MOP 6.00 Closing editor: Stephanie Lai
China stocks rise to two‑week high Page 14
Year IV
Number 944 Friday December 18, 2015
Publisher: Paulo A. Azevedo
Angola signs oil deal with Sinochem Page 13
Macau Hikes Base Rate
It’s taken 9 years. But the Fed has moved on interest rates. Causing a chain reaction in US$-pegged currencies. Thus, the Monetary Authority of Macao has raised the base rate by 25 basis points to 0.75 per cent. In lockstep with Hong Kong’s base rate hike following the US Federal Reserve’s lead. Secretary for Economy and Finance Lionel Leong Vai Tac said the gov’t would keep a close watch on developments. Particularly on the city’s property and banking industry Page
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Judgement day for junkets
Zero-Rate Era Over
The U.S. Federal Reserve has raised interest rates. For the first time in almost a decade. American officials are now on the alert for higher inflation
Page 18
Part of the plan. Suncity junket boss Alvin Chau reckons the gov’t is delaying VIP gaming table allocation until next year. But says the much lauded diversification can only suffer with reduced VIP rooms. Because confidence is key
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Name
Putting the brakes on
An urgent procedure. A green light from the Legislative Assembly. And a bill substantially increasing vehicle tax is accelerating through legislation. With implementation likely within days. “We aim to slow down the vehicle growth rate,” said the Secretary for Economy and Finance
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Bank of East Asia Ltd/T
+3.58
Sands China Ltd
+3.54
HSBC Holdings PLC
+2.83
Galaxy Entertainment
+2.60
China Resources Land L
+2.07
CK Hutchison Holdings
-1.17
Li & Fung Ltd
-1.20
Hengan International
-1.25
PetroChina Co Ltd
-1.89
CNOOC Ltd
-2.20
Source: Bloomberg
Economy www.macaubusinessdaily.com
%Day
Maritime economy boost
I SSN 2226-8294
An aid to the maritime economy. And a boost for yacht show organisers. Everyone seems to be a winner with the agreed demarcation of 85 sq km of Macau’s coastal waters
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December 18, 2015
Macau
Macau raises base rate to 0.75 per cent Stephanie Lai
sw.lai@macaubusinessdaily.com
T
he Monetary Authority of Macao (AMCM) hiked the base rate to 0.75 per cent yesterday, in lockstep with Hong Kong’s baserate move to match the rise in US rates ordered by the Federal Reserve. “Given the prevailing peg of the MOP to the HKD, the Monetary Authority of Macao has hiked the base rate by 25 basis points to 0.75 per cent, mirroring the latest base rate move of the same magnitude by the Hong Kong Monetary Authority,” AMCM told Business Daily yesterday. The base rate is the discount window rate charged to commercial banks to get funding from the Monetary Authority of Macao. The Macau pataca is pegged indirectly to the US dollar via the Hong Kong dollar.
The Monetary Authority of Macao has hiked the base rate by 25 basis points to 0.75 per cent, mirroring the latest base rate move of the same magnitude by the Hong Kong Monetary Authority
The Hong Kong Monetary Authority has raised its base rate for the first time in nine years, following the US Federal Reserve’s lead overnight, and flagged the risk of rising capital outflows from the city. As Hong Kong’s currency is pegged to the US dollar, the city’s monetary policy typically moves in line with the Fed. Speaking to media yesterday, Secretary for Economy and Finance Lionel Leong Vai Tac said the government would keep a close watch on the changes the interest rate hike has on the city’s property and banking industry. Under an interest rate upward cycle kicked off by the Fed’s latest move, the Secretary has warned homebuyers of greater pressure on affording a mortgage.
But given the modest policy tightening by the US Federal Reserve on the interest rate, which falls in line with the market’s forecast, estate broker Centaline (Macau) Property Agency Ltd. and a banking director told Business Daily that they do not expect the latest rate move to impose a significant impact upon home prices and mortgage plans here. “Still, if we are referring to the home investor, this type of client will become more observant and we may even see less [mortgage] demand from them in the coming months, as the rock-bottom prime rate we saw in the past eight years is now finally coming to an end,” remarked Stephen Ieong Chi Kuong, director of banking business at Bank of China's Macau Branch. With Bloomberg
Midland Holdings warns of net loss for year
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eal estate company Midland Holdings Ltd., parent company of Midland Macau, forecasts that its annual results will fall into the red due to declining sales in Hong Kong. ‘It is expected that the group will record a consolidated net loss attributable to equity holders for the year ending 31 December 2015 as compared to the consolidated net profit attributable to equity holders of approximately HK$64 million (US$7.97 million) for the year ended 31 December 2014,’ it told Hong Kong Stock Exchange yesterday. According to the filing, the property company posted a net loss of HK$75 million for the first eleven months of the year.
It explained that the expected annual net loss was driven by the ‘drop in the residential property market sales activities in Hong Kong’ and the ‘keen competition in the property agency industry in both Mainland China and Hong Kong which has also led to an increase in operating costs.’ In 2014, the company generated some HK$3.48 billion in revenues from its businesses in Hong Kong and Macau. For the first half of this year, its revenues from the two Special Administrative Regions totalled HK$1.78 billion, a year-on-year increase of 14.8 per cent. K.L.
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December 18, 2015
Macau opinion
“The Gods must be crazy” or not
Pedro Cortés
Lawyer* cortes@macau.ctm.net
T
he recent weeks have been absolutely fantastic for those who, week after week, try to find themes to fulfil; in this case, the left part of the third or fourth page of the - with all due respect to the others - best newspaper in Macau! Here are some examples: The strange case of the Association of gaming employees who want to cap tables Firstly, there was an association of individuals trying to defend their jobs in the gaming industry saying something along the lines: “We request the government to stop allowing more table games!” Oh, well, after almost fourteen years I still get flabbergasted by some of the comments and need to read them again in order to assess whether I’m reading correctly. Yes, Macau dealers want the government to stop authorising new tables to casinos. I don’t know who’s behind these ideas and therefore if someone knows who he, she or they are, do tell them that I’d be pleased to spring for lunch to understand the position. Maybe I’m the one who doesn’t know how to read signals. Government offering legal services Secondly, and in this case directly affecting my profession, we had a Secretary of the Macau Government offering legal services to the buyers of units in a construction development, the land concession of which is about to expire due to the inaction of said government. Yes, the Macau Government now provides legal advice to citizens who make a private deal with a private company. Not only the Macau Government but some high profile persons with highly respected professional credentials and offices announced their pro bono availability for those buyers. As to the latter, I’m all for true pro bono. As to the Macau Government, please let me know whether this is going to be the rule, as some clients of the office where I work may want to know that the government now offers free legal advice. That would also help us internally to forecast the future of the profession and prepare our trainees to start thinking about changing job. Hopefully, there will be no claims for illicit provision of legal services by the Macau Government! Humidity, the evil of our Internet speed Thirdly, well, if the above two happenings were not sufficient, then we had the declarations of a high ranking official stating in black and white that the reason for the low speed of the Internet in the tiny Special Administrative Region we call home is the HUMIDITY! Yes, I’m sure that the next step will be for the service providers to include clauses in their contracts disclaiming liability: ‘As a service provider we DISCLAIM all liability for any loss or damage suffered by Internet users. Such losses or damages are solely caused by humidity’. This is, since I have started pretending to study law, the best statement I have ever seen. Hopefully, this trend will be so strong that all providers of all types of services will categorically state it in their contracts. At least, I’m sure the government will provide free advice to those damaged users. Merry Christmas, My Learned Friends and Dearest Readers, and beware the humidity! *Who also suffers with the low speed of the Internet.
City’s autonomy on new coastal waters helps maritime trade shows Macau’s new powers to administer its coastal waters means fewer bureaucratic procedures involved in organising maritime trade shows, says a MICE trade chamber rep Stephanie Lai
sw.lai@macaubusinessdaily.com
T
he announcement of the city being given authority to administer 85 square kilometres of coastal waters will translate into less complicated administrative procedures and reduced cost for organising yacht shows and other trade fairs for the maritime industry, remarked the director of the Macao Convention and Exhibition Association, Alan Ho Hoi Meng. “The biggest problem that we have encountered in the past whenever organising yacht shows here is that we have to have the Marine and Water Bureau help us to co-ordinate with its counterpart in Zhuhai to dredge up silt and build piers,” Mr. Ho told media on the sidelines of his Association’s event yesterday. “Now we don’t need to go through this [co-ordination] process any
more,” he added. “Macau has more autonomy as it can have its own coastal waters, and that facilitates us in organising maritime events like the yacht shows, at reduced cost.” On Wednesday, the Macau Government announced that the city is to be given powers to administer 85 square kilometres of coastal waters surrounding the territory; at the same time, it will be given the administrative rights over the land plot where the Border Gate checkpoint is located. The State Council of China is expected to issue a decree stating the administrative division map for the city on December 20, the date of the MSAR handover anniversary. Prior to the demarcation of Macau’s coastal waters, there was no provision for the local government to manage the city’s surrounding sea lanes.
Despite the autonomy given to the city to administer its own coastal waters, any future plans for land reclamation will still have to be reported to Beijing and such plans cannot involve any gaming purposes, according to a statement issued by Chief Executive Fernando Chui Sai On. The demarcation of Macau’s coastal waters can help the territory to develop its maritime economy, in particular with the addition of nongaming attractions such as water tours, Secretary for Economy and Finance Lionel Leong Vai Tac remarked on the sidelines of a Legislative Assembly meeting yesterday. Speaking to media, the Secretary pledged that the government will further study the city’s maritime industry and how it can be developed more.
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December 18, 2015
Macau
AL approves vehicle tax increase The Legislative Assembly greenlighted the government-proposed bill to increase the city’s motor vehicle tax yesterday. The bill’s contents, discussed in the Assembly in an urgent procedure, will likely be implemented in the coming days Kam Leong
kamleong@macaubusinessdaily.com
T
he Legislative Assembly unanimously approved the bill amending the city’s current vehicle tax regulation, increasing the current motor vehicle tax rate and delisting tourist vehicles from tax exemption. Yesterday, the Legislative Assembly passed both the first reading and final reading of the bill that seeks to control the growth of local vehicle numbers. The bill was discussed in urgent procedure as requested by Chief Executive Fernando Chui Sai On. “The city’s vehicle number steadily grows by some 5.54 per cent every year. By amending the current vehicle tax regulation to increase the tax rate, we aim to slow down the vehicle growth rate,” Secretary for Economy and Finance Lionel Leong Vai Tac said in introducing the bill to legislators. The bill, which will come into effect [as law] the day following its publication in the Official Gazette, will increase the tax rate for a newly imported automobile to 40 to 72 per
Nevertheless, Transport Bureau director Lam Hin Sang said increasing the vehicle tax is not the only measure the government will adopt to control the city’s vehicle number, claiming lifting the general cost of keeping a car will cause the growth rate to slow down by about one per cent. “We aim to increase the cost of keeping a car in three ways - the purchase, possession and use of the vehicle. For example, we recently increased the parking fees at some public car parks. We estimate that the vehicle growth rate will drop by one per cent based on our study and Hong Kong’s experiences,” the government official explained. cent depending upon the imported price, compared to the current 30 to 55 per cent. Meanwhile, that on motorcycles and scooters will range from 24 to 50 per cent, as compared to the current 10 to 30 per cent.
New rate applied to all
Legislative members Au Kam San and Ma Chi Seng queried whether the
implementation of “the urgent bill” will kindle price conflicts between vehicle companies and local buyers waiting for their new vehicles to arrive. “For those who have already made the down payment on new vehicles, I wonder whether they should follow the new or the old taxation if their cars only arrive after the new taxation is applied,” Mr. Ma queried. According to the Secretary, such buyers would need to pay for the vehicle tax based on the new rate if their cars only arrive after the bill is implemented. However, he stressed that he did not see it would create big problems between buyers and sellers. “We know that most of the vehicle companies always state in the sale contracts that the exact car prices are subject to changes in the government’ s tax rate,” the Secretary claimed.
Effectiveness
During yesterday’s discussion on the bill, many legislators queried whether the number of vehicles could effectively be controlled by the increase in motor vehicle tax. Legislator Zheng Anting said increasing the vehicle tax may only be a short-term solution to controlling vehicle numbers. “The increase in vehicle tax will not stop people buying new cars. The government should have evaluated how many cars the city’s roads can [carry] so that we can have a better policy to control the growth rate. It seems that this bill cannot exactly solve the problems we want to solve. I think the government should come up with a long-germ policy instead,” the directly-elected legislator said. Directly-elected legislator Angela Leong On Kei also perceives that the new proposed measure would not stop buyers who really need to purchase vehicles. In addition, she indicated that the new proposed vehicle tax rate for motorcycles was too high. “If residents have the necessity to buy a car, they will still buy despite the tax increase. If they don’t need to, they won’t buy even if the government decreases the tax. I think the government should first improve its transportation system if it wants to control the vehicle growth rate,” she said. “Meanwhile, in my opinion, the new tax rate for motorbikes is too high. Many motorbike riders perceive that the new rate is not fair to them”.
Tourist vehicle tax exemption cancelled
Yesterday’s approved bill will de-list tourist vehicles from tax exemption. Director of Macau Government Tourist Office (MGTO) Maria Helena de Senna Fernandes agrees with legislators that the operating costs of local travel agencies may be increased following the implementation of the bill. “Will small-scale travel companies face closure following the increasing costs? The aim of the bill is to control the vehicle number. But I don’t think travel companies will easily eliminate their current buses after the bill. Meanwhile, big-scale companies will continue purchasing more buses to meet their business demands,” Zheng Anting believes. The MGTO head replied that delisting tourist vehicles from tax exemption may cause travel agencies to increase tour prices. “In the short term travel agencies will have the pressure to increase their tour prices once the exemption is cancelled. However, if they can reach reasonable returns, I think it’s a good thing in the long term especially when the city is now trying to attract better quality package tours, “the official said. She added that the local tourism industry, with a total of 222 travel agencies as at the end of November, is prepared for the amendment.
Assembly passes final reading of 2016 Budget The Legislative Assembly also approved the final reading of the city’s 2016 Budget Plan yesterday, with all votes in favour. The government expects to take in MOP103.3 billion (US$12.93 billion) next year, down 13.9 per cent year-onyear, while budgeting to spend some MOP85.04 billion vis-a-vis this year’s MOP83.76 billion. It also seeks to reach a fiscal surplus of some MOP18.2 billion for 2016. The Public Investment Plan (PIDDA), meanwhile, will be reduced by 24.6 per cent year-on-year to MOP11.07 billion from MOP14.68 billion. The Chief Executive forecast that the city’s gaming revenues may total some MOP200 billion (USD25 billion) next year, the lowest amount
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December 18, 2015
Macau
Suncity boss: Melco Crown lacks licence to run VIP rooms in Studio City Alvin Chau said in an interview that Melco Crown had not received a licence for VIP rooms in its new Studio City resort. This contradicts Lawrence Ho’s version that the lack of VIP tables in the property was a “business decision” João Santos Filipe
jsfilipe@macaubusinessdaily.com
the policy adjustment – the junket business in Macau declined quickly and people haven’t had time to adapt. I think this is a normal adjustment for the business. We’re all waiting for the economic recovery on the Mainland”, he said. “It’s an advantage in the short run [the consolidation] but in the long run it will cause damage when investors, gamblers, visitors or the industry lose confidence in the junket business”, he explained.
Expansion into casino business
M
elco Crown’s new Studio City resort began operations in October without VIP tables. At the time, the CEO of Melco Crown, Lawrence Ho, explained it as a “business decision”. Now the boss of Suncity, the city’s largest
junket, has hinted it was a politically motivated announcement during an interview with Inside Asian Gaming publication. “It’s just a matter of the government’s table distribution – delaying the distribution of VIP tables
until next year. It is known that their licence for VIP rooms hasn’t started”, Chau said. “I don’t believe a casino hotel can be completed without VIP tables. Overall, you won’t achieve diversified development by reducing the number of VIP rooms”. Initially, Melco Crown requested 400 gaming tables for its new US$3.2 billion property but finally received only 200 during this year. However there is the option of expanding this number by 50 from January onwards.
Consolidation a natural process
During the first three quarters, VIP baccarat declined 41 per cent year-onyear to MOP98.23 billion (US$12.30 billion) from MOP166.48 billion. Although Alvin Chau considers this adjustment a natural process, he admits that if it lasts for too long bad consequences will ensue for the industry. “The junket business has its ups and downs. Because everything has happened all at once – the slowdown of the Chinese economy as well as
During the interview, the Suncity Group CEO expressed his agreement with the development of non-gaming attractions in the city as a sign that the market is maturing. “I’m happy to see those new entertainment facilities. When the market gets to a certain size with more hotels, hotel rooms and tables, competition increases. People are not satisfied with large gaming revenue only; therefore diverse products will keep appearing”, he said. Regarding his company strategy, Alvin Chau openly admitted that Suncity wants to step into casino ownership in different countries, rather than remaining confined to the junket business. At the moment, the group is investing in a Vietnam resort, in Hoi An South, in partnership with local group VinaCapital and Hong Kong jeweller Chow Tai Fook. “We will gradually extend our business to the casino hotel segment while, of course, still running our VIP business. Our future development aim is to move our investments from junket operations to owning casinos. We don’t want to be limited to being only a junket promoter”, he explained.
Corporate CEM provides free safety checks for needy citizens of Macau Since 2000, CEM has been operating the ‘Community Programme’, by which voluntary technical staff provide free safety checks and rewiring of electrical installations for elderly citizens living alone, underprivileged families, and citizens with special needs. CEM proactively co-operates with different institutions and major local associations to provide support to the community in Macau. CEM has served hundreds of beneficiaries over the years. In 2015, the Programme primarily focused on helping members of the Rehabilitation Centre for the Blind, an institution falling under the social welfare scope of the Macau Holy House of Mercy. Some 12 members of the Centre were selected to benefit from the Programme. In addition to conducting safety checks of electrical installations, CEM staff helped relocate some of the electrical parts so that the visually impaired could better access them and live in a more convenient and safer environment.
Simultaneously, throughout the year, CEM received extended requests from other institutions to assist their members, such as Peng On Tung Association in the northern district that co-operated with CEM to install LED light bulbs in the houses of 13 elder citizens who live by themselves, aiming to help them reduce their energy consumption and ultimately save on their electricity bill. These 13 elders were also individually partnered with a CEM Ambassador in a pilot project titled CAT 1+1 Elderly Programme, launched this year, through which CEM Ambassadors throughout the year visited them, checking on their wellbeing and thereby enhancing CEM employees’ consciousness of the importance of taking care of our seniors. Moreover, two members of the Macau Deaf Association benefited from the Community Programme, with special doorbell flashlights installed in these two cases.
10 | Business Daily
December 18, 2015
Macau
Short-sellers target mgm as downturn for Macau persists Daniela Wei, Cindy Wang and Moxy Ying
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s 2015 draws to a close, investors are shunning the advice of analysts by increasing their bets against casinos in Macau, the world’s largest gambling hub. For example, short interest in MGM China Holdings Ltd. is nearing the record reached on Nov. 20, data compiled by Bloomberg and research firm Markit Ltd. showed. That’s as analysts predict the company, a unit of the largest casino operator on the Las Vegas Strip, will deliver the best return among its beleaguered peers in Macau. The fallout has spread beyond Macau’s borders, hitting global gambling magnates such as Steve Wynn and Australian billionaire James Packer, who is said to be considering taking some of his casino assets in Crown Resorts Ltd. private. Despite China’s relentless crackdown on corruption and slowing economy, some investors have taken the advice of analysts
calling a bottom to Macau’s gambling downturn -- now in its 18th month -- only to get largely burned, with the exception of the occasional rally. Investors “are still shorting, because they think the analysts are wrong. They don’t believe we are close to the bottom,” Linda Csellak, head of Asia Pacific Equities at Manulife Asset Management, said in an interview. “The short side probably believes the worst is not over yet.” Share prices of Macau casinos have seen brief rallies since the slump started in early 2014, only to collapse again as signs of optimism proved to be unsustainable, according to Karen Tang, an analyst in Deutsche Bank AG. For instance, a 15 percent rebound in Bloomberg Intelligence’s index of Macau stocks in October 2014 was cut short after the government imposed a smoking ban on casino floors that was more stringent than operators had expected.
Part of the reason why Macau is so unpredictable is because casino executives and analysts struggle to anticipate policy changes. Some have turned to frustration, with Las Vegas tycoon Steve Wynn blasting Macau’s government in October
Casino shares rose on Thursday, amid a broad bounce in Asian markets after a highly anticipated U.S. interest-rate increase. Sands China Ltd. rose 4.3 percent as of 10:04 a.m. in Hong Kong trading, the top gainer on the benchmark Hang Seng Index. Galaxy Entertainment Group Ltd. advanced 3.5 percent and MGM China was up 2.4 percent at HK$9.6, extending Wednesday’s gains. Part of the reason why Macau is so unpredictable is because casino executives and analysts struggle to anticipate policy changes. Some have turned to frustration, with Las Vegas tycoon Steve Wynn blasting Macau’s government in October for their lack of clarity. Others have just gotten busier: Daiwa Securities Group Inc. analyst Jamie Soo, the top Macau analyst tracked by Bloomberg, switched his investment ratings on Sands China Ltd. three times in two months. Macau’s high-stakes gambling industry will continue to be squeezed by restrictive policies on capital outflow including a crackdown on underground banks and illicit use of debit-card transaction terminals from China UnionPay Co., Eddie Tam, Chief Executive Office of Hong Kong-based Central Asset Investment, said in an interview. Other headwinds include the depreciation of the yuan, which will increase the costs for mainland Chinese to gamble in Macau, he said. “The industry lacks a growth engine,” Tam said.
Cotai Divergence
MGM China is seen as particularly vulnerable among the city’s six casino operators due to its lack of exposure to the Cotai Strip, the latest gaming area being developed in the Macau peninsula. Newer properties such as Melco Crown’s Studio City, which opened in late October, have taken market share from older casinos. For its part, MGM China’s US$3 billion project in Cotai is scheduled to open in the last quarter of 2016. Wynn Macau Ltd.’s first Cotai project won’t open until mid-2016 and SJM Holdings Ltd.’s first project in the district, Lisboa Palace, is slated to open in 2017. Still, analysts expect MGM China shares to gain about 38 percent in 12 months, according to the average target of 22 analyst estimates compiled by Bloomberg, after plunging more than 70 percent from their January 2014 peak. That’s the best return potential among its peers as analysts again expect the industry to start recovering -- this time from next year. MGM isn’t immediately available to comment. Manulife, for one, thinks the worst is over and the Canadian insurer’s US$86 million fund focusing in Asia Pacific stocks has started investing in Macau casino companies since November. “I just can’t see things getting a lot worse,” said Csellak, who expects Macau casino stocks to recover next year after the sell-off. “I think it’s probably a better buy than sell at this level.” Bloomberg
12 | Business Daily
December 18, 2015
Greater China
Mainland women’s fashion sites to explore possible merger China’s e-commerce is going through a shakeout as smaller operators combine to gain scale Lulu Yilun Chen
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hina’s Meilishuo.com, a fashion retailer backed by Tencent Holdings Ltd., and rival Mogujie.com are discussing ways to cooperate that could include a merger, according to people familiar with the matter. Discussions about potential cooperation are in an initial stages,
with the e-commerce operators yet to agree on issues including roles for the founders, the people said, asking not to be identified because the talks are private. Both startups are backed by Hillhouse Capital Management. China’s e-commerce business, which is projected to expand to 3.6
trillion yuan (US$557 billion) next year, is going through a shakeout as smaller operators combine to gain scale and end costly battles for market share. Deals this year include mergers between ride-hailing companies Didi Taxi and Kuaidi Taxi, group buying sites Meituan. com and Dianping.com, and travel operators Ctrip.com International Ltd. and Qunar.com Inc. Mogujie declined to comment in an e-mailed statement. Meilishuo didn’t respond to an e-mail seeking comment. Wu Xiaoning, a director of investor relations at Hillhouse, declined to comment in an e-mail. Meilishuo has been seeking to raise about US$300 million since April and has yet to close the funding round, according to one of the people. The company, whose name translates as “Beauty Talk,” was considering a U.S. initial public offering at a US$2.5 billion valuation, people familiar with the matter said earlier this year. Founded in 2009 by Xu Yirong, Meilishuo runs an online marketplace
selling clothes, shoes and handbags, targeting young women. It has about 15,000 merchants selling on its website and runs a mobile application that has been downloaded 100 million times, according to a company brochure distributed in April. Mogujie, founded in 2011 and backed by IDG and Qiming Venture Partners, has 130 million registered users and raised a D round of more than US$200 million in November, according to statements from the company. E-commerce will grow 20 percent next year from an estimated 3 trillion yuan this year, according to Shanghai-based Internet consultant IResearch. The leading player is Alibaba Group Holding Ltd., which went public last year in the largest initial public offering ever and is estimated to hit revenue of 98 billion yuan this year. Baidu Inc., the country’s leading Internet search engine, operates its own e-commerce business.
Police take "coercive measures" against P2P lender Ezubao Ezubao investors have formed social media groups and attempted to protest in several cities around the country
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hinese police said had taken “coercive measures” against suspects at Ezubao, the country’s largest online peer-to-peer (P2P) platform by lending figures, which generally means detention. Police in Beijing, Shanghai, eastern province of Jiangsu and southern province of
Guangdong said they had sealed, frozen and seized assets of Ezubao and its linked companies as part of probes into the company, according to postings on their official microblogs late on Wednesday. “How can we get our money back?” said an investor named 24 in an Ezubao investors’ social media group in response
to the news. “That’s our hardearned money.” The investigation into Ezubao is the latest case highlighting the growing financial risks, and potential social unrest, linked to China’s unregulated P2P industry, which has been dogged by reports of frauds in recent years.
In recent days, Ezubao investors have formed social media groups and attempted to protest in several cities around the country, including Beijing and Shanghai. Among China’s almost 3,800 P2P firms operating in the sector now worth of 133.1 billion yuan (US$21 billion), more than 1,200
Bloomberg News
are in trouble, either running away with investors’ money, or closed down, according to industry data provider Wangdaizhijia. Attempts by Reuters to reach Ezubao by telephone were not answered. Ezubao’s offices in Beijing and Shenzhen were closed by police earlier this month, an investor told Reuters. Last week, state media Xinhua News Agency reported Ezubao is under investigation for suspected illegal business activities. The P2P lender had lent 70 billion yuan (US$11 billion) and counts Bank of China, the country’s fourth-biggest lender, as its major creditor, financial magazine Caixin reported. Reuters
editorial council Paulo A. Azevedo, José I. Duarte, Mandy Kuok Founder & Publisher Paulo A. Azevedo | pazevedo@macaubusinessdaily.com Newsdesk João Santos Filipe, Michael Armstrong, Stephanie Lai, Óscar Guijarro, Kam Leong, Joanne Kuai GROUP SENIOR ANALYST José I. Duarte Designer Francisco Cordeiro WEB & IT Janne Louhikari Contributors James Chu, João Francisco Pinto, José Carlos Matias, Larry So, Pedro Cortés, Ricardo Siu, Rose N. Lai, Zen Udani Photography Carmo Correia Assistant to the publisher Lu Yang | lu.yang@projectasiacorp.com office manager Elsa Vong | elsav@macaubusinessdaily.com Agencies Bloomberg, Reuters, AFP, Xinhua, Lusa, Project Syndicate Printed in Macau by Welfare Ltd.
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Business Daily | 13
December 18, 2015
Greater China
Angola signs oil deal with Sinochem in bid for mainland buyers The agreement will help Angola secure an even bigger share of the Asian market Libby George and Chen Aizhu
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ngola is expanding its long-term oil sales deals to China, signing a 10-year agreement with Sinochem Group that would make the Chinese firm one of the largest contract buyers of Angolan oil. The deal, with state energy company Sonangol, will help the west African oil producing nation raise funds to withstand the low oil price storm. The agreement will help Angola secure an even bigger share of the Asian market as West African oil grapples with the long-term displacement from the U.S. market by the shale oil revolution. A statement on the Chinese company’s website did not give financial or volume details, but trading sources said it would take five cargoes per month. Sonangol already has a contract with China’s Unipec, but the total number of cargoes
given to all term buyers in any month rarely surpasses 15. The new contract is the first between Sonangol and Sinochem. Already, Angola sells as much as half of its 1.7 million barrels per day (bpd) of crude oil exports to China, but competes for buyers worldwide with OPEC rivals such as Saudi Arabia and Iraq. Sources said the deal directly related to loans
that the Chinese government has given to Angola as its commodity-reliant economy struggles with the slump in crude oil prices over the past year. “This should be a prefinancing deal under which the producer uses its oil as collateral, and China is poised to win construction or engineering contracts there in return,” a senior Beijingbased crude oil trader with a state firm said. “In terms
of quality and geopolitics, Angolan oil seems a safe bet.” Along with the chairman of Sonangol, Angola’s financial minister, Armando Manuel, was present at the signing of the deal, as was Zheng Zhijie, president of China Development Bank. China agreed a year ago to lend Sonangol US$2 billion to expand oil and gas projects, and Angolan President Jose Eduardo dos Santos was in China in June seeking a
two-year moratorium on debt repayments along with financing for a range of projects, including a US$4.5 billion hydropower scheme. The deal is also likely to push out another term contract holder, sources said, as Sonangol has to trade some of its oil on a spot basis in order to establish prices for term agreements. But the loss of a term buyer could be worth it in exchange for a bigger foothold in China. Sources said Sinochem, which has investments in three refineries, was likely to use some of the oil to supply the country’s new crude importers. The government earlier this year granted almost 700,000 bpd of new crude import quotas to domestic refiners as part of efforts to reform the industry, and also authorized more of these refineries to export oil products. Reuters
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December 18, 2015
Greater China
Mainland stocks rise to two-week high as yuan weakens for 10th day Bolstered outlook for exports was one of the factors leading to the rise of China’s stocks Zhang Shidong
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hina’s stocks rose to a two-week high as funds flowed back to the equities market after a recent spate of initial public offerings, while the yuan weakened for a record 10th day, bolstering the outlook for exports. Property developers and consumer-discretionary companies led gains. The Shanghai Composite Index climbed 1.8 percent to 3,579.99 at the close. Poly Real Estate Group Co. jumped by the daily limit before Friday’s data on home prices, while household-appliances maker Midea Group Ltd. advanced to a one- month high. The Chinese currency capped its longest losing streak since at least 2007. The Hang Seng China Enterprises Index rose 1.3 percent for its steepest two-day advance since October after the Federal Reserve signaled a gradual pace for future interestrate increases.
About 2.7 trillion yuan (US$420 billion) worth of funds has been released back to the market after Monday’s nine IPOs, according to the Securities Times. The Fed’s decision to increase interest rates for the first time in almost a decade signals its confidence in the strength of the U.S. economy and bodes well for Chinese exports, according to Shenwan Hongyuan Group Co. “A weaker local currency is good to boost industries that count heavily on exports,” said Dai Ming, a fund manager keeping the holdings unchanged at Hengsheng Asset Management Co. in Shanghai. “The rate increase has removed a big uncertainty from the market and reflects official confidence in the economy.” The CSI 300 Index gained 1.9 percent. Hong Kong’s Hang Seng Index advanced 0.8 percent as gains for banks overshadowed losses for oil companies.
The Shanghai property index jumped 4.6 percent, the most among industry groups. Poly Real Estate and China Vanke Co., the largestlisted Chinese developers, surged 10 percent in mainland trading. Top researchers at China’s central bank said on Wednesday property investment may recover next year, supported by rebounding land and home sales, while the Chinese Academy of Social Sciences said on the same day property prices will become a “growth stabilizer” as real estate investment rebounds. The Communist Party’s Politburo vowed this week to stabilize the property market. Friday’s new-home price data for November will provide further clues on whether the government needs to do more to support the property market. The nation’s home-price recovery slowed in October, as a supply glut in less-prosperous cities challenges the authorities’ efforts to revive the residential market with interest-rate cuts and easing of mortgage restrictions.
Yuan Slumps
The yuan slipped 0.16 percent to 6.4837 per dollar in Shanghai. The People’s Bank of China may continue its effort to stabilize the yuan against a basket of currencies and seek gradual depreciation against dollar after the Fed’s move, Citic Securities Co. analysts wrote in a note. While recent data show the Chinese economy is stabilizing, trade is still a reason for concern after exports fell for a fifth month in November amid tepid global demand. In a move that was widely telegraphed, the Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent. The U.S. rate increase solidifies the Fed’s divergence from other major central
banks, with policy makers in China still emphasizing measures to support economic growth. China and India may continue accommodative or stable monetary policies next year, supporting emerging markets as they face the possibility of more Fed rate hikes, said David Gaud, senior portfolio manager at Edmond de Rothschild Asset Management in Hong Kong.
Fed Move
“The Fed decision to increase rates moderately was well received by the U.S. stock market and that’s going to give some support to stocks in Asia, including China as it indicates that the Fed has confidence in the recovery of the U.S. economy and that is a very positive development for the Chinese export sector,” said Gerry Alfonso, a sales trader at Shenwan Hongyuan Group in Shanghai. Household-appliance exporters paced gains for consumerdiscretionary companies. Midea and Gree Electric Appliances Inc. advanced at least 1.3 percent. In Hong Kong, the H-shares gauged extended gains over the past two days to 3.5 percent. Industrial & Commercial Bank of China Ltd. jumped 2 percent. China Railway Group Ltd. surged 3.8 percent. The city’s monetary authority raised its base rate for the first time in nine years, following the Fed’s lead overnight, and flagged the risk of rising capital outflows from the city. Mark Mobius, chairman of the emerging markets group at Franklin Templeton, said in an interview with Bloomberg Television that China’s stock market is unlikely to see “dramatic” moves in 2016. The Shanghai index has advanced 8.7 percent this year through Wednesday’s close after soaring as much as 60 percent then plunging from the peak in June. Bloomberg
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December 18, 2015
Asia
ASEAN air safety regulator may still be decades away The 10-nation group is already struggling to implement an Open Skies initiative, or single aviation market, to liberalise air services by the end of 2015 Khettiya Jittapong and Kanupriya Kapoor
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t could take Southeast Asia, one of the fastest growing air travel markets, two decades to set up a regulatory body to oversee safety in an industry blighted by disasters in recent years, say national regulators and airline executives. The need for tougher regulations gained urgency following this month’s report by Indonesia’s National Transportation Safety Committee (NTSC) into the crash of an Indonesia AirAsia A320 passenger jet last year that killed all 162 on board. Investigators found no single cause for the crash, but listed a combination of factors including a glitch-prone rudder component and pilots’ response when things went wrong. The 200-page report has been hailed as a potential turning point as pressure grows for stronger regulation to keep pace with rampant growth in aviation in Southeast Asia. AirAsia founder Tony Fernandes has himself led calls for the Association of Southeast Asian Nations (ASEAN) to forge a common aviation regulator, saying ASEAN institutions should “step forward, for commonality, and for standardization, and for quality”.. But the 10-nation group is already struggling to implement an Open Skies initiative, or single aviation market, to liberalise air services by the end of 2015. That will slip due to differences among the member states, and the difficulty in achieving it illustrates the challenges in taking it a step further and creating common aviation regulatory and safety standards, experts say. Unlike Europe, ASEAN has no legal or executive body to push through liberalisation or create regional organisations that oversee safety and air traffic control. This is mainly because member countries are reluctant to give up their sovereign rights, say industry experts. “Given the (different) speed of development in each country, I don’t think it will be done anytime soon and may take at least 20 years to take shape,” Chula Sukmanop, director of the Office of Civil Aviation in Thailand, told Reuters. A lack of consensus among stakeholders is delaying the process, even as more of the region’s 600 million population take to the skies,
KEY POINTS ASEAN has agreed Open Skies initiative But differences persist over aviation standards Some call for single regional regulator Others see bigger role for national agencies
aided by robust growth of lowcost carriers such as AirAsia and Indonesia’s privately-held Lion Air. Both airlines have placed record orders with the main plane makers. “Malaysia is open and ready, but some other countries are not ready,” a senior Malaysian official involved in the ASEAN talks told Reuters, declining to be more specific. Airline executives, too, are divided on how to regulate the industry. In contrast with Fernandes’ call for a cross-border regulator, Arif Wibowo, chief of the Indonesian National Carriers Association and CEO of flag carrier Garuda, believes aircraft safety should be left to national regulators. “Each inspector should intensify aircraft maintenance and ensure a high level of scrutiny. Second, regulators in each country should be able to check all airlines in an integrated way. There’s no need to raise it to the ASEAN level,” he told Reuters.
Patchy, but improving
Air safety standards have improved in much of Southeast Asia, including Indonesia. In 2007, safety standards were so bad that the European Union barred all Indonesian airlines from flying to its member states. That ban was lifted in August 2009 for all the country’s airlines except Lion Air. But Indonesia’s airline safety record was highlighted again last year with the AirAsia A320 crash. “In Indonesia, the regulators don’t seem to understand the bigger picture,” said Gerry Soedjatman, a Jakarta-based aviation analyst. “A lot of the policies that came out this year after the crash have been kneejerk reactions.” Following this month’s AirAsia crash report, Indonesia’s transport ministry said it ordered additional safety and training checks, including
an inspection of all Airbus A320s operating in Indonesia and more frequent training of pilots in so-called “upset recovery” maneuvers. In Thailand, Prime Minister Prayuth Chan-ocha ordered officials to improve aviation safety standards after the U.S. Federal Aviation Administration (FAA) downgraded the country’s safety ratings. Last week, the European Aviation Safety Agency signed up to help Thailand improve its air safety oversight, but did not add any Thai airlines to its blacklist. European officials nonetheless warned they would continue to scrutinise Thailand’s safety record, which has been the subject of debate in aviation for years. At a meeting this month, the Thai government said it will hire 86 international specialists to resolve
flaws in the country’s commercial aviation standards raised by the FAA. ASEAN’s new Open Skies policy includes higher standards of safety and regulations on operating flights. Other measures aim to improve security, air traffic management, civil aviation technology, and air transport regulatory frameworks. “The message that the Air Asia report sent out was that regulatory oversight in Indonesia and in the region needs to catch up with industry standards,” said Soedjatman. “It’s going to take a long time to achieve uniformity on everything from quality of training to knowledge, safety and commercial regulations. But they have to start.” AirAsia has said the whole industry, including manufacturers, has lessons to learn from the report. Reuters
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December 18, 2015
Asia
Japan’s pampered cows eat cheap feed to get profit on US$250 steak For the first time ever, Japan is getting most of its imported feed barley from the U.K. and Germany rather than from Australia Aya Takada
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he most-expensive meat in the world is getting a little cheaper to produce. Japanese farmers who raise Wagyu cattle for 7-ounce steaks that can fetch US$250 at the poshest restaurants have been struggling to stay in business as their expenses rise faster than income. The young calves they buy and then nurture for 20 months cost more than ever before, and feed for the animals surged to the highest price in three decades. But a plunge in shipping rates during the global commodity slump is allowing Japanese beef producers to import the most European barley ever, because it is far less expensive than the crops from Australia the cattle normally eat. While profit margins remain tight for Wagyu -- with its honeycomb of taste- enhancing fat embedded in the meat -- the shift in feed supplies is providing relief for farmers like Toshio Sotome that Prime Minister Shinzo Abe is counting on to help boost food exports. “Cutting feed costs is vital for us to keep running the farm,” Sotome, 59, said by telephone from Tochigi prefecture, about 100 kilometers (60 miles) north of Tokyo.
Wagyu cattle are coddled with everything from custom clothing to beer for breakfast, and they are fed in a way that ensures maximum marbling in the meat. More than half the barley imports by Japan -- the world’s fourth-largest buyer -- are fed to the animals because it delivers whiter fat layers than other grains and is cheaper.
Margin squeeze
Farmers are spending more than 700,000 yen (US$5,740) -- the most ever -- to buy a 10-month-old Wagyu calf that weighs about 280 kilograms, Sotome said. It costs as much as 400,000 yen to feed and care for them before they are sold to a meat processor for more than 1 million yen, he said. To make sure each one has enough fat, Wagyu cattle are usually slaughtered after 30 months, almost a year older than typical corn-fed herds in the U.S., the world’s biggest beef producer. For the first time ever, Japan is getting most of its imported feed barley from the U.K. and Germany rather than from Australia, which is about 2,500 kilometers closer, government data show. The Baltic
Wagyu calves are too expensive for cattle growers to make profits, unless they can slash costs for feed Koichiro Uemura, managing director, Meat Companion
Korean banks prepare for attack on zombies by boosting CoCo bonds The number of indebted and unprofitable companies known as zombies has increased by 22 percent in five years Kyungji Cho
Dry Index of shipping rates for bulk commodities like iron ore, coal and grain, plunged 79 percent in the past two years, reaching a record low, as demand slows mostly in China. At the same time, the Japanese yen has strengthened 8.5 percent against the euro in 2015, the most in four years, making imports more attractive. Australian barley costs about 2,000 yen more per metric ton than supplies from the U.K. and Germany, according to Nobuyuki Chino, president of Continental Rice Corp., a grain-trading company in Tokyo. That’s a welcome savings for farmers, who in July 2014 were spending 68,661 yen per ton on average for feed, the most in 33 years, according to the Agriculture Ministry. Costs have dropped to 66,476 yen in September.
Beef competition
Domestic cattle producers will need to keep cutting costs to remain competitive after the government agreed to slash tariffs on imported meat to secure the Trans-Pacific Partnership trade deal, Chino said. Import taxes on beef will drop to 9 percent in the deal’s 16th year from 38.5 percent.
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outh Korean lenders are accelerating sales of bonds to bolster capital amid concern the government’s drive to restructure struggling companies will lead to more bad loans. Korea Development Bank sold 700 billion won (US$595 million) of Basel III-compliant tier 2 subordinated contingent convertible notes, or CoCos, last week. Shinhan Bank issued 300 billion won of similar securities on Dec. 4, after KEB Hana Bank’s 300 billion won sale last month. Domestic offerings of such bonds by local lenders and bank holding companies rose 81 percent this year to 5.2 trillion won, Bloomberg-compiled data show. Policy makers in Asia’s fourthlargest economy have called for sales of poorly performing assets and steps to boost competitiveness in industries including steel and shipbuilding. The number of indebted and unprofitable companies known as zombies has increased by 22 percent in five years, according to Bank of Korea data. Demand to sell securities that count as capital may also rise as stricter requirements are phased in from next month. “Banks want to create an adequate buffer preemptively ahead of the strengthened capital rules and as the government’s push to restructure zombie companies may worsen their capital- adequacy ratios,” said Lee Kyoung Rok, a Seoul-based credit analyst at Daewoo Securities Co. “Sales of capital bonds will likely remain busy next year.” Companies with incomes falling short of debt servicing costs for
Business Daily | 17
December 18, 2015
Asia
Of the 463,000 tons of barley imported in the six months through September, Japan got 34 percent from Germany and 25 percent from the U.K., compared with zero from those countries a year ago, agriculture ministry data show. Australia’s share dropped to 6.6 percent from 50 percent a year earlier, while shipments increased from Romania, Ukraine and Hungary. “Demand from the Japanese livestock industry has shifted to European supplies,” said Ryoichi
three straight years rose to 3,295 in 2014, or 15.2 percent of the total, from 2,698, or 12.8 percent, in 2009, according to the Bank of Korea. The central bank has said some of these companies, labeled hangye or ‘marginal’ in Korean, may be staying alive by taking advantage of low borrowing costs to pile on more debt. Lenders in Korea will be required to hold total capital equivalent to at least 10.5 percent of their riskweighted assets by 2019 from 8 percent now, and they will also need to have an additional buffer of 2.5 percentage points by that year, according to the Financial Services Commission. A buffer of 0.625 percentage point will be required from next year. If banks fail to meet the so-called capital conservation buffer, their ability to grant dividends or share buybacks will be curtailed. The average total capital adequacy ratio of the 17 banks in the country subject to Basel III global financial rules fell to 13.96 percent on Sept. 30 from 14.09 percent at the end of June, according to the Financial Supervisory Service. That mostly resulted from growth in
Watanabe, deputy director at the ministry’s feed division.
Import surge
Barley imports by Japan probably will rise 9.4 percent to 1.2 million tons in 2015-2016, the first increase in three years, the U.S. Department of Agriculture estimates. And less of the grain is coming from its traditional suppliers in Australia, Canada and the U.S., Continental Rice’s Chino said. Japan’s government-run grain importer, which is tasked with
regulating supply and prices, expanded its planned purchases of barley, most of which will come from Europe. In November, it announced plans to purchase a maximum 1 million tons in the year through March, up 45 percent from its March estimate of 690,000 tons. Increased supplies of cheaper European grain are easing the strain on profit margins for beef producers who are spending ever more on the cattle they raise. In October, the average cost of a Wagyu calf was
Bloomberg News
issued similar debt at 3.01 percent and 3.04 percent respectively. That compares with an average yield of 2.4 percent on AAA rated 10-year Korean bank bonds.
risk-weighted assets exceeding the increase in capital, the FSS said.
Capital demand
“Basically restructuring by marginal firms will lead to losses at lenders, especially those that have extended higher amounts of corporate loans, resulting in a decrease in capital ratios,” said Jeong Dae Ho, a credit analyst at KB Investment & Securities Co. in Seoul. “The need to raise capital may increase further with the stricter capital rule implemented from next year.” Moody’s Investors Service warned in July that Korean banks’ big loan exposure to “structurally declining sectors” including shipbuilding, steel and shipping poses “a significant risk” to the lenders’ asset quality. The nation’s top-three shipbuilders, also the world’s biggest, had combined operating losses of 7.3 trillion won in the first nine months of this year, according to their financial statements. CoCo bonds offer higher payments to compensate investors for the risk the lender can write them off should its balance sheet deteriorate to a point of non-viability. KDB sold 10-year tier 2 securities at 2.76 percent, while Shinhan Bank and KEB Hana Bank
672,414 yen, up 19% from a year earlier, according to Zen-Noh, a Japanese agricultural cooperative. Prices have risen since then, and are almost double the average of five years ago. “Wagyu calves are too expensive for cattle growers to make profits, unless they can slash costs for feed,” said Koichiro Uemura, managing director at Meat Companion, a beef producer in Tachikawa City, west of Tokyo.
Investor hesitancy
The central bank has said some of these companies, labeled hangye or ‘marginal’ in Korean, may be staying alive by taking advantage of low borrowing costs to pile on more debt
While there’s been steady demand for tier 2 CoCo securities, local institutional investors seem hesitant to buy tier 1 securities, which have equity-like characteristics, Lee at Daewoo Securities said. That’s pushed banks to sell the bonds abroad, Lee said. Woori Bank issued the nation’s first dollar- denominated additional tier 1 notes in June. Seven interest-rate cuts by the Bank of Korea since July 2012 have weighed on domestic lenders’ profits. Banks’ average net interest margin, a key gauge for profitability from lending, fell to a record low of 1.56 percent in the third quarter, the FSS said in a Nov. 10 statement. “Due to Korean banks’ low profitability, potential rises in provision charges could shrink their capital buffers against asset quality risks,” Graeme Knowd, managing director for financial institutions group at Moody’s, said in a note last month. Bloomberg News
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December 18, 2015
International
Fed ends zero-rate era as Yellen signals gradual tightening The Chair of the Federal Reserve is expecting the American economy to expand at a moderate pace and labor market indicators to continue to strengthen Christopher Condon and Craig Torres
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he Federal Reserve raised interest rates for the first time in almost a decade, a widely telegraphed move that Chair Janet Yellen said would be followed by “gradual” tightening as officials watch for evidence of higher inflation. The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent. Policy makers separately forecast an appropriate rate of 1.375 percent at the end of 2016, the same as September, implying four quarterpoint increases in the target range next year, based on the median number from 17 officials. “The economic recovery has clearly come a long way, although it is not yet complete,” Yellen told a press conference following the conclusion of the FOMC’s two-day meeting in Washington. “The committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen.” The increase draws to a close an unprecedented period of record-low rates that were part of extraordinary and controversial Fed policies designed to stimulate the U.S. economy in the wake of the most devastating financial crisis since the Great Depression. The FOMC lowered its benchmark rate to near zero in December 2008, three months after the collapse of investment bank Lehman Brothers Holdings Inc. and 10 months before unemployment in the U.S. peaked at 10 percent.
The economic recovery has clearly come a long way, although it is not yet complete Janet Yellen, Chair of Federal Reserve
Inflation Outlook
"The one phrase that I think is notable is that the committee is confident that inflation will rise, and that was the key criterion that changed," said Guy LeBas, managing director and chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.
The Standard & Poor’s 500 Index of U.S. stocks jumped 1.5 percent to 2,073.07 in New York, rising for three consecutive days for the first time since October while erasing losses
for the year. The dollar fluctuated against the euro after the decision, falling as much as 0.7 percent. It later recouped losses, climbing 0.3 percent to $1.0902 per euro as of 4:14 p.m. in New York. While the vote was unanimous, the rate forecasts show that two officials among the full group of voters and non-voters saw no rate increases as appropriate in 2015, without identifying them. “The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” the FOMC said. “The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
Balance Sheet
The FOMC said it expects to maintain the size of its balance sheet “until normalization of the level of the federal funds rate is well under way.” The quarter-point increase in the target fed funds rate, the overnight interbank lending rate that influences other borrowing costs in the economy, was forecast by 102 of 105 analysts surveyed by Bloomberg News. The Fed gave a largely positive assessment of the U.S. economy, saying that expansion continued at a “moderate pace” and that a “range” of job-market indicators “confirms that underutilization of labor resources has diminished appreciably since early this year.” The central bank also said that the risks to the outlook for economic activity and the labor market are now “balanced,” changing from a previous reference to being “nearly balanced.”
Sustainable Improvement
“Americans should realize that the Fed’s decision today reflects our confidence in the U.S. economy,” Yellen said. “While things may be uneven across regions of the country and different industrial sectors, we
see an economy that is on a path of sustainable improvement.” Still, the recovery has been disappointing for many. Household incomes remain lower than they were a decade ago when adjusted for inflation, and wages have climbed only sluggishly even as firms hired back workers. Hourly earnings have risen by about an average 2.2 percent annual pace over the past seven years, compared with 3.3 percent in the 20 years through 2008. The Fed said monetary policy is still “accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.” The central bank acknowledged the state of low inflation, saying that it plans to “carefully monitor actual and expected progress toward” its 2 percent target. As part of the decision, the Fed increased the interest it pays on overnight reverse repos to 0.25 percent from 0.05 percent to put a floor at the lower end of the range. It also raised the interest it pays on excess reserves held at the Fed to 0.5 percent from 0.25 percent to mark the upper end of the range. In a related move, the Fed’s Board of Governors unanimously voted to raise the discount rate, which covers direct loans to banks, by a quarter point to 1 percent. In addition to setting rock-bottom short-term interest rates during the crisis, the Fed engaged in three rounds of bond purchases aimed at suppressing long-term rates to stimulate borrowing and spending. Officials also provided unusually explicit guidance, assuring investors for years they intended to keep rates low well into the future. Prior to 2008, the effective fed funds rate had never dropped below 0.63 percent, according to data compiled by the St. Louis Fed dating back to 1954. Bloomberg
Business Daily | 19
December 18, 2015
Opinion Business
wires
Leading reports from Asia’s best business newspapers
Great expectations for the renminbi Zhang Jun
The Taipei Times
Professor of Economics and Director of the China Center for Economic Studies at Fudan University, Shanghai
Total revenue from the region’s manufacturing sector this year is expected to fall from last year, due to continued decline in crude oil and stainless steel prices, the Ministry of Economic Affairs said yesterday. “We expect annual revenues in the manufacturing sector to drop about 2.5 percent from last year’s NT$27.33 trillion (US$829.44 billion),” Department of Statistics Deputy Director-General Yang Kuei-hsien said. Yang’s remarks came after the ministry released the manufacturing sector’s revenues for last quarter, in which the figure dropped 5.6 percent annually to NT$6.56 trillion.
The Straits Times The gloom surrounding Singapore’s trade picture darkened in November, with non-oil domestic exports (NODX) falling 3.3 per cent year-on-year, as a contraction in non-electronic shipments outweighed the slight increase in electronic NODX. November’s NODX was expected to have edged up 1.5 per cent from a year earlier, helped by a comparison against a low base, according to a Reuters poll of economists. On a year-on-year basis, NODX to all of the Singapore’s top 10 markets - except the US, Japan, Thailand and South Korea - contracted in November 2015.
The Korea Herald Revenues by South Korean companies continued to dwindle in the third quarter partly due to weak exports, but the rate of the decline slowed while the firms’ overall financial stability improved on better profitability, central bank data showed Thursday. In the three months ended Sept. 30, sales of South Korean firms slipped 1.6 percent from the same period last year, decelerating from a 4.3 percent onyear drop in the previous quarter. Sales of large companies dipped 3.4 percent on-year, also slowing from a 5.7 percent drop in the previous quarter, while those of smaller firms gained 6.5 percent, quickening from a 2 percent increase in the second quarter.
Bangkok Post The civil aviation committee has rebuffed calls to set a floor price for low-cost airline tickets following reports of “price dumping” by a carrier. The committee, chaired by Transport Minister Arkhom Termpittayapaisith, made the decision at a meeting Wednesday, Chula Sukmanop, chief of the Civil Aviation Authority of Thailand (CAAT) and the Airport Department said. The committee received a complaint from an unnamed carrier that some lowcost airlines were selling tickets at below cost price. The panel disagreed with the proposal as cheap ticket prices were set for some seats on a flight, not all seats, he said adding passengers would benefit from price competition.
T
he International Monetary Fund’s recent decision to add the Chinese renminbi to the basket of currencies that determine the value of its reserve asset, the Special Drawing Right, has captured headlines around the world. But the SDR itself has not exactly dominated discussions – much less transactions – since its creation in 1969. So does the decision really matter? In fact, given the SDR’s very limited role in the global economy, the move will have few concrete effects in the short term. In the longer term, however, the attention the decision has attracted could spur wider use of the SDR. More important, at least for now, the decision amounts to an endorsement by the IMF of the progress China has made toward renminbi internationalization, while reflecting – and reinforcing – China’s growing economic clout. Since China joined the World Trade Organization in 2001, its GDP has surged from about CN¥20 trillion (US$3.1 trillion) to CN¥60 trillion. In 2009 China became the world’s largest exporter. And last year, according to the IMF, China overtook the United States to become the world’s largest economy (in purchasing power parity terms). The acknowledgement by the IMF board, which represents all 188 of the Fund’s member countries, that the renminbi meets “all existing criteria” for inclusion in the SDR basket is another step forward along this path of progress. It is important to note, however, that meeting “all existing criteria” does not place the
renminbi on par with, say, the US dollar – or, indeed, with any of the other SDR currencies (the euro, the British pound, or the Japanese yen) – in terms of international usage. On the contrary, despite China’s massive GDP and trade volume, the renminbi’s share in the global foreign-exchange market remains negligible. And the process of internationalizing the renminbi is far from complete. Given this, the IMF could easily have rejected the renminbi’s bid for inclusion in the SDR basket, as it did five years ago. But the IMF seemed eager (especially in the last few months) to bring China on board this time around. What brought about the Fund’s change of heart? The explanation, I believe, lies largely in the August 11 devaluation of the renminbi, after a decade of appreciation. By moving away from the renminbi peg to the US dollar – an undoubtedly risky move – China demonstrated its willingness to allow market forces to establish the exchange rate in the long term. Of course, now that the renminbi has been accepted into the SDR basket, China must prove that it can manage dramatic currency depreciation effectively and continue to make progress toward internationalization. This will be no easy feat, especially at a time of slowing economic growth. A gradual depreciation would create expectations of further exchange-rate weakening, thereby fueling capital outflows and undermining companies’ willingness to use renminbi in exports and imports. The renminbi offshore market, which has strengthened considerably over the last few
years, would lose value, forcing the People’s Bank of China to channel foreign-exchange reserves toward that market to offset the decline. Already, China’s reserves have declined considerably – by $87.2 billion last month alone. Despite these challenges, China’s leaders anticipate that, in the longer term, the
Of course, now that the renminbi has been accepted into the SDR basket, China must prove that it can manage dramatic currency depreciation effectively and continue to make progress toward internationalization
renminbi’s inclusion in the SDR basket will help to bring about the currency’s steady appreciation and, by serving as a kind of certification of credibility, support its continued internationalization. They are probably right. Nonetheless, what will really drive the renminbi’s continued rise will not be the SDR (though it will help), but China’s own long-term economic performance. Indeed, as Arvind Subramanian has argued, China’s share of global GDP and trade is what makes the renminbi likely to become a global reserve currency. The question is when. According to Subramanian, it could occur as early as 2020. Chinese researchers are somewhat less optimistic. Five years ago, Pan Yingli of Shanghai Jiao Tong University projected that, without accounting for other currencies’ incumbency advantage, the renminbi’s share of foreign-exchange reserves worldwide could reach 26% by 2025 (about the current level of the euro). Accounting for the incumbency advantage, the share falls to 10%. But even at that level, the renminbi could be the world’s third reserve currency, after the dollar and the euro, by 2030. In short, the inclusion of the renminbi in the SDR basket does matter, and not just symbolically. By demonstrating its confidence in the renminbi’s continued rise, the IMF has reinforced global expectations of – and lent implicit support to – the renminbi’s progress toward internationalization. Whatever challenges China faces, its steady march to the forefront of the global economy is set to continue. Project Syndicate
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December 18, 2015
Closing China companies look homeward to borrow
Mainland summons u.S. over us$1.83 bln arms sale to Taiwan
Chinese companies have used U.S. dollardenominated financing for less than 2 percent of their bonds this year, the lowest share since 2012, as borrowers switch to the yuan funding market. The companies have issued or announced plans to raise US$39 billion in dollar debt this year, down from more than US$43 billion in 2014. The total for all currencies tops US$2 trillion this year, up 73 percent from last year’s record US$1.2 trillion. Offshore dollar bonds are losing their appeal to cheaper onshore issuance after the People’s Bank of China cut its benchmark interest rate six times in the past year.
China protested the sale of US$1.83 billion in arms to Taiwan, summoning a U.S. diplomat to the foreign ministry to lodge a formal complaint and saying the country would impose sanctions on companies involved. Kaye Lee, the U.S. Embassy’s charge d’affaires, was called to the Ministry of Foreign Affairs, where Vice Foreign Minister Zheng Zeguang expressed displeasure over the first U.S.-Taiwan weapons sale in four years, according to a statement on the ministry’s website. Such protests had been expected and the transaction wasn’t seen as likely to cause lasting damage in relations between Washington and Beijing. The transaction would increase to more than US$20 billion the total bought from the U.S. by Taiwan during the tenure of Taiwanese President Ma Ying-jeou, his office said.
Oil trades near lowest in almost 7 years as glut fails to ease Goldman Sachs warned of “high risks” that oil may fall even lower as inventories swell Heesu Lee and Grant Smith
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il traded near the lowest price since February 2009 as U.S. crude inventories surged and the Federal Reserve raised interest rates for the first time in almost a decade. Futures slipped 1 percent in New York after losing 4.9 percent Wednesday. U.S. stockpiles climbed by 4.8 million barrels to 490.7 million last week, the highest level for this time of year since 1930, the Energy Information Administration reported. Goldman Sachs Group Inc. warned of “high risks” that oil may fall even lower as inventories swell. The Fed’s decision bolstered the dollar, which can diminish the appeal of commodities denominated in the U.S. currency.
Oil is trading near levels last seen during the global financial crisis on signs a record surplus will worsen. The Organization of Petroleum Exporting Countries earlier this month effectively abandoned production limits to defend market share, while the White House on Wednesday announced its support for a deal reached by congressional leaders that would end the nation’s 40year restrictions on crude exports. The “strong inventory build in the U.S. puts oil prices under pressure,” Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt, said in a report. “Stocks normally decline towards the end of the year.”
West Texas Intermediate for January delivery was at US$35.17 a barrel on the New York Mercantile Exchange, down 35 cents, at 9:52 a.m. London time. The contract fell US$1.83 to US$35.52 on Wednesday, the lowest closing price in almost seven years. Total volume was 39 percent above the 100-day average. Prices have dropped 34 percent this year, set for a second annual decline.
Brent, the European benchmark crude, was at a premium of as little as 44 cents a barrel to WTI for February, the narrowest gap since January. The spread has shrunk amid speculation the plan to allow domestic crude to be shipped overseas may help alleviate the U.S. supply glut. The nation’s crude inventories have swelled to 130 million barrels above the five-year seasonal average, EIA data showed.
U.S. Supplies
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Brent for February delivery slid 39 cents to US$37 a barrel on the Londonbased ICE Futures Europe exchange. The January contract expired Wednesday after decreasing US$1.26 to US$37.19, the lowest close since December 2008.
Prices are probably low enough to choke off investment in supplies and tame the current surplus by the end of 2016, Goldman Sachs said in a report Thursday. However, there’s still a possibility that crudestorage tanks will reach their
China Southern hands US$10 bln Philippines holds benchmark aircraft order to Boeing rate as Asia braces for outflows
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hina Southern Airlines Co., Asia’s largest carrier by number of passengers, ordered 110 planes valued at about US$10 billion in list prices from Boeing Co., two months after the planemaker agreed to build an assembly plant for single-aisle planes in China. The Guangzhou-based airline will buy 30 737NG and 50 737MAX models, valued at US$7.24 billion at list prices, the company said in a statement Thursday. The prices are before discounts, which are typical in the industry. China Southern’s unit Xiamen Airlines also agreed to buy 30 737MAX planes for a total of US$2.88 billion before discounts, China Southern said in a separate exchange filing. Asian air travel growth is lifting orders for planemakers Boeing and Airbus Group SE, with China forecast to surpass the U.S. as the world’s largest aircraft market within the next 20 years. The country’s economic expansion is making air travel affordable to more people, prompting carriers such as Air China Ltd. and China Southern to increase their fleets. China is also forecast to become the world’s biggest air travel market, according to Boeing. The plane fleet in China will surge to 7,210 by 2034 from 2,570 last year, Boeing said in August. The Chicago-based company forecast China will need 6,330 new planes worth US$950 billion in the next two decades. Bloomberg
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limit, pushing oil down to levels necessary to force an immediate halt to some production, the bank said. “We still see high risks that prices may decline further, as storage continues to fill,” Damien Courvalin, an analyst in New York, said in the report. Oil prices also declined as the dollar’s advance damped the investment appeal of commodities. The Bloomberg Dollar Spot Index, a gauge of the U.S. currency against 10 major peers, gained 0.3 percent to a two-week high. “As the market generally expects another rate increase in March, oil prices will most likely stay low at least until the first quarter,” said Kang Yoo Jin, a commodities analyst at NH Investment & Securities Co. in Seoul. Bloomberg
Taiwan dollar forwards extend decline as interest rates lowered
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he Philippines left its key interest rate unchanged for a 10th straight meeting as an expanding economy provided scope for policy makers to assess the impact of the U.S. Federal Reserve’s tightening. Bangko Sentral ng Pilipinas kept the rate it pays lenders for overnight deposits at 4 percent, it said in Manila Thursday, a decision predicted by all 18 economists surveyed by Bloomberg. Policy makers also held the rate on so-called special deposit accounts at 2.5 percent, as forecast by all nine analysts surveyed. Asian stocks rose Thursday after the Fed embarked on what it said would be a gradual tightening cycle, with some emerging nations including the Philippines still sounding caution about possible capital outflows. Quickening growth has supported Bangko Sentral’s decision to refrain from joining neighbors including Singapore and Thailand in adding stimulus this year. BSP will “stand hold for now and observe how conditions are after the Fed meeting,” Joseph Incalcaterra, a Hong Kong-based economist at HSBC Holdings Plc, said before the decision. “Growth has held up relatively well. With liquidity in the system abundant and with inflation so low, there’s no need to tweak policy.”
orward contracts on Taiwan’s dollar extended declines as the central bank lowered its policy rate for a second straight quarter, eroding the appeal of the currency as sliding exports hurt the economy. The monetary authority lowered the benchmark discount rate by another 12.5 basis points to 1.625 percent. Twelve of 25 economists surveyed by Bloomberg had predicted a cut, while the remainder had expected the rate to be held after it was reduced in September for the first time since 2009. A gauge of U.S. dollar strength climbed after the Federal Reserve increased borrowing costs for the first time since 2006. One-month non-deliverable forwards dropped 0.6 percent to NT$32.935 versus the greenback as of 5:14 p.m. in Taipei, after falling 0.3 percent on Wednesday, according to data compiled by Bloomberg. In the spot market, the Taiwan dollar closed 0.3 percent lower before the rate decision was announced, Taipei Forex Inc. prices show. This year’s 3.7 percent decline in the currency is the best performance in emerging markets after the Hong Kong dollar, which is pegged to the greenback. “The central bank may cut rates again and prefer a weaker Taiwan dollar to support exports,” said Leon Chu, fund manager at Franklin Templeton SinoAm Securities Investment Management Inc. in Taipei.
Bloomberg
Bloomberg