Anzac Day Observance in Macau Mon, 25 April 2016 │ 7:30am - 9am │ MGM Macau Followed by Gunfire Breakfast from 8am
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HK stocks scorn economic gloom as bull market approaches HKEX Page 7
Friday, April 22 2016 Year V Nr. 1027 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Joanne Kuai
Activists Weaker than demand debate expected Canidrome Local ani mal concern group ANI MA calls for debate with management company of Canidrome, the greyhound racing track. Urging the gov’t, too, to take a clearer stance on the fate of the dogs and property. Page 4
Gaming Sands China Q1 adjusted property EBITDA shrank 2.5 pct to US$517.9 mln. Attributed by analysts to poor non-gaming business performance and higher bad debt. Chinese tourism and consumer numbers were ‘pretty depressing across the globe,’ said Las Vegas Sands Chief Operating Officer Rob Goldstein. Page 5
www.macaubusinessdaily.com
Inflation at new low The city’s monthly inflation rate stood at 3.31 pct in March. The consumer price index (CPI) has risen to 108. With growth attributed to higher rentals, dearer charges for eating out plus rising prices of tobacco, motor cars and vegetables. Cost of living Page 2
Auction Inc. Auctions
MOP7 bln to MOP30 bln profit a year. Creating 11,000 to 45,000 jobs in Macau. Including 4,200 to 18,000 jobs directly related to the local auction industry. These are the rosy prospects painted by cultural promotion specialist Wong Cheng Pou. But it’s a long haul from concept to cash. Page 3
Air Macau net profit plunged by 70.6 pct y-o-y for 2015 Page 2
HK Hang Seng Index April 21, 2016
Shadow banking
Chinese authorities stop finance companies’ new registration to combat online proliferation Page 9 21,622.25 +385.94 (1.82%)
CNOOC Ltd
+5.49%
China Petroleum & Chemical
+3.98%
Galaxy Entertainment Group
-2.58%
HSBC Holdings PLC
+4.44%
PetroChina Co Ltd
+3.74%
Sands China Ltd
-4.91%
Asian banks
Regional financial institutions hold highest levels of bad debt since 2008 Page 16
23° 27° 23° 26° 23° 26° 23° 25° 24° 26° Today
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Source: AccuWeather
Alvin Chau: raising the bar for junkets necessary Page 6
Aviation
Source: Bloomberg
Junkets
I SSN 2226-8294
2 Business Daily Friday, April 22 2016
Macau Inflation Inflation rate stood at 3.31pct in March
Inflation plumbs new low Meanwhile, Clothing & Footwear and Communication decreased by 2.88 per cent and 1.20 per cent. Nevertheless, CPI has decreased 0.36 per cent month-to-month.
The Composite Consumer Price Index for March has risen 3.31 pct year-on-year but decreased 0.35 pct month-to-month.
Annualised rate at 4.21 pct
On a monthly comparison, the price index of Recreation & Culture and Clothing & Footwear fell by 7.97 per cent and 1.96 per cent due to lower charges for package tours after the Lunar New Year and seasonal sale of winter clothing. Meanwhile, the receding prices of vegetables, fruits, fresh fish and seafood pushed down the price index of Food & Non-Alcoholic Beverages by 0.33 per cent. For the 12 months ended March 2016, the average Composite CPI increased by 4.21 per cent from the previous period. The price index of Alcoholic Beverages & Tobacco, Education and Housing & Fuels showed a marked increase, with 26.85 per cent, 6.43 per cent and 6.09 per cent, respectively. The average Composite CPI for the first quarter of 2016 (107.91) increased by 3.67 per cent year-on-year, with the price index of Alcoholic Beverages & Tobacco, Education and Transport rising 38.56 per cent, 8.93 per cent and 6.72 per cent, respectively.
Nelson Moura nelson.moura@macaubusinessdaily.com
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he city’s monthly inflation rate stood at 3.31 per cent in March 2016. The consumer price index (CPI) has risen to 108 from 104.54 since March 2016, according to data released yesterday by the Statistics and Science Service (DSEC). This growth in CPI was attributed by the DSEC to higher rentals for dwellings and parking spaces, dearer charges for eating out, as well as rising prices of tobacco, motor cars and vegetables. In comparison with March 2015, increases in tobacco tax, tuition fees, rentals for parking spaces and prices of motor cars drove up the price index of Alcoholic Beverages & Tobacco, Education and Transport by 37.36 per cent, 8.97 per cent and 7.70 per cent, respectively.
Retail
Aviation Air Macau’s annual net profit dives
Sasa turnover in SARs Flying slides 18 pct in Q1 on profit fumes Cosmetics retailer Sasa International Ltd recorded turnover of HK$1.52 billion (US$190.5 million) in Macau and Hong Kong for the first three months of this year, plunging 17.9 per cent compared to the same period of last year. In a filing with Hong Kong Stock Exchange on Wednesday evening, the company said the continued decline in retail sales in the two Special Administrative Regions is due to ‘the adverse impact of the new ‘one-tripper-week’ policy on the local retail market to a greater extent.’ During the three months, the retailer saw its same-store sales in the two cities fall 17.6 per cent year-onyear. In addition, average sales per transaction dropped 13.9 per cent year-on-year to HK$341.
‘The retail market has also been adversely affected by the weaker sentiment arising from increased outbound travel of the locals and weakened inbound tourism due to the strength of the Hong Kong dollar,’ the company added, indicating it would adjust its sale strategies ‘in order to better cater to market needs.’ The Hong Kong-listed company generated total turnover of HK$1.93 billion for the first quarter, down 15.1 per cent year-on-year. It said retail and wholesale turnover from its other markets, including Mainland China, recorded a fall of 2.8 per cent yearon-year for the period. As at the end of March, the company owned 113 stores in Hong Kong and Macau plus 57 in Mainland China. K.L.
The local airline’s net profit plunged by 70.6 per cent year-on-year for 2015, while that of its parent company Air China soared by 80.3 per cent for the same period.
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ir Macau posted a yearon-year fall of 70.6 per cent for its net profit to 31 million yuan (MOP38.2 million/US$4.8 million) for the whole year of 2015, in the wake of lower revenues generated, according to the 2015 annual report released yesterday by parent company Air China Ltd. Last year, the local flag carrier saw its revenues dip 9.29 per cent yearon-year to 2.45 billion yuan, of which air traffic revenue amounted to1.93 billion yuan, a year-on-year decrease of 7.45 per cent. Air China did not expand on the reasons its subsidiary raked in less earnings in 2015. For the twelve months, Air Macau carried some 2.31 million passengers, an increase of 8.79 per cent year-onyear, whilst its average passenger load factor is down 1.12 percentage points year-on-year to 67.1 per cent.
According to the report, the locally based airline’s revenue passenger kilometres (RPK), a measure of sales volume of passenger traffic, actually jumped 9.27 per cent year-on-year. Its available seat kilometre (ASK), used to measure an airline’s capacity to transport passengers, is up 11.1 per cent year-on-year.
More cargo carried
In terms of air cargo, Air Macau carried a total of 17,153 tonnes of cargo and mail last year, growing 7.84 per cent year-on-year. The load factor for the sector, however, declined by 1.8 percentage points to 27.83 per cent compared to last year. The airline’s revenue freight tone kilometre (RFTK), an indicator of an airline’s freight traffic volume, registered a year-on-year increase of 6.7 per cent. Its available freight tonne kilometre (AFTK), which shows the company’s available cargo capacity, rose by 12.9 per cent year-on-year. As at last year-end, Air Macau operated a fleet of 18 aircraft with an average age of 9.32 years. The flag carrier, established in 1994 with a registered capital of MOP442 million is 66.9 per cent owned by Air China.
Parent’s net profit soars
Last year, Air China’s profit attributable to equity shareholders of the company totalled 7.06 billion yuan, soaring 83.3 per cent compared to 3.85 billion yuan for 2014. But the national flag carrier’s revenues for the year posted only a slight growth of some 3.9 per cent to 110 million yuan. The airline carried 89.8 million passengers last year, which is an increase of 8.2 per cent year-on-year. In addition, its operated flights for the twelve months rose 7.6 per cent year-on-year to 615,912 flights. K.L.
2.45 Billion yuan Air Macau’s revenue in 2015
Business Daily Friday, April 22 2016 3
Macau Cultural Industry
The art of the auction Stamp duty and a lack of professional skills are the hurdles standing in the way of Macau’s auction industry for antique items and artworks. Annie Lao annie.lao@macaubusinessdaily.com
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he auction industry is a field worth developing here in Macau since the city already has the infrastructure such as venues for proper display and the hosting of events, said Wong Cheng Pou, a representative of an association specialising in Chinese cultural promotion that has been commissioned by the government to study the prospects for an artworks and antique auction businesses in the MSAR. Mr. Wong indicated that Hong Kong’s auction market is almost saturated and that Macau could take a slice
of the pie as more buyers and sellers may be willing to come over here for a new experience, especially when the Hong Kong-Zhuhai-Macau Bridge is complete. The auction industry can help the city diversify its economy and create more jobs, as it involves promotion, sales and artwork display, said Mr. Wong at the first plenary meeting in 2016 of the Cultural Industry Committee held yesterday. He also pointed that it would help Macau’s cultural and creative industry as auctions may help sell local artworks to international buyers. Currently, there are 78 registered companies in the antique and artworks’ auction business in Macau. Macau Chung Shun International Auctions Co., Ltd. is the largest organisation in its field. Last year, at one auction it sold items valued at MOP1.2 billion (US$150 million) according to Mr. Wong. He said that the estimated profit of the auction industry would be between MOP7 billion to MOP30 billion per year once developed and could
create 11,000 to 45,000 jobs in Macau including 4,200 to 18,000 jobs directly related to the auction industry, according to Mr. Wong. However, he also added that currently Macau still lacks professionals in this area, which will require skilled human resources, and the security that is currently insufficient in Macau.
Stamp duty
Currently, Macau has no specific law regulating the auction industry. But laws in place are enough to support the development of the industry, according to Tong Io Cheng, another representative of the research team who attended the cultural industry committee meeting yesterday. There is no tax-free incentive for the auction industry, hence stamp duty still applies for items sold at auction. Nevertheless, Angela Leong On Kei, Executive Director of casino operator SJM Holdings Ltd, who also presented at the meeting yesterday, disagreed with the policy and said it may cause conflicts and misunderstandings between buyers and sellers.
Leong, claiming to be experienced in auctions, said that sales should be tax-exempt to help the development of the industry. While some raised concerns that such a business may be used as a conduit for money laundering, Ms. Leong said that transactions are always made through banks that perform background checks of the buyer and pointed out that integrity is the key to building up the industry. The Secretary for Social Affairs and Culture, Alexis Tam Chon Weng, who chaired the meeting, said that he would host a discussion with the Financial Services Bureau (DSF) regarding the stamp duty and hoped to set up a special task force to study the development of the auction industry.
Developing art scene
There were 1,038 registered companies engaged in the cultural and creative industry as of 2014, employing some 7,188 people and generating MOP3.8 billion in revenues that year, according to Ieong Meng Chao, the director of
the Statistics and Census Service (DSEC), who shared the data at yesterday’s meeting. Some 726 companies in creative design generated MOP1.31 billion in revenue; 207 companies in digital media accounted for the biggest chunk of MOP1.37 billion; 91 in cultural exhibitions and performances took MOP1.1 billion; and 14 companies in art collection made MOP5 million. Mr. Ieong indicated that for collecting relevant data in 2015 new categories will be included such as music production, PC software, gaming design, construction design, photography and art performance training, and art performance venues. The Secretary also indicated that in order to support the local cultural and creative industry, the government should prioritise local companies in the procurement of relevant products. In addition, Alexis Tam claimed that with the demand for making promotional videos by different government departments increasing, local production companies would be prioritised.
4 Business Daily Friday, April 22 2016
Macau Opinion
Pedro Cortés Yes, Hengqin! It is not the first time that I touch on this theme but yesterday we had another excellent luncheon organised by the British Business Association of Macau (BBAM) – superbly chaired by Mr. Henry Brockman, who is, by the way, my other reader – where the main topic was the great opportunities Hengqin offers foreign investors, principally for the local investor. At the table, a colleague did not seem very confident in the future of our neighbouring mountain island. Well, I tried to respond that, with few exceptions, 15 years ago no-one thought that Macau would become what we are today. There are many kinds of people in this world: pessimist, mid-optimist and optimist – probably I repeat myself but my father always taught me that an optimist is a pessimist lacking sufficient information. Yet, even after the crisis of 2008 we had people abandoning projects and pumping money into other locations. Well, I am a simple person who has always been completely entranced by the news, having read a weekly newspaper since a very young age. That is why I try to read the news. And the news is: we will have a huge project nearby that will put Macau even more in the limelight. Hopefully, not in a secondary role in what is going to unfold in Hengqin. Yes, my dear and learned friends, it is going to happen irrespective of the unenthusiastic views of some. We will have one of the biggest tourism destinations in the world just across the river within the next decade. Chimelong, I learned yesterday, welcomed 25 million visitors in the last two years. Figures are to be increased this year. Therefore, there are two ways for the entrepreneurs of Macau and other players to proceed: they may cling to being local or otherwise look for opportunities, take risks and think Macau a blessed place that had the opportunity to adjoin Hengqin. Macau players should think beyond the borders and open themselves to the world. And, in these players we shall place our politicians and public decision makers: look to what is happening in the world in order to take measures for those whom you govern. Some years ago I heard the story of a businessman who was challenged to set up an office overseas. Instead of seeing it as an opportunity he answered to the one that was presenting him with the idea that if it was to lose money he would rather invest in the stock market. A view, unfortunately, that remains the predominant one. Pedro Cortés is a lawyer and frequent contributor to this newspaper.
GREYHOUNDS
Gauntlet thrown down for TV debate ANIMA head believes the Canidrome is a waste of public funds and demands a televised public debate about the issue. Nelson Moura nelson.moura@macaubusinessdaily.com
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he president of the Animal Protection Society of Macau (ANIMA), Albano Martins, demands a televised public debate in order to decide the future use of the Canidrome. Mr. Martins told Business Daily, as he considers it to be a “waste of public funds”. He then reiterated his request that the government “have the political courage to face the people who have very important roles in the local economy that keep the Canidrome running.” This statement comes after ANIMA sent public letters requesting a public open debate in May - hosted by local public broadcaster TDM - to several parties: Lei Chi Man, Executive Director of Macau (Yat Yuen) Canidrome Company Ltd., which is responsible for track management, and to Josephine Lau, Vice President
of the Macau Abandoned Animals Protection Association (AAPAM). The letter was also forwarded to Lionel Leong Vai Tac, Secretary for Economy and Finance.
All for animal protection
In the letters Martins accused the AAPAM of co-organising events with the Canidrome, even after a report by the South China Morning Post revealed that the race track had killed 383 underperforming dogs in 2010, and criticised the greyhound adoption scheme which he labels ineffectual. “We haven’t received any response yet for our debate request, but the truth is that no dog gets adopted there. Any dog that enters only comes out dead and we’ll keep fighting any imports of greyhounds from abroad,” Mr. Martins told Business Daily. In response to Business Daily’s enquiry, the AAPAM declared it had no knowledge of the request for a televised debate and said more information is needed before any decision can be made about the Canidrome. “We need to decide what to do if a place with history in Macau is to be shut down: where to put the dogs, how to use the terrain. And before defending any position, we need to know more about the issue. What about the horses? It’s not just dogs, and that’s why we want the government to pass the Animal Protection Law,” an AAPAM spokesperson told Business Daily. On April 30, AAPAM will hold a protest in partnership with animal rights associations in Hong Kong and Taiwan in order to demand the passing of the Animal Protection Law in Macau, aiming to extend
cruelty to any animal as punishable by imprisonment.
Dog deficit
The ANIMA president also criticised the study ordered by Secretary Lionel Leong from the University of Macau Institute for the Study of Commercial Gaming, which will help the government decide whether to renew or scrap the existing concession for Macau (Yat Yuen) Canidrome. The study, which began last November, is expected to be finished this year and will ‘focus on the importance and influence of the Canidrome on the territory as a World Centre for Tourism and Leisure’, as stated by Lionel Leong previously. “So now ANIMA believes a public debate is the best way for the public to see where the voice of reason lies,” Martins added. “You [the Canidrome] have a contract, which we believe was wrongfully made, where taxes are reduced, meaning more waste of public funds,“ Mr. Martins told Business Daily, adding that the race track area should be converted into a community park without any building construction so that it could serve “one of the most densely populated areas in the world.” In 2015, the Canidrome generated MOP125 million (US$15.6 million) in gross gaming revenues, around 0.05 per cent of the MOP231.81 billion generated by the whole of the gaming industry in Macau, per data provided by the Gaming Inspection and Co-ordination Bureau (DICJ). Business Daily has contacted DICJ for more details regarding the gaming concession and sought a comment but received no reply by the time the story went to print.
Business Daily Friday, April 22 2016 5
Macau
Gaming
Sands China misses forecast on China slowdown, rival casinos Chinese tourism and consumer numbers are “pretty depressing across the globe” and softer than the company had hoped in Macau, said Las Vegas Sands COO.
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ands China Ltd., the Macau-based casino unit of Las Vegas Sands Corp., reported first-quarter profit missed analysts’ estimates as China’s economic slowdown hurt visitor spending, even as its billionaire chairman Sheldon Adelson saw future improvement from mass market gamblers and tourists. The shares slumped in Hong Kong trading Thursday. Sands China’s adjusted property earnings before interest, taxes, depreciation and amortization shrank 2.5 per cent to US$517.9 million from US$531 million a year earlier, the Las Vegas-based parent said in a statement Wednesday. That compares with the US$547 million median estimate of four analysts surveyed by Bloomberg. “The mass market has increased. It’s performed better, and I think we can look forward to more of that and as far as the non-gaming is concerned, people have to eat, they have to sleep. They want to be entertained.” Adelson said in a conference call. “There are non-gaming elements that I think will pick up again and do better in the future.” Macau has seen tightened money flows as the US$30 billion casino industry struggles with almost 22 months of slumping revenue. Chinese President Xi Jinping’s anti-graft campaign, as well as heightened scrutiny of junket operators, have sent gambling revenue plunging. Operators such as Galaxy Entertainment
Group Ltd. and Wynn Macau Ltd. are turning to tourists by building new resorts. Sands China fell as much as 4.9 per cent to HK$29.05, compared with the 0.7 per cent rise in the benchmark Hang Seng Index. The shares have plunged about 48 per cent since June 2014, when Macau reported the first drop in gross gaming revenue after China’s government launched its crackdown on corruption. “Sands China’s first quarter is weaker than expected, primarily due to poor performance in non-gaming business and higher bad debt expense,” Sanford C Bernstein & Co LLC’s analysts led by Vitaly Umansky said in a note after the results. While the gaming business is stabilizing, its profit margin contracted on lower retail rental income and lower hotel occupancy rate, the analysts wrote.
‘Pretty depressing’
Chinese tourism and consumer numbers are “pretty depressing across the globe” and softer than the company had hoped in Macau, said Las Vegas Sands Chief Operating Officer Robert Goldstein on the call, promising a return to better results in the second quarter. Sands China is targeting to open its US$2.7 billion Parisian Macao in mid-September this year, featuring non-gaming aspects such as retail shops and meeting space in addition to the casino, even as it faces intensifying competition including
from Wynn Macau, whose project is scheduled to start in June after a series of construction delays. Retail sales in Macau is being hurt by China’s economic slowdown which “is affecting the amount of money that people are spending,” Las Vegas Sands chairman Adelson said on the call. Still, the casino tycoon is adamant that the impact is temporary.
“Sands China’s first quarter is weaker than expected, primarily due to poor performance in non-gaming business and higher bad debt expense” Sanford C Bernstein & Co LLC Analysts
“I don’t see that this is going to be permanent. When we open the Parisian I’m completely confident, more than confident,” said the 82-year-old Adelson, who is also chairman and chief executive officer of Sands China. “Everything is cyclical -- we’ve been in Macau for 12 years now, and
there have been times over the 12 years that people thought that the business was going down, and then it’s going to go up.”
Non-gambling business
Despite the downturn, Sands China “stands out among Macau casino operators” for its focus on the mass market and significant non-gambling business, which have helped support its higher profitability compared with its peers during the last two year’s gambling downturn, said Bloomberg Intelligence analyst Tim Craighead. Sands China gained the most market share in the first quarter among Macau operators as February’s weeklong Lunar New Year holiday boosted business, Credit Suisse analysts led by Kenneth Fong wrote in a note on April 19. The company’s focus on the mass market helped lift its share to 23.3 per cent from 22.5 per cent a quarter earlier, they wrote. The Parisian plans to attract visitors with facilities such as a half-size Eiffel Tower replica accessible to the public before September’s official opening, Sands China President and Chief Operating Officer Wilfred Wong said in February. The company is hoping the Macau government will allocate 250 or more new gambling tables for the project, he said in an interview. Las Vegas Sands’s profit fell to 45 cents a share, excluding some items, the company said Wednesday, missing the 63-cent average of analysts’estimates compiled by Bloomberg. Revenue shrank 9.8 per cent to US$2.72 billion, missing projections of US$2.88 billion. Bloomberg
6 Business Daily Friday, April 22 2016
Macau Junkets Cali Group closes VIP room in MGM Macau
Only one remains Following the closure of two VIP rooms at the end of January, the junket promoter has shut down one more, meaning it now has only one VIP room operating in the territory.
Kam Leong kamleong@macaubusinessdaily.com
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ocal junket operator Cali Group has shut down another VIP room located in MGM Macau, Business Daily has learned. According to the president of gaming labour union Forefront of Macau Gaming (FMG) Ieong Meng Teng, he was informed by a Cali worker last week that the VIP promoter had issued notice of terminating employment to most of its workers at the room, in addition to having disbursed
severance pay. Asked by Business Daily yesterday when the VIP room officially stopped operations and how many workers were involved, the FMG head claimed he did not have the related information on hand. But an MGM spokesperson told us yesterday that no VIP room of Cali Group is currently located in the MGM property, adding that the junket operator’s operation in MGM has ceased “for a while.” Cali Group once had four VIP rooms in the city. At the end of January this year, the company closed two in Grand Lisboa on the Peninsula and in City of Dreams on the Cotai Strip. As at yesterday, the junket’s official website still states that it has two VIP rooms located in MGM Macau and Galaxy Macau, respectively. Business Daily also contacted the junket operator for clarification but received no reply from the company before this story went to press. Meanwhile, the contact number of Cali’s MGM VIP room, as stated on its official website, was still reachable yesterday. An employee
answering our call claimed she was not clear about the issue and declined to comment further.
Large-scale operations benefiting
Despite the closure of local VIP rooms, the labour un ion leader sees the closure of small-scale VIP rooms as benefiting the large-scale operations. “Of course, [the trend] would affect most of the local workers in the VIP sector. But so far we don’t see much impact on workers working in the mass market. The closures of small-scale VIP rooms would help large-scale ones to stabilise,” Mr. Ieong said in a phone interview. Meanwhile, He claimed junket operators requesting local workers to work overseas is becoming more frequent as they shift their businesses outside the Special Administrative Region in response to the gaming slump. “But this is not really fair for gaming workers. They don’t have much freedom to choose the options [offered by the company]. Either go work overseas or quit,” the union leader said.
LEGISLATION
Junket operators agree to raise the bar Alvin Chau agrees with increasing security deposit, background check on junkets. The Macau Government is working on a new proposal that would increase capital requirements for new junket operators. Alvin Chau Cheok Wa, owner and chairman of the city’s largest junket operator, Suncity Group Ltd., says he agrees with raising the entry bar for the industry. “When looking at the whole gaming industry, the VIP sector accounts for 54 per cent of gaming revenue. I think it is necessary to raise the bar for them to enter,” he said on the sidelines of a Cultural Industry Committee Meeting yesterday. Mr. Chau also acts as Vice President of the Macau Association of Gaming and Entertainment Promoters. He added it was also necessary to conduct background checks on gaming promoters and
disclose and review such information as necessary. It has been reported that Macau’s junket sector has proposed to the SAR Government that it raise the capital requirements for new junket promoters to MOP10 million (US$1.25 million) from the current MOP100,000 and to name at least one Macau resident as a shareholder. With regard to a proposed shared ‘blacklist’ of players who are considered at high risk of default and a centralised gaming debtor database, the junket group boss indicated that such a system would be “reasonable and effective”. Alvin Chau added that gross gaming revenue from the first quarter of this year had showed signs of stabilization vis-a-vis the last quarter of 2015. A.L.
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Business Daily Friday, April 22 2016 7
Macau
The Standard Chartered Bank building, center, HSBC Holdings Plc headquarters building, center right, and other buildings standing illuminated and shrouded in clouds are seen from Victoria Peak at night in Hong Kong, China.
HKEX
Hong Kong stocks scorn economic gloom as bull market approaches Among the biggest gainers are Macau casino operators, real estate companies and lenders.
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or all the gloom enveloping Hong Kong, the stock market is looking decidedly upbeat. The mainstays of the US$291 billion economy, from property to tourism, retail sales and trade, are fraying. Public confidence in the city’s future is the lowest in a decade and legislative dysfunction is delaying bills. The benchmark equity gauge is heading in the opposite direction, back toward a bull market. Optimists say Hong Kong is home to some of the strongest companies in Asia and a US$2 trillion equity rout has made the city’s shares too cheap to pass up. Plus, two of the biggest concerns that propelled the MSCI Hong Kong Index to a threeyear low in January -- the Federal Reserve’s monetary tightening and China’s sliding yuan -- have receded, with U.S. policy makers dialing back their planned interest-rate increases for this year and the Chinese currency stabilizing against the dollar. “I can understand from macro viewpoint a number of strategists saying Hong Kong is not looking great,” said Khiem Do, the Hong Kong-based head of multi-asset strategy at Baring Asset Management. “But when you look at the companies, they are very hardnosed, very bottom-line focused. There will always be some great companies in Hong Kong trading at a reasonable price which one has to buy because they’re very well managed.” There will always be some great companies in Hong Kong trading at a reasonable price which one has to buy because they’re very well managed.” Khiem Do, the Hong Kong-based
head of multi-asset strategy at Baring Asset Management The MSCI Hong Kong Index climbed 17 per cent from its Jan. 21 low through Wednesday, beating the 14 per cent advance by the MSCI All-Country World Index. Even after the advance, the city’s 44-member gauge trades at 1.2 times net assets, almost half the level of the global measure. The MSCI Hong Kong index advanced 1.2 per cent on Thursday, its highest close since Nov. 24, while the Hang Seng Index rallied 1.8 per cent.
Cashflow, yield
While the city’s economic data is poor, that doesn’t mean the outlook for its companies is necessarily bad, according to Adrian Mowat, the chief Asian and emerging-market equity at JPMorgan Chase & Co. An improvement in China’s economy will boost equities across the border, he said. For Mowat, some of the biggest weightings on the MSCI Hong Kong gauge are well diversified with good cashflow, while utility companies are attractive to yield-hungry investors. Pork producer WH Group Ltd., the best performer on the measure this year, gets 60 percent of its revenue from the U.S., with about a third coming from China. Analysts forecast an average 4.2 percent dividend yield in the next 12 months for utilities CLP Holdings Ltd. and Power Assets Holdings Ltd., compared with an average 2.9 percent for companies on the MSCI Asia Pacific Index. The time to buy is when sentiment has turned “overly bearish,” says Tony Chu, a Hong Kong-based money manager at RS Investment Management, which oversees about US$17 billion. That may explain why stocks most directly tied to Hong Kong’s economic problems have led the rebound.
Top performers
Among the biggest gainers are Macau casino operators, real estate
companies including Li Ka-Shing’s Cheung Kong Property Holdings Ltd., and lenders such as Bank of East Asia Ltd. The Macau gambling industry is suffering through an almost two-year slump, Hong Kong’s home sales are the lowest since at least 2002 and Morgan Stanley predicts the city’s lenders will struggle under shrinking revenues and rising credit costs.
‘Public confidence in the city’s future is the lowest in a decade and legislative dysfunction is delaying bills. The benchmark equity gauge is heading in the opposite direction, back toward a bull market.’ Chow Tai Fook Jewellery Group Ltd. is up 32 per cent from its January low, even as reports showed the number of mainland tourists, who once flooded the city’s shopping districts to load up on luxury handbags and expensive watches, fell 18 per cent in the first two months of the year, according to Hong Kong government data. Retail sales plunged the most since 1999 in February and the first-quarter jobless rate reached a 28-month high.
Balance sheets
“It’s still a functioning economy,” said Paul Chan, the Hong Kongbased chief investment officer for Asia excluding Japan at Invesco,
which oversees US$772 billion globally. He holds more Hong Kong shares than the benchmarks he tracks. The city’s “corporate ownership is a bit different. They are family owned or majority shareholder owned and the balance sheet risk is a lot lower in terms of capital expenditure.” For Rahul Chadha, co-chief investment officer at Mirae Asset Global Investments, the dominance of a handful of tycoons over the city’s economy is a reason to sell rather than buy. He says it’s strangling innovation, while the city’s businesses will struggle without being able to rely on a steady increase in mainland tourists. “It’s a very oligopolistic market structure which doesn’t encourage too much competition,” said Chadha. The stock market is “cheap, but it can go lower. You’re not seeing an improvement from a structural, fundamental perspective for us to say that this is bottoming.”
Interest rates
Chu says the city’s large budget surpluses will help it counter the effects of a slowing economy, while a weakening greenback and diminishing prospects for higher U.S. interest rates will relieve pressure on the Hong Kong dollar. The government is also able to relax some measures it introduced to cool the property market if the downturn continues, Chu says. Hong Kong sits on estimated fiscal reserves of US$111 billion. Traders are pricing in zero chance the Fed will raise rates at its meeting next week, while the first month with at least even odds for a boost is December. Secondary residential prices are stabilizing after mortgage rates eased since March. “Although it’s gloomy and the economic outlook is weak, it may not be as bad as people would have expected,” Chu said. “The negatives are moderating now.” Bloomberg
8 Business Daily Friday, April 22 2016
Greater China Monetary policy
PBOC to hold off on rate cut until year-end Goldman Sachs Group Inc. this week boosted its gross domestic product forecast for China.
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conomists now see China’s central bank keeping its main interest rate on hold until the fourth quarter, when policy makers will lower it to help safeguard a stabilizing expansion. The People’s Bank of China will hold its benchmark one-year lending rate at a record low of 4.35 percent through the third quarter before cutting it to 4.1 percent in the fourth quarter, economists said in an April 15-20 survey by Bloomberg. That compares with projections in the March survey for a reduction to 4.1 percent in the second quarter and another decrease to 3.85 percent in the fourth quarter. “Monetary policy has already done its job after last year’s intensive easing,” said Harrison Hu, chief Greater China economist at Royal Bank of Scotland Plc in Singapore, who now expects rates on hold all year versus earlier predicting a second-quarter cut. “The central bank needs to save the bullets for more difficult times ahead. Fiscal policy should take over and play a larger role this year in buttressing the real economy.” The world’s second-largest economy is showing new signs of stabilization after a series of PBOC interest rate cuts and stronger fiscal stimulus spurred a pickup in March. Still, improvement came with a buildup in borrowing that’s pushed debt to 247 percent of the economy and surging new credit issuance. Economists raised their fourth-quarter growth estimate by 0.1 percentage point to 6.5 percent. Their projections for 6.6 percent in the second quarter
People’s Bank of China headquarters.
and 6.5 percent in the third quarter were unchanged from the prior survey. Data Friday showed 6.7 percent first-quarter growth, matching forecasts for the slowest quarterly expansion since early 2009. Other reports showed new credit, industrial output, fixed-asset investment and retail sales picked up in March and beat analysts’ estimates.
Amid such improvement, the PBOC is signalling less of an appetite for expanding stimulus. Research bureau chief economist Ma Jun said in a media briefing this week that policy operations, while observing the need to keep supporting growth, will also pay attention to heading off macroeconomic risks, especially an over-expansion of corporate leverage.
PBOC Governor Zhou Xiaochuan said the economy had a good start to the year and the fundamentals will remain sound in the long run, according to statement on the PBOC website Saturday. He reiterated that China will pursue prudent monetary policy in a flexible and moderate way while keeping reasonable and ample liquidity. “As economic reflation unfolds,
Li Ka-shing telco push
Hutchison rules out more EU remedies to secure O2 bid The proposed combination could pave the way for consolidation in other European markets. Pamela Barbaglia, Julien Toyer and Andrés González
Ck Hutchison Holdings will not offer EU regulators further concessions to secure a takeover of Telefonica’s O2 and is ready to challenge a rejection of its bid, sources familiar with the matter said. The Hong-Kong-based group still hopes to persuade the European Commission to allow its 10.3 billion pound (US$15 billion) bid to become Britain’s biggest mobile operator, which will cut the number of players from four to three. But although talks with Brussels are still going on, Hutchison, controlled by Asia’s richest man, Li Ka-shing, will not offer any more concessions, two sources told Reuters. “Hutchison has gone out of its way to offer substantial remedies for the O2 deal. It will fight in court if EU regulators want to block the deal,” one of the sources said. The proposed combination could pave the way for consolidation in other European markets, including Italy where Hutchison and Vimpelcom agreed last year to merge their mobile units. However, Britain’s competition watchdog and telecoms
regulator both oppose the deal, and their views may carry extra weight when a debate is raging in the country about the power wielded by Brussels ahead of a vote on EU membership in June. The EU antitrust watchdog is likely to decide on the deal in the coming weeks, with a formal decision expected by May 19. O2’s owner Telefonica is increasingly worried it will have to abandon the deal, which values Britain’s second largest mobile firm at about 7.5 times earnings before interest, tax, depreciation and amortisation (EBITDA).
Although talks with Brussels are still going on, Hutchison, controlled by Asia’s richest man, Li Ka-shing (pictured), will not offer any more concessions, two sources said.
That is a price that private equity firms would not be able to afford, sources familiar with the matter said.
Telefonica’s Plan B
Telefonica, which bought O2’s assets in Britain, Germany and Ireland in 2005, is working on a contingency plan to cut debt and appease ratings agencies in case the deal with Hutchison falls through, one of the sources said. The source said a wide range of options were being looked at, but a fire sale of O2 or a dividend cut were off the table, although Telefonica would stick to a complementary dividend paid in shares and would not start paying it in cash as flagged.
The contingency plan is designed to provide enough breathing space for Telefonica to review other strategic options for O2, which as well as a sale could also include merging it with another UK player such
Key Points Hutchison not willing to offer new concessions -sources Company would challenge any block of O2 deal -sources Telefonica working on contingency plan to cut debt -source Dividend cut, O2 fire sale not part of debt plan –source
as Sky or TalkTalk. The proposed deal between Hutchison and Telefonica has led British regulators to voice concerns with the UK’s Competition and Markets Authority (CMA) and a call for the European Commission to prevent “long-term damage” to the UK mobile telecoms market. The CMA Chief Executive Alex Chisholm said last week that a merger was likely to lead to increased prices and/or a reduction in quality for UK consumers. But for Hutchison, it offers a unique opportunity to expand its European footprint and gain access to O2’s 22 million subscribers, after consolidating the German and Irish markets. Hutchison is prepared to challenge any EU veto in court, one of the sources said, and a block to the deal could even prompt the diversified conglomerate to get out of British telecoms, where it already owns the Three network. An EU veto was also likely to colour Hutchison’s future negotiations with European regulators, making it reluctant to negotiate remedies for a long-awaited mobile deal in Italy, one of the sources said. Opposition to a planned merger in Denmark between TeliaSonera and Telenor led them to abandon their plans last year, raising concerns that larger mobile telecom deals might also run into trouble. Another rejection would signal that EU Competition Commissioner Margrethe Vestager is taking a harder line than predecessor Joaquin Almunia, who had approved similar mobile consolidation deals in Austria, Ireland and Germany. Reuters
Business Daily Friday, April 22 2016 9
Greater China Shadow banking
monetary policy may gradually move toward a more neutralized stance” and momentum for monetary expansionary may moderate, China International Capital Corp. economists Eva Yi and Liang Hong, who expect rates on hold all year, wrote this week. “We continue to see the ‘green shoots’ of cyclical recovery.” Goldman Sachs Group Inc. this week boosted its gross domestic product forecast for China, with the 2016 gain now
“The central bank needs to save the bullets for more difficult times ahead” Harrison Hu, Chief Greater China economist at Royal Bank of Scotland Plc in Singapore
seen at 6.6 percent, up from 6.4 percent. UBS Group AG increased its 2016 forecast Friday to 6.6 percent from 6.2 percent. Deutsche Bank AG raised its second-quarter growth forecast Friday to 7 percent, up from 6.8 percent. Inflation also will firm up to a level closer to the 3 percent pace that policy makers target, according to the survey. Consumer prices will rise 2 percent in the second quarter, compared with a projected 1.7 percent increase in the prior poll. Producer price declines, which have continued for four years, will narrow to 4.3 percent versus the earlier estimate for 4.8 percent, the survey showed. Fiscal policy has recently supplemented monetary easing to help boost growth. Spending surged 20.1 percent in March while revenue only rose 7.1 percent, data showed Friday. Bloomberg News
In Brief
Beijing suspends registrations of finance firms The change is part of a campaign to clean up online finance that began April 14 and will end by January 2017.
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hina suspended new registrations of finance companies nationwide as authorities started a crackdown on Internet finance, business magazine Caixin reported, citing unidentified people familiar with the matter. Applicants with finance-related names or businesses can no longer simply register with local offices of the State Administration for Industry & Commerce, Caixin reported yesterday. Firms will instead first need approvals from financial regulators, it said. The change is part of a campaign to clean up online finance that began April 14 and will end by January next year, the magazine said. China Business News reported yesterday that the government’s efforts will last for a year. The central bank is leading the campaign, involving multiple government agencies, Caixin reported previously. Policy makers are cracking down on Internet-based unconventional financing that threatens to undermine financial stability and stoke social unrest after the failure of thousands of online peer-to-peer lenders, some suspected of fraud. Online financing added fuel to last year’s stock bubble.
‘Necessary’ step
While the government calls it a “special Internet finance crackdown,” the campaign also covers some offline financial businesses such as wealth management, according to China Business News. The initiative will focus on areas such as
third-party payments, peer-to-peer lending, crowdfunding and online insurance, according to the news service. “This is a necessary move,” said Zheng Chunming, a Shanghai-based analyst at Capital Securities Corp. “The government is cracking down on Internet finance as the business is developing too rapidly and more problematic platforms have emerged.” The tightening of registrations is intended to cover businesses including exchanges, fund and investment managers, private equity, online finance, peer-to-peer lending, crowdfunding, Internet insurance and payments, Caixin said. Cities including Shanghai, Shenzhen and Beijing had already halted registrations, it said. Bloomberg News
“The government is cracking down on Internet finance as the business is developing too rapidly and more problematic platforms have emerged” Zheng Chunming, Shanghai-based analyst at Capital Securities
Overcapacity
Stricter credit for new coal, steel projects China is planning to shed 100-150 million tonnes of crude steel capacity in the next five years. David Stanway and Ruby Lian
China will strictly control credit available for new capacity additions in the steel and coal sectors, both of which are suffering from price sapping supply gluts, the government said yesterday. Beijing will also boost state support for the export of steel and coal by encouraging firms to shift capacity abroad as part of its efforts to ease domestic overcapacity, according to a joint statement issued by the central bank and several other government bodies. It was unclear whether the government planned to encourage greater exports of the two commodities directly from China. The statement said China would “strengthen financing support for
enterprises ‘going out’”, and use loans, export credits and project financing to encourage coal and steel enterprises to build capacity abroad. “The details are in line with the government’s overall guidelines,” said Jiang Feitao, a steel researcher with the China Academy of Social Sciences. “China’s measures to boost the economy will definitely lift demand and this will be unfavourable for the overcapacity cut.” “I am also cautious about China’s move to shift overcapacity overseas as this doesn’t help, and just replaces exports,” he added. China has been blamed for flooding world markets with cheap steel, putting overseas producers at risk of closure, though analysts say cost disadvantages make a large surge in coal exports highly unlikely this year. China is planning to shed 100-150 million tonnes of crude steel capacity in the next five years, and a further 500 million tonnes of surplus coal production, in a bid to tackle huge capacity
overhangs that have saddled domestic firms with persistent losses. Local governments have been reluctant to force through bankruptcies at so-called zombie coal and steel enterprises amid fears of rising unemployment and a surge in non-performing loans. The government has earmarked 100 billion yuan (US$15.45 billion) to handle layoffs, and it is also promising to establish mechanisms to deal with mounting debt. The government said yesterday’s statement that it would speed up the handling of non-performing loans in the debt-ridden sectors, and extend direct financing to support their restructuring. It also would work to deal with possible default risks in the two sectors as soon as possible. It said banks would use a wide range of methods, including debt restructuring and bankruptcy settlements, to handle the problem, and it would also develop pilot projects aimed at securitising non-performing loans. Reuters
Financing
Huawei said planning US$2 billion bond Huawei Technologies Co., the world’s third-biggest smartphone maker, plans to sell at least US$2 billion of bonds amid a boom in financing for Chinese technology companies, a person familiar with the matter said. The firm, founded in 1987 by former army engineer Ren Zhengfei, plans to offer ten-year notes, according to the person, who asked not to be identified because the details are private. It is still in discussion with banks about the details and the size could change, the person said. Default
Baoding Tianwei Group fails to make payment Chinese power equipment firm Baoding Tianwei Group Co Ltd said it has been unable to make interest and principal payments on a 5-year bond due April 21. In a statement issued by the company and posted on China’s foreign exchange trading platform yesterday, the company said it would be unable to make the payment due to continuous losses and lack of funds. The issue in question is a 1.5 billion yuan (US$231.69 million) bond, on which the company is due to repay a total of 1.5855 billion yuan in interest and principal yesterday, according to the statement. Oil industry
Diesel exports surge China’s diesel exports advanced a second month to the highest on record as rising oil prices encouraged refiners to ship excess fuel overseas. The world’s largest energy consumer exported 1.25 million tons of the fuel last month, the most in records going back to 2003, data from the General Administration of Customs website showed yesterday. Shipments of gasoline and kerosene also rose to the highest in three months. A wave of exports from the country slowed earlier this year as the government’s decision not to cut retail prices when oil falls below US$40 a barrel made domestic sales more profitable, according to ICIS China, a Shanghaibased commodity consultant. Aviation
AVIC acquires Spain’s Aritex The Aviation Industry Corporation of China (AVIC) has acquired 95 percent of Spanish company Aritex, the Chinese state-owned enterprise said Wednesday. During a ceremony held in the north-eastern Spanish city of Barcelona, Aritex said the acquisition was completed thanks to cooperation between the two companies. “We opened a new period of challenges and opportunities in this company ... We want Aritex to be a leading provider at a world level,” said Aritex General Manager David Lopez, who got the remaining 5 percent of the Spanish firm.
10 Business Daily Friday, April 22 2016
Greater China RATINGS AGENCIES
Fitch says recovery masking financial risks
Standard & Poor’s and Moody’s Investors Service cut China’s longterm credit rating outlook to negative last month. Ye Xie
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lobal investors have cheered the recent signs of economic pickup in China. Andrew Colquhoun is unimpressed. Colquhoun, the head of Asia Pacific sovereigns at Fitch Ratings, sees the growth spurt, fuelled by a resurgence in borrowing, threatening to
wreak havoc on the financial system. “Whether we call it stabilization or not, I am not sure,” Colquhoun said in an interview in New York. “From a credit perspective, we’d be more comfortable with China slowing more than it is. We are getting less confident in the government’s commitment to structural reforms.” While global equity and commodity markets have rallied on signs that a surge in lending is helping stabilize the economy, the borrowing binge is adding to an already unsustainable debt level, according to Colquhoun. Eventually, the very thing that has been driving the recovery could end up derailing it, he said.
Standard & Poor’s and Moody’s Investors Service cut China’s long-term credit rating outlook to negative last month, citing the country’s surging debt burden and concern that the government won’t be able to implement reforms. Fitch affirmed China’s credit rating at A+, the fifth highest rating, in November, with a stable outlook. That is one grade lower than Moody’s and S&P.
Credit surge
China’s new credit increased a record 4.6 trillion yuan (US$712 billion) in the first quarter, surpassing the level of 2009 during the depths of the global financial crisis. Total debt from companies, governments and households was 247 percent of gross
KFC results
Yum sales jump in Mainland in Q1 China KFC restaurants, the majority of the 7,205 stores in the division, posted a 12 percent rise in same-store sales. Lisa Baertlein
Yum Brands Inc’s China sales accelerated faster than Wall Street expected in the first quarter, helped by Chinese New Year KFC chicken bucket promotions, marking an auspicious start to a year in which the company plans to spin off its China unit. The owner of the KFC, Pizza Hut and Taco Bell brands also said first-quarter profit topped analysts’ targets and raised its forecast for core business operating profit growth to 12 percent for the year from 10 percent. The China unit is Yum’s top profit-driver. Its spinoff has garnered intense interest, attracting high-profile potential suitors and sparking speculation that the deal will fetch a rich valuation. “Yum China will get a better valuation as same-store sales accelerate,” said Howard Penney, restaurant analyst at Hedgeye Risk Management. Sales at China restaurants open at least one year rose 6 percent in the first quarter, Yum said on Wednesday.
China KFC restaurants, the majority of the 7,205 stores in the division, posted a 12 percent rise in same-store sales while the smaller Pizza Hut Casual Dining posted a 12 percent decline. Analysts had expected a 5.5 percent gain in KFC China and a 3.7 percent drop at Pizza Hut China. Sales at China restaurants open at least one year had risen 2 percent for both the third and fourth quarters of last year, and analysts polled by research firm Consensus Metrix had expected Yum to report a 2.1 percent gain for the China region, where it is the biggest Western restaurant operator. Yum also said that the separation of the China business was on track for completion by year-end. Total revenue was steady at US$2.6 billion. Net income rose to US$391 million or 93 cents per diluted share from US$362 million or 81 cents per share a year earlier. Adjusted earnings per share of 95 cents topped the 83-cent Wall Street consensus as calculated by Thomson Reuters I/B/E/S. Shares of Yum have gained 13 percent so far this year, outperforming the S&P 500 as well as the stocks of both Starbucks Corp and McDonald’s Corp. Yum representatives declined to comment on the spinoff. Reuters
domestic product last year, up from 164 percent in 2008, according to data compiled by Bloomberg. Instead of focusing on reducing debt levels, Chinese policy makers choose to open up the lending tap
“We are getting less confident in the government’s commitment to structural reforms” Andrew Colquhoun, Head of Asia Pacific sovereigns at Fitch Ratings
whenever the economy slows, Colquhoun said. Such a stop-and-go policy weakens the credibility of President Xi Jinping’s administration as a reformer, he said. Gross domestic product rose 6.7 percent in the first quarter from a year earlier, in line with the government’s growth target of 6.5 percent to 7 percent for the full year. “It’s difficult to achieve both objectives” of reaching a 6.5 percent growth target and carrying out reforms, including slashing debt and reducing excessive production capacity, said Colquhoun. “Given the twists and turns in the management of the policy over the last year, I am no longer sure which objective has higher weight.” Bloomberg News
Business Daily Friday, April 22 2016 11
Asia Financial sector
Australian banks unveil reforms in wake of scandals Australia also faces the risk of losing its coveted AAA credit rating. Swati Pandey
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ustralian banks yesterday promised unprecedented reforms to protect consumers and boost transparency following revelations of misconduct and ahead of a federal election set to be fought partly over calls for tougher sector oversight. The package includes reviewing sales commissions, supporting whistle-blower employees and black-listing individuals for poor conduct, the Australian Bankers Association (ABA) said. The politically charged announcement is the first co-ordinated industry-wide step by Australia’s biggest banks to clean up their act in the wake of reputationally damaging probes into wealth mismanagement, insurance scams and benchmark interest rate rigging. “We are very conscious that there are issues out there that people are concerned about,” ABA Chief Executive Steven Munchenberg told reporters yesterday. “We are now responding to some of the current concerns.” Major lenders National Australia Bank, Commonwealth Bank, Westpac and ANZ Banking Group successfully pulled through the 2008 financial crisis but are now facing mounting criticism over misconduct even as they continue to deliver record profits. The plan announced yesterday, parts of which are subject to regulatory approval or legislative reform, would be overseen by an independent expert, the ABA said, although it gave no details about specific measures that would be taken. The review would also look at the sensitive issue of remuneration, sales targets and incentives that have encouraged misspelling of financial products, Munchenberg said. It comes as political pressure is piling on Prime Minister Malcolm Turnbull to order a high-powered
very concerned about the grief and loss that individuals have suffered,” Turnbull told reporters. He said he told executives there had to be a “demonstrated change in the culture of banks” to rebuild community trust.
judicial inquiry into financial industry misconduct as he campaigns for a federal election in July. Turnbull and the ABA have rejected calls from the opposition Labour Party for a Royal Commission into the industry, saying the existing watchdog and self-regulation are enough. Banking analysts say a Royal Commission could open a can of worms and expose top executives, who have so far avoided direct responsibility, to intense scrutiny about what they knew about malpractices in their firms. Turnbull and Treasurer Scott Morrison met with bank bosses earlier yesterday to discuss the reforms. “There have been some failures, we acknowledge that ... and we are
Under pressure
The banks’ announcement came a day after Turnbull’s conservative government announced reforms to beef up the powers of the markets watchdog, with the industry itself asked to foot the bill of A$127 million (US$99 million).
Key Points Banks to review product sales commissions, remove bad apples To also support whistle-blower employees Plan to take effect immediately Australian shares among worst performers on the index
Asked on Melbourne radio whether he believed the banks’ assurances that those costs would not be passed on to customers, Labour leader Bill Shorten said: “Even a crocodile wouldn’t swallow that.” The political debate is a new headache for Australia’s banking chiefs who are already being forced to respond to investor concerns about rising bad debts and slowing profit as the commodities super cycle plumbs new lows. Australia also faces the risk of losing its coveted AAA credit rating, which could raise the banks’ costs of doing business. All this is elevating the level of nervousness for investors, particularly retail shareholders, Morningstar analyst David Ellis said. “We’ve not seen a big bounce in bank (shares). It’s just an unrelenting flow of bad news which is having an effect on the share price,” he said. The four big banks are among the top losers on the benchmark share index so far this year, down between 6 and 13 percent. Reuters
El Niño
Vietnam coffee exports could drop 25 pct in 2016 Farmers in the Central Highlands coffee belt have been hit by the widening impact of the worst drought in three decades. Ho Binh Minh
Vietnam’s coffee exports could fall 25 percent in 2016 to their lowest in a decade at 1 million tonnes (16.67 million 60-kg bags), hit by drought, lower yields from old trees and increased output from domestic roasters, a senior industry official said. Tighter supply from Vietnam, the world’s largest producer of robusta beans, coupled with concerns over lower output in Brazil and
Colombia, could boost global coffee prices. ICE July robustas settled up US$13, or 0.8 percent, at US$1,578 per tonne on Wednesday. The contract has gained around 3 percent so far this year. “Coffee processing in the country serving a higher number of coffee shops, plus more newly registered roasting businesses, will bring down the country’s coffee bean exports,” said Luong Van Tu, chairman of the Vietnam Coffee and Cocoa Association. He added that local consumption now accounted for 10 percent of Vietnam’s output, up from 5 percent in 2006, when the Southeast Asian nation exported 981,000 tonnes of coffee. Apart from domestic roasters, foreign firms including Nestle have established processing facilities in Vietnam.
Nestle alone buys up to a quarter of Vietnam’s coffee. Farmers in the Central Highlands coffee belt have been hit by the widening impact of the worst drought in three decades brought on by the El Niño weather pattern. The October 2016/September 2017 coffee crop could drop 30 percent if the drought intensifies in the Central Highlands during April, Tu told Reuters. The region produces 80 percent
Key Points Vietnam’s coffee exports seen down at 1 mln T in 2016 Domestic consumption now takes 10 pct of output Lower supply in top producers to support prices -ICO
of the country’s coffee. Output from the key growing province of Daklak is expected to drop 30 percent. Tu said lower yields from old trees, which account for 35 percent of Vietnam’s 650,000 hectares of coffee, will contribute to the decline in output. Dryness brought on by El Niño could also cut supply from Colombia in the second
half of 2016, the International Coffee Organization said in its March report. “Drought is also affecting supply expectations in Vietnam and (the state of) Espirito Santo in Brazil, which could lend support to robusta prices in the near future,” the report said. But BMI Research, a Fitch Group company, has forecast higher 2016/2017 output in Vietnam, Brazil, Colombia, Ethiopia and Mexico despite concerns over El Niño. Reuters
12 Business Daily Friday, April 22 2016
Asia Rating dilemma
Australia’s membership of AAA‑club carries hidden costs Pleasing the ratings agencies seriously constrains the government’s ability to borrow to fund infrastructure. Wayne Cole and Cecile Lefort
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t is an exclusive club of just 10 members. But what happens when the cost of staying in starts to outweigh that of leaving? That is the dilemma Australia’s conservative government faces over its coveted triple-A credit rating. With an election set to be called for July 2, the rating has become a millstone, seemingly more important politically to preserve than spending on desperately needed infrastructure.
It was front page news when ratings agency Moody’s warned next month’s budget would have to raise taxes as well as cut spending to rein in deficits and safeguard its highest rating. This was not welcome advice for Prime Minister Malcolm Turnbull, who has pledged not to raise the overall tax burden. His party has spent years demonising debt and won power largely by painting the Labour opposition as profligate spenders who tipped the country into a “debt and deficit disaster”. Yet for the vast majority of Australians a sovereign credit downgrade would mean next to nothing. Even for the government the impact on borrowing costs would be marginal. “There is not much difference between AAA and AA,” said James Alexander, head of fixed income at
Nikko Asset Management in Sydney. “In many ways, it has become a political issue. No one wants to be the one where the AAA rating has gone on their watch.” For in a world where so many countries were downgraded so sharply in the wake of the global financial crisis, double A is the new triple. That is especially the case when many central banks have been scooping up their own nation’s debt. Spain, for instance, is just BBB+ yet thanks to buying by the European Central Bank can borrow for a decade at 1.47 percent. It costs Australia 2.57 percent for the same privilege. Peter Jolly, head of research at National Australia Bank, estimated a one-notch ratings downgrade would add just a couple of basis points to the current cost of debt. “Australia is not getting a big advantage in terms of funding costs,” Jolly
said, noting neighbour New Zealand paid much the same in global markets but was rated two notches lower.
Opportunity costs
While the financial toll of losing the triple-A may not be that large, the government’s obsession in trying to keep it does bear substantial opportunity costs. Pleasing the ratings agencies seriously constrains the government’s ability to borrow to fund infrastructure, even though interest rates are the lowest in human memory. Australia may be the world’s 12th-largest economy, but its out-ofdate public transport and Internet lags far behind peers. Traffic congestion cost around A$16 billion to businesses and residents last year, according to official estimates. The Internet is even slower than in emerging countries such as India, with a U.S. study ranking Australian connection speeds 48th in the world. Australia would seem to have plenty of scope to fund needed spending through borrowing. General government gross debt is around 37 percent of gross domestic product (GDP), compared to an average of 117 percent for the Group of Seven rich nations. Even that paragon of fiscal rectitude, Germany, has debt of 68 percent. Indeed, some fund managers would be more than happy if Australia borrowed more. “A credit downgrade would not be a big deal. There is not enough Aussie bonds on supply and Australia is one of the few countries with a positive yield,” says Kumar Palghat, managing director of fund management company Kapstream Capital in Sydney. Instead, Palghat, whose fund holds around 10 percent of its A$10.5 billion assets in Australian government and state-bonds, said the government should take advantage of the lowest borrowing rates in human memory and spend on infrastructure. “A deficit is not a bad thing as long as you borrow money to invest, versus borrowing to spend.” Reuters
Investment trends
Hunger for pricey Indonesian, Philippine stocks Neighbouring Malaysia and Thailand have lower valuations. Nichola Saminather
Indonesia and the Philippines are the two South East Asian stock markets benefiting most from investors’ return to emerging markets this year, with foreign funds undeterred by them becoming the region’s most expensive markets. “We’re not so concerned about valuation,” said Sean Taylor, Asia Pacific chief investment officer at Deutsche Asset Management. “We are looking for strong business models which can withstand the headwinds.” So far investors have reaped a 13-percent gain since the
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start of the year in Indonesia, and a 5-percent gain in the Philippines, versus the MSCI emerging Asia index’s rise of 3 percent. Indonesia also compares well against the MSCI Emerging Markets index, whose 7.7 percent gain this year has been largely fuelled by Latin America’s comeback, after the index fell 17 percent in 2015. Like the Philippines, Indonesia has a consumption-led economy, whose strong domestic demand cushions the impact of slow global growth. They are also blessed with governments that are spending big on infrastructure. “Major global macro drivers, such as the U.S. Federal Reserve, U.S. dollar and oil prices, are likely to be headwinds as the year progresses, notwithstanding sequential improvement in China’s economic momentum,” Deutsche’s Taylor said. “Comparatively, Philippines and Indonesia are more attractive due to their private consumption driven economies.” Foreign buying has helped make them the most expensive major share markets in Southeast Asia, with prices
at 2.97 and 2.82 times book value respectively, according to Thomson Reuters Datastream. While high in absolute terms, investors reckon both markets can go further as they remain below their March 2015 peaks, when Indonesia’s market was 3.6 times its book value and the Philippines stood at 3.39 times.
Indonesia liberalises, Philippines votes
So far this year, according to Credit Suisse data, foreign investors have bought US$427 million of shares in Indonesia, after selling US$2.7 billion in 2015. Indonesia’s push to open previously closed sectors, such as telecom, power and business services, to foreign investors has helped make it more attractive, Blackrock said in a March 30 note. Indonesian companies that fit these themes have seen strong growth. Conglomerate PT Astra International has surged 27 percent this year, PT Telekomunikasi Indonesia has risen 18 percent and cement manufacturer Holcim Indonesia is up 16 percent. T r e n d s f av o u r t h e
Philippines after foreigners’ net sales of US$1.2 billion in 2015, but it was still showing net sales of US$7 million for the year so far. Investors will want to see whether whoever wins next month’s presidential election can keep the economy performing at the high levels set by outgoing president Benigno Aquino. “There is a risk that growth could taper off immediately after the election, particularly in 2017, if the new administration advocates sharp policy changes,” Joseph Incalcaterra, economist at HSBC, wrote in a note last month. Amy Leung, research analyst for emerging and Asian equities at Newton Investment Management, a subsidiary of BNY Mellon Investment, saw compelling fundamentals favouring the Philippines. Newton is overweight Philippines snack food company Universal Robina Corp and conglomerate GT Capital Holdings Inc due to their growth potential.
Cheaper for a reason
Neighbouring Malaysia and Thailand have lower
valuations. Prices are at 1.7 times book value from 1.99 a year ago in Malaysia, the region’s cheapest major market, and 1.97 from 2.2 in Thailand - but they are cheaper for several reasons. In Malaysia, rising inflation is limiting consumption, and the scandal surrounding state fund 1Malaysia Development Berhad and a change of central bank governors in May are adding to uncertainty, Deutsche’s Taylor said. Thailand is in danger of losing out as several foreign companies are moving manufacturing facilities from Thailand to other countries, like Vietnam, and demand for some major export items, such as hard disk drives, is dwindling, according to Phil Lee, head of Asia-Pacific research at Mirae Asset Management. Hi gh h o u s eh o l d d ebt levels are a problem common to both Malaysia and Thailand, according to Kum Soek Ching, head of Southeast Asia research at Credit Suisse Private Banking in Singapore, and that has added to foreign investors’ caution. Reuters
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Business Daily Friday, April 22 2016 13
Asia In Brief Stocks
Malaysia says US$1.5 billion sukuk oversubscribed
Currency impact
Japan Inc sees profits holding up despite yen Thirty-nine percent of companies expect operating profit to be flat in the financial year that started April 1. Stanley White
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ost Japan companies expect to maintain or see a small increase in operating profits this financial year, a Reuters poll showed, shrugging off a sharp rise in the yen due to an expected pick-up in consumer spending and business investment. But the Reuters Corporate Survey also found that companies are against any further expansion of the Bank of Japan’s negative interest rate policy, suggesting some disillusionment with Prime Minister Shinzo Abe’s efforts to reflate the economy, known as “Abenomics”. Written comments from companies participating in the survey,
Key Points Operating profits seen flat or a bit higher this business year Companies see positive signs in capex, consumer spending Firms roundly oppose expansion of negative rate policy
conducted April 1-15 for Reuters by Nikkei Research, suggest optimism about strengthening demand as well as a rosier outlook for some sectors such as tourism and construction ahead of the 2020 Tokyo Olympics. “Our customers’ manufacturing facilities are old and we expect companies to continue with capital expenditure to replace these facilities,” a manager at an electronic equipment maker wrote. “You could say things are looking up.” Thirty-nine percent of companies expect operating profit to be flat in the financial year that started April 1, while 30 percent see a slight rise and another 2 percent see a considerable increase. The remainder see declines in earnings. Around 510 big and mid-size firms were polled, with managers responding on condition of anonymity. Of the firms surveyed, 245 responded to questions about operating profit. The outlook comes despite a sharp 10 percent appreciation in the yen this year to around 109 per dollar, near a 17-month high, as investors seek the currency as a safe haven due to worries about falling commodities and China’s slowing economy. A stronger yen eats into earnings income for Japan Inc’s many exporters. “We cannot ignore the impact that currency moves have on profits, but compared to a few years ago when the yen was at 70 or 80 per dollar, Japanese companies are more resilient,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
The poll was conducted before a series of earthquakes struck over the weekend in Kumamoto, an important manufacturing hub in southern Japan. Some economists say Japan is likely to quickly shake off the impact, as firms are already starting to resume production in the area. After contracting in the last quarter of the year, Japan’s economy is forecast to have narrowly avoided a recession in the January-March period. Seeking to kick-start the economy and pull it out of two decades of deflation, the central bank stunned investors in January with its adoption of a negative 0.1 percent interest rate, charged on a small portion of commercial bank reserves. It has left open the option of deeper negative interest rates, but 78 percent of firms said they were not in favour of such a move. “Monetary policy has reached its limit,” wrote a manager at a chemicals company. “Easing policy further would only reduce trust in Japanese government debt.” The Bank of Japan argues that negative rates have pushed down borrowing rates, which will stimulate economic activity, but 65 percent of firms said the move had no impact on their funding for capital expenditure. Its next two-day policy meeting ends on April 28. Policymakers will likely debate the possibility of easing monetary policy further, sources familiar with their thinking told Reuters this month. Reuters
Ex-deputy comments
Bank of Japan must cut key rate to -1.0 pct to beat deflation Some economists say negative interest rates have backfired, because it reinforces the perception that the central bank does not have much leeway to expand government debt purchases further. Minami Funakoshi
The Bank of Japan (BOJ) must lower its minus 0.1 percent interest rate to about minus 1.0 percent for the country to conquer deflation, a former deputy governor at the central bank said yesterday. The BOJ should make negative interest rates its main policy tool because it is difficult to further expand government debt purchases due to losses the BOJ is incurring on these investments, former BOJ Deputy Governor Kazumasa Iwata told reporters.
Households and commercial banks have criticised the BOJ’s negative rate policy for placing an excessive burden on savers and the financial system, underscoring the daunting challenge faced by the central bank in its quest to cast off deflation. “For Japan to achieve its mission of completely escaping deflation, the BOJ has to consider further expansionary policy,” mainly through further lowering the interest rate, said Iwata, now president of the Japan Centre for Economic Research. The BOJ in January decided to
begin charging 0.1 percent interest on some bank reserves parked with the institution, in a bid to kick-start the economy and pull it out of two decades of deflation. The BOJ’s next two-day policy review ends on April 28. Policymakers will likely debate the possibility of easing monetary policy further at this meeting, sources familiar with their thinking told Reuters earlier this month. BOJ Governor Haruhiko Kuroda has indicated that expanding purchases of exchange-traded funds (ETFs) could be one option to lower risk premiums and try to ignite inflation. Iwata, however, said it is not “favourable” for central banks to buy ETFs when stock market prices are relatively good. Under the current programme introduced in April 2013, the BOJ buys 3.3 trillion yen of ETFs annually, much smaller than the 80-trillion-yen per year in purchases of government bonds. Reuters
Malaysia said yesterday that it had successfully priced US$1.5 billion worth of Islamic bonds, or sukuk, which was oversubscribed by 4.2 times with the bulk of the take-up from Asian accounts. The sukuk was split between a US$1 billion 10-year tranche and a US$500 million 30-year tranche at a rate of 3.179 percent and 4.080 percent respectively, the ministry of finance said in a statement. The deal attracted orders of over US$6.3 billion from a combined investor base of over 195 accounts, the statement said. Asian accounts took two-thirds of the 10-year tranche and over half of the 30-year tranche. Tax collaboration
Panama-Japan aim to exchange information Panama and Japan agreed on an early start of talks aimed at creating a bilateral framework for exchanging taxation-related information, Panamanian President Juan Carlos Varela and Japanese Prime Minister Shinzo Abe said on Wednesday. The announcement comes after the leak of thousands of confidential documents from a Panamanian law firm earlier this month highlighted Panama’s failure to cooperate in international efforts to clamp down on tax evasion by the rich and powerful. “Let me reconfirm the Panamanian government’s responsible engagement with and commitment to transparency in the financial system,” Varela told. Hijackings
Indonesian coal ports ban ships to Philippines Authorities from at least two Indonesian coal ports have blocked ships from leaving to the Philippines due to security concerns after a spate of ship hijackings in the southern Philippines, an Indonesian government official said on Wednesday. The growing frequency of maritime attacks by Islamist militants is for the first time affecting coal trade between the Southeast Asian neighbours. Indonesia, the world’s largest thermal coal exporter, supplies 70 percent of the Philippines’ coal import needs. Results
Sony cuts FY 2015 profit estimate Japanese electronics firm Sony Corp cut its profit estimate by 9.4 percent for the financial year that ended in March, as slowing global smartphone sales dented demand for its camera modules. Sony said yesterday it is estimating an operating profit of 290 billion yen (US$2.64 billion) for the year, down from a previously estimated 320 billion yen, citing weaker demand for camera modules. The company booked an impairment loss of 59.6 billion yen as it wrote down the value of the camera module business to match a weaker sales prospect.
14 Business Daily Friday, April 22 2016
International In Brief Quake-hit
Ecuador announces drastic economic measures Ecuador announced drastic economic measures late Wednesday, including a hike in some taxes and mandatory wage contributions, to deal with the aftermath of the devastating earthquake that killed more than 500 people and injured over 5,000. Saturday’s 7.8-magnitude quake was the worst to hit the South American country in decades. But aside from the staggering human cost, the quake comes as a big economic blow to oil-producing Ecuador, which has already taken a huge hit from the drop in global crude prices. President Rafael Correa, in an evening address to the nation, estimated that rebuilding could come to as much as US$3 billion and knock two or three points off the country’s GDP. Real estate
U.S. home sales rebound U.S. home resales rebounded more than expected in March as supply improved, suggesting the housing market recovery remained intact despite signs that economic growth probably stalled in the first quarter. The sales surge at the start of the spring selling season was a sign of confidence in the economy, and the momentum is expected to be sustained given low mortgage rates, recent stock market gains and a firming labour market, analysts said. “There cannot be too much wrong with the economy if consumers keep buying new homes. It shows confidence,” said Chris Rupkey, chief economist at MUFG Union Bank in New York. Target missed
U.K. retail sales fall more than forecast U.K. retail sales posted their biggest monthly decline in more than two years in March as Britons bought less of everything from food to clothing. The volume of sales excluding auto fuel fell 1.6 percent from February, the most since January 2014. Total sales dropped 1.3 percent. Both far exceeded the modest declines forecast in a Bloomberg survey. The Office for National Statistics, which published the data yesterday, also revealed that public-sector borrowing overshot official forecasts in the latest fiscal year, and debt as a share of the economy rose. Procedures audit
Watchdog recommends Fed improve safeguard data The Federal Reserve should beef up its controls over embargoed economic information given to news outlets, the U.S central bank’s internal watchdog said on Wednesday in a 38-page report dated April 15 and released publicly on Wednesday. The audit of the central bank’s procedures by the board’s Office of Inspector General covered a period both before and after the Fed relocated the site it uses for releasing sensitive material, and the auditor noted “substantial improvements were planned before we began our review and that many were implemented during our review.”
Trade deal
Survey shows plunging public support for TTIP Only 17 percent of Germans believe the Transatlantic Trade and Investment Partnership is a good thing.
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upport for the transatlantic trade deal known as TTIP has fallen sharply in Germany and the United States, a survey showed yesterday, days before Chancellor Angela Merkel and President Barack Obama meet to try to breathe new life into the pact. The survey, conducted by YouGov for the Bertelsmann Foundation, showed that only 17 percent of Germans believe the Transatlantic Trade and Investment Partnership is a good thing, down from 55 percent two years ago. In the United States, only 18 percent support the deal compared to 53 percent in 2014. Nearly half of U.S. respondents said they did not know enough about the agreement to voice an opinion. TTIP is expected to be at the top of the agenda when Merkel hosts
Obama at a trade show in Hanover on Sunday and Monday. Ahead of that meeting, German officials said they remained optimistic that a broad “political agreement” between Brussels and Washington could be clinched before Obama leaves office in January. The hope is that TTIP could then be finalised with Obama’s successor. But there have been abundant signs in recent weeks that European countries are growing impatient with the slow pace of the talks, which are due to resume in New York next week. On Wednesday, German Economy Minister Sigmar Gabriel described the negotiations as “frozen up” and questioned whether Washington really wanted a deal.
‘In the United States, only 18 percent support the deal compared to 53 percent in 2014’
The day before, France’s trade minister threatened to halt the talks, citing a lack of progress. Deep public scepticism in Germany, Europe’s largest economy, has clouded the negotiations from the start. The Bertelsmann survey showed that many Germans fear the deal will lower standards for products, consumer protection and the labour market. It also pointed to a dramatic shift in how Germans view free trade in general. Only 56 percent see it positively, compared to 88 percent two years ago. “Support for trade agreements is fading in a country that views itself as the global export champion,” said Aart de Geus, chairman and chief executive of the Bertelsmann Foundation. In the United States, leading candidates for the presidency, including Republican Donald Trump and Democrat Bernie Sanders, have been sharply critical of free trade deals, although most of their ire has been focused on the Trans-Pacific Partnership (TPP) pact, which has already been negotiated and is awaiting a vote in Congress. Reuters
Freeze deal
Nigeria plans shuttle diplomacy on oil Africa’s top oil producer has been at the forefront of attempts to agree a production freeze. Felix Onuah
Nigeria will hold talks with Saudi Arabia, Iran and other oil producers by May, hoping to reach a deal on an output freeze at the next OPEC meeting in June, the West African country’s oil minister told Reuters. A deal to stabilise oil output by OPEC and non-OPEC producers fell apart on Sunday after Saudi Arabia demanded that Iran join in despite calls on Riyadh to save the agreement and help prop up crude prices. “I will be doing a lot of shuttle diplomacy with the (president) ... of OPEC to see how we can engage Saudi more, engage Iran more,” Oil Minister Emmanuel Ibe Kachikwu said in an interview late on Wednesday.
“We will be doing a lot of consultations before the June (OPEC) Vienna meeting,” he added. “I hope we can get there,” Kachikwu said, when asked whether there was a chance of a freeze when the Organization of the Petroleum Exporting Countries holds its June meeting. He said he hoped non-OPEC member Russia would support such an agreement, after Moscow said on Wednesday it was prepared to push output to new historic highs following threats made by Saudi Arabia to flood markets with more crude. Nigeria, Africa’s top oil producer, has been at the forefront of attempts to agree a production freeze as it suffers from a slump in oil revenues. Brent crude is trading at about US$45 a barrel, down from levels as high as US$115 hit in mid-2014. Kachikwu said a failure in Vienna would encourage more producers to flood the market.
“Saudi, which produces 10.2 million (barrels per day) now, can go to 11.2 million. Russia is doing about 10.5 million and has the capacity of about 12 million so if everybody opens up ... there will be much more surplus,” he said. Iran has refused to participate in any freezing of production levels as Tehran wants to ramp up output after years of Western sanctions. “Iran is pumping more and there will be more if others take a cue,” he said. The focus of Nigeria’s shuttle diplomacy would be to convince Saudi Arabia and its arch foe Iran to agree on a deal. “We need to get them realising that both parties can exist in this organisation happily and look at common interest,” Kachikwu said. He added that Nigeria’s oil production would remain below 2 million bpd due to the closure of a Shell pipeline after an attack by unknown gunmen. Repairs are expected to last until June. “My intention was to produce over and above 2.2 million (bpd) this year and be able to hit 2.5 million,” Kachikwu said, adding that any extra production would go to local refineries, not exports. Reuters
Business Daily Friday, April 22 2016 15
Opinion Business Wires
The Jakarta Post Bank Indonesia’s (BI) decision to make its seven-day repo rate its new official benchmark starting on August 19 may support the government’s push for banks to bring interest rates for their customers down to single digits by the end of the year, the Financial Services Authority (OJK) has said. OJK chairman Muliaman Hadad said the office would adjust some policies to support the reduction in interest rates as a follow-up measure to the monetary policy change at the central bank last week.
New Zealand Herald New Zealand set a new annual migration record for a 20th month in March, as more people moved across the Tasman from Australia. New Zealand had net migration of 67,600 in the 12 months through March 31, Statistics New Zealand said. Migrant arrivals rose 9 per cent to 124,100 while departures slid 2 per cent to 56,400. Net migration from Australia was a gain of 1,900, the highest since August 1991 and the sixth straight month of annual gains. Record migration has helped underpin economic growth, with the economy expanded at a 2.3 per cent annual pace in the fourth quarter of last year, boosting demand for housing, vehicles, services and retailing.
The Star Malaysian palm oil futures rose for a third consecutive day on Wednesday, tracking a rally in alternative vegetable oils to reach a near two-week high. Palm has gained 1.7 percent so far this week after falling for two weeks. The palm oil contract for July delivery on the Bursa Malaysia Derivatives Exchange rose 0.8 percent to settle at 2,709 ringgit (US$701) per tonne at the end of the trading day. It earlier hit an intraday peak of 2,733 ringgit, the highest since April 7. Traded volumes were 51,945 lots of 25 tonnes each, higher than the 2015 daily average of 44,600.
The Times of India Around 70 per cent of India Inc feels that at least one form of unethical conduct is justified to meet financial targets even as the perception of bribery and corruption being widespread in the country has gone down over the years, says a report. According to findings tax advisory firm EY ‘14th Global Fraud Survey’, there is a gradual but positive shift in the perception of bribery and corruption being widespread in the country among 58 per cent respondents in India. This is less than 67 per cent and 70 per cent observed in 2014 and 2012, respectively. “The government has already undertaken significant steps to augment transparency and crackdown corruption which is reflected in the survey,” EY noted.
Investors overrate chances of a crash tenfold
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or those of you still labouring under the efficient markets hypothesis here is a tidbit: investors overestimate the chances of a stock market crash by a factor of about 10. That’s the upshot of a new analysis of data collected by Nobel Prize winner Robert Shiller over decades showing that individual investors, and to a lesser extent institutional ones, wildly overrate the chances of a 1929- or 1987-style crash. Investors as a whole during the period 1989-2015 assigned a median probability of 10 percent of a crash in the U.S. over the next six months, according to the study (Follow QR code below to reach the paper). The mean, amazingly, was 19 percent. Of course these are the same individual investors whose expectations of a crash grow if an earthquake happens near where they live. It seems a wonder there isn’t panic selling every time there is a solar eclipse. Individual investors in 2015 put the chances of a crash in the next six months at about 20 percent, with institutional investors coming in slightly below that. “We find evidence that investors use recent market performance to estimate probabilities about a crash,” Shiller, his Yale colleague William Goetzmann and Dasol Kim of Case Western Reserve University write in a working paper. “We also find that the press makes negative market returns relatively more salient and this is associated with individual investor probability assessments of a crash.” Looking at the entire history of daily movements in the Dow Jones Industrial Average and assuming a coin-flip-like distribution of returns, the authors estimate that the actual chance of a crash over a six-month period is about 1 percent. The study looked at a survey Shiller has been carrying out which quizzes individual and institutional investors about a variety of topics, including asking them to assign a probability to the chances of a 1929- or 1987-type crash over the coming six months. One thing is clear, investors read about what is happening and are influenced by recent events. As you might expect, investor expectations of a coming crash shifted higher in 2008 and have remained stubbornly high, even as the VIX volatility index, which is sometimes used as a shorthand for risk, has trended lower. Events in 2008 and 2009 were both massively covered and highly memorable, and possibly have had a lasting impact on expectations.
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James Saft Reuters columnist.
traded as if the people who own it think it quite likely that we will soon have a crash. My supposition, and this is far outside the bounds of the study, is that official support of financial markets, by governments and central banks, has ‘forced’ professional, benchmarked investors to track asset values higher while still leaving many worried about the fundamentals. It is also quite true that it is impossible to actually calculate the chances of a crash, past distribution being no certain guide to future outcomes. Another purpose of the study was to look at the relationship between how the media covers financial events and how investors view the likelihood of a crash. Interestingly, individual investor responses to the survey are “significantly associated” with negative media coverage of the financial markets during downturns, but not with positive coverage during “booms”. Institutional investors, as you would hope, are not influenced in this way by the media. To test whether investors are irrationally influenced by unrelated events to “read across” higher chances of a crash in financial markets, the study looked at the responses of investors who lived within 30 miles of a moderate earthquake, one which was big enough to be upsetting but not an economic force which would drive the overall stock market. These quakes, of up to 5.5 magnitude, do have a positive association with investor crash probabilities, but only for individuals. In other words, one bad thing happening makes people think something else bad might happen, even if there is no possible relationship. This is an example of the availability heuristic, or bias, the tendency described by Amos Tversky and Daniel Kahneman of people to use easily remembered information to make complex judgements. To be sure, individual investors could turn out to be right and crashes may have simply been happening less often than they “should”. Still, the easiest lesson may be: don’t be an individual investor, but do play poker with them if you get the chance. Then bluff, especially after they suffer a bad beat. Reuters
It is also quite true that it is impossible to actually calculate the chances of a crash, past distribution being no certain guide to future outcomes
The volcano god is angry
Less clear is what all of this means for investor behaviour. Certainly the U.S. stock market has not
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16 Business Daily Friday, April 22 2016
Closing Luxury market
Swiss watch exports plunge in Hong Kong
Global exports of Swiss watches plummeted in March, amid a dramatic contraction of sales in main markets Hong Kong and the United States. Exports fell 16.1 percent from March 2015 to 1.5 billion Swiss francs (US$1.5 billion, 1.4 billion euros), the Federation of the Swiss Watch Industry (FHS) said. In 2015, watch exports recorded their first fullyear decline since 2009, contracting by 3.3 percent with weakening Hong Kong demand already the main factor. And FHS said the downward trend was accelerating. The
numbers last month, it said, were “the lowest March figures since 2011.” “The mood amongst watch retailers seems to have deteriorated in recent months,” Citi Research analyst Thomas Chauvet said. The slump came as top Swiss watch market Hong Kong saw one of its sharpest downturns, slumping a full 37.7 percent compared to March a year earlier. The Hong Kong watch market has steadily shrunk since the 2014 pro-democracy Umbrella protests chased away the wealthy Chinese tourists who previously travelled there in droves to purchase luxury timepieces. AFP
Financial health
Asian banks’ bad debt pile highest since global financial crisis Last year, the total bad debt pile for all listed and unlisted Chinese banks stood at US$297 billion.
Sumeet Chatterjee and Patturaja Murugaboopathy
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ad debts at Asian banks have climbed to their highest since the global financial crisis and the trend will likely worsen as regional economies battle against China’s slowdown and volatile oil and commodities prices, a Reuters data analysis shows. The bad loans pile at 74 major listed Asian banks, excluding Indian and Japanese banks, reached US$171 billion at the end of 2015, the survey of banks showed, the highest since at least 2008. Non-performing loans (NPLs) jumped 28 percent from a year earlier, nearly twice the growth in 2013. Indian and Japanese banks were not included as their fiscal year ends in March.
With economic growth in the region slowing, analysts expect the asset quality of Asian lenders will continue to deteriorate as banks start publishing quarterly earnings, forcing them to make write-downs that will hurt profit and depress valuations. Asian central banks have cut interest rates to ensure abundant liquidity, but uncertain economic growth and weak export demand will likely lead to more loan defaults in the near term, analysts and bankers said. “We expect asset quality to weaken and bad loans to increase ... the key factor we see is Asia entering into more challenging phase of the credit cycle,” said Gene Fang, Moody’s associate managing director for financial institutions group. “In the recent past, we saw relatively strong growth and low interest rates, which encouraged loan growth and higher leverage. But growth has
“In the recent past, we saw relatively strong growth and low interest rates, which encouraged loan growth and higher leverage” Gene Fang, Moody’s associate managing director for financial institutions group
now weakened, most significantly in China, which is impacting the rest of the region.” The average ratio of bad loans to gross credit for 29 Asian banks for
which this data is available stood at 1.9 percent last year - the highest since 2009, the survey showed. In 2008, the ratio stood at 2.5 percent. In China, where the economy grew 6.9 percent in 2015 - the weakest pace in a quarter of a century - bad loans surged to a decade-high at the end of December, with Moody’s expecting continued asset quality pressure over the next 12-18 months. Top Chinese lenders including Industrial and Commercial Bank of China, Agricultural Bank of China and Bank of Communications, will report March quarter results next week. Last year, the total bad debt pile for all listed and unlisted Chinese banks stood at US$297 billion. Japanese banks’ average ratio of bad loans to gross credit stood at 2.5 percent at the end of last year, a slight improvement from 2.7 percent at the end of 2014, Thomson Reuters data showed. In India, where the central bank is forcing a debt clean-up, total distressed debt surged nearly a third between September and December to US$120 billion. The March quarter will probably show a further increase, analysts said. Thailand’s fourth-largest bank Kasikornbank, which published quarterly results on Wednesday, expects the ratio of non-performing loans to total loans to rise to 3.5-3.6 percent this year from 2.7 percent last year, Admit Laixuthai, a senior vice president at the bank, told Reuters. “NPLs for the whole banking system are likely to rise further this year as the overall economy remains weak I can’t tell when NPLs will peak. It depends on the economic situation.” Reuters
Stock link
Forex
Markets reaction
Hong Kong-Shanghai valuation gap narrows
Mainland banks’ foreign exchange sales rise mildly
Scandal wipes US$2.5 billion off Mitsubishi stock
The valuation difference between Chinese shares traded in Hong Kong and Shanghai narrowed to the smallest in five months as foreign investors turned more bullish on the country’s equities. The Hang Seng China AH Premium Index fell 1.6 percent to 129.27, the lowest since October 27. A gauge of Chinese stocks in Hong Kong rallied 1.3 percent, compared with a 0.7 percent loss by the Shanghai Composite Index. While dual-listed equities are still 29 percent more expensive across the border from Hong Kong, that’s down from 47 percent in January. The Hang Seng China Enterprises Index has rebounded 23 percent since this year’s low and entered a bull market last month on signs the nation’s economy and currency are stabilizing. Concerns about a depreciating yuan and capital outflows helped drag the gauge of 40 members to its lowest level in about seven years on Feb. 12, sending valuations to record lows. “Investors are increasingly finding Hong Kong equities attractive,” said Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. “The risk-return ratio of Hong Kong stocks is reasonable and the valuation gap is likely to narrow further.” Bloomberg News
Chinese banks saw US$36.4 billion of net foreign exchange sales in March, up slightly from February but still markedly lower than the previous two months, official data showed yesterday. Chinese lenders bought US$117.7 billion’ worth of foreign currency last month and sold 154 billion dollars, the State Administration of Foreign Exchange (SAFE) said in a statement. It was the ninth consecutive month of deficits, and was higher than the US$33.9 billion dollars recorded in February. However, it has narrowed from the US$54.4 billion seen in January and US$89.4 billion in December. The figures show that the pressure of cross-border capital outflows has eased significantly compared with the start of this year, SAFE spokesperson Wang Chunying said at a press conference yesterday. In the first quarter, banks registered 124.8 billion of net forex sales, according to SAFE. The outstanding foreign-currency deposits held by Chinese firms and individuals rose US$8.4 billion in March, a narrower increase than the US$8.8 billion in February and US$16.7 billion in January. “Market sentiment has become more rational, and cross-border capital flows have been steady,” Wang said. Xinhua
Mitsubishi Motors shares nosedived again yesterday as panic selling wiped about US$2.5 billion off the automaker’s market value in response to its shock admission that it cheated on fuel-efficiency tests. The embarrassing revelation is the latest in a string of recent scandals to hit Japanese firms, while German giant Volkswagen struggles to restore its badly dented reputation after a massive emissions scandal. The news has also raised questions about Mitsubishi’s future as it faces the prospect of huge lawsuits and fines. Yesterday, the embattled stock went into freefall, plunging to 583 yen (US$5.31) in Tokyo, down 20 percent, after it dived 15 percent on Wednesday when the news first broke. Japanese transport ministry officials descended on a company research and development centre yesterday morning, as the government slammed the maker of Outlander sport utility vehicles and Lancer cars. “This has critically damaged consumers’ trust and it won’t be tolerated,” top government spokesman Yoshihide Suga said yesterday. “It’s an extremely serious issue.” AFP