MOP 6.00 Closing editor: Joanne Kuai
Two-child policy to add 3 million babies every year
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Year IV
Number 917 Wednesday November 11, 2015
Publisher: Paulo A. Azevedo
Tourism Industries Expo starts Friday Page 4
Shenzhen-HK markets link characteristics unveiled
Back to School for DSEJ
The Commission of Audit has slammed the Education and Youth Affairs Bureau (DSEJ) for its poor supervision of finances and has revealed disturbing discrepancies. Plus negligence in overlooking school violations and overcharging. Of the 324 reports approved by Education Development Fund during school year 2012/13, the Commission of Audit found 71 lacking evidence about the use of more than MOP32.5 mln. From these reports, 29 lacked receipts to the tune of over MOP18 mln Page
3
Slower growth Fewer non-resident workers dwelling in the city. Thus, the population grew at a slower pace. Macau’s population totalled 643,100 as at end-September. During Q3, non-residents increased just 0.1 pct to 180,751 Q-o-Q. Official data recorded 1,819 live births during this period. While mortality cases totalled 490
HSI - Movers November 10
Name
%Day
HSBC Holdings PLC
+0.08
Want Want China Hold
0.00
Hong Kong Exchanges
-0.28
China Mobile Ltd
-0.60
Sun Hung Kai Propertie
-0.71
Galaxy Entertainment
-3.97
Belle International Ho
-4.05
China Overseas Land &
-4.14
Li & Fung Ltd
-4.09
Lenovo Group Ltd
-4.23
Source: Bloomberg
I SSN 2226-8294
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Weaker inflation All eyes on China’s consumer inflation. But it has come in weaker than expected. The consumer price index grew 1.3 pct Y-o-Y in October, the National Bureau of Statistics announced yesterday
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Lusa cashes in on property Portuguese news agency Lusa has sold its property in Macau. For MOP15.5 mln. The apartment was bought during the Portuguese administration with
Macau Gov’t aid. In a bid to strengthen the news agency’s presence in China during the period of transition
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www.macaubusinessdaily.com
Gaming
Slippery slope A senior Wells Fargo analyst has cut his November gaming revenue prediction. To a Y-o-Y drop of 34 pct, compared to a previous forecast of -30 pct. A weaker than expected performance during the first eight days of the month prompted the revision. Cameron McKnight calculated average daily revenue of this period at MOP525 mln
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November 11, 2015
Macau
Lusa cashes in on its Macau property Portuguese news agency Lusa recently sold its only asset in Macau for MOP15.5 million. A property bought with the Macau Government’s yearly financial contribution during the last years of the Portuguese administration of the territory to help the agency maintain its presence in China Paulo A. Azevedo*
pazevedo@macaubusinessdaily.com
The short story of Apartment 2A Bought with Macau’s financial aid to give Lusa an edge and a strong footing in Macau, easing its presence after the handover, Apartment 2A in Villa Bela building, right next to ‘Half Orange’ at Sai Wan Lakes, started as the agency’s office and its head chief’s home. Years later, the four-bedroom apartment became only the official residence of Lusa’s team leader. The office was rented in another part of town. Currently, it occupies a space in the Portuguese Consulate.
daily and ten weekly) that meet the requirements and four Portuguese newspapers (three daily and one weekly). Since neither Lusa nor Xinhua belong to this category, GCS does not give financial aid to those agencies”.
“Never a diplomatic gift”
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he year, 1991. The concern: how to help Portuguese news agency Lusa maintain a foothold in Asia, namely in China. The last Governor of Macau, and especially its Secretary for Communication, Tourism and Culture, Salavessa da Costa, were worried that the agency would not have the financial means to maintain a presence in Macau after the handover. Since 1987, with Governor Carlos Melancia, the Macau Government and Lusa had a contract in which the news agency would maintain its news service paying closer attention to the Chinese territory under Portuguese administration. But also to be able to have a journalist in Beijing. “Four years later, we started the necessary steps to reformulate the contract and to upgrade the financial aid so Lusa would be able to acquire
its own headquarters” in Macau, Salavessa da Costa, in Lisbon, told Business Daily in a phone interview. The apartment/headquarters were officially inaugurated in 1994. The Macau Government started to send 300 million escudos (equivalent at that time to MOP15 million) directly to Lusa, in the Portuguese capital. Every year, until the handover. “To maintain Lusa we needed to give aid, I told the Portuguese President then during his visit to Macau”, recalls Salavessa da Costa. “All this is actually published in a chapter in the book ‘My Travels’, a kind of biographic narration of my life”, he told Business Daily.
Discomfort and silence
When the Macau Government was told about the decision to sell the property on Av. Da República by
Sai Wan lakes, for MOP15.5 million, the news “was welcomed with a kind of sadness”, a source who prefers to remain anonymous told this newspaper. Confronted with the news by Business Daily, since the financial aid was always donated by Macau’s public coffers and not by Lisbon, the local government prefers to distance itself. “The Government Spokesperson Office hereby considers the real estate deal as business between private parties”, we were told. The Government Information Bureau (GCS in the Portuguese acronym) later explained that no financial aid is being given to either Portuguese or Chinese news agencies. “According to the Chief Executive order 145/2002, GCS in 2015 supports a total of 19 Chinese newspapers (three
Teresa Marques, president of the Board of Lusa, defended the agency’s decision to sell, explaining to Business Daily that “the documents I was handed regarding the sale of the apartment never mentioned any information about it as a diplomatic gift offered by the Macau Government”. “Initially, it was used as a Lusa newsroom but due to the lack of proper conditions for this purpose, the Lusa newsroom moved away from the flat. From that moment, it was used as a house for the Lusa delegate in Macau. However, it’s not company policy to offer delegates a house but rather to offer an accommodation subsidy”, explained Ms. Marques. The new Lusa delegate, Margarida Pinto, recently arrived to succeed the former head of the agency José Costa Santos, who joined TDM, and is the first in the last two decades to rent her own apartment in Macau. The Lusa president explains the decision to sell as a purely business one: “Even before I assumed this position, the sale of the flat had already been discussed. Now we decided to do it because we considered that we could make a good deal, as the property market in Macau has boomed in recent years. Concerning our newsroom, our option will be to rent an office area in Macau”, she told this newspaper. *with J.S.F
Business Daily | 3
November 11, 2015
Macau
Government lost track of mammoth education subsidies A total of MOP9.65 million in subsidies claimed by private schools was approved by the Education Development Fund without any proof of the existence of the claimed expenses, according to a damning report by the Commission of Audit João Santos Filipe
jsfilipe@macaubusinessdaily.com
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he government is unable to verify that a total of MOP32.46 million (US$4.07 million) from subsidies handed out by the Education Development Fund (FDE) was actually used for projects proposed by local private schools. According to a report by the Commission of Audit (CA) titled ‘Inspection of Financial Subsidies Attributed to Private Schools’, of 324 reports submitted by schools to FDE to purportedly prove that the projects subsidised were actually developed during the school year of 2012/2013, 21.91 per cent, or 71 reports, did not have offer any proof regarding such development. The FDE accepts different types of proof regarding the subsidies handled, such as pictures of school trips abroad by the students or the construction of structures in the schools. However, the fund approved the use of money without subsequent inspection.
‘Of the reports analysed, 71 did not contain proof elements, which puts into question the use of the money for which the subsidies were awarded [which] totaled MOP32.46 million’, the CA report stressed. Another 29 cases that the Education Development Fund did not have enough proof of regarding expenses claimed are actually true. This represents a total of MOP18.80 million, and involves cases in which the value of the receipts presented is lower than the subsidy received. Still concerning the MOP18.80 million, some MOP9.65 million, or 13 reports, approved by the fund, have no evidence at all regarding the expenses claimed for. ‘The Commission of Audit has to stress that the lack of proof of payments, besides raising questions about the amounts claimed in the reports, shows that FDE did not act according to its own legal framework’,
the reports, published yesterday, noted.
Illegal fees
The CA inspection also analysed payments received by the 53 private schools which are part of the free education network of the government. This means that these private schools receive subsidies from the Education and Youth Affairs Bureau (DSEJ) in order not to charge tuition fees to students. In the school year of 2012/2013 the subsidies paid to 53 schools not to charge tuition fees amounted to more than MOP1.20 billion. By analysing the financial balance of the schools for the school years of 2010/2011, 2011/2012 and 2012/2013, the CA found a total of 5 illegal payments charged to students, amounting to MOP91,800. The School Inspection confirmed these five payments. However, the
School Inspection was unable to confirm the legality of another 31 payments to schools by students, which CA believes to be illegal. These suspicious payments amount to MOP625,820. ‘The School Inspection did not confirm or deny that these 31 payments are illegal, explaining that it did not make a suitable follow-up of the cases’, the CA notes in the report. ‘DSEJ is not able to detect obvious irregularities such as illegal charges by schools nor detect other problems less visible, damaging the inspection of the duties legally assigned, as well as the interests and rights of the students’, it noted. The Commission of Audit concludes the report by saying that the failure of FDE and DSEJ reveal ‘serious’ management shortcomings, and that both departments had failed in their inspection duties.
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November 11, 2015
Macau Beijing prosecutors visit Macau courts A delegation led by the Chief Prosecutor of the Beijing Municipal People’s Procuratorate, Chi Qiang, recently visited the Court of Final Appeal of Macau. The President of the Court of Final Appeal Sam Hou Fai introduced to the guests the basic situation of the Macau SAR, the structure and operations of different level courts, and the progress of some cases the courts are handling. The two parties also exchanged opinions on the difference of power distribution between court and procuratorate in the two cities as well as the impact of social development on case process.
Total population increases 200 to 643,100 in Q3 The slow growth of the population is due to more non‑resident workers opting to live outside the territory
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he population in the city totalled 643,100 as at the end of September, a slight increase of 200 compared to the end of June this year due to fewer non-resident workers dwelling in the territory in the past quarter, according to the latest data released by the Statistics and Census Service (DSEC) yesterday. During the third quarter of the year, the total number of non-residents increased just 0.1 per cent to 180,751 quarter-on-quarter, or 228 persons, as the number of working permits granted to foreign labour dropped 11.2
per cent quarter-on-quarter to 24,106 from 27,156, while 10.8 per cent more workers had their working documents terminated from the second quarter, some 23,878.
According to DSEC, 64.6 per cent of the city’s non-resident workers were from Mainland China as at the end of September, while 13.2 per cent and 8 per cent came from the Philippines and Vietnam, respectively.
Meanwhile, the government granted right of abode to 405 individuals during the quarter, which is an increase of 5.2 per cent from 385 in the second quarter of the year. However, the right of abode of some
357 individuals was annulled during the period, jumping 123.1 per cent quarter-onquarter. In addition, the number of Chinese immigrants in the Special Administrative Region registered a quarteron-quarter increase of 19 per cent to 1,982, compared to 1,666 in the previous period. The official data also indicates that 1,819 live births were delivered during the quarter, an increase of 9.4 per cent quarter-on-quarter. The sex ratio at birth for the period stood at 107.4, for 107.4 male babies per 100 female babies. For the total population, females accounted for 50.8 per cent. Meanwhile, the number of mortality cases totalled 490 in the three months. According to DSEC, the top three underlying causes of death were neoplasms, diseases of the circulatory system and diseases of the respiratory system, which killed 188, 107 and 80 in the quarter, respectively. K.L.
Tourism Industries Expo starts Friday
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he 3rd Macau International Tourism Industries Expo, kicking off this Friday, hopes to attract more mass visitors to the event this year by offering discounts to local residents, according to its organiser. The three-day event, occupying 6,500 square metres at The Venetian Macao at the end of the week, will highlight the concepts of ‘One Belt, One Road’, ‘Exhibition and Sales Together’ and ‘Smart Tourism’, as well as following the principle of ‘Fantastic World Gathers in Macau’. “We hope to increase our interaction with local residents this year. Before, the expo was more professional and was only for business to business. This year, we hope to enrich the content for business to consumer as well,” the vice secretary-general of the expo’s organising committee Sabrina Jiang said yesterday on the sidelines of a press briefing.
“For example, many of the local and Mainland Chinese travel agencies are to offer discounts for some tourism routes or products,” she indicated. According to the vice secretarygeneral, the event is expected to attract some 50,000 visitors. Meanwhile, exhibitors who have confirmed participation in the expo, which is providing 300 booths, comprise nearly 30 different countries and regions, such as Japan, India, the Philippines, Portugal, Brazil and other Portuguese-speaking countries. The event is co-organised by several local associations; namely, Macau Travel Agency Association, Association of Macao Tourist Agents, Travel Industry Council of Macau, Macao Creative Industry Association and Macau International Travel (Industry) Expo Organising Committee. K.L. with J.S.F
Business Daily | 5
November 11, 2015
Macau Hong Kong shares close lower Hong Kong shares finished down on Tuesday in tandem with lower regional share markets, which were weighed by concerns about higher interest rates in the U.S. and slackening global growth. The Hang Seng index fell 1.4 per cent to 22,401.70, while the China Enterprises Index lost 1.8 per cent, to 10,314.74 points. Total trading volume of companies included in the HSI index was 1.9 billion shares.
Casinos fall on forecast cut to November gambling revenue Despite the new property, Macau’s gaming revenue in the first eight days of the month went down 36 per cent y-o-y, worse than expected
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acau casino shares fell in Hong Kong after Wells Fargo & Co. cut its forecast for November gross gaming revenue due to worse-than-expected gambling data from the city’s so far this month. Wynn Macau Ltd. lost as much as 6.3 per cent, the biggest intraday drop since Oct. 16., while Galaxy Entertainment Group Ltd. declined as much as 5.1 per cent. MGM China Holdings Ltd. and Sands China Ltd. lost more than 4.7 per cent. American depositary receipts of Melco Crown Entertainment Ltd. closed 6.8 per cent lower in New York. Average daily revenue came in at MOP525 million (US$65.8 million) in the first eight days of
The weak-than-expected performance prompted him to cut revenue estimate for November to a drop of as much as 34 per cent, compared with his previous forecast for a 30 per cent drop. Casino takings may fall 32 per cent, according to a median estimate of five analysts surveyed by Bloomberg. That would be worse than the 28.4 per cent fall in October. the month, down 36 per cent year on year, even after the Oct. 27 opening of Melco Crown’s Studio City casino resort, Wells Fargo analyst Cameron McKnight wrote in a note on Monday.
Worst downturn
Macau is experiencing its worst downturn in history, as China’s slowdown and scrutiny of corruption deterred high-stakes VIP gamblers from visiting the world’s largest gaming hub. Total takings at casinos
fell for 17th straight month in October with revenue from high-end players dropping 33 per cent, according to Bloomberg Intelligence. VIP volumes so far this month were softer than recent trends, probably due to the segment being “over-stretched” last month during China’s week-long National Day holiday, a peak season for Macau casinos, JPMorgan Chase & Co. analysts led by DS Kim said in a report on Monday. Studio City resort helped draw mass market customers, boosting Melco Crown’s market share to 14.8 per cent in the first eight days of November, the highest since at least May, according to data from Sanford C Bernstein. Bloomberg
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November 11, 2015
Macau opinion
Rental ceilings
José I. Duarte Economist
MelcoLot accrues HK$26 million loss in nine months The lottery operator, controlled by Lawrence Ho, saw its revenues generated by sales decrease 9.5 pct year-on-year, while those from the provision of services and solutions surged 91 pct in the first nine months of the year Kam Leong
kamleong@macaubusinessdaily.com
H
ousing issues have been for a long time a main point of contention. Rising sale prices and rents have put the acquisition and renting of a place to live beyond the reach of many. Time and again, the government has refused to intervene, arguing that it is not the role of the administration to interfere with the functioning of the (presumably free) market. Tomorrow, in the Legislative Assembly, some legislators will submit a proposal introducing some changes to the rental market operation. They include a new rule under which the Chief Executive will, in the future, set a ceiling for rental increases. The proposal deals with other related matters as well, but we will focus here on this particular issue. Two questions come to the fore. First, how strong and defensible is the ‘hands-off’ approach of the government? Secondly, if that is found insufficient or inadequate, how appropriate and feasible is the mechanism proposed? It certainly sounds reasonable that a government should avoid interfering with the normal functioning of the market, in most cases arguably the ‘natural’ mechanism for interaction and regulation of conflicting private interests. Should the Macau real estate market be, by any reasonable measure, a ‘free market’, the administration’s non-interference approach would be unimpeachable. It is doubtful that, under such circumstances, the administration could properly arbitrate the various interests involved. But Macau land and construction markets – the two are intertwined, for reasons that need not be developed here - can hardly be defined as such. The reasons why can be easily listed. The government has a virtual monopoly of land. Building construction is decided in negotiations set directly between developers and the authorities, where the latter can and do decide in a mostly discretionary manner. Those negotiations are largely limited by circumstantial considerations, in the absence of both limits imposed by urban planning and enforceable (or actually enforced) construction regulations. A passive policy approach, under such a framework, results in actual types of housing units approved and built being, deliberately or not, in short supply relative to internal needs, among other consequences. Summing up, the imbalances in the market are endogenous to the domestic market set-up, reinforced by policy omissions and limited political representation of some of the parties involved. This situation is unlikely to change significantly, given the nature of the political system and the way various social interests are represented there. Under these circumstances, it can be argued that some policy intervention is warranted, as a sort of ‘second-best’ choice – especially if we recognise that these matters are sources of continuous social dissatisfaction. But is the mechanism proposed appropriate? It is debatable; but we assume it will be approved, given the list of supporters. On pragmatic grounds, it will mostly depend upon the interpretation the CE will make of this new power and obligation, and how fair the decisions will be deemed by the various parties affected. Only time will tell how hot that spot will be.
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hinese sports lottery operator MelcoLot Ltd. posted a net loss of HK$25.9 million (US$3.2 million) for the first nine months of the year, an improvement from the loss of HK$57.5 million during the same period of last year. The lottery operator is a subsidiary of Melco International Development Ltd., chaired by local gaming entrepreneur Lawrence Ho Yau Lung (pictured). It claimed in a filing with the Hong Kong Stock Exchange on Monday evening that the narrowed loss it posted for the nine months is due to a decrease in employee benefits costs and lower finance costs. According to the company, its sales of lottery terminals and parts brought it revenues of some HK$28.6 million. However, the number represents a year-on-year drop of 9.5 per cent from HK$31.6 million. Nevertheless, the company’s revenues generated from the provision of services and solutions for the distribution of lottery products soared 91 per cent year-on-year to HK$5.4 million from HK$2.8 million for the nine months. ‘The group has been adopting a low pricing strategy in order to maintain market share as the demand for terminals and parts was slower than expected,’ the company claimed in the filing. ‘We believe the Chinese lottery market will remain challenging due to continued changing of the regulatory
framework by Chinese authorities, but these changes will undoubtedly bring new opportunities for the Group to use our competitive strength to capitalise on,’ it added. Meanwhile, the company revealed in the filing that its plan of establishing a new boutique casino in Tbilisi, Georgia is ‘continuing under discussion’, while the development of a premium integrated resort project
in Spain, near Barcelona, is ‘in the planning process’. ‘These ongoing international projects and existing [Chinese] opportunities leverage our corporate expertise in the gaming and entertainment industry, and diversify our business to support our goal in maximising long-term shareholders’ value,’ the China-based lottery operator said in the filing.
Caesars revenue jumps as renovated Vegas rooms lure guests
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aesars Entertainment Corp. reported third- quarter results for the parts of the company that aren’t in bankruptcy, saying revenue grew 12 per cent to US$1.41 billion as room renovations in Las Vegas generated gains. Profit, based on adjusted earnings before interest, taxes,
depreciation and amortization, grew 51 per cent to US$317 million, Las Vegas-based Caesars said Monday in a statement. Results were also buoyed by the opening of the Horseshoe casino in Baltimore in August of last year. Revenue for the company’s interactive unit rose 20 per cent to US$195
million, Caesars said. The Las Vegas-based company no longer reports consolidated results for Caesars Entertainment Operating Co., its largest division, which went into bankruptcy in January. The units not in bankruptcy are among its fastestgrowing. Bloomberg
Business Daily | 7
November 11, 2015
Gaming
Christie vetoes Atlantic City bill aimed at casino tax fight The city has lost its monopoly on U.S. East Coast gambling as neighbouring states allow more casinos. The competition eviscerated Atlantic City's property tax base as casino values dwindled
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ew Jersey Governor Chris Christie conditionally vetoed a bill that would have put an end to Atlantic City’s property-tax fights with casinos, saying he wants changes to the measure aimed at stabilizing the struggling gambling hub’s finances. Christie, a Republican, suggested alterations to the legislation and sent it back to lawmakers for their approval, his office said in a statement e-mailed to reporters Monday. The bill as passed would have established fixed payments instead of taxes based on real estate values, allowing officials to avoid appeals that could “significantly strain city finances,” Moody’s Investors Service said in a July report. Christie also made changes to bills that would have diverted gambling money to the city and sent them back
to the legislature, which had passed them in June. The city was counting on the funds to help close a US$101 million deficit this year. “Without these adjustments, the bills put before me by the legislature will not set a course for renewed long-term prosperity, economic growth, and expansion in the region’s tourism, entertainment, and gaming industries,” Christie said in the statement.
Struggling gaming
Atlantic City has been pushed into state financial oversight as its onetime dominance over East Coast gambling is eroded by competition from neighbouring states. The closing of four of 12 casinos last year battered Atlantic City’s tax base. With the casinos losing business, they’ve fought Atlantic City’s property
assessments in order to lower their tax bills. Atlantic City faces refunds of about US$200 million to casinos, of which US$153 million is due to Borgata Hotel Casino & Spa, according to Moody’s. The changes requested by Christie to the tax measure include having the state’s local finance board collect the
THERE ARE THINGS WE DON’T DO BUT WE DO • Advertising • Branding & marketing consulting • Marketing strategy • Creativity • Design
revenue from the casinos and make its release dependent on the city’s fiscal progress. Senate President Steve Sweeney, a Democrat, and Christie said in a joint statement that they will work together on a final plan for rejuvenating Atlantic City. “That plan will incorporate all actions that will be
necessary to unlock Atlantic City’s vast potential and ensure prosperity for both all residents and businesses,” the two said in the statement. Atlantic City Mayor Don Guardian won’t comment until he reviews Christie’s requests, said Chris Filiciello, his chief of staff. Bloomberg
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8 | Business Daily
November 11, 2015
Greater China
October data shows deflationary pressure p
On a monthly basis, consumer prices fell 0.3 percent, compared with a 0.1 percent incre Xiaoyi Shao and Nathaniel Taplin
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hina’s October inflation data showed persisting if not intensifying deflationary pressure, spurring analysts to expect more moves to stimulate the slowing economy by year-end. The October consumer price index (CPI) cooled more than expected, rising 1.3 percent from a year earlier. compared with 1.6 percent in September, National Bureau of Statistics (NBS) data showed yesterday. A Reuters poll expected a 1.5 percent rise. The producer price index (PPI) fell 5.9 percent in October from a year earlier, equal to the September decline and slightly worse than economists’ forecasts of a 5.8 percent drop. On a monthly basis, consumer prices fell 0.3 percent, compared with a 0.1 percent increase in September. Analysts agreed the weak inflation readings raised the odds of further stimulus soon, but were divided on whether that meant further rate cuts, greater fiscal outlays or both. “While it is rational to argue China should ease monetary policy further, China appears to intend to stimulate demand via more proactive fiscal policy,” wrote Zhou Hao, senior emerging markets economist at Commerzbank in Singapore. On Friday, Caixin Magazine
quoted China’s vice minister of finance indicating a fiscal deficit of 3 percent, well above the current planned 2.3 percent for 2015, might still be considered within a safe range. China is already in its biggest easing cycle since the height of the financial crisis, but low inflation means that real interest rates remain high for many firms, especially manufacturers who have endured years of falling factory gate prices.
The central bank has cut benchmark interest six times since November 2014 and repeatedly reduced banks’ reserve requirement ratio. Yesterday’s weak inflation print continues a well-established trend of falling producer prices and tepid consumer price rises, in part a result of sharply lower commodity prices in 2015 but also reflecting slowing demand growth for many goods.
Problem of overcapacity
KEY POINTS Oct CPI +1.3 pct y/y vs +1.6 pct in Sept Oct PPI -5.9 pct y/y, same as Sept Streak of falling producer prices hits 44 months Consumer inflation -0.3 pct m/m in Oct Analysts anticipate further stimulus moves
“The PPI data continued to point out weak domestic demand and the overcapacity problem in the real economy,” said Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai. “We think the government needs to step in to intervene with more support as the outlook of the economy is not so optimistic. We expect more interest rates and RRR cuts in coming months.” Heavy industrial firms and miners, hit by an extended slump in the real estate sector which drives final demand for many of their products, have fared particularly poorly. The Luan Group, a state coal miner, said last month it had no choice but to cut output and put workers on extended unpaid leave.
Although consumer price inflation in China is highly seasonal due to the outsize index weight of food prices , economists also highlighted weakening sequential momentum as a concern. The monthly fall in CPI indicates “the momentum of consumer price rises is petering out,” wrote Li-Gang
Shenzhen exchange conducts Hong Kong link tests Foreign investors are poised to gain greater access to the best-performing stocks in China
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he Shenzhen exchange will include small-cap ChiNext shares in its planned link with Hong Kong, Liu Fuzhong, vice director of strategy and international relations at China’s secondlargest bourse, said in an interview on the side-lines of a conference in Shanghai. The Shenzhen exchange is conducting internal tests on link infrastructure, though the program’s start date is still “uncertain,” Liu said at the conference.
Investors have been clamouring for details on the Shenzhen connect amid concern that a US$5 trillion rout in Chinese shares earlier this year would derail plans to expand the existing cross-border program with Shanghai. The ChiNext index -- used by local traders as a proxy for “new economy” companies in the technology and service industries -- has jumped 87 percent this year and is valued at levels more than four times higher than
the Shanghai Composite Index. “The Shenzhen link will include the stocks that represent the new economy, from Shenzhen’s main board, ChiNext and SME board,” Liu said. The link “is certain to happen and go on. What’s uncertain is the timing,” he said. The specific list of companies included in the connect are still under discussion, Liu said. He declined to comment on
whether the link will allow one-way or two-way flows with Hong Kong. Policy makers have given few details about the timing of the program since China’s stock-market selloff started in June. The link may begin in the second half of the year, Hong Kong Chief Executive Leung Chun-ying said May 28. The city’s exchange operator had also outlined a similar timeframe, while a person familiar with the matter
said in May that China’s State Council had signed off on the plan.
Timing speculation
In a sign of how keenly investors are watching for news on the link, China’s stock market surged last week after the central bank published five-month-old comments from governor Zhou Xiaochuan that said the program would start in 2015. The central bank later said via text message that the comments were taken from a speech on May 27, before the crash in Chinese shares made a delay of the program more likely. Officials have been reviewing plans to expand the exchange link to Shenzhen after starting the Stock Connect program between Shanghai and Hong Kong in November 2014. MSCI Inc. has said that giving foreigners more access to Shenzhen is key to getting the nation’s stocks included in global benchmark indexes. Expanding the exchange connect would be part of China’s effort to link its financial markets with the rest of the world and boosting global usage of the yuan. Bloomberg News
Business Daily | 9
November 11, 2015
Greater China Police freeze shares held by mother of hedge fund boss Xu
persists
ease in September
Major cities’ October land revenues rise
He is among the targets of a Chinese government crackdown
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Liu and Louis Lam, economists at ANZ in Hong Kong, adding that deflationary pressure has “intensified”. October trade figures widely missed forecasts, with exports falling 6.9 percent and imports tumbling 18.8 percent. Reuters
hinese police slapped a two-year freeze on more than US$670 million of shares owned by the mother of Xu Xiang, the Shanghai hedge fund boss under investigation for alleged insider trading and stock manipulation. Two companies, one in Beijing and one in Nantong in Jiangsu province, reported the freeze on stakes held by Xu’s mother, Zheng Suzhen, in statements to the Shanghai stock exchange on Monday night. Zheng hasn’t been named by authorities as being under investigation. Xu, one of China’s highest-profile and top-performing money managers, is among the targets of a Chinese government crackdown that spans executives at brokerage Citic Securities Co. and officials at the China Securities Regulatory Commission after a US$5 trillion summer stock market rout. The police detained Xu, who’s known in China as “hedge fund brother No. 1” on the highway between Shanghai and Ningbo on November 1, China National Radio reported. Xu, the general manager of Zexi Investment, didn’t answer a call to his mobile phone yesterday and calls to Zexi’s Shanghai and Beijing offices weren’t answered.
His mother Zheng’s 275 million shares in retailing firm Wenfeng Great World Chain Development Corp. in Nantong were worth 2.16 billion yuan (US$340 million) at Monday’s closing price. The company’s stock jumped as much as the maximum 10 percent yesterday. At technology firm Daheng New Epoch Technology Inc. in Beijing, Zheng is the biggest shareholder with 129.96 million shares valued at 2.14 billion yuan on Monday. That firm’s stock also rose by as much as 10 percent yesterday. Cheng Min, Wenfeng’s securities affairs representative, said the company didn’t have any contact information for Zheng. At Daheng, two officials -the board secretary and the securities affairs representative -- didn’t answer phone calls. Xu’s Zexi managed four of China’s top-10 performing hedge funds between June and August, according to Shenzhen Rongzhi Investment Consultant Co. The average return of Zexi’s five stock funds has ranked in China’s top three each year since the firm was founded five years ago, according to the Economic Daily’s website. Bloomberg News
No tough rules for foreign bank card firms The State Council, China’s cabinet, announced in April that China would allow foreign firms to apply to the central bank for licences to operate bank card clearing businesses from June 1
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hina will not impose tough licensing restrictions on overseas bank card providers seeking to enter the country’s US$7 trillion card payment market, a senior central bank official said yesterday. Industry sources told Reuters in October that they were concerned the Chinese government would limit the number of licences issued to foreign card providers and force them to operate through joint ventures with local partners. However Fan Yifei, a vice governor at the People’s Bank of China (PBOC),
told a conference that there are no plans to bring in such requirements. “We will actively and cautiously open up China’s card payment market according to laws and regulations, and encourage fair competition,” Fan said. Foreign card companies, including Visa Inc and MasterCard Inc, have been lobbying for more than a decade for direct access to China’s fast-growing cards market, which is projected to become the world’s biggest by 2020. The State Council, China’s cabinet, announced in April that China would
allow foreign firms to apply to the central bank for licences to operate bank card clearing businesses from June 1, a move aimed at addressing a 2012 ruling by the World Trade Organization that found China was discriminating against U.S. credit card firms. Currently China UnionPay Co, a state-controlled consortium, has a monopoly on all yuan payment cards issued and used in the country. “As China opens up its market, more institutions will enter interbank clearing market. UnionPay will compete and collaborate with new joiners,” Ge Huayong, chairman of China UnionPay, said following Fan’s remarks at the same event. Bank card consumer transactions stood at 42.38 trillion yuan (US$6.84 trillion) last year, central bank data showed, representing an annual growth of 33 percent. The PBOC released draft implementation regulations in July and the detailed measures will be finalized “as soon as possible”, Fan said. A spokeswoman for Visa declined to comment. Reuters could not immediately reach MasterCard for comment. Reuters
Local government revenue from land sales in China’s 10 biggest cities rose 24 percent in October from a year earlier, a private survey showed, pointing to early signs of price stabilisation in the property market. But land revenues were still down 17.9 percent in the first 10 months in the cities, which include Beijing and Shanghai, data from real estate services firm E-House China showed. Selling land to developers is a major source of income for China’s local governments, but a cool down in the housing market since last year has crimped developers’ demand for land.
C. bank chief sees yuan as int’l currency by 2020 China will deliver a slew of economic and financial reforms over the next five years, which will help the yuan become an international currency by 2020, central bank governor Zhou Xiaochuan said in an article. The reforms will also include improving central bank communications and guiding market expectations to enhance monetary policy, Zhou wrote in the Caixin article published on the magazine’s website. Zhou said the government will strengthen supervision of its financial system to prevent “systemic risk”, explaining China’s proposed 13th Five-Year economic plan for the years 2016 to 2020.
No plan to discuss South China Sea at APEC China is not aware of any plan to discuss the disputed South China Sea at an Asia Pacific leaders’ summit next week in Manila, a senior Chinese diplomat said yesterday, amid tensions between China and the Philippines over the waters. Chinese President Xi Jinping is attending the summit of the Asia-Pacific Economic Cooperation (APEC) group The APEC meeting will take place in Manila from November 17 to 19. APEC’s members include the United States, China, Japan, South Korea, Indonesia and Canada, and together account for 57 percent of global production and 46.5 percent of world trade.
Annual water consumption cap at 670 bcm by 2020
China will increase a cap on annual water consumption over the next five years, but plans tough new regulations to tackle pollution and preserve supplies, the country’s Water Resources minister wrote in a new book on China’s economic goals. The article appears in a collection of essays by senior officials on the 13th five-year plan, which maps out China’s targets up to 2020. China is facing constraints on its water resources at a time of increasing demand, as the world’s second-largest economy continues to expand.
10 | Business Daily
November 11, 2015
Greater China
Two-child policy to add 3 million babies a year It will be implemented after the law is revised by the National People’s Congress, China’s rubber stamp parliament that annually meets in March
The across-theboard two-child policy in the short term will drive consumption for housing, education, healthcare, housekeeping and daily necessities, stimulate investment in relevant sectors and increase job offerings
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round three million extra babies will be born each year after Beijing abolished its hugely controversial "one child" policy to allow all couples to have two offspring, officials said yesterday. Decades of strict, sometimes brutal enforcement left the world's largest population -- 1.37 billion people -ageing rapidly and with a shrinking workforce that has heightened the challenges of slowing economic growth. The rule change, announced after a key Communist Party meeting last month, will allow 90 million more Chinese women a second child, said Wang
Pei'an, a vice minister of the National Health and Family Planning Commission. But half of them are aged between 40 and 49, he added, limiting their desire or ability to bear children. Some might be "reluctant" to have more children, he said, while some might be "unable to give birth" even if they wanted to. Before the change, he added, 50 million women were already entitled to have a second baby under various exemptions -- rural families whose first child is a girl, couples where one is an only child and ethnic minorities. The announcement of the change prompted speculation
of a baby boom giving the economy a boost, but analysts warn that many Chinese couples do not want more children, particularly given the expense, and the effects of the change remain unclear. Relatively few have taken up the opportunities presented by reforms allowing some people more children in recent years. There were nearly 17 million births in China in 2014 and Wang said the policy liberalisation will see around three million extra babies born each year over the next five years. It would add a total of about 30 million people to the labour force by 2050, he
told a briefing. "The across-the-board two-child policy in the short term will drive consumption for housing, education, healthcare, housekeeping and daily necessities, stimulate investment in relevant sectors and increase job offerings," he said. "It will have even stronger positive impact on economic expansion in the long run," he said, adding China's "potential growth rate" was expected to rise by 0.5 percentage points. But after the change was announced, Edward Hugh, an independent economist based in Spain, warned: "There is a huge time lag,
Brands suing Alibaba say mediation looks futile after Ma comments Forbes magazine quoted Alibaba’s executive chairman as saying there was no chance of settling
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uxury brands suing Chinese e-commerce behemoth Alibaba Group Holding Ltd have asked a U.S. judge to be relieved of the obligation to mediate, which they say looks futile after Alibaba founder Jack Ma (pictured) was quoted in a magazine as saying he would rather lose the case than settle. Gucci, Yves Saint Laurent and other brands held by Paris-based Kering SA filed a suit in New York in May accusing Alibaba of being a giant conduit for counterfeiters and alleging that China’s U.S.-listed e-commerce leader had knowingly made it possible to sell fakes. In an article published late last week, Forbes magazine quoted
Ma, Alibaba’s executive chairman, as saying there was no chance of settling. “I would lose the case, lose the money... But we would gain our dignity and respect,” Ma was quoted as saying. The plaintiffs were “greatly troubled” by the comment, particularly since Alibaba had requested mediation in the first place, the lead lawyer said in a November 6 letter to a judge at the U.S. District Court for the Southern District of New York. “It leaves the impression... that Alibaba’s request for mediation was not made in good faith, but rather as a tactic to delay this case and to force Plaintiffs to expend resources
spinning their wheels in an expensive and time-consuming mediation,” said the letter, seen by Reuters. The letter said the plaintiffs “do not want to foreclose the possibility of mediation in the future, but right now mediation would appear to be a futile exercise”.
Wang Pei’an, a vice minister, National Health and Family Planning Commission
15 years plus, before this has any impact." China's family planning policy was instituted in the late 1970s, restricted most couples to only a single offspring and for years authorities argued that it was a key contributor to China's economic boom and had prevented 400 million births. AFP
Alibaba spokesman Bob Christie said Ma had made the comments prior to Kering agreeing to Alibaba’s proposal to mediate. “If they want to return to the path of litigation, instead of mediation, we will vigorously defend our legal rights and reputation,” he said in an email to Reuters. China’s biggest e-commerce company has been dogged for years by allegations that its online shopping sites are riddled with fake or otherwise copyright-infringing goods. It says it is constantly improving its monitoring and enforcement of rules against counterfeits, but critics say it has not done nearly enough and fakes remain rampant. In response to the Kering request, Judge Kevin Castle urged the parties to continue with mediation, which had yet to begin. “Needless public comments can undermine talks. Yet public positions and positions in confidential talks have been known to vary... The Court strongly recommends that the parties proceed to mediation,” he wrote in an order on Monday. Reuters
Business Daily | 11
November 11, 2015
Asia
Australian bank says business conditions stay strong Some of this improvement has been attributed to the popularity of newly installed Prime Minister Malcolm Turnbull
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ustralian business conditions stayed strong in October with sales, profits and employment all in positive territory, though confidence faded a little in the face of financial market volatility and concerns over emerging markets. National Australia Bank’s (NAB) monthly survey of more than 400 firms showed its index of business conditions held at an above-average +9 in October, even as confidence eased back 3 points to +2. “Business confidence remains somewhat fickle, despite persistent strength in business conditions,” said NAB’s chief economist Alan Oster. The better trend in business conditions was one reason the Reserve Bank of Australia (RBA) skipped a chance to cut interest rates this month. A separate survey of consumers from ANZ and Roy Morgan showed confidence rising to the highest since January 2014 as people became more upbeat on the economic outlook. Some of this improvement has been attributed to the popularity of newly installed
Prime Minister Malcolm Turnbull, who ousted predecessor Tony Abbott in a Liberal party leadership challenge in September. NAB’s survey of businesses showed the outperformance of sectors most exposed to a weaker Australian dollar and record-low interest rates. The survey’s index of sales picked up a point to an historically high +15 while profitability lost a point to +8. Encouragingly for the labour market, the index of employment held at a firm +3 in October, matching its highest since 2011. Oster said the index pointed to stronger momentum ahead with annual job creation perhaps around 200,000. The outlook for non-mining business investment remained positive with that index dipping only a point to +6 and above its long run average. Capacity utilisation ticked up to 81.4 percent, its highest since early 2012. “Capacity utilisation increased further this month, which bodes well for business investment and the labour market,” said Oster.
Encouragingly for the labour market, the index of employment held at a firm +3 in October
Reuters
Indian companies struggle to escape debt burden as profit slows Corporate debt is particularly high in the resources, infrastructure and construction sectors, along with telecoms, where firms paid handsomely to snap up spectrum Rafael Nam and Patturaja Murugaboopathy
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ore profit growth at India’s top companies has slowed down sharply from last year’s levels, hampering efforts to cut debt in one of Asia’s most leveraged corporate sectors and dampening the private investment needed to spur sluggish economic growth. With a majority of Indian companies already reporting financial results for the quarter to end-September, 53 top firms have shown collective 9.4 percent growth in core profit, the slowest since JanuaryMarch 2013, according to Thomson Reuters data. That compared with average quarterly profit growth of 16.9 percent in the previous financial year that ended in March, the data showed. Slowing profit growth will weigh on spending by the companies, which, analysts say, are already utilising the majority of their operating profit to service interest costs. Debt for India’s
963 companies covered by Thomson Reuters StarMine reached more than US$640 billion, or more than 40 percent of India’s gross domestic product.
KEY POINTS Profit growth in July-Sept of 53 firms 9.4 pct - data Slowest pace in 2-1/2 years, disappointing mkts Debt-to-equity falls only slightly in April-Sept Corporate India among the most leveraged in Asia
Disappointment over earnings has helped send Indian shares down for two consecutive weeks now and pushed the broader market into negative territory for the year, with the main index down about 5 percent. “The ability to service debt, as measured by interest coverage, is continuing to deteriorate,” said Rakesh Valecha, head of credit and market research at credit agency India Ratings. Midway through India’s fiscal year, debt-to-equity ratios at the 53 companies had fallen only slightly to 1.05 from 1.10 in the six months to March - still the highest in Asia, and more than double the 0.40 in China, the data showed. But debt-to-forward core profit estimates, a broad measure of how many years it would take to pay off debt, rose to 2.39 in the AprilSeptember period from 2.30 in the previous fiscal half year. That means
it could take almost five years of annual profits to pay all debts.
Concentrated debt
Credit Suisse estimates Indian conglomerates with the biggest gross debt, including infrastructure builders Lanco Group and GVK Group, have debt that is seven times core profit, while their interest cover, a measure of their ability to pay down debt, is less than one, below the 1.5 that is generally considered as the minimum necessary. The result is companies are focusing on cutting back that debt, at the expense of much-needed spending. India Ratings estimates two-thirds of operating profit among the country’s top companies is being used to service interest. The lack of private spending was seen as a major reason why the economy grew more slowly than expected in the first three months of India’s fiscal year that runs from April to March. The government is now stepping up to take up some of the private sector investment slack, seeking to build roads, highways and railways. But how much it can ultimately spend is in doubt given it is also diverting some of its budget funds to bail out state-owned banks and has a deficit target to hit. “They have used the fiscal space to push their spending on building road infrastructure,” said Somasekhar Vemuri, a senior director at CRISIL Ratings. “Whether this is enough to revive animal spirits, we’ll have to wait and watch.” Reuters
12 | Business Daily
November 11, 2015
Asia
Morgan Stanley sees Japan shift in easing methods The central bank’s quantitative and qualitative easing absorbs 80 trillion yen of JGBs annually Kevin Buckland and Shigeki Nozawa
So it would make it harder to exit the policy when you need to.”
Economy optimism
Bank of Japan’s Governor Haruhiko Kuroda may shift to a cap on yields
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he Bank of Japan (BOJ) will be forced to change its stimulus strategy as soon as next autumn as it runs out of government debt to buy from the market, said Robert Feldman, the chief economist in Tokyo for Morgan Stanley MUFG Securities Co. Governor Haruhiko Kuroda may shift to a cap on yields, using bond purchases as needed, rather than buying notes and other assets to hit a monetary base level, Feldman, a member of the advisory council on government debt management, said in an interview on November 6. He expects the BOJ to reach 2 percent inflation around the end of 2016, the middle of its latest target period. He doesn’t see the need for accelerated easing. “If there’s an issue, it’s what do they do when they don’t have enough bonds left to buy,” said Feldman, who has worked at the International Monetary Fund and the Federal Reserve Bank of New York. “Some sort of regime change will probably be necessary.” Feldman is envisaging a change in a regime that has cut yields on notes as long as five years in maturity below zero, driven an almost 60 percent rally in the Topix stock index and weakened the yen by more than 20 percent against the dollar since April 2013. The Japanese government bond
(JGB) yield curve has steepened in the past month with longer-dated yields rising as bets on accelerated easing retreated after Kuroda’s board left policy unchanged on October 30. Eight of 15 economists in a snap poll immediately following the BOJ decision said they see no further monetary easing. Days earlier, 16 of 36 respondents predicted action at the meeting. Kuroda said this month he doesn’t see any limits to policy, and the BOJ can keep buying bonds until its price target is reached. He has also said earlier this year that there were “many options” available for more stimulus and that the central bank could get creative in the case of further expansion. Investors cautioned about bond market functioning in an inaugural BOJ survey. Morgan Stanley MUFG Securities is one of 22 primary dealers obliged to bid at government auctions.
Yield cap
“It’s difficult to predict when the BOJ will hit the limit of its bond buying, but liquidity is tight and it will continue to weigh on yields,” said Koya Miyamae, an economist at SMBC Nikko Securities Inc., another primary dealer. “In that eventuality, it’s certainly possible that the BOJ would introduce a cap on yields.”
The Japanese monetary authority currently buys about 90 percent of issuance, and has cornered an unprecedented 28.5 percent of the market
The central bank’s quantitative and qualitative easing absorbs 80 trillion yen (US$649 billion) of JGBs annually, compared with just 3 trillion yen in exchange-traded funds (ETF) and 90 billion yen of real-estate investment trusts. Feldman doesn’t expect an expansion in purchases of those assets. “I’m not sure that’s such a good idea, and they don’t think so either,” he said, referring to BOJ policy makers. “Bonds roll off. ETFs don’t.
Feldman remains optimistic that wages in Japan will climb, adding to inflationary pressures, even as Morgan Stanley’s own index of annual wage growth slid to the lowest in almost two years -- an aberration he says is due to a disruptive change in the sample at the start of this year. Consumer prices gained 1.2 percent in September from a year earlier, when stripped of both energy and fresh food costs. That compares to the slump below zero in recent months of the central bank’s benchmark gauge, which includes energy. Investors say relying on a rebound in fuel costs to revive inflation is risky and any jump in such expenses would damp consumer confidence. Notes linked to the consumer-price index signal a 0.77 percent average rate of increase in the next decade. Feldman is sanguine about the recovery even as economists forecast the world’s third-largest economy may have slipped back into recession. Third-quarter gross domestic product shrank by an annualized 0.3 percent, following a 1.2 percent drop in the period ended in June, according to the latest median of economists’ estimates compiled by Bloomberg. “Unless something really bad happens, there’s no reason to use more monetary stimulus,” Feldman said. “Underlying prices really are improving.”
Track records
Feldman proved prescient when he predicted at the end of last year that stocks would advance sharply while the yen’s decline would be capped around 125 per dollar. In June, with the Japanese currency around that level, he said further weakness was unlikely. Benchmark 10-year JGBs yielded 0.33 percent, the lowest after Switzerland among bonds globally. The yield sank to a record-low 0.195 percent in January. Feldman expects yields to rise “gradually” as the economy continues to improve, while stocks advance and the yen drifts lower against the dollar, driven by a widening interest-rate differential as the Federal Reserve lifts borrowing costs. “This move away from QQE to some sort of new regime is happening because the economy is normalizing,” he said. “That’s more important than the individual policy moves.” Bloomberg News
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Business Daily | 13
November 11, 2015
Asia
Bank of Korea holding rates as Fed hike conviction grows Thanks to a rebound in private consumption, annual inflation in October stepped up to its highest in 11 months
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outh Korea’s central bank is expected to keep its policy interest rate unchanged this week on increasing anticipation of a rate hike in the U.S., but it may still ease within the next four months to preserve domestic momentum, a Reuters poll found. Twenty-nine out of 31 analysts surveyed by Reuters forecast the Bank of Korea would hold the base rate at 1.50 percent at Thursday’s meeting, whereas the remaining two saw a cut in the rate to a fresh record low of 1.25 percent. Of those who gave an opinion on where rates would go next, 16 of 27 analysts saw rates on hold at least until end-June next year. Eleven respondents said rates would be cut again soon to follow up the BOK’s 25 basis point cuts in March and June this year. As the outlook for a December rate hike in the U.S. gained traction this week, thanks to robust jobs data there, most
KEY POINTS 29 out of 31 see base rate unchanged Respondents divided between cut and no change BOK rate cut timing views pushed back on Fed
Bank of Korea headquarters
analysts who had previously forecast a Korean rate cut this year pushed back their projections to early next year. “Right now, there is no plausible reason to cut rates as consumption is recovering while the U.S. Federal Reserve is gearing up to raise rates,” said Peter Park, an economist at NH Investment & Securities. Park sees local interest rates being held steady until end-June next year. Thanks to a rebound in private consumption, annual inflation in October stepped up to its highest in 11 months, driven by the services sector. Price pressures are expected to grow after the base effect from low global oil prices dissipates next year, analysts said, which could stay the Bank of Korea’s hand.
Annual consumer price inflation, as well as core inflation, are well below the central bank’s current inflation target band of 2.5 to 3.5 percent, but the target is set to expire at the end of this year and discussions are on-going to set the new 3-year target. Despite inflation creeping up and mounting household debt, analysts who saw a cut have persistently pressed for action to offset the harmful effects of falling exports on the economy. Exports have declined throughout this year, with shipments in October slumping the most in more than six years as steep falls in exports to China, the U.S. and Europe reflected a further weakening in global demand. Reuters
Food accounts for more than 50 percent of rural consumer price inflation in India
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South Korea’s top department and discount stores sales rose in October as a recovery in consumption firmed, preliminary government data showed yesterday. Combined sales last month at department stores run by Hyundai Department Store, Lotte Shopping and Shinsegae Co jumped 17.4 percent on an annual basis, the finance ministry said in a report. The same preliminary data showed sales at major discount-store chains in October inched up an annual 1.6 percent. The finance ministry data are watched as a gauge of retail sales for the entire month.
Japan mulling raising Post Bank deposit limit
Rising food prices to hit rural India in 2016
ndia’s villages face a sharp spike in food prices in 2016, as a second year of drought drives up the cost of ingredients such as sugar and milk, and poor transport infrastructure stops falling global prices from reaching rural areas. India’s first back-to-back drought in three decades also complicates government spending calculations as Prime Minister Narendra Modi tries to prune a subsidy regime that has long propped up the rural economy, and he can ill afford to alienate rural voters after a bruising weekend electoral defeat in the north-eastern sate of Bihar. It is bad news for the central bank, too, which faces a conundrum achieving its 4 percent inflation target for the medium term as levels diverge in town and country, and infrastructure development would take years to fix it. India’s overall retail inflation eased to 4.41 percent in September, helped by falling commodity prices, but rural inflation was at 5.05 percent, mostly due to food prices. That,
S.Korea stores’ sales rise
some analysts argue, could worsen, despite the dampening effect of lower wages and sluggish growth in the agricultural sector. While urban dwellers have seen some cheaper imported food products, benefiting from global deflation, that has not filtered through to rural areas, given poor roads, rail and a lack of storage facilities for perishable goods. Prices of vegetables like onions, tomatoes and potatoes have already been rising, with some staples up as much as 20 percent in a month. Palm oil prices have also climbed in the last two months, while milk prices have risen by 10 percent. India will release monthly retail inflation data for October on November 12.
Faltering rural economy
There is little sign of relief. Indian sugar futures are up by a quarter since a late July low, and producers say lower output because of the drought will push them up further in 2016.
Edible oil prices in India, which meets nearly 70 percent of demand through imports, are also likely to rise, given scant rainfall in palm oilproducing countries. Meanwhile, scarcity of fodder and water is expected to hit local milk production from February. Food accounts for more than 50 percent of rural consumer price inflation in India, compared with a third of urban inflation, while categories like fuel, which has seen a considerable price drop, has a much smaller impact in rural areas, where families use firewood or biogas from manure. The rural economy contributes around 50 percent of Indian gross domestic product and is already showing signs of strain as government cuts the once-generous subsidies that shielded farmers and villagers. Motorbike and tractor sales were weak in October, traditionally an auspicious time to buy. Two-wheeler sales rose just 0.36 percent in April-October compared with 16.4 percent growth in the same period a year ago. Reuters
Japan’s government is considering raising the deposit limit on savings accounts at Japan Post Bank Co by 3 to 5 million yen (US$25,000 to US$40,000) this fiscal year to allow it to better compete with other banks after its initial public offering, several sources said. The government could start changing the regulations for Japan Post Bank as early as the beginning of next year, according to several government and ruling party sources. The current limit for individual savings accounts at Japan Post Bank is 10 million yen.
Korean fx bank deposits up South Korea’s foreign exchange bank deposits rose in October after falling for five straight months, central bank data showed yesterday, as local businesses hoarded cash for trade settlements. Foreign exchange bank deposits stood at US$63.40 billion as of end-October, the Bank of Korea said in a statement, up US$4.21 billion from the previous month. According to a breakdown of the data, dollar bank deposits rose for a fifth consecutive month by US$5.98 billion to a new record-high US$49.45 billion in October as non-financial companies piled up dollars.
Philippines coal demand to grow Annual coal consumption in the Philippines, one of the world’s fastest growing economies, could rise by more than two-thirds to as much as 35 million tonnes over the next two decades, the head of a local industry group said yesterday. That could be good news for the country’s main coal supplier, Indonesia, and could also stimulate investment to develop local coal mines. “We’re looking at ... additional (annual consumption of) 10 to 15 million tonnes for the next 10 to 20 years,” said Arnulfo Robles, executive director of the Philippine Chamber of Coal Mines.
GE, Alstom to supply Indian railway General Electric and Alstom have won contracts worth a combined US$5.6 billion to supply India’s railways with new locomotives, as the vast but dilapidated state-owned network looks to foreign companies to help it modernise. France’s Alstom has been picked to supply 800 electric locomotives and will also build a factory in the eastern state of Bihar, railways spokesman Anil Saxena told Reuters yesterday. The total value of the contract and the new factory is about 200 billion rupees (US$3 billion), he said.
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November 11, 2015
International ECB faces three suits over quantitative easing in Germany The European Central Bank’s 1.1 trillion-euro (US$1.2 trillion) asset-purchase program is the target of three lawsuits pending in Germany’s top constitutional court that challenge the country’s role in the policy, a tribunal spokesman said yesterday. The first suit was filed in May, the second in September and the third in October, according to Michael Allmendinger, a spokesman for the Federal Constitutional Court in Karlsruhe. The September action was brought by Bernd Lucke, the head of political party ALFA, said Allmendinger. He declined to disclose the other plaintiffs as they haven’t made their cases public.
EU poised to delay securities reform by a year The European Union’s landmark reform of securities markets to apply lessons from the financial crisis may need to be delayed by a year to January 2018, a European Commission official said yesterday. MiFID II introduces reforms that were agreed at the global level during the 2007-09 financial crisis, such as trading derivatives on electronic platforms to improve transparency. The United States has already introduced such changes under its reform of Wall Street know as Dodd Frank. Martin Merlin said the European Commission’s preliminary technical view was that a delay was needed.
Petrobras-union strike talks fail Brazil’s Petrobras and unions failed to reach an agreement on Monday over worker demands that the state-run oil company reverse budget cuts and cancel assets sales aimed at trimming its massive debt, union and company officials said. The week-old strike, already the biggest in 20 years, now risks an impasse that could hurt domestic fuel supplies and further hobble a company already under financial pressure and the fallout from a corruption scandal. Combined with a growing truckers strike, the Petrobras walkout could further harm a Brazilian economy already struggling with its worst recession in decades.
Mexican oil regulator modifies terms for auction Mexico’s oil regulator approved tweaks to a third auction set for next month, including more flexible capital requirements aimed at attracting more bids, as well as an extended timeline for companies to submit development plans. The December 15 auction will tender 25 mature onshore fields via so-called license contracts. The regulator voted to allow pre-qualified bidders to make multiple offers using the same financial capital, even if a bidder’s amount of capital is only sufficient to win fewer blocks than the offers it makes.
Euro zone conditions money for Greece The euro zone will release the next tranche of loans for Greece as well as money for bank recapitalisation only after Athens implements agreed reforms, euro zone finance ministers said, noting a Greek pledge the conditions would be met this week. A European Central Bank Stress test showed at the end of October that Greek banks needed a total of 14.4 billion euros in additional capital if they were to survive a scenario of adverse economic conditions.
World energy use to grow one-third over 25 years Energy use is projected to drop by 15 percent by 2040 in the EU, 12 percent in Japan and 3 percent in the US
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lobal energy use is set to grow by one-third over the next 25 years, driven mostly by emerging economies, the International Energy Agency said yesterday. Energy consumption in the most developed nations is expected to decline over the same period, it said in its annual World Energy Outlook. The main drivers for increased overall energy consumption will be India, China, Africa, the Middle East and Southeast Asia, the report said. But energy use is projected to drop by 15 percent by 2040 in the European Union, 12 percent in Japan and 3 percent in the US on the back of increased energy efficiency, energy savings and demographic trends. The use of low-carbon fuels and technologies is on the rise, and the share of non-fossil fuels in the total mix is set to increase to 25 percent by 2040 from 19 now, the Pari-based IEA said.
This trend confirmed what the IEA called a “tantalising hint” that economic growth will longer systematically translate into higher CO2 emissions. “Pledges made in advance of COP21 promise to give new impetus to the move towards a lower-carbon and more efficient energy system, but do not alter the picture of rising global needs for energy,” the IEA noted. COP21 refers to a key UN climate change summit taking place in Paris from the end of this month, tasked with producing a climate rescue pact. Among fossil fuels, natural gas, the least carbon-intensive, is the only one expected to see its share rise, the IEA report added. “Where it replaces more carbonintensive fuels or backs up the integration of renewables, natural gas is a good fit for a gradually decarbonising energy system,” the IEA said.
As demand for oil picks up, the oil price is expected to recover gradually to reach US$80 per barrel in 2020, the IEA said. In the following two decades oil demand is likely to level off as governments continue to reduce subsidies and there is further momentum towards energy efficiency and alternative energy sources. With less than three weeks to go before the crucial COP21 conference, the IEA said an on-going policy shift was not enough to avoid the worst effects of climate change. “There are unmistakeable signs that the much-needed global energy transition is underway, but not yet at a pace that leads to a lasting reversal of the trend of rising CO2 emissions,” it said. The world still needed a “clear and credible vision of long-term decarbonisation” to combat climate change. AFP
Emerging company defaults to rise sharply to 7 percent in 2016 Barclays sees this rising to 6.5-7.0 percent by the end of next year
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ebt default rates among emerging market companies could hit 7 percent by the end of 2016, almost double this year’s levels, because of a tougher global funding backdrop, according to investment bank Barclays. Companies that have gone on a borrowing binge during the easymoney years after 2009 face a rise in borrowing costs as the U.S. Federal Reserve prepares to raise interest rates. The rise in rates will come just as debts taken out around 2010 start to fall due. In a note received yesterday, Barclays said the trailing 12-month default rate for junk-rated emerging market companies now stands at 3.8 percent, having climbed steadily since hitting a record low 0.7 percent in 2011.
The bank sees this rising to 6.57.0 percent by the end of next year. “The Fed lift-off is likely to keep FX volatility elevated; commodity prices are set to remain under pressure; and EM bank lending conditions may tighten further. We believe that these factors, alongside the higher cost of funding, will contribute to higher EM defaults in 2016,” Barclays said. Default rates at U.S. junk-rated companies too are set to surge in 2016 to 5.0-5.5 percent. Barclays forecast, double this year’s 2.5 percent rate but staying well below EM levels. That is a departure from recent years when U.S. high-yield default rates were typically higher than in emerging markets. The U.S. rate was 2.1 percent back in 2011.
“Historically EM defaults have risen above those in the United States only during sovereign crises,” Barclays warned. Historically, debt default in emerging markets has gone lockstep with episodes of dollar strength. So companies that borrowed in dollars while earning revenues in fast-depreciating domestic currencies are finding repayments becoming costlier. Currencies such as the Turkish lira and Brazilian real have fallen 20-30 percent this year. This year’s high-profile defaults this year include Chinese developer Kaisa Brazil’s OAS and Ukraine’s Ukreximbank. Reuters
Business Daily | 15
November 11, 2015
Opinion Business
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Is US monetary policy made in China?
Leading reports from Asia’s best business newspapers
Barry Eichengreen
Professor at the University of California, Berkeley, and the University of Cambridge
THE STRAITS TIMES The upgraded ChinaSingapore free trade deal will bring opportunities to firms here as the mainland moves from a manufacturingbased economy to a services one. Analysts note that services are becoming an increasingly important part of the mainland’s economic make-up, a shift that should benefit Singapore, given the strength of the sector here. The catalyst could come from moves to broaden the existing free trade agreement struck between China and Singapore in 2008, an initiative set in motion last Saturday during Chinese President Xi Jinping’s visit.
TAIPEI TIMES The nation’s semiconductor industry is expected to grow its revenue 4 percent next year on improving smartphone demand, market researcher the Industrial Economics and Knowledge Centre (IEK) said. Taiwanese semiconductor companies are to expand their revenues to NT$2.34 trillion (US$71.27 billion) next year, compared with this year’s estimated NT$2.24 trillion, the IEK said. The growth is to be primarily supported by the foundry sector’s estimated 9.9 percent annual growth, while most sectors are to grow less than 5 percent next year, the IEK said.
THE PHNOM PENH POST Cambodia’s General Department of Taxation (GDT) collected US$1.09 billion in taxes during the first 10 months of 2015, up 23.9 per cent compared to the same period a year earlier, according to a statement posted on its website. Leading this growth was increased tax revenue on vehicles, which grew 116 per cent during the period, while taxes collected on tobacco grew 114.9 per cent, according to the statement. The US$1.09 billion tax revenue collected so far this year represents 93.7 per cent of 2015’s annual tax revenue quota, GDT director general Kong Vibol said.
JAKARTA GLOBE Indonesian entrepreneurs signed economic cooperation agreements worth more than US$1 billion with Italian counterparts on Monday following the first bilateral meeting between President Joko Widodo and Italian President Sergio Mattarella. Joko said Mattarella’s visit was the first official visit from Italy to Indonesia in over six decades. “I am excited that in such a visit, 30 Italian business delegates sign agreements worth around US$1.055 billion,” Joko said. The contracts will cover partnerships in logistics, renewable energy, infrastructure, automotive industry, leather, fashion, furniture and travel.
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or much of the year, investors have been fixated on when the Fed will achieve “liftoff” – that is, when it will raise interest rates by 25 basis points, or 0.25%, as a first step toward normalizing monetary conditions. Markets have soared and plummeted in response to small changes in Fed statements perceived as affecting the likelihood that lift-off is imminent. But, in seeking to gauge changes in US monetary conditions, investors have been looking in the wrong place. Since mid-August, when Chinese policymakers startled the markets by devaluing the renminbi by 2%, China’s official intervention in foreign-exchange markets has continued, in order to prevent the currency from falling further. The Chinese authorities have been selling foreign securities, mainly United States Treasury bonds, and buying up renminbi. This is the opposite of what China did when the renminbi was strong. Back then, China bought US Treasury bonds to keep the currency from rising and eroding the competitiveness of Chinese exporters. As a result, it accumulated an astounding US$4 trillion of foreign reserves. And what was true of China was also true of other emergingmarket countries receiving capital inflows. These countries’ foreign reserves, mainly held in US securities, topped US$8 trillion at their peak last year. The effects of these purchases attracted considerable attention.
In 2005, US Federal Reserve Chair Alan Greenspan pointed to the phenomenon as an explanation for his famous “conundrum”: interest rates on Treasury bonds were lower than market conditions appeared to warrant. His successor, Ben Bernanke, similarly pointed to purchases of US debt by foreign central banks and governments as a reason why American interest rates were so low. Now this process has gone into reverse. Although no one outside official Chinese circles knows the exact magnitude of China’s foreign-exchange intervention, informed guesses suggest that it has been running at roughly US$100 billion a month since mid-August. Observers believe that roughly 60% of China’s liquid reserves are in US Treasury bills. Given that reserve managers prefer to avoid unbalancing their carefully composed portfolios, they probably have been selling Treasuries at a rate of roughly US$60 billion a month. The effects are analogous – but opposite – to those of quantitative easing. Recall that the Fed began its third round of quantitative easing (QE3) by purchasing US$40 billion of securities a month, before boosting the volume to US$85 billion. Monthly sales of US$60 billion by China’s government would lie squarely in the middle. Estimates of the effects of QE3 differ. But the weight of the evidence is that QE3 had a modest but significant downward impact on Treasury yields and a positive effect on demand for riskier assets.
The problem is that no-one knows how long capital outflows from China will persist or how long the Chinese authorities will continue to intervene
Menzie Chinn of the University of Wisconsin has examined the impact of foreign purchases and sales of US government securities on ten-year Treasury yields. His estimates imply that foreign sales at a rate of US$60 billion per month raise yields by ten basis points. Given that China has been at it for 2.5 months, this implies that the equivalent of a 25-basis-point increase in interest rates has already been injected into the market. Some would object that the renminbi is weak because China
is experiencing capital outflows by private investors, and that some of this private money also flows into US financial markets. This is technically correct, but it is already factored into the changes in interest rates described above. Recall that capital also flowed out of the US when the Fed was engaged in QE, without vitiating the effects. That was what the earlier debate over “currency wars” – when emerging markets complained about being inundated by financial inflows from the US – was all about. Another objection is that QE operates not just through the so-called portfolio channel – by changing the mix of securities in the market – but also through the expectations channel. It signals that the authorities are seriously committed to making the future different from the past. But if Chinese intervention is just a one-off event, and there are no expectations of it continuing, then this second channel shouldn’t be operative, and the impact will be smaller than that of QE. The problem is that no one knows how long capital outflows from China will persist or how long the Chinese authorities will continue to intervene. From this standpoint, the Fed’s decision to wait to begin lift-off is eminently sensible. And, given that China holds (and is therefore now selling) euros as well, the European Central Bank also should bear this in mind when it decides in December whether to ramp up its own program of quantitative easing. Project Syndicate
16 | Business Daily
November 11, 2015
Closing President Xi okays stock investors protection
Mainland’s mobile Internet users hit 875 million
China will give its stock market investors adequate protection to fend off financial market risks, President Xi Jinping told a meeting of financial leaders yesterday, the state-owned Xinhua news agency reported. Xi’s remarks come after Beijing intervened to halt a share price rout that started in June, which sparked volatility across global financial markets. The main key index, the Shanghai Composite Index, plunged as much as 40 percent from mid-June to late August. At the same meeting, Xi said that China would maintain its prudent monetary policy while accelerating fiscal, tax and financial reforms, including reform of state-owned enterprises.
The number of people in China using mobile Internet has surpassed 875 million, according to an industry report released yesterday. The value of the market is expected to exceed 2.3 trillion yuan (US$362.2 billion) by year end and surpass 3 trillion yuan next year, said a report from the China Centre for Information Industry Development. It said “Internet technology services,” including mobile Internet commerce, smart homes and mobile offices, will become new growth engines, helping entrepreneurship and innovation. In September, the Ministry of Industry and Information Technology urged telecommunication companies to lower prices and increase connection speeds.
Beijing improves FX statistics but GDP data still flawed Most of China’s more than 30 provinces and regions, however, still compile their data on a year to date cumulative basis exceeds the national GDP total, which economists say could be a case of local officials exaggerating output.
FX improvements impressive
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hina is making welcome efforts to improve its official foreign exchange statistics in a bid to win reserve status for its currency, but some big data flaws remain, particularly the embarrassing disparity between local and centrally reported GDP figures. As Beijing pursues efforts to internationalise its yuan currency and rival the dollar’s predominant role in world trade and finance, it has started publishing data using
the International Monetary Fund’s (IMF) Special Data Dissemination Standard (SDDS). Since July, the People’s Bank of China (PBOC) has shifted to reporting foreign exchange reserves and other related data on a monthly basis rather than quarterly. The central bank has also separated out forex reserves already held at the IMF in the form of Special Drawing Rights (SDRs), the IMF’s synthetic reserve currency
Japan’s service sector sentiment improves in October
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and has added visibility into short-term sales and purchases of foreign currency securities. In a similar move, the National Bureau of Statistics (NBS) in the third quarter began releasing quarterly figures on gross domestic product (GDP), replacing the previously used cumulative year-to-date figures. But here the outcome appears much less impressive: the combined economic output of provinces still conspicuously
Established in 1996, the SDDS requires member countries to calculate and publish their data through a highly-standardized platform to improve efficiency and accuracy in data sharing. Its adoption indicates that a country meets the test of “good statistical citizenship”. The IMF is scheduled to decide this month whether to put the yuan into the SDR, and a key factor will be transparency. Now thanks to the new data published for the first time, the market has learnt that the value of PBOC-owned securities dropped more than US$45.3 billion in September from August, accounting for nearly half of total foreign currency sales by that month, indicating that the central
Shanghai Free Trade Zone director under investigation
bank partly drew down its own overseas securities reserves to help the yuan stabilise. Since the PBOC abruptly devalued the yuan in midAugust, Chinese policymakers have scrambled to keep the currency from falling further, and foreign exchange reserves were run down by a record amount in August, the PBOC data shows. In addition, the central bank has also published its data much faster than before. Still, some indicators for shortterm reserve movements are absent in the latest data.
GDP data still murky
In line with the SDDS standard, the NBS has revised down China’s year-on-year GDP growth for every quarter in 2014. It reported that the country’s third-quarter 2015 GDP grew 6.9 percent from a year earlier, the weakest since 2009. The thirty-one provinces and regions’ combined thirdquarter GDP reached 50.7 trillion yuan (US$7.97 trillion), higher than the national total of 48.8 trillion yuan, according to Reuters calculations. Some economists also suspect government statistics may underestimate strong consumption and service sector growth, leaving investors to focus instead on the cyclical and structural weakness in industry and fixed asset investment. Reuters
Myanmar opposition says it’s headed for landslide election win
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entiment in Japan’s service sector improved in October for the first time in three months, helped by good weather and an increase in tourists visiting Japan, a government report said yesterday. According to the Cabinet Office’s “Economy Watchers” survey for October, the diffusion index for Japan’s current economic climate rose 0.7 point from the previous month to 48.2, although failed to breach the key 50-mark threshold for the third successive month, the report revealed. With the corporate sector showing evidence of increased trade based on tourism, thanks to a comparatively weak yen making Japan an attractive hub for holiday makers, coupled with clement weather during the recording period, the office maintained its basic assessment of the economy, stating that it is “recovering moderately” despite the downside effects of other Asian nation’s slowing economies. The forward-looking index, which gauges conditions two to three months ahead stood at 49.1, the same reading as a month earlier, while overall “watchers” were seen to be optimistic about their upcoming winter bonuses and increased appetite in the approaching festive period for new durable goods.
hinese authorities said yesterday that a director of the Shanghai free trade zone (FTZ) had been put under investigation for “severe disciplinary violations”, a phrase which typically refers to corruption. In a statement on its website, the Central Commission for Discipline Inspection -- the Communist Party’s corruption watchdog -- gave no further details of the case involving Ai Baojun, 55, who is also a vice mayor of the commercial hub. Ai holds the title of director of the Shanghai FTZ, according to his official biography. He has been one of several Shanghai vice mayors since 2007, holding the portfolio for development and planning, it said. China set up the Shanghai FTZ in September 2013, promising a range of financial reforms, though foreign companies have been disappointed with the pace of change. Following investigation, authorities typically pass cases involving Communist Party and government officials accused of corruption to prosecutors for court trial and punishment. Shanghai party chief Han Zheng pledged “zero tolerance” towards corruption at an internal meeting about the case, according to a statement posted on the government’s official microblog.
yanmar opposition leader Aung San Suu Kyi’s party said it expected to win 80 percent of the seats contested in the nation’s historic election, as limited official results from the party’s strongholds showed it was dominating early returns. The National League for Democracy was the victor in 48 of 53 seats in the national parliament for which results were available, the election commission announced yesterday, though there are hundreds more contests left to count from Sunday’s vote. Even the co-chair of the militarybacked ruling party said his party likely lost more seats than it won, though he stressed that results he was looking at were not yet official. “We expect we will win 80 percent,” Win Myint, a member of the NLD’s executive committee, said yesterday. “The voters, the people, really want change and want to build a democratic country.” The election commission has said counting the votes could take a week or longer. For NLD supporters who remember the last time the party contested a nationwide election -- a landslide 1990 victory that was ignored by the ruling junta -- spirits were high as they sang and danced in the rain for a second night Monday and cheered each result that trickled in.
Xinhua
AFP
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