Debt burdened Mainland economy could face extra challenge in overcapacity fight Reform Pages 8&9
Thursday, March 24 2016 Year IV Nr. 1008 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Joanne Kuai Crime Construction
China State Construction’s 2015 Macau gross profit up 178 pct Page 6
Guangdong sniffs out biggest online casino fraud in years Page 7
www.macaubusinessdaily.com
ExCo
Government proposes exemption for industrial licence levy Page 7
Consumers
Content Chinese city dwellers new face of changing economy Page 8
Penal Clause Favoured For Public Contracts
Gonçalo Lobo Pinheiro
Public Works Debate in the Legislative Assembly. On whether a compensational penal clause should be introduced into public contracts. Many legislators support such a policy. Saying it would urge contractors to finish their jobs on time. Thus obviating unnecessary delays and budget overruns. Secretary for Transport and Public Works Raimundo Rosário (pictured) argued legislation in place is not necessarily worse. But concedes enhancement of enforcement is vitally important. Page 5
Silver lining
Glass half full
Tourist arrivals Feeling good about February. The MSAR welcomed 2.6 mln visitors. Representing 8.1 pct more than in January. Despite a drop in the Mainland market, visitations from all major international source markets increased. Page 4
Debt swap Huarong Energy shareholders vote today. On a debt-for-equity swap that could change the fate of the company. And set a landmark for indebted firms. PBOC has announced the preparation of laws that would allow banks to follow suit. Page 9
+4.09%
Sands China Ltd
+2.14%
China Petroleum & Chem-
+2.07%
China Mengniu Dairy Co
+1.83%
Galaxy Entertainment
+1.57%
Henderson Land Develop-
+1.29%
Cheung Kong Infrastruc-
-1.39%
New World Development
-1.44%
Link REIT
-1.73%
MTR Corp Ltd
-1.84%
China Overseas Land &
-2.58%
Hengan International
-4.59%
11° 16° 12° 13° 12° 18° 14° 20° 16° 20° Today
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Source: Bloomberg
Europe under attack Pages 2&3
Tingyi Cayman Islands
Source: AccuWeather
Travel alert Macau Gov’t issued a travel security alert for Belgium yesterday following terrorist attacks in Brussels. Macau has been described by a Hong Kong-based security and consulting company as a potential target of terrorism. By contrast, Head of Security Wong Sio Chak recently said, “the security of the territory can be guaranteed”.
HK HSI March 23, 2016 20,615.23 -51.52 (0.25%)
2 Business Daily Thursday, March 24 2016
Europe under attack Terrorism Report
With Brussels bombs, jihadists hit heart of a fraying Europe The risks are palpable for the future of passport‑free travel within 26 European countries. John Follain, Ian Wishart and Marine Strauss
E
urope’s leaders pledged a united front against Islamic State after the bomb attacks that killed at least 31 people in Brussels, but the jihadist group’s latest and powerfully symbolic strike may only widen the continent’s divisions. The synchronized explosions during Tuesday morning’s rush hour targeted the core of the European Union at a time when a deluge of refugees from the Middle East is testing the bloc’s dedication to open borders and stirring up anti-foreigner demagoguery. The attacks, along the lines of the November killings in Paris, dramatized the need for a coordinated European response to terrorism, while stoking populist anger that
makes such a reaction harder to achieve. Belgian police launched a manhunt hours after the blasts at the airport and a subway station, the deadliest attacks ever on Belgian soil. Special forces raided homes in the northern Brussels neighbourhood of Schaerbeek -- not far from the district where the Paris attacks are said to have been planned. They found a nail bomb, chemical products and an Islamic State flag. The country was put on the highest alert level. “We will act with all our force to defend ourselves,” Prime Minister Charles Michel told reporters, adding that the country will observe three days of mourning. “Our freedom was hit in the heart this morning in Brussels, as it was several months ago in Paris. It’s a common battle, a battle without borders.” The assaults shortly after 8 a.m. at the airport and an hour later on the subway appeared calculated to inflict the maximum possible damage and pandemonium. In the minutes after the airport attacks, panicked travellers ran past the departure hall’s blown-out windows and through the rubble of ceiling tiles. Following the Maelbeek metro station assault,
smoke poured from the stop as seriously injured, soot-covered people were taken out on stretchers and wailing passengers fled. Police released a still from closed-circuit TV footage showing three men pushing baggage carts whom they suspect were involved in the attack at the airport. The office of Frederic Van Leeuw, Belgium’s federal prosecutor, said in a statement that two of the men likely carried out suicide attacks, while the third was being sought.
“The perpetrators are the enemies of all of the values that Europe stands for today and which we uphold together as members of the European Union” Angela Merkel, German chancellor
“There may be other individuals on the run today,” Belgian Foreign Minister Didier Reynders told RTL TV. “We feared it would happen in Brussels and it did.” Islamic State claimed responsibility. In a statement, it promised “dark days” for countries allied against the group, adding that future attacks will be “harder and more bitter.” The underground bombing wreaked carnage down the street from where EU leaders on Friday struck a deal with Turkey to address the region’s biggest refugee wave since World War II, many of them fleeing the civil war in Syria. The busy subway line is used by Belgian commuters, schoolchildren, tourists and bureaucrats from all over Europe -- a cross-section of the global community.
Palpable risks The risks are palpable for the future of passport-free travel within 26 European countries, seven of which have already partly reinstated border checks. Even as police sifted through body parts and shredded suitcases at the airport departure hall, the Brussels murders roiled European politics. People gather and light candles at the Place de la Bourse during a vigil to pay tribute to the victims.
Lusa
Macau Security
Operation terrorist attack SAR could be a target but is not at risk. Kelsey Wilhelm kelsey.wilhelm@macaubusinessdaily.com
I
n the wake of the tragedy in Brussels, Professor Sten Verhoeven of the University of Macau’s Faculty of Law opines that the early morning timing of the
terrorist events in the Belgian capital “was indeed indicative that they wanted to [harm] as many victims as possible.” The professor is one of “around 30 or 40” Belgians in Macau and believes that the impact “in the short run” for tourism in Belgium will be negative but in the medium and the long-term will probably not have a huge impact. “People will still go to Paris, people will go to London so the same will probably happen with Brussels,” he told Business Daily. Chinese tourist visitation to Paris has indeed slumped following the November attacks, reports Bloomberg, but Chinese investment in the country remains strong - reaching US$3.62 million in 2015 according to a study by Baker & McKenzie. “There are simply good deals to be made,” Yan Jufen, general secretary of the
Chinese chamber of commerce in Paris, told the agency. In the wake of the attacks on the European Union capital South Korea, Japan, Indonesia, Thailand and India said they were deploying additional resources at major transport hubs including increased checks on those entering airports and additional patrols in buildings, Reuters has reported. China passed a new anti-terrorism law in January of this year with an official pledging to resolutely prevent and crack down on terrorist activities whilst stating that the law would balance the protection of citizens from terrorists as well as citizens’ rights, Xinha news agency reports. Liu Yuejin, counter-terrorism commissioner of the Ministry of Public Security for the PRC, told the agency
that the country’s current anti-terrorism situation is “stable and under control”.
Macau as target
Despite government reassurances of the city’s safety the MSAR is seen as the potential target of a ‘spectacular attack such as […] a casino in Macau’, said a report by Steve Vickers and Associates, published earlier this year. The city’s ‘nexus of Chinese, American and Jewish interests in the gaming sector,’ says the report, makes the city an ‘attractive target’. The report described Macau as having an ‘increasingly mercantilist policy, with rhetoric against the foreign companies rising’. Speaking to the media earlier this year Macau’s head of Judiciary Police, Chau Wai Kwong, described the MSAR
Business Daily Thursday, March 24 2016 3
Europe Under Attack Beyond Brussels Last weeks saw another three major terrorists attacks:
Turkey
Belgian Prime Minister Charles Michel (C‑L) and European Commission President Jean‑Claude Juncker (C-R) lighting candles at Bourse square to pay tribute to the victims. Lusa
In Britain, Prime Minister David Cameron criticized the anti-immigration U.K. Independence Party for exploiting the assaults to make the case for Britain to leave the EU, a decision voters will make in a June referendum that polls suggest will be a close call. German Chancellor Angela Merkel is fighting opponents within her own government pushing her to back away from her open-door policy for asylum seekers. “There is a growing perception among European public opinion that EU leaders are not in control of the continent’s terrorist threat,” Mujtaba Rahman, a former EU official who is now director of European analysis at the Eurasia Group in London, said in a note to clients. “This will in turn put more pressure on incumbent governments and limit their space for policy action to address Europe’s multiple crises.”
Joint statement In a rare joint statement, EU leaders - still at odds over refugees and
Main suspect in attacks caught
Police captured the main suspect still on the run following Belgium’s worst terrorist attacks as a heavy security persisted in Brussels after the strike by Islamic State. Authorities yesterday arrested 24-year-old Najim Laachraoui, one of three men filmed on closed-circuit TV wheeling baggage carts at the airport, Belgian media reported. Brothers Khalid and Brahim El Bakraoui, residents of the Belgian capital, have also been identified as suicide bombers who blew themselves up at the airport and
how to stimulate the economy - expressed solidarity with Belgium and said they’re “determined to face this threat together with all necessary means.” “The perpetrators are the enemies of all of the values that Europe stands for today and which we uphold together as members of the European Union,” Merkel said in Berlin. The timing, only four days after the arrest in Brussels of Salah Abdeslam, believed to be the only surviving perpetrator of the Paris massacres, was a brazen signal of the unrelenting threat Europe faces even with some terrorist operatives behind bars. The attack also shows the vulnerability of open societies such as Belgium, where authorities have been on alert since the slaughter in the French capital after the discovery that some of the suspects had lived in Brussels. Prosecutor Van Leeuw told reporters that two suspects probably blew themselves up, adding that it was too early to confirm links with the Paris attacks.
Brussels returned to the same type of lockdown that accompanied a heightened state of alert for several days after the Paris attacks. Belgian officials urged people to stay where they were and to communicate via social media to avoid putting excess strain on already overloaded mobile phone networks. Car and truck access to Brussels was curbed and some tunnels were shut. Access roads and rail lines were halted to the airport, in the suburb of Zaventem, about 15 kilometres from central Brussels. The airport will not reopen Wednesday as crews assess the damage. The city’s transit authority, which had earlier suspended its entire subway, tram and bus network, announced that some bus routes and at least one tram would start running in the evening. “People ask me if I’m scared,” said Agnieszka Lukaszczyk, 35, who works at the European Commission in a building close to the Maelbeek station. “I’m not scared actually, I’m just very sad, very angry and I feel hopeless, and that is the worst - the hopelessness.” Bloomberg News
at a metro station, according to state broadcaster RTBF, citing an unidentified police source. RTBF reported the brothers were known to police but as gang members rather than terrorists, and that Khalid had rented, under a false name, a flat in the Brussels district of Forest which police raided last week. A taxi driver who drove the three suspects to the airport led police to a home in another borough, Schaerbeek, hours after the attacks, Belgian newspaper Le Soir said. Police found a nail bomb, chemical products and an Islamic State flag at the residence. Bloomberg News Lusa
as being at “low risk” of a terrorist attack; however, a measurement on how high the threat level could be is still under evaluation. Secretary for Security Wong Sio Chak told legislators late last year that authorities would “study the setting up of a scheme for such an index, which is important for us.” The Secretary assured legislators that “the security of the territory can be guaranteed,” stating that authorities “have been preparing and making arrangements based on the standards for mid-high level risks.”
Prepared for the worst
Threats relating to terrorism fall under the jurisdiction of the Macau Public Security Force, specifically the Police Intervention Tactical Unit (UTIP) headquartered next to the Portas do Cerco border crossing.
According to a United States report on terrorism published in June of last year the UTIP is charged with “protecting important installations and dignitaries, and for conducting highrisk missions, such as deactivation of IEDs, with a special unit named the Special Operations Group exclusively tasked with counterterrorism operations. Officers have received US-sponsored training at the International Law Enforcement Academy specifically relating to ‘personnel and
“The security of the territory can be guaranteed.” Wong Sio Chak, Secretary for Security
facility security, financial and crime scene investigations, combating terrorism, computer investigations, and evidence protection’. Lei Wai Meng, Vice-Director of the Association of Macau Police Officers, earlier this year told Chinese television station MASTV that it had been difficult to conduct an evacuation rehearsal in the city’s tourist zones due to crowd sizes. “Every year, Macau receives around 30 million visitors. And should a terrorist attack take place, it would result in injuries to these outside visitors from various countries,” he said. The Macau Government passed an anti-terrorism law in April 2002, classifying which acts are considered terrorism and punishments for terrorism activities, such as those that took place in Brussels on Tuesday morning.
A suicide bomb exploded on the most heavily trafficked pedestrian street in central Istanbul on Saturday leaving five people dead, including the attacker, and 39 injured, most of them foreign tourists. The blast occurred shortly before 11 a.m. just off Istiklal Caddesi, a milelong avenue that stretches south from Taksim Square, a major entertainment area. At least two of the dead were Israelis, according to Israel’s foreign ministry, and Istanbul Governor Vasip Sahin said 24 of the wounded were foreigners. The explosion extended the string of terror attacks targeting Turkey’s urban centres since the middle of 2015. Six days ago, 37 people were killed in a suicide car bombing in Ankara claimed by TAK, a splinter group of the autonomy-seeking Kurdish PKK, with which the Turkish state is locked in a 30-year battle. TAK also claimed responsibility for a similar attack that killed 28 in the Turkish capital in February.
Nigeria At least 22 people were killed after two female suicide bombers targeted a mosque in Umarari village located on the outskirts of Maiduguri, capital of Nigeria’s north-eastern state of Borno. One of the attacks took place inside the local mosque, while the second blast occurred a few minutes later, about 50 meters away, according to spokesman of the Nigerian army, Col. Sani Usman. President Buhari, while commiserating with families of the victims of the terrorist attack, said “the condemnable and reprehensible attack on a place of worship by perpetrators who pretended to be worshippers has once again exposed them as mere criminals who have no place among civilized people”.
Cote d’Ivoire Gunmen stormed three hotels in Grand-Bassam on Sunday 13th, killing at least 18 people, including 15 civilians and three soldiers. Grand-Bassam, some 30 km southeast of the commercial capital Abidjan, is popular with both locals and foreigners. “We had never witnessed such an incident, we are still in shock,” a witness told Xinhua. Al-Qaeda in the Islamic Maghreb (AQIM) claimed attack’s responsibility. It also claims responsibility for a hotel raid in Mail’s capital Bamako in November last year, which left 20 people dead, among them 14 foreigners. Xinhua and Bloomberg News
4 Business Daily Thursday, March 24 2016
Macau Geek shootout
International hacker contest in the offing
a target. The organisers say the event aims to raise awareness about the vulnerabilities An international contest for techies is to be of smart devices. Prizes are up for grabs held in Macau on May 12. The contest - titled in the categories of smart transportation, wearable devices, smart home appliances, GeekPwn - is being organised by a white smart entertainment, and mobile hat hacker team known as KEEN based in applications. This year, the maximum prize Mainland China. The group contestants for for each section could be up to 800,000 the event can choose to break any smart software or hardware. Large cash prizes are yuan (US$123,169). Last year’s edition to be won if a player successfully breaks into offered a total prize pool of five million yuan.
Tourism Visitor arrivals by air surge 28.9 pct to 225,168 y-o-y
February visitor arrivals up 8.1 pct to 2.6 million vis-à-vis January Mainland visitor arrivals dip 5.2 pct y-o-y, while all other major international markets rise. Bami Lio bami.lio@macaubusinessdaily.com
T
he city’s visitor arrivals in February increased by 8.1 per cent to 2,644,289 month-on-month, due in part because of the Chinese
New Year holiday, according to the Statistics and Census Service (DSEC). However, the lastest data from DSEC also indicates a year-on-year decrese of 1.2 per cent in total visitor arrivals. In the first two months of 2016, the city has seen a slight
year-on-year decrease of 1 per cent to 5,090,165 in accumulative visitor arrivals compared to the same period of last year. In Feburary alone, visitors travelling by air registered a year-on-year surge of 28.7 per cent to 225,168, while 99.7 per cent of them arrived
via the airport with a year-on-year surge of 28.9 per cent to 224,417. However, the city saw a year-onyear drop of 11.2 per cent to 813,214 visitors travelling by sea. Those who arrived by land increased 1.3 per cent year-on-year to 1,605,907.
More international origins
In February alone, Mainland visitor arrivals saw a year-on-year drop of 5.2 per cent to 1,799,522. However, it still remains the biggest source of visitor arrivals travelling to the MSAR. Good news from other origins was apparent as visitors from Hong Kong (548,080) and Taiwan (86,477) increased 4.8 per cent and 16.6 per cent year-on- year respectively. In Asian market, visitors from Korea (63,013) and Japan (nearly 21,000) registered a year-on-year increase of 12 per cent and 24.5 per cent, respectively. International visitors from the United States (12,763), Canada (5,932) and Australia (5,727) also registered increases of 9.2 per cent, 13.1 per cent and 1.1 per cent, respectively. In the first two months of 2016, accumulated Mainland visitors decreased 3.1 per cent year-on-year to 3,458,156. While those from Hong Kong (996,273) remained similar on a yearly basis, and those from Taiwan (172,416) increased by 14.1 per cent year-on-year.
Average length of stay up
Also in February, same-day visitors dropped 7.6 per cent year-onyear to 1,454,944, whereas overnight visitors rose 7.9 per cent to 1,189,345. The average length of stay of visitors increased by 0.2 days year-on-year to 1.1 days. The average stay of same-day visitors held stable at 0.2 days, while that of overnight visitors rose 0.3 days to 2.1 days.
Retail
Hermes profit rises as bag maker copes with Paris attacks Luxury market remains challenging as companies face slowing demand in China, a slump in Hong Kong and Macau, and subdued consumption in the U.S. French luxury handbag maker Hermes International SCAreported full-year profit that beat analysts’ estimates even after the November terrorist attacks in Paris damped tourist spending in its home market. Operating profit rose 19 per cent 1.54 billion euros (US$1.7 billion) on an adjusted basis, the Paris-based company said Wednesday in a statement. Analysts predicted 1.52
billion euros, based on the average of 16 estimates. The margin widened to 31.8 per cent, after the company had warned profitability would be close to 2014’s 31.5 per cent because of adverse currency shifts. “In a world where there are a multitude of risks and uncertainties, the ability to be able to react and adapt according to events remains important,” Chief Executive
Officer Axel Dumas said on a call with reporters. Fewer tourists are shopping in Europe, following the terror attacks last year in Paris -- a situation that’s been aggravated by Tuesday’s bombings in Brussels, which killed at least 31 people. Hermes said sales in France rose 6 per cent, faring “remarkably well” despite the slowdown after the Nov. 13 events in Paris.
The stock rose 1.8 per cent to 317 euros as of 9:11 a.m. local time. Luxury companies also face slowing demand in China, a slump in Hong Kong and Macau, and subdued consumption in the U.S.
Market expansion
Hermes is benefiting from two new productions sites in France, which are boosting its supply of handbags and other leather goods. Earnings were also buoyed by sales in Japan, which has seen an influx of Chinese tourists. Still, the company kept its guidance for 2016, saying growth could be below its medium-term goal of 8 per cent growth at constant exchange rates due to global economic and political risks.
The company plans to raise prices about 3.5 per cent this year in Europe, in line with production costs, Dumas said. He said it was too early to give a margin forecast or comment on sales growth. Hermes lowered its sales outlook for a second year in February, predicting currency-neutral growth at less than half the level of the start of this decade. The company’s fourth- quarter revenue increase was the weakest in six years. Hermes also said it plans to pay a dividend at 3.35 euros a share. The luxury market will expand about 2 per cent in 2016, according to MainFirst Bank AG. The maker of 4,200-euro saddles is targeting revenue of 6 billion euros by 2020. Bloomberg
Business Daily Thursday, March 24 2016 5
Macau Public Works AL debates public works contracts clause
Don’t rock the boat Government is inclined to exclude the compensatory clauses that were suggested by legislators. Annie Lao annie.lao@macaubusinessdaily.com
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he government is inclined to maintain the current system of public works contract. Secretary for Transport and Public Works Raimundo Arrais do Rosário said that the system in place mandates punitive clauses rather than compensatory clauses. He said the current system “is not necessarily worse” and changes will take time to make. “We have strictly enforced law 74/99/M to punish contractors. Actually, compensatory penal clauses would have more procedures. Our biggest problem is the time it would take us to go through all those procedures,” the Secretary said in the course of a debate in the Legislative Assembly yesterday. The debate - on the issue of whether compensatory clauses should be introduced into public works contracts as
requested by legislator Ella Lei Cheng I - was tabled as consecutive delays and budget overruns have been observed in many public projects. The legislator argues the aim of introducing the new clauses is to ensure contractors complete their projects on schedule and avoid delays and cost overruns in public works such as the current problems encountered in the construction of the Light Rapid Transport (LRT).
Objection
Secretary Raimundo Rosário admits Macau has no culture or habit of enforcing penalties in public work contracts and stressed that enhancing the enforcement of current laws is important. “With regard to the Light Rapid Transport (LRT), we should not change the law. All of us need to enforce the law of 74/99/M. There is no need to have compensatory penal clauses in place as we can penalise them without going through the courts,” he explained. “We are making an effort to follow the work more carefully and so surely there will be the possibility of imposing fines,” added the Secretary.
Argued against
However, many legislators voiced out that an effective
Secretary for Transport and Public Works Raimundo Arrais do Rosário during the debate in the AL yesterday.
system works more efficiently than relying on the government to act strictly per the law. “We can’t rely on the government to keep calling the contractors to finish the works on time. A proper system in place is needed with compensatory clauses,” legislator Au Kam Sam argued, adding there are more hidden problems behind the public projects. “The new clauses should be set up in response to the situation’s needs since the issues have not been resolved yet from many unfinished public projects and the core
problem comes down to the responsibility of the government,” legislator Kwan Tsui Hang said. “ P r o f essi o n a l p r o j ect managers and consultants should be hired to do project management works in the public projects as Macau is lacking these professional people,” said legislator Fong Chi Keong. “If a new law is not introduced, that could affect the investment environment of Macau by letting the contractors continue delaying works,” legislator Leonel Alberto Alves added.
Protection Fund
Deposit Protection Fund’s annual surplus jumps 10.8 pct The Deposit Protection Fund posted a surplus of MOP61.96 million (US$7.75 million) for 2015, which is an increase of 10.8 per cent year-on-year compared to the MOP55.95 million of last year, its 2015 report published yesterday in the Official Gazette shows. Last year, local banks’ contribution to the Fund amounted to MOP60.2 million, whilst the body generated deposit interest of the order of MOP1.79 million. Meanwhile, the Fund’s accumulative surplus had totalled MOP268.2 million as at yearend since its establishment in October, 2012. The Fund, with a start-up allocation of MOP150 million from the government, is a scheme to protect residents’ deposits in local banks. The law mandates that Macau-registered banks must pay an annual contribution of 0.05 per cent of the amount of protected deposits held. In the event of a bank failure the Fund would compensate depositors up to a maximum of MOP500,000. I n t e r m s o f ex p e n ses, the Fund spent some MOP48,000 for third-party services in 2015, down 46.7 per cent year-on-year from MOP90,000 according to the report. K.L.
6 Business Daily Thursday, March 24 2016
Macau Infrastructure
The longest construction period is Open bid for government’s Pac On multi-function building 450 days. The site is Phase O1 at the The design and construction of the planned multi-function building in Pac On, Taipa calls for public procurement with a deadline of 5:00 pm on May 25, according to an open tender document released by the Infrastructure Development Office (GDI).
conjunction between Estrada do Pac On and Rua da Felicidade occupying an area of 4,392 square metres. Phase O1 is one of the first five idle land plots announced invalid by the government last year. The land belonged to Fábrica de Isqueiros Chong Loi (Macau) Limitada for industrial usage.
Construction
China State Construction nearly doubles gross profit in Macau Group continues on Wynn Palace, MGM Cotai and The 13 projects. Kelsey Wilhelm kelsey.wilhelm@macaubusinessdaily.com
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hina State Construction International Holdings Ltd. announced on Tuesday that it had achieved a gross profit of HK$269 million (US$34.69 million) from HK$5.31 billion in revenues in Macau alone last year, increases of 178 per cent and 135 per cent, respectively, on the previous year. This was largely due to the ‘construction markets in Macau and Hong Kong’ continuing “’to prosper in both residential and public sectors,’ it reported in a filing with the Hong Kong Stock Exchange on Tuesday.
“For Macau it is a peak in construction of large-scale projects so revenue was up 135.5 per cent year on year,” said Zhou Hancheng, Executive Director and Chief Financial Officer (CFO) of the company, in an earnings call announcing the results. The group was appointed general contractor and investor for Phase 5 of Nova City. The company report for 2015’s annual results noted that
‘projects of Wynn Palace Cotai, Macau, MGM Cotai and Louis XIII Macau [now The 13] are progressing well, and curtain wall installation keeps pace with the progress of the main structures’.
“Government’s biggest contractor”
The group reported completing a total of 24 projects and securing 41 new projects over the course of the year, with the SAR accounting for 7.8 per cent of an aggregate attributable
“In Macau we have been the biggest contractor for the government.” China State Construction International Holdings Ltd.
contract value of HK$70 billion. “In Macau, we have been the biggest contractor for the government,” said an unidentified company representative during the call, predicting that “in the future in the Macau market, we believe that our company can get or can deliver quite good results,” especially following the marine body of the SAR has been fixed by the central government and the company believes the problem of not enough land supply in Macau will be gradually solved. Jacky Zhou, General Manager of Corporate Communications at the company, also noted that as large casino-resorts projects in Macau near completion “the market is shrinking”. However, he believes “Macau construction industry will shift from mainly focusing on the gaming industry to public projects.” ‘The Macau segment has provided a stable contribution to the group’s operating cash flow,’ and the company says it’s very confident about local business, emphasising, ‘in Macau there will be a railway, airport, reclamation and island district medical complex development projects’.
Business Daily Thursday, March 24 2016 7
Gaming Licence
Government proposes exemption for industrial licence levy The Executive Council said the newly proposed bill seeks to cut local industrial operators’ operational costs. Kam Leong kamleong@macaubusinessdaily.com
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he E x e c u t i v e Council (ExCo) introduced a bill yesterday that proposes exempting the levy on industrial licences, claiming the draft law aims to decrease local industrial operators’ operational costs and streamline the authorities’ administrative procedures. According to Council spokesperson Leong Heng Teng, some 700 industrial units in the Special Administrative Region would benefit from the newly proposed bill despite the estimated exempted levied amount totalling just MOP90,000 (US$11,250). In fact, the government’s intention in scrapping the industrial licence levy was first broached in the 2015
Policy Address. The ExCo spokesperson claimed yesterday that the new bill demonstrates the government’s support of the city’s industrial sector. Currently, industrial operators pay between MOP700 and MOP1,500 to get an industrial licence for their units or industrial activities. The levied amount depends upon the size of the unit as well as the genre of industrial activity.
Temporary income subsidy extended
The Executive Council also announced a bill extending the implementation of Temporary Measures for the Income Subsidy for this year. The financial aid scheme aims to subsidise the city’s low-income earners so that their monthly income reaches MOP5,000. All permanent residents aged 40 or above can apply for the subsidy if their total quarterly income is less than MOP15,000 and they have accumulated at least 152 working hours per month (or 128 hours for those in the textile, garment or leather industry). These ‘temporary measures’ for income subsidy were launched by the
government in 2008, while their effective period has been extended every year since. Official data reveals that the government has granted total subsidies of MOP23 million through the scheme last year, which is the lowest amount since 2008 due to the lowest number of applicants. Accumulatively, the government had disbursed MOP244 million in subsidies for the city’s low-income earners over the past eight years. In 2015, some 1,197 residents filed applications for low-income subsidies, of whom 1,119 were greenlighted. The approved applicants received average subsidies of MOP5,151 per head for each quarter. Meanwhile, a bill allowing the retail of meat, fish catch and poultry in any areas of the territory was announced by the Council yesterday. Currently, retailers cannot sell the aforementioned products in any area outside a public market. The government expects the proposed law to encourage more fresh agricultural food retailers to enter the local market, with the market’s competitiveness and service quality likely enhanced.
Gaming Scam
Criminal group allegedly scams victims by exploiting local casino names Guangdong sniffs out biggest online casino fraud in years. Guangdong police have cracked down on the province’s biggest telecommunications and Internet fraud in recent years, in which victims were scammed via fake online casino sites using the names of Macau casinos. The province’s security department told Mainland media yesterday that it had arrested 218 suspects, including 11 core members. The scammed
Gaming Results
amount totalled 140 million yuan (MOP173 million/US$21.6 million) from over 1,000 victims in 11 cities across the country. Last March, the security department in Foshan first received a report about the case. The authority later discovered two fake online gaming websites scamming victims in the names of Macau casinos and issuing gaming messages via a malicious base station. Upon investigation, Mainland police discovered the servers of the fake gaming websites were registered in Cambodia, whilst the core members of the criminal group primarily hail from Fujian Province. The Chinese security authority said it had demolished five hideouts of telecommunications and Internet criminals, as well as four dens of fake base stations after taking action in 18 cities on the Mainland and receiving assistance from the Cambodian police. K.L.
Success Dragon anticipates greater loss Hong Kong-listed Success Dragon International Holdings Ltd., which majors in the provision of services for the management of electronic gaming equipment in Macau, estimated that its net loss would increase for the financial year ending this month-end. The company, formerly known as CY Foundation Group Ltd., told Hong Kong Stock Exchange yesterday that the larger loss for this fiscal year is due to ‘the deterioration in the performance of the business of the provision of services in the management of electronic gaming equipment in Macau,’ coupled with the decline in revenue and margin generated by its packaging business. ‘The Board is of the view that the increase in loss was also due to the significant set up costs incurred in developing the business of provision of racing system and betting system
in Vietnam,’ the company added. For the 2014/2015 fiscal year, the company registered a net loss of HK$47.3 million (US$5.89 million) compared to the HK$12.8 million it posted for the year before. K.L.
Corporate
Wynn Macau makes chocolate with children
Two groups, totalling around 60 students in Primary Four from Tung Sing Tong Middle School learned how to make chocolate eggs from chefs at Wynn Macau yesterday. The children created and decorated their eggs in Wynn Macau’s F+B academy,
dedicated to teaching and cultivating local talent in the culinary arts. The event was led by Yoann Mathy – Executive Pastry Chef of Wynn Macau, Christophe Devoille - Executive Pastry Chef of Wynn Palace, Kwan Kai Leong - Pastry Chef of Wynn Palace, and Macau local Lei Fu Veng - Pastry Chef for Wynn Macau.
CEM to attend power company seminar
‘New Technologies, New Services’ is the theme of a seminar to be held in Dongguan, Guangdong in November. The seminar - part of a plan to keep communication and co-operation close between power companies in Guangdong, Hong Kong and Macau - is in its 21st edition and will welcome
representatives from CEM, Guangdong Power Grid Co. Ltd. (GPG) and CLP Holdings Limited (CLP). GPG will host this year’s event which aims to exchange experiences and applications of advanced technologies between the three power providers. Representatives of the three companies attended a preparatory meeting at the Zhuhai Power Supply Bureau yesterday.
8 Business Daily Thursday, March 24 2016
Greater China Overcapacity
Mounting debts could derail Statistics bureau puts coal and steel debts alone at 8 trillion yuan. David Stanway
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hina’s campaign to slim down its bloated industries could be derailed by more than US$1.5 trillion of debt in its steel, coal, cement and non-ferrous metal sectors, which threatens to overwhelm local banks. Tackling industrial overcapacity has become a priority for Beijing to make its slowing economy more efficient and address a supply glut that has hammered coal and steel prices. China is providing more than 100 billion yuan (US$15 billion) in the next two years to handle layoffs from coal and steel, but that will only be made available once debts have been settled. Critics say there is no clear mechanism for tackling the debt burden, which will put huge strain on the weakest sections of the banking sector. The debt figures, revealed in papers submitted to China’s parliament this month, highlight the dilemma facing state firms grappling with surplus capacity and how difficult it will be to pull off this central plank of Beijing’s economic reform plans. Costs for the estimated 1.3 million coal-sector layoffs alone are as much as 195 billion yuan, and coal industry delegates attending parliament urged government to provide more support to deal with the mounting debts of hundreds of stricken “zombie” firms.
The four sectors targeted in the battle against overcapacity owe around 10.2 trillion yuan (US$1.56 trillion), according to documents submitted to parliament by Wang Mingsheng, head of Anhui-based coal firm Huaibei Mining. China’s statistics bureau puts coal and steel debts alone at 8 trillion yuan, of which about a third is bank debt. If 20 percent of that were to go bad in 2016, which industry analysts say is not unrealistic, it would raise Chinese banks’ non-performing loans by nearly half. Bankers say city and regional banks set up by party or provincial government officials are most exposed, and that official NPLs, which already doubled last year, underestimate the scale of their problem lending. “China needs to set up a new organisation, a special bank just to take over these debts in order to avoid the local banks going bankrupt,” said steel industry consultant Xu Zhongbo. China’s banking regulator didn’t return a request for comment, though earlier in March sent notices to joint-stock
Key Points China to cut capacity in coal, steel, nonferrous metals, cement Companies need to settle debt before getting govt help Total debts for these sectors about US$1.56 trln -document Bankers say city and regional banks most exposed
banks and city commercial lenders to boost risk assessment and collateral valuations to control exposure to industries suffering overcapacity. A lawyer who handles steel industry non-performing loans for mid-sized Chinese banks said: “Banks’ fear is not without reason. The steel sector’s continued slump increases the difficulty of disposing of outstanding non-performing loans.”
Shouting slogans
tougher credit policies and recalling some loans. He said one mine in Henan was facing a 40 billion yuan repayment bill that was unlikely to be rolled over. The February policy documents said China would create a special mechanism to restructure industry debts and non-performing assets while introducing incentives to write off bad debts or transfer them to specialist asset managers, but officials said more specific measures were required.
As well as seeking cuts in value-added tax and relief from expensive “social functions” like healthcare and education, the coal delegates urged government to provide additional funding and policy support, and establish “debt-to-equity” mechanisms to handle the problem. “Because the mechanisms and related policies for state-owned firms exiting the market are not complete, closing them will raise thorny problems like the settlement of debts,” said Liang Tieshan, chairman of the Henan Pingdingshan Coal Group. Average debt-to-equity ratios at steel firms rose 1.55 percentage points to 70.1 percent in 2015 and for at least five firms exceed 100 percent, figures from the China Iron and Steel Association (CISA) show. Coal executives estimate their sector average exceeds 75 percent. In plans published in February, Beijing promised to slash 100-150 million tonnes, or up to 12.5 percent, of crude steel capacity and as much as 500 million tonnes, or 9 percent, of coal production in over three to five years. Liang of Pingdingshan Coal said state banks responded by implementing
Transitions to services
Urban consumers more optimistic even amid slowing growth China is pressing on with plans to transition its economy away from exports and investment to a more sustainable model based on services and domestic consumption. Colin Simpson
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trength in real estate and labour markets helped consumers in China’s biggest cities shrug off last year’s
slowdown, according to a new survey based on 12,000 interviews. RFi Group’s Urban Financial Sentiment Index rose to 101 in the second half of 2015, up from 92.5 in the first half. Readings
over 100 show consumers say they’re optimistic about their financial positions, while those below indicate pessimism, according to the Sydney-based market research firm and financial data provider. The
gauge was above 105 in late 2013 and early 2014. The findings show consumers remained resilient late last year even amid a US$5 trillion stock plunge, yuan devaluation, and economic growth that slowed from 7 percent in the first two quarters of 2015 to 6.9 percent in the third and finally a six- year low of 6.8 percent. Such optimism is good news for policy makers working to shift toward a more consumer-led economy. “Consumers remain fairly sheltered from developments in the industrial sectors of the economy,” RFi Senior Economist Amit Khan wrote in the report published Tuesday. “There is little correlation with the massive swings in Chinese stocks over the last 18 months.” The survey is based on interviews with consumers dating back to April 2013 in Beijing, Guangzhou, Tianjin, Shanghai and Shenzhen, and combines data on intentions to spend, save and borrow over the coming year. RFi plans to update the gauge every six months. Khan cited property prices and labour markets as primary reasons consumers grew more optimistic. “In the tier one cities such as Beijing, Shenzhen and Shanghai we’ve seen a strong recovery in price growth, particularly in 2015,” he said.
“There’s definitely a shift occurring in the economy” Amit Khan, RFi Senior Economist
The majority of those interviewed said that the stock market collapse, in which shares plunged by almost half from June to August, had a minimal impact on their net worth. Inflation was the biggest concern, with far fewer worried about unemployment. Thirty percent of the respondents said they planned to spend more in the next 12 months.
Economic transition
The findings come as China presses on with plans to transition its economy away from exports and investment to a more sustainable model based on services and domestic consumption. Household consumption accounts for 36.5 percent of China’s gross domestic product, compared with 68.6 percent in the U.S., World Bank data show. “Consumption is contributing far more to growth than it has previously,” Khan said. He also cited strength in car sales, retail sales, rail travel, international travel, as well as surging sales of movie tickets and Apple iPhones. Extremely high household saving rates have been seen as an obstacle to the transformation — the World Bank says the savings rate in China stands at 50 percent of GDP compared to about 18 percent in the U.S. However, the report says: “The intention to save more is down over the last three years.” The report underscored the significance of young consumers, who say they want to spend more than older generations. For Generation Y, those born from the early 1980s to the early 2000s, 37 percent said they plan to increase spending over the next 12 months, compared with 25 percent of baby boomers. Bloomberg News
Business Daily Thursday, March 24 2016 9
Greater China
plans to cut steel “To cut capacity we cannot just shout slogans and issue targets - we must have a realistic and effective mechanism,” said Wang at Huaibei Mining Group. He said it was unreasonable to expect local governments to take the initiative in closing zombie coal firms, given the contribution coal makes to local GDP, employment and government revenue. China’s industry ministry and the commission responsible for state assets did not return requests for comment
on how government will deal with the debt burden, or how it would affect their plans to cut capacity. The action plans said China would rely mostly on “market methods” to solve debt problems, but Liang said the market was all but useless when it came to disposing of assets once a mine had closed. Zhang Wuzong, chairman of Shiheng Special Steel Group, said there was also no incentive for managers to use
China’s bankruptcy laws, which offer little protection for executives. “Creditors will come to retrieve their debts, and not just the banks,” he said. “Your personal assets are frozen, and you will be sued. It is terrifying, so why don’t these bosses simply run away?” Chinese bankers complain privately they are also being held personally responsible for recovering doubtful debts, with loan officers’ passports taken away to keep them from fleeing. Reuters
In Brief
Clean-air projects
World Bank approves loan for Beijing The World Bank has approved a US$500 million loan to China to support financing of projects to help control air pollution in and around Beijing. The money is part of a broader programme expected to reach $1.4 billion for “green financing” over the next six years that includes another half billion dollars from Hua Xia Bank Co Ltd and US$400 million in equity contributions from sub-borrowers, the World Bank said. China suffers from severe air pollution and is the world’s largest emitter of greenhouse gases, such as carbon dioxide. Reform
Jiangxi Copper plans output cuts
Debt Swap
Huarong vote may break new ground for zombie corporations Allowing banks to exchange debt for equity would help their balance sheets in the short-term. Saikat Chatterjee
Shareholders of heavily indebted China Huarong Energy Ltd will vote today on a ground-breaking debt-for-equity swap plan that has stoked concern about the implications for Chinese banks taking on risky equity stakes. China’s central bank is preparing regulations to allow banks to swap debt for equity. Up until now, lenders have only done so through investment units using opaque channels. A deal for Huarong would be the first known instance of a swap at a listed firm and is expected to pave the way for a raft of other debt-laden companies to follow suit. Allowing banks to exchange debt for equity would help their balance sheets in the short-term by putting a lid on non-performing loans which have grown to decade highs. But it also opens what some analysts and investors say is a dangerous door to Chinese banks investing in weak non-financial firms, as they would be saddling themselves with sub-standard equity stakes that would likely be worth less than debt in the event of bankruptcies. That is very different from the status quo where lenders are only allowed to invest in financial firms. “I can’t see this being positive for the banks any way you slice it,” said a fund manager at an Asian fund, declining to be identified as he was not authorised to speak to the media. “If banks are being forced to convert more of these dud loans into equity, we
may be looking at massive bank capital injections down the line,” he added. Huarong has proposed creditors would swap 17.8 billion yuan (US$2.7 billion) in debt for nearly 90 percent of the company. Minority shareholders will see their combined holdings shrink to 7 percent from 64 percent. The banks, whose names have not been disclosed, are expected to accept it as they would little chance otherwise of recovering their loans, analysts have said. Shareholders are also expected to vote in favour as it lowers the position of creditors to a similar footing to other stakeholders, even though minority holdings would be drastically diluted. Analysts note that under mainland regulations, exposure to equities carries higher risk-weighted capital on balance sheets, sometimes four to 12 times that of loans. They add that banks can also unload
bad loans to state-owned asset management companies like Cinda Asset Management but it is not clear how they would realistically offload unattractive equity stakes. Since making its transition from the troubled shipping industry to energy last year, Huarong has seen 80 percent of its market capitalisation wiped out, compared with a 28 percent decline for the benchmark Hong Kong index in the same period. Losses from operating activities have grown in recent years and debt has increased. The company owes 22.4 billion yuan to creditors, 80 percent of which is either overdue or due over the next 12 months. David Yin, an assistant vice president at ratings agency Moody’s Investors Service, said he was particularly keen to see how many other firms would follow in Huarong’s footsteps. Reuters
China’s biggest integrated copper producer, said it plans to cut refined copper output by 6.7 percent this year, in line with a proposal by the country’s big smelters to reduce output to support prices. The move would cut production by 80,000 tonnes to 1.175 million tonnes, and follows a pledge last week by No. 2 producer Tongling Nonferrous Metals Group to reduce output by 110,000 tonnes. Nine of China’s large copper smelters agreed last year to cut output by at least 350,000 tonnes in 2016, and said they could deepen the cuts if prices and profitability deteriorate. Stock market
YTO Express to list via reverse merger Alibaba-backed YTO Express plans to go public via a 17.5 billion yuan (US$2.7 billion) merger with a listed clothing maker, becoming the latest courier seeking capital market funds to stay competitive during China’s e-commerce boom. China’s mostly privately held express delivery firms are under pressure to spend heavily on logistics infrastructure and service upgrades to retain market share as tech firms such as Alibaba Group Holding Ltd propel the country’s fast-growing e-commerce market. Clothing maker Dalian Dayang Trands Co Ltd said it would buy YTO Express through an asset swap and share issue. Results
PetroChina profit dives on low oil prices National biggest oil and gas producer, reported a 70 percent slump in its full-year 2015 profit, with earnings upstream and in the marketing segment both taking a hit from lower prices. Net profit declined to 35.52 billion yuan (US$5.47 billion) last year, from 107.17 billion yuan in 2014, the state-controlled company said yesterday in a filing with the Hong Kong bourse. Last March, PetroChina reported a 17 percent drop in net profit for 2014.
10 Business Daily Thursday, March 24 2016
Asia Key Points Sentiment index at 65 in Q1 vs 58 in Q4 Businesses say China demand drop is biggest risk Philippines most optimistic economy, Indonesia least Household and food sector most positive, financial least States is still not raising interest rates despite an on-going recovery - which tells me how fragile sentiment is,” said Edward Yip, corporate affairs general manager at Malaysian survey respondent Kossan Rubber Industries Bhd, which makes medical gloves. “We need to see two sustained quarters of rebound before drawing that conclusion.”
Financial pessimism
Asean members’ flags. Business Mood
Sentiment brightens with turnaround in China view The companies ranked a decline in Chinese demand as the primary risk to their outlooks. Saikat Chatterjee
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entiment at some of the biggest companies across Asia brightened in the first quarter of 2016, rising from a four-year low registered three months prior, as executives bet on economic improvement in China, a Thomson Reuters/ INSEAD survey showed. The survey in which 97 firms rated their sixmonth outlook resulted in a
Thomson Reuters/INSEAD Asian Business Sentiment Index of 65 for March from 58 in December. A reading over 50 indicates a positive view. The companies ranked a decline in Chinese demand as the primary risk to their outlooks, followed by excessive foreign exchange volatility and falling oil prices. Yet readings across the region revealed the biggest increase in confidence among firms in China itself and chief trading partners such as Singapore. “The index is not an amazingly great number but it tells us there is certainly less pessimism now than in previous surveys,” said Singapore-based economics professor Antonio Fatas at global business school INSEAD.
“People are digesting the economic slowdown in China and are being more optimistic and looking for opportunities rather than being alarmist, and that shows up in the numbers around the region, particularly Singapore,” he said. The Southeast Asian citystate registered the quarter’s steepest rise in sentiment at 29 points, resulting in a neutral sub-index at 50 after two deeply pessimistic quarters. In its top trading partner China, sentiment rose 21 points to 71. Latest government data showed improving economic conditions in China, with fixed-asset investment increasing and capital outflows moderating, top officials said. The government also said it is
aiming for economic growth of as much as 7 percent in 2016, after 6.9 percent in 2015 - the slowest rate in 25 years.
Too soon to cheer
China’s outlook is crucial in a region where every economy counts China among its top three trading partners. But while economic improvement helped overall sentiment rebound, sub-indexes were still below the 50 mark in Malaysia, Taiwan and Indonesia. Sentiment fell the most in Indonesia, by 23 points to 42, in a quarter when the central bank of Southeast Asia’s biggest economy lowered interest rates three times to stimulate growth. Stimulus measures by central banks elsewhere, from Japan to Europe, encouraged investment in the more risky assets during the survey’s polling. But, on the whole, corporate executives remained wary about the broader health of the global economy. “I think it is still too soon to say the world economy has turned a corner as the United
Companies in the Philippines were the most optimistic for the third consecutive survey, with that sub-index rising to 85 from 77 three months earlier. By sector, recovery in sentiment was most prominent among eight household, food and beverage companies, where the sub-index jumped to a record high of 100 from 50. At the other end of the scale, 15 financial institutions including China Pacific Insurance Group Co Ltd and PT Bank Rakyat Indonesia (Persero) Tbk combined to log the only pessimistic sub-index of 47, falling from 50. Thomson Reuters and INSEAD polled companies from March 7-19. Of 97 respondents, 41 percent rated their six-month outlook as positive, 48 percent were neutral and 11 percent were negative. Respondents this quarter included Australia’s Stockland Corp Ltd, India’s Hero MotoCorp Ltd, Japan’s Hitachi Ltd and Fast Retailing Co Ltd, Korea Aerospace Industries Ltd, the Philippines’ Energy Development Corp and Taiwan’s Far EasTone Telecommunications Co Ltd. Reuters
Confidence Poll
Japanese manufacturers’ mood weighed by yen gains The upcoming BOJ tankan on April 1 is among key indicators the central bank scrutinises when making monetary policy. Tetsushi Kajimoto and Izumi Nakagawa
Confidence at Japanese manufacturers eased in March and is seen unlikely to change much over the next three months, a Reuters poll showed yesterday, in a sign that yen gains and slowing growth in China and emerging markets are hurting exporters. Service-sector sentiment bounced from the prior month’s drop, but it is seen down again in June, underscoring the fragility in private consumption, which accounts for roughly 60
percent of the economy. The monthly poll, which closely tracks the Bank of Japan’s (BOJ) quarterly tankan survey, suggests the BOJ poll may show worsening of the big manufacturers’ sentiment index, as the economy faces the risk of another recession. The poll of 513 big and mid-sized Japanese companies between March 3-17, of which 259 responded, came a week after the BOJ downgraded its economic view because of sluggish exports and factory output. The central bank stood pat at last week’s policy review, after adopting a negative interest rate policy in January. “Weak external demand is the major culprit for deterioration in manufacturers’ sentiment,” said Yuichiro Nagai, economist at Barclays Securities. “The BOJ tankan will probably show worsening of sentiment at
manufacturers and non-manufacturers. We expect the BOJ will ease again in July when it is likely to cut economic and price outlooks. A surprise action cannot be ruled out in April though.” The upcoming BOJ tankan on April 1 is among key indicators the central bank scrutinises when making monetary policy. Expectations linger that it could ease again in coming
Key Points March manufacturers’ sentiment index +6 vs +7 in Feb Service-sector firms’ index +24 in March vs +21 in Feb Manufacturers’ mood seen largely flat ahead, service-sector down Reuters poll suggests worsening manufacturer mood in BOJ tankan
months to hit its ambitious 2 percent price target. “Some of our clients are taking a wait-and-see stance due to yen’s rise, stock falls and negative interest rates. While the government’s preferential measures for investment end in March, construction is lagging due to labour shortages,” a machinery producer said in the survey, which companies answer anonymously. Many manufacturers complained about the slowdown in China and emerging markets, and rises in the yen, which hit a 17-month high below 111 versus the dollar this month. The Reuters Tankan sentiment index for manufacturers fell to 6 in March from 7 in February, weighed by chemicals, metal products and precision machinery. It is seen at 7 in June. Compared with three months ago, the manufacturers’ index worsened by three points, suggesting the BOJ’s tankan may show a deterioration in the big manufacturers’ sentiment. The service-sector index rose to 24 from 21 in February, led by retailers and information/communications. The index is seen worsening again in the next three months. Reuters
Business Daily Thursday, March 24 2016 11
Asia India
Modi under fire as rising costs put squeeze on “Middle India” While national elections are three years away, the ruling party’s popularity faces earlier tests. Suvashree Choudhury and Manoj Kumar
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harp rises in education and healthcare costs in the last two years have hit India’s burgeoning middle class hard, denting Prime Minister Narendra Modi’s popularity among the relatively well-off ahead of a series of state elections. Price increases for services deemed a luxury for most Indians could also complicate the central bank’s plans to cut borrowing costs, with decades of low investment in schools and hospitals meaning they will remain expensive for some time. “Spending on my son’s education and medicine for the family has gone up sharply,” said Sambuddha Banerjee, a 47-year-old IT professional, who works for local government in Kolkata in the northeast of the country. “The government also cut fuel subsidies and tried to impose taxes on our pension savings. This is not acceptable.” Banerjee is thinking twice about voting for Modi’s ruling Bharatiya Janata Party (BJP) at elections scheduled for 2019. That view is far from universal, but is already on the radar of a government that swept to power in 2014 with promises of economic reforms and pro-business policies that appealed to aspirational Indians living in big towns and cities. Modi has already seen support among the huge agriculture sector ebb following several crop failures, so appeasing the middle class, which accounts for about a quarter of the 1.3 billion population, looks increasingly important.
“Rising prices of commodities and services which have a higher weight in the consumption basket of middle class households is an issue that cannot be ignored,” said a senior finance ministry official. “This is a supply side issue and can’t be addressed in the short term,” he added. To ease some pressure on middle income earners, the government plans to hike salaries of its nearly 10 million employees by 24 percent this year.
Government backs down
Education costs have risen 13 percent, housing 10 percent, healthcare 14 percent and electricity 8 percent since Modi took charge in May 2014, time series data on CPI inflation collected by the Ministry of Statistics showed. That puts a disproportionate strain on middle class incomes, with education costs accounting for 7 percent of urban households’ monthly spend compared with 3.5 percent of rural households, data showed. Food and beverage prices, meanwhile, which account for more than a half of the CPI basket, fell 10.5 percent since Modi’s election victory, although there, too, items like milk
and eggs favoured by middle income Indians have actually risen. Owners of motorcycles and cars are further upset that the government took away some windfall gains from falling oil prices in the form of taxes, and people across the country are cutting back on discretionary spending as expenses outstrip earnings. Underlining the government’s sensitivity to a “squeeze” on the middle class, earlier this month it agreed to roll back plans to tax pension fund withdrawals following a backlash from salaried workers. While national elections are three years away, the BJP’s popularity faces earlier tests, with ballots in states including West Bengal and Assam later in 2016, and the key battleground of Uttar Pradesh due next year.
Rate cut
A disgruntled middle class also poses problems for Reserve Bank of India (RBI) Governor Raghuram Rajan, who has pledged to bring down consumer price inflation to 5 percent by March, 2017 and 4 percent in the medium term. Headline retail inflation eased to 5.18 percent in February from 5.69 percent in January, but core inflation,
which strips out food and fuel, rose to 4.9 percent from 4.75 percent, mostly due to increases in education, housing and personal care. The RBI is widely expected to cut its policy interest rate by 25 basis points on April 5, after lowering it by 125 basis points last year thanks in part to easing inflation and the government’s fiscal consolidation roadmap. “The spare capacity in the economy is not getting reflected in the core inflation number, which means the challenge for monetary policy to control the demand side pressure is much more,” said one senior policymaker, hinting at the difficulty of deep rate cuts beyond April. That could be a bad news for middle income Indians who are looking to the central bank to bring down their borrowing costs, particularly after deposit rates fell. The government slashed the federal pension fund rate and deposit rates offered to millions of small savers to align with market rates, triggering protest from opposition parties. Despite the complaints, many are willing to give Modi more time to address their concerns. “Our expectations of him were very high, and he needs more time to solve these age-old problems,” said Kundan Mukherjee, a 51-year-old from the eastern state of Jharkhand, who works for a pharmaceutical company. Reuters
Key Points Education, health costs up sharply since May 2014 Modi blamed by some for rising tax burden, prices PM faces risk of backlash from “middle India” C. bank seen cutting policy rate by 25 bps next month Prime Minister Modi during the latest parliamentary debate on nation’s budget.
ECONOMIC BOOM
Philippines holds rates steady as inflation ebbs The nation has been enjoying one of the strongest economic growth rates in the world. Enrico Dela Cruz and Neil Jerome Morales
The Philippine central bank kept its benchmark interest rate steady yesterday, bucking the global trend of policy easing, saying it expected inflation to remain manageable despite robust economic growth. The policy-making Monetary Board left the overnight borrowing rate unchanged at 4.0 percent, where it has been since September 2014. It also kept the special deposit account rate steady at 2.5 percent and the reserve requirement ratio at 20 percent. All 12 economists in a Reuters poll had expected no change in policy settings. “The monetary board’s assessment of manageable inflation outlook and robust growth conditions continue to support keeping monetary policy
settings unchanged,” Bangko Sentral ng Pilipinas Governor Amando Tetangco told a media briefing. The central bank trimmed its price forecasts for this year and next, citing an easing in inflation in February to a four-month low, delays in a power rate increase and lower transport fares in March. It now expects inflation to average 2.1 percent in 2016 and 3.1 percent in 2017, from forecasts of 2.2 percent and 3.2 percent previously. The central bank has a 2-4 percent annual inflation target for 2016-2017. Average inflation in 2015 was 1.4 percent, below target. While slower inflation gives policymakers plenty of room to cut interest rates if needed, DBS economist Gundy Cahyadi said robust domestic demand would argue against policy easing.
“BSP is unlikely to be too concerned about near-term growth prospects. And if long-term sustainability remains a focus, we reckon the BSP would still tighten its policy later this year,” Cahyadi said. The Philippines has been enjoying one of the strongest economic growth rates in the world, largely due to strong domestic consumption but also because it is less exposed than its neighbours to China’s prolonged slowdown and sluggish global demand for Asian goods. Philippine imports grew at their fastest pace in more than five years in January as strong public and private sector investment led to a sharp rise in purchases of equipment and machinery, data earlier yesterday showed. The government slightly trimmed its 2016 economic growth target last
month to 6.8-7.8 percent from 7-8 percent, in a nod to global risks, but the revised goal is much faster than the 5.8 percent expansion in 2015. BSP deputy governor Diwa Guinigundo said the monetary authority is on track to implement an interest rate corridor system, a push to guide market interest rates towards its main policy rate, in the second quarter. Reuters
Key Points Philippine c.bank keeps main rate steady at 4.0 pct C.bank trims 2016, 2017 inflation forecasts C.bank on track to implement interest rate corridor in Q2
12 Business Daily Thursday, March 24 2016
Asia Monetary Policy
Australian politics complicates decisions over economy June 7 policy meeting could be bang in the middle of the election campaign.
RBA Governor Glenn Stevens.
Wayne Cole
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olitics has put a new hurdle in the way of lower Australian interest rates as the prospect of an early election intrudes into what was already a delicately balanced calculation. Liberal-National Prime Minister Malcolm Turnbull has set the gears in motion for a federal election in July, probably July 2, rather than in September or October as originally expected. That’s a complication for the Reserve Bank of Australia (RBA) which had left the door ajar for a cut in rates to help combat the disinflationary impact of a rising currency and slowing jobs growth. The RBA’s June 7 policy meeting, for instance, would now be bang in the middle of the election campaign, while the July 5 meeting would come just three days after the vote. To be sure, RBA Governor Glenn Stevens has long emphasised that the bank would not hesitate to move if
justified by the economic outlook, no matter what the political background. He drove home the point in 2007 by raising rates during an election campaign, a move that may have played a small part in the Liberal National government’s eventual defeat. Yet the desire to avoid any hint of political partisanship might play a part should the case for an imminent easing be finely balanced. Since the RBA has spent the past 10 months arguing that a further cut in
“The political dynamics likely work in favour of the RBA remaining on the sidelines during this time” Su-Lin Ong, Senior economist at RBC Capital Markets
the already record-low cash rate of 2 percent was not needed, the bar to action would seem to be quite high. “Should the case to cut strengthen materially in the coming months, we have no doubt that the RBA would move,” says Su-Lin Ong, a senior economist at RBC Capital Markets. “However, if the case to ease in the coming months is still building, as we suspect it will be, then the political dynamics likely work in favour of the RBA remaining on the side-lines during this time.”
Inflation might still be trigger
Financial markets had already turned lukewarm on the chance of a cut mid-year following unexpectedly strong readings on Australian economic growth. Currently interbank futures imply around a 6 percent chance of a cut in April, 24 percent in May and 36 percent for June. Even July is less than 50-50. Still, a recent surge in the local dollar and aggressive easing from central banks in Europe and Japan, means
there is plenty of pressure for the RBA to follow with action of its own. An added wrinkle is that the government brought forward by a week its annual Budget statement, putting it on May 3 which happens to be the same day as the RBA’s monthly policy meeting. Nomura analyst Andrew Ticehurst argues the timing could actually add to the case for easing in May. “The RBA may prefer to act in advance of the budget, specifically linking the decision to inflation rather than allowing a perception that a rate cut, post-budget, was somehow linked to the budget itself,” he reasoned. The budget will be announced five hours after the RBA releases its policy decision. Nomura has for a while wagered that inflation figures for the first quarter due in late April would be weak enough to trigger a move in May. It was notable earlier this month that New Zealand’s central bank surprised many by easing policy in reaction to a very low reading on inflation expectations. Reuters
Central bank
Thailand holds interest rate Bank of Thailand also cuts 2016 growth and exports forecasts. Orathai Sriring and Kitiphong Thaichareon
Thailand’s central bank yesterday held its key interest rate and cut its 2016 growth forecast, saying economic momentum is slowing as the impact of the government’s short-term stimulus measures is fading. The Bank of Thailand (BOT), whose key rate was held at 1.50 percent as expected, revised its 2016 economic growth projection to
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3.1 percent from 3.5 percent. It also cut its 2016 exports forecast to a contraction of 2 percent instead of no expansion. “Overall economic momentum slowed, following dissipation of the effect of the government’s tax rebate measure around the end of last year and of the accelerated car purchase prior to the increase in vehicle excise tax this year,” the Monetary Policy Committee said in a statement.
The MPC has left the rate unchanged since surprise cuts in March and April 2015. The BOT said the current policy rate supports economic recovery and the “policy space should be preserved”. All but two of 28 economists polled by Reuters had predicted no policy change yesterday. Two forecast a 25 basis-point cut. Many see no change throughout 2016, as more than a year of declining consumer prices gives
policymakers leeway to keep monetary policy easy.
Fragile recovery
Although an army coup in May 2014 ended months of political unrest, Southeast Asia’s second-largest economy has yet to regain traction, with exports and domestic demand still weak. The economy grew 2.8 percent last year, up from 0.8 percent in 2014 but its recovery remains fragile. In a bid to lift activity, the military junta introduced economic measures and stepped up infrastructure projects. It plans more stimulus, including home loans for low-income earners, a tax break and cash handouts to spur spending.
Santitarn Sathirathai, senior economist of Credit Suisse in Singapore, said: “We continue to think that the Bank of Thailand will likely cut rate later this year as the currency strength combined with sluggish growth and low inflation improve the risk reward of easing further.” Jack Chambers, senior economist at Moody’s Analytics in Sydney, said business and consumer confidence “remain weak and unlikely to improve in the near term.” While BOT will be reluctant to ease too much due to high household debt levels, Chambers said he expects a 25 basis point cut by the end of the second quarter. Reuters
Founder & Publisher Paulo A. Azevedo, pazevedo@macaubusinessdaily.com Editorial Council Paulo A. Azevedo; José I. Duarte; Mandy Kuok Newsdesk Michael Armstrong; Óscar Guijarro; Kam Leong; Joanne Kuai; Bami Lio; Annie Lao; Kelsey Wilhelm Group Senior Analyst José I. Duarte Design Francisco Cordeiro Web & IT Janne Louhikari Photography Cheong Kam Ka, Ruka Borges, Gonçalo Lobo Pinheiro, António Mil-Homens, Carmo Correia Contributors James Chu; João Francisco Pinto; José Carlos Matias; Larry So; Pedro Cortés; Ricardo Siu; Rose N. Lai; Zen Udani 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. Address Block C, Floor 9, Flat H, Edf. Ind. Nam Fong, Av. Dr. Francisco Vieira Machado, No. 679, Macau Tel. (853) 2833 1258 / 2870 5909 Fax (853) 2833 1487 E-mail newsdesk@macaubusinessdaily. com Advertising advertising@macaubusinessdaily.com Subscriptions sub@macaubusinessdaily.com Online www.macaubusinessdaily.com
Business Daily Thursday, March 24 2016 13
Asia Stock exchange
Learning to trade: Myanmar investors swot up for new bourse The Yangon Stock Exchange will initially launch with just a single firm, First Myanmar Investment. Kelly Macnamara and Athens Zaw Zaw
I
nside the graceful halls of Myanmar’s first modern bourse a huddle of business leaders crowds into a crash course on share trading, as the former junta-run country takes another leap towards economic revitalisation. Yangon Stock Exchange (YSX) is due to debut its first listed company on Friday, just days before a new civilian government overseen by Aung San Suu Kyi comes to power in a nation fast opening up after decades of military rule. The start of trading, long after the bourse was first envisaged, is a vivid illustration of Myanmar’s economic handicap - a country that still has no credit rating and where business has long been hamstrung by ingrained corruption. But it also encapsulates the excitement and optimism that has gripped both local and foreign investors alike. Dozens of people every week have attended the YSX classes for those unfamiliar with share trading, which include lessons on investment risks
Htin Kyaw, newly elected president of Myanmar and member of the National League for Democracy (NLD) party. New government and new bourse for new times in Myanmar.
and rewards as well as multimedia guides to stock purchasing. “It is great for Myanmar people to learn about the stock market. It will bring new hope for our business sector,” business consultant Nwe Ni Soe told AFP at a recent training day. Under the military, Myanmar was plunged into poverty and pummelled by banking crises, international sanctions and arbitrary economic policies that destroyed the once vibrant economy and saw ordinary people hoard savings in assets like gold. The tide began turning under the outgoing reformist quasi-civilian government which took power in 2011. A handful of foreign banks have slowly crept into the country, while a raft of new business and finance laws have begun to untangle a messy legal landscape. The World Bank says the country could grow by as much as eight percent a year for the next five years, but says firms are struggling with access to finance. Myanmar’s incoming government is faced with a raft of challenges as it looks to encourage investment and create jobs. In the way is a weak kyat currency, decrepit infrastructure, patchy electricity and an urgent need to improve skills in a nation whose education system withered with neglect under the junta.
Solo trader
The YSX will initially launch with just a single firm, First Myanmar Investment run by Myanmar tycoon Serge Pun, and be open only to domestic investors. Tun Tun, FMI’s executive director and chief finance officer, said he hoped the bourse would provide a “healthy capital market for the benefits of both investors and businesses”, urging authorities to accelerate plans to allow foreign investment. With its sister firm Yoma Strategic Holdings listed in Singapore and around 6,800 shareholders through an in-house system, FMI already has experience of stock trading, a rarity in Myanmar. Several other firms that have been approved to list, including the Japan-backed Thilawa Special
Economic Zone, have yet to finalise their preparations. Rajiv Biswas, Asia-Pacific chief economist, IHS Global Insight, said it would take time for YSX to overcome an array of hurdles, like building up enough stocks to trade, creating liquidity and putting in place strong governance standards. “Relatively new stock exchanges need to build confidence among investors about the transparency of listed companies in their stock exchange filings, as well as setting tough regulatory standards to prevent acts such as insider trading or market manipulation,” he said. But he added that the market could have a “crucial role to play” in the future for both government and companies to raise equity and debt for “funding their economic expansion plans”.
Investing in the future
The bourse has been decades in the making. In 1996 Japanese firm Daiwa Securities and a state bank set up the Myanmar Securities Exchange Centre, but this allowed over-the-counter sales of shares in just two firms. “We didn’t make much progress under the last junta regime,” said Thet Htun Oo, a senior bourse official. A joint venture agreement was eventually signed in 2014, with Myanmar Economic Bank owning a controlling 51 percent stake in YSX, with the remainder divided between Japanese partners. It is now housed in a newly-renovated colonial-era building, replete with a gleaming trading bell, souvenir shop and cafe. Officials are aiming to attract 30 to 50 firms in five years. Early investors are expected to be businesses and individuals, and Thet Htun Oo said they are “very eager”. At its ceremonial opening in December, officials were stunned to see a crowd of people outside wanting to buy shares, some from as far away as Myanmar’s second largest city Mandalay. That enthusiasm is on show at the YSX’s weekly classes. “YSX is a chance for the future,” said business advisor Than Win at a recent training session. AFP
Tax Amnesty
Indonesia seeks to curb use of tax havens by companies In 2015 government issued a decree tightening rules for tax deductions based on offshore loans in a bid to tackle such practices. Gayatri Suroyo and Nicholas Owen
Indonesia hopes its plans for a tax amnesty will dissuade companies from channelling profits through overseas tax havens and shopping around for the most advantageous tax treaties, its finance minister said yesterday.
Bambang Brodjonegoro said he suspected Indonesian firms of setting up “special purpose vehicles” (SPVs) to benefit both from tax treaties between Indonesia and other countries, and from low tax rates in those countries. The tax amnesty, which offers hefty tax discounts to individuals and companies who declare concealed untaxed wealth, would allow SPVs to declare or repatriate money stashed overseas. “Regarding the tax amnesty, these SPVs deposit their money not in Indonesia. But they are certainly 100 percent Indonesian in terms of ownership,” Brodjonegoro told foreign correspondents. “We’ll ask them to join the amnesty first, but if they refuse, then we’ll knock them,” he said. Brodjonegoro was quoted by media as saying the tax authority has identified 2,000 SPVs set up by Indonesian firms and 6,000 saving accounts in tax-haven countries. The British Virgin Islands and the Cook Islands topped the list of countries favoured by Indonesian firms for their SPVs, Brodjonegoro said, and that has resulted in the two tiny island nations becoming among the biggest sources of foreign direct investment into Southeast Asia’s largest economy.
This also distorts Indonesia’s FDI records, Brodjonegoro said, making inward investment look larger than it actually is. Shareholder loans and lending from a parent company in a tax haven to its Indonesian subsidiary also inflated Indonesia’s foreign debt figures, he said. This year, the government also is looking to impose a minimum tax on thousands of serial loss-making foreign companies, suspecting them of avoiding taxes. While those efforts might lift revenue in the longer term, the government is counting on the tax amnesty bill for a short-term boost, but it has been delayed until at least April amid parliamentary wrangling. The government risks missing its revenue target by 250 trillion rupiah (US$18.95 billion) this year without the amnesty, Brodjonegoro said. Previously, he has said the amnesty could bring in about 100 trillion rupiah of additional income and broaden Indonesia’s tax base. Yesterday, Brodjonegoro also said a decision on whether to lower the rate of corporate income tax would only be taken after the tax amnesty had been implemented successfully. Reuters
In Brief Financial technology
British, Australian regulators sign support pact
Financial regulators in Australia and United Kingdom signed a cooperation agreement on Wednesday to help financial technology companies expand into each other’s markets, Australia’s securities watchdog said. Financial technology - or fintech - companies use technology to make financial services more efficient. Some fintech innovations include automated financial advice, crowd-sourced equity funding, digital payments and blockchain business models. Under the agreement, the UK’s Financial Conduct Authority and the Australian Securities and Investments Commission (ASIC) will refer to one another “innovative businesses” seeking to expand to help break down barriers to entry, ASIC said in a statement. Dairy
Fonterra advances dividends New Zealand dairy giant Fonterra promised to bring forward dividends on Wednesday, as the same slide in milk prices that helped it more than double first-half profit continues to eat into revenue for the co-operative’s farmer-shareholders. “There’s unprecedented pressure on them (farmers), it’s very tough for those families,” said Fonterra chairman John Wilson. The firm earlier reported lower milk purchase costs helped its JulyDecember net profit jump 123 percent to NZ$409 million (US$276 million), in line with estimates. Yesterday Fonterra said it was bringing forward dividend payments to provide cash faster to struggling farmers. Bank of Japan
Board member says ready to ease again Bank of Japan board member Yukitoshi Funo said yesterday the central bank won’t hesitate expanding monetary stimulus again if risks threaten to derail a fragile economic recovery. But he acknowledged that there were limits to how deep the central bank can push interest rates into negative territory, adding that the next easing step may not necessarily take the form of another rate cut. “What’s clear is we can’t keep cutting rates forever. At some point, we’ll reach a level” considered as the floor for rates, Funo told reporters after meeting business leaders in Kobe, western Japan. LNG
Woodside scraps Australian Browse project Woodside Petroleum and its partners have shelved plans to build the US$30 billion Browse floating liquefied natural gas (LNG) project off Australia in the face of global oversupply, spelling the end of an era of mega LNG projects. The shelving of the project follows an 80 percent plunge in Asian LNG prices over the past two years after a construction boom that is set to make Australia the world’s top LNG exporter.
14 Business Daily Thursday, March 24 2016
International In Brief Restructuring
Credit Suisse steps up cost and job cuts Credit Suisse Group yesterday announced 800 million Swiss francs (US$821 million) in additional cost cuts and plans to shrink its investment bank further as part of a restructuring plan aimed at revitalising its earnings. Like its global peers, Credit Suisse is grappling with record low interest rates, low commodity prices and slower growth in emerging markets such as China. Banks are facing a slump of 15 percent in market trading revenue in the first quarter, spoiling what is normally the most lucrative period when investors put their money to work at the start of the year. Bribery
Venezuelan businessman pleads guilty in U.S. case A Venezuelan businessman accused by U.S. prosecutors of taking part in a US$1 billion conspiracy to pay bribes to obtain contracts from Venezuela’s state oil company pleaded guilty on Tuesday. Abraham Jose Shiera Bastidas, 52, pleaded guilty in federal court in Houston to charges that he engaged in a conspiracy and violated the Foreign Corrupt Practices Act, according to court records. Lawyers for Shiera, who is manager of Vertix Instrumentos, did not immediately respond to requests for comment. A spokesman for the U.S. Justice Department confirmed the plea but had no other comment.
Bank Regulations
“Don’t punish us” plead UK’s fledgling banks as new rules bite Rules are impacting middle-managers, with some now preferring to keep a low profile in order to avoid being singled out in the event of another banking scandal.
T
ougher rules aimed at holding top UK bankers to account when things go wrong are driving up pay, which smaller “challenger” banks say is making it harder to recruit senior staff. Executives at several such banks told Reuters the Senior Managers Regime (SMR), which came into force this month, is hurting those with no history of wrong-doing more than bigger rivals, who were the ones the rules were aimed at. Public outrage over the financial crisis and subsequent scandals prompted the SMR, allowing regulators to pin the blame for excessive risk-taking and reckless expansion on individuals. This marks a step change for British banking, where political scrutiny and tough new regulations had already made it hard to find people to take on some of the most senior jobs. The challengers say a one-size fits all approach to regulation is stifling their efforts to grab market share from big fish such as HSBC, Lloyds Banking Group, Barclays and Royal Bank of Scotland. This now appears to be at odds with the aim of Britain’s finance minister George Osborne and other politicians of boosting retail banking competition by encouraging new players. HSBC, Lloyds, Barclays declined to comment, while RBS and the
Financial Conduct Authority, which designed the regulation, did not immediately respond to requests for comment. While rising pay impacts all banks, the problem is particularly acute for the minnows trying to recruit Non-Executive Directors (NEDs) who see increased risk from joining new banks with no track record and are demanding more pay. Barclays and HSBC, which reported billions of pounds in profits last year, paid NEDs an average of 211,857 pounds and 229,933 pounds respectively, while Shawbrook Group posted underlying pre-tax profit of 80 million pounds and paid them a base fee of 65,000 pounds.
“While the SMR (Senior Managers Regime regulation) could potentially improve accountability and transparency, it raises that barrier further” Rishi Khosla, Chief Executive of OakNorth Bank
The challenger banks are also harder hit by the fixed costs of complying with the new regime, the executives said. The rules are also impacting middle-managers, with some now preferring to keep a low profile in order to avoid being singled out in the event of another banking scandal. Some are concerned about gaining promotion at smaller banks with a shorter path to the top, according to PWC risk and regulatory partner Sarah Isted. This leads some to seek roles in bigger banks, enabling them to advance without taking on a more regulated status. At the same time the SMR has clarified responsibilities, Chris Box, human resources partner at PWC said, adding that people wanting to join an institution perceived to have a cleaner culture are more likely to work for a challenger. It is not just the SMR which fledgling lenders say is stunting their growth. They already face sharp rises in tax after Osborne introduced a profit surcharge because of the risk they pose to the economy, a policy approved by Britain’s top competition watchdog last month. Osborne hinted at more proportionate regulation of smaller lenders in his budget last week, including possible changes to capital requirements, but said nothing on executive supervision. Reuters
Bangladesh heist
Central bank weighs lawsuit against NY Fed Bangladesh’s central bank has hired a U.S. lawyer for a potential lawsuit against the Federal Reserve Bank of New York after hackers stole US$81 million from its account with the NY Fed, according to an internal report by the Bangladesh bank. After the report surfaced on Tuesday in the Bangladesh capital of Dhaka, U.S. Representative Carolyn Maloney called for a probe of last month’s cyber attack on Bangladesh Bank. In one of the largest cyber heists in history, the hackers ordered the New York Fed to transfer US$81 million from Bangladesh central bank funds to accounts in the Philippines.
Oil
International Energy Agency lowers production meeting importance
M&A
Popolare, BPM said nearer to merger Banco Popolare SC and Banca Popolare di Milano Scarlare edging closer to a merger that would create Italy’s third-largest bank after adjusting the terms of an agreement to satisfy the European Central Bank, according to people with knowledge of the matter. Shares in the two banks were suspended from trading yesterday pending an announcement. The ECB asked for clarification on a proposed deal that includes Banco Popolare’s plan to raise about 1 billion euros (US$1.1 billion) through a share sale and disposals of assets and bad loans, according to the sources.
Libya has joined Iran in snubbing the initiative. Florence Tan
A deal among some OPEC producers and Russia to freeze production is perhaps “meaningless” as Saudi Arabia is the only country with the ability to increase output, a senior executive from the International Energy Agency (IEA) said yesterday. Brent crude futures are up more than 50 percent from a 12-year low near US$27 a barrel hit early this year, bouncing back after Russia and OPEC’s Saudi Arabia, Venezuela and Qatar struck an agreement last month to keep output at January levels. Qatar has invited all 13 members of the Organization of the Petroleum Exporting Countries (OPEC) and major non-OPEC producers to Doha on April 17 for another round of talks
to widen the production freeze deal. “Amongst the group of countries (participating in the meeting) that we’re aware of, only Saudi Arabia has any ability to increase its production,” said Neil Atkinson, head of the IEA’s oil industry and markets division, at an industry event. “So a freeze on production is perhaps rather meaningless. It’s more some kind of gesture which perhaps is aimed ... to build confidence that there will be stability in oil prices.” Libya has joined Iran in snubbing the initiative, and the absence of the two OPEC producers - both with ample room to increase output - would limit the impact of any success in broadening the freeze at the April meeting. The rise in output from Iran in
the first quarter post-sanctions has been in line with IEA’s expectation of 300,000 barrels per day (bpd), Atkinson said, adding that Tehran’s output could rise again by the same amount by the third quarter. “Iran has not exactly been flooding the market with lots more oil. It seems to be far more measured,” Atkinson said. It will take a while for Iran to regain its pre-sanctions share in Europe, where markets have been taken over by Saudi Arabia, Russia and Iraq, he added. The IEA, energy watchdog for the Organisation for Economic Co-operation and Development (OECD), expects the wide gap between supply and demand to narrow later this year, paving the way for an oil price recovery in 2017. “We think the worst is over for prices ... Today’s prices may not be sustainable at exactly US$40 a barrel, but in this mid-US$30s and upward range, we think there will be some support unless there’s a major change in fundamentals,” Atkinson said. Reuters
Business Daily Thursday, March 24 2016 15
Opinion Business Wires
THE STAR The oil and gas industry in Malaysia is adapting to a “fundamental structural shift”, with billions of ringgit worth of projects having been deferred or cancelled around the world, said Datuk Wan Zulkiflee Wan Ariffin, president and group chief executive officer of Petroliam Nasional Bhd (Petronas). “This mind-set and drive for excellence will be critical to adapt to the challenges at hand to ensure long-term robustness,” he said during his opening remarks at the Offshore Technology Conference Asia 2016 yesterday. He said globally, industry layoffs have exceeded a quarter of a million.
PHILSTAR Moody’s Investors Service said domestic demand-driven economies among member countries of the Association of Southeast Asian Nations (ASEAN) led by the Philippines are expected to grow faster than export-oriented economies in the next two years. In a report titled “Growth outlook of ASEAN economies to diverge in 2016 and 2017,” Moody’s said the gross domestic product (GDP) of the Philippines would expand faster at six percent for 2016 and 2017. The country’s GDP growth eased to 5.8 percent last year from 6.1 percent in 2014 due to weak global demand.
VIETNAM NEWS The Ministry of Science and Technology yesterday named 77 Vietnamese enterprises that will be granted a 2015 National Quality Award. The results were announced during a press conference for the 2015 National Quality Awards and Global Performance Excellence Award (GPEA) of the AsiaPacific Quality Organisation held in Hà Nội. Of the 77 awardees, 20 firms will receive gold awards, including Electrical Equipment Joint Stock Company, Truong Hai Automobile Joint Stock Company, Pharmaceutical Joint Stock Company Traphaco and Đông Á Steel Joint Stock Company. The remainder of the firms will receive silver awards.
THE AGE News Corporation’s wade into financial services has come to an end with the sale of investment publication Eureka Report as well as its superannuation service spinoff BrightDay for an undisclosed sum. News Corp acquired Alan Kohler’s Australia Independent Business Media, which included business news website Business Spectator and Eureka Report, in 2012 for A$30 million. Eureka Report has been sold to Australasian Wealth Investments, which also publishes Intelligent Investor, InvestSMART and Your Share, while BrightDay has been sold to Mark Bouris’s financial services business Yellow Brick Road.
Reckoning with inequality
W
hen it comes to the rise in economic inequality since the 1970s in the United States and some other advanced economies, it doesn’t really matter which measure of income distribution we choose: They all show the increase. And, while many competing explanations have been proposed, we do not need to agree about causes to concur on sensible policies to address the problem. There are many ways to measure inequality. Each can tell us something different. Many Asian countries’ recent economic success has reduced inequality by some measures (for example, a big fall in the poverty rate), but not by others (the high-low range has increased). In the US, however, all measures of inequality have pointed in the same direction since the turn of the century, reflecting the fact that the benefits of economic growth have gone almost exclusively to those at the top. The share of income received by the top 0.5% has reached 14%, where it was in the 1920s. Normally, one would think that diagnosing the cause of such a fundamental shift would be a necessary step in prescribing a cure. In that case, one might be discouraged by the over-abundance of plausible explanations that have been offered and the difficulty in choosing among them. Thomas Piketty’s Capital in the Twenty-First Century emphasizes what he sees as a very longterm trend arising from a high return to capital, which causes inherited wealth to accumulate at a faster rate than earned income grows. Piketty’s book, published in 2013, did much to put inequality back on the agenda of American economists. But most researchers believe that the sources of widening US inequality lie primarily within earned income, rather than arising from the difference between earned income (wages and salaries) and unearned income (return on capital). Th e f i rst ex p l a n a t i o n f o r earned-income inequality is technological change, which raises the demand for skilled workers faster than the supply. But, while this can explain a widening wage or income gap between skilled and “unskilled” workers (defined according to whether they are college-educated), this has little to do with the gap between the top 1% and the rest. The second explanation is what is called “assortative mating,” according to which highly accomplished professional men no longer marry their secretaries, but instead choose highly accomplished professional women. The third is the winner-take-all character of many professions, from dentists to university professors to movie stars. Because modern media tell us who is the best dentist in town or the best movie actor in the world, relatively small differences in abilities win far bigger differences in income than they used to. According to the fourth explanation, the very high compensation of corporate executives, especially in the financial sector, is not a return to services that are in demand because they are socially valuable (like having gone to medical school or having been born with acting talent). Rather, managers essentially get to set the terms of their own pay, through compensation packages that reflect failures of corporate governance, tax law, and financial engineering. Stock options,
Jeffrey Frankel Professor of Capital Formation and Growth at Harvard University.
for example, have failed in their original goal of relating pay to performance. Finally, an especially popular explanation is that the rich have captured the levers of power, through campaign donations. The politicians they finance are only too eager to enact favourable policies. But many policy prescriptions to ameliorate inequality apply regardless of the cause. Most would make the tax system more progressive, by, for example, lowering the effective marginal tax rate for low-income workers – what US President Barack Obama has called “making work pay.” Enhancing the earned-income tax credit is a live option today, and Obama proposed in his January 2016 State of the Union address expanding wage insurance, which currently helps workers who lose their jobs because of trade but could be extended to those who lose their jobs due to technological change. Similarly, the payroll tax for low-income workers could be eliminated. In light of looming deficits for America’s Social Security and Medicare programs, such changes in the tax code should ideally be revenue-neutral. The Republican candidates for president this year, as usual, propose massive tax cuts, focused on the rich, without a plan for how to pay for them. The US can raise additional revenue with which to address inequality in fiscally responsible ways. The tax break for “carried interest,” by which hedge-fund managers’ income is taxed at low capital-gains rates, should be abolished (as Democratic presidential candidate Hillary Clinton favours), and the exemption for the estate tax (originally expanded by George W. Bush) could be reduced. At the same time, the cap on payroll taxes for upper-income workers could be raised, and distorting tax deductions, like that for mortgage interest, could be tightened for upper-income households. A lot should be done on the spending side, too. Examples include universal high-quality preschool, health insurance for all, and infrastructure spending. Many of those who are upset about inequality are attracted to the banner of Bernie Sanders (or that of Donald Trump). Many believe that one must break up banks in order to address the root cause of the problem, which is thought to be that the rich have “bought” politicians. Money in politics is indeed a big problem. But what do politicians use all that money for? It doesn’t go into their pockets (at least not in the US). It goes to running for office: campaign advertisements and mobilizing supporters. In my view, voting for candidates who will enact the right policies is a far more direct strategy for addressing inequality – and much else – than voting for those who want to break up the banks to reduce the amount of money available to dissuade voters from supporting the right candidates. Project Syndicate
“Piketty’s book, published in 2013, did much to put inequality back on the agenda of American economists”
16 Business Daily Thursday, March 24 2016
Closing Securities
HK regulator names new head of enforcement
Hong Kong’s securities regulator said yesterday it had hired Thomas Atkinson, the head of enforcement at Canada’s Ontario Securities Commission, to take on a similar role in Hong Kong. Atkinson will begin a three-year term as executive director of enforcement at the Securities and Futures Commission (SFC) on May 3, the SFC said in a statement. He replaces Mark Steward who left in
September to join the United Kingdom’s Financial Conduct Authority. Industry sources said Atkinson’s appointment was a coup for the SFC, which had been struggling to fill the enforcement role since Steward’s departure was announced in June last year. Atkinson joined Canada’s biggest securities regulator in 2009, prior to which he worked for investment regulator Market Regulation Services Inc, which he helped to found, and the Toronto Stock Exchange. Reuters
Stocks
Mainland small-cap stocks enter bull market as margin debt jumps Moves in the Shanghai Composite over much of the past two years have closely tracked appetite for leveraged bets.
C
hinese stocks rose in late trade, with a gauge of small companies entering a bull market, as a revival in margin lending underpinned demand for riskier shares. The small-cap ChiNext index advanced 20 percent from a February low, the threshold for a bull market. Margin financing on the nation’s two stock exchanges climbed the most since November on Monday after policy makers loosened controls. The Shanghai Composite Index added 0.4 percent to close above the 3,000 level for the second time this week, with gains coming in the last 30 minutes of trading as technology companies rallied. Moves in the Shanghai Composite over much of the past two years have closely tracked appetite for leveraged bets, which fell to the lowest level since December 2014 last week. Relaxing restrictions imposed on margin trading during last year’s stock rout may boost China’s stocks, which are the worst-performing equities among global indexes this year. “The environment for stocks seems to be getting better, with domestic economic data stabilizing and U.S. refraining from raising interest rates, while the rise in margin trading is also fueling buying,” said Dai Ming, a fund manager at Hengsheng Asset Management Co. in Shanghai. “There is still room for the rally to continue, particularly the ChiNext and smallcap stocks, and their valuations may rise to a pretty high levels in this speculative environment,” said Dai, who has recently been adding to his stock holdings. The Shanghai Composite closed at 3,009.96, with trading volumes in line with the 30-day average. The ChiNext gained 1.7 percent and is valued at 63 times reported profits,
compared with a multiple of 16 for the large-cap gauge, according to data compiled by Bloomberg. The CSI 300 Index added 0.3 percent, with a gauge of technology shares jumping 1 percent for the steepest gain among 10 industry groups. Hong Kong’s Hang Seng China Enterprises Index and the Hang Seng Index both slipped 0.3 percent. East Money Information Co., the third-biggest weighted stock in ChiNext, jumped 6.3 percent, bringing its rally since Feb. 29 to 40 percent. Hithink RoyalFlush Information Network Co. jumped by the 10 percent daily limit.
Outstanding margin trading rose 2.2 percent, the most since Nov. 9, to 863.3 billion yuan (US$133 billion) on Monday, data compiled by Bloomberg show. This came after China Securities Finance Corp. said Friday it will resume offering short-dated margin loans to brokerages. The CSF move, which included cutting interest rates for loans to brokerages, shouldn’t be
‘Hang Seng Index slipped 0.3 per cent’
seen as regulators encouraging leverage in the stock market, the China Securities Journal reported on its front page, without citing anyone. Credit Suisse Group AG prefers Chinese cyclical and property stocks over small-cap shares because of policy support, global monetary easing and the booming housing market, analysts led by Chen Li wrote in a report. Chen sees risks in small-cap and ChiNext companies due to the expiry of a lock-up period for shares held by pre-IPO investors as well as expensive valuations, the report said. Airlines declined in Shanghai, with Air China Ltd. and China Southern Airlines Co. retreating at least 1 percent. Belgian police launched a manhunt hours after the blasts at the airport and a subway station, the deadliest attacks ever on Belgian soil. Europe’s leaders pledged a united front against Islamic State after the bomb attacks killed at least 31 people in Brussels. Bloomberg News
The Short Take
China Inc. is getting an expensive derivatives lesson China’s capitalists are getting a lesson in the law of supply and demand. As they scramble to hedge exposure to dollars following the yuan’s devaluation, chief financial officers from Shanghai to Shenzhen are finding the costs have gone up. For some, the price has been too high. Modern Land China hasn’t used swap markets to protect against currency risks because of the expense, Faye Fang, a Hong Kongbased investor relations officer at the Beijing-based developer, told Bloomberg News. The yuan has depreciated about 4.2 percent against the dollar and 6.5 percent against the euro in the past 12 months. With China’s currency no longer seen as a one-way bet on appreciation,
there’s been a rush to protect against further declines. The higher cost of hedging has affected investors as well as companies. Pimco’s Luke Spajic toldBloomberg News that one hurdle for investing in China’s local bond market right now is the cost of immunizing portfolios against currency volatility. Yuan three-month volatility since April has increased: 6x One of the cheapest ways of hedging against currency exposure is to use options. Among the principal measures of option costs is implied volatility, which reflects what kind of swings investors expect in the underlying security. That gauge has surged for the yuan since China’s unexpected devaluation on August 11.
Three-month implied yuan volatility hit 9.6 percent on February 3, the highest since December 2008 and six times the level it was at in April. Option prices have increased in response to higher demand for dollar-yuan calls, which rise in value as the Chinese currency depreciates (a call option gives the right but not the obligation to buy an asset at a certain price within a set time frame). The one-month risk reversal, a measure of the premium paid for calls over puts (the right to sell), hit the highest in almost 26 years on Aug. 12. Buying options is the cheapest way to hedge foreign currency exposure, but not the best. Among their limitations: While options are more liquid, they have short tenors. Maturities longer
Christopher Langner Markets columnist for Bloomberg
than a year are expensive and hard to find. That means that every so often the hedge has to be rolled over and if that need comes just as there is a jump in volatility, the costs increase. The more conservative chief financial officers in the emerging world usually enter into a basis swap that hedges the entire cash flow of their bond throughout the life of the security. That increases the costs of selling bonds offshore but significantly reduces headaches and surprises. Perhaps investment bankers are now adding a bit of hedging education to their bond-sale pitches in China. They might take a leaf from the insurance salesman’s book: It’s best to buy protection before you actually need it. Bloomberg News