Macau Business Daily, Jan 23, 2015 by Business Daily

MOP 6.00 Closing editor: Joanne Kuai Publisher: Paulo A. Azevedo Number 714 Friday January 23, 2015

Pass the parcel P

Year III

lenty of mud has been dug up. Now it’s time to sling it. A Light Railway Transit (LRT) contractor blames the government for construction delays. Top Builder Group Ltd., responsible for three projects, says the game plan changed underneath them. While Macau Construction Association said the initial budget was the result of ‘non-professional’ calculations foisted on decision makers by advisors. The Association stressed they will not gain from the delay. In fact, just the reverse as they will have to pay more ‘overhead costs’ PAGE

Chinese billionaire Wang Jianlin to buy stake in Atletico soccer club

Homing in on Hengqin

PAGE 7

Chinese Premier delivers measured speech at Davos

They’re just waiting for their licence. Following which, JLL will start marketing Hengqin properties in Macau and Hong Kong. The Chicagobased realtor is the lead agent for the 5.4 million square foot Lotus Square project in Hengqin. Retail, residential and office space sales are likely to get underway mid-year.

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Singapore Exchange plans to start trading Chinese equity-index

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PAGE 12

HSI - Movers January 22

Name

Betting against recovery

www.macaubusinessdaily.com

Everyone has an opinion. This time, options traders are betting against a quick recovery by Macau casinos. This, according to a derivatives strategist. Companies that have diversified into China are going to be subject to more scepticism, it is claimed

%Day

China Resources Ente

5.07

Kunlun Energy Co Ltd

4.13

Sands China Ltd

3.56

Galaxy Entertainment

3.05

Tencent Holdings Ltd

2.25

Li & Fung Ltd

-1.35

China Resources Land

-1.64

Link REIT/The

-1.70

China Overseas Land

-1.83

Want Want China Hol

-6.47

Source: Bloomberg

I SSN 2226-8294

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Desert deserted

Central banks at work

A two-year slide in gold and quieter casino tables. Resulting in a $170 million hole in Nevada’s budget even as its economy booms. Governor Brian Sandoval is rethinking the state’s dependence on mining and gambling

China has joined the ranks of central banks. Acting with a reverse repurchase injecting 50 billion yuan. Canada, Denmark, Switzerland and ECB are also assuming leading roles in this shaky start to 2015

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2 | Business Daily

January 23, 2015

Macau Telecommunications Regulation Services Bureau awards MOP87,000 in 4Q The Telecommunications Regulation Services Bureau awarded MOP87,000 in financial subsidies to three associations in Macau in the last quarter of 2014 with Macau Computer Society receiving the largest share. According to the Official Gazette, the Telecommunications Regulation Services Bureau gave MOP55,000 to Macau Computer Society to finance the cost of its event ‘Award of Information and Communication Technologies of Asia Pacific 2014’. The Macau Institution of Engineers received MOP30,000 to support its ‘Radio Spectrum Conference Asia Pacific (Macau) 2014’ event. Finally, MOP2,000 was granted to the Association of Ou Mun Readers to support participation in the ‘Charity Walk’, the Official Gazette said.

Deutsche Bank: Macau’s weakness an opportunity for Korea and Philippines Chinese gamblers will travel abroad to mid-sized markets as in the SAR the industry will contract 8 per cent year-on-year. The year, however, bodes well for Galaxy and Melco Crown as their new resorts will open João Santos Filipe

jsfilipe@macaubusinessdaily.com

n 2015, Deutsche Bank expects the Macau gaming industry to decline 8 per cent year-on-year in terms of Gross Gaming Revenue (GGR) terms. However, the pain of the Special Administrative Region will boost the Korean and Philippines gaming industries, according to yesterday’s report by the German bank. “Macau’s weakness creates opportunities for Korea and the Philippines. Weakness in big markets means opportunities for mid-sized markets as Chinese gamblers travel farther to try new destinations”, research analyst Karen Tang wrote. “For 2015, we expect Korean foreigners-only casino GGR to grow 16 per cent. For the Philippines, we expect new property openings to boost GGR by 33 per cent this year”, she said. In relation to the former

Portuguese colony, Deutsche Bank says the first half of the year will be tough, to the point of registering a 21 per cent year-on-year fall. GGR will be dragged down, as happened in 2014, by the anti-corruption crackdown in Mainland China, junket liquidity problems, a stricter transit visa policy by the Central Government and

the smoking ban. “We expect 2015 GGR to fall 8 per cent year-on-year to US$40bn, driven by a 9 per cent year-on-year decline in VIP and a 7 per cent yearon-year decline in mass. GGR will likely contract further in the first half of the year (-21 per cent year-on-year) as difficult debt collection puts

GGR market share

2014

2015

2016

Wynn Macau 10% 10% 15% SJM 23% 20% 15% Sands China 23% 20% 18% MGM China 10% 9% 9% Melco Crown 13% 17% 17% Galaxy 21% 25% 26% Source: Deutsche Bank predictions

pressure on junket liquidity”, the analyst forecast. However, the openings of Galaxy Phase II and Studio City will calm the negativity of the industry, boosting recovery to 7 per cent year-on-year during the second half. “With two new property openings in mid-2015, GGR should recover to 7 per cent year-on-year in the second half of 2015 as new hotel capacity releases bottlenecks on visitation and length of stay”, it was claimed. Despite the opening of the new casinos, the industry will be hurt by new challenges, such as increasing labour costs and competition, which will result in increasing marketing costs as operators fight for a larger slice of market share. The year of 2015 will be good in terms of market share for Galaxy and Melco Crown,

which will happen due to the opening of the new casinos. Deutsche Bank predicts that this year Galaxy will own as much as 25 per cent of the market, while Melco Crown will achieve 17 per cent. On the opposite side, SJM Is predicted to drop from 23 to 20 per cent, Sands from 23 to 20 per cent and MGM from 10 to 9 per cent. Wynn should be able to secure the same slice of the market in 2015 as in 2014, which was 10 per cent. However, the bank forecasts that SJM will have to endure further suffering in 2016, while it waits for Lisboa Palace to start operating. Although SJM’s new project broke ground in February last year, the grand opening is only scheduled for 2017. This has led Deutsche Bank to forecast that SJM’s market share will further drop to 15 per cent.

JLL to start selling Hengqin residences in Macau mid-year The Chicago-based realtor is the lead agent for the Lotus Square project in Hengqin for the overseas markets, including Macau, with sales set to begin in the middle of the year

ones Long LaSalle (JLL) expects to receive the sales licence for the Lotus Square Hengqin project in the middle of this year in order to start marketing, the Managing Director of JLL in Macau, Gregory Ku, told Business Daily. The Chicagobased firm is the lead agent for the project overseas,

which includes the markets of Macau and Hong Kong. “At this moment, we’re doing the soft marketing for the project. After the Chinese New Year, and more closely to the middle of the year, we are expecting to receive the sales licence and then we will begin the full marketing for the project”, he explained.

Lotus Square has a gross floor area of 5.4 million square feet. Of this, 1 million square feet is for retail, 2.15 million square feet - comprising 11 towers is for residential, and roughly another 2 million square feet will be allocated to office space. The 11 blocks will consist of 600 residential units, with the first phase comprising 4 of these

towers. This phase is expected to be completed In 2017. “The foundation work is completed and now contractors are working on the infrastructure. Once we have the sales licence, which should happen in mid-2015, we will formally launch the sales of the project”, Ku said. During the presentation

of JLL’s Year-end Review, which took place earlier this week, Gregory Ku said that in the coming years increasing imported labour would result in people moving to Zhuhai and Hengqin Island, as Macau will not have enough space to accommodate all these new workers. J.S.F.

Business Daily | 3

January 23, 2015

Macau

LRT contractor slams gov’t for construction delay Macau Construction Association said it was time for them to clarify that contractors should not be the one to be blamed for the delay of the city’s infrastructure. One LRT contractor, Top Builder, claimed their LRT works had, in fact, been ‘delayed’ by the government Kam Leong

kamleong@macaubusinessdaily.com

op Builder Group Ltd., a local contractor in charge of three construction projects on the Light Rail Transit (LRT), said that the government is the cause of the delay of their construction of the LRT. The company is responsible for the construction of the superstructure for the Macau LRT Depot, the Transport Interchange of LRT in front of the Jockey Club in Taipa as well as the C360 Light Rail Construction for Cotai District. During a press briefing of Macau Construction Association (MCA) yesterday, Top Builder revealed that the construction of the Transport hub had only officially started in July 2014, despite the contract of the company and the government regulating that construction should start

in 2012. “In 2012, we had ‘clearly’ proposed the plan of blocking [Estrada Gov. A. Oliveirain] for the construction in our tender proposal. We won the bid yet the government [GIT] did not raise any problem with the plan of blocking the road. However, later, the Transport Bureau said they did not know about such a plan,” the project director of Top Builder, Calvin Pang, claimed, indicating that DSAT had rejected blocking the road. According to the contractor, the east side of Estrada Gov. A. Oliveirain, which is opposite the Jockey Club, has to be blocked for the construction. However, the government only started partly blocking the road in April 2014, Top Builder said. Mr. Pang said the company

is now estimating that the completion of the transport hub, which is 50 per cent finished, will be delayed for one more year despite the contract between the company and the government regulating that the construction should be wrapped up by November 2014. “[The government] could not pass the site for us to construct; the responsibility [of delay] should not fall on us,” the managing director of the company, Forest Tang Hon Cheong, said. According to Mr. Pang, the company is losing some 30 million patacas for the construction as they have paid 2 million overhead costs every month. Regarding the increasing budget revisions of the LRT, the honorary president of the Association, Lo Kai Jone,

indicated that it is because the initial budget of 4.2 billion patacas was probably not made by a professional in the field, but only relied on the experience of advisors. “The initial budget of 4.2 billion patacas for the whole construction can only afford to buy the train itself now,” the Secretary General of the Association, Lo Chi Hou, remarked. The Association indicated that it has to clarify that the delay in the infrastructure is not necessarily due to the contractors as they will not gain more profit from the delay. In fact, they claim that they will have to pay more ‘overhead costs’ for delays, such as fees for the management of the construction site as well as equipment rental fees.

4 | Business Daily

January 23, 2015

Macau

CAM targets MOP1.16bln revenue for 2015

he Macau International Airport Company Ltd (CAM) said it was targeting some 54,500 flight movements for this year, in addition to 26,162 tonnes of cargo and 5.65 million passenger movements. In addition, the airport company said it expects revenues for this year to increase to MOP1.16 billion from 2014’s revenue of MOP1.04 billion. In a statement released by the company, CAM said Macau International Airport (MIA) operations increased by 6.6 per cent to a total MOP4.38 billion, of which MOP1.04 billion were revenues. This represented a 13.6 per cent increase over that of 2013 revenues. Passenger movement also increased by 9 per

cent to 5.48 million compared to the previous year. Still in 2014, business jet movements recorded a 29.2 per cent increase to reach a total of 2,791, while aircraft movements increase by 7.4 per cent to around 52,000. Cargo transported at the Macau International Airport increased by 8.7 per cent to 2.8 tonnes in 2014 compared to that of a year ago. And one new low cost carrier began flight operations to and from Macau. Three new cities – Palau, Siem Reap and Dalian – were added to the list of destinations flights from Macau fly to. Currently, up to 22 airlines operate to and from Macau, servicing a total of 36 routes, the company said in its statement. S.F.

HK-Shanghai link to allow IPO’s and short selling Both bourses are willing to allow investors to trade new products beyond trade stocks. Bonds, IPO’s, commodities futures and even margin financing and short selling are some of the possibilities Luís Gonçalves

Luis.goncalves@macaubusinessdaily.com

ong Kong and Shanghai stock exchanges want to diversify and expand the link – called Stock Connect - allowing more products to be traded and benefit from links with other regional bourses like Shenzhen. The link started operating in November and allows investors to trade stocks listed on the major indexes of Hong Kong and Shanghai but with a limit of 23.5 billion yuan per day. With the opening to new financial products, the limit is set to be improved. The confirmation of Stock Connect expansion plans was announced by Charles Li Xiaojia, chief executive of Hong Kong Exchanges and Clearing

at the Asia Financial Forum, the Standard reported this week. Mr. Li added that stock index futures will be introduced under the HK-Shanghai link in the upcoming months and initial public offerings (IPO’s) and commodities futures are two other possibilities. “If our link with Shanghai and Shenzhen are two legs of the opening up of China’s stock market, the linkup of stock index futures is as crucial as the waist”, he told the Standard. Bloomberg reported this week that Stock Connect will also receive the green light from Beijing permitting international investors to buy bonds and exchange-traded funds

Haitong anticipates 50pct net profit increase

aitong Securities Co. Ltd. has announced it is expecting to post a net profit increase of 50 per cent for the full year 2014, the company said in a filing with the Hong Kong Stock Exchange yesterday. A preliminary review of the company’s management accounts suggests Haitong could see ‘an increase of not less than 50 per cent in consolidated net profit’ for the 12 months ended December 31 over that of the previous year. In 2013, the company’s audited consolidated net profit amounted to HK$529.2 million. A 50 per cent increase over this figure would mean Haitong could expect to post a consolidated net profit of at least, or around, HK$793.8 million for the whole of last year. Meanwhile, Haitong has proposed the issuance of bonds to professional investors. These, a separate filing with the Hong Kong Stock Exchange says, will only be offered outside the United States in offshore transactions. ‘None of the bonds will be offered to the public in Hong Kong,’ the filing adds.

under the link. The move is likely to draw attention from the market as companies, mainly Hong Kongbased fund managers, seek greater access to China’s 1.32 trillion yuan of exchange-traded bonds. Roy Teo, a Singapore-based strategist at ABN Amro, told Bloomberg that this proposal “is a progressive step for China to open up the capital markets . . . When the market opens up the difference between borrowing costs in Hong Kong and China would reduce.” But that’s not all. Shanghai Stock Exchange chief executive Huang Hongyuan also told the Standard that the two bourses have already begun to

discuss the change of the daily trading quota and the possibility of allowing margin financing and short selling. Charles Li Xiaojia also told reporters that he expects a direct link between Hong Kong and Shenzhen stock exchanges to be ready in the third quarter of this year. According to Bloomberg, the valuation gap between dual-listed stocks in Shanghai and Hong Kong has widened since Stock Connect opened. The premium on mainland shares to those in Hong Kong was about 2 per cent when the link began and ended last week at a three-year high of 33 per cent, Hang Seng China AH Premium Index data revealed.

Corporate Taste Sensations Welcome in CNY

While at the moment terms and conditions as well as the amount of bonds has yet to be determined, Haitong did say the ‘proceeds from the bonds are intended to be used primarily for general corporate purposes of the group.’ According to the filing, the company will seek to have the bonds listed on the stock exchange, and ‘confirmation of the eligibility for the listing of the bonds has been received from the stock exchange.’ Haitong bought Novo Banco’s investment bank Banco Espirito Santo de Investimento (BESI) for 379 million euros (HK$3.6 billion) in December last year. According to a company filing at the time, Haitong’s wholly-owned subsidiary HTIH, which entered into the purchase agreement with the Portuguese bank, was to pay 56.9 million euros as an ‘initial payment’ by December 19, followed by the remainder once the full purchase is completed, no later than December 31. S.F.

Chinese New Year is a time for family feasting and with a superb selection, ranging from traditional festive treats to more unusual seasonal fare, Galaxy Macau™ and StarWorld Hotel are catering to every taste to welcome in the Year of the Goat this February. Stars of StarWorld Hotel include savouring seasonal seafood Sichuan and Hunan-style at Feng Wei Ju, and sensational Poon Choi is made for sharing. Gourmand’s pleasure at Galaxy Macau allows one to choose a tasty Taiwanese treat in Lugang Café, enjoy a festive feast at Festiva and holiday high tea indulgence at Cascades. All three of Galaxy Macau’s stunning 5-star hotels are also pulling out the culinary stops for Chinese New Year.

Business Daily | 5

January 23, 2015

Macau

Investors betting against Macau casino recovery in 2015 The three US operators with casinos here - Wynn Resorts, Las Vegas Sands and MGM – have all seen options on their shares reach record highs since 2008. Now, the market is turning bearish with the timing of the announced recovery in Macau still questionable

hen it comes to the prospects for casino companies operating in China, options traders are betting against a quick recovery. One-month contracts to sell shares of Wynn Resorts and Las Vegas Sands cost the most since 2008 relative to bullish ones, data compiled by Bloomberg show. Bearish options on MGM Resorts International (MGM) are near their more expensive levels in almost six years, relative to calls. All three companies operate in Macau, China’s gambling center. Each stock lost more than 25 percent in the past year as Chinese President Xi Jinping seeks to battle illicit money channeled through Macau’s casinos. The crackdown is scaring away high rollers. Gambling revenue in the former Portuguese enclave fell in 2014 for the first time, ending a decade of growth that transformed it into a betting center bigger than the Las Vegas Strip. “Things are not going to rebound in 2015, it’s going to be a tough first half of the year,” Timothy Chen, an analyst at Rhino Trading Partners LLC in New York, said by phone. “Macau has been a conduit for money to leave the country. The landscape is changing and no one knows where this could go.” Gambling revenue in Macau declined 2.6 percent last year, and Barclays Plc projected this month a note that sales will drop 8 percent in 2015. Macau is the only place in China where casinos are legal and is viewed as a conduit for officials and businessmen to bypass currency controls and send money out of the mainland to safer havens.

Revenue Loss Wynn’s Macau sales fell 5.6 percent in the third quarter, while they dropped for Sands both in the enclave and in Singapore. The companies get more than 65 percent of their revenue from Macau, data compiled by Bloomberg show. MGM, the largest owner of casinos on the Las Vegas Strip, reported an unexpected loss in the

third quarter as revenue from the U.S. also fell. Analysts estimate earnings will slide 42 percent in the fourth quarter, according to the average projection compiled by Bloomberg. The company gets about 33 percent of its sales from Macau. “The companies that have diversified into China are going to be subject to more skepticism,” Jared Woodard, the New Yorkbased senior equity derivatives strategist at BGC Partners LP, said in a phone interview. “That story keeps popping up, and it seems consistent with the overall policy the president in China has tried to pursue.” The biggest earnings cuts for the Macau gaming sector are over, Kenneth Fong, an analyst at Credit Suisse in New York, wrote in a Jan. 8 note to clients. On Jan. 9, Morgan Stanley raised its rating on Wynn to overweight from the equivalent of a hold.

New Resorts Companies will build new resorts in Macau and gross gaming revenue will climb 13 percent in 2016, according to Fong. Three casino operators are planning to open new resorts costing over US$6 billion in the second half of 2015, according to an analysis by Bloomberg Intelligence. Still, investors are betting that more stock declines await. Seven of the 10 most-owned options on MGM were bearish, while Sands had eight and Wynn had six, data compiled by Bloomberg show. Bearish one-month options on Wynn shares were 7.7 points more expensive than contracts betting on a 10 percent rally, compared with a one-year average of 4.3 points. On Jan. 2, the price relationship known as skew reached 14, the highest in more than six years, according to data compiled by Bloomberg. It was at 9.3 points yesterday for Sands, and at 11.8 points for MGM. “People still buy into the longterm idea that if the casinos increase their penetration into the Chinese market, there’s a lot of incremental

money there,” Brian Miller, a gaming and lodging analyst for Bloomberg Intelligence, said in a phone interview. “The risk is in the

short term: there’s a lot of supply opening up and the question is if demand will come back to match it.” Bloomberg

6 | Business Daily

January 23, 2015

Gaming

Nevada’s budget busted as Baccarat tables go quiet Baccarat winnings declined 23 percent in the three months ended November 30 from the same period a year earlier. An academic from the University of Macau attributed the drop largely to Beijing’s anti-graft campaign

two-year slide in gold and quieter casino tables have opened a US$170 million hole in Nevada’s budget even as its economy booms, pushing Governor Brian Sandoval to rethink dependence on mining and gambling. State collections from baccarat, the most profitable game on the Las Vegas Strip after slot machines, were down almost a quarter in the three months through November. Gold prices are off a third from a 2011 peak, even after a rebound this month. Gambling revenue is projected to fall US$41.5 million below the secondterm Republican’s forecast this year, while mining revenue is expected to miss by US$72 million. The trends belie Nevada’s growth. The state tied with Idaho for the biggest improvement in economic health for the year through June, according to data compiled by Bloomberg. Yet even that challenges a state without levies on personal or corporate income: Rising school enrolment driven by new jobs is adding US$81 million to spending. “The economy is diversifying, but we’re just not taxing what’s diversifying the economy,” said Robert Lang, a professor of urban affairs at University of Nevada at Las Vegas. “Growth in Nevada stopped paying its way when growth stopped being driven by tourism. And yet, 400 baccarat players are what the state wants to tax.”

Changes afoot Nevada’s changing economy is exemplified by a successful bid for Tesla Motors Inc.’s US$10 billion battery factory near Reno. The state agreed to forgo US$1.3 billion in taxes over 20 years to win it. Lawmakers will probably use reserves to fill the budget gap, a “credit negative step backward at a time when most states are rebuilding reserves,” Moody’s Investors Service said in a report last month.

More than 25 percent of revenue comes from gambling and mining, relics of a tax code that dates to the 1970s, when Nevada had a quarter of its current population. Today, Nevada is home to almost 3 million people and employers such as Apple Inc. and Zappos.com Inc., though tourism remains its largest industry. The gambling business has evolved beyond sun-hungry visitors from the East Coast and Midwest, with visits from China increasing 13 percent from 2012 to 2013 alone. International travellers accounted for 20 percent of visits in 2013, up from 14 percent in 2009, according to the Las Vegas Convention and Visitors Authority.

Corruption crackdown Yet dependence on tourists from abroad carries risks. Baccarat winnings on the Strip declined 23 percent in the three months ended November 30 from the same period a year earlier. Desmond Lam, a University of Macau marketing professor, attributed the drop largely to a Chinese crackdown on financialindustry corruption. Baccarat, a card game that relies on chance, was popularized by James Bond movies in the 1960s and is a favourite of Asian gamblers, Lam said. “The anti-corruption campaign has a widespread effect on managers and executives from state-owned enterprises and businessmen who work with or for these people,” Lam said by e- mail. “Many are covering their trails, lying low and avoiding unnecessary expenses and overseas trips.” Casino revenue in Macau, China’s gambling centre, fell last year for the first time.

Baccarat profits High-end baccarat players in Las Vegas, with credit lines of

US$1 million or more, are “almost exclusively Chinese,” said Brent Pirosch, the director of Gaming Consulting Services for CBRE’s Global Gaming Group in Las Vegas. There may be 100 to 150 such players, he said. Such high-rollers inhabit a different realm. They stay in private hotels such as The Mansion at MGM Grand, which includes a four-bedroom, 12,000-square-foot villa and a 12-story atrium with gardens and a reflecting pool. There’s a restaurant with no menu where chefs prepare meals on demand. Baccarat grew to more than 14 percent of Nevada’s gaming win in 2013 from about 4 percent in 2003. In the first half of last year, it fell to about 12 percent, said David G. Schwartz, director of UNLV’s Center for Gaming Research. The state taxes gambling winnings at 6.75 percent. Sandoval, 51, re-elected in November, will confront both the deficit and fellow Republicans opposed to raising taxes to erase it. Both legislative chambers switched from Democratic to Republican majorities in the same election, including an anti- tax faction. “What these conservatives ran on was cost control,” said Lisa MayoDeRiso, a Las Vegas consultant advising several newly elected Republicans.

‘Antiquated systems’ On January 15, Sandoval proposed US$560 million in tax increases over two years by imposing a license fee on businesses and by increasing cigarette taxes by 50 percent. He also recommended keeping sales- and business-tax increases set to expire June 30, which would raise US$580 million. “We have relied on antiquated systems and half measures for too long,” Sandoval said in his State of the State address in Carson City, the capital.

In a December report to the legislature, state budget forecasters said Nevada is on track to have less than $8 million in reserve by July, short of the US$170 million required under state law, which equates to 5 percent of expenditures. Revenue depends disproportionately on discretionary spending, Moody’s analyst Julius Vizner said by telephone. The company rates Nevada Aa2, its third-highest rank. “It’s not an economic problem,” said Vizner, who’s based in New York. “It’s a revenue problem. There is a disconnect between the underlying economy and state revenue performance.”

November rejection Voters in November rejected a 2 percent tax on gross business receipts. The Las Vegas Metro Chamber of Commerce, which opposed the levy, commissioned the non-profit Tax Foundation in Washington to look at other measures to reduce swings in revenue, such as applying sales taxes to services, ending exemptions to a live-entertainment tax and lowering the 6.85 percent salestax rate. Nevada’s history as the U.S. gambling mecca means boom-andbust cycles are inevitable, said Michael Johnson, managing partner at Gurtin Fixed Income Management. The firm in Solana Beach, California, oversees US$9.5 billion. “Most of the time this is a situation that cannot be controlled,” Johnson said by e-mail. “If Nevada can use legislation to diversify tax revenue without causing additional problems or lowering revenue overall, that would be the preferred method,” he said. “Otherwise, the state needs to build reserves to be able to weather the volatility with less pain.” Bloomberg

Business Daily | 7

January 23, 2015

Gaming

Wang Jianlin purchases stake in Atletico Madrid to reach casinos in Spain The chairman and founder of Dalian Wanda Group says he met Spanish Prime Minister Mariano Rajoy to discuss a 3 billion euro ‘megadeal’ last year. He has now bought 20 per cent of a Spanish soccer club that has properties outside Madrid, which Mr. Wang hopes he can develop as part of a casino and leisure complex

hen you’ve got the yacht, the private jet and the Van Gogh, there’s only one choice to signal you’ve joined the global super-elite: that vast sinkhole of cash known as a European soccer club. Our first thought on reading that Chinese billionaire Wang Jianlin is buying into Atletico Madrid was the advice we received when planning our first Swiss holiday: “Take a lot of money.” European football clubs are such spendthrifts that the governing body, UEFA, had to bring in rules to limit the amount they are allowed to lose every year. (Profits? What are they?) Football is where billionaires go to spend their fortunes, not enhance them. On second glance, Wang looks a little cannier. For one thing, he isn’t buying

the whole club -- only a 20 percent stake, so won’t be on the hook (we presume) for any big spending plans inspired by the arrival of

a new sugar-daddy. For another, Atletico Madrid has achieved success on a budget, becoming Spanish champion last season while spending a

fraction of bigger-name rivals Real Madrid and Barcelona. Even better, there may be a business side-angle for Wang. The chairman and

founder of Dalian Wanda Group said he’d met Spanish Prime Minister Mariano Rajoy to discuss a 3 billion euro (US$3.4 billion) “megadeal.” Atletico has properties outside Madrid that it was hoping to develop as part of a casino and leisure complex, according to the Financial Times. U.S. billionaire Sheldon Adelson abandoned the US$30 billion project in 2013 after failing to gain assurances from Spanish officials on tax rates and other conditions. Then again, maybe Wang’s heart will end up ruling his head. The billionaire, who has a net worth of US$24.9 billion according to the Bloomberg Billionaires Index, said he’s considering buying more soccer clubs and has been linked in the past with a bid for English Premier League outfit Southampton. Bloomberg

8 | Business Daily

January 23, 2015

Greater China Public funds profits at 4-year high China’s public funds saw a profit of nearly 300 billion yuan (US$49 billion) in the final quarter of 2014, the highest quarterly gains in four years, boosted by the recent stock market rally. A total of 2,226 public funds managed by 88 fund companies saw combined profits of 299.1 billion yuan during this period, according to data compiled, based on these firms’ quarterly reports. Profits of stock funds stood at 204.7 billion yuan, accounting for the biggest share in the total gains.

Farm produce prices up China’s farm produce prices in 36 large and medium-sized cities edged up slightly in the week ending January 18 compared with the previous week, the Ministry of Commerce said yesterday. The average price of 18 vegetables went up 0.5 percent in the time period. The price of wax gourd and cabbage rose 7.7 percent and 6.6 percent, respectively. Last week, the price of pork and mutton dropped 0.3 percent and 0.6 percent, respectively. The average price of aquatic products went down 0.3 percent, and egg prices declined 1.1 percent.

Public satisfaction of anti-graft campaign A recent survey found 70 percent of respondents were satisfied over the progress of the country’s anti-graft campaign, China Youth Daily reported. The respondents listed the downfall of a batch of “big tigers” or high-ranking officials, cracking down on corrupt officials fleeing abroad, and a purge of “naked officials”, which refer to those whose spouse and children have emigrated overseas, as the top three biggest results in 2014. The survey sampled 2,167 people, with employers ranging from private and state-owned companies to government agencies.

Luxury market shrinks in 2014 Luxury goods consumption in mainland China declined for the first time in 2014 as China’s on-going anti-extravagance campaign hit sales hard. Chinese mainland’s luxury goods consumption reached 115 billion yuan (US$18.79 billion) in 2014, down 1 percent year on year, compared with a 2-percent and 7-percent growth in 2013 and 2012, according to a recent report from the international consulting firm Bain & Company. The government campaign encourages to put a dent in gifting, which had been one of the major growth engines for the sector, said Bruno Lannes, author of the report.

Cutting fossil fuel essential Chinese Premier Li Keqiang pledged to reduce the proportion of fossil fuel in China’s total energy mix and promote clean technology. This marks the latest effort of the world’s most populous country in its uphill battle against air pollution and climate change. When meeting with representatives of the International Business Council of the on-going World Economic Forum (WEF) in the Swiss mountain resort of Davos, Li said China has pledged to increase the share of non-fossil fuels in primary energy consumption to around 20 percent by 2030.

PBOC injects cash using r

An auction of 50 billion yuan of six-month treasury deposits also ad

hina’s monetary authority used open-market operations to add cash to the financial system for the first time in a year and boosted loans amid a seasonal fund shortage and signs of outflows from the world’s second-largest economy. The People’s Bank of China used reverse-repurchase agreements to inject 50 billion yuan (US$8.05 billion), it said in a statement yesterday. The central bank also rolled over 269.5 billion yuan of three-month loans extended to lenders in October and used the medium-term lending facility to add a further 50 billion yuan to smooth supply before the Lunar New Year holiday, it said late Wednesday. “The twin moves to roll over loans and using repos may signal there will be no broad-based easing such as a reserve-requirement-ratio cut in the first quarter,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong. The PBOC’s stance is less dovish than that in other major economies, he added. “There may be some irregular capital inflow and outflow around the world,” PBOC Governor Zhou Xiaochuan said Wednesday at a World Economic Forum panel in Davos, Switzerland. “That may also be a source of volatility.”

Reserve ratios The PBOC needs to cut lenders’ reserve requirements this quarter

People’s Bank of China headquarters in Beijing

in order to compensate for capital outflows and push the seven-day repo rate back to a range of 3 percent to 3.5 percent, said Dariusz Kowalczyk, senior economist at Credit Agricole CIB. That view was echoed by Yan Yan, an analyst at China Guangfa Bank Co. in Shanghai, who said the resumption of reverse repos will help ease concern that policy was tightening.

China is expected to record deficits in its capital account in the fourth quarter, Guan Tao, head of the balance of payments department at China’s State Administration of Foreign Exchange, said at a briefing in Beijing. Yuan positions on the People’s Bank of China’s balance sheet fell 128.9 billion yuan in December from a month earlier, the most since 2003, official data show.

Authorities watch volatile capital flows China’s relatively fast growth and higher interest rates may help attract foreign investment, but investors may also be nervous about its economic, financial and fiscal risks

hina is closely monitoring its cross-border capital flows, the foreign exchange regulator said yesterday, amid signs that money is leaving the world’s secondlargest economy as it slows. But China is able to manage risks from capital outflows as the country still posts a solid trade surplus, the State Administration of Foreign Exchange (SAFE) said. “China’s cross-border capital flows still face many uncertainties,” Guan Tao, head of the department of international payments at the SAFE, told a news conference. Still, China will continue to see a relatively big current account surplus this year, he added. “We will strengthen monitoring and early warning on cross-border capital flows... and crack down on illegal capital flows.”

The pattern of having trade surpluses and capital outflows will become more normalised Guan Tao, head of international payments, State Administration of Foreign Exchange

Globally, polices of major central banks could diverge as the U.S. Federal Reserve is “normalising” policy while central banks in Europe

and Japan are stepping up policy easing, he said. Chinese banks sold a net US$46.5 billion in spot foreign exchange settlements in the fourth quarter of 2014, up from US$16 billion in the third quarter, the State Administration of Foreign Exchange (SAFE) said. For the whole of 2014, Chinese banks still bought a net US$125.8 billion worth of foreign exchange. China’s central bank and commercial banks bought the most yuan in seven years in December at around US$19 billion, a Reuters calculation of data showed, suggesting some capital is leaving the world’s second-largest economy as growth slows. Guan reiterated that the central bank is gradually exiting from its regular intervention in the foreign exchange market. Economists expect policymakers to roll out more stimulus measures this year to prevent a sharper slowdown, including interest rate cuts and reductions in banks’ reserve requirement ratios (RRR) to allow banks to lend more. Analysts at OCBC believe an RRR cut may be the central bank’s weapon of choice to counter the impact of any more significant capital outflows. Reuters

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January 23, 2015

Greater China Shadow banking growth slowing

reverse repos

Although new financing channels are on the rise according to Moody’s

dded cash yesterday

Using repos may signal there will be no broadbased easing such as a reserve-requirement-ratio cut in the first quarter Liu Li-Gang, head of Greater China economics, Australia & New Zealand Banking Group

The nation’s trade surplus climbed to a record US$54.5 billion in November and was US$49.6 billion last month. Goldman Sachs Group Inc. says China’s official errors and omissions data -- figures used by nations to balance cross- border flows when records don’t match -- point to a record US$63 billion of capital outflows in the third quarter of 2014. China’s foreign-exchange reserves

fell to US$3.84 trillion in December, from an all-time high of US$3.99 trillion in June. Chinese banks sold US$63.5 billion more foreign exchange than they bought in the last five months, trimming net purchases for 2014 to US$125.8 billion, the currency regulator reported yesterday. “We are in a continuing easing cycle so we need to inject more liquidity,” said Becky Liu, a rates strategist at Standard Chartered Plc in Hong Kong. “At the same time, I don’t think they want to do a broadbased reserve-requirement cut for the moment. Injecting liquidity to smooth out interbank liquidity via reverse repos is a better way.” Bloomberg News

egulatory measures to curb China’s shadow banking growth appear to be having an effect and have prompted a shift in credit activity back to the formal banking system, Moody’s Investors Service said yesterday. But Total Social Financing (TSF), of which shadow banking is a component, continued to grow more quickly than nominal gross domestic product (GDP), leading to higher overall leverage in the economy, the ratings agency said. “Although shadow banking has continued to grow, it has done so more slowly in recent quarters as regulatory measures to rein in the sector’s growth appear to be having an effect,” Michael Taylor, Moody’s Chief Credit Officer for Asia-Pacific, said in a news release. The ratings agency estimated that shadow banking assets reached 45 trillion yuan (US$7.25 trillion) at the end of 2014, amounting to 71 percent of GDP, compared to 66 percent at the end of 2013. “Maturity mismatches and contagion risks to banks are two of the most concerning factors in the shadow banking system,” it said. “Risks from property sector exposures remain elevated with an on-going downturn in the sector and slowing GDP growth. Real estate and infrastructure account for one third of all trust loan exposures.” It also noted that financing activities were shifting to new areas, such as e-financing platforms and

Maturity mismatches and contagion risks to banks are two of the most concerning factors in the shadow banking system Moody’s press release

margin financing in the equity market, which has helped fuel a blistering rally in mainland China shares. Banks are indirectly financing some of this lending through their shortterm purchases of loan assets from securities firms. The share of margin finance in the daily stock transaction surged to above 16 percent at end-2014, from an average of only 7 percent in 2013, it said. Data last week showed cautious Chinese banks issued far less credit in December, driving cash-starved companies into the shadow banking system in a blow to Beijing’s efforts to crack down on the risky sector. Reuters

Banks pile up risks through loans to financial leasing firms Banks lend to their own lessors despite rules restricting that practice, magnifying the lenders’ exposure to the country’s underperforming sectors (EXIM), China Development Bank and Industrial and Commercial Bank of China, according to lawyers and bankers.

hinese banks scrambling to meet capital adequacy rules have stepped up lending to financial leasing companies in the past year as they move away from traditional corporate loans that require them to set aside more funds as provisions. Under global regulations known as BASEL III introduced last year, China’s biggest banks have to increase their capital as a percentage of their assets. To help free up funds to meet the rules, banks are looking for ways to cut provisions for some loans - even if they have to lend to companies leasing ships, tractors and building equipment in some of China’s most vulnerable sectors. The provisioning for certain leasing companies owned by financial institutions is lower as they fall under the official category of safe borrowers. Provisioning for direct loans to heavily indebted corporate borrowers such as shipping companies and property developers is higher as the economy slows and default risks increase. “Lending to a bank-

We have increased lending to leasing companies by 10 percent this year Gao Zefeng, assistant general manager of transport finance, ExportImport Bank of China

owned leasing company with a guarantee from the parent means a lender only has to set aside capital for 25 percent of the loan, whereas for straight debt, it is 100

percent,” said Michael Hu, a financial services assurance Partner at PwC China. But lending to leasing companies does not totally shield the banks from

defaults in the economy’s underperforming sectors. Leasing companies buy big-ticket assets like ships, planes and heavy machinery and lease them out to the very firms that would have tried to borrow money straight from banks, according to bankers and leasing company employees. Among leading lenders to financial leasing firms are Export-Import Bank of China

Risk takers Compounding the risks for lenders, leasing companies are not afraid of leasing assets to companies in volatile sectors, with the shipping industry being a prime example. Since 2008, the shipping sector has been wallowing in a slump, leaving Chinese banks stuck with defaulting shipyards. Yet ICBC Financial Leasing Co, China’s largest lessor, increased its number of vessels by 50 percent in 2013 from 2012, according to data on its website. At the end of the third quarter of 2014, the value of assets held by China’s leasing companies rose 45 percent to 1.22 trillion yuan (US$196.91 billion) from the end of the first quarter of 2013, banking regulator data reported in official media shows. There are other reasons why banks extend loans to leasing companies. Reuters

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Greater China Shenzhen to seek investors for Kaisa The Shenzhen government is holding talks with several property developers in a bid to orchestrate investments in Kaisa Group Holdings Ltd., people familiar with the matter said yesterday. The government doesn’t want stakes to be sold at a discount, one of the people said, asking not to be identified because the discussions are private. Kaisa, a developer based in the southern Chinese city of Shenzhen, failed to make US$23 million coupon payment, due January 8, on its US$500 million of 2020 dollar bonds, putting it at risk of becoming the first real estate company in China of defaulting on its U.S. currency debt.

Closer legislature cooperation with EU The head of the Mission of China to the European Union (EU) Yang Yanyi pledged that China’s legislature body will have a closer cooperation with that of the EU. She made the remarks when addressing a plenary session of the Delegation of European Parliament for Relations with China. “The frequent exchanges between the National People’s Congress (NPC) of China and the European Parliament, though there was a lapse last year due to election here in the EU, are very much in tune with the overall trend of our bilateral ties,” she said.

Two million tons of Viet rice in 2014

Canning Fok, at the ‘Hong Kong Heart’ of Li Ka-shing’s deal machine He has been Hong Kong’s biggest individual tax payer for the past five years Denny Thomas

n late summer 2014, as mass protests rocked central Hong Kong, Canning Fok sat in his office quietly planning a business overhaul that would make his boss Li Ka-shing (pictured), Asia’s richest man, richer still. After Li revealed the fruits of Fok’s labour on January 9, describing it as

KEY POINTS Fok, 36 years at Li’s group, behind most big deals Fok planned the group overhaul announced on Jan. 9 He is Hong Kong’s top tax payer for 5 years -report Has a reputation as a fast, persuasive negotiator

a “watershed” moment in the history of his business group, shares in his principal companies, Cheung Kong Holdings and Hutchison Whampoa, jumped more than 14 percent. For three months, Fok worked with his core five-member team on “Project Diamond” to put the basic structure in place, then recruited HSBC to execute the plan, people familiar with the matter told Reuters. The overhaul, aimed at tackling a valuation discount caused by the group’s conglomerate structure, will split 86-year-old Li’s empire into two camps, one focusing on property, and the other housing businesses including telecoms, infrastructure and ports. Fok, now 63, had been an auditor at Arthur Andersen when he wrote directly to Li asking for a job 36 years ago. Li gave Fok a personal hearing and hired him for Cheung Kong, according to a German newspaper. He impressed with his calm effectiveness and rose through the ranks to become Li’s most trusted lieutenant and the family’s Mr Fix It. When Fok, backed by his “brains

trust” team, is sold on a proposal, he takes it to Li and his son Victor for their approval and is rarely turned down, the sources said.

Persuasion Fok has been behind most of the group’s big deals of the past two decades, including the purchase of Orange Austria and Telefonica’s Irish business, selling out of its Indian telecom venture and bringing in State Grid Corp of China as a key investor in the initial public offering of group company HK Electric Investments. In all these deals, Fok has personally led the negotiations, relying on his network of top-level contacts, the sources said. He has on occasion taken a private jet to close a deal - his own, since Hutchison, where he is group managing director, does not have a corporate jet. In a region where M&A is often painfully slow, Fok is noted for his persuasiveness and an ability to deliver in a hurry. Last year as the group’s health

RMB gets closer to Zurich China will give Switzerland QFII quota amid closer financial ties Vietnam exported about 2 million tons of rice to China in 2014, despite the amount registered upon official contracts was only 650,000 tons, local Saigon Economic Times reported yesterday. The surplus volume over the contract-based figure was traded through land borders between the two countries, the report quoted the Vietnam Food Association (VFA) as saying. According to the Vietnam General Statistics Office, Vietnam exported over 6.3 million tons of rice in 2014, earning nearly US$3 billion. However, the country’s rice inventories were sold off thanks to the increasing demand of rice from China through the borders, said the VFA.

Top court vows to continue correction China’s top judge has vowed to continue correction of wrongful convictions following multiple judicial scandals including Huugjilt’s case. “Deep lessons should be drawn from major wrongful convictions such as Huugjilt, and their grave harm should be fully recognized,” said Zhou Qiang, president of the Supreme People’s Court (SPC), at a national meeting of chief justices of higher courts on Wednesday. A higher court in Inner Mongolia ruled in December 2014 that teenager Huugjilt, who was found guilty of rape and murder in 1996, was innocent and had been wrongfully executed.

hina has agreed to give Switzerland an US$8 billion investment quota under its Qualified Foreign Institutional Investor (QFII) program. The agreement is part of a memorandum of understanding signed by the central banks of the two countries on Wednesday, which also includes a plan -- pending regulators’ approval -- to set up the first branch of a Chinese bank in the Swiss financial hub of Zurich for future RMB clearance. The deal is set to materialize Beijing and Bern’s pledge for closer financial ties and accelerate the establishment of a Zurich offshore RMB market. The signing came after visiting Chinese Premier Li Keqiang met in

this ski resort with President Simonetta Sommaruga of the Swiss Confederation on the side-lines of the 2015 annual meeting of the World Economic Forum (WEF). Li and Sommaruga witnessed the signing of several cooperation accords in the areas of food, medicine, scientific research and personnel exchanges. The two leaders pledged closer bilateral financial cooperation and agreed to support the establishment of the offshore RMB market in Switzerland, which analysts say marks a crucial step in the internationalization of the Chinese currency, especially in Europe. Li attributed the new achievements of China-Switzerland relations to their mutual respect, frank treatment of

Zhou Xiaochuan (Front-L), Governor of the People’s Bank of China, and Thomas Jordan, Chairman of the Swiss National Bank (SNB) (Front-R), sign documents in the presence of Li Keqiang, Premier of the People’s Republic of China (Back-L) and Swiss President and Justice Minister Simonetta Sommaruga (Back-R), during a bilateral meeting on the sidelines of the 45th Annual Meeting of the World Economic Forum

each other, cooperation on an equal footing as well as mutually beneficial and win-win cooperation. He said China stands ready to further consolidate political mutual trust and deepen practical cooperation with Switzerland so as to elevate the bilateral ties to a higher level and better benefit the two peoples. Li urged the two countries to well implement their free trade agreement after the document took effect in July 2014, further optimize their trade structure, encourage and expand the two-way investment and deepen their cooperation in areas including highend manufacture, energy conservation and environment protection, as well as modern agriculture. The premier also called on the two sides to expand people-to-people exchanges and strengthen their communication and cooperation in such areas as culture, science and technology, education, tourism and personnel training. He also said the two countries should conduct more law-enforcement cooperation in areas of criminal chasing, recovery of embezzled money and combating transnational crimes. Sommaruga, on her part, said Switzerland stands ready to further expand mutually beneficial cooperation with China and deepen the friendship between the two peoples. Switzerland was the first among the world’s top 20 economies to reach a free trade deal with China. Xinhua

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January 23, 2015

Greater China

Show must go on … on Li Ka‑shing’s deals spree and beauty retailer A.S. Watson was preparing to list on the market, Fok decided to gamble on an alternative fundraising avenue that would avoid the uncertainty of an IPO and bring in the kudos of a big global fund. He called Singapore sovereign wealth fund Temasek Holdings , which had been looking to buy a small stake in the IPO, and convinced its leaders over a brief series of meetings to sign their biggest ever deal, paying US$5.7 billion for a 25 percent stake. Failure could have wrecked the listing.

“Hong Kong heart” He also has a reputation for sticking to his guns on pricing. When he tested buyers’ interest in Hong Kong supermarket operator ParkNShop in 2013, he set a US$3 billion price tag. Though he got offers just 10 percent shy of that sum, he walked away, according to people

who have worked with him. Though Fok has been instrumental in building Li’s empire to a behemoth spanning 50 countries, with listed companies worth more than US$100 billion, he keeps his cards close to his chest. He hasn’t always had things his own way - his big push into European telecoms has yet to deliver - but he has been richly rewarded for his service, making him Hong Kong’s biggest individual tax payer for the past five years, according to local media reports. At home, as at work, the married father of four doesn’t do things by halves. A keen musician, he has five pianos, one of them 200 years old, according to a local media report, and wrote the music and lyrics, including the title track, for eight songs on the “Hong Kong Heart” album by singer Irene A.

Watson to buy the Netherlands’ Dirx Drugstores A S Watson & Co Ltd, backed by Hong Kong tycoon Li Ka-shing, has agreed to buy all 50 outlets of the Netherlands’ Dirx Drugstores for an undisclosed sum, marking the second overseas purchase this week for Asia’s richest man. Less than two days earlier, Li’s Cheung Kong Infrastructure Holdings Ltd agreed to buy Britain’s Eversholt Rail for an enterprise value of 2.5 billion pounds (US$3.8 billion), as part of his group’s diversification drive into Europe. A S Watson, the retail arm of Li’s Hutchison Whampoa Ltd , said late on Wednesday it had agreed with the management of health and beauty network Dirx to buy 50 stores and open a further five. The stores will continue to operate under the brands of Kruidvat or Trekpleister, A S Watson said.

At present, Dirx is “too small a player to independently expand” so the A S Watson deal would “move the business forward”, said Rick Groen, Director of Dirx Drugstores. Last year, Temasek Holdings (Private) Ltd bought 24.9 percent of A S Watson for US$5.7 billion, in the Singapore sovereign wealth fund’s biggest single investment. A S Watson is likely to list within the next two to three years, Li said at the time of the Temasek deal. Li has been restructuring and expanding abroad as his group outgrows its home market. Earlier this month, the group said it would restructure into two camps, with one focusing on property and the other on telecommunications, retail and energy. For a story on Li’s dealmaker, click on. Reuters

Reuters

Premier Li calms down Davos China will avoid a hard landing and is focused on ensuring long-term medium-to-fast growth, Premier Li Keqiang told global leaders in Davos

hile the economy will still face large downward pressures in 2015, China won’t have systemic financial risks and will seek to improve the quality of growth to ensure an “appropriate” pace of expansion, Li said Wednesday in a speech at the World Economic Forum in the Swiss ski town. A few hours earlier, the central bank governor said on a panel that a slower expansion is “good news” if it’s more sustainable. The comments and the first reverserepurchase agreements in a year on Thursday follow data this week showing 7.4 economic percent growth for 2014, the slowest in 24 years and the first failure to meet government targets this century. “For now, the Chinese leaders are trying to hold off broad-based policy easing,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong. “But if economic indicators in the coming months point to further weakness, China has to act.” Liu said investors aren’t

Chinese Premier Li Keqiang speaks during the opening session on the first day of the 45th Annual Meeting of the World Economic Forum, WEF, in Davos, Switzerland

fully convinced that the world’s second-largest economy can engineer a smooth “soft-landing” into the “New Normal” era of steadier growth. He cited risks in local government debt and shadow banking. Kaisa Group Holdings Ltd., a property developer based in Shenzhen, missed debt payments this month, highlighting stresses in the industry as a housing downturn weighs on growth.

Risks contained? For Li, the risks are under control.

“China has much room for urban, suburban and regional development, and domestic demand has huge potential,” he said. “China’s condition will continue to improve and China will bring more opportunities to the world if China’s economy keeps growing at medium to fast speed for 10 to 20 years.” At an earlier panel in Davos on Wednesday, Zhou Xiaochuan, governor of the People’s Bank of China, expressed willingness to sacrifice growth for stability. “If China’s economy slows down a bit, but meanwhile is more sustainable for the

China has much room for urban, suburban and regional development, and domestic demand has huge potential Li Keqiang, China’s Premier

medium and long-term, I think that’s good news,” he said.

Prudent policy Li reiterated that China will pursue a prudent monetary policy and proactive fiscal policy. Leaders are using effective methods to prevent potential risks in finance, and

the nation’s savings ratio of as high as 50 percent provides “strong support” to growth, he said. Li was the first Chinese premier to speak at the annual Alps gathering since 2009. China sent its first official delegation there in 1979, when former supreme leader Deng Xiaoping was starting to open China to the outside world. In 1992, when relations with western nations were thawing after the 1989 crackdown on the Tiananmen Square democracy movement, then-Premier Li Peng told the Davos audience that China would continue its economic reforms. In 2009, Wen Jiabao expressed confidence in maintaining stable growth even as the U.S. and Europe were roiled by the global financial crisis and outlined his massive stimulus response. China’s industrial output and retail sales for December increased at higher-thananticipated rates, reflecting the initial effects of proinvestment efforts and the central bank’s first interestrate cut in two years. Bloomberg News

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Asia Thai subway and toll firms merger Thai subway operator Bangkok Metro PCL said on Thursday its planned merger with toll way operator Bangkok Expressway PCL will be completed in the third quarter of 2015. Bangkok Metro’s major shareholder, Ch Karnchang PCL, will support the merger of the two companies, it said in a statement. Late on Wednesday, the two companies announced a merger which involved a share swap deal to create a new entity with estimated market value of 78.4 billion baht (US$2.4 billion).

Kia CEO says Indian factory necessary Kia Motors needs to set up a factory in India to tap growth there and offset slowing sales in Russia and China, the Dong-A Ilbo newspaper quoted the South Korean automaker’s chief executive as saying. India is expected to become the world’s third largest auto market by next year, according to industry data provider IHS. Kia Motors, an affiliate of Hyundai Motor Co, currently has no production in India, and high import taxes mean Kia’s India sales are also negligible. By contrast, Hyundai has two factories in India and is the country’s second-largest automaker.

Hyundai Q4 profit tumbles

SGX plans China equity-index options SGX Chief Executive Officer Magnus Bocker sees mergers as one way to boost growth amid increasing exchange competition Jonathan Burgos and Adam Haigh

ingapore Exchange Ltd., Southeast Asia’s biggest bourse, plans to start trading Chinese equity-index options as investors seek ways to hedge risks in the world’s most volatile stock market. SGX is in talks with the China Securities Regulatory Commission on when the Singapore bourse can introduce options on the FTSE China A50 Index, with approval likely to come after such products are introduced on the mainland, President Muthukrishnan Ramaswami said in an interview. Volume on China A50 futures traded in Singapore surged 183 percent in the three months ended December 31. “We’re awaiting CSRC guidance on when they are ready to let options trade overseas,” said Ramaswami. “We are not in a great rush. The futures have some room to grow and options does provide a second stage of growth.” Th e S i n g a p o r e b o u r s e o n Wednesday reported its first quarterly

profit growth since 2013 as it benefits from efforts to attract investors across a broader range of asset classes, while appetite for trading shares in the city-state stagnates. Derivatives accounted for 39 percent of revenue in the quarter, up from 32 percent a year earlier. “Our efforts today are really to expand beyond just equity futures into things like options and other

contracts that will help you cover similar exposures,” Ramaswami said in a Bloomberg TV interview today. “The second focus we have is on similar FX futures contracts for the same markets.”

China volatility A gauge of 30-day volatility on the Shanghai Composite Index rose to

Asia FX sentiment improves South Korea’s Hyundai Motor Co yesterday reported a fourth straight quarterly profit decline, pulled down by a plunge in the Russian rouble and increased buying incentives in the United States. The result is likely to fuel discontent among investors, who expect the automaker to raise its year-end dividend later in the day to appease those dismayed by slowing growth and involvement in a US$10 billion property purchase. Economic turmoil in Russia undermined earnings in a country where the pair rank second, while a weak yen made Japanese cars cheaper in the U.S., its No.2 market.

Metrobank seeks US$721 mln The Philippines’ Metropolitan Bank & Trust Co is seeking to raise up to 32 billion pesos (US$721 million) through a rights offer, the country’s largest equity offering in two years, as the lender seeks to boost capital. The country’s second-largest lender in asset terms said in a disclosure to the stock exchange that the timing of the stock rights offering aimed at raising its common equity Tier 1 capital - is subject to regulatory approvals and market conditions. Philippine banks are beefing up capital to comply with Basel III standards.

A Reuters survey asks analysts about the current market positions in nine Asian emerging market currencies Jongwoo Cheon

entiment towards emerging Asian currencies improved on hopes of massive European Central Bank monetary stimulus and the yen’s rebound, with traders putting their first optimistic bets on the Chinese yuan since early December, a Reuters poll showed yesterday. Long positions in the Indian rupee rose to a seven-month high, according to the survey of 16 currency analysts and traders conducted between Tuesday and yesterday. Traders remained pessimistic on most other emerging Asian currencies, but reduced their short positions in regional units, even including Malaysia’s ringgit. Views on the yuan turned positive for the first time in about six weeks. The renminbi found support from better-than-expected economic data such as the fourth-quarter growth and December trade. The rupee, on which investors have

KEY POINTS Yuan sentiment turns optimistic Rupee long positions largest since June Ringgit short positions slightly lower

been bullish since October, saw the largest optimistic bets since June. It has been the best performing Asian currency so far this month on capital inflows to India. Short positions in the ringgit slightly eased from two weeks ago, when its bearish bets hit the largest since August 2008, the global financial crisis.

The Philippine peso reversed short positions as the currency hit a fourmonth high on capital inflows. Sentiment on South Korea’s won and Thailand’s baht became almost neutral. Bearish bets on the Taiwan dollar and the Singapore dollar fell to the lowest since late October when investors were bullish on those units. Short positions in the Indonesian rupiah slid to the smallest since late November. The yen also advanced as the Bank of Japan held its monetary policy on Wednesday, causing some speculators who had expected more easing to cover short positions. The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3. A score of plus 3 indicates the market is significantly long U.S. dollars. The figures included positions held through non-deliverable forwards (NDFs). Reuters

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January 23, 2015

Asia 42.3 on January 19, the highest among the 15 biggest global benchmark indexes tracked by Bloomberg and up from its decade-low 9.4 in July. “For exchange operators, volatility is OK,” Ramaswami said. “Not having any volatility is a problem.” The CSRC has approved trading of Shanghai Stock Exchange 50 A-Share Index exchange-traded fund options from February 9, Shanghai Securities News reported January 9, citing a weekly briefing by the securities regulator.

We’re optimistic that we will be the first ones outside of China to be allowed a link Muthukrishnan Ramaswami, Singapore Exchange President

Derivatives transactions climbed 52 percent to 40 million in the quarter, with trading of China A-50 futures increasing to more than 17 million contracts, according to SGX. “We are still in the early stages of pretty sustainable growth,”

Ramaswami said. “We are well positioned on China.” SGX also plans to pursue a trading link with both the Shanghai and Shenzhen bourses, Ramaswami said. Hong Kong is taking steps to increase trading through the Shanghai exchange connect that started in November amid discussions to set up a separate link with Shenzhen.

Shanghai link “We’re optimistic that we will be the first ones outside of China to be allowed a link,” Ramaswami said. “This opens up access for Singapore investors to a larger pool of liquidity and that’s a good thing.” Building trading links is a good way for Asian exchanges to tap into other markets’ liquidity pools because cross-border mergers will be difficult to achieve, Ramaswami said. Australian regulators rejected in April 2011 SGX’s proposed A$8.4 billion (US$6.8 billion) acquisition of ASX Ltd. Intercontinental Exchange Inc. will start its first five futures contracts to be listed and cleared in Singapore this year, while Deutsche Boerse’s Eurex won regulatory approval to set up a clearing house in the citystate in 2016. Increasing competition in Singapore will be good for SGX as new entrants will bring more participants, into the market, Ramaswami said. “We’re able to cope well with competition,” Ramaswami said. “We will continue to do well what we do well.” Bloomberg News

Australian SMEs see 2015 as “patchy and stuttering” The key findings of the December SBI report showed that 51 percent of small business owners are feeling confident about the year ahead

he mood of Australian small and medium sized enterprises (SME) is subdued and a recovery in 2015 looks patchy and stuttering, according to a new survey. The quarterly Sensis Business Index (SBI) for December showed a lack of improvement on most measures while performance and expectations vary considerably across metro and regional areas, states and industries. The Sensis report surveyed 1,000 metropolitan and regional SMEs from areas such as manufacturing, wholesale and retail trade, hospitality, construction, communication, property, business services, health, community services, cultural and recreational industries. The key findings of the December SBI report showed that 51 percent of small business owners are feeling confident about the year ahead, down from 53 percent in September. A quarter are worried about their

prospects for the year ahead with subdued consumer spending and sales the major causes of concern, it said. SME’s prognosis of the economy a year from now is six points lower than the previous quarter and regional SMEs are the main source of declining confidence. Sensis chief executive John Allan said there was a great deal of evidence that suggests the past year has been a mixed one for SMEs. “SMEs comprise 99 percent of all businesses operating in Australia, so their experiences and outlook are a true window into the health of the economy,” he said in a statement. “This year is shaping up to be a year that sees a patchy economic recovery with much variation across all states and between metro and regional areas. What we see in the report is evidence that the local environment plays a big role in confidence for SMEs.” Xinhua

South Korea watchful of markets volatility The governor reiterated that there was a low risk of falling global oil prices pushing the economy into deflation Christine Kim

outh Korea is closely watching rising volatility in financial markets sparked by rate cuts around the world, the central bank governor said, and pointed to the European Central Bank policy decision later in the global day as a key moment for investors. Bank of Korea Governor Lee Juyeol said temporary market volatility has been heightened by recent global divergence in monetary policy, but added that these developments have yet to affect Seoul’s own policy stance. “The volatility has not affected us much yet, but we are keeping a close eye on markets and especially the European Central Bank’s decision,” Lee told reporters at a press briefing in Seoul on Thursday. “The markets have priced in the ECB’s expected decision, but we expect volatility from the decision nevertheless and are preparing for that.” The governor’s comments came just after the Bank of Canada stunned markets by cutting interest rates on Wednesday, citing a threat to economic growth and its inflation targets from the recent oil slide.

Rate cut delay? On the domestic policy front, Lee said rate cuts by the BOK last year will take some time to show up in the economy given the lags between actual policy moves and the effect on

Bank of Korea wary over global market volatility

credit conditions - a sign the bank is prepared to wait before altering rates again. “Our monetary policy is more accommodative now after the two cuts last year and there is a time lapse between the actual moves and the effects thereafter,” Lee added. “Although our growth forecast was cut to 3.4 percent, this does not indicate that we are pessimistic about the economy.”

Seeking to revive a faltering economic recovery, the Bank of Korea cut its base rate in August and October last year by 25 basis points each to 2.0 percent, matching a record low touched during the 2008-2009 global crisis. The governor reiterated that there was a low risk of falling global oil prices pushing the economy into deflation. Many economists believe the central bank will cut rates again,

but the timing of an easing may be pushed back given the central bank’s more sanguine stance on the economy. Raymond Yeung, a senior economist at ANZ Research pushed back his forecast for a rate cut to the second quarter, from the first quarter, in a note published shortly after Lee’s press conference. The central bank now sees another rate cut as an “open option,” Yeung said. Reuters

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January 23, 2015

International Canada central bank headquarters

Maduro hikes wages With Venezuela’s economy in crisis, President Nicolas Maduro on announced a 15-percent hike in the minimum wage, and plans to keep a multi-tiered exchange rate system in place. “This whole exchange system is a transitional system,” the president said in an annual address in which many Venezuelans -exhausted by 64-percent inflation; food shortages and rationing -- had hoped for news of major economic policy changes. Maduro did not give much detail on the exchange rates other than to say that one -- for food and medicine -- would be at 6.3 to the US dollar.

Goldman’s CEO: “We are in currency wars”

Canada surprise rate cut keeps housing party going Concerns about the effect of oil prices that have fallen in half this year overrode worries about stoking a housing bubble

Countries around the world are already engaged in a currency war in a bid to boost growth, Gary Cohn, the president and chief operating officer of Goldman Sachs, said yesterday “We are in currency wars,” Cohn told a panel discussion at the World Economic Forum in Davos, Switzerland. “The prevailing view is that the easy way to stimulate economic growth is to have a low currency.”

ECB independence in question French Finance Minister Michel Sapin said yesterday that Germany should remember to respect the independence of the European Central Bank after the head of Germany’s central bank said its action was subject to legal limits. The ECB has won crucial legal support for its pledge to buy government bonds, a measure supported by the French government but criticized by some German policymakers. “The Germans have taught us to respect the independence of the European Central Bank,” Sapin told France Info radio. “They must remember that themselves.”

Spain jobless rate falls Unemployment rate fell for the second straight year in 2014 to 23.7 percent as an economic recovery gained pace, but remains at one of the highest levels in the European Union, official data showed yesterday. Joblessness fell from 25.73 percent in 2013 as the country’s large services sector took on more staff, driven by a strong tourist season and construction activity also picked up, the National Statistics Institute said. The fall was greater than what had been expected by Prime Minister Mariano Rajoy’s conservative government.

Gazprom to build LNG plant on the Baltic Sea Russia’s firm said yesterday it would build a liquefied natural gas plant with an annual capacity of up to 15 million tonnes on the Baltic Sea. Gazprom, the world’s biggest conventional gas producer, said in a statement the plant would be built near the port of Ust-Luga.

surprise move by the Bank of Canada to cut interest rates on Wednesday could reignite Canada’s housing market and renew fears of a bubble, just as the market had finally begun to cool after a fiveyear run to record prices. Canadian housing prices have risen 36.8 percent on average since mid-2009 and the average home price has doubled over the past decade. Last month, the central bank said the housing market could be overvalued by as much as 30 percent. But concerns about the effect of oil prices that have fallen in half this year overrode worries about stoking a housing bubble on Wednesday, and the bank cut its benchmark rate to 0.75 percent from 1 percent. The energy sector makes up about 11 percent of Canada’s GDP and about one quarter of Canadian exports in 2013. Canada’s housing market paused in 2009 but didn’t collapse as it did in the United States, and prices have risen as low interest rates helped Canadians boost their borrowing to buy ever more expensive homes. According to the RBC Housing

Affordability Index, it takes 47.8 percent of a household’s pre-tax income to service the cost of owning a standard two-story Canadian home at current market values. Benjamin Tal, senior economist of CIBC World Markets, said that while a drop in interest rates by 25 basis points may not impress homebuyers who have come to believe cheap money is normal, it raises the risk that indebted Canadians will take on more debt. “With the debt situation relatively elevated, cutting interest rates and adding fuel to the fire is not exactly the best thing for this situation,” Tal said. James Laird, President of CanWise Financial residential mortgage brokerage, said the rate cut will have an immediate effect on the demand for mortgages, pushing people back into cheaper variable rates from higher fixed-rate products. “The Bank signalling that costs will be lower, even declining, should mean another year of growth for housing and real estate,” said Laird, whose company does business in Ontario and Quebec, Canada’s two

Nigerian central bank increases forex trading limits

igeria’s central bank increased the foreign currency trading position for commercial banks yesterday to 0.5 percent of their capital base from 0.1 percent, in a move to shore up interbank dollar liquidity. Liquidity conditions have deteriorated as the naira has slumped to record lows because dollar inflows from foreign investment and other sources have dried up. The central bank is having to intervene and sell dollars into the market, but that is burning up its foreign reserves. According to a circular seen by Reuters, the central bank said funds sold to commercial lenders would be used for funding letters of credit, other invisible trades but should not be resold to bureau de change dealers. The central bank had reduced

dealers open positions from 1 percent to zero in a bid to stabilise the currency after it was devalued by 8 percent against the dollar in November. Last week it allowed banks a 0.1 percent net position but warned them against carry trades or speculative activity. The naira is at risk of speculative attacks as it is being hit hard by the slump in oil prices and by pressure on emerging market currencies as the

The central bank had reduced dealers open positions from 1 percent to zero

most populous provinces. To be sure, there are important differences between Canada’s housing market and that in the U.S., where the bursting of a housing bubble beginning in 2007 helped usher in the worst economic downturn since the Depression. Canada has tighter lending standards, healthier banks that keep mortgage loans on their books and high fees which discourage buying and flipping homes for profit. In Canada, housing as an investment means buying a house and renting it out, earning income from rent and counting on capital appreciation. The most common mortgage in Canada is a fixed five-year product. Mortgage interest isn’t deductible in Canada, meaning there’s no incentive to take on a bigger mortgage than what’s needed. For Fudge, the real estate agent whose business with the property website urbaneer.com focuses on the Toronto market, the ability of new buyers to shift from a five-year fixed rate to a one-year variable gives them just enough wiggle room to bump up their price limit another C$50,000. Reuters

Nigerian currency dealers agreed on Wednesday to halt trading if there is a more than 2 percent intraday slide in the naira dollar strengthens on expectations the United States will soon raise interest rates. Nigerian currency dealers agreed on Wednesday to halt trading if there is a more than 2 percent intraday slide in the naira. They said they fear the naira could head to 200 to the dollar, creating extreme volatility and adding to deteriorating liquidity conditions. The central bank sold US$178 million at 168 naira to the dollar at its twice-weekly forex auction on Wednesday, less than the US$200 million it offered, dealers said. Banks can earn trading revenues when the naira is weak through carry trades, by borrowing the naira to buy dollars which they resell at a higher level to make a profit. That makes it difficult for genuine forex users to buy dollars when liquidity is tight. Reuters

Business Daily | 15

January 23, 2015

Opinion Business

wires

Leading reports from Asia’s best business newspapers

Central banks are not your friends

THE STRAITS TIMES

James Saft

Reuters columnist

Singapore Exchange (SGX) plans to start trading Chinese equity-index options as investors seek ways to hedge risks in the world’s most volatile stock market. SGX is in talks with the China Securities Regulatory Commission on when the Singapore bourse can introduce options on the FTSE China A50 Index, with approval likely to come after such products are introduced on the mainland, President Muthukrishnan Ramaswami said in a Bloomberg TV interview yesterday. Volume on China A50 futures traded in Singapore surged 183 per cent in the three months ended December 31.

THE TIMES OF INDIA The telecom auctions in February will see the sale of only 5MHz of 3G spectrum, a dampener to the telecom industry, which was pitching for availability of at least 20 MHz as suggested by regulator Trai. Although the government moved ahead with the process of procuring an additional 15 MHz of spectrum through creation of an exclusive defence band for the armed forces, the exercise will easily stretch beyond one year. The Cabinet approved the creation of the defence band and a defence interest zone.

THE NEW ZEALAND HERALD Activity in New Zealand’s manufacturing sector rose last month to its highest level in a decade. The BNZ-Business NZ performance of manufacturing index rose to a seasonally adjusted 57.7 last month, the highest reading for a December month since 2004, and up 2.1 points from November’s 55.2 reading. Meanwhile, the annual average reading was 56, unchanged from a year earlier. The index, where a reading above 50 indicates growing activity, has been in expansion for the past 27 months. Manufacturing activity remained above the key 50 level in four of the five sub-indices.

THE JAKARTA POST The country’s pay TV operators have been seeing declines in their average revenue per unit (ARPU) as fiercer competition has forced them to lower subscription fees. Media firm Media Partners Asia (MPA) executive director Vivek Couto said on Tuesday that while the country’s pay TV customer base was growing, operators’ ARPU had been experiencing declines for years. “ARPU declined close to 15 percent a year over the last five years,” he said during the “Indonesia in View 2015” seminar held by the Cable and Satellite Broadcasting Association of Asia (CASBAA).

nvestors are feeling a rather unfamiliar sentiment towards central banks: betrayed. Not only have the Indian, Danish and now Canadian central banks surprised with interest rate cuts, the Swiss National Bank confounded expectations last week by abandoning its vow to cap the value of the franc against the euro just days after calling the peg a “cornerstone” of Swiss monetary policy. It isn’t so much that these moves cost people money, because obviously they made different people money as well. Rather it has all eroded the related beliefs that central banks are a) mostly in control of events and b) therefore worthy of being trusted in their promises. Virtually no economist expected the Bank of Canada to cut rates, as it did to 0.75 percent from 1 percent, because though its economy has been hit hard by the tumble in energy prices, housing prices are in bubble territory and debt is a worry. “It signals a spectacular loss of nerve that central bankers should always try to eschew, above all when you have a country like Canada with the worst household debt levels in the developed world and an overheated housing market,” strategist Marc Ostwald of London-based ADM Investor Services wrote in a note to clients. “This is symptomatic of the whole mirage of stability that developed world central banks have sought to foster in the

post-crisis era starting to unravel in a rather disorderly fashion ... The ECB’s task tomorrow looks ever more unenviable!” Two pieces of advice immediately come to mind for investors feeling newly wary about their central banking friends: Get over it. Get used to it.

Get over it Investors over the past quarter century have grown used to feeling that central bankers were somehow ‘on their side,’ and for good reason. The U.S. under Greenspan and Bernanke ran asymmetrical monetary policy, cutting rates to ease market disorder when things go well but quailing at raising them to stop either the economy or risk taking from going too far. Between 1990 and 2012 more than 80 percent of excess returns on U.S. stocks happened in the 24 hours before Fed interest rate announcements, as clear an illustration of the candy-forthe-baby relationship as you could ask. It wasn’t so much that central banks ‘liked’ investors but rather, when faced with an economic control panel with few levers, they found them useful. Much of the point of quantitative easing, … , was to drive up the prices of risky assets so as to goose spending, investment and growth. The thing is, though it is well and good to make money by being someone’s tool, it is important

Though it is well and good to make money by being someone’s tool, it is important to remember the nature of the relationship and its limits

to remember the nature of the relationship and its limits.

Get used to it The idea that central banks will continue to try to use markets and investors as a way to stimulate growth is far from dead. The ECB is turning to QE, the Bank of Japan continues with its massive program and the Fed is arguably still leaving rates at zero despite improving U.S. fundamentals for just this reason. What is worrisome is the idea that central banks are increasingly feeling forced to surprise markets with abrupt changes in direction.

Remember, and you know that central bankers do, that we got through the crisis in large part because central banks had enormous stores of credibility. Every event like the SNB move whittles that down, leaving less to draw upon the next time. Remember that the SNB wasn’t forced to take its step: it can after all print all the francs it likes. It took it because it recognized that the risks, from the ECB, from Greece and from Russia, made the policy not worth the potential costs. The counter argument to this is that there is a big vs. little divide, with the Swiss, Canadians and the like on one side and the ECB, Fed and BOJ on the other. One side is far more vulnerable to changes in the real situation, like the oil bust, while the other can, if you like, ‘make its own reality.’ There is something to this, though obviously the ECB, big as its economies are, is somewhat hamstrung by the lousy institutional arrangements under which it labours. But note that the Bank of Japan left monetary policy unchanged at its meeting ending Wednesday while saying two contradictory things: that it can hit its 2.0 percent inflation target in the next 15 months or so, and that the outlook for core inflation in the same period is falling, not rising. At some point investors may lose faith or the big central banks, like the Swiss did, may throw in the towel on risk-friendly policy. Reuters

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January 23, 2015

Closing Beijing’s GDP exceeds 2 trillion yuan

Japanese economy to show powerful upward trend

Capital’s gross domestic product (GDP) in 2014 topped 2.133 trillion yuan (US$343.38 billion), up by 7.3 percent from the previous year, local authorities said yesterday. According to a report published by Beijing Statistics Bureau and the National Bureau of Statistics Beijing survey office, the per capita GDP of Beijing was 99,995 yuan in 2014. During 2014, the added value of primary industry was 15.9 billion yuan, down by 0.1 percent year on year. Meanwhile, the added value of the secondary and tertiary industry in 2014 was 454.55 billion yuan and 1662.63 billion yuan.

Japan could see some “concrete movement” in its real economy in 2015, an economic adviser to Japanese Prime Minister Shinzo Abe (pictured) said yesterday, adding that inflation expectations have been rising under the Bank of Japan’s monetary stimulus. The Japanese economy will show a powerful upward trend this year, said Etsuro Honda, a University of Shizuoka professor and a prominent outside architect of Abe’s reflationary policies. The real GDP growth rate was likely to turn positive sometime in the first half of this year, he said. The world’s third-largest economy slipped into recession in the third quarter.

Fear of deflation as Chinese hold back on gadgets Consumer inflation eased in 2014 to a near 5-year low and policymakers are worried it could fall further Adam Jourdan

ennon Yu may be Beijing’s worst nightmare: the 24-year-old is willing to wait for car prices to fall before buying. This mind-set, if it becomes widespread, could threaten to trap China’s cooling economy in a deflationary rut. With the world’s second largest economy growing at its slowest in nearly quarter of a century, risks of deflation in China are growing just as a slump in global oil prices raises similar concerns in Europe and other parts of the world. Consumer inflation eased in 2014 to a near 5-year low and policymakers are worried it could fall further because factory gate prices have been dropping for almost three years. Chinese consumers are also curbing spending on nice-to-have items, a Reuters analysis shows, and there are signs more people are choosing cheaper products. Paired with sales engineer Yu’s waiting game, these trends could push retailers

Luxury consumption decreased last year all over the country

to cut prices. “The consumer sector has passed its golden growth stage,” said Jessie Guo, consumer equity analyst at

Profit growth of China’s state firms slows

broker Jefferies. “A meaningful recovery in retail sales seems unlikely, given volatile consumer sentiment, low CPI and a lacklustre economy.”

The Reuters analysis looked at just under 50 firms which make up the CSI300 Consumer Discretionary index, a mix of Shanghai- and Shenzhen-listed firms that includes textiles, consumer electronics, media, tourism and autos. The data showed sales growth of items ranging from holidays to TVs to leather jackets shrank to around 7 percent at the end of last year from nearly 30 percent at the start of 2013. Consumer electronics, autos and tourism firms were hardest hit. “We think there will be some sort of growth in 2015, but the rate will slow,” said an official at carmaker Chongqing Changan Automobile Co Ltd, citing weaker macro-economic growth and policy changes in the sector. Weaker consumer spending and widespread thriftiness are clouds over Beijing’s long-term goal to encourage domestic sales, rather than exports or investment, to drive economic growth. If deflation sets in, changing

consumer behaviour becomes even more of a worry: for the past two years, Japan’s Prime Minister Shinzo Abe has struggled to pull the economy out of a 20-year rut partly by encouraging consumers to pay more for services and goods. While there is no clear indication that more Chinese than before are buying cheaper goods, lower priced items appear to have become more attractive. China’s imports of lowend wines from Australia rose last year, bucking the rising demand for premium and ultra-premium vintages across the rest of Asia, according to data from the Australian Grape and Wine Authority. Demand for lower grade robusta coffee beans is also rising. Chinese domestic spending on luxury goods fell for the first time last year, as consumers turned to ‘value’ products made by smaller, less-established brands, according to a report this week by Bain & Co. Luxury sales have been cooling in part due to Beijing’s crackdown on extravagance and graft. A weaker economy will keep the pressure on Beijing to take aggressive steps to avoid a sharper downturn. But for some consumers, slower growth and falling prices mean more spending. “The wider economy’s in a slump, but for my cash flow it’s helping, because things are cheaper,” said 27-yearold policeman Zhu Zhen. “My salary is fixed, so my purchasing power is actually getting stronger.”

Cognac sales beat expectations

Wanda tycoon’s firm surges 44% on debut

rofitability of China’s state-owned enterprises (SOEs) was squeezed in 2014 amid slackening momentum in the economy as it registered the weakest growth since 1990. Combined profits of SOEs reached 2.48 trillion yuan (US$404.66 billion), up 3.4 percent from one year earlier, the Ministry of Finance said in a statement yesterday. The growth slowed from 4.5 percent reported in the first 11 months last year and 5.9 percent in 2013. Business revenue climbed 4 percent year on year to 48.06 trillion yuan while operating costs rose at a faster pace of 4.5 percent to 46.66 trillion yuan. By the end of December, total assets gained 12.1 percent from the beginning of 2014 to 102.12 trillion yuan while liabilities grew 12.2 percent to 66.56 trillion yuan, the ministry said. It said auto making and pharmaceutical industries posted strong profit increases, while sectors such as coal mining and chemicals saw notable declines in profits.

emy Cointreau yesterday reported third quarter cognac sales well ahead of forecasts, driven by robust demand for premium qualities in the United States while shipments to China improved on weak year-ago comparables. The French spirits group, whose premium cognac is suffering from a Chinese government crackdown on ostentatious spending, kept its target of delivering organic growth in full year sales and current operating profit for the year to end-March 31. The maker of Remy Martin cognac, Cointreau liqueur and Mount Gay Rum said group sales reached 269.1 million euros (US$311.73 million) in the three months to December 31, for an organic decline of 1 percent, compared with a fall of 5.5 percent in the second quarter. Cognac sales, which account for more than half the company’s revenue, rose 0.4 percent year-onyear in the quarter, a marked improvement from an 11.8 percent fall in the second quarter and a 15.3 percent decline in the first quarter.

Xinhua

Reuters

hares in a cinema firm owned by Chinese tycoon Wang Jianlin, who this week bought a 20 percent stake of Spanish football club Atletico de Madrid, surged 44 percent on their trading debut yesterday. Wanda Cinema, part of Wang’s private conglomerate Wanda Group, raised 1.28 billion yuan (US$210 million) by issuing 60 million new shares, or 10.71 percent of its enlarged share capital, exchange filings showed, as investors bet on strong growth in film viewers. The parent group bought US cinema chain AMC Entertainment Holdings in 2012 and has moved to branch out into film production and theme parks. On its first day of trading on China’s Shenzhen Stock Exchange, Wanda Cinema shares rose by the maximum allowed for new listings to close at 30.74 yuan, valuing the company as a whole at more than 17 billion yuan. Wanda Cinema plans to expand its cinema theatres network to 260 cinemas with 2,300 screens by 2016, according to the firm. AFP