Dealers’ discounts push car sales on Mainland Automotive sector Page 10
Wednesday, May 11 2016 Year V Nr. 1040 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Kelsey Wilhem Politics
Coutinho calls new proposals for Legislative Assembly election “political persecution” Page 3
Gaming
www.macaubusinessdaily.com
Bernstein analysts predict 6 pct to 8 pct decline in gaming revenue for May Page 7
Presidential election
Duterte claims big Philippines win and hints at sweeping parliamentary changes Page 11
The Tailor of Panama
Panama Papers High profile local residents’ company details have also been exposed. Legislator and lawyer Vong Hin Fai and auditor Leong Kam Chun number among those named as the International Consortium of Investigative Journalists posts the full database of Mossad Fonseca leaks. Revealing 25 offshore companies, 342 officers, 16 intermediaries and 299 addresses that tie the British Virgin Isles to the MSAR. Page 6
Hide and seek Restructuring. The Personal Data Protection Bureau tries to keep up with the paperless times. Cross-border information sharing. Junket player blacklists. Communicating information for medical and banking purposes. And how to properly and efficiently create legislation that helps citizens is all part of the Bureau’s remit.
Feels like home
Flat inflation
Real Estate Commercial properties throughout the SAR located in residential areas performed better in Q1. And were in higher demand than those in tourist areas, says Centaline Macau. Page 4
Chinese CPI China’s consumer price index grew 2.3 pct y-o-y in April. Flat from the previous two months, new data revealed yesterday. Growth remains at its highest level since July 2014 for a third month. Page 8
25° 28° 25° 28° 25° 28° 25° 28° 24° 30° Today
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Personal Data Page 5
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2 Business Daily Wednesday, May 11 2016
Macau
Pensions
Current system sustainable, with limitations UMAC professor believes the latest pension report by the Social Security Fund should focus on more than sustainability. Nelson Moura nelson.moura@macaubusinessdaily.com
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he government should focus on more than the sustainability of the pension system for elderly people, according to Assistant Professor Kin Sun Chan of the University of Macau’s (UMAC) Faculty of Public
Administration. The professor’s comments come in the wake of a report by financial advisory company Willis Towers Watson for the Social Security Fund (FSS) which warns of possible future instability in pension funds created by the falling gaming revenues in the SAR and suggests changing the system that regulates pensions for the elderly, as reported
by Business Daily. The report states that any old age pension system should take into account six main elements such as equity, sustainability and stability, in order for a pension system to survive ‘economic, demographic, political, and external factors,’ while considering that the current system in the SAR doesn’t take into consideration economic stability and demographic factors, Business Daily reported.
Made to last
The professor believes that the present social security system is sustainable enough to weather economic changes due to the amount of fiscal reserves dedicated to social welfare spending but believes the government should focus on more than the sustainability of the pension system. In 2016, the government has a dedicated budget of MOP4.46 billion (US$557 million) for social welfare, which includes funds for the Social Security Fund, according to this year’s Policy Address. “The present mechanism can last for around 40 to 50 years. As I know, many countries’ public pension systems can only last for around 10 years. The determination of the government to promote the sustainability of the public pension system is well known, so I do not believe the current pension system is too vulnerable to economic changes.” “Generally, I agree with the introduction of [a] new mechanism for breaking the relationship between low benefit and low contribution for
the pension income system. However, according to the report, there is no new mechanism described and it only introduced a well-known principle for the new mechanism (i.e.) sustainability. In fact, there are four principles, including sustainability, robustness, affordability and adequacy, and it’s not easy for society to reach a consensus for the pension income system reform on these four principles,” Professor Chan told Business Daily. Chan, whose research focuses on social policy in Hong Kong and Macau, mentioned how the Hong Kong SAR Government has encountered difficulties while conducting public consultations on the reform of its public pension system, stating how “difficult it is for society to reach the consensus of the reform” and wishing that the “MSAR Government can reform the system based on the four principles, rather than just focusing on sustainability.” The professor also suggested the government use layman’s terms to explain the report, because it is currently too hard for citizens to understand.
Maybe this year
In statements to Business Daily, the FSS has said that the Chief Executive proposed last year a feasibility study on the establishment of a funding mechanism that links the Social Security Fund to the fiscal surplus, to be announced to the public in the second half of the year. It has also stated that if “both employers and employees fail to reach a consensus during the year” the government will make a decision taking into account their feedback and the “interests of the majority of residents.”
Demographics
Cold front increases mortality 47.27 pct in the first quarter of 2016 The SAR registered a 0.35 per cent quarter-to-quarter increase in population as of the end of March, now totalling 649,100 residents, reveals data from the Statistics and Census Service (DSEC), published yesterday. While a total of 1,664 births occurred within the first quarter of 2016, a quarter-to-quarter decrease of 10.6 per cent, a 24.26 per cent increase in Chinese immigrants to the city throughout the quarter, totalling 2,695 in number, helped the population increase. Also the number of male babies for the period was 870 with the sex ratio at birth
corresponding to 109.6 male babies per 100 female babies. Some 650 residents died in the first quarter of the year, with mortality increasing 47.27 per cent quarter-to-quarter, mostly due to the cold weather early this year, the DSEC explained, citing neoplasms, diseases of the circulatory system and diseases of the respiratory system as the three main underlying causes of death. A total of 975 marriage registrations were recorded in the first quarter, a 0.93 per cent increase quarter-to-quarter. N.M.
Business Daily Wednesday, May 11 2016 3
Macau Politics
Coutinho case triggers law revision mentioned to the local newspaper that he considers “unfair” the fact that Chinese nationals can hold political positions such as honorary consul from a foreign country in Macau and have dual nationality, telling Business Daily he will wait until the law revision is debated in the AL.
Legislator Jose Pereira Coutinho considers ban “political persecution”. Nelson Moura nelson.moura@macaubusinessdaily.com
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egislator Jose Pereira Coutinho believes a proposed law revision to be “political persecution” and thinks it should encompass any current political official holding a foreign passport in the MSAR, the legislator told Business Daily. The law revision banning elected officials in the Legislative Assembly (AL) from holding any political position in a foreign country professes to ‘prevent the occurrence of a similar case’, likely referring to the candidacy of Legislator Perira Coutinho, who last year ran for the Council of the Portuguese Communities (CCP) and for the Portuguese Parliament, and is the only Portuguese citizen to be elected in the AL. The revision joins a 30-day public consultation accepting proposals for changes to the law on the election of the members of the Legislative Assembly. “There are situations with people holding functions in Macau in the AL (Legislative Assembly) and in the CPPCC (Chinese People’s Political Consultative Conference), who hold foreign passports from Canada or Portugal and other countries. Since Chinese law doesn’t allow double nationality I can’t understand that
Uncommon position
Legislator Jose Pereira Coutinho and Chief Executive of the MSAR Chui Sai On.
the proposed new law doesn’t include these people,” Coutinho told Business Daily. Coutinho - President of the pro-democratic New Hope party and a directly-elected legislator since 2005 - wants to know if the possible ban will also “encompass people with Chinese nationality who hold foreign passports, instead of just being made to block [an individual] presenting oneself as a candidate for political functions in his own country [Portugal].” The legislator opines that “to restrict what the Basic law allows me [to do] as a deputy in the MSAR doesn’t make sense; if the law
is revised it should take everyone into consideration.” Currently, the Macau Basic Law states that foreign nationals may stand for election to directly elected seats, noting that the AL must comprise permanent residents of the MSAR with no specification of an individual’s nationality. “The Basic Law allows a double swearing in of Chinese nationals and other nationalities, and I believe this law revision proposal is a step back and doesn’t respect the openness of the Macau law to people who want to hold functions here,” the legislator told Business Daily Coutinho also
In statements to Business Daily, Professor Jianwei Wang, Head of the Department of Government and Public Administration at the Faculty of Social Sciences in the University of Macau, stated that “it’s just not common for elected politicians from a country to exert political functions in another country. Even if you have a different passport or nationality, as many people in Macau have Portuguese passports, that doesn’t mean you should hold political functions in another country, which could maybe create some conflict of interest.” “If you are a Macau resident and have Portuguese nationality and you could have a political position in Portugal I believe it would still be improper. Can you imagine a member of the US Congress who is also a Member of Parliament in Great Britain?” Professor Wang added. Wang sees honorary consular positions to be a different case as “it’s not an official position with decision making; and honorary positions are not so connected to nationality since you can have a different nationality and can be an honorary consul for a different country.” The public consultation on the potential changes runs until June 5.
4 Business Daily Wednesday, May 11 2016
Macau Opinion
José I. Duarte Breeding policies? Macau is currently discussing its first Five-Year Plan. The draft document has been submitted for public consultation and, inescapably, is the subject of much talk and commentary. At first sight, this relatively long document does not distinguish itself neatly from the yearly Policy Address. Somehow, it looks like an extended version, no less wordy and vague in many of its statements. But the purpose here is not to engage in a discussion about the style and content of the document, or its relationship with the annual Budget and Policy Address debate. We must note that it contains, at least and beyond doubt, one statement that is indeed a novelty – in fact, a major one. We can find it close to the bottom of page 55 in the Portuguese version. That is the section dealing with demographic concerns and, namely, an aging population. There, the stated aim is to ‘develop global demographic strategies’, including some focusing on birth incentives. Among these, we find that the government will ‘incentivize couples to have more children applying the concept of eugenics’! That’s right: it says Macau wants to establish eugenics as the guiding principle to promote population growth! The first question that comes to mind is: do they know, understand, what they are saying? The charitable answer would be, possibly not! Probably that’s just a bad translation. But that is hard to accept. We are dealing with an official document published in one of the official languages. Taking that view would mean that among those who wrote, translated, commented, revised and gave the green light for publication nobody thought the issue was significant and controversial – or understood what it meant. It would be just a case of ignorance, albeit an outstanding one. That’s frightening! It just happens that the alternative explanation is even more so! That is, we would have to accept that the government of Macau wants to set eugenics as a guiding light for demographic policy or, at least, that some of its members and advisors think it would be a good idea. In that case, an urgent elucidation is needed. Leaving aside no lesser matters of compatibility with internal laws and international covenants, who is going to define the specific objectives, standards, and tools of such a policy? The possibilities are just too scary to contemplate. So I pray for the first alternative: nobody truly understood or realised the implications. But that is only marginally reassuring. José I. Duarte is an economist and permanent contributor to this newspaper.
Real Estate
Commercial properties near tourist zones less profitable Annie Lao annie.lao@macaubusinessdaily.com
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or commercial properties throughout the SAR those located in residential areas are performing better and are in higher demand than their counterparts located in tourist areas, Roy Ho Siu Hang, director of Centaline Macau Property Agency Ltd., said yesterday in a first quarter review briefing on the local property market. For the first three months of the year most of the property transactions were for properties located in residential areas, with only one store sold so far in the quarter - an April sale for a shop in Kam Yuen Building located in NAPE near several casino resorts. The sale price for the property was at a six-month low, according to Mr. Ho, amounting to MOP130 million (US$16 million), and equating to a drop of over 30 per cent compared to last year, he explained. In general, prices for office properties remain stable although dropping by between 7 per cent and 14 per cent in the NAPE and Nam Van areas compared to the same period last
year, reducing rental costs to MOP19.9 per square foot. Demand for the purchase of industrial properties has been low, with sales falling 56 per cent in the first quarter year-on-year. The average sales price, however, was up 6 per cent quarter-to-quarter, at MOP3,500 per square foot.
Cheaper store rental
Luxury store rentals have decreased, causing other high-end properties’ sales prices to fall accordingly, noted Stanley Poon, managing director of Centaline Macau. The highest rentals recorded were registered in 2012 and 2013. Since then, high-end store rentals have seen a 40 per cent drop in asking prices, based upon data released by Centaline Macau. The number of luxury stores opening in the SAR has increased over the last three years. However, given that many of these stores eventually closed - primarily those selling gold, jewellery, watches and other upmarket products - this has resulted in a continuous drop in rent for these types of shop, according to Mr. Poon.
On the other hand, non-luxury shops, especially those focusing on local branded products for fashion, footwear and sports clothing have increased their demand for rental locations, with an increase in local brand products stores evident throughout April, Poon notes. The fall in rentals for these types of store is not as steep as for those selling luxury products although both have been affected by Macau’s economic environment, falling 10 to 20 per cent compared to the previous year, according to data provided by Centaline Macau. The food and beverage sector has seen the smallest changes in the sector, especially for cafés and restaurants - which have shown an increase in profit. However, this is not the case for the high-end food and beverage sector, which has shown a decline, Poon explained. Most landlords do not expect rental prices to rebound, causing an increase in store purchases in March and April as prices fell to their lowest seen so far, Mr. Poon said. Investing in stores is generally more popular for those with a long-term view, Poon concluded.
Real Estate
Housing Bureau releases social housing opinions The government received 221 opinion papers regarding the distribution of public housing units to residents during a public consultation period running for 90 days last year, amounting to 310 total opinions divided into 11 main themes. The Housing Bureau
published its analysis of the opinions yesterday. Of primary interest was the treatment of ‘families with higher income than the stated limit’ and that of ‘rich families’ amounting to 70 submissions; revision of the
minimum age for individual candidates, with 52 submissions; flexibility of the restrictions for candidate qualification of the family members who benefit from other benefits – 34; the problem of dog ownership - 34; introduction of the points deduction system by the administrators of social housing – 26; revision of the provisions prohibiting land ownership – 24; criteria for classification – 18; clear definition of the ‘family units with income over the determined maximum limit’ and ‘rich families’ - 18; number of opportunities for allocation – 13; increase in the rent percentage for ‘rich families’ – 11 and flexibility of the restriction of the net assets of elderly candidates – 10 submissions. The Bureau noted that it was ‘grateful for the opinions and proposals presented by the different social sectors’ and would ‘proceed in the future to the respective legislative steps in order to improve the tender for public housing’.
Business Daily Wednesday, May 11 2016 5
Macau
Data protection GPDP: Personal Data Protection Law outdated
Junket-proposed debtor database under study Fong Man Chong highlights local personal data protection works’ complexity due to “sophistication of society”. Joanne Kuai joannekuai@macaubusinessdaily.com
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shared blacklist of players proposed by local gaming promoters is still being studied, according to Fong Man Chong – Co-ordinator of the Personal Data Protection Office (GPDP) - at a press conference held yesterday. “How such a database should be established, what should be mandated as principles and guidelines, who would have access to the data; all of these need to be studied in depth,” said Mr. Fong. Previously, it was reported that a Macau junket association is working with the government to establish a shared blacklist of players who are considered at high risk of defaulting. The Secretary of Security, Wong Sio Chak, commented at the time that the scheme is worth trying but needs to be authorised by the GPDP. In addition the junket association piloted a gaming debtor database for the exclusive use of its members, although this was suspended due to compliance issues regarding Macau’s Personal Data Protection Law. The Secretary for Economy and Finance, Lionel Leong Vai Tac, emphasised
at the time that it was essential for groups to communicate schemes to the GPDP. However, the Personal Data Protection Office head indicated that there had been little progress on the matter. “These are not simple works and they involve a lot of different issues. We need to comprehend the operation of the industries and their characteristics. We need to refer to relevant laws and regulations so that we can come up with better and more efficient regulations for the industries to obey,” said Mr. Fong.
Cross-border data sharing
With regard to other issues pertaining to personal data protection, specifically relating to Macau’s SAR status, that involving Macau single-licensed vehicles entering Hengqin Island in the neighbouring Zhuhai city was brought up. The scheme has been under discussion for years and was recently revealed by Zhuhai authorities as coming into effect “very soon” as: “all the policies and documents are ready and are just waiting for both governments to set an announcement date”. “In the near future, Macau-licensed vehicles will be available to enter Hengqin and we will face the issue of insurance,” said the GPDP head. “I believe for the sake of convenience, Macau residents wouldn’t purchase insurance from Mainland companies and such business will be conducted by Macau corporations co-operating with Mainland insurance firms. It will involve the issue where the personal information is
travelling across the border. It needs a mechanism to protect local residents’ personal data [to ensure it will] not be used for other purposes and the types of rules the insurance companies are required to obey will need to be regulated.” The office head admitted that the office itself is facing a challenge in regulating cross-border personal data sharing, as the organisation is undergoing a restructuring. “Sometimes, the other parties question whether this office (GPDP) is an autonomous body that has the power and authorisation to deal with personal data protection,” said Mr. Fong. “Actually, all the documents regarding the restructure of the office are ready. We are waiting for the SAR Government to [submit] it for the legislation process.”
Complications in data protection
Fong Man Chong highlighted some other challenges that the office is facing due to an ever-changing society; namely, personal data protection issues involving a credit status database proposed by the local banking sector and a medical recording sharing system for public and private hospitals. Mr. Fong indicates that Macau’s Personal Data Protection Law is outdated and “it’s time for a review”, but stated that such a revision of legislation could not be completed this year. “The most advanced example for personal data protection would be the European Union, where there are over 200 articles in the laws regulating such a sector. Macau still lags
behind,” said Mr. Fong. “One of the biggest challenges is the evolving technology, especially in computer science. Nowadays, most personal data are stored digitally and rarely paper-based…we don’t have a detailed plan to revise the law yet, but we will document every issue and problem we come across when applying the current law for future referencing.”
Case numbers drop
In the press conference of a 2015 review of the GPDP’s work, office head Fong Man Chong announced that the office had launched 155 investigations last year, which is 20 per cent less than the 194 cases launched in 2014. Around 67 per cent of the investigations targeted private entities, while 27 per cent targeted individuals and 6 per cent focused on public organisations. With regard to the nature of the investigations, 98 cases involved the accused individual not having sufficient justification to access the personal data in question; 70 cases involved handling data in an erroneous way; 27 cases failed to protect the rights of relevant parties; 15 cases lacked adequate security measures; 3 cases violated confidentiality, while 19 were of a different nature. With regards to enquiries the office head said that in 2015 the GPDP received 1,834 cases - 5 per cent fewer than the 1,936 received in 2014. Applications for permission to access personal data received by the office also dropped to 14 last year from 45 in the previous year. Meanwhile, the office announced a ‘Privacy Week’ taking place from May 9 to May 15 this year. The office says that the event is held annually since the office is a member of the Asia Pacific Privacy Authorities (APPA). This year’s edition - titled ‘Data Protection in Your Hands’ - seeks to raise public awareness of protecting personal information.
6 Business Daily Wednesday, May 11 2016
Macau
Panama Papers The full version of the Panama Papers identifies 25 offshore companies linked to the city
Vong Hin Fai, Leong Kam Chun named in Panama Papers The latest leaks show that lawyer Vong Hin Fai and auditor Leong Kam Chun jointly own an active BVI company set up in 2004. But Mr. Vong, having declared the company to the local supreme court, told Business Daily that there is nothing to hide. Kam Leong kamleong@macaubusinessdaily.com
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hief Executive-appointed legislator and lawyer Vong Hin Fai, as well as renowned local auditor Leong Kam Chun are both shareholders in an offshore company that was disclosed by the latest release of the Panama Papers early yesterday morning. All the Panama Papers, including more than 11.5 million leaked files from Panama-based law firm Mossack Fonseca, were fully uploaded by the International Consortium of Investigative Journalists (ICIJ) for public access at two o’clock yesterday morning in a searchable database. According to the latest leaks, a total of 25 offshore companies, 342 officers (potentially including overlapping names), 16 intermediaries and 299 addresses are linked to the Special
Administrative Region.
Active company
Mr. Vong and Mr. Leong, meanwhile, were revealed to jointly own a company called Perfect Talent Group Ltd. registered in the British Virgin Islands (BVI) and set up in January 2004 through Mossack Fonseca. This offshore company has seven other shareholders, including Sammy Tam Yuk Sang, a non-executive director of Hong Kong-listed Long Success International (Holdings) Ltd. In addition, the name of Lou Soi Cheong - the foreign name of the notary of Macau’s first public notary office - is shown as one of the shareholders. The Panama Papers indicate the status of the company as still active. Nevertheless, being named in the Panama Papers does not necessarily mean the individuals have conducted illegal actions such as tax evasion, the International Consortium of Investigative Journalists (ICIJ) expressly noted on the database. ‘There are legitimate uses for offshore companies and trusts. We do not intend to suggest or imply that any persons, companies or other entities included in the ICIJ Offshore Leaks Database have broken the law or otherwise acted improperly,’ ICIJ declared in a statement.
Vong declares
In fact, according to Mr. Vong’s latest property declaration to the Court of Final Appeal in 2014, as required of legislators, Vong did declare that he is a shareholder of Perfect Talent,
owning 15 per cent of the company’s stake. In addition, he stated that the company’s capital only amounted to US$100 (MOP800). Contacted by Business Daily yesterday, the local lawyer declined to furnish details of the core business of his offshore company. “As a legislator and an ordinary resident, I have fully fulfilled my responsibility of declaring the company [to the Court of Final Appeal] as the local law requires,” he noted on the phone yesterday, adding he had nothing to hide. However, the auditor, who is a member of the supervisory committee of the the Civic and Municipal Affairs Bureau (IACM), did not declare Perfect Talent in his latest property declaration filed with the top court in March this year. Nevertheless, there is no official information indicating whether Perfect Talent is associated with any of the Chinese language company names declared by Mr. Leong.
Mocha Slot
On the other hand, the Panama Papers disclosed that Mocha Slot Group Limited, which was owned by local gaming mogul Stanley Ho Hung Sun and his son Lawrence Ho Yau Lung’s company Melco International Development Ltd, was registered in the BVI in 2005. The information shows that the company was struck off in October 2006 following an acquisition from Melco Crown Entertainment Ltd. the same year. The gaming operator wrote in its 2015 annual report that Mocha Slot Group is still part of the
company’s goodwill and intangible assets. In addition, the president of the Macau General Association of Real Estate, Chong Sio Kin, set up a BVI company named Ringo Development Ltd. via the Panamanian law firm in July 2010 although the offshore firm was struck off the records in 2013 and dissolved, according to the Papers.
Biggest Leaks
The Panama Papers, including nearly 214,000 secret offshore entities created in 21 jurisdictions, is the biggest leak of information of offshore companies and people behind the firms holding them. Prior to full access to the papers one of the city’s wealthiest real estate developers, Ng Lap Seng - who has been charged by the United States for bribing officials from the United Nations - had already been revealed to have had links to the papers through two BVI companies; namely, Goluck Limited and South South News International Group Limited, established in 2004 and 2010, respectively. In 2013, the ICIJ also published information on more than 100,000 offshore entitles in its Offshore Leaks, which indicated several local businesspeople having operated offshore companies. The names in the 2013 leaks included gaming mogul Stanley Ho Hung Sun, his fourth wife Angela Leong On Kei, their righthand man Ambrose So Shu Fai, junket boss Alvin Chau Cheok Wa, and businessmen Lao Ngai Leong and Sio Tak Hong among others.
Business Daily Wednesday, May 11 2016 7
Macau Retail
DFS Group expanding City of Dreams footprint
have in Macau – the space will be multiplied by three times,” said Chairman & CEO of DFS Group DFS Group has started its first Philippe Schaus. The first phase phase of expansion at its City of the project will feature fashion of Dreams store in Cotai and is and beauty products. Watches expecting to open in early June, & jewellery and shoe products according to a notice by UK will be introduced in the later publisher Moodie Davitt Report released on Monday. “It’s a massive phases. The whole project will be expansion of the store we already completed by the end of this year.
Crown Resorts Bernstein analysts predict 6 pct to 8 pct decline in gaming revenue for May
Strong start to mass driver Gaming analysts reckon that the impact of the ban on proxy betting is likely to be minimal. Joanne Kuai joannekuai@macaubusinessdaily.com
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ay is off to a strong start and is expected to be seasonally stronger than April given the benefit of the Labour Day holiday, say analysts from brokerage Sanford C. Bernstein Co. LLC. However, the Monday note also indicates that the result may be offset somewhat by fewer weekend days in May this year as there were only four weekends compared to five in May 2015. According to the brokerage, the SAR sees its gross gaming revenue for last week reaching MOP6.1 billion (US$763 million), implying an average daily rate of MOP762 million. While assuming an average daily rate of MOP550 million to MOP270 million for the rest of the month, analysts predict that gross gaming revenue for May will reach MOP18.7 billion to MOP19.2 billion, representing a year-on-year decline of 6 per cent to 8 per cent. The Bernstein analysts are also expecting the government’s mid-term review on the local gaming industry to be released this month, but anticipate the table cap “unlikely to change” based on the Secretary for Economy and Finance, Lionel Leong’s previous comments.
Self-policed policy
With regard to the ban on proxy betting confirmed by the Gaming Inspection and Co-ordination Bureau (DICJ) that came into effect on Monday, Bernstein analysts say “the key issue is how the ban is policed in the VIP rooms” and estimate that phone betting in Macau
constitutes only around five per cent of total VIP volume. “To our knowledge, it is likely a self-policed policy. The onus is on casino operators to enforce the implementation and to ask junkets/players in VIP rooms to refrain from using phones by gaming tables,” reads the note. According to the analysts, the extent of enforcement varies from casino to casino, as Sands, Wynn, MGM and Galaxy have now stopped all proxy betting, while “there may exist some proxy betting occurring in Grand Lisboa and potentially City of Dreams”. However, analysts “expect them to be completely eliminated shortly or have very minimal volume going forward”.
Supply driven
“While the Macau gaming industry will remain volatile over the near term, we view the industry as a secular growth story driven by the paradigm shift from VIP to mass.” Analysts at brokerage Sanford C. Bernstein Co LLC
Overall, the brokerage indicates that while the Macau gaming
industry will remain volatile over the near term, they view the industry as a secular growth story driven by the paradigm shift from VIP to mass. “Although unlikely to disappear as some fear, the VIP model is structurally challenged by China’s anti-corruption campaign dampening highend spend, junket liquidity stress and junkets facing potential regulatory headwinds in the near term,” say the analysts. In addition, the firm says that due to improvements in transportation infrastructure and the opening of large scale integrated resorts from 2015 to 2018: “Mass will be the driver of rejuvenated growth beginning in 2016 and continuing through the rest of the decade – the execution of a supply driven market”.
Crown Resorts
Technology
Melco remains sound long-term investment for Crown
New Zealand company lands self‑serve kiosk deal
Crown Resorts’ ‘significant footprint’ in the SAR will pay off in the long term despite short term contraction, according to the group’s director Helen Coonan. Crown Resorts director Helen Coonan says that the company remains committed to its investment in Melco Crown Entertainment despite its unexpected offloading of AU$1 billion-worth (US$800 million) of shares in the Macau casino-resort company, according to Australian newspaper Sydney Morning Herald, published yesterday. Crown cut its 34 per cent stake in Melco down to 27 per cent last week, fuelling rumours of cleaning house
but Ms. Coonan denied the offload was a reflection on the short-term prospects of the SAR, resulting from falling revenues for almost two years due to a strict Chinese Government crackdown on corruption. “The downturn in Macau is in the short term and in the medium-to-longer term it’s a sound investment,” said the Crown Resorts director. “It’s part of a capital management strategy and Crown still has a significant footprint in Macau, and in the longer term Crown is of the view that these assets are just gold because of their position,” added Ms. Coonan. She revealed no potential deal had been put to the Crown board by James Packer’s private investment vehicle Consolidated Press Holdings regarding a rumoured AU$8 billion privatisation of Crown. “On the privatisation, we’ve never had a proposal brought to the board,” Ms. Coonan said. A.L.
Five-year deal to provide new ticketing kiosks to Cotai Water Jet. Liverton Technology Group, a technology and managed services company originating in New Zealand and based in Wellington, has landed a five-year contract to supply new ticketing kiosks for Cotai Water Jet in Macau, according to New Zealand newspaper National Business Review yesterday. Cotai Water Jet has bought ten kiosks from Liverton to date and Liverton chief executive Justin De Lille hopes to supply another 100 to the Cotai transportation operator, commenting that “they’re basically saying give us a sip and we’ll see if we want the bottle of wine,” he said. The Kiwi company’s SmartTicket system enables customers to buy
ferry tickets and redeem existing bookings via an automated service: the new service is set to kick off later this year. In addition to the ticketing system, the group’s SmartCheck kiosks have also been installed in The Venetian Macao for the 3,000-room hotel and casino, allowing guests to check in and check out using their passports or IDs without needing to wait in line for receptionists to serve them. Liverton established an office in the Cyberport innovation and technology hub in Hong Kong in March to support its Asian customers and the company generates about NZ$10 million (US$ 6.7 million) in annual turnover, maintaining 20 staff. “A lot of Kiwi companies are heading to the US to sell their products but as an IT company, we see a huge amount of growth in Asia,” De Lille said. A.L.
8 Business Daily Wednesday, May 11 2016
Greater China Prices evolution
Inflation data sharpens debate on need for more easing Non-food prices rose just 1.1 percent, ticking up from March, but again not showing a build in price pressures that would be expected.
C
hina’s consumer inflation remained modest in April, while producer prices’ four-year slump moderated as commodity prices rebounded, easing concerns about deflationary risks to the world’s second-largest economy. But analysts disagreed on whether the price trends alone are compelling enough for the central bank to shift to a more cautious stance on interest rate cuts just yet, after lowering them six times since late 2014. Strong March data had raised hopes the economy was bottoming out from a prolonged slump - possibly allowing the People’s Bank of China (PBOC) to take its foot off the gas - but mixed April data so far and surging debt levels have fueled doubts about whether any recovery will prove sustainable.
“With regards to monetary policy, we do not expect inflation to play a large part in the central bank’s thinking,” said Chester Liaw an economist at Forecast in Singapore. “Inflation prints are not too high to dissuade them from further easing if need be, and not too low to warrant loosening.” The consumer price index (CPI) rose 2.3 percent in April from a year earlier, largely due to a spike in food prices, particularly pork. The reading has now been at the same level for three months in a row, and April defied market expectations for a slight pick-up in inflationary pressures. Non-food prices rose just
1.1 percent, ticking up from March, but again not showing a build in price pressures that would be expected if the broader economy was suddenly perking up. Producer price trends in April were more encouraging, with price declines easing to 3.4 percent from a year earlier, less than the 3.8 percent economists had forecast and a fall of 4.3 percent in March. On a sequential basis, the producer price index (PPI) rose for the second month in a row. HSBC believes downside risks to growth and inflation mean it is too early to change China’s policy stance just yet. But some analysts maintain that if inflation stays at
current levels, there is less need for more cuts to interest rates or banks’ reserve requirements. “We think that CPI could peak in Q2 as the pork price cycle turns, but at above 2 percent it’s already at a level which constrains the room for further rate cuts,” said Ding Shuang, chief economist for Greater China at ANZ Bank in Hong Kong. Economist Nie Wen at Hwabao Trust in Shanghai agreed. He expected no further interest rate cuts this year, but said more reductions in banks’ reserve requirements were still likely.
Key Points Consumer inflation steady for 3rd mth, producer deflation eases April CPI +2.3 pct vs +2.4 pct expected, big jump in pork prices April PPI -3.4 pct vs -3.8 pct expected Analysts say consumer inflation to stay modest Analysts say producer price recovery may not be sustainable
Indeed, an IMF official told Reuters in early May that China’s policy might be too accomodative at present and it might need to start tightening policy.
Short-lived?
There are suspicions that signs of improvement in both consumer and producer prices might prove short-lived. Beijing has released 3 million kg of frozen pork reserves in a bid to combat rising prices, which jumped 33.5 percent in April. And overall food prices dipped in April from March. China’s consumer inflation rate also remains well below the official 3 percent target, indicating persistently weak demand and downward pressure on prices from massive overcapacity. On the producer side, a recent rally in prices of raw materials such as iron ore and steel that resuscitated corporate cash flows is rapidly fizzling. “The acceleration of PPI inflation in the past two months is largely due to surging steel prices pushed up by speculative flows, rather than improving demand,” Zhou Hao, senior emerging market economist for Commerzbank, said in a note. “As long as the underlying demand remains sluggish, we think that PPI inflation is likely to turn soft soon. We believe that China’s monetary policy stance will remain accommodative in the foreseeable future.” Reuters
Commodities bubble
World’s most extreme speculative mania is unrave
Nobody knows for sure how much of the trading surge has been driven by individuals, but the evidence suggests r From the Dutch tulip craze of 1637 to America’s dot-com bubble at the turn of the century, history is littered with speculative frenzies that ended badly for investors. But rarely has a mania escalated so rapidly, and spurred such fevered trading, as the great China commodities boom of 2016. Over the span of just two wild months, daily turnover on the nation’s futures markets has jumped by the equivalent of US$183 billion, outpacing the headiest days of last year’s Chinese stock bubble and making volumes on the Nasdaq exchange in 2000 look tame. What started as a logical bet - that China’s economic stimulus and industrial reforms would lead to shortages of construction materials - quickly morphed into a full-blown commodities frenzy with little bearing on reality. As the nation’s army of individual investors piled in, they traded enough cotton in a single day last month to make one pair of jeans for everyone on Earth and shuffled around enough soybeans for 56 billion servings of tofu. Now, as Chinese authorities introduce trading curbs to prevent surging commodities from fuelling inflation and undermining plans to shut down inefficient producers, speculators are retreating as fast as they poured in. It’s the latest in a series of boom-bust market cycles that critics say are becoming more extreme as China’s policy makers flood the financial system with cash to stave off an economic hard landing. “You have far too much credit, money sloshing about, money looking for higher returns,” said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “Even in commodities where you could have argued there is some reason
for prices to rise, that gets quickly swamped by a nascent bull market and becomes an uncontrollable bubble.”
Night trading
In many ways, China’s financial landscape was ripe for another round of mania. New credit soared to a record in the first quarter, giving individuals and businesses plenty of cash to invest at a time when several of the country’s traditional sources of return looked unattractive. Government debt yields were hovering near record lows, while wealth-management products and company bonds had been rattled by a growing number of corporate defaults. Stocks were still too risky for many investors burned by last year’s crash, and moving money offshore had become harder as the government clamped down on capital outflows. Jeremy He started pouring his savings into commodities last month after losing money in China’s stock rout and deciding that returns from his WMPs were too low. The 25-year-old employee at a multinational trade company in Shanghai set up a joint account with his friend to trade futures on rebar, coal and cotton, making as much as 150 percent before prices started falling at the end of last month.
Retail punters
“I’m pretty bored at work, so I trade commodities futures for some excitement,’’ said He, whose account swelled to as much as 700,000 yuan (US$107,596) before sliding back to 400,000 yuan at the end of April. “Because I’m making investments with my friend, we can comfort each other when we are making a loss.’’ Nobody knows for sure how much of the trading surge has been driven by
individuals, but the evidence suggests retail punters are playing a big role. More than 40 percent of the volume in rebar futures last month came during the night session, when it’s more convenient for people with day jobs to trade. The average holding period for contracts including rebar and iron ore was less than 3 hours in April, according to data compiled by Bloomberg. Individuals with a bank account and official identity card can open a futures trading account at a brokerage within
40 minutes, with no initial balance required, Morgan Stanley said in a report on May 4. While at least five commodities in China gained more than 50 percent from their recent lows during the trading surge, the rally in prices is still a far cry from the Shanghai Composite Index’s 159 percent advance to its peak last year, or the Nasdaq Composite Index’s 256 percent advance at the height of the dot-com boom 16 years ago. What makes the frenzy in China stand
Business Daily Wednesday, May 11 2016 9
Greater China In Brief Reform drive
Details on “zombie companies” plan unveiled
Debt relief
Cash injection eases corporate bond crunch More than 100 firms cancelled at least US$15 billion of debt issuance in April following high profile defaults. Nathaniel Taplin
China’s 715 billion yuan (US$110 billion) cash injection into its financial system last month has helped avert a rout in the domestic corporate bond market, easing pressure on the central bank to take more aggressive action. The spread between China’s interbank market high-yield bond index and the AAA rated index has fallen 9 basis
points since early May, after spiking nearly 20 basis points in the second half of April to its widest since 2012. Corporate yields have dropped sharply, with the interbank medium-term note index down 15 basis points since late April and other yield indices also broadly down. Analysts attribute the fall in yields in part to the People’s Bank of China’s (PBOC) heavy late April use of its medium-term lending facility (MLF) - used to provide banks with low-cost three and six month loans. “The government still wants to lower the cost of doing business, and the central bank has a lot of tools now like the MLF to keep money market rates stable,” said Ding Shuang, Head of Greater China Economic Research at Standard Chartered Bank in Hong Kong. Corporate debt yields - up by over 50 basis points in April in many cases peaked on April 26 and 27 immediately after the central bank’s 267 billion yuan MLF injection on April 25. The injection brought the total for April to 715
billion yuan according to central bank calculations, compared with nothing in March and just 163 billion yuan in February. The sharp bond sell-off in April had increased the risk of a further run-up in defaults and could have forced the central bank into much more aggressive action to avert a sharp credit crunch. More than 100 firms cancelled at least US$15 billion of debt issuance in April following high profile defaults by stateowned firms like Dongbei Special Steel Group Co Ltd. Five-year AA rated enterprise bonds, which topped out on April 26 at 4.77 percent, have now fallen 19 basis points to 4.58 percent, reversing almost half of last month’s sell-off, which was the sharpest since 2014. Standard Chartered’s Shuang added he still expects several more reserve requirement ratio cuts by the end of the year, as capital outflows are still pressuring liquidity despite tapering off somewhat in recent months. Reuters
elling in Mainland
retail punters are playing a big role. out is the sheer volume of trading. Market turnover on bourses in Dalian, Zhengzhou and Shanghai jumped from a daily average of about US$78 billion in February to a peak of US$261 billion on April 22 - exceeding the gross domestic product of Ireland. Turnover on Nasdaq’s exchange in early 2000, by contrast, peaked at about US$150 billion. China’s frenzy has begun to cool after the three main futures bourses took steps to curb speculation by raising
from warehouses and mills was running low. Physical prices surged, with rebar still up as much as 48 percent from its December low on the spot market, according to Beijing Antaike Information Development Co., a stateowned consultancy.
Steel demand
Yet China’s response to the boom suggest authorities are worried there’s froth in the market. Officials at the China Securities Regulatory Commission have pledged to prevent excessive speculation, while the Dalian Commodity Exchange said in a statement that “some sectors of the society still have limited understanding of the futures market.’’ Regulators including the CSRC have prepared further measures to limit price fluctuations if abnormal volatility persists, people with knowledge of the matter said last month. “They don’t want this to turn into a speculative market in commodities,’’ said Tiger Shi, managing partner at Bands Financial Ltd. in Hong Kong, who’s been trading commodities for two decades. If China’s equity bubble is any guide, regulators may find it difficult to cool excessive speculation without triggering a collapse in prices. Domestic shares lost US$5 trillion of value last summer as authorities moved to curb leveraged bets and restrain trading in the stock-index futures market, where volumes tumbled by 99 percent from their peak. “The worry is that as soon as the bubble bursts, it’s everyone out of the door at the same time,’’ said Paul Adkins, managing director of AZ China Ltd., a Beijing-based aluminium consultancy. “It’s the last guys out the door that have the most pain.” Bloomberg News
“The worry is that as soon as the bubble bursts, it’s everyone out of the door at the same time’’ Paul Adkins, Managing director of AZ China
For some commodities, there were fundamental reasons for prices to rise. Steel demand has increased amid fresh spending on infrastructure and a pickup in the property sector. New floor space under construction in China rose by 19 percent in the first quarter, boosting usage at a time when supplies of steel
Financial Information
Authorities to improve credit reference China will upgrade the credit reference system and introduce more monitoring, said Yang Ziqiang, assistant governor of the People’s Bank of China, the central bank. More should be done to protect those who have shared their credit information, and guard against conflicts in sharing such information, Yang was quoted as saying by a bank statement on Monday. By the end of last year, China’s basic database of financial credit information covered 880 million individuals, including 380 million with loan records, and 21.2 million enterprises, including 5.77 million with loan records, according to the central bank. Debt
margin requirements, lifting trading fees and, for rebar, cutting trading hours in the evening session. Total turnover on May 6 was US$125 billion, down about US$135 billion from the peak, while prices for rebar and iron ore have dropped almost 20 percent from their highs in April. Some individuals are staying invested despite official attempts to rein in the market. Peter Sun, a 30-year-old professional in the financial industry in Shanghai, opened a futures account last month to trade steel, bitumen and glass after work. He devotes about half his income to investment, using technical patterns to make his buy and sell decisions because he doesn’t have time for more in depth analysis of supply and demand. “I’m not concerned about measures aimed at cooling down the market,’’ Sun said.
China is expected to release a detailed plan on “zombie companies” soon to reduce capacity in oversupplied industries, The China Securities News reported yesterday. “Zombie companies” are economically unviable businesses, usually in industries with severe overcapacity, kept alive only with aid from the government and banks. The plan, which is being drafted by China’s economic planner and the Ministry of Industry and Information Technology, will support banks in implementing differentiated credit policies to companies in different sectors. The plan will begin trials in around 20 cities nationwide this year, said the paper.
Market froth
Railway Materials trying to pay in time State-owned China Railway Materials Co Ltd, which once had trading in 16.8 billion yuan (US$2.60 billion) worth of its debt instruments suspended for payment problems, said yesterday that it would make every effort to pay the debts in time. The company would strengthen its efforts to collect retrievable and seek help from other parties to raise funds, it said in a statement. Trading in the company’s debt instruments was suspended on April 11 but resumed two weeks later after China’s state assets manager appointed government asset firm Chengtong Group to manage its debt issue in an apparent bail-out effort. Results
JD.com forecast slower revenue growth Chinese online retailer JD.com forecast slower revenue growth for the second quarter on Monday, sending its shares tumbling more than 9 percent even though its expansion in the first three months broadly met expectations. The outlook from China’s second biggest ecommerce firm after market leader Alibaba Group Holding Ltd is the latest to raise questions about an economy that grew at its slowest pace since the global financial crisis in the first quarter. JD.com said it expected second-quarter revenue to grow by 40-44 percent.
10 Business Daily Wednesday, May 11 2016
Greater China
Automotive market
April auto sales rise as dealers dangle discounts But inventory levels have remained above what’s considered healthy for eight consecutive months.
C
hina’s passenger-vehicle sales rose for the eighth time in nine months, with General Motors Co. and Toyota Motor Corp. reporting increased deliveries in April as dealers offered discounts to reduce stockpiles. Retail sales of cars, SUVs and multipurpose vehicles climbed 6.4 percent to 1.72 million units last month, according to the China Passenger Car
Association. Deliveries gained 6.7 percent to 7.36 million units in the first four months of this year. Dealers in China offered average discounts of 18 percent off the automakers’ recommended selling price, according to estimates by Bank of America Merrill Lynch. Inventory levels - measured by the number of days a dealer needs to sell its stock - have remained above what’s considered healthy for eight consecutive months, data from the China Automobile Dealer Association showed. China’s government halved the purchase tax for smaller-engine models as of October to prop up a key pillar of the economy. “Many car buyers in China have been accustomed to incentives,” said Steve Man, a Hong Kong-based auto
industry analyst for Bloomberg Intelligence. “Automakers are also using marketing ploys like rebates and cheap financing to lure consumers into the showrooms and buy new cars.” Sport utility vehicle jumped 36 percent last month and multipurpose vehicle sales rose 2.7 percent, while car sales declined 4.5 percent, according to the association.
VW, BYD
A check with popular car-pricing website Bitauto showed dealers offering discounts of as much as 35 percent for models including Volkswagen AG’s Jetta and Polo compact cars, BYD Co.’s F0 and F3 sedans and Ford Motor Co.’s Fiesta. GM’s sales in China rose 7.5 percent
to 277,979 units last month, with SUV deliveries doubling from a year earlier. Toyota’s sales in the country climbed 9.2 percent to 101,100 vehicles. Among local carmakers, FAW Car Co. cited fierce competition in reporting deliveries that slumped 37 percent to 13,608 units. Local automakers have increased their share of the passenger-vehicle market thanks to entry-level SUV models. Local brands’ market share rose by 1.8 percentage points in the first quarter to 45 percent, according to the China Association of Automobile Manufacturers. China should refrain from using short-term policies such as last year’s purchase tax cut to stimulate auto sales, according to Chen Bin, who helped oversee the auto sector as head of the top policy making National Development and Reform Commission’s industry department until 2014. Such measures may result in overly fast expansion and increase the risks of a steep downturn once they expire, Chen said last month in an interview. Bloomberg News
Health ads crisis
Baidu CEO tells staff to put values before profit The Chinese internet stalwart has been fiercely criticised both online and by state media for how it handles adverts Paul Carsten
Baidu Inc’s CEO has called on employees to put values before profit in response to a scandal around the death of a student who underwent an experimental cancer treatment he found on the company’s search website. Before his death, student Wei Zexi, 21, criticised the military-run hospital that provided the failed treatment
for misleading claims about its effectiveness and accused Baidu, which controls 80 percent of the Chinese search market, of promoting false medical information. In a letter to employees seen by Reuters, Baidu chief executive Robin Li wrote: “If we lose the support of users, we lose hold of our values, and Baidu will truly go bankrupt in just 30 days!” Li’s letter said employees were making compromises for the sake of commercial interests and placing earnings growth above user experience. The controversy over Wei’s death, which erupted at the beginning of the month, prompted regulators on Monday to impose curbs on the advertising business Baidu relies on for the lion’s share of its income. Baidu said on Monday it would comply with the regulators’ decision, which followed a probe launched early last week. The company will re-evaluate every one of its products’
Baidu chief executive Robin Li
business models, despite the fact it may have a negative impact on the company’s income, Li wrote. The Chinese internet stalwart has been fiercely criticised both online and by state media for how it handles adverts within its search results, especially in the sensitive
healthcare sector. “These days, whenever it’s the dead of night, I think: Why do the people who use Baidu’s products no longer love us?” Li wrote. “The outrage is greater than in any crisis Baidu has experienced before.” It is not the first time the
company has fallen foul of regulators and public opinion for its handling of healthcare ads and blogs, and has previously changed elements of its business model in response. “I believe this is the right way!” said Li in his letter. “It’s the long-term way!” Reuters
Business Daily Wednesday, May 11 2016 11
Asia Policy preview
Philippines’ election victor Duterte plans government overhaul His incendiary rhetoric and advocacy of extrajudicial killings to stamp out crime and drugs have alarmed many.
Rodrigo Duterte listens to questions during a press conference after he cast his vote for the National Election Day in Davao city.
Neil Jerome Morales
T
he victor of the Philippines’ presidential election, tough-talking city mayor Rodrigo Duterte, announced plans yesterday for a radical overhaul of the country’s unitary system of government that would empower the provinces. Duterte’s win in Monday’s poll has not been confirmed, but an unofficial count of votes by an election commission-accredited watchdog showed he had a huge lead over his closest rivals, one of whom has already conceded defeat. By midmorning yesterday, the rolling ballot count showed Duterte had almost 39 percent of votes cast. He was more than 6 million votes ahead of the second-placed candidate with 90 percent of votes counted from an electorate of 54 million. Duterte’s spokesman, Peter Lavina, told a news conference in the southern city of Davao that the new president would seek a national consensus for a revision of the constitution to switch from a U.S.-style system of government to a parliamentary and federal model. The proposal to devolve power from Manila fits with Duterte’s challenge as a political outsider to the country’s establishment, which he has slammed as self-serving and corrupt. The spokesman said Duterte would also seek peace agreements with rebel groups in the south of the archipelago, where the outgoing government has been using force to quell militancy. The 71-year-old’s truculent defiance of political tradition has drawn comparisons with U.S. Republican presidential candidate Donald Trump, as have his references to his libido. That tapped into popular disgust with the ruling class over its failure to reduce poverty and inequality despite several years of robust economic growth. His campaign vows to crush crime and drug abuse also resonated with voters.
South China sea talks
However, Duterte’s incendiary rhetoric and advocacy of extrajudicial killings to stamp out crime and drugs have alarmed many who hear echoes of the Southeast Asian country’s
Key Points Duterte to propose federal system of government to devolve power Davao mayor comfortably ahead with 90 pct of vote counted Duterte proposes multilateral talks on South China Sea “Duterte Harry” reiterates shootto-kill policy authoritarian past. Duterte made a succession of winding, bellicose and at times comical remarks on television late on Monday as the votes were being counted, venting over corruption and bad governance and telling anecdotes from his 22 years as mayor of Davao city. He said corrupt officials should “retire or die” and reiterated his support for police to use deadly force against criminals. “If they put up a good fight and refuse to surrender and if you feel your life is in jeopardy, shoot. You have my authority,” he told reporters in Davao, wearing a checked shirt and slouched in a chair. He also said that he wouldn’t go on any overseas state visits to places where the weather was cold. In an early indication of his unorthodoxy, Duterte told reporters on
Monday that if he became president he would seek multilateral talks to resolve disputes over the South China Sea. The outgoing administration of President Benigno Aquino has asked a court of arbitration in The Hague to recognise its right to exploit waters in the South China Sea, a case it hoped could bolster claims by other countries against China in the resource-rich waters. Duterte said negotiations should include Japan, Australia and the United States, which is traditionally the region’s dominant security player and contests China’s development of islands and rocky outcrops in the sea. The influential Chinese state-run tabloid the Global Times, said on Monday that “if there is anything that can be changed by Duterte, it will be diplomacy”. “China will not be too naive to believe that a new president will bring a promising solution to the South China Sea disputes between Beijing and Manila. Only time will tell how far the new leader, be it Duterte or not, will go toward restoring the bilateral relationship.”
Fighting the establishment
Duterte’s entertaining speeches, often loaded with profanities, have shed little light on his policies beyond going after gangsters and drug pushers.
He has been vague on what he would do to spur an economy that has averaged growth at around 6 percent under outgoing President Benigno Aquino. In a report on Monday, ratings agency S&P Global said a Duterte presidency would create uncertainty, especially if he picks fights with the political elite. “He could take some time getting used to the many compromises required in the national leadership position,” it said. One indication of that came on Monday as Duterte told reporters he planned to loosen restrictions on foreign ownership of companies across all industries, which could meet with resistance from protectionist forces. One of Duterte’s economic advisers told Reuters spending on education would be lifted to benefit “disadvantaged regions” and agriculture and rural development will be prioritised to spread wealth more evenly across the country. “Everything seems to be in imperial Manila,” said Ernesto Pernia, professor emeritus of economics at the University of the Philippines. “He wants to give more attention to the lagging, the backward regions.” Pernia said the pursuit of tax evaders and corrupt officials should bolster government revenues to fund extra spending. Reuters
Finance minister
Japan will intervene if ‘one-sided’ yen moves persist Aso has escalated his warning to markets against pushing up the yen too much. Leika Kihara
Japan is determined to prevent recent “one-sided” yen rises from accelerating, Finance Minister Taro Aso said, reiterating his resolve to intervene in the currency market if yen gains last long enough to hurt a fragile economic recovery. Aso told parliament yesterday that Japan has not and has no plans to
manipulate currency moves on a long-term basis to give its exports a competitive trade advantage. But he added that it was a shared understanding among G7 and G20 nations that excessive currency volatility was undesirable. “Japan obviously will intervene if one-sided moves persist,” he said, stressing Tokyo’s readiness to step into the market to stem any excessive yen rises. The yen’s appreciation before and during Japan’s Golden Week holidays last week has been “quite rapid,” Aso said. “We’re determined to prevent such one-sided moves from accelerating.”
Finance Minister Taro Aso.
Aso has escalated his warning to markets against pushing up the yen too much, explicitly using the word “intervention” for two straight days instead of the usual, more indirect language that Tokyo will “act appropriately” against excessive volatility. The jawboning pushed the dollar up nearly 1 percent to around 108 yen yesterday, off the 18-month low of 105.55 yen hit last week. Japanese authorities have stayed away from the markets since they last intervened in 2011. At the time, Tokyo got G7 consent to intervene to stem a yen spike driven by speculation that a devastating earthquake would force Japanese insurers to repatriate overseas funds to pay for damage claims. Reuters
12 Business Daily Wednesday, May 11 2016
Asia Strategy
Japan Post Bank eyes investment in alternative assets The bank also plans to continue increasing investment in foreign bonds with currency hedging. Hideyuki Sano and Tomo Uetake
J
apan Post Bank Co Ltd plans to allocate “a few hundred billion yen” towards alternative assets such as private equity, real estate and hedge funds this business year, its chief investment officer said yesterday. Katsunori Sago, who is tasked with improving returns on the former state-owned behemoth’s US$2 trillion assets, also told Reuters in an interview he does not expect the yen to weaken this year. Market players will closely watch how Sago, a former Goldman Sachs executive, diversifies Japan Post’s portfolio, once mostly comprised of Japanese government bonds (JGBs). Its need to find new revenue sources beyond JGBs has become acute after the Bank of Japan introduced negative interest rate this year. “Clearly, we cannot invest in interest rates markets. In Japan, interest rates markets are very big and it is not easy to give up on them. But if you look around the world, there are many other markets that have depth. We should steadily build up those assets in our portfolio,” Sago said. For diversification, he said the focus would be on private equity, real estate and hedge funds, in that order.
A risk not worth taking
The bank also plans to continue increasing investment in foreign bonds with currency hedging - a popular strategy among Japanese institutional
investors. Sago said the bank has little appetite for currency risks. Given the volatility of currencies and their returns, “you can see it is a risk not worth taking unless you have a strong conviction that the yen will fall,” Sago said. He said the yen is still relatively cheap in terms of purchasing power but its current levels, around 108 yen to the dollar, are close to fair value given the prospects of monetary tightening in the United States and easing in Japan. Sago also said he advises against buying long-term JGBs at current levels. The 30-year JGB yield fell to around 0.3 percent from 1.2 percent before negative interest rates, as investors flocked to bonds still having positive returns. But Sago said the sharp fall cannot be justified as the BOJ’s rate cut was just 20 basis points, to minus 0.10 percent from plus 0.10 percent. “You should avoid making investment judgement by paying too much attention to avoiding negative interest rates,” he said. In Japan, Sago added, “negative rates are emotionally affecting investment judgements. To avoid negative interest of a few billion yen, (some investors) are making investments that could lead to a loss that is 10 times, or even 100 times bigger. This is very dangerous.” Reuters
Key Points Alternative assets pillar of new investment plans CIO does not expect yen to weaken this year No interest to buy long-term JGBs at current levels
M&A
Thailand’s Central sells stake in Big C to finance Vietnam deal Central’s purchase of Big C Vietnam is part of rush of deals in the country by Thai firms. Manunphattr Dhanananphorn and Khettiya Jittapong
Thailand’s Central Group has sold out of domestic retail firm Big C Supercenter Pcl, accepting a tender offer from rival TCC Group in a deal that will help Central fund its purchase of a Vietnamese supermarket chain, people with knowledge of the matter said. Central, Thailand’s biggest retailer led by tycoon Tos Chirathivat, is expected to gain at least 50 billion baht (US$1.4 billion) from the sale of its 25 percent holding, said one person close to the sale process. The deal will allow TCC to cement its control of Big C Supercentre without worrying about interference from Central which founded the Thai retail firm in 1993 before selling a majority stake to France’s Casino six years later. The latest spate of deals stem from
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Casino’s decision to sell its Thai and Vietnam units this year in an effort to cut debt. Both businesses encompass hypermarkets, supermarkets and convenience stores. Central lost out to TCC’s flagship retail unit Berli Jucker in the battle to gain control of the Thai unit. But it emerged the winner for the Vietnam unit, called Big C Vietnam, agreeing to pay 920 million euros (US$1.1 billion). The people declined to be identified as they were not authorised to speak to media. Central and Berli did not
immediately respond to requests for comment. Berli made a mandatory offer for the all the shares it does not own after buying Casino’s 58.6 percent stake. Berli is expected to own more than 85 percent of Big C Supercenter once the tender offer closes on May 11, the sources said. Central’s purchase of Big C Vietnam is part of rush of deals in the country by Thai firms. They have been attracted by a quadrupling in average incomes during 15 years of economic
growth at over 5 percent, and are keen to hedge against political and economic uncertainty back home after a military coup two years ago. Vietnam’s swelling middle-class also sees Thai products as better and more affordable than Japanese and Korean imports, and vastly preferable to the cheap but unpopular goods that flood across the border from China. TCC purchased the Vietnam chain of German retailer Metro for 655 million euros last year. Reuters
Key Points Central to gain at least $1.4 bln from stake sale Deal will also allow TCC to cement control of Big C Central’s Vietnam purchase part of an M&A rush by Thai tycoons
Big C shop in Thailand.
Founder & Publisher Paulo A. Azevedo, pazevedo@macaubusinessdaily.com Editorial Council Paulo A. Azevedo; José I. Duarte; Mandy Kuok Newsdesk Mike Armstrong; Óscar Guijarro; Kam Leong; Joanne Kuai; Nelson Moura; Annie Lao; Kelsey Wilhelm Group Senior Analyst José I. Duarte Design Francisco Cordeiro Web & IT Janne Louhikari Photography Cheong Kam Ka, Ruka Borges, Gonçalo Lobo Pinheiro, António Mil-Homens, Carmo Correia Contributors James Chu; João Francisco Pinto; José Carlos Matias; Larry So; Pedro Cortés; Ricardo Siu; Rose N. Lai; Zen Udani Assistant to the Publisher Lu Yang, lu.yang@projectasiacorp.com Office Manager Elsa Vong, elsav@macaubusinessdaily.com Agencies Bloomberg, Reuters, AFP, Xinhua, Lusa, Project Syndicate Printed in Macau by Welfare Ltd. Address Block C, Floor 9, Flat H, Edf. Ind. Nam Fong, Av. Dr. Francisco Vieira Machado, No. 679, Macau Tel. (853) 2833 1258 / 2870 5909 Fax (853) 2833 1487 E-mail newsdesk@macaubusinessdaily. com Advertising advertising@macaubusinessdaily.com Subscriptions sub@macaubusinessdaily.com Online www.macaubusinessdaily.com
Business Daily Wednesday, May 11 2016 13
Asia In Brief Earthquakes impact
Japan set to adopt extra reconstruction budget
Drought
Indonesia’s coffee crop may tumble most in five years A smaller Indonesian crop will cut supply of robusta beans used by Nestle SA. Yoga Rusmana and Eko Listiyorini
C
offee production in Indonesia will probably drop 10 percent this year after dry weather caused by the worst El Niño in almost two decades damaged some crops and delayed the harvest. Farmers in the world’s third-largest grower of robusta may reap 570,000 metric tons of beans in the season that started April 1, down from a record 636,300 tons a year earlier, according to the median of five traders estimates compiled by Bloomberg. That would be the steepest decline since 2011-12, data from the U.S. Department of Agriculture showed. A smaller Indonesian crop will cut supply of robusta beans used by Nestle SA, potentially boosting a rally in futures in London this year. The strongest El Niño since 1997-98 was largely responsible for dryness in the country’s main coffee-producing region of southern Sumatra last year, according to Indonesia’s Meteorology, Climatology and Geophysics Agency. “Drought caused a crop failure in the lowland of Sumatra, the trees withered and dried and flowering has failed,” said Moelyono Soesilo, purchasing and marketing manager at PT Taman Delta Indonesia, a Semarang, Central Java-based exporter. “We’re now waiting for the harvest
in the highland to start in June or July.” The harvest normally starts at the end of May or early June on the higher ground of Southern Sumatra, Soesilo said.
Coffee regions
The provinces of Lampung, Bengkulu and South Sumatra in the southern tip of Sumatra island are the main robusta areas in Indonesia, producing about 75 percent of the country’s output. Beans from the area are shipped from Panjang port in Lampung. Arabica is grown mostly in northern Sumatra and Java, and accounted for 16 percent of the total harvest in 2014-15, USDA data showed. Robusta coffee 0.9 percent to close at US$1, 635 a ton on ICE Futures Europe on Monday, trimming the gain this year to 6.9 percent. Futures slumped 20 percent last year. The dry period may soon give way to normal weather as there is a 50 percent chance for La Niña weather from August to October, with its impact to be seen by the end of year, said Adi Ripaldi, head of climate analysis and information at the Indonesia’s meteorology agency.
Rainy season
“The weather is likely to be normal starting June or July as El Niño is seen fading through the end of May,” Adi said by phone May 3. Indonesia may
see a very wet rainy season if La Niña happens, he said. The possibility of a prolonged rainy period is bad as well and can damage bean quality as most farmers rely on the sun to dry cherries by spreading them on the ground, said Hutama Sugandhi, head of Indonesian Coffee Exporters’ Association.
“The weather is likely to be normal starting June or July as El Niño is seen fading through the end of May” Adi Ripaldi, Head of climate analysis and information at the Indonesia’s meteorology agency
La Niña occur when the surface of the Pacific cools, bringing on an atmospheric reaction that can upset global weather patterns and move commodity and energy markets. In addition to helping cause colder winters across the northern U.S., the phenomenon also has meant heavier monsoons in India as well as more rain across parts of Indonesia, Australia and Brazil. Bloomberg News
Commodity trading
Noble Group set to clinch US$3 bln credit facilities As recently as December, Noble was an investment-grade credit before Standard & Poor’s and Moody’s cut its ratings to junk and followed up with more downgrades in February. Anshuman Daga and Prakash Chakravarti
Noble Group is set to clinch about US$3 billion in bank credit facilities, sources close to the matter said, but it will have to offer the highest interest rate it has ever paid as lenders are wary after its ratings downgrades to junk status. Obtaining the credit facilities will allow Noble, Asia’s biggest commodity trader, to vault the last refinancing hurdle it faces this year and help regain investor confidence following a US$1.2 billion write-down that
pushed it last year into its first annual net loss since 1998. Noble is set to pay an interest of 225 basis points over the U.S. dollar LIBOR rate on the US$1 billion one-year unsecured loan portion of the deal, more than twice the 85 basis points above LIBOR it paid just a year ago, said the sources. The latest interest rate will be the highest in Noble’s history in Asia. Noble is also set to seal an agreement for a credit facility of about US$2 billion backed by its trade flows and inventories, with an announcement expected as early as this week, said the sources, who declined to be identified as lending discussions are not public. Noble reports results on Thursday. The sources said the number of lead arrangers on the unsecured loan declined to eight banks from 15 last year, a further sign that the market is still cautious about Noble, which has been hit by a bruising accounting dispute last year and a rout in the commodities market.
Trade finance heavyweights such as Societe Generale, Mitsubishi UFJ Financial Group, ING and HSBC are among the lead arrangers on the transaction. The banks declined to comment. Noble declined to comment on its credit facilities. Reuters had previously reported that the company had started discussions over the credit facilities. As recently as December, Noble was an investment-grade credit before Standard & Poor’s and Moody’s cut its ratings to junk and followed up with more downgrades in February. The company, headquartered in Hong Kong but listed in Singapore, is one of the world’s biggest traders of commodities from coal to iron ore to oil. On Friday, Fitch Ratings placed Noble on watch for a potential downgrade, which would also take the firm’s ratings to junk, triggering a 14 percent fall in its shares on Monday. The shares slumped 65 percent last year. Reuters
The Japanese government is set this week to compile an extra budget worth around 778 billion yen (US$7.15 billion) for reconstruction in the areas of southern Japan hit by deadly earthquakes last month, government sources told Reuters yesterday. The quakes on the southern island of Kyushu killed about 50 people and damaged at least 5,000 homes. The extra budget for the current fiscal year that began in April will fund the building of temporary housing for the victims, with establishment of a reserve fund of 700 billion yen to support reconstruction, the sources said. Consumption
South Korea dept store sales seen surging South Korea’s top department stores scored a second month of sales growth in April, preliminary government data showed yesterday, backing recent surveys showing consumers are feeling better about the economy. Combined sales at department stores run by Hyundai Department Store, Lotte Shopping and Shinsegae Co were seen up 8.0 percent on-year in April, according to data from the finance ministry. That would be much stronger growth than a 0.3 percent rise in March. The data also showed sales at discount stores last month likely rebounded. Malaysian markets
Khazanah said to mull big selling
Malaysian sovereign fund Khazanah Nasional Bhd. is considering paring its stakes in three listed companies, in deals that could raise as much as 3.6 billion ringgit (US$897 million), according to people familiar with the matter. The state-owned investor asked banks to pitch for a role arranging the sale of about 2 percent each in Tenaga Nasional Bhd., IHH Healthcare Bhd. and Axiata Group Bhd., according to the people, who asked not to be identified as the information is private. Khazanah, which is the largest shareholder in the three Malaysian companies, may decide to sell stock in one or all of the firms, one of the people said. Jewellery contraction
Indians shun gold buys during key festival Indians bought a third less gold than last year during the annual Hindu and Jain holy festival of Akshaya Tritiya on Monday, industry officials estimate, as droughts have hit the earnings of millions of farmers and the metal’s price rallied. Weaker demand from the world’s second-biggest consumer could limit a rally in global prices, which are up around a fifth this year. Indian prices were around 30,000 rupees per 10 grams on Monday, up nearly 10 percent from a year ago.
14 Business Daily Wednesday, May 11 2016
International In Brief SMB sentiment
U.S. confidence rises from two-year low U.S. small business confidence rebounded from a twoyear low in April amid growing labour market optimism, supporting views economic growth will regain momentum in the second quarter. The National Federation of Independent Business (NFIB) said yesterday its small business optimism index increased 1.0 point to a reading of 93.6 last month. It was the first increase in the index this year. The index hit a two-year low in March. Despite April’s jump, it remained below the 100 reading in December 2014 and its 42-year average of 98. Quarterly results
German economy set for strong performance German industrial output fell more than expected in March, but exports posed a surprisingly strong increase, data showed on yesterday, a mixed performance by Europe’s largest economy at the end of an overall solid first quarter. The data came after factory orders rose more than expected in March due to buoyant foreign demand especially from countries outside the euro zone, suggesting that a strong start to the year for the German economy may extend into the second quarter. Industrial output fell by 1.3 percent in March, the strongest monthly decline since August 2014, data from the Economy Ministry showed. Fiscal policy
Trump retreats on taxes comments Republican presidential candidate Donald Trump backtracked on Monday on his remarks about raising taxes on wealthy Americans, saying the rich might simply get a smaller tax cut than he originally proposed. Trump walked away from his Sunday comment that taxes on the wealthy would “go up” once his broad tax policy proposals, which include tax cuts for rich Americans, were negotiated with Congress. That appeared to be a break with traditional Republican support for lower taxes in all income brackets. On Monday, Trump said he was referring to potential adjustments to his own tax policy proposal. Debt service costs
Petrobras seeks US$1 billion China loan Brazil’s state-controlled oil company Petrobras is seeking a US$1 billion loan from the Export-Import Bank of China before originally planned as its debt service costs surge in the coming years amid the worst oil market in a generation. Petroleo Brasileiro SA, as it is formally known, is negotiating a definitive contract with the Chinese lender after signing a term sheet, the Rio de Janeiro-based producer said Monday in a filing. The financing is tied to equipment and service contracts from Chinese suppliers, and was originally planned for 2017, it said.
Global push
BIS economist calls for new global monetary order Central bankers with domestic mandates usually refuse to discuss more explicit forms of policy coordination outside periods of severe turbulence. Jeff Black
T
he world’s dollar-dominated monetary order has serious instabilities that can best be fixed by central banks explicitly coordinating policy, Claudio Borio, the chief economist of the Bank for International Settlements, argued in a new paper. “The Achilles heel of the international monetary and financial system is that it amplifies the key weakness of domestic monetary and financial regimes, i.e. their inability to prevent the build-up and unwinding of hugely damaging financial imbalances,” Borio wrote. The “most ambitious possibility would be to develop and implement new global rules of the game that would help instil greater discipline in national policies.” As the global economy shudders at the prospect of a simultaneous slowdown in China and tightening of monetary policy in the U.S., more attention is now being paid to the cost that countries pay when monetary or fiscal policy in other jurisdictions changes direction. Most prominently, Reserve Bank of India Governor Raghuram Rajan has argued that policy needs to be explicitly coordinated to avoid such harmful spillovers.
Dollar dominance
“How far away is the international community from finding adequate solutions? The answer is a long way,” Borio said. “There is no doubt that the dominance of one currency creates challenges” for the global system, he said. The paper cites research showing that the dollar is involved in about 90 percent of all foreign-exchange transactions, accounts for 60 percent of official foreign-exchange reserves as well as debts and assets outside the U.S. The euro came in a distant second at about 25 percent, Borio wrote. As the interests of domestic policy usually give little space to consideration of the spillovers to others,
Borio argued that this gives rise to financial imbalances elsewhere that can “take the form of unsustainable credit and asset-price booms that overstretch balance sheets on the back of aggressive risk-taking.” Three levels of cooperation or coordination would be feasible to lower the chances of a repeat of the 2008 global financial crisis, Borio wrote. What may not be helpful is “more pluralism” in the makeup of international currency markets, he said.
Self-interest
“At a minimum, enlightened self-interest, based on a thorough exchange of information, should be feasible,” the paper argues. “When setting domestic policies, countries would individually seek to take spillovers and spillbacks more systematically into account.”
“How far away is the international community from finding adequate solutions? The answer is a long way” Claudio Borio, Chief economist of the Bank for International Settlements
Currently, Group of 20 nations agree that their monetary policies ought to avoid a spiral of competitive currency devaluations, amid persistent concerns that monetary easing is being aimed at artificially boosting countries’ export positions. In February, G-20 finance chiefs said they’d “consult” closely on policy spillovers, language seen as referring to shock moves in China and Japan that weakened their currencies. That said, central bankers with domestic mandates usually refuse to discuss more explicit forms of policy coordination outside periods of severe turbulence.
Bank for International Settlements headquarters.
“Cooperation could extent to occasional joint decisions, on both interest rates and foreign exchange intervention, beyond the well-honed responses seen during crises,” Borio wrote.
Rajan proposal
Yet fears over the impact of, for instance, U.S. monetary tightening are giving weight to those like Rajan who see the need to go further. The RBI governor advocates a “traffic light” system for domestic policy, with red being for measures that should be avoided due to the adverse effect they have on others. Though the best solution would be an explicit rethinking of the global system, there’s little appetite for that now, Borio said. “The preconditions for progress are consensus on diagnosis, which would put financial imbalances at the heart of the problem, as well as a strong sense of urgency and shared responsibility internationally,” he said. “At present, neither precondition is met.” Bloomberg News
IPO
Saudi Aramco prepares for global expansion Saudi Arabia is expected to sell up to five percent of Aramco via an initial public offering. Rania El Gamal
Saudi Arabia’s state-owned oil giant Aramco is seeking to expand globally via joint ventures overseas as it prepares for a partial privatisation pushed by a government intent on diversifying the economy. The company is looking at opportunities in the United States, India, Indonesia, Vietnam and China, chief executive Amin Nasser told reporters during a rare media visit to the company’s Dhahran headquarters. “We are looking at the current market status that, even though challenging, is an excellent opportunity for growth,” Nasser said, adding that he believed an extra 1.2 million barrels per day would be added to global oil demand this year. Changes to Saudi Aramco lie at the heart of plans for a radical overhaul
of the kingdom’s economy and energy sector to meet the challenge of expected lower oil prices that have already caused massive fiscal deficits in Riyadh. Saudi Arabia is expected to sell up to five percent of Aramco via an initial public offering (IPO) and has asked the company to play a big role in developing industrial projects aimed at diversifying the energy-centred economy. “We will meet the call on Saudi Aramco,” Nasser said, adding that the company produced an average of 10.2 million bpd of crude in 2015
Key Points Aramco changes central to overhaul of Saudi economy Firm looking at U.S., India, Indonesia, Vietnam, China Riyadh expected to sell up to 5 pct of Aramco in IPO Latest stage of Shaybah expansion ready “in a couple of weeks”
and that the latest stage of its expansion project at the southeastern Shaybah oil field would be finished “in a couple of weeks”. The increased capacity of 250,000 bpd, taking Shaybah’s total production capacity to 1 million bpd, is aimed at rebalancing Saudi Arabia’s crude oil quality and at compensating for falling output at other fields as they mature, he said. Saudi Aramco also expects a huge ship repair and shipbuilding complex that it is developing at Ras alKhair on the kingdom’s east coast to be fully operational by 2021, Nasser said. The first part of the shipbuilding complex, part of Riyadh’s plans to boost industrial diversification, will be ready by 2018, and it will eventually make oil rigs and tankers, Nasser said. A presentation by the company showed the complex would create 80,000 jobs and allow Saudi Arabia to reduce its imports by US$12 billion, while increasing the country’s gross domestic product by US$17 billion. Reuters
Business Daily Wednesday, May 11 2016 15
Opinion Business Wires
The Korea Herald Korea’s three major energy-related public companies are to pay back more than 8 trillion won (US$6.8 billion) in debts maturing this year, which stemmed from their heavily leveraged investments in overseas energy assets, government data showed yesterday. The Korea National Oil Corp. (KNOC), the Korea Gas Corp. (KOGAS) and the Korea Resources Corp. (KORES) carry a collective maturing debt of 8.29 trillion won to be paid back by the end of 2016, according to the All Public Information In-One (ALIO). KOGAS and KORES said yesterday they will also take similar steps to repay their short-term debts that should be paid back within this year.
The Phnom Penh Post The Cambodian government needs to take stock of its economic place within ASEAN, and globally, to continue its growth trajectory given the anticipated ratification of a major international trade pact expected to erode the competitiveness of the Kingdom’s biggest industrial sector, US Ambassador to Cambodia William Heidt said. Addressing AmCham Cambodia’s annual meeting, Heidt said the Trans-Pacific Partnership (TPP) agreement – which creates a 12-member trade bloc that accounts for 40 per cent of the world’s economy – will make Vietnam a top US trading partner, potentially at the expense of Cambodia, which is not part of the landmark agreement.
“Neither the collapse of Credit-Anstalt nor that of Lehman Brothers caused all of the global financial tumult that ensued,” states the author.
The global financial system’s weakened defences
The Times of India GMR Infrastructure has secured a US$300-million (around Rs 2,000-crore) investment in cash from Malaysian energy firm Tenaga Nasional Berhad for a 30% stake in its energy arm. The Rs 11,000-crore infra major, which runs the Delhi airport, has been hiving off its assets to reduce its debt burden, which stands at Rs 46,000 crore at the group level. GMR has interests across airports, energy and highways. The funds will be primarily used to repay corporate debt, it said. Tenaga, a public listed company, is the largest power utility player in Malaysia with an integrated presence across the energy sector.
The Star 1Malaysia Development Bhd (1MDB) has hired Alvarez & Marsal Asia Ltd as it starts an engagement process for its US dollar-denominated bondholders following the default on the US$1.75bil 1MDB Energy (Langat) Ltd. It said on Monday while Alvarez & Marsal Asia would be its financial advisor, it has also hired D.F. King Ltd, an Orient Capital company as the identification and information agent to directly carry out the bondholder identification and registration process. It also said D.F. King would identify and register bondholders of the Langat notes, whose fixed rate is 5.75% and are due 2022.
E
ighty-five years ago this month, Credit-Anstalt, by far the largest bank in Austria, collapsed. By that July, banks in Egypt, Germany, Hungary, Latvia, Poland, Romania, and Turkey had experienced runs. A banking panic hit the United States in August, though the sources of that panic may have been domestic. In September, banks in the United Kingdom experienced large withdrawals. The parallels to the 2008 collapse of the US investment bank Lehman Brothers are strong – and crucial for understanding today’s financial risks. For starters, neither the collapse of Credit-Anstalt nor that of Lehman Brothers caused all of the global financial tumult that ensued. Those collapses and the subsequent problems were symptoms of the same disease: a weak banking system. In Austria in 1931, the problem was rooted in the breakup of the Austro-Hungarian Empire after World War I, hyperinflation in the early 1920s, and banks’ excessive exposure to the industrial sector. By the time Credit-Anstalt collapsed, the world had been in deep recession for two years, banking systems in a number of countries had become fragile, and tensions were easily transmitted across national borders, with the gold standard exacerbating financial vulnerability by constraining central banks’ ability to act. Similarly, in 2008, the entire financial system was overextended, owing to a combination of weak internal risk management and inadequate government regulation and supervision. Lehman Brothers was simply the weakest link in a long chain of brittle financial firms. Could a crisis like those triggered by the CreditAnstalt and the Lehman Brothers collapse happen today? One is tempted to say no. After all, the global economy and the financial system appear to be on the mend; risk-taking in the private sector has been reduced; and huge, though burdensome, regulatory improvements have been undertaken. Taken together, these developments surely make for a stable financial system. The problem with this reasoning is that financial crises tend to reveal fault lines that were not visible before. Indeed, the financial sector manages the risks that it recognizes, not necessarily all the risks that it runs. And it is easy to overestimate the crisis-preventing power of the new regulatory environment, which is analogous to a new highway: It is technically safer than a country road, but it also attracts more cars that are traveling at much higher speeds, so traffic accidents continue. Unable to rule out a new crisis, how well are we
“
Stefan Gerlach Chief Economist at BSI Bank in Zurich and former Deputy Governor of the Central Bank of Ireland.
equipped to cope with one? The short answer is: not very. In fact, if a financial crisis were to occur today, its consequences for the real economy might be even more severe than in the past. Of course, because central banks now recognize that their responsibilities extend beyond stabilizing prices to include the prevention and management of financial tensions, they would undoubtedly be quick to respond to any shock with a battery of market operations. But, in the event of a crisis, the tools available to central banks to prevent deflation and a collapse of the real economy are severely constrained, especially today. In the early twentieth century, central banks could all devalue their currencies against gold, thereby raising the price level and escaping debt deflation. And, indeed, nine countries, including the UK, did exactly that in 1931, with another eight countries, including the US, following suit over the next five years. Today, however, currency depreciation is a zero-sum game. Without the joint-depreciation option, central banks responded to the 2008 crisis with interest-rate cuts that were unprecedented in scope, size, and speed, as well as massive purchases of long-term securities (so-called quantitative easing, or QE). And those efforts were effective. But interest rates remain extremely low, and are even negative in some countries, and QE has been taken close to its limits, with public support for the policy waning. As a result, these tools’ ability to cushion an economy against further shocks is severely constrained. While forward guidance by central banks has also helped, it, too, is unlikely to be able to provide an effective buffer against a new shock. None of this is to say that another global financial crisis is necessarily imminent. On the contrary, economies worldwide are making progress in recovering from the 2008 disaster, and the US Federal Reserve’s tightening of policy last December signals that the global interest-rate cycle is moving into the next phase. This is good news. But the danger of another financial crisis should not be ruled out. Indeed, given that the capacity of central banks to cope with a financial shock will remain woefully limited for years to come, it should be taken very seriously. The risks of complacency are simply too great. Project Syndicate
The danger of another financial crisis should not be ruled out
”
16 Business Daily Wednesday, May 11 2016
Closing Cyber gap
World Bank says India faces stark digital divide
India is a global IT powerhouse but a huge majority of the population remains locked out of the benefits brought by the digital economy, the World Bank said yesterday. India’s vibrant business process outsourcing sector, centred in the southern hubs of Bangalore and Hyderabad, has made it the leading exporter of IT services and skilled manpower in the developing world. Yet nearly a billion people have no Internet access, the biggest offline population of any country, World Bank economists said at the India launch
of the World Development Report 2016, Digital Dividends. Fewer than two in five Indian businesses have an online presence, compared with almost two-thirds of Chinese firms, the report found. India needs to strengthen the “analogue foundations” of its digital economy - providing affordable Internet access, training workers in new skills and beefing up regulations to ensure competition, the authors write. One barrier to online access for India’s millions of poor citizens is cost - a residential broadband service is six to ten times more expensive than in China. AFP
Moody’s comments
Ballooning state firm debt poses contingent risk to China
The rating company says reforms to the state enterprises’ are critical to checking the rise in contingent liabilities. Umesh Desai
D
ebt owed by China’s stateowned enterprises (SOE) is higher than in any other rated nation and failure to curb risks from these liabilities would curb growth, lower credit availability and ultimately lead to state support, Moody’s said yesterday. In a report, the credit rating agencies said SOE liabilities stood at 115 percent of gross domestic product
(GDP), far exceeding levels seen in countries such as Japan and South Korea where the state sector also plays a significant role. China’s SOE debt to GDP has risen from 100 percent in 2012 and represents the lion’s share of China’s total debt to GDP of 280 percent. In Japan, SOE debt stands at 31 percent of GDP and in South Korea the ratio is 28.9 percent. “Large and rising SOE liabilities - at a time when profitability is falling - could strain bank balance sheets, potentially necessitating support from the government,” the agency said in a report. Bringing down the leverage of the most indebted listed SOEs would require an equity injection of 2.7 trillion yuan (US$414.4 billion), Moody’s estimated in the report. Including the non-listed SOEs, the required
Parliament questions
Key Points China SOE debt has risen to 115 pct of GDP SOE debt is higher in China than in any other nation Rising SOE debt could trigger state support Bringing SOE debt down could cost China 25 pct of GDP SOE risks could spill into banking sector
capital injection was equivalent to 20 percent to 25 percent of GDP, it said. Mergers in the sector were also to be expected, the agency said. Moody’s added that a planned debt-for-equity swap programme
Political shift
aimed at helping reduce the debt overhang in the sector could actually transfer risk from the corporate sector to the banking sector and would not be able to prevent a full-blown financial crisis. “The swaps would not address issues of economy-wide financial stress and falling returns on assets,” said Moody’s, which lowered in March the outlook on China’s Aa3 rating to negative from stable blaming uncertainty around reforms, rising debt and falling reserves. Reforms to the SOE sector are critical to checking the rise in contingent liabilities, Moody’s said. Rising leverage and shrinking profit in the SOE sector would lead to a further rise in non-performing loans, which, if substantial and protracted, could also require equity injections for the banks, it said. Reuters
Bilateral ties
Bank of Japan inquires about US mulls Myanmar new board member’s resume sanctions rethink
Chinese State Councillor meets Malaysian PM
Bank of Japan (BOJ) officials were left squirming yesterday by questions in parliament about discrepancies in the resume of Makoto Sakurai, the central bank’s newest policy board member. BOJ Deputy Governor Hiroshi Nakaso told lawmakers the discrepancies do not amount to falsification, but the incident leaves the central bank and the government open to criticism that they overstated Sakurai’s credentials. Sakurai, who shares Prime Minister Shinzo Abe’s views on the need to reflate the economy and prevent a return to deflation, joined the BOJ last month after his nomination was approved in a vote in parliament in March. His appointment was seen as moving the board more in favour of Governor Haruhiko Kuroda’s radical quantitative easing, but his nomination by the government surprised economists because he was unknown in the financial community. Sakurai, in response to a lawmaker’s questions, said he got the credits for a doctorate in economics at the prestigious Tokyo University but dropped out and was not granted a PhD. In contrast, Sakurai’s profile on the BOJ’s web site says he completed the PhD programme in 1976. Reuters
Visiting Chinese State Councillor Yang Jiechi met with Malaysian Prime Minister Najib Razak yesterday, as both agreed to strengthen ties and cooperation between the two countries. Bilateral ties between China and Malaysia have been developing fast and steadily in recent years, yielding fruitful results, Yang said, pointing out that leaders of the two countries held a series of important talks last year. China attaches great importance to the bilateral ties with Malaysia, and is willing to work with the Malaysian side to implement the important consensus on pragmatic cooperation on all fronts reached between leaders of the two countries, Yang said. China is willing to work with Malaysia to increase high-level exchanges, strengthen strategic communication, actively promote synergy between the Belt and Road Initiative and Malaysia’s development strategy, push for cooperation in areas like production capacity and infrastructure, increase people-to-people exchange for the healthy and stable development of the China- Malaysia relations in the long term, he added. For his part, Najib spoke highly of the importance of the bilateral ties between Malaysia and China. Xinhua
Washington’s new ambassador to Myanmar yesterday said remaining sanctions had taken an “unintended” toll on the nation’s delicate economic development, as the US re-evaluates its embargoes on the former pariah state. Myanmar’s stunning transition from decades of repressive junta rule to a civilian-led government steered by Aung San Suu Kyi and her pro-democracy party was accompanied by the lifting of most Western embargoes. The United States rolled back many of its sanctions to reward reforms since 2011, but kept a clutch of blacklists targeting junta-era cronies and their sprawling business interests. “We recognise that even these limited, targeted sanctions occasionally have unintended effects on the broader economy,” ambassador Scot Marciel said at a press conference in Yangon. “Now in the aftermath of the transition to the new elected government we are again reviewing our sanctions,” he said, adding that he could not yet say what the result of next week’s review would be. In December the US temporarily eased restrictions on Myanmar’s ports to unclog trade into the fast-developing country. AFP