we thought were not related suddenly discover unknown correlations. That even implies that assets we thought were liquid, or semi-liquid, will prove to be hard to sell, or very costly to sell, in a pinch.

Everything is connected in a crisis In financial markets liquid assets are defined as those which can easily be bought or sold, particularly bought or sold quickly without having a large impact on the price paid or realized. The classic example of an illiquid asset would be a minority interest in a private business, while U.S. government bonds are highly valued because the market for them is so large and deep that large positions can be sold without moving the market strongly, if at all. Even Treasuries can lose their liquidity in a crisis, as was shown during the Long-Term Capital Management (LTCM) debacle in 1998 when Alan Greenspan, that great believer in markets,

It is impossible to know what will happen in the euro zone, or if the Fed will be able to raise rates, but there will be plenty of opportunities for investors to want easy, low-friction access to their investments in coming months

found himself shocked to find a large premium being paid for more liquid issues of Treasuries which were identical, from a risk and terms point of view, to smaller less liquid issues. (It should be noted that Scholes, who seems to have learned his lesson, was one of the founders of LTCM). Because it is a handy thing to be able to access one’s money quickly and with minimal friction

investors tend to put a value on this, called the liquidity premium. This is essentially the extra return they demand in exchange for holding something which can be harder to sell. Interestingly, these premiums seem to have been declining and are generally now quite low in historical terms. One good indicator is the St Louis Fed Financial Stress Index, which is strongly negative, indicating that markets are extremely relaxed. Indeed, while not as supine as several months ago, levels in the index are looser than where they were in 2007, before the beginning of the crisis. The Capital Markets Liquidity Index, which measures bond market liquidity in shorter-dated paper, is up 56 percent over the past two years and 15 percent above its late-2007 peak. The index fell by almost 75 percent in late 2007 and 2008 the last time investors suddenly discovered the value of liquidity. Demand from long-term investors like insurance funds has caused the premium that used to exist in highly rated private placements to nearly halve in some cases over the past two years. While primarily a bond market phenomenon, the fact that liquidity is out of fashion can come back and bite equity sectors like smallcap shares and REITs (Real Estate Investment Trusts), which did particularly well last year. Liquidity this time round has been a capital markets phenomenon, and when it ebbs it will look familiar to those who remember 2008. Reuters

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January 9, 2015

Closing Planning agency plays down stimulus speculation

China buys more iPhones than US for first time

China is not planning to sharply boost spending to stimulate the slowing economy, the country’s top planning agency said yesterday, playing down speculation that the government was planning to embark on a splurge. The government aims to spur investment in key areas but it will encourage private sector rather than relay on state entities, said Luo Guosan, deputy head of the investment department at the National Development and Reform Commission. The central government hopes to reduce routine spending to channel more funds into major projects, he said without elaborating.

Strong demand for Apple’s latest iPhone 6 and iPhone 6 plus smartphones has helped the Chinese market outsell the United States for the first time, according to tech news hub pingwest.com citing a report from investment banking firm UBS. Steven Milunovich, an analyst with UBS, said iPhone demand saw outsized growth in China and China could constitute as much as 35 percent of shipments in the last quarter of 2014, way higher than the 24 percent ratio of the U.S. market. During the same period last year, China’s market share was 22 percent.

Chow Tai Fook third-quarter sales fall

how Tai Fook Jewellery Group Ltd. revenue slumped 10 percent in its fiscal third quarter after Hong Kong pro-democracy protests hurt traffic to its stores, with growth unlikely to improve in the current quarter. Same-store sales, referring to outlets open for at least a year, fell 18 percent in the three months ending December, the world’s largest-listed jeweller said in

a statement to the Hong Kong stock exchange yesterday. Same-store sales in Hong Kong and Macau plunged 21 percent, while that for stores in mainland China dropped 15 percent. Retailers in Hong Kong were hit after pro-democracy protesters occupied the city’s streets for 79 days, disrupting businesses and traffic. The Occupy Central Movement, which ended on December 15,

was the biggest challenge to China’s rule over Hong Kong since it resumed sovereignty over the former British colony in 1997. Same-store sales growth in the fourth quarter is expected to “remain at the negative zone,” Managing Director Kent Wong said in a teleconference today. While he expects sales in China for the next three months to improve, Wong said performance in Hong

Chow Tai Fook said in November that sales at stores open at least a year plunged 24 percent in October Kong stores is unlikely to see a big improvement as consumer sentiment will remain weak. Chow Tai Fook said in November that sales at stores open at least a year plunged 24 percent in October as the demonstrations disrupted business. Its profit fell 23 percent in the six months to September after sales of its gold products slowed compared with a year earlier due to a rebound in prices of

the precious metal. Its shares rose 2.2 percent to HK$11 at the end of trading in Hong Kong yesterday, the highest closing price since September 16. The benchmark Hang Seng index increased 0.7 percent. The Hong Kong street protests began September 26 when student leaders stormed the premises of the government headquarters and drew as many as 100,000 people after the police used tear gas to try and disperse demonstrators two days later. Chow Tai Fook was named after founder Chow Chi-yuen and whose name means “big blessing” in Chinese. Founded in 1929 in the southern Chinese city of Guangzhou, the company had 2,243 points of sales as of end-December after adding a net of 52 points in the threemonth period. Hong Kong’s democracy protests will have a “mild impact” on the city’s fourth quarter economic data this year, Citi economist Adrienne Lui said in a briefing last month. Going forward, companies that operate in Hong Kong will now have to factor in the potential for more disruptive, frequent and prolonged protests, possibly affecting retail sales, Lui said. Bloomberg News

Hong Kong air quality slightly improved

Moody’s appeals HK regulatory penalty

German factory orders slump in November

ir quality in Hong Kong improved slightly last year, pushing the death toll from polluted air below 3,000 for the first time in more than a decade, an environment monitoring group said. Nitrogen dioxide at all monitoring stations fell in Hong Kong as some vehicles installed catalytic converters, Clean Air Network Ltd. said, citing data from the government. Health costs associated with pollution fell 20.6 percent to HK$32.7 billion (US$4.2 billion) from the year before, according to an index compiled by the University of Hong Kong. Pollutant levels still fell short of standards from the World Health Organization, and marine and regional pollution threats persist in the city, according to the report. Hong Kong Chief Executive Leung Chun-ying has made cleaning up the streets a priority. “The numbers are good to prove that the policies are starting to show effect, but change is not happening fast enough,” said Kwong Sum-yin, the environmental group’s chief executive officer.

oody’s Investors Service began an appeal yesterday against a decision by Hong Kong’s markets watchdog to fine the ratings agency US$3 million for a report that raised concerns about corporate governance at some Chinese companies. The case before the Hong Kong’s Securities and Futures Appeals Tribunal (SFAT) comes amid growing investor scrutiny of Chinese companies as Beijing opens up its mainland stock market, and renewed attention from short-sell research firms hoping to sniff out corporate fraud. After a brief procedural hearing, the tribunal adjourned the case to September. A spokesman for Moody’s said it would not be appropriate to comment while the case is in progress. A spokesman for the SFC declined to comment. Moody’s is seeking to defend the publication of the July 2011 report in which it raised concerns about 49 Chinese companies, most of them listed in Hong Kong, some of which have since run into financial trouble.

Bloomberg News

Reuters

erman industrial orders, a key measure of demand for German-made goods both at home and abroad, fell unexpectedly in November, data showed yesterday, but analysts insisted the uptrend remains intact. Industrial orders dropped by 2.4 percent in November compared with the previous month, the economy ministry said in a statement. In October, German factory orders had risen by 2.9 percent. Domestic orders slumped by 4.7 percent and export orders slipped by 0.7 percent compared with the previous month. Orders from the eurozone rose by 2.7 percent while those from outside the eurozone were down by 2.6 percent, the ministry calculated. By sector, orders for semi-finished goods fell by 2.3 percent and those for capital goods slumped by 3.1 percent, while demand for consumer goods rose by 2.6 percent. “It was the first decline after two consecutive and strong increases. Hence, there is no need for being disappointed,” said UniCredit economist Andreas Rees. AFP