Taiwan trims 2016 economic growth outlook again GDP Page 9
Monday, May 30 2016 Year V Nr. 1053 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Kelsey Wilhelm Logistics
CCAC
Logistics centre in Cotai halted until integrated resorts planning complete Pages 4
Two men allegedly commit fraud in gov’t low income subsidy scheme Page 2
www.macaubusinessdaily.com
Cinema
Abenomics
New film festival leverages non‑gaming needs and millennial market Page 4
Japan’s Prime Minister may leave tax hike to successor Page 11
Romancing the stone Real Estate | EXCLUSIVE INTERVIEW
A niche worth exploring. Developer Headland Developments MD John Gunning tells Business Daily he sees the renovation of cultural heritage buildings as both a responsibility and an opportunity. With the key point giving such buildings a longer life. By upgrading interiors and maintaining or improving exterior façades. In addition to heritage commissions the group is involved in several other high profile projects in the region. Pages 6 & 7
Real estate rebound Residential property transactions rebounded to 1,087 in April. Representing not only a m-o-m surge but a jump of 63.7 pct y-o-y. Average housing prices in the city reached MOP78,745 per square metre compared to MOP72,741 one month prior. Some 793 deals were transacted for residential units on the Peninsula.
Unemployment 1.9 pct in April
Labour Between February and April, the city had more gaming workers. But fewer people working in retail, wholesale, and construction. Five pct of the 7,700 unemployed in the territory were fresh labour force entrants searching for their first job. Page 4
Mixed fortunes
Gaming Revenue for Q1 amounted to US$1.28 bln (MOP10.23 bln). A 51 pct increase y-o-y slot and electronic gaming manufacturer IGT. But also a net loss increase of 132.13 pct due to non-cash foreign exchange losses. Page 5
Persistent concerns
Industrial data Profit growth of China’s major industrial firms slowed sharply in April. Adding to concerns about growing downward pressure on the economy. Profits of high-tech industries, however, surged 21.6 pct y-o-y, outperforming the overall industrial sector. Page 8
27° 31° 27° 30° 28° 31° 28° 32° 28° 32° Today
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Source: Bloomberg
Source: AccuWeather
Housing Page 3
HK Hang Seng Index May 27, 2016
20,576.77 +179.66 (0.88%)
Tencent Holdings Ltd
+4.52%
Bank of Communications
+1.92%
Tingyi Cayman Islands
-10.21%
Hong Kong Exchanges and
+2.19%
China Construction Bank
+1.65%
Lenovo Group Ltd
-3.82%
I SSN 2226-8294
2 Business Daily Monday, May 30 2016
Macau Fraud
CCAC snares alleged income subsidy fraudsters
T
he city’s graft-watchdog - the Commission Against Corruption (CCAC) – found that a property company owner and a property management committee president allegedly committed fraud over the government’s income subsidy for low income workers, in the amount of nearly MOP100,000 (US$12,450).
According to the CCAC press release last Friday, the persons involved in the two fraud cases also allegedly committed offences of document forgery. The two cases have already been referred to the Public Prosecutor’s Office. The anti-corruption body found that the owner of a property management and cleaning company had
understated the wages of its employees and overstated their working hours in addition to faking their personal data when applying for a low income subsidy on behalf of the workers, in an attempt to fraudulently obtain a supplementary allowance of over MOP700,000. Meanwhile, the president of a property administration committee was found to have allegedly obtained more than MOP200,000-worth of subsidies from the government by fraudulent means. CCAC claimed that the committee president intentionally understated the wages of the property administrators when applying for income subsidies for them, in addition to having named part of their wages as ‘allowance and bonus’ - paid separately on a different date - in order to conceal the actual amounts of their income. The government enacted the temporary measures for the income subsidy in 2008, which sought to subsidise the city’s low income earners so that their monthly income reached MOP5,000. K.L.
Transport
Gov’t: Local driver-only policy unchanged The government stated last Friday that the current policy of not importing non-resident workers as local drivers has not changed. The statement issued by the Government Spokesperson’s Office followed last week’s media reports that the MSAR Government was considering amending local laws for Hong Kong drivers to obtain bus and truck licences in the territory. ‘The government is very much concerned about the lack of local drivers. [It is] actively attracting individuals
with a heavy-bus driving licence to join the bus industry, apart from trying its best to create conditions for those interested in joining the industry - but without such a licence - through training [programmes],’ the Office wrote. Last Tuesday, the HKSAR Transport and Housing Bureau told the legislative body of Hong Kong that the Macau Government is studying the inclusion of law amendments so that Hong Kong cross-boundary drivers may apply for bus and truck
Health
Health Bureau demands removal of 45 pharmaceutical products on sale in Macau A list of 201 medications produced by Taiwanese medication company Ta Fong Pharmaceutical Co., Ltd. have been mandated for removal from local shops and distribution points due to detected production violations by the Taiwan food and medication authority, a statement released by the Health Bureau statement has announced. The Health Bureau has solicited any citizens, import and export
companies, pharmacies and private clinics in Macau to remove or return a total of 45 different types of medication and health products on sale in Macau, which include two lots of female hygiene products, children’s anti-cold syrup, anti-migraine film coated tablets and Throtin anti-inflammatory throat spray, according to the Health Bureau release. N.M.
driving licences in the city for an initially-planned cost of HK$1,040 (US$129.5) to HK$1,240, according to Hong Kong media reports. The city’s Transport Bureau told Business Daily last week that the two governments were still studying the two cities’ cross-boundary traffic policies for the future completion of the Hong Kong-Zhuhai-Macau Bridge, claiming that details of the new traffic policies would be announced to the public when conditions warrant. K.L.
Law
Associations question government on electoral law revisions Association members have questioned how the government will distinguish between electoral campaigning and association activities during the voting process for the Legislative Assembly, a Public Administration and Civil Service Bureau release stated. The enquiries arose at the fourth consultative session for the Legislative Assembly Election Law revisions. In addition, the associations present suggested additional installations and equipment for voting sites to facilitate the access of voters with disabilities. The session welcomed 130 participants from 87 associations and organisations to the Tourism Activities Centre last week, in an event presided over by the Secretary for Administration and Justice, Sonia Chan Hoi Fan, the Commission Against Corruption (CCAC) Assistant Commissioner, Lam Chi Long, and the director of the Public Administration of the Civil Service Bureau, Koi Peng Kuan. Some of the proposed revisions on the Election Law included efforts to define and clarify meanings for promotional efforts associated with electoral campaigning and to regulate promotional efforts; the introduction under the law of a scheme to monitor campaign expenses; a strengthening of supervision on electoral activity, including any electioneering done outside of Macau; an update of the rules for candidacy; and the introduction of a ban on elected members of the Legislative Assembly holding any political position in a foreign country, as previously reported by Business Daily. After association members presented their concerns and suggestions, Kou Peng Kuan noted that any policies for the support of voters with disabilities would only be defined after the creation of the legislative Assembly Election Committee, which will also be in charge of establishing the instructions for associations to set up the distinction of association activities and electoral campaigning, the release stated. Lam Chi Long of the CCAC also presented a suggestion in the proposed revisions of a system for associations to declare to the Committee their planned activities during campaigning, which would then be made public and subject to the scrutiny of the public and CCAC. N.M.
Business Daily Monday, May 30 2016 3
Macau Property Housing transactions soar by 84 pct m-o-m in April despite price rise
Spring returns to housing market Residential property transactions rebounded to 1,087 in April, representing not only a month-on-month surge, but a jump of 63.7 per cent year-on-year. Kam Leong kamleong@macaubusinessdaily.com
T
he city’s residential property market continued picking up in April with total transactions surging by 83.9 per cent month-on-month whilst average home prices grew by 8.25 per cent, the latest official data released by the Financial Services Bureau (DSF) reveals. Last month, some 1,087 housing deals were transacted, a jump of 496 compared to the 591 transactions of March. The number, compared to 664 transactions for April 2015, also represents growth of 63.7 per cent year-on-year. In addition, average housing prices in the city reached MOP78,745 (US$9,843) per square metre compared to MOP72,741 one month ago. The average cost of a home, compared to MOP103,128 per square metre for the same month last year, was 23.6
per cent cheaper. Of the total transactions, the majority, 793, were agreed on residential units on the Peninsula, an increase of 66.6 per cent month-on-month and by 82.2 per cent year-on-year. In the month, a unit on the Peninsula cost on average MOP76,507 per square metre, up 8.23 per cent month-onmonth, although down 8.23 per cent year-on-year.
Transactions in Taipa notably up
Meanwhile, the number of housing transactions in Taipa posted the most significant month-on-month growth - of 186 per cent - at 252 transactions last month. Compared
to 168 transactions one year ago, the transaction number on the island rose by 50 per cent. In addition, housing prices in Taipa grew by 7.47 per cent month-onmonth to MOP79,854 per square metre last month. On a year-on-year comparison, residential units in Taipa were some 42.6 per cent cheaper from MOP139,080 one year ago. Home prices in Coloane also rose by 9.52 per cent month-on-month to MOP102,619 in April. The average cost was some 12.2 per cent lower than the MOP116,907 per square metre seen one year ago. The total number of housing units there totalled 42 in April.
In terms of property types, transactions on completed units accounted for 92 per cent of the total of 999 last month. According to DSF data, the average cost for a completed unit was some MOP75,627 per square metre in the month, which is 7.1 per cent higher than one month ago, but 5 per cent lower than one year ago. For units that were still under construction, their worth surged 20.9 per cent month-on-month to MOP111,119 per square metre in April, compared to MOP91,862 per square metre one month ago. Yet, compared to MOP142,524 one year ago, the cost is still 22 per cent cheaper.
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4 Business Daily Monday, May 30 2016
Macau
Employment
Unemployment lingers at 1.9 percent as at end-April Between February and April, the city had more gaming workers, but fewer labourers working in the retail and wholesale field, as well in the construction sector.
T
he city’s unemployment rate hovered at 1.9 per cent from February to April of this year, whilst the number of employees in the gaming sector registered a slight increase compared to the previous period. According to official data released last Friday by the Statistics and Census Service (DSEC), the total labour force rose by 0.2 per cent period-to-period, amounting to 397,300 as at the
end of April. Of the total, the employed population accounted for 389,600, up by 600 compared to the previous period. Meanwhile, the labour force participation rate remained at 72.2 per cent as at the end of the month. According to the DSEC, 5 per cent of the 7,700 unemployed in the territory were fresh labour force entrants searching for their first job, which
declined by 1.3 percentage points compared to the first three months of this year.
More gaming workers
In terms of industry, the number of workers engaged in gaming and junket activities totalled 83,800 as at the end of April, which rose by 4 per cent period-to-period from 80,600. The number, meanwhile, accounted for some 21.5 per cent of the city’s total employed population. However, the number of labourers serving for hotels and similar activities fell by 3.3 per cent period-to-period to 29,200 in the three months from 30,200 in the previous period. These workers, plus some
other 27,800 of those working for local restaurants, accounted for 14.6 per cent of the total employed in the Special Administrative Region. In addition, the number of labourers in the construction field was also down by 1.2 per cent - to 47,700 - in the three months compared to 48,200 in the previous period. The number accounted for 12.2 per cent of the total employed labour force. According to DSEC, other major industries that local workers were working for include the wholesale & retail trade, the real estate & business activities sector, as well as public administration & social security, of which the number of labourers accounted for 10.7 per cent, 7.9 per cent and 6.9 per cent of the total, respectively. On a year-on-year comparison, the city’s unemployment rate rose by 0.2 percentage points for the three months whilst the labour force participation rate decreased by 1.8 percentage points, according to DSEC. K.L.
Cinema
International Film Festival to showcase local industry
Urban planning
Gov’t mulls change of plan for Cotai reclamation zone The government is studying potential alterations to its urban planning for the reclamation area located in Cotai, which may involve gaming and hotel projects, the director of the Transport Bureau (DSAT), Lam Hin San, revealed in reply to an enquiry by legislator Si Ka Lon. The legislative member stated in his written interpellation that the development of the city’s logistics industry is restricted by the lack of a logistics centre in the local territory, querying why the plan of a building such as a centre has still not been implemented despite the government granting a land plot of 21,000 square metres for such purpose in 2006. The DSAT director, in reply, claimed that the land parcel for the logistics industry would only have
conditions to be developed after the land grants for gaming projects, hotel facilities and big-scale stadium project for a university are confirmed in the area - due to the progressing study on the change of urban planning there. The transport official added that the government would reserve a certain space for the logistics industry on the city’s artificial island, where the local border checkpoint for the Hong Kong-Zhuhai-Macau Bridge is located. ‘But detailed analysis and research [on the plan] are still required for the current stage. In addition, [the government] needs to review arrangements for other facilities as well. Hence, there is no timetable for that,’ the Bureau director wrote. K.L.
In line with continued efforts to diversify the entertainment offerings in the city, the dates for the 1st International Film Festival Macao as well as the Awards Ceremony for the event will take place from December 8 to 13, as announced at a press conference attended by Macao Government Tourism Office Director Maria Helena de Senna Fernandes. The event will purportedly have a budget of around US$10 million (MOP800 million), Business Daily previously reported, and will be jointly sponsored by MGTO and the Macau Films & Television Productions and Culture Association, with events occurring at the Macau Cultural Centre and Macao Science Centre. MGTO and movie festival director Maria Helena de Senna Fernandes stated that the event will allow exchange opportunities, raise awareness of Macau’s brand on the world stage, and develop synergy between
tourism and culture, while allowing for the sustainable development of local creative and cultural activities. According to data from Bloomberg Intelligence the healthy development of a sustainable entertainment industry in the SAR when relating to young tourists and visitors would be highly reliant upon film/box office related events, which have strong growth predicted, with an eventual estimated 30 per cent of non-gaming entertainment revenues coming from film and box office over the next five years, as compared to 15 per cent from theme parks and 7 per cent from live entertainment. Also, in the last quarter of 2015, according to data by the Statistics and Census Services (DSEC), 32 per cent of the Macau population participating in cultural activities comprises people going to the cinema, making it the most attended cultural activity, albeit with a 0.6 per cent decrease year-on-year. N.M.
Business Daily Monday, May 30 2016 5
Macau Gaming
IGT increases revenue and losses in Q1 management, and synergy savings’ all contributing to ‘sharp profit expansion.’ However, adjusted operating income was 35 per cent above the first quarter of 2015, with a ‘significant bad debt expense’ totalling US$7.72 million in net debt. Analyst firm Wells Fargo stated that the company registered ‘better than expected 1Q results’ with revenue ‘in-line and EBITDA was 5 per cent above consensus expectations,’ but that ‘while leverage remains high, management focused on reducing debt burden.’
Nelson Moura together with Macau Business nelson.moura@macaubusinessdaily.com
I
nternational Game Technology PLC has registered revenue for the first quarter of this year amounting to US$1.28 billion (MOP10.23 billion), a 51 per cent increase year-on-year, but also a net loss increase of 132.13 per cent due to non-cash foreign exchange losses, a company statement revealed. International Game Technology PLC, a slot machine and lottery company created through a US$6.4 billion merger between Italian lottery company Gtech and slot machine company IGT, justified the revenue growth as due to ‘strong lottery performance, particularly in North America and Italy,’ as ‘global lottery same-store revenue, excluding Italy, increased 18 per cent during the first quarter, reflecting the benefit of the record Powerball jackpot in the United States’, but with gaming revenue lower than in 2015.
Great expectations
*51
Not all smiles
However, for the same time period the gaming developer and manufacturer registered net losses of US$93 million in the first quarter of 2016, an increase of 136.13 per cent from last year, due to the impact of US$162 million in primarily non-cash foreign exchange losses, according to the company statement. ‘We begin 2016 with a solid first quarter, evidenced by good revenue growth with all operating segments contributing to an improvement in profitability. Continuing growth across all regions, especially North
*132.13
pct Year-on-year increase in revenue
pct Year-on-year increase in net loss
America and Italy, propelled our lottery revenues,’ Marco Sala - CEO of IGT - said in the company statement, adding that gaming revenues were resilient despite: ‘challenging market conditions in North America,’ IGT’s largest gaming market, with the company remaining ‘focused on re-energising gaming operations’.
The company also registered an adjusted EBITDA of US$460 million, up 43 per cent year-on-year, with an overall sales growth due to the ‘favourable revenue mix and synergy savings.’ Alberto Fornaro - CFO of IGT - justified the first quarter results growth on the ‘diversity’ of IGT’s product’ and ‘geographic mix’ with ‘revenue growth, disciplined cost
The CFO of IGT stated that ‘even after large interest payments during the period, we generated significant free cash flow, enabling us to reduce debt in constant currency and further improve our leverage profile,’ as IGT registered US$206 million in cash operations in the first quarter and capital expenditures of US$98 million. The company predicts an adjusted EBITDA of US$1.79 million in 2016, supported by growth in core operations and an average euro/dollar exchange rate of 1.10 instead of 1.11, an estimate in consensus with analyst company Wells Fargo’s predictions, while capital expenditures excluding lottery concession payments are expected to be between US$575 million to US$625 million. Also, Lotto-related capital expenditure was estimated at US$695 million, with US$660 million for upfront payments and approximately US$35 million for infrastructure upgrades, while net debt could reach US$7.9 million at the end of 2016, the company statement predicted.
Gaming
Konami horseracing electronic betting station sparks public interest Smoking
Government open to revisiting smoking ban According to a statement by the Secretary for Social Affairs and Culture, Alexis Tam, the government would be open to debate on the continuing of smoking areas in casino VIP rooms, TDM radio reported. “It’s still early. But we’re open [to the idea]. We’ll analyse first; we have to be objective and open-minded,” Alexis Tam stated, suggesting a possible revision of the zero tolerance policy in relation to VIP gaming floors by the government. The Secretary said he would wait to see the results of the report conducted by the Legislative Assembly’s second standing committee, which has been analysing the smoking ban law for almost a year. The chairman of the sub-committee, Chan Chak Mo, told reporters following a closed-door session meeting on the full-smoking ban that the majority of the members of the committee support the establishment of smoking lounges in local casinos, while only two members support a total smoking ban, as reported by Business daily. Alexis Tam stated he would study the proposals by the Macau Health Bureau and admits the possibility of conducting another enquiry by the gaming operators and workers, TDM Radio reported. N.M.
Of all the new varieties of table game, slots and more available at the most recent gaming expo in the SAR, of particular interest was the prototype of the Konami ‘Fortune Cup’ horseracing betting station. The company notes that the response was very positive, according to product and marketing manager for Konami Australia Pty Ltd., Charles Seo, as noted by GGRAsia. The product’s combination of a traditional horseracing-themed mechanical game with digital betting stations was presented at the threeday trade show in Macau last week as one of the main attractions of the Konami booth. ‘It brings a little bit more fun to players: they can physically see the horses on the track running rather than on the screen,’ the Konami marketing manager stated to GGRAsia, while adding that Macau has been a more difficult market for Konami, but that the group has a ‘long-term view’ of the city’s prospects. N.M. C
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6 Business Daily Monday, May 30 2016
Macau Real Estate Interview
“There’s a lot of interest from Hong Kong and Singapore investors in Macau” Developer Headland Developments sees the renovation of cultural heritage buildings as a niche worth exploring in Macau over the coming years, the developer’s Managing Director, John Gunning, tells Business Daily.
higher through straightforward renovation, but also by building a basement and stories above the current limit. Effectively, it’s possible to almost double the gross floor area of a building. It takes some time and planning, and requires close work with the government but once you get the permit the process doesn’t take long. What is the main profile of your clients in this business? To date, we’ve worked mostly with Sniper Capital as a prime source of projects. Obviously, we’re open to working with other private sector clients at any level and we’re not focused 100 per cent on heritage projects. We’ve been involved in the development of the residential Rua de Laboratorio and there are other projects, such as Senado Square which is a retail project in the heart of Macau.
‘Investors in Macau started to realise that there may be higher returns in other markets, particularly in Europe, the U.S. or Australia.’ Originally, the Senado Square project was expected to already be completed. What happened with this project in order for the opening date to be moved to the fourth quarter of 2017? This issue is sensitive and involves information [from] the Macau Property Opportunities Fund. But essentially it has taken a while to work out the design parameters. However, there’s been extensive work with the Cultural Heritage Department to ensure we get the best possible design. Hopefully, in the coming few months we’ll receive the first approval for the design and then we can get a construction permit and start the works. We hope that the construction works will start by the end of this year.
João Santos Filipe newsdesk@macaubusinessdaily.com
H
eadland Developments has been developing many projects in which clients want to preserve the traditional ‘Macau style’, a combination of Portuguese and Chinese elements in their buildings. Is this an area the company is now specialising in? Absolutely; it’s taken us seven years to get to this point. Now we can take an existing building and restore it, while preserving its cultural heritage value. This is the result of working closely with not only the owners, but also the Cultural Heritage Department and specialists in heritage architecture from Hong Kong and Macau. Regarding the renovation of these heritage buildings, is this an area
that we can say is a niche market? In a way it’s niche because it’s a very small market that only a very small number of people are able to access. In a way what we’re doing is enhancing the cultural heritage of the buildings and at the same time allowing people to continue to use them. We’re looking for ways to help owners of these particular buildings see how we can help them bring the buildings back to life, while keeping their glory, but also reusing them. The key point is to give the building a longer life and be able to upgrade its interior and maintain or improve its exterior façade. The Cultural Bureau (IC) is expected to classify in the coming year 70 buildings of ‘architectural interest’. According to the law, the owners of the buildings have to preserve them. Is this a process Headland
Developments is following? Yes. Macau has quite a significant number of heritage buildings that are on the Heritage list or Monuments list. It’s a shame to see buildings falling into decay simply because there’s not enough money from the owners to be able to rebuild and take good care of them. We’re all in favour of maintaining Macau’s cultural heritage history and culture. Before, we worked very closely with the Cultural Heritage Department and all our projects go through some form of consideration by this department. Is the fact that Macau has natural limitations because of its size and that when you renovate old buildings you’re able to increase the gross floor area by expanding underground a plus in this business? There are ways to make the value of the heritage building significantly
Recently, one gaming operator manager said that they don’t mind delaying the opening of their Cotai project because it will give them more time to gauge the future. Are you applying this logic to the Senado Square project? It is a prudent move if you are thinking about expanding to Macau to hold fire until you get an accurate forecast. The market is showing signs of bottoming out. I’m not a market pundit but the more people I talk to about the retail and gaming sectors, they feel the market is reaching its bottom. That is not reflecting in any upturn in activities but it means that it has been flat. That’s probably a good sign. The local retail market, mainly the luxury sector, is falling. Some brands are closing stores and rental prices are declining. How will this affect your project? The market is cyclical and in the last year and a half there’s been a downturn in tourists, existing demand, and the average tourist spending was cut. This has happened because other markets have opened up, there was a
Business Daily Monday, May 30 2016 7
Macau decline in the numbers of tourists and also the crackdown in terms of corruption in Mainland China. All these combined to have a negative impact upon retail sales. But this is cyclical and the market will come back, particularly once the Hong KongZhuhai-Macau Bridge is operating. How do you expect the opening of the casino resorts in Cotai to affect the tourism industry? This so-called second wave of casinos opening is another positive factor that will contribute to a regeneration of tourism and spending in Macau. At that point the numbers of gross gaming revenue will also increase. That will stimulate the retail market back again. I hope that by the time we come to complete the Senado Square project we will be entering another upturn in the cycle. With the Bridge heading towards conclusion, and the construction of the Light Rail Transit (LRT), there’re a lot of positive factors about Macau’s future. The property market has been declining for some time now. The common view is that this trend will continue. What’s your take? Again, I think it’s cyclical. We’ve seen the same in Hong Kong in the past, like in 1997 and 1998; and also with the SARS situation. But then there was a V-shaped spike. From that point on, it increased significantly until 2008 and 2009, until the global financial crisis. Then there was a sudden decline and then from 2010 to 2015 we saw the recovery again. It’s a strong decline but it’s cyclical. I don’t have the fear that the market will not come back to its former position. Maybe it’ll actually exceed it. How do you see the development of Hengqin, the easing of conditions for locals buying homes in Zhuhai and the new claimed territories? Will this benefit the local market? In my view these factors are all positive. There’s a lot of business moving into Hengqin bringing new industries and more opportunities. This will create extra demand for homes of the people coming to the area. Hengqin is more at this point business-generating and therefore it’s going to attract more people into the area and create demand for housing. I don’t think that the fact that the market and the boundaries seem to be opening up will be a negative trend. Does the fact that the market is going down increase the number of people interested in investing? Everybody views a downturn as an
‘The key point is to give the building a longer life and be able to upgrade its interior and maintain or improve its exterior façade.’ opportunity. I still feel there aren’t that many new houses coming onto the market and that there’s an underlying demand for new properties of the right size and affordability. Even in a period of decline there’s always a continuous demand for new property. It’s a demand that always occurs even when people are seeing the market going down, but they wait until they can see signs that the property market is bottoming out and possibly on the incline. Then, we’ll see those people who have waited about their buying decision jump into the market very quickly. That’s when you see an uplift in the curve, because all these people have been waiting for the buying opportunity and this is the right time to get into the market. Investment in property is one of the core areas of Headland Developments’ business. Can you elaborate? Usually, we identify a project and we try to secure the development rights. Then either through a direct purchase or option agreement we start working with our joint-venture partner. After that, we prepare a feasibility study and we go out to the market to source the equity to go into those deals. Once we source the equity, it’s relative easy to secure the bank debt in the UK. With the whole package we are able to go back to investors with the returns. It’s difficult to tell how the money
‘It’s difficult to tell how the money is going to multiply but generally 25 per cent return on revenue plus returns, this is our target.’
Headland Developments
Headland Developments was founded in 2009 and since then has been operating in Macau, Hong Kong and the United Kingdom. Many of the projects of the company have been developed together with local is going to multiply but generally 25 per cent return on revenue plus returns, this is our target. What’s the profile of the clients involved in this kind of investment? Usually, they are high net worth or people in the industry. Still, we are open to any background. It’s also common for investors to be financial or real estate institutions. In Macau, the background of the existing investors relates to very experienced people in construction and development. We’re talking about local experts in development and construction. Is it easier to attract investors from Macau to invest abroad or to attract investors to Macau? Nowadays there’s a lot of interest by Hong Kong and Singapore investors in Macau. Some investors see Macau today as a good buying opportunity because of the downturn. Others say it’s an opportunity to take advantage of people who need a quick exit from their positions. So some funds and even families are looking at the opportunities and for a quick and relatively easy exit with profit. They know that if they buy at discount they can make profit because in two or three years time the building will be back to its original market price. What about investors from Macau? What’s the main trend now? Investors in Macau started to realise that there may be higher returns in other markets, particularly in Europe,
fund management company Sniper Capital, including the Taipa Entertainment District, The Fountainside and more recently the Senado Square project. The company provides services related to development, investment and project consultancy. the U.S. or Australia. These are very strong favourites because a lot of these people send their kids to universities in these countries and they see buying opportunities there. Concerning more high-end investors they may seek other investment opportunities. Besides Macau, Headland Developments is operating in Hong Kong and the United Kingdom. What is your main focus at the moment? We’ve set up an investment platform to develop - which is called the Franklin in Birmingham, the former Cadbury’s headquarters in Bournville - with 73,000 square feet. We made it into 79 houses/apartments and we renovated the building. So far, we’ve sold 62 per cent of the apartments and are looking to finish the project [in late] May this year. We’re looking to be 100 per cent sold before that. At the moment you’re only operating in Macau, Hong Kong and the UK. Would you consider stepping into the Mainland? We definitely consider it but we don’t have specific plans. Clearly, if there was an opportunity that was right for us, we would definitely consider it. We’re open to investing in good opportunities outside our markets. At this moment, we have a one-time opportunity in Lisbon and we’re looking for investors for a luxury project in the city’s downtown, very close to Avenida da Liberdade. This is one of the [potential] high-end areas of the town.
8 Business Daily Monday, May 30 2016
Greater China Weak data
April industrial profit growth slows from March Sectoral performance remained highly uneven
P
rofit growth at China’s industrial firms slowed in April, in line with other data for the month which suggested the economy may be losing steam again after picking up earlier in the year. China’s industrial firms made 502 billion yuan (US$76.59 billion) in profits last month, up 4.2 percent from the same period last year and compared with growth of 11.1 percent in March, the National Bureau of Statistics said on Friday. For the first four months of the year, profits reached 1.84 trillion yuan, a 6.5 percent gain from a year earlier but down from a 7.4 percent rise in the first quarter. The data covers large firms with at least 20 million yuan of annual revenue. Product inventories at industrial firms fell 1.2 percent year on year at end April, the first drop in recent years, the statistics bureau said, without giving details. A return to profit growth early this year and a rebound in commodities
prices such as steel had sparked hopes that China’s industrial sector was finally perking up after a protracted downturn that has dragged on the world’s second-largest economy. But a string of disappointing economic data for April and a sharp reversal in raw material prices in recent weeks suggest the outlook for China’s industrial sector remains challenging. Indeed, sectoral performance remained highly uneven. Oil refiners’ profits rose more than
80-fold in January-April on-year, while steel mills saw a 42 percent gain as prices rebounded and they upped production. But coal miners saw profits fall 92.2 percent, while oil and gas producers posted a loss. Profits in the manufacturing sector rose 13.3 percent in January-April, indicating relative strength in the sector despite stubbornly weak exports. Debt at Chinese industrial companies increased 4.8 percent on an annual basis to 55.8 trillion yuan as of end-April,
compared with a 5.2 percent rise in March. China’s growing debt and risks to its financial system have topped investors’ worry lists this year, but the mood in Beijing seems to have shifted as the government expresses concerns about the dangers of too much debt-fuelled stimulus. A May 9 commentary in the People’s Daily said China will not use excessive investment or high credit growth to boost growth. Profits at state-owned firms fell 8.4 percent in January-April on-year, data showed earlier this week. A survey of over 2,000 firms by the Cheung Kong Graduate School of Business found the industrial economy did not stabilise in the first quarter, with excess capacity at a record high. Reuters
Key Points April industrial profits rise 4.2 pct y/y vs March’s 11.1 pct January to April profits up 6.5 pct y/y Performance uneven, refiners and steel mills post sharper gains Debt up 4.8 pct vs March’s 5.2 pct
Commercial relations
Beijing and Brussels edge towards deal on market status China is the European Union’s second-largest trading partner after the United States Robin Emmott
The European Commission and China may be near a deal to avoid a dispute at the World Trade Organization and a wider trade war, diplomats say, but must convince EU lawmakers angry over record Chinese steel output. The Commission is set to accept a change to China’s trade status at the WTO by treating it as an economy controlled by the market, not the state. That would benefit Beijing and make it easier for it to export into the bloc. But the Commission also wants to enhance the bloc’s ability to defend itself against ch ea p Chi n es e i m p o rts . “Everyone has to know that if somebody distorts the market, Europe cannot be defenceless,” Commission President Jean-Claude Juncker said at the G7 summit in Japan. Chinese envoys have signalled they could live with the dual approach, which is designed to assuage fears of European industry that Europe’s economy will suffer if China is able to undercut its industries with heavily subsidised goods.
“Every country has a legitimate right to make full use of trade defence measures, within WTO rules,” a Chinese diplomat said. “If they follow the WTO rules, there’s no problem for us.” Without a deal, China is willing to retaliate. “A trade war is not our choice,” a second Chinese diplomat said. “But our confidence in doing business with the EU would be affected, if we find our trading partners don’t respect the rules.” China is the European Union’s second-largest trading partner after the United States. Europe is China’s top trading partner. Europe’s concerns have
been worsened by record Chinese steel production in April amid a global steel glut. After world economies failed to find agreement on how to deal with overcapacity, the
Key Points China wants to be recognised as a “market economy” Chinese diplomats say trade defences OK under WTO rules Steel over capacity has hardened EU lawmaker opposition
United States put hefty duties on China. G7 leaders discussed the issue in Japan.
Prices and tariffs
Beijing’s private stance contrasts with public remarks that changing China’s status at the WTO is not for negotiation. “This is the consensus reached between China and other WTO members during the negotiation on China’s accession,” Chinese Foreign Ministry spokesperson Hong Lei said earlier this month. “It must be observed by all WTO members as their obligation.” The WTO recognised when Communist-ruled China
joined in 2001 that its local prices were not set by market forces. WTO members can normally apply punitive tariffs on others only if export prices are below those in the exporter’s home market. But with China, the EU and others have been able to ignore low domestic prices and set tariffs to make Chinese exports as expensive as in wealthier countries. However, those WTO limitations on China are due to expire on Dec. 11, though there is some room for interpretation. European commissioners from the bloc’s 28 members debated the politically sensitive issue for the first time in January and are expected to come back to it again in late June or July. After an EU-China summit in Brussels on July 15, the Commission will make specific proposals on China’s market economy status before the end of the month. However, the European Parliament must approve the Commission plan and EU lawmakers have so far rejected considering China as a market economy in trade disputes, in part because of steel. “China is not a market economy and should not be recognised as one when calculating anti-dumping sanctions,” said David Martin, an EU lawmaker from Britain’s Labour party. “Granting them market economy status in the current circumstances would tighten the noose around the UK steel industry’s neck,” he said. Reuters
Business Daily Monday, May 30 2016 9
Greater China In Brief
Beijing to open e-commerce to foreign investment
Private poll
May official factory PMI may mark end to expansion The official manufacturing PMI data will be released on June 1, along with the official services PMI. Growth in China’s vast manufacturing sector likely stalled in May after slight expansions in the previous two months, a Reuters poll showed, throwing more cold water on hopes that the world’s second-largest economy is reviving. The official manufacturing Purchasing Managers’ Index (PMI) is expected to fall to 50.0 from 50.1 in April, according to a median forecast of 31 economists polled. The index will likely show that a twomonth, credit-fuelled expansion in March and April was short-lived and that a solid recovery in the manufacturing sector has not taken hold. The official PMI was in contraction territory for the seven months prior to March’s surprise gain. Most economic data grew more slowly in April after a surprise rebound in March, feeding doubts that the economy is stabilising.
A record credit binge in the first quarter boosted investment and industrial output in March, but Chinese banks sharply cut back new lending in April and the growth of M2 money supply slowed. “With concerns about rising debt, we do not believe we will see massive monetary stimulus. Our view is for a further slowdown in the economy, but not a hard landing. We think China is experiencing an on-going soft landing”, said Frederik Kunze, an economist at NORD/LB.
“There will be a transformation of the growth model in China, and this will happen at the expense of the manufacturing sector” Frederik Kunze, an economist at NORD/LB
“There will be a transformation of the growth model in China, and this will happen at the expense of the manufacturing sector,” he said. Global financial markets have been buzzing over whether China is shifting to a more cautious policy stance since an article in the People’s Daily early this month, but signals remain mixed. The official newspaper quoted an “authoritative person” as saying China may suffer a financial crisis or recession if the government relies too much on debt-fuelled stimulus to boost flagging economic growth. The Ministry of Finance said on Thursday the government could increase its own leverage ratio in order to avoid negative economic impacts of an overall contraction in debt levels, while at the same time highlighting the need to tighten checks on local government debt issuance. The official manufacturing PMI data will be released on June 1, along with the official services PMI. The Markit/Caixin factory PMI, a private and separate gauge of manufacturing activity, will also be released on June 1. Economists polled by Reuters expect the Caixin PMI, which focuses on smaller companies, to show factory activity shrank for the 15th straight month in May, with the headline PMI seen easing to 49.3 from 49.4 in April. Reuters
Exports slump
Taiwan cuts 2016 GDP forecast again From a year earlier, GDP shrank a revised 0.68 percent, better than initial forecast of a 0.84 percent contraction. Faith Hung and Jeanny Kao
Taiwan trimmed its 2016 economic growth outlook for the third time on Friday, as weak demand for the island’s exports continue to hurt the island’s prospects for recovery. Gross domestic product should grow 1.06 percent this year, the Directorate General of Budget, Accounting and Statistics said, slower than 1.47 percent growth it forecast previously. Trade-reliant Taiwan, whose economic fortunes are closely linked to China, is struggling to shake off last year’s recession due to faltering global demand for its tech products and slowdown in the world’s second-largest economy. Economic growth in 2015 slowed to its weakest pace since the global financial crisis. “The downward revision is mainly because of soft external demand and private investments,” the statistics agency said in a statement. “The growth momentum for global consumer electronics products has slowed down.” While exports have contracted for more than a year and export orders and industrial production remain soft, the outlook for domestic demand is also lacklustre.
smartphones and other gadgets. “The government’s lowered forecasts in the full-year GDP tells us that exports, consumption and domestic investments will all deteriorate through the rest of this year,” said Lucas Lee, an analyst at Mega Securities in Taipei. First-quarter GDP growth was revised sharply higher to 3.14 percent on a seasonally adjusted basis, from a preliminary 0.76 percent, partly boosted by increased consumption and a downward revision of fourth quarter growth. From a year earlier, GDP shrank a
Key Points Govt cuts 2016 GDP f’cast to 1.06 pct, for third time Full-year export estimate lowered to -3.65 pct Central bank widely expected to cut interest rates again
Export slump deepens
The government slashed its 2016 export estimate to a 3.65 percent contraction, deeper than the 2.78 percent fall predicted earlier, on slowing demand for
Taiwan’s cranes are not so busy lately
China will lift restrictions to investments by foreign firms in a range of service industry sectors, including e-commerce, logistics, accounting and auditing, the China Securities News quoted commerce minister Gao Hucheng as saying. Gao said China would also promote the orderly opening of other service fields including finance, education, culture and health care, the report published on Saturday said without elaborating or giving a time-frame. China’s trade in services would exceed US$1 trillion by 2020, the minister predicted. The Ministry of Commerce has previously said the value of China’s services trade was expected to exceed US$750 billion this year. WTO
U.S. seeks dispute panel in chicken fracas The Obama administration on Friday asked the World Trade Organization to establish a dispute settlement panel to rule on U.S. claims that China is unfairly continuing anti-dumping duties on U.S. broiler chicken products. The U.S. Trade Representative’s office said in a statement it made the request after consultations with Chinese officials on May 24 failed to resolve the dispute over the duties. China first imposed the duties on chicken imports from the United States in 2010 on grounds they were priced below fair market value and this was injuring Chinese producers. Demography
revised 0.68 percent, better than initial forecast of a 0.84 percent contraction. Taiwan is the Asian hub for many global tech names such as Apple Inc, in producing components for smartphones, notebook PCs and other tech gadgets. The U.S. iPhone maker recently posted its first decline in iPhone sales and a lower-than-expected revenue outlook, clouding the fortunes of many Taiwan suppliers. Slowing economic momentum will pressure the new government to come up with more stimulus to support the economy. “This country urgently needs a new model for economic development,” President Tsai Ing-wen said in her inauguration speech last week, adding that Taiwan needs to find new markets and not rely too heavily on China. The government announced this week it would set up a fund of up to T$100 billion (US$3.1 billion) to support industry innovation and transformation, while the central bank is also expected to cut interest rates in June to bolster the economy. Reuters
Xi says government should invest more in the elderly China should increase investment in care for the elderly, President Xi Jinping told a meeting of the country’s top leaders on its ageing population, official Xinhua news agency reported. “Our policies measures, work base, institutional mechanisms, and so forth are still deficient leading to a fairly large gap with the hope of the elderly to enjoy happiness later in life,” it quoted Xi as saying on Friday. China’s population is set to peak at about 1.45 billion by 2050 when one in every three people is expected to be more than 60 years old. Debt market
Authorities allows foreigners to remit funds freely Foreign institutions that have invested in China’s interbank debt market will be allowed to remit their funds freely, the foreign exchange regulator said on Friday. The central bank said in February it would allow all kinds of financial institutions that are registered outside China to buy bonds in the interbank market and would scrap quotas for medium- and long-term investors. Foreign institutional investors in China’s interbank debt market will be allowed to buy foreign exchange from banks and remit funds, without regulatory approval, the State Administration of Foreign Exchange, said in a statement.
10 Business Daily Monday, May 30 2016
Greater China Markets
HKEx aims to launch first exchange-traded USD/CNH option this year The HKEx plans to introduce futures products related to these indexes by year-end Michelle Chen
T
he Hong Kong Exchanges and Clearing Ltd (HKEx) aims to launch the world’s first exchange-traded USD/CNH option product by the end of this year, amid growing demand to hedge currency risk, arising from a more volatile yuan. The Hong Kong bourse is also considering introducing more yuan currency futures, including against the Korean won and the British pound, after a plan to add four currency pairs of yuan futures next Monday. “The yuan futures market has grown quite a lot since last August after the People’s Bank of China allowed
more two-way volatility of the currency,” Julien Martin, head of fixed income and currency product development at the HKEx, told Reuters on Friday. “It is a market that is growing not only in terms of daily trading volumes, but the overall people who use it. An interesting trend is that asset managers and big state-owned enterprises have started to use these contracts more and more.” More yuan volatility and confusion over China’s exchange rate policy, along with slowdown in the world’s second-largest economy, have dampened investor appetite to use or hold the currency. Yuan deposits in Hong Kong shrank to their lowest
level since September 2013 in March, while the once-red hot dim sum bond market has been extremely quiet this year. China’s central bank orchestrated a sharp depreciation of its currency on August 11 last year, which caught market players off guard and saw the yuan lose more than 5 percent against the dollar since then. Chinese corporates that typically do not hedge foreign currency exposure have been
forced to replace their dollar-denominated debt with yuan-denominated debt, or rely on the futures market to hedge risk. Existing USD/CNH futures that were introduced in 2012 had a record high open interest of 32,009 contracts on February 5, and average daily volume in the first quarter was 3,128 contracts, more than triple the same period last year. “If we see more yuan volatility in the second half of the year, the market can grow
Key Points HKEx plans a series of yuan products this year HKEx sees rising demand to hedge currency risk
quite quickly beyond that,” Martin said. There has been a growing push by the HKEx to diversify its revenue streams due to weak stock markets. Chinese stocks are among the worst performing in Asia this year. The HKEx has recently received regulatory approval to launch cash-settled euro-yuan, Japanese yen-yuan, Australian dollar-yuan and yuan-dollar futures on May 30. The exchange operator is also working to create a new series of renminbi indexes designed to be transparent and tradable. The HKEx plans to introduce futures products related to these indexes by year-end, and the launch of all these new yuan products will be subject to regulatory approval, Martin said. Charles Li, chief executive of the HKEx, said on Tuesday he would “work very quickly” on a plan to link bond markets in China with those in Hong Kong, giving global investors more access to yuan-related assets. Reuters
M&A
Konecranes-Terex deal to proceed as Zoomlion drops rival bid A successful acquisition would have put Zoomlion on a more equal footing with crosstown rival Sany Heavy Industry Co Ltd Anne Marie Roantree and Tuomas Forsell
China’s Zoomlion Heavy Industry Science and Technology Co Ltd has abandoned its US$3.4 billion bid for U.S. crane maker Terex Corp, clearing the way for a smaller deal between Terex and Finland’s Konecranes. The decision comes after six months of merger talks between Terex and Zoomlion and marks the latest setback to corporate China’s ambitions to acquire U.S. assets. In March, Anbang Insurance Group Co unexpectedly withdrew its US$14 billion offer to buy Starwood Hotels & Resorts Worldwide Inc. Zoomlion and Konecranes had both bid for Terex to help them better cope with cooling Chinese and weak European demand in the cranes business. Konecranes and Terex had agreed on an all-share merger in August. But Zoomlion emerged publicly as a rival bidder in January and sweetened its unsolicited offer to US$3.4 billion in March. The Finnish company this month scrapped plans for a full merger and instead agreed to buy just part of Terex - its cranes business for ports and factories (MHPS) - for 1.1 billion euros (US$1.2 billion). “Unfortunately, after many months of discussions, Zoomlion was unable to provide a fully financed, binding
Key Points Zoomlion fails to agree terms with Terex Decision clears way for deal between Terex and Konecranes Konecranes shares rise, Zoomlion fall
proposal for the purchase of Terex with or without MHPS,” David Sachs, chairman of the board of Terex, said in a statement. The latest agreement with Konecranes gave Terex the right to terminate the deal for a fee by the end of the month if its talks with Zoomlion were to proceed. “Following negotiations, Zoomlion has concluded that Terex’s expectations on the valuation do not adequately reflect the impact of the sale of the MHPS segment,” Zoomlion said in a statement that elaborated on its move. There had been concerns that, were Terex’s port business to be acquired
by Zoomlion rather than Konecranes, the deal would have been scrutinized heavily by the Committee on Foreign Investment in the United States on national security grounds. “We’ve reached the result we wanted, and we are very pleased,” Konecranes Chief Executive Panu Routila told Reuters, adding that the companies would start integration plans after the summer. Last week, Konecranes shares jumped as much as 18 percent when the modified deal was announced. The merger is expected to close early next year. A successful acquisition would have put Zoomlion on a more equal
footing with cross-town rival Sany Heavy Industry Co Ltd , which has a U.S. assembly plant. “Without the positive effect due from Terex, Zoomlion will continue to develop slowly at its own pace,” said Jiao Yiding, an analyst at China Merchants Securities in Shenzhen. Last month, Zoomlion posted a record quarterly loss as Chinese heavy equipment makers battle an historic glut of unsold equipment. In January, the United States blocked a bid by Chinese-based investment fund GO Scale Capital for Philips’ lighting-components business on security grounds. Reuters
Business Daily Monday, May 30 2016 11
Asia Abenomics pause
Japan’s Abe to delay sales tax hike until 2019 Prime minister has long said he would proceed with a plan to raise the tax rate to 10 percent from 8 percent next April unless Japan faced a crisis on the magnitude of the Lehman shock Takaya Yamaguchi
J
apanese Prime Minister Shinzo Abe plans to delay an increase in sales tax by two and a half years, a government official said yesterday, as the economy sputters and Abe prepares for a national election. Abe told Finance Minister Taro Aso and the secretary general of his ruling Liberal Democratic Party, Sadakazu Tanigaki, on Saturday of his plan to propose delaying the tax hike for a second time, until October 2019, said the official, who was briefed on the meeting. The prime minister, who has promised to announce steps on Tuesday to spur economic growth and promote structural reform, is also expected to order an extra budget to fund stimulus measures, just two months into the fiscal year and on the heels of a supplementary budget to pay for recovery from recent earthquakes in southern Japan. After chairing a summit of Group of Seven leaders on Friday, Abe said Japan would mobilise “all policy tools” - including the possibility of delaying the tax hike - to avoid what he called an economic crisis on the scale of the global financial crisis that followed the 2008 Lehman Brothers bankruptcy. “There is a risk of the global economy falling into crisis if appropriate policy responses are not made,” Abe told a news conference after the summit. To play its part, Japan “must reignite powerfully the engine of Abenomics,” he said, referring to his easy-money policies aimed at getting Japan out of two decades of deflation and fitful growth. Abe has long said he would proceed with a plan to raise the tax rate to 10 percent from 8 percent next April unless Japan faced a crisis on the magnitude of the Lehman shock. He said the G7 “shares a strong sense of crisis” about the global outlook, with the most worrisome risk being a global contraction led by a
slowdown in emerging economies like China. Other G7 leaders, however, appeared to differ with Abe on the risk of a global crisis, fuelling comment that Abe was using the G7 to justify delaying the painful tax hike. Abe will announce his intention
to delay the tax hike by the end of the current session of parliament on Wednesday, after meeting with Komeito, the LDP’s junior coalition partner, the government official told Reuters. Japan fell into recession after Abe raised the tax from 5 percent in April 2014 hoping to curb government debt, and consumption has still not recovered. Despite massive monetary easing by the Bank of Japan and a series of government spending packages Japan’s growth is weakening. Core
consumer prices and exports fell in April, and manufacturing shrank at the fastest pace since Abe took office in 2012. A Reuters poll last week showed most companies expect no escape from deflation for the foreseeable future. Despite the fresh fiscal stimulus, however, Abe told Aso and Tanigaki that will stick with his pledge to achieve a budget surplus, excluding debt-servicing costs and income from bond sales, by the fiscal year ending in March 2021. Reuters
Abe (R) told Finance Minister Taro Aso (L) on Saturday of his plan to propose delaying the tax hike for a second time
Trade ban
Europe steps up North Korea sanctions The measures are designed to show solidarity with major EU trade partners South Korea and Japan Robin Emmott
The European Union stepped up its sanctions on North Korea on Friday with near-blanket trade and travel bans after Pyongyang’s latest nuclear test and rocket launch, a move going beyond new U.N. Security Council sanctions. Pyongyang is also banned from selling any oil-related or luxury goods to the European Union, while EU nations cannot invest in the country’s mining, refining and chemical industries. “Considering that the actions of (North Korea) constitute a grave threat to international peace and security in the region and beyond, the EU decided to further expand its restrictive measures,” the Council said.
North Korea’s latest nuclear test was on January 6. On February 7, it launched a rocket that the United States said used banned ballistic missile technology. Pyongyang said it was a peaceful satellite launch.
‘Trade between the European Union and North Korea fell to just 34 million euros in 2014 from more than 300 million euros a decade ago’
The EU measures, which diplomats say are designed to show solidarity with major EU trade partners South Korea and Japan, come on top of asset freezes and travel bans for another 16 North Koreans agreed earlier this year. That puts 66 people and 42 companies under the EU sanctions regime.
Korean border checkpoint
EU foreign ministers have reinforced their sanctions several times in recent years to include asset freezes and bans on financing and the delivery of banknotes. EU countries cannot export arms or metals used in ballistic missile systems and are banned from selling gold, diamonds and luxury goods to North Korea. Joint ventures are outlawed. However, the impact of the
new measures is likely to be limited as trade between the European Union and North Korea fell to just 34 million euros in 2014 from more than 300 million euros a decade ago. Germany and Sweden are also reluctant to totally isolate North Korea. They have maintained diplomatic ties in Pyongyang since the 1970s, providing humanitarian aid to North Koreans. Reuters
12 Business Daily Monday, May 30 2016
Asia Inflation
Japan's consumer prices fall for 2nd month The nationwide core consumer price index fell 0.3 percent in April from a year earlier Leika Kihara
J
apan’s core consumer prices fell for the second straight month in April as weak consumption discouraged firms from raising prices, stoking fears of deflation and keeping pressure on the central bank to do more to hit its ambitious inflation target. A separate index calculated by the Bank of Japan (BOJ) also showed consumer inflation slowing to a near one-year low, casting doubt on its argument that underlying price trend is improving steadily thanks to its massive stimulus programme. The data underscores the fragile nature of Japan’s
recovery and may give Prime Minister Shinzo Abe justification to delay a scheduled increase in sales tax next year. A recent Reuters poll added to the gloom, showing a strong majority of Japanese firms surveyed now expect no escape from deflation for the foreseeable future. “We’re seeing downward pressure on inflation not only from energy but from food prices,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “Both prices and the economy are weak, so expectations for further BOJ easing will heighten,” he said. The nationwide core consumer price index (CPI), which includes energy but excludes volatile fresh food costs, fell 0.3 percent in April from a year earlier, matching the drop in March which was the biggest annual decline in three years. In a sign price falls will persist, core consumer prices in the Tokyo area - a leading indicator of nationwide
tendencies - fell 0.5 percent in May, more than a median forecast for a 0.4 percent drop, the government data showed on Friday. Some analysts warned that Japan may be returning to deflation, despite Abe’s stimulus policies to eradicate such sustained price declines, including three years of aggressive money printing by the BOJ. “The (CPI data) marks a change in the price trend and is a sign Japan is reverting back to deflation,” said Junichi Makino, chief economist at SMBC Nikko Securities, adding that the BOJ may ease policy at next month’s rate review. BOJ board member Yutaka Harada on Friday said the bank should not hesitate expanding stimulus if risks, such as a deeper slowdown in emerging economies, derail Japan’s recovery.
Back to deflation?
The BOJ hopes a moderate economic recovery will keep
boosting corporate profits, allowing firms to increase wages and nudge consumers into spending more. Robust consumption will allow companies to raise prices and help accelerate inflation. Last year, some companies passed on rising import costs from a weak yen on households. That trend has subsided this year due to the yen’s rebound and weak consumer demand, analysts say. The BOJ’s internal index that strips away energy and
Key Points BOJ’s CPI index falls below 1 pct; 1st since July 2015 Nationwide core CPI down 0.3 pct vs f’cast -0.4 pct Tokyo May core CPI down 0.5 pct vs f’cast -0.4 pct Weak data keeps BOJ under pressure for more easing Japan firms expect no escape from deflation-poll
fresh food prices but includes processed food costs, showed consumer inflation slowed to 0.9 percent in April from a year earlier versus 1.1 percent in March. It was the first time since July 2015 that the index had fallen below 1 percent, casting doubt on the BOJ’s view that underlying trend inflation was improving steadily. The BOJ stunned markets in January by adding negative interest rates to its massive asset-buying programme in a fresh effort to accelerate inflation to its 2 percent target. But the move has failed to improve public sentiment or arrest an unwelcome rise in the yen that hurts exports and weighs on inflation by pushing down import costs. Anaemic inflation has forced the BOJ to push back the expected timing for hitting its price target to around early 2018, though many analysts say even the new forecast is too ambitious, given slow wage growth and a sluggish economy. Reuters
Trade forecast
South Korean May exports rebounding Exports forecasts ranged from a 5.5 percent fall to a rise of 7.5 percent South Korea’s May exports are expected to notch their first growth since December 2014 as global oil prices rise and some advanced economies like the United States pick up momentum, a Reuters survey found on Friday. The median forecast from 13 analysts showed exports are expected to rise 1.6 percent in May from a year earlier, rebounding from a 11.2 percent drop in April. “We see exports rising on raw commodities prices that rose past mid-Q1, resulting in higher export prices. However, if the U.S. dollar firms further on interest rate hike prospects there and commodity prices fall the gain may not be sustained,” said Lee Sang-jae, chief economist
at Eugene Investment & Securities. A number of the analysts surveyed also pointed out this month had one more working day than May last year, adding to optimism supported by the Bank of Korea, which said earlier on Friday it expects the exports slump to ease gradually. Exports forecasts ranged from a 5.5 percent fall to a rise of 7.5 percent. The same poll forecast industrial output edged down 0.2 percent in April in seasonally adjusted terms from a month earlier, less worse than a 2.2 percent fall in March. “It’s important industrial output has
Key Points April industrial output seen -0.2 pct s/adj m/m May exports seen +1.6 pct y/y, imports -7.7 pct y/y May CPI seen +0.9 pct y/y
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 Aivi Remulla 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 Founder & Publisher
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escaped from the bottom we saw in January,” said analyst An Ki-tae at NH Investment & Securities. April output was helped largely by a temporary tax cut scheme for auto purchases, spurring manufacturing, and new smartphone models,
respondents said. Industrial output largely tracks exports, but the data tends to be volatile at times. May inflation was forecast at 0.9 percent, slightly down from 1.0 percent in April, from the same Reuters poll. Industrial output data will be issued on May 31, followed by the trade and inflation data on June 1. Reuters
Business Daily Monday, May 30 2016 13
Asia Enterprises data
In Brief
India Inc shows growth spreading On Tuesday Government will release gross domestic product data for the January-March quarter Rafael Nam and Rajesh Kumar Singh
Indian companies are posting their best earnings results since Prime Minister Narendra Modi swept to power two years ago, giving the clearest sign yet that India’s fast, but patchy, economic growth is becoming more broad-based. Though headline growth figures make India one of the world’s fastest growing economies, weak private investment and low capacity utilisation rates have painted a less rosy picture. Going by India Inc’s surge in profit growth in the first three months of the year, however, the outlook really does seem to be brightening, as benefits feed through from lower interest rates and government spending in infrastructure and defence. On Tuesday, India will release gross domestic product data for the January-March quarter. Year-on-year growth of 7.5 percent is forecast by a Reuters survey economists, slightly faster than the previous quarter’s 7.3 percent. “Macro indicators are suggesting that at the ground level the economy is gaining momentum,” said Dhiraj Sachdev, a fund manager at HSBC Asset Management in Mumbai. “That has also been validated in terms of better corporate earnings in many of the sectors.” Operating profits for 289 companies that have reported results so far leapt 25.5 percent year-on-year in the March quarter, compared with
1.7 percent growth in the previous quarter, according to Thomson Reuters data. It is Indian firms’ best showing since the April-June quarter in 2014. Put alongside the 6.8 percent decline in earnings that data provider Factset reckons companies in the S&P 500 suffered during the same quarter, India’s corporates have some things going in their favour. India’s broader National Stock Exchange share index has surged around 17 percent from a near 2-year low on Feb. 29, outperforming a 7 percent gain by the Asia-Pacific MSCI index excluding Japan. This week, Morgan Stanley upgraded Indian equities to “overweight” from “equalweight” citing rising dividends, and prospects of a simpler country-wide sales tax, lower interest rates and benign monsoon among its reasons.
Bumpy ride
Sadly, corporate balance sheets remain stretched, making it hard to revive private investment, which has lagged for the past four years. Yet, sectors tied to capital goods and infrastructure such as steel and cement are recovering. After five quarters of double-digit declines, operating profit in the materials sector rose 22 percent in the March quarter. Following droughts in the past two years, monsoon rains, due in coming weeks, are forecast to be better than average, which should underpin demand, particularly from the rural sector.
“We have seen false dawns before” Shilan Shah, an economist with Capital Economics
Drugs pricing
Sun Pharma gets U.S. subpoena
India’s Prime Minister Narendra Modi
And while factories are running nearly 30 percent below capacity, sales are increasing. Consumption of long steel products, used mainly in construction, has averaged 10 percent annual growth on a rolling three-month basis over the past six months. The cement and power sectors have also seen demand improve. Commercial vehicle sales are growing at a double-digit pace on the back of a strong replacement demand, industry data shows. Projects worth nearly US$31 billion were completed in the March quarter, according to think-tank CMIE, up from US$13 billion in the previous quarter. New investments in the same period more than doubled. There are still plenty of less encouraging indicators. A weak global economy hardly bodes well for exports, which have fallen for the last 17 months. Businesses are also finding it hard to borrow as a spike in stressed loans has made banks wary, and Thomson Reuters data shows Indian firms are taking longer than usual to pay or get paid. “The economy is undergoing a slow and bumpy recovery after three years of tepid growth,” said Shilan Shah, an economist with Capital Economics. “But we have seen false dawns before.” Reuters
The U.S. Department of Justice (DoJ) has subpoenaed India’s largest drug maker Sun Pharmaceutical Industries Ltd seeking information about the pricing and marketing of the generic drugs it sells in the United States, the company said on Saturday. The DoJ’s antitrust division has also asked Sun Pharma’s U.S. unit for documents related to employee and corporate records and communications with competitors. The subpoena comes amid a wider probe by U.S. regulators into steep increases in the prices of generic medicines in recent years. Bank of Japan
Harada says should be ready to ease further Bank of Japan board member Yutaka Harada said on Friday the central bank should not hesitate to expand monetary stimulus further if risks, such as a deeper slowdown in emerging economies, derail Japan’s economic recovery. Harada, a former academic, said Japan’s economy continued to recover moderately with the BOJ’s negative interest rate policy and massive asset-purchasing programme exerting their intended effects. But he warned of various risks that could hurt Japan’s economy, such as a further slowdown in China’s economy, the market fallout from changes in U.S. monetary policy as well as a potential flare up of the European debt crisis. Results
Maybank’s quarterly profit falls 16 percent
Markets
New Zealand’s NZX launches milk futures The milk futures contract joins a group of other dairy futures contracts in New Zealand launched in 2010 Rebecca Howard
Financial exchange operator NZX Ltd on Friday launched New Zealand’s first milk futures contract, offering dairy farmers in the country a new tool to manage risk as they grapple with plunging prices. Early take-up of the contract was slow with just two trades in the first session, but dairy industry officials and analysts said liquidity would grow as more farmers looked to lock in forward pricing. Global dairy prices have plummeted more than 50 percent since early 2014, hit by oversupply and slowing demand in China. New Zealand and its 10,500 farmer shareholders of the Fonterra Cooperative Group Ltd , the world’s largest dairy exporter, have been hit particularly hard. “Suppliers of milk are finding the current environment untenable,” Kathryn Jaggard, NZX head of derivatives, told Reuters. “They just can’t manage that risk and they are looking for ways to do that.” The milk futures contract joins a group of other dairy futures contracts in New Zealand, such as for whole milk powder and skim milk powder, launched in 2010. The new contract, however, is related to the actual milk price paid to farmers. Similar trading schemes already exist in Europe and the United States, but New Zealand has been slower to adopt its own, in part due to the cooperative nature of Fonterra’s structure,
but an explosion in global trade has led to heightened price volatility. Whole milk powder prices soared to more than US$5,000 a tonne in early 2014, before falling back to around US$1,800 last August. Prices were US$2,252 a tonne in the latest Global Dairy Trade auction. The first trades on NZX suggested some optimism that the milk price would improve longer term.
Key Points New Zealand bourse launches milk futures Two trades recorded in first session But liquidity expected to grow as farmers look to manage risk
The price for the September 2017 contract was NZ$4.35 (US$2.93) per kilogram, slightly higher than the NZ$4.25 Fonterra this week predicted it would pay in 2016-17. Fonterra’s forecast was below breakeven for the third year running. The September 2018 contract price was NZ$5.60. Nigel Brunel, director of financial markets at OMF, New Zealand’s largest broker for dairy futures, said usage of the tool would depend on pricing. “(The current price is) below break even for a lot of farmers, so if they use it to hedge, they will effectively be hedging a loss and that may be a bit of a stretch for some,” said Brunel, adding that he had seen interest from some of his farmer clients. Andrew Hoggard, who runs a dairy farm on the North Island, said farmers would need independent advice and education before jumping in. “We will have a discussion around what we want to achieve and whether we can use this to achieve that,” he said of his own business. Reuters
Malayan Banking (Maybank), Malaysia’s largest lender by assets, posted a 16 percent drop in first-quarter profit as it set aside more provisions to accommodate restructuring of loans. Maybank’s net profit for the three months to March 31 fell to 1.43 billion ringgit (US$350.40 million) from 1.7 billion ringgit in the year-ago period. “The increase in provisioning was primarily owing to the rise in number of corporate loans undergoing restructuring and rescheduling of their repayment to better match their projected cash flows arising from the subdued operating environment,” the company said. Forex
Indonesia issues new repo rules Central bank has issued new regulations for repurchase agreements of rupiah-denominated bonds with banks for them to get Chinese yuan. The move is part of Bank Indonesia’s push to get more transactions settled in currencies other than the U.S. dollar to reduce the country’s dollar demand. Its governor has previously said BI will facilitate transactions with the rupiah and the yuan because it has the support of the People’s Bank of China under a bilateral swap agreement. Banks can use the yuan to finance international trade or foreign direct investment.
14 Business Daily Monday, May 30 2016
International In Brief Monetary policy
Nigeria’s Buhari rules out devaluing currency Nigerian President Muhammadu Buhari ruled out currency devaluation and said he plans to hold talks with leaders in the Niger River delta as attacks on oil installations sap the nation’s economy. The government has “resolved to keep the naira steady,” Buhari said yesterday in a television broadcast to mark his first year in office. “In the past, devaluation has done dreadful harm to the Nigerian economy.” Africa’s largest economy shrank for the first time since 2004 in the first quarter as the government contends with lower global crude prices. Loan
IMF OKs new flexible credit line for Mexico The International Monetary Fund on Friday boosted its flexible credit line with Mexico to US$88 billion in a bid to support Latin America’s No. 2 economy, whose currency has been battered by global volatility. The fund said it cancelled a previous flexible credit line, which was for US$67 billion and approved on November 26, 2014. The new credit line will last for two years, the fund said. Mexico’s macroeconomic policies “remain very strong,” but there are risks given global market volatility, David Lipton, IMF First Deputy Managing Director and Acting Chair said in a statement. Russian Eurobond
Banks, funds and asset managers key buyers Banks, funds and asset management firms were key buyers of Russia’s Eurobond issue this week, the finance ministry said on Friday. Russia managed to raise US$1.75 billion at a yield of 4.75 percent this week in its first Eurobond issue since 2013. The ministry said universal banks accounted for 30 percent of the issue, with funds and asset management firms taking 34 percent. Banks focused on private banking took 25 percent, with insurance companies and other investors buying the rest. Technically, western sanctions do not prevent foreigners from buying into the bond. Assets data
World’s biggest hedge funds lose market share The world’s biggest hedge funds lost market share to smaller rivals over the last year as a result of underperformance, data tracker Preqin said on Friday. Total assets held by hedge funds with more than US$1 billion dropped to 88 percent in the year to end-March 2016 from 92 percent in the year-earlier period, it said in an annual report. Thirtyseven percent of funds with over US$1 billion lost investor money in the first three months of the year, it added, although a small majority of them secured net inflows.
Labour reform
French PM says he will not bow to protestors The government is under pressure to find a solution to the latest stand-off before the June 10 start of the Euro 2016 soccer tournament in France Ingrid Melander
F
rench Prime Minister Manuel Valls is determined not to join a long list of politicians who have conceded defeat to protesters, he told the Journal Du Dimanche (JDD) newspaper, as the government prepares to dig in its heels on labour reform. The hard line CGT union has organised street protests, train strikes and refinery blockades to pressure the government to scrap plans that would make it easier for companies to hire and fire workers. “If we gave in to the street and to CGT because we were obsessed over the short term by 2017 (presidential elections), we would lose everything,” Valls was quoted as
saying by the French newspaper. In the mid-1990s Prime Minister Alain Juppe triggered France’s worst unrest in decades because he would not budge on pension reform but he eventually backed down after weeks of industrial action and protests. The government is under pressure to find a solution to the latest stand-off before the June 10 start of the Euro 2016 soccer tournament in France, which the CGT has threatened to disrupt. Finance Minister Michel Sapin emphasised the government’s stance. “First and foremost we must be firm,” Sapin said in an interview with Reuters and three European newspapers. “Doing otherwise would be wrong with respect to (other) labour unions, most of whom support the text.” The more moderate CFDT union backs proposed reform that will allow
businesses to lay off staff more easily in hard times but also give unions more power to negotiate unilateral deals with companies rather than national collective agreement. Sapin said he agreed with the tough stance taken by Valls and that he had been misunderstood when he told LCP television last week that it might be possible to tweak the part of the draft bill that would let companies opt out of national obligations on labour protection if they adopt inhouse deals on pay and conditions with the consent of a majority of employees. For all the tough talk, however, another minister said that the government could not let the Euro 2016 tournament be disrupted because it would be bad for France’s image. One option could be for lawmakers to tweak the bill when it returns to the lower house of parliament for a second reading, the minister said, speaking on condition of anonymity The government pushed the bill through the lower house with a decree, bypassing the first reading. The final vote is expected in July. Reuters
“If we gave in to the street and to CGT because we were obsessed over the short term by 2017 (presidential elections), we would lose everything” Manuel Valls, French Prime Minister
French Prime Minister Manuel Valls (R) with Finance Minister Michel Sapin (L) and President Hollande behind them
Interest rate
Yellen says Fed hike likely in coming months Fed chair joked that her comments would be brief so as not to delay Wall Street money managers hanging on her words. The Federal Reserve should raise interest rates “in the coming months” if the economy picks up as expected and jobs continue to be generated, U.S. central bank chief Janet Yellen said on Friday, bolstering the case for a rate increase in June or July. “It’s appropriate ... for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate,” Yellen said during an appearance at Harvard University. Her comments, while balanced, suggested the powerful Fed chair is on board with several of her colleagues who in recent weeks have said the central bank is preparing to follow up on an initial policy tightening in December. Although Yellen expressed caution about too steep a rise in U.S. rates, she sounded more confident than she has in the past that the U.S. economy has rebounded from a weak winter and that inflation would edge higher toward the Fed’s 2 percent target. “The economy is continuing to improve ... growth looks to be picking up,” Yellen told a group of professors and alumni at the Ivy League college in Cambridge, Massachusetts. She expects the labour market to continue to improve despite much
progress because “further gains are possible,” she said under an open-air tent on campus. The probability of a rate hike at the Federal Open Market Committee’s June 14-15 meeting rose to 34 percent from 30 percent before Yellen’s remarks, according to CME Group, where the futures contracts are traded. The Fed raised its key benchmark interest rate in December for the first time in nearly a decade, but has held off since then due to concerns earlier this year about a global economic slowdown and financial market volatility. Those concerns have subsided somewhat in recent months. In recent weeks, several Fed
‘Bets on a rate increase at the July 26-27 policy meeting edged up to 60 percent, more than double the estimate from a month ago’
policymakers have reacted to stronger U.S. economic data including on housing and retail sales by putting a rate hike squarely on the table for either June or July. Earlier on Friday, the government revised higher its first-quarter GDP growth estimate to 0.8 percent, from 0.5 percent. Yellen’s comment “reinforces the signals on early rate hikes communicated recently by her FOMC colleagues,” Mohamed El-Erian, chief economic adviser at Allianz, said via Twitter of the policy-making Federal Open Market Committee. Weak oil prices and a strong dollar have been blamed for helping to keep U.S. inflation below the central bank’s target. On Friday, Yellen said those factors “seem like they are roughly stabilizing at this point and my own expectation is that ... inflation will move back up over the next couple of years to our 2 percent objective.” Still, she cautioned against hiking rates too quickly given the Fed’s benchmark remains low at 0.25-0.5 percent currently. “It is important to be cautious ... because if we were to trigger a downturn or to contribute to a downturn, we would have limited scope for responding,” Yellen said. The economy has not seen “much improvement in wage growth which is suggestive of some slack in the labour market,” Yellen added just before receiving the Radcliffe Medal from Harvard’s Radcliffe Institute for Advanced Study. Reuters
Business Daily Monday, May 30 2016 15
Opinion Business Wires
THE KOREA HERALD South Korea’s annual economic growth lagged behind fast-expanding members of the Organization for Economic Cooperation and Development (OECD), data showed yesterday. Asia’s fourth-largest economy saw its annual economic growth reach 2.6 percent on-year in 2015, ranking 12th among the members of the Paris-based organization of economically developed countries. It marked the first time since 2006 that South Korea did not make the top-10 list of the fastest expanding member states. South Korea’s economic growth came in below major Eastern European countries, with the Czech Republic, Hungary and Poland posting comparable figures.
THE TIMES OF INDIA Sri Lanka has reduced import duties on 800 and 1,000cc cars while increasing duty on higher engine capacity cars, a move likely to benefit India-made smaller vehicles. Prices of vehicles above 1,000 cubic centimetre engine capacity will increase following the increase of the minimum unit tax from Friday, Sri Lanka’s Vehicle Importers Association said. According to a gazette notification released on Friday by the ministry of finance, the 800 and 1,000cc cars would have a lower import tax band. A majority of this category imports are dominated by the India-made cars.
About that June or July rate hike
H TAIPEI TIMES Premier Lin Chuan vowed to reduce land expropriation and enhance communication with the public as the government pushes forward with the Taoyuan Aerotropolis project, which is to be a key component of a larger “Asian Silicon Valley” project that President Tsai Ingwen proposed during her campaign. The premier made the remarks during a visit to Taoyuan to inspect the future site of the Asian Silicon Valley project, where he was briefed about a dispute between area residents and the government over the Taoyuan Aerotropolis project.
PHILSTAR New free trade deals to be entered by the Philippines with other economic blocs would hamper the regulation of the country’s mining industry, a report by an Amsterdam-based international research and advocacy institute said. Transnational Institute said free trade agreements such as the European UnionPhilippines free trade agreement and the Regional Comprehensive Economic Partnership (RCEP) pose a threat in the regulation of the local mining sector. According to the report, the country’s treaties with Australia, Canada, China, Japan, Malaysia, South Korea and the UK have already created a very effective line of defence against regulation in the mining industry.
ere is a short recipe: Take a weakening service sector, contracting corporate profits and capital expenditure, add a Federal Reserve rate hike and stand well back. The resulting dish may not be best served cold, but the economy in which we eat it definitely would be cooling. Of course, we probably won’t have to eat this particular variety of Federal Reserve pie because the Fed will delay the June or July rate hike members have been signalling. “Depending on the incoming data and the evolving risks, another rate increase may be appropriate fairly soon,” Federal Reserve Governor Jerome Powell said on Thursday, becoming the latest to give the impression that a summer increase is likely. He tempered his remarks by noting concern over Britain’s EU exit referendum in June and added that the risks of waiting were “not that great.” Durable goods data released on Thursday, while coming with a fantastic headline figure courtesy of a spike in airline orders, showed some definite signs of underlying weakness. Company capital spending, a good gauge not only of current but future activity, is slumping, down 0.8 percentage point from April to March and 4.1 percent from a year ago. The capital expenditure data comes closely after the Markit survey of service sector purchasing managers found them at their least optimistic in six-and-ahalf years - in other words, since just after the last recession. Some managers cited uncertainty over the presidential election, a factor that will only grow in impact as we approach November. The overall reading is still expansionary but job creation in services - which comprise two- thirds of output - was slowing, according to the survey. Total business inventories-to-sales, a measure of both demand and corporate health, has risen in the past year, taking it to a level not seen since spring of 2009, the tail-end of the last recession. All of this is before we consider external risks, from the aforementioned Brexit vote to China’s on-going and ragged attempts to both boost growth and transition its economy toward consumption. The Fed doubtless earnestly wants to hike, if only to get some room between itself and the zero bound before a genuine downturn. But now does not seem to be a good time.
“
James Saft Reuters columnist
in retreat in major and emerging economies, but world trade has also slowed. “Global economies have suffered the kinds of earnings declines that normally induce business retrenchments that begin the vicious cycle of recessions,” Levy wrote in a note to clients. “Declining profits have become ubiquitous across countries and sectors. Moreover, global trade has been contracting, both in unit volume and in nominal terms. Contracting trade and falling profits are typically recessionary phenomena.” To be sure, while things have a distinctly late-cycle feel about them, it is not as if there are strong signs that we definitely are moving toward a nearterm recession. Employment remains strong, and while it often does until just before a recession, it is far more often a sign that things are going well. The build in inventories too, while not a good sign for profitability or demand, is hardly flashing distress. It is when inventories begin to be aggressively liquidated that we are truly in trouble, and housing is not too bad at all. Much of what we are seeing is in line with a lowgrowth year, with an annual increase in output of 1 to 2 percent. Not what we typically associate with a tightening cycle. It is easy to see why Fed officials would like to be able to raise rates in June or July. If not in the next two meetings, then they, and we, will be staring down the barrel of the presidential election, with only two more meetings before the big day. It isn’t that the Fed is under an obligation to sit out an election, it is that this particular election, with Donald Trump as one candidate, has a exceptionally wide range of possible government policy outcomes. How do you set monetary policy in anticipation of a possible trade war? Gingerly. Futures markets are placing a 54 percent chance of an increase to 0.75 percent or 1.00 percent by July. But if the next few pieces of data are anything like the services PMI or durable goods numbers, the Fed will find it difficult to hike any time soon. Reuters
The Fed doubtless earnestly wants to hike, if only to get some room between itself and the zero bound before a genuine downturn
Profits and trade
David Levy, economist at the Levy Forecasting Centre, points out that not only are corporate profits
”
16 Business Daily Monday, May 30 2016
Closing Wine cellars
In high-rise Hong Kong, fine wines lurk in British war bunker Thanks to incredible concentrations of wealth, the city has become a world capital for fine wine. Jacques Clement
I
n high-rise, highpriced Hong Kong, even millionaires don’t always have room to store their fine wine collection at home, but a converted British war bunker offers space-crunched oenophiles the perfect solution. Built by Her Majesty’s government in the 1930s to hold munitions, the “Little Hong Kong” bunker complex was the last Allied position to fall to the invading Japanese on 27 December 1941 - two days after the surrender of the British governor. Collectors may rest assured that this spirit endures, says Gregory De ‘Eb company principal of Crown Wine Cellars. “We have great feng shui here. Nobody died, last place to surrender - it was all good!” he explains. The firm has converted the sprawling complex into state of the art wine storage. Six of the Central Ordnance Munitions Depot bunkers - each spanning some 1,000 square feet - have been painstakingly transformed in to what he describes as “the Rolls Royce of wine cellars.” Carved out of Hong Kong’s hills, protected by reinforced concrete and soil, the complex - whose sensitive restoration even received a nod from UNESCO - offers one of the most secure environments possible for wine. “If you give us one bottle of 1982 Petrus that your grandfather gave to you (with) his signature on the top left hand corner,
we make absolutely sure that your bottle will never be interchanged with any other,” said De’ Eb, a former diplomat. “In 50 years time we will give that bottle back to you. It’s so important,” he added.
‘Gold standard’ security
De’ Eb says the wine vaults were built in accordance to the US standard for gold bullion, while overall security at the bunkers drew inspiration from methods employed by the diamond industry in his native South Africa. Staff must wear wetsuits when entering the cellars - an anti-theft measure to ensure nothing can be smuggled out in clothing, and some vaults require three people to simultaneously input codes in order to access them. Clients are not allowed to enter the main storage warehouses, but can request to view their wine collection
in small rooms, where they will be closely monitored by security cameras. Such measures are not just for show: the cellar holds two of the world’s most expensive bottles of wine ever sold at auction - Château Lafite 1869 that went under the hammer in 2010 at Sotheby’s Hong Kong, fetching US$232,692 dollars apiece. Thanks to Hong Kong’s incredible concentrations of wealth, the city has become
Imports have grown exponentially - to
1.5
billion USD in 2015, up from
206 million USD in 2007 Hong Kong Trade Development Council figures
a world capital for fine wine. The city hosts Vinexpo, Asia’s largest wine and spirits fair, and has become a major hub for fine wine sales across Asia, thanks in part to a government decision in 2008 to drop import duties on wine. Imports have grown exponentially - to US$1.5 billion in 2015, up from US$206 million in 2007 according to Hong Kong Trade Development Council figures. The city is a key gateway to the vast, lucrative Chinese market, but of the 63.3 million litres of wine that was imported into Hong Kong in 2015, just 27.2 million was re-exported - highlighting the city’s own love affair with grapes.
Where to keep it?
Astronomical real estate prices coupled with Hong Kong’s hot and humid environment, mean that “wine storage really is a growing business,” said Korean wine
expert Jeannie Cho Lee. “It’s not like in France where everyone has a basement under their house,” said wine importer Alex Yim. “In Hong Kong, you even need to find a place to store your clothes,” he added, referring to the city’s notoriously small but expensive apartments, which often lack basic storage space. The government has sought to encourage the nascent local wine storage industry, creating the world’s first Wine Storage Management Systems Certification Scheme in 2009. By the end of 2015, 37 Hong Kong companies had been certified, giving wine-lovers many options. They could trust their entire collection to Crown, which has 2,000 customers including major auction houses like Sotheby’s, and manages “more than three billion Hong Kong dollars,” worth of wine, De’ Eb said. The company is an arm of Crown Worldwide, which also has relocation, record management and fine art divisions. Or they could turn to companies like Wine Vault, which started in 2008 and has converted disused industrial space into individual climate-controlled wine storage rooms. The firm’s cellars are between 40 and 80 square feet in size, and users can access their wine collection whenever they want, thanks to facial recognition software. The rooms off the long corridor in the bland industrial complex are now packed with cases and bottles of the world’s best vintages: Petrus 1966, Château Margaux 1981, Graves 1928, Barolo 1945. “In order to mimic the environment of underground cellars in Bordeaux or other wine regions we keep the temperature around... 13, 14 degrees,” said Hubert Li, a partner at the Wine Vault. “All of our 550 clients are private collectors,” he said, adding that sometimes clients send their drivers to collect a few more bottles to top up their smaller wine fridge at home. AFP
Investment
Regulator
Mining
Kuwait to spend US$115 billion on oil projects
China’s bad loans rise, risk under control
Australian gold output slips 2 percent
OPEC member Kuwait has earmarked 34.5 billion dinars (US$115 billion) to spend on oil projects over the next five years, despite the slump in oil prices, a senior executive said yesterday. “We have earmarked 34.5 billion dinars for spending on oil projects over the next five years,” Wafa al-Zaabi, head of planning at Kuwait Petroleum Corp, told an oil conference. “Over 30 billion dinars (US$100 billion) will be spent on the local market and the rest abroad,” she said. Overtwo-thirdsofthespending,or23billiondinars,has beenallocatedforexplorationandproduction,Zaabisaid. Kuwait aims to raise its production capacity, currently just over 3.0 million barrels per day, to 4.0 million bpd by 2020 and maintain it for another decade. Among main projects, it plans to build four gathering centres, carry out a key project to boost heavy oil production and raise output of free natural gas to over two billion cubic feet daily, from 150 million cubic feet currently, Zaabi said. Besides the upstream projects, Kuwait is currently implementing three downstream ventures costing over US$30 billion. These include a new 615,000-bpd refinery and a clean fuel project to upgrade two of the three existing refineries, and a platform for LNG imports. AFP
Banks saw their bad loans rise in the first quarter due to the slowing economy, but the risks were controllable, the regulator said yesterday. Guo Ligen, vice chairman of China Banking Regulatory Commission (CBRC), told a financial forum that non-performing loans by banks have been rising, as many sectors have felt the pains of the slowing economy. The increase in bad loans came as China moved to reduce the capacity of oversupplied industries and close “zombie companies,” which only survive thanks to bailouts. The measures are part of a wider push to restructure and upgrade a slowing economy. By the end of Q1, outstanding loans to five severely oversupplied industries rose only 0.1 percent from the same period last year, Guo said. He said the overall risk of the banking industry was “under control,” pledging that the CBRC will improve regulations in line with the new conditions in the macro-economy. He reaffirmed that banks should boost lending to strategic and emerging industries, and should continue to support oversupplied industries to reduce production capacity. Xinhua
Gold output in Australia, the world’s second biggest producer, slipped 2 percent in the first quarter, due in part to mining of lesser grade ores during a period of higher bullion prices, a survey released yesterday showed. Australian gold production reached some 71 tonnes in the first quarter, around 1.5 tonnes, or 2 percent lower, than the previous quarter, according to the survey by sector consultants Surbiton Associates in Melbourne. “Many operators have the flexibility to trim their grades and still make a reasonable profit,” said Surbiton’s director, Sandra Close. “If the overall grade is reduced by just a fraction of a gram per tonne, it will reduce the total gold output by several tonnes.” Close said mining companies had preserved some richer grade ores for leaner times while gold prices firmed in the first quarter, leading to the decline. That strategy may not play out in the current quarter as gold prices once again contract. Gold prices have been falling for most of the second quarter, both in U.S. dollar and Australian dollar terms. Reuters