Macau Business Daily July 5, 2016 by Business Daily

Imperial Pacific rakes in US$1.66 bln off VIP clientele in June Gaming Page 2

Tuesday, July 5 2016 Year V Nr. 1079 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Joanne Kuai Infrasturcutre

New contract for LRT Taipa depot attracts seven bidders Page 3

www.macaubusinessdaily.com

Going public

M&A

Postal Savings Bank of China challenges troubled environment and prepares biggest IPO of the year Page 9

Investment bank CICC and brokerage China Investment Securities in talks on a possible merger Pages 8 & 9

Monopoly alert Telecommunications

Legislators took to the floor at yesterday’s Legislative Assembly to criticize the government for signing an ‘unfair’ concession with CTM, the city’s dominant telecommunications service provider, and hindering the liberalization of the market. Page 5

Less free

Economy Macau placed 37th in the Global Economic Freedom Index, falling three places compared to last year. This year also marks the fifth consecutive year the SAR has seen a decrease in its ranking, with Freedom from Corruption scoring the lowest. Page 6

Poor data forecast

Economic performance Experts are forecasting the next set of data will confirm prolonged weaknesses in the Chinese economy. FX reserves, trade, investment and industrial production are expected to be the worst performers. Analysts are also betting that mainland authorities will release new measures to spur growth. Page 16

A push for legalisation

Uber Macau and a few driver-partner representatives delivered thousands of letters by hand to Secretary of Transport and Public Works Raimundo do Rosário. The letters were written over the past week by local residents and tourists, expressing their support for Uber in Macau and calling on Secretary Rosário to consider new regulations on ridesharing in the territory.

HK Hang Seng Index July 4, 2016

21,059.20 +264.83 (+1.27%) Worst Performers

Hengan International Group

+4.71%

Sino Land Co Ltd

+2.53%

Belle International Holdings

-0.88%

Hong Kong Exchanges and

+0.00%

Cheung Kong Property

+4.24%

Henderson Land Develop-

+2.53%

China Resources Power

-0.87%

Wharf Holdings Ltd/The

+0.00%

Sun Hung Kai Properties Ltd

+3.98%

Swire Pacific Ltd

+2.45%

Industrial & Commercial

-0.23%

China Mengniu Dairy Co Ltd

+0.15%

Hang Lung Properties Ltd

+3.84%

China Overseas Land &

+2.45%

CK Hutchison Holdings Ltd

-0.18%

China Petroleum & Chemical

+0.36%

Link REIT

+2.08%

China Merchants Holdings

+0.00%

Cheung Kong Infrastructure

+0.52%

Tingyi Cayman Islands

+3.15%

28° 30° 28° 31° 28° 32° 29° 34° 28° 33° Today

Source: Bloomberg

Best Performers

Wed

Thu

I SSN 2226-8294

Fri

Sat

Source: AccuWeather

Transportation Page 3

2 Business Daily Tuesday, July 5 2016

Macau In Brief Legislation

Animal Protection Law passed Legislators approved the Animal Protection Law article by article yesterday at a plenary session of the Legislative Assembly. Regarding the previously controversial clause that mandates dogs over 23 kilograms wear a muzzle, Secretary for Administration and Justice Sonia Chan Hoi Fan said that dogs that have passed certain tests would be exempt from wearing muzzles, but the owners would have to take precautionary measures to prevent the animals from hurting people, or else be held accountable if an incident takes place.

Finance

HSBC sells Brazil business to Banco Bradesco

SBC Holdings announced that it has ‘received all necessary regulatory approval for the sale of its entire business in Brazil,’ in a recent filing to the Hong Kong Stock Exchange. This marks the completion of a sale comprising HSBC Bank Brasil S.A. – Banco Multiplo as well as HSBC Servicios e Participacoes Ltda, to the purchaser Banco Bradesco S.A. ‘The sale of HSBC Brazil represents a significant step in HSBC’s stated

goal to optimize its global network and reduce complexity,’ the report detailing the sale states. ‘The Transaction was expected to decrease Group risk-weighted assets by around US$37 billion,’ it details, adding that the “Transaction would have generated a gain on sale (net of tax and transaction costs) of US$0.6 billion,’ however taking into account ‘the recycling of foreign exchange losses, there would have been an accounting loss on sale of US$1.7

billion,’. This however will not ‘impact the regulatory capital that will be generated from the disposal at Group level,’ the group specifies. Banco Bradesco, notes the group, is the fourth largest bank in Brazil, with total assets of US$309 billion and total equity of US$26 billion – as of March 31. The bank has 25.6 million account holders, 91,000 employees and 4,509 branches, as well as operating the largest insurance business in the country. K.W.

Real Estate Labour

The Waterside launches 59 newly-renovated apartments

Police arrest 58 illegal workers in May The Public Security Police (PSP) arrested 58 illegal workers in the MSAR in May, according to a press release issued by PSP yesterday. The PSP says that in cooperation with the Labour Affairs Bureau (DSAL) and other services, they conducted investigations at 377 locations, including construction sites, residences and industrial and commercial establishments. A total of 106 illegal workers were found working in the city in the first quarter of 2016, with 40 illegal workers being arrested in April. In the first five months of this year, a total of 204 illegal workers were arrested, representing a year-on-year decrease of 32.3 per cent compared to the first five months in 2015, when 301 illegal workers were arrested. N.M. Education

University of Macau gets MOP90 million budget for 2016 The Chief Executive (CE) has approved a MOP90 million (US$11.2 million) budget for the University of Macau (UMAC) in 2016, according to an Official Gazette dispatch. This year’s budget has been reduced by 3 per cent from last year’s MOP93 million budget. According to the release, MOP31 million will be for the payment of personnel salaries, while MOP51 million will be for capital investments. Around MOP8 million will be used to purchase services relating to communications and transport. Compared to last year, UMAC fell ten positions on ‘The Times Higher Education Asia University Ranking 2016’, now ranking 50th on the Asia university rankings. N.M.

Bela Vista Property Services Limited announced yesterday the opening of 59 newly-renovated apartments located in the One Central Residences. Though the property is only six years old, the group’s self-proclaimed ‘major makeover for units’, cost the group ‘approximately HK$15 million and firmly position The Waterside as Macau’s preeminent property for lease,’ a press release from the group states. “With several upcoming mega integrated resorts projects slated to open later this year and beyond, we are seeing increasing demand for high quality, fully-furnished accommodation,” states João Afonso, Managing Director of Bela Vista Property Services. “We are confident that the enhanced units will position The Waterside in good standing with senior-level expatriates, families and individuals,” Afonso says. The apartments range in size from

2,300 square feet to 4,750 square feet, with asking rents starting at HK$18 per square foot. Despite admitting ‘sluggish market sentiment’ in its press release, the group classifies the expensive remodeling as a way to ‘demonstrate the continued long term belief in Macau by the owner of The Waterside’. Official data for the first quarter of this year shows that a total of 1,928 building units were purchased and sold, down by 246 quarter-to-quarter. The sale of building units and parking lots amounted to MOP8.45 billion for the quarter, while the average price of residential units per square meter of usable area decreased by 4.2 per cent quarter-to-quarter, with those located in the NAPE and the Aterros da Baía da Praia Grande area averaging MOP84,467 per square meter, according to data from the Statistics and Census Service. K.W.

Gaming Saipan casino operator rakes in US$1.66 billion off VIP clientele in June

Imperial Pacific sees 35 pct slide in VIP chip turnover Imperial Pacific International Holdings Limited, operator of a temporary casino on the island of Saipan - located in the Northern Mariana Islands - has voluntarily announced unaudited results for their VIP table games rolling chip turnover for June, amounting to US$1.66 billion (HK$12.85 billion). The announcement comes as a continuation of their pledge to: ‘announce on the second day of each month the unaudited VIP table games rolling for the previous month’. The group saw a 35 per cent drop in its VIP table games rolling chip turnover as compared to the previous month, and the US$1.66 billion figure marks the lowest value the group has seen since December of last year, when rolling chip turnover reached

US$1.44 billion (HK$11.18 billion). Since then it saw its highest mark in April, totaling US$3.18 billion (HK$24.74 billion) followed by a slide to US$2.53 billion in May, before June’s month-on-month drop to US$1.66 billion. The group previously announced that VIP operations had reached saturation, however, CEO Mark Brown of Best Sunshine International, the operator of the casino, told Business

Daily previously that average returns were expected to continue coming in at “US$2 billion a month”. The island’s operations work without fixed junket operators, with the group handling its credit operations internally while in possession of a 40-year monopoly on gaming in the area. The group hopes to open its Grand Mariana property on the island “at the end of this year,” Brown told Business Daily. K.W.

Business Daily Tuesday, July 5 2016 3

Macau Transportation

No response yet to Ride-sharing service’s push for legalisation

Uber delivers around 3,000 letters to Secretary Kelsey Wilhelm kelsey.wilhelm@macaubusinessdaily.com

n the most recent installment of Uber’s attempt at legalization, the car-sharing service turned in around 3,000 letters from local citizens and tourists alike to Secretary for Transport and Public Works Raimundo do Rosário’s office yesterday, the group reported. The letters included both written requests and printed emails of support for the service, with a mixture of praise for the ride-sharing app, and criticism of the current landscape regarding transport in the SAR. The letters were written over the past week and reportedly hail from various demographics. They were delivered by Uber Macau’s General Manager Trasy Walsh, who was accompanied by supporters of the cause, taking pedicabs, to the Secretary’s office. “Frankly, we were surprised by the overwhelming response, with nearly 3,000 residents and tourists sharing their stories and support for Uber in less than a week,” said Ms. Walsh. “We know Secretary Rosário and the

government shares our commitment to addressing transportation pain points in our city, so I’m very hopeful for a positive response and constructive dialogue,” the General Manager added.

Write it up

In a number of letters provided by the service to the media, proponents take positions such as: “I am asking you to consider the reasonable, consumerfriendly regulations that encourage ridesharing in Macau and allow Uber to continue serving Macau with its high-quality service,” an individual named Alexei states. A self-proclaimed resident of Macau who gave her name as Denise writes: “the local taxi service is, to say the least, SHAMEFUL. Too many fellow residents and I have reached a point in which we simply refuse to ask for a taxi service.” An individual named Marc, also citing negative taxi experiences notes that “ensuring that my family and I have access to reliable transport options anywhere in the city, at any time of the day, is extremely important to our daily lives,” pledging

his support for the service. Having received no immediate response to the letters at the time of publication, the team at Uber remains hopeful for a positive resolution to the current legal environment in which it operates. Attempting to pressure the government to legalise its services, the campaign urged citizens to email the Secretary directly using email templates beginning with the phrase: “I love the service for many reasons including…” The email template was sent out to Uber riders late last month by the ride-sharing company’s General Manager, Trasy Lou, sparking

yesterday’s letter delivery. In the email, the General Manager described the consequences of Uber’s as-yet-illegal status, noting: “sometimes members of the police may not understand our service – they impose steep fines on drivers and disrupt the journeys of riders.” Eight months into operations the carsharing provider is still waiting for legislation to legalize its services. Contacted by Business Daily, the Office of Secretariat for Transport and Public Works said they have no official comment on this matter so far.

Construction

New contract for LRT Taipa depot attracts seven bidders The public tender for the Light Railway Transit (LRT) Taipa section and depot superstructure has received proposals from seven companies, according to information provided to TDM Radio by the Transportation Infrastructure Office (GIT). Ac c o r d i n g t o e st i m a t e s b y the Committee for Land and Public Concession Affairs of the Legislative Assembly, the Taipa depot superstructure will cost MOP1 billion (US$125 million) out of an estimated MOP11 billion for the total

construction of the Taipa section of the LRT. According to Secretary for Transport and Public Works Raimundo do Rosário, construction of the depot will be finished in 2019. The contract for the construction of the LRT depot in Taipa was signed in 2009 with a consortium comprising Mei Cheong and Top Builders, initially valued at MOP555 million over four years. However, due to serious delays in the construction, the contract

Business

Tysan has new controlling shareholder Tysan Holdings Limited, the group contracted for the Passenger Clearance Building of the Hong Kong-Zhuhai-Macau Bridge, announced in an update to their previously launched annual results that the company has issued a profit warning given the completion of one of the groups’ transactions previously disclosed on April 19, according to a filing to the Hong Kong Stock Exchange. With the completion of the negotiations, the company comes under a new controlling shareholder – HNA Finance I – causing an additional HK$197.98 million reportedly ‘under the Management Incentive Scheme’ to have ‘become payable’ for the 2015 fiscal results, as well as adding an additional HK$192.41 million to the loss sheets for the 2016 fiscal year ending March 31, 2017, the report notes. The adjusted profit for the 2015 fiscal year, following the transaction, fell from its previously announced HK$512.5 million (US$66 million) profit for the year, to HK$396.9 million (US$38.28 million), and the board warns that ‘there will be a significant and negative impact on the Group’s

financial results for the six months ending 30 September 2016 and the full financial year ending 31 March 2017’. However the group notes that the scheme’s expense is not recurring, as it is ‘a one-off expense and following the completion of the Tides Transaction, there will be no more payments or entitlements under the Management Incentive Scheme’. The board also noted that it does not expect a ‘gain on disposal of subsidiaries of approximately HK$113 million,’ which took place in the 2015 fiscal year, to be repeated again in the 2016 fiscal year. K.W.

was terminated, with an overall expenditure of the contract of MOP85 million. The depot will serve as a storage area for the LRT cabins supplied by Mitsubishi, who is providing the

materials for the first phase of the LRT. Previous delays in the depot construction have also resulted in changes to the contract with Mitsubishi involving an additional payment of MOP700 million. N.M.

4 Business Daily Tuesday, July 5 2016

Macau In Brief Public Project

Infectious diseases building project begins work The city’s infectious diseases building has started erecting hoardings for its expansion project, according to a statement published by the Infrastructure Development Office (GDI) and Health Bureau yesterday. After the completion of the relevant preparatory work, the five buildings inside the hoardings will be demolished later through different phases, including the health warehouse and Social Welfare Bureau’s detoxification center. After the relevant demolition work has been completed, the land will be flattened for further construction works. The duration of the demolition work will be 120 days, at a total expense of MOP 1.15 million (US$0.14 million). A.L. Petrol

Qualified light diesel In order to monitor petrol quality and control car emissions to safeguard air quality, the Environmental Protection Bureau (DSPA) took 20 samples of light diesel from gas stations in Macau, Taipa, Coloane, and from Ka Ho’s oil depot between May 17 to 18. The samples were delivered to a specialized laboratory for testing, according to a statement issued by DSPA yesterday. The bureau says the results show that the sulfur content of the samples of light diesel ranged between 0.0007 per cent and 0.0009 per cent, which is less than the standard policy requires. In order to improve the air quality in the city, DSPA implemented a new policy from January 23, 2006 to monitor the sulfur content in the sales of light diesel oil. A new policy on the usage of unleaded petrol and light diesel for vehicles will come into effect on July 14 for a 180-day trial. It aims to reduce air pollution caused by vehicle exhaust to protect the quality of the environment and the health of residents. A.L.

Ferries

Cotai Water Jet offers new summer routes Cotai Water Jet has added three additional routes in July, a company release states. There will be two routes departing from Macau Taipa Ferry Terminal to Hong Kong China Ferry Terminal and Hong Kong Macau Ferry Terminal, while an extra route will be added between Hong Kong International Airport and Macau Taipa Ferry Terminal. Cotai Water Jet will also add four new additional routes in August. The ferry company is also offering a 20 per cent discount to MasterCard holders who buy First Class tickets for either a city route or an airport route, with the company app now providing information on special discounts and promotional tickets. N.M.

Public Housing

Issues of public housing and related facilities The use of a public and private partnership model could speed up the construction of public housing, a committee member of the Urban Planning Committee suggests. Annie Lao annie.lao@macaubusinessdaily.com

artnerships between the private and public sectors are suggested to help with the building of public housing in Macau, it was discussed in a public debate held by local public broadcaster TDM over the weekend. Wu Chou Kit, a committee member of the Urban Planning Committee said during the discussion that facilities at the public housing in Ilha Verde and Seac Pai Van are still lacking. Mr. Wu suggested forming a partnership with private companies, especially for the planned public housing developments that are located far away from the city. “This type of land for building public housing should be opened for a public tender so the government can gain another source of income that can be invested in building facilities for planned public housing,” Mr. Wu commented. Once the establishment of a new Urban Renewal Committee has been set up, the city could develop in a similar way to Hong Kong, with businesses partnering with the housing projects to develop new areas and to make the procedures more efficient, Mr. Wu recommended. Mr. Wu also suggested the government should speed up the construction of the public housing units in the areas which have well set-up facilities and good transport networks, so that the residents can move in quickly. Legislator Si Ka Lon suggested the government should open applications

for public housing as soon as possible and publish a timetable in a timely manner so residents can move in sooner. “This also helps the government to figure out the current situation of the community in terms of the population and facilities issues,” the legislator explained. There will be 28,000 public housing units to be built in the New Area Zone A. About 10,000 public housing units will be built in Avenida Wai Long, where around 4,000 units are currently being built, according to the legislator.

Lacking facilities

Iun Ioc Va, the deputy convener of the Advisory Council of Community Services of the Islands acknowledged that the government reclaimed the five land plots located in Avenida Wai Long in Taipa to build public housing. However, Mr. Iun suggested one plot of land located at the junction between Rua do Desporto and Rua do Colegio should be reserved for sports and youth related activities and to increase the facilities in the area. “If further development is to take place, it should enhance the overall development of sports and youth facilities,” Mr. Iun said. Local residents expressed hope that the government would keep its promise to finish the planned public housing projects by 2020. “The Chief Executive, Chui Sai On has promised to build public housing units in the New Area Zone A. Also, 12 projects of planned public housing in Nam Van and 14 planned projects of public housing in Seac Pai Van, which equals

to 60,000 units of planned public housing. I hope these will be built by 2020,” a local resident said while attending the discussion on Sunday.

Existing facilities unchanged

A multi-storey car parking space will be built for 1,000 units of public housing located on the eastern side of the Macau Olympic Aquatic Centre in Rua do Desporto, according to a report by local TDM Chinese Radio. Pun Weng Kun, director of the Sports Bureau has already made a request to the Land, Public Works and Transport Bureau (DSSOPT) that the existing sports facilities should be kept unchanged, including badminton and basketball courts. He also requested that the DSSOPT provide no less than the current existing number of parking spaces available. “The surrounding area of the Macau Olympic Aquatic Centre is for Macau residents to do exercises so we have requested DSSOPT to retain the current sports facilities in place,” Mr. Pun said. Currently, the multi-storey car parking space and the open parking space on the ground floor can provide about 500 parking spaces. According to the draft plan of the parking spaces from the DSSOPT, no less than 650 parking spaces, of which 400 parking spaces are for light vehicles, will be provided. Mr. Pun said that the Bureau has now collected feedback from the Urban Planning Committee, but still has not received the exact date for land clearance from the DSSOPT and Housing Bureau. Mr. Pun revealed that the Bureau has received some feedback to request a change in land usage for building public housing, yet up till now the Bureau has not received any requests to change the usage of the sport facilities.

Business Daily Tuesday, July 5 2016 5

Macau

Telecommunications

Legislators slam gov’t for signing unfair contract with CTM

Put him in the stand Legislator Jose Pereira Coutinho wants former Secretary for Transport and Public Works Lau Si Io to explain “disadvantageous” contract made with CTM in 2009. Nelson Moura nelson.moura@macaubusinessdaily.com

he former Secretary for Transport and Public Works Lau Si Io should explain the public concession contract made with Companhia de Telecomunicações de Macau S.A.R.L. (CTM) to the Public Administrative Affairs Committee of the Legislative Assembly, Legislator Jose Pereira Coutinho told Business Daily.

“CTM currently controls a quota of 100 per cent of the Internet services, fixed telephone lines and data transfer services. This is a case of taking the emperor hostage to control the court” Chan Meng Kam, Legislator Legislators of the Public Administrative Affairs Committee a r e c u r r e n t l y di sc u ssi n g th e telecommunication services in Macau. One area of focus is whether the government should keep the public telecommunication service contract agreed to in 2009 with CTM until 2021, or terminate the contract earlier.

Terminating the contact would force the government to pay 2.5 times the value of the average profit that CTM made in the past three fiscal years before tax. “I hope the Committee can hear the ex-Secretary for Transport and Public Works, and three former directors of the Bureau of Telecommunications Regulation (DSRT), in order to understand why such a disadvantageous contract to the interests of the Macau public was awarded,” Coutinho told Business Daily. The President of the pro-democratic New Hope party and directly-elected legislator believes that at the time, the concession contract made between CTM and the government “didn’t pay attention to the consumer interest, placing itself in a very disadvantageous situation.”

Bad planning?

The contract made in 2009 with CTM stated that the exclusive rights to the fixed telephone service, telegram service, fixed telex service and switched fixed service for data transmission would finish in 2011, after which time the telecommunications market would be liberalised, according to the DSRT. At the time it was decided that CTM would continue to provide telecommunication services in a non-exclusive way for five years until 2016, with the possibility of an extension for five more years until 2021. Legislator Coutinho believes the public interest wasn’t taken into account when the contract was awarded in 2009, and considers that it “benefited the company more than the region.” “Why was this contract celebrated

in 2009 when it was known that in 2011 the telecommunications market would be opened,” Coutinho told Business Daily. Now the legislator wants the Committee to evaluate the conditions under which the contract was made, and decide if the telecommunications market has been truly fair and competitive since the market was liberalised. “Let’s see if the government, even taking the public interest into account, will be forced to pay compensation to CTM,” Coutinho told Business Daily. When questioned when a decision would be made by the Committee, the legislator didn’t provide any information. Last week, the current Secretary for Transport and Public Works, Raimundo Arrais do Rosário stated that unless there has been a serious violation of the law or of the public interest, the concession contract will automatically be renewed for another five years.

Who controls the cables?

In an interpellation at yesterday’s Legislative Assembly (AL) plenary session, Legislator Chan Meng Kam, President of the Public Administrative Affairs Committee stated that the contract had unjust criteria, and questioned the idea that the telecommunications market has become competitive. “CTM currently controls a quota of 100 per cent of the Internet services, fixed telephone lines and data transfer services. This is a case of taking the emperor hostage to control the court,” Chan Meng Kam stated. The contract established in 2009 stated that CTM would remain as the administrator of the underground communication network, taking care of its management and agreeing to share the network system with other telecommunication operators. The telecommunication concession holder has maintained its mobile market share in Macau at around 43.3 per cent as at December last

year, Business Daily reported previously. However some legislators have stated that, although the telecommunications market has been open for four years, CTM continues to have exclusive use of the network system. Chan Meng Kam mentioned that since it is the government that decides the amount of network rent compensation paid to CTM by other operators, “how was a compensation that represents 80 per cent of the profit authorised?”

“I hope the Committee can hear the ex-Secretary for Transport and Public Works, and three former directors of the Bureau of Telecommunications Regulation (DSRT), in order to understand why such a disadvantageous contract to the interests of the Macau public was awarded” Jose Pereira Coutinho, Legislator The Committee President also questioned that if contract termination compensation was to be paid to CTM, would the telecommunications market revert to what it was before the liberalisation in 2011. Or in case of contract renewal, how would the market change after the CTM concession finishes in 2021. “If the government continues to not have interest, capacity or talented personnel, it will continue to do all these foolish contracts,” the legislator stated.

6 Business Daily Tuesday, July 5 2016

Macau

Finance

Freedom from Corruption still lowest indicator

Economic freedom falling Macau falls for the fifth consecutive year in The Wall Street Journal ranking for Economic Freedom. Nelson Moura nelson.moura@macaubusinessdaily.com

acau has fallen three places on the global Index of Economic Freedom, an annual ranking published by The Wall Street Journal and The Heritage Foundation has revealed. Macau now occupies 37th place globally, and 9th place in the AsiaPacific region, after a 0.2 point fall from last year to 70.1 points. This year was the fifth consecutive year Macau has seen a decrease in its economic freedom ranking. In order to determine economic freedom, the index grades 10 quantitative and qualitative factors on a scale from zero to 100. Those factors include property rights; freedom from corruption; fiscal freedom; government spending; business, labor and monetary freedom; and market openness. The data analysed by the index covers the second half of 2014 through to the first half of 2015. The report states ‘the rule of law [in Macau] is relatively well respected, th o u gh m o r e eff ecti v e a n ti corruption measures are needed’,

while asking for ‘more committed structural reforms’ in order ‘to enhance prospects for broad-based long-term economic development.’ The report also mentions a lack of tourist attractions for non-gamblers and high travel expenses, as two recurrent structural problems in the city.

Corruption dragging it down

Although Macau’s economic freedom is well above the world average of 60.7, Freedom from Corruption was the lowest ranking in the factors analysed for the city, with 49.7 points, a value that has remained unchanged since 2013. This result places the city in the ‘Mostly Unfree’ countries section of the index in terms of corruption. The report also considers that Monetary Freedom in the territory has decreased 5.3 points from the 2015 index, down to 69.6 points this year, while Business and Labour Freedom remained stable at 60 and 50 points respectively. The fall has caused the city’s Monetary Freedom ranking to dip below the global average of 75.7 points. In general, Regulatory Efficiency in

Corporate

Wynn Macau supports Holy House of Mercy

Wynn Macau has donated MOP300,000 to Macau Holy House of Mercy (SCMM)’s Welfare Shop Project to finance the distribution of food hampers to 355 underprivileged families. Ms Linda Chen, Executive Director and Chief Operating Officer of Wynn Macau Ltd, presented the

cheque to Mr António José de Freitas, President of SCMM on Saturday. Around 30 warm-hearted volunteers from Wynn Macau took part in the food hamper distribution, handing out hampers containing basic food items and daily necessities. In addition, this year Wynn Macau also gave out MOP100 supermarket vouchers as a special gift to each household.

Macau was considered ‘less efficient than those of similar economies’, citing the absence of ‘serious reform efforts’ as the reason for the ‘lack of a dynamic, broad-based labor market.’

Government spending up

The only indicators to have risen for Macau in the 2016 Index for Economic Freedom have been Government Spending and Fiscal Freedom. The Government Spending ranking increased 2.1 points in 2016 to reach 93.9 points, way above the world average of 63.5. The report by The Wall Street Journal underlined how government spending in Macau is equivalent to 14.3 per cent of total domestic output, with gambling revenue still ‘generating considerable surpluses’. Fiscal Freedom increased 1.3 points from last year to 73.1, however it was still below the world average of 77.8. The report also considers Trade Freedom as one of the successes of the Macau economy, thanks to low-tariffs and openness to foreign investment.

Hong Kong still number one

The report shows a third consecutive year of improvement overall in the Asia-Pacific region, with the scores of 22 countries in the region having risen, while 19 declined, and one stayed the same. Four of the top five

freest economies in the world are located in the region including Hong Kong, Singapore, New Zealand and Australia, with number four being Switzerland. Even with a one point decrease from last year, Macau’s neighbour Hong Kong still occupied the first position in the economic freedom ranking with a score of 88.6 points. The high position was credited to the city’s ‘open markets, strong property rights, and highly competitive fiscal policies’ the report stated. In 2016, Hong Kong scored 97.4 points for Business Freedom, 90.7 for government spending and 90 for Property Rights. ‘The implementation of prudent economic policy within a stable and transparent legal environment has been the cornerstone of Hong Kong’s continuing achievement in maintaining the world’s freest economy. Well-secured property rights ensure vibrant commercial interactions and entrepreneurial growth. With a high level of market openness and fiscal discipline, Hong Kong continues to be a leading global business and financial hub,’ the report stated. Hong Kong was followed in the global rankings by Singapore, which despite a 1.6-point dip, still scored 87.8 points, the second highest score. ‘Economic growth has slowed in Singapore, but the city’s openness to global trade and investment continues to provide a solid basis for economic dynamism,’ the report said.

Business Daily Tuesday, July 5 2016 7

Macau society HK seeks improved communication with mainland after bookseller controversy

Improving Communication Macau has no need for more communication measures with mainland authorities regarding arrested individuals says Secretary for Security. Kelsey Wilhelm kelsey.wilhelm@macaubusinessdaily.com

inisters of Justice and Security for the Hong Kong SAR will be flying to Beijing as early as this week to begin talks with mainland officials, regarding improved channels of communication in the wake of the disappearing bookseller controversy, the South China Morning Post has reported. The incidents involved five booksellers in the SAR, who separately went missing starting from last October. The booksellers later resurfaced on the mainland months after their disappearance, having claimed “voluntary dislocation” from the SAR. One of the booksellers, believed to have been dealing in books banned in China - a Swedish national - is still being held, while the other four have returned to Hong Kong within this year, with one claiming to have been abducted by agents from a central investigative unit, the publication notes. The talks come in the wake of a request from the neighboring SAR’s Chief Executive Leung Chun-ying to the central government for a review of the communication mechanism, which was recently granted, sparking the visit by the Hong Kong delegation to the mainland, notes SCMP.

In a recent interview with the publication, the Chief Executive expressed a wish for a comprehensive mechanism to apply to both the mainland and international governments regarding notification of detainment of its citizens, stating: “we want to know as soon as possible when a Hong Kong resident is arrested by a jurisdiction outside of Hong Kong […] that applies to foreign governments and should also apply to the mainland,”.

local SAR’s closest communication is with the neighboring province of Guangdong, which borders both Macau and Hong Kong. “Until now everything has gone well and because of this I believe that it’s not necessary (to expand the mechanism),” explains Secretary Wong.

Accountability

Based on legislation enacted in 2001, the Public Security Police Force, under the border control division,

is charged with the duty to ‘control and oversee the entrances and exits of all persons to and from the MSAR’ as well as to ‘propose the repatriation of people considered undesirable to the MSAR’. At the same time, under the same mandate but a separate division, the Public Security Police Force is charged with ‘guaranteeing the practice of citizens’ fundamental rights and liberties’ – therefore any case of disappearance and repatriation should fall immediately under the mandate of the Public Security Police Force, while simultaneously any need to repatriate would also be the responsibility of the same department.

No cases

Despite local authorities in the Macau SAR possessing the mechanism to communicate and receive communication regarding these types of incidents, no effort is currently being made, or seen as required, to expand the mechanism currently managed by the Police force and the Ministry of Public Security. The reason – no such cases have occurred since the mechanism was set up. “We have had this mechanism in place since 2001,” Secretary for Security Wong Sio Chak told Business Daily, adding that: “it’s working very well, there has never been a similar case here (as that of the Hong Kong SAR bookseller disappearance).” Much like Hong Kong’s current situation, the local communication agreement was reached with the central government’s Ministry of Security as well as the Police force, yet, according to the Secretary, the

Leung Chun-ying, Hong Kong SAR’s Chief Executive

8 Business Daily Tuesday, July 5 2016

Greater China

Key Points State-owned firms dominate private-public partnerships PPP scheme was designed to boost private sector Private firms say they are crowded out Local authorities see state firms as financially stronger Central government investigating Public projects

Private infrastructure firms face unexpected competition The central government is investigating why the private sector is winning so few projects. Brenda Goh

rivate Chinese companies taking part in a scheme to reduce the state’s dominance in building infrastructure are finding competition is coming from an unusual place - the government peers they are supposed to replace. Private-sector businessmen say they are losing out in most projects to state

firms, which are favoured by local authorities because they are seen as financially stronger and better able to raise capital. State companies are also more likely to bid for projects that private firms consider financially unfeasible. Finance ministry data shows that 600 public-private partnerships (PPP) have so far found partners, and analysts say that about three quarters of the investment has come from stateowned firms.

“The government is willing to work with government firms, but co-operation with private companies is a shambles,” said Yan Jiehe, chairman of China Pacific Construction Group, which grew to become China’s largest private builder by revenue over the last 20 years by building roads and bridges for local governments. Yan has no plans to invest in any of the advertised PPP projects, which range from municipal works to highway schemes. “None of the projects make financial sense,” he said. The central government is investigating why the private sector is winning so few projects. The central government has promised to reduce the oversized role of state enterprises in the economy, so any failure of the PPP scheme would raise doubts about that goal. China’s Ministry of Finance and the state planning agency, the National Development and Reform Commission, did not respond to requests for comment. Government officials are already worried about signs of a rapid slowdown in the private sector. Investment growth slowed to a record low 3.9 percent in January-May from the year-earlier period, which compares with a double-digit pace last year. Private firms provide the lion’s share of overall investment in China and create 90 percent of new urban jobs.

Shut out

Problems with the PPP scheme may be more fundamental. Local authorities have advertised close to 9,000 PPP projects - worth an estimated 9.8 trillion yuan (US$1.47 trillion) - so most have yet to find a partner at all. While Britain’s PPP scheme limits

partnerships to a state authority and the private sector, China does not differentiate between government and private firms. At best, government firms are not allowed to bid on projects in their home province but are free to do so elsewhere. Still, infrastructure projects would not get done without the participation of government firms because the state is so dominant in the economy, said Wang Shouqing, a Tsinghua University professor who advises local authorities across China on the financing of PPP projects. “It was unrealistic to stop state and government firms from participating,” Wang said. “But placing no restrictions on them has resulted in this, because they run on a different playing field.” In 2014, Beijing pledged to give PPP funding more policy support and began offering rewards of up to 8 million yuan to all participating firms. That prompted local governments across the country to advertise projects as PPP, hoping Beijing’s policy focus would lead to faster approvals. State media has reported that the government is seeking views on a draft PPP law.

Unsuitable

The finance ministry’s database shows just 565 projects out of 8,644 have funding partners. Shanghai-based privately-owned YHX Bank found 73 percent of the investment came from government firms. “At all the projects we’ve dealt with, we’ve been told that what they want is a government or state contractor,” said a project manager at a private construction firm in southwestern Sichuan province who only wanted to give his surname as Long. Water treatment PPP projects have been the most popular among private investors because many have operating agreements that allow firms to collect fees from end-users, unlike other “build-and-transfer” schemes, like roads, that rely on the local authority for payment, analysts said. Agreements with local authorities leave the firms at risk of sudden changes in policy or budget priorities. Government firms, however, have tended to heavily undercut private companies on bids, said He Yuanping, chief financial officer of water treatment firm Beijing Originwater Technology. The company is involved in close to 80 PPPs and has mostly won projects on the back of its technology, he said. Other executives said project terms are not always viable. Some offer lengthy repayment periods of up to 30 years, or uncompetitive returns as low as 1-2 percent, they said. “In my opinion, out of those 8,000 plus projects, half are unsuitable for PPP,” said Wang. “We find that a lot of government officials have an incorrect understanding of PPP.” Reuters

M&A

China Investment Securities, CICC said to be in CICC, which listed in Hong Kong in November, had 94.1 billion yuan of assets at the end of last year, while China Investment Securities had 92.2 billion yuan, according to the websites. Investment bank China International Capital Corp. and brokerage China Investment Securities Co., firms with 186 billion yuan (US$28 billion) of assets last year, are in talks on a possible merger, people familiar with the matter said. A transaction is not certain, and the structure of any deal is yet to be decided, the people said, asking not to be identified because the talks are private. Linking up could be “a good deal for CICC,” said Lucas Wang, a Hong Kong-based analyst at First Shanghai Securities Ltd. “CICC’s strength has been with high net worth individuals and corporate clients; the network and

mass-market client base of China Investment Securities will be a good fit.”

China’s Goldman

Set up in 1995, Beijing-based CICC was part-owned by Morgan Stanley until that firm sold out in 2010. Run by Levin Zhu, the son of then-Premier Zhu Rongji, it brought some of the country’s biggest state-owned firms to market, becoming known as China’s answer to Goldman Sachs Group Inc. As part of CICC’s efforts to drive a revival, it raised US$811 million from an initial public offering in Hong Kong in November, earmarking money for

Business Daily Tuesday, July 5 2016 9

Greater China Going public

In Brief

Postal bank defies market turmoil with IPO plan China’s five largest state banks are now trading in Hong Kong at an average of 4.7 times their estimated earnings for this year. Global bank shares are gyrating after the U.K. vote to leave the European Union. Hedge fund managers and analysts are sounding increasingly dire warnings about the bad debts piling up on the balance sheets of Chinese banks. Enter Postal Savings Bank of China Co., which last week shrugged off the naysayers and filed a listing application with the Hong Kong stock exchange. The bank, China’s sixth largest in terms of assets, is seeking to raise US$8 billion in what could be the world’s largest IPO this year, according to people familiar with the matter. Despite the questionable timing, analysts are confident that the IPO will be a success, noting that the actual listing isn’t likely to take place until September. “There is no doubt it will be a tough sale and Postal Savings Bank will have to price the IPO close to its book value to appeal to investors,” said Li Bin, a Shanghai-based analyst at Capital Securities Corp. “But I believe it can nail it.” Postal Savings is more focused on the “political achievement” of listing its shares in Hong Kong - the last step of its transformation from a sleepy postal service into a fully fledged lender rather than the precise timing of the IPO, Li said. An arm of the state-owned China Post Group Co., and with about 6.8 trillion yuan (US$1 trillion) of assets at the end of September, it’s the last major Chinese commercial bank yet to be listed. Britain’s vote to exit the European Union last month has roiled global

equity markets and caused the pound to plunge to its lowest in more than 30 years. At the same time, there are growing concerns about the true level of bad debt in the Chinese banking system, which have pushed valuations of the nation’s lenders to near-record lows.

Turbulent conditions

China’s five largest state banks are now trading in Hong Kong at an average of 4.7 times their estimated earnings for this year, and at 0.6 times their estimated book value, according to data compiled by Bloomberg. That is well below the average of 11 times price-toearnings and 1.1 times price-to-book for global banks with a market value of at least US$10 billion. Turbulent market conditions have affected other recent public offerings by Chinese financial firms. Orient Securities Co. and China Development Bank Financial Leasing Co. both ended up pricing their Hong Kong share sales last month near the low end of the marketed range. Bank of Jiangsu Co., which has been preparing for a domestic IPO for six years, slashed the number of shares it had planned to sell by more than half. BOC Aviation Ltd., which raised US$1.1 billion and started trading in June, closed Thursday 6.3 per cent lower than its offer price in Hong Kong. Globally, companies have raised US$52.3 billion from first-time share sales in the first half, the slowest pace in seven years, Bloomberg-compiled data show. Postal Savings Bank’s IPO would be the largest since e-commerce

billionaire Jack Ma’s Alibaba Group Holding Ltd. priced its US$25 billion New York share sale in September 2014, according to data compiled by Bloomberg.

AgBank’s IPO

For some, Postal Savings Bank’s sense of timing is reminiscent of Agricultural Bank of China Ltd., the nation’s third-largest lender, which completed its US$22.1 billion IPO in 2010 at a time of similar turmoil in global markets. Despite almost 50 companies worldwide shelving their IPOs in the three months before its offering, AgBank proceeded with the listing and priced the shares near the upper end of the range. With 500 million customers and more than 40,000 outlets, Postal Savings Bank has received the support of UBS Group AG, Temasek Holdings Pte and eight other strategic investors which in December bought a total 17 per cent stake for 45 billion yuan. Other investors are JPMorgan Chase & Co. and Alibaba Group Holding Ltd.’s finance affiliate, Zhejiang Ant Small & Micro Financial Services Group Co. The bank also has a relatively clean balance sheet, without the legacy of bad loans which is troubling other Chinese lenders. Its nonperforming loan ratio stood at 0.64 per cent by the end of 2014, compared with an industry average of 1.75 per cent as of March 31. “The timing could be even worse going forward, but it doesn’t really matter,” said Xue Huiru, a Shanghai-based analyst at SWS Research Co. If Postal Savings Bank encounters difficulties attracting investors to its shares as the offering proceeds, it can always bring in Chinese insurers and other state companies to take stakes in the bank, Xue said. Bloomberg News

“The timing could be even worse going forward, but it doesn’t really matter” Xue Huiru, a Shanghai-based analyst at SWS Research Co.

Hong Kong Stock Exchange trader

n merger talks expansions in equity sales and trading, wealth management and international business. During last year, surging income from brokerage commissions and asset management helped to drive up profit. The company that CICC may combine with, Shenzhen-based China Investment Securities, sat at No. 17 in the revenue rankings for last year, where Citic Securities Co. was No. 1, according to Securities Association of China data. China Investment Securities is 100 per cent owned by Central Huijin Investment Ltd., according to the brokerage’s website. Huijin, a unit of China’s sovereign wealth fund, owns 28.4 per cent of CICC, according to CICC’s website.

Huijin’s revamps

A deal would follow previous revamps of brokerages controlled by Huijin.

Shenyin & Wanguo Securities Co. and Hong Yuan Securities Co. were combined in a US$6.4 billion deal struck in 2014, creating one of the nation’s biggest brokers, Shenwan Hongyuan Group Co. Another broker controlled by Huijin, China Galaxy Securities Co., was listed in 2013.

Sherry Tan, a spokeswoman for CICC in Beijing, declined to comment. There was no immediate response to an e-mail sent to the Beijing-based press office of Central Huijin’s parent, China Investment Corp., and no one answered a call to China Investment Securities seeking comment. Bloomberg News

UBS forecast

Stable growth in second quarter The upcoming release of official Chinese economic indicators will show the country maintained stable growth in the second quarter of 2016, UBS predicted in a report yesterday. The Swiss bank put China’s Q2 growth at 6.7 per cent year on year, flat with the first quarter. “Property sales may have moderated further and industrial production growth stabilized. Infrastructure investment likely stayed strong to offset downward pressures from still-weak private investment,” it said. The forecast came less than two weeks ahead of the official release of data including GDP, industrial output, fixed-asset investment and retail sales for the past quarter. Insurance

Regulator relaxes rules on infrastructure investment China’s insurance regulator has revised rules to make it easier for insurance companies to invest in infrastructure projects in a bid to support a slow economy and create investment opportunities in an environment of low returns. Insurers will no longer need to obtain regulatory approval to invest in infrastructure, and their scope of investment will also be expanded, the China Insurance Regulatory Commission (CIRC) said on its website. The CIRC said that since 2006, insurers have invested a total of 893.83 billion yuan (US$134.32 billion) into infrastructure projects. M&A

HNA bid for Gategroup shares yet to reach target HNA Group said yesterday it now owned 63.6 per cent of the shares in Gategroup, just short of the minimum acceptance level for its takeover bid for the Swiss airline catering firm. Chinese aviation and shipping conglomerate HNA stepped up its global expansion in April by agreeing an all-cash deal to buy Gategroup for US$1.5 billion, a price some shareholders and analysts criticized at the time as too low. The provisional interim result of the bid was under the threshold of at least 67 per cent of Gategroup shares HNA had said it planned to buy. infrastructure

Domestic building giant joins NZ tourism project China’s biggest building company will be working on a hotel project billed as China’s biggest-ever investment in New Zealand’s tourism infrastructure, the developer said yesterday. New Zealand’s Hawkins Group would be working in a joint venture with China Construction to build the Park Hyatt Auckland, on downtown Auckland’s harbour front, after signing a contract with Beijingbased developer Fu Wah International Group. Work on the seven-storey hotel, which would have a total floor area of 29,000 square meters and 195 rooms, was due to commence this month and completion was scheduled for late 2018.

10 Business Daily Tuesday, July 5 2016

Greater China Investment

Commodities rally on hopes of stimulus Chinese commodities have mostly outperformed stocks this year. Manolo Serapio Jr

hinese commodities from nickel to cotton surged yesterday on hopes Beijing will unleash more stimulus to prop up a sluggish economy, brightening the outlook for raw material demand. An official survey on Friday pointed to China’s weak manufacturing sector in June with export orders and inventories falling and factories shedding more workers. “There are headwinds in the domestic market and exports and for the government to achieve its macroeconomic targets they need to focus on more stimulus in the second

half of the year,” said Helen Lau, an analyst at Argonaut Securities in Hong Kong. “That will be good for commodity demand.” Chinese commodities have mostly outperformed stocks this year as investors see more upside potential after a glut in supply had hit the sector hard. A rally in commodities in April caused prices and volumes to soar and forced exchanges to step in to curb speculative activity. The gains also reflect sustained recovery in risk appetite among Chinese investors as the fallout from the British vote to exit the European Union eases.

Rebar and iron ore, which hit the highest in two months, were among the most-traded commodity futures. Rebar on the Shanghai Futures Exchange rose as much as 5.3 per cent to 2,468 yuan (US$370) a tonne and iron ore on the Dalian Commodity Exchange advanced as much as 4.9 per cent to 441.50 yuan per tonne. Rebar closed 3.4 per cent higher at 2,424 yuan and iron ore ended up 4 per cent at 438 yuan. Both extended last week’s gains that were spurred by low steel inventory levels and efforts by Beijing to consolidate its steel sector. “The tight supply and expectation of more fiscal stimulus by the government to shore up the economy may continue to boost sentiment in both spot and futures market,” said Lau.

Among other commodities, the most-traded cotton contract on the Zhengzhou Commodity Exchange rose by its maximum allowed 5 per cent to close at its highest since May 2014. Shanghai nickel surged by its 6 per cent upside limit to the strongest since November and tin jumped as much as 7.5 per cent to the highest since last May. Nickel was supported by worries about mine closures in the Philippines as the country’s new mining minister announced plans to review all mines in the country, the biggest supplier of nickel ore to China. Other strong performers include Dalian soy oil and Shanghai silver, which advanced by their 4 per cent and 6 per cent upside limit, respectively. Shanghai rubber rose nearly 6 per cent. Reuters

Key Points Rebar and iron ore among most-traded, hit 2-month highs Cotton surges 5 pct to highest since May 2014 Nickel climbs 6 pct on worries over Philippine mine closures

M&A

Kuka investor to sell stake to Midea China’s Midea, which already owned a 13.5 per cent Kuka stake, has offered 115 euros a share. German mechanical engineering group Voith has decided to sell its 25.1 per cent stake in robot maker Kuka to Chinese bidder Midea for about 1.2 billion euros (US$1.34 billion), it said on Sunday. The sale smoothens the path for Midea’s takeover of Kuka, which initially upset German politicians who feared a loss of important technology. The two companies have since addressed those concerns by agreeing a deal to keep its existing headquarters, factories and jobs. Midea has offered 4.5 billion euros for Kuka, making it the biggest German industrial technology company to be targeted by a Chinese buyer in a wave of deals over recent months. Voith said it viewed its investment in Kuka as a success because the value of its stake had more than doubled since it acquired it around 18 months ago in December 2014. “I am convinced that Voith is one of the winners of this takeover offer,” Voith CEO Hubert Lienhard said. The company said it would use the proceeds from the sale for its strategy to invest in digital technologies, such as automatisation, IT security, sensors and robotics. Midea, which already owned a 13.5

per cent Kuka stake, has offered 115 euros a share and said it aimed to buy at least 30 per cent of the company.

‘Kuka CEO said the company was in talks to ensure Midea did not get more than a 49 per cent stake’

Kuka robots working

Kuka Chief Executive Till Reuter said last week that the company was in confidential talks with potential new investors to ensure Midea did not get more than a 49 per cent stake. Voith had wanted to use the stake in Kuka as part of its plans to expand its

digital operations, but said on Sunday it made strategic sense to sell given the current situation. Sources had told Reuters last month that Voith planned to tender its stake after a meeting between Voith and Midea’s chief executives, at which Midea boss Paul Fang had indicated the Chinese company would not be in favour of Voith remaining a 25 per cent shareholder. Reuters

Business Daily Tuesday, July 5 2016 11

Asia

Singapore’s skyline

Fintech

In race to be Asia’s hub, Singapore leads Hong Kong Hong Kong’s rules and regulations make it difficult to set up crowdfunding platforms, payment firms and peer-to-peer lending operations. Saeed Azhar and Marius Zaharia

ingapore is rushing to reinvent itself as Asia’s financial technology, or fintech, hub to fend off a regulatory threat to its wealth management industry and revive a sluggish economy. State funding, light-touch regulation and a recent move to allow startups to test financial products in a controlled environment have put Singapore ahead of rival Hong Kong to be Asia’s fintech hotspot. Much like Uber, Airbnb and others have harnessed technology and online social networking to disrupt taxi and hotel services, fintech firms are shaking up the traditional banking and financial services industry. Singapore’s fintech drive comes as its role as an offshore private banking centre is under threat from a multibillion-dollar money laundering scandal in neighbouring Malaysia, and as Indonesia chases undeclared money parked in the low-tax city state. Also, Singapore’s traditional shipping and manufacturing growth drivers are faltering amid a global economic slowdown and a slump in commodity prices and demand.

Brexit boost?

Singapore is attracting interest, too, from among the 60,000 or so fintech firms based in London’s near-US$9 billion market - a trend likely to accelerate with Britain’s referendum vote to leave the European Union. “We already have registered

interest from UK-based companies to move to Asia as it’s getting very crowded there,” said Markus Gnirck, partner and co-founder of tryb, a fintech consultancy. “Brexit will probably accelerate a few of these conversations.” Britain’s soft approach to regulation and its influence on Europe would likely wane with Brexit and any new barriers that would create. “In the long term (this) makes Europe much less attractive as a place for entrepreneurs,” Taveet Hintikus, CEO of peer-to-peer money transfer firm TransferWise, told the World Economic Forum in the Chinese city of Tianjin this week. He told a panel session that his company was looking at Asia for expansion, and Singapore appeared a more vibrant fintech centre than Hong Kong. A KPMG report said Singapore has been more aggressive in pursuing fintech opportunities, and tryb noted that all but a dozen of the around 210 fintech firms operating in Singapore have opened in the past two years the fastest growth rate in Asia.

Obstacles

However, Singapore’s immigration laws are an obstacle, start-ups and consultants say, as measures to curb the number of foreign workers and give priority to Singaporeans have left a shortage of talent. And Singapore’s banking regulations have created a risk averse culture that is at odds with the trial-and-error approach of fintech start-ups. But the city state’s efforts are bearing fruit.

SmartKarma, a start-up that operates a platform offering Asian institutional research and analysis on demand, chose Singapore over Hong Kong for its headquarters. “There’s no other city in the world where you have such a progressive government when it comes to supporting innovation today - be it from grants, to having funding vehicles to operational support,” said co-founder and CEO Raghav Kapoor. Singapore state agency SPRING is an investor in SmartKarma, and government agency International Enterprise is helping the firm expand overseas. With Moody’s expecting Singapore’s economy to grow at its slowest pace since the global financial crisis, government officials are keen to engage with new industries: one fintech entrepreneur in shorts and flip-flops says he keeps in touch by WhatsApp with regulators and meets them once a week.

“Not moving fast enough”

In Hong Kong, despite nearly US$300 million in fintech funding, start-ups face tough regulatory hurdles say lawyers, consultants and fintech executives. There are fewer than 100 fintech firms in Hong Kong, according to tryb. Hong Kong’s rules and regulations make it difficult to set up crowdfunding platforms, payment firms and peerto-peer lending operations, and to secure operating licenses. For example, Chinese peer-topeer lender Jimubox spent nearly a year setting up in Hong Kong only to abandon the plan because strict rules on account openings made it hard for the firm to take on customers. “I spent time and money and hired

a couple of people to explore this and ended up having to kill it because it didn’t make sense from a commercial standpoint, purely around the account opening process,” said Jimubox cofounder Barry Freeman. In Singapore, any entity can operate payment systems and e-wallets without seeking approval, while rules introduced in Hong Kong last year require firms to have a licence for Stored Value Facilities, or a prepaid electronic cash or card. Monetary Authority of Singapore (MAS) managing director Ravi Menon said fintech firms would only be regulated when they grow large enough to pose a risk to the traditional financial system.

Key Points Singapore has fastest growth in fintech start-ups in Asia MAS proposes regulatory “sandbox”, funding for start-ups Brexit seen boosting Singapore’s attraction for fintechs Drive comes as other economic growth engines slowing In Hong Kong, tough regulations check fintech growth A spokeswoman for Hong Kong’s Financial Services and the Treasury Bureau, the agency overseeing fintech policy development, said the government “is committed to facilitating the development of fintech in Hong Kong, whilst upholding the ‘technology neutrality’ principle and ensuring appropriate consumer protection.” “We are absolutely not moving fast enough” on fintech, said Laura Cha, chairman of Hong Kong’s Financial Services Development Council (FSDC). “This is an area of development that is a very key element of the financial industry that we cannot ignore.” Reuters

12 Business Daily Tuesday, July 5 2016

Asia Election

Australia gridlock leaves central bank to do heavy lifting The RBA has plenty of economic reasons to consider more stimulus, particularly with inflation so low. Wayne Cole

ustralia’ s c e n t ra l bank will have to carry the economy on its own after a cliff hanger election condemned the country to months of deadlock on budget reform, adding to an already compelling case for another cut in interest rates. Vote counting will not even be finished when the Reserve Bank of Australia (RBA) holds its July policy meeting today, making an easing unlikely this month. Rates are already at all-time lows of 1.75 per cent after being cut in May. Yet a move in August looks likely given inflation is too low for comfort,

while consumers and businesses face the deadening hand of political uncertainty both at home and abroad. It was little more than a week since Britain’s shock decision to leave the European Union roiled markets and darkened the outlook for growth globally. “The outcome bodes poorly for confidence, growth, and reform and we believe will weaken further the nation’s AAA sovereign rating while keeping pressure on the RBA to do the heavy lifting,” said Su-Lin Ong, a senior economist at RBC Capital Markets. Ong sees rates reaching 1.25 per cent before year-end, and she is hardly alone. A Reuters poll of 37

economists found all but 2 expected a steady outcome this week, but the majority predicted at least one more easing in August. Futures imply a 60 per cent chance of a cut next month and are fully priced for a move by November. Bond markets are already well ahead of that with yields out to five years paying less than the overnight cash rate. Borrowing costs for the government are at record lows as investors hunt for any return in a world where negative bond yields are becoming the new normal. Even speculation that political dysfunction could imperil Australia’s triple A credit rating had scant impact. “Fitch views Australia’s overall credit profile as still consistent with a ‘AAA’ rating,” the agency said. “But political gridlock that leads to

a sustained widening of the deficit would put downward pressure on the rating, particularly if the economic environment deteriorates.”

Inflation under target

The RBA has plenty of economic reasons to consider more stimulus, particularly with inflation so low. A p r i va t e s u r v e y f r o m t h e Melbourne Institute out yesterday showed its version of the consumer price index jumped in June as petrol, holidays and fresh food all climbed.

Key Points Close election points to minority govt, gridlock on reform Adds to pressure for more interest rate stimulus from RBA Fitch cautions AAA rating under threat over long run Inflation still under target, home building cools a touch Yet annual inflation of 1.5 per cent was still well below the RBA’s long run target band of 2 to 3 per cent. A key measure of underlying inflation stood at just 1.2 per cent. Government data also showed a 5.2 per cent pullback in approvals to build new homes in May, albeit from very high levels. Home building has been one of the bright spots in the economy and helped growth reach 3.1 per cent in the first quarter of the year. Th e r e w as b e tt e r n e w s o n employment with ANZ’s measure of job advertisements rising 0.5 per cent in June on top of a 2.2 per cent jump the month before. “The strength in labour demand over the past two months is consistent with robust business conditions and solid momentum in the domestic economy,” said Felicity Emmett, head of Australian Economics at ANZ. Reuters

Monetary pressure

Japan firms’ price expectations slide In five years’ time, companies expect consumer prices to rise an annual 1.1 per cent. Leika Kihara

Japanese companies’ inflation expectations fell slightly in June from three months ago, the Bank of Japan’s (BOJ) tankan survey showed, adding to growing doubts over its argument that aggressive money printing will accelerate price growth to its 2 per cent goal. The data on inflation expectations came after Friday’s tankan sentiment survey showed business confidence was subdued in the second quarter, heightening pressure on the BOJ to roll out yet more stimulus to ease the pain from a strong yen. Companies expect consumer prices to rise an average 0.7 per cent a year from now, down 0.1 percentage point from three months ago and some way off the BOJ’s 2 per cent target, the tankan survey on price expectations showed on Monday. The survey underscores the challenges the BOJ faces in trying to achieve its 2 per cent target by flooding the economy with cash, on hope that doing so would prompt companies and households to spend now rather than later on expectations that prices will rise in the future.

“The BOJ will probably have to cut its inflation forecasts again and in doing so may ease this month,” said Mari Iwashita, chief market economist at SMBC Friend Securities. “But it’s hard to explain why further easing would help the economy, when bond yields are already so low,” she said. The stiff challenge posed by the yen’s rise on exports and weak

Key Points Japan firms expect 0.7 pct CPI growth a year ahead-BOJ Inflation expectations slide from 3 months ago-tankan Firms expect inflation of just 1.1 pct 3 yrs from now Japan’s monetary base expands to 80 pct size of GDP

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 N. 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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inflation have heightened market expectations that the BOJ will expand monetary stimulus at its next rate review on July 28-29. Firms polled in the tankan said they expect consumer prices to rise an annual 1.1 per cent three years from now, unchanged from the projection in March. In five years’ time, companies expect consumer prices to rise an annual 1.1 per cent, lower than a 1.2 per cent increase projected in the previous survey. The BOJ added negative interest

rates in February to its massive stimulus programme, under which it prints 80 trillion yen (US$780.9 billion) a year to buy government bonds. As a result of the aggressive money printing, Japan’s monetary base, or cash in circulation and deposits at financial institutions, rose to a record 404 trillion yen at the end of June, roughly 80 per cent the size of its economy. But the core consumer price index, which strips away the effect of volatile fresh food costs, fell 0.4 per cent in May from a year earlier, marking the biggest drop since the BOJ deployed its huge asset-buying programme in 2013. Reuters

Business Daily Tuesday, July 5 2016 13

Asia In Brief Employment

Australia job advertisements rise

Energy policy

New Philippine minister says can’t afford to ditch coal The countryrelies on imported coal to fuel about a dozen power plants with total capacity of around 6,000 megawatts. The Philippines will retain coal as a core part of its electricity generation mix due to its dependability, though it will seek to boost the use of cleaner fuels and renewable energy, the country’s energy minister said yesterday. The Southeast Asian nation, with a population of more than 100 million people and one of the world’s fastest growing economies, aims to double its power generation capacity by 2030 to avoid a return to the frequent blackouts suffered during the 1990s. “Coal is the more dependable, the more reliable source for base load,” Energy Secretary Alfonso Cusi told his first media briefing since the administration of President Rodrigo Duterte took office last week. “As a developing country we cannot afford not to have coal,” added Cusi. The previous administration made a belated push for clean energy and

renewables after approving coalfired power plant projects that could expand the fossil fuel’s share in the mix to more than 50 per cent from more than 30 per cent currently. Just weeks before he stepped down on June 30, President Benigno Aquino ordered a review of the government’s energy policy within six months, seen by environmentalists as a major step to steer the country away from coal and toward renewables. Under Aquino, the Department of Energy was pushing for a 30:30:30 mix for renewables, coal and natural gas, with the remaining 10 per cent allocated for alternative energy including nuclear. But capping the use of cheap coal is likely to be tough in a country where electricity costs are among the highest in Asia. Proponents of solar energy have launched a campaign aiming to make

the Philippines use only renewables by 2030, by halving the cost of solar so that it can compete against fossil fuels without subsidies. “We have to find a happy balance. We cannot afford to rely solely on renewables,” Cusi said, adding that his team would try to complete a review to establish a new energy policy in 30 days. Nuclear power is also an option and the government would encourage investment in liquefied natural gas with the expected depletion of the country’s Malampaya natural gas field by 2024, he said.

“As a developing country we cannot afford not to have coal” Alfonso Cusi, Philippine Energy Secretary The Philippines relies on imported coal, mainly from Indonesia, to fuel about a dozen power plants with total capacity of around 6,000 megawatts. Annual coal imports could rise 16 per cent over the next 10 years to 17.6 million tonnes, according to government projections. Reuters

Going public

Line raises price of IPO citing demand The brand will be valued at about 693 billion yen if it prices its IPO at the very top of its range. Pavel Alpeyev and Takashi Amano

Line Corp. hiked the price of its initial public offering to raise as much as 116 billion yen (US$1.1 billion), citing strong demand and market conditions. The operator of Japan’s most popular messaging service increased the price range for shares to 2,900 yen to 3,300 yen from an earlier target of 2,700 yen to 3,200 yen. Line is offering 35 million shares in its debut. Including a so-called greenshoe option that allows it to increase the number of shares sold, the company may wind up raising as much as 132.8 billion yen. Line is planning to go public during one of the most tumultuous times for global markets in years, after the U.K. voted to leave the European Union. Its well-recognized brand in Japan, where monthly active users represent almost half the population, is expected to attract individual investors. Line, backed by South Korean search portal Naver Corp., is aiming to list this month in New York and Tokyo in what could be the largest technology IPO of 2016. “The stock will do well on the back of retail investor demand,” said Amir

Anvarzadeh, manager of Japanese equity sales at BGC Partners Inc. “I can see the price going to 4,000 yen post listing, but the chances of significant growth overseas are very remote.” The Japanese stock market has pared the losses in the wake of the U.K.’s vote. The Nikkei 225 Stock Average climbed 4.9 per cent last week, after closing 7.9 per cent lower on June 24. Line will set the final price on July 11. Line originally filed to go public

“I can see the price going to 4,000 yen post listing, but the chances of significant growth overseas are very remote.” Amir Anvarzadeh, manager of Japanese equity sales at BGC Partners

two years ago, but held off in hopes of getting a stronger reception from investors. Instead, the delay may have cost the messaging service US$3 billion in valuation as Facebook Inc. began encroaching on its turf and the market for technology company IPOs cooled. Line will be valued at about 693 billion yen if it prices its IPO at the very top of its range, compared with a target of about 1 trillion yen in 2014. Line is now gearing up for a battle with far larger rivals Facebook and Tencent Holdings Ltd. as it looks to expand its 218 million user base beyond its strongest markets of Japan, Taiwan and Thailand. It plans to use the proceeds to spearhead an expansion across Asia and, eventually, the U.S. Bloomberg News

Australian job advertisements rose for a second month in June in an encouraging sign the economy is growing fast enough to generate demand for labour. A monthly survey by Australia and New Zealand Banking Group showed total job advertisements rose 0.5 per cent in June, from May when they jumped 2.2 per cent. That left the annual pace of job ads growth at 8.0 per cent. The number of internet job ads firmed 0.6 per cent, while the more volatile newspaper component fell 5.3 per cent. Garment industry

Uniqlo suspends most Bangladesh travel Japan’s Fast Retailing Co, owner of the Uniqlo casual-wear brand, will suspend all but critical travel to Bangladesh and has told staff there to stay home after 20 people, including seven Japanese, were killed in an attack that began late Friday. Bangladesh’s US$26 billion garment industry has been bracing for the fallout of the killings at a Dhaka restaurant, fearing major retailers from Uniqlo to Marks and Spencer and Gap Inc could rethink their investment after the latest attack targeting foreigners. Uniqlo has 10 Japanese staff in Bangladesh. Monetary advise

BOJ should refrain from easing The Bank of Japan should refrain from expanding monetary stimulus, including at this month’s policy meeting, as borrowing costs are already very low and the economy is in fairly good shape, former BOJ board member Sayuri Shirai said yesterday. Shirai said the central bank’s next step should be to taper its massive asset-buying programme, accompanied by a deepening of negative interest rates to moderate rises in bond yields. On recent yen gains, Shirai said the abrupt way in which the currency had risen may temporary hurt corporate profits. Investigation

Prosecutors seek detention for Lotte member South Korean prosecutors conducting a bribery investigation yesterday requested a detention warrant for the daughter of the founder of South Korea’s Lotte Group conglomerate, Yonhap News Agency reported, citing the prosecutors’ office. Prosecutors have been investigating whether Shin Young-ja, who is also a director of Lotte Group’s hotel unit, received bribes from local cosmetics company Nature Republic in exchange for Lotte Duty Free store space, Hotel Lotte previously said in a filing.

14 Business Daily Tuesday, July 5 2016

International In Brief Sentix index

Brexit hits euro zone sentiment Sentiment in the euro zone fell to an 18-month low in July, a survey showed yesterday, as investors and analysts fear a major economic fallout from Britain’s vote last month to leave the European Union. The Frankfurt-based Sentix research group’s index fell to 1.7 from 9.9 in June. Analysts polled by Reuters has expected a reading of 5.0. “The Brexit vote at the end of June in the United Kingdom is having a very different impact globally in terms of economic expectations,” Sentix said in a statement. Public salaries

Cashew exports ensure Guinea-Bissau’s public wages Cashew exports are going to ensure the regular payment of public sector wages in the coming months, Guinea-Bissau’s economy minister, Henrique Horta dos Santos, has told Lusa. The government, which was sworn in at the beginning of the month is complaining about a hole in the finances, but guarantees there is liquidity in the treasury. The cashew gathering and processing campaign, which runs from March to September every year, “is a period when the country can get money from exports” of the nuts, he said.

Building setback

U.K. construction contracts at fastest pace since 2009 Housing was the worst-performing sub index, contracting at the fastest pace since December 2012. Emma Charlton and Scott Hamilton

.K. construction unexpectedly contracted at the fastest pace since 2009 in June as the i m pe ndi ng vot e on Britain’s European Union membership stymied residential building. A Purchasing Managers’ Index slid to 46 from 51.2 a month earlier, Markit Economics said in London yesterday. Economists in a Bloomberg News survey had predicted a reading of 50.7, above the 50 level that divides expansion from contraction. The report adds to evidence that the June 23 referendum was hindering the economy even before the shock vote to leave. Markit said it collected the construction survey data between June 13 and June 29, with just over 80 per cent of the responses submitted before the result was announced on June 24. “Construction firms are at the sharp end of domestic economic uncertainty and jolts to investor sentiment, so trading conditions were always going to be challenging in the run-up to the EU referendum,” said Tim Moore, an economist at Markit. “However, the

extent and speed of the downturn in the face of political and economic uncertainty is a clear warning flag for the wider post-Brexit economic outlook.”

“The worry is that the ensuing political turmoil will hit construction spending decisions for some time to come” Tim Moore, an economist at Markit

Housing was the worst-performing sub index, contracting at the fastest pace since December 2012. Commercial building work also shrank, while civil engineering was stable. The downturn was linked to falling orders and a lack of new work, Markit said.

“A number of firms commented on reluctance among clients to commence new contracts in the runup to the EU referendum, alongside on-going uncertainty about the general economic outlook,” Markit said.

Policy Response

Britain’s decision to split from the EU has roiled markets, rattled investors and sparked chaos among Britain’s political classes. Bank of England Governor Mark Carney said last week that the outlook had deteriorated and policy easing may be needed within months. The central bank is due to publish its financial-stability report today and will hold its next monetary-policy meeting on July 14. With just over a week since the referendum, there is little hard data yet on the economic impact of the outcome. “The vast majority of June’s survey responses were received ahead of the EU referendum, so the worry is that the ensuing political turmoil will hit construction s p e n di n g d eci si o n s f o r s o m e time to come,” Moore said. “As a result, the latest figures raise the likelihood that the Bank of England will inject additional stimulus this summer in an attempt to dampen the short-term impact of Brexit uncertainty on the real economy.” Bloomberg News

Exports decline

Venezuela’s 2015 oil revenues plunge 40 percent Venezuela’s oil revenues plummeted 40.7 percent in 2015 due to sinking global oil prices, the country’s state-owned PDVSA said in its annual report released Sunday. PDVSA - the world’s fifth-largest oil company - earned US$72.2 billion in revenues last year, a sharp drop from 2014’s US$121.9 billion. Meanwhile, its net profit fell 19 percent to US$7.3 billion. The South American OPEC country relies heavily on its oil and gas reserves - which account for 96 percent of the country’s exports and are the largest worldwide at more than 300 billion barrels. Budget reductions

EU Commissioner in favour of sanctions The European commissioner for economy, Gunther Oettinger, said yesterday that he was in favour of sanctions against Portugal and Spain as they had not complied with budget reductions. The European commissioner told German paper Bild that “sanctions are necessary”, saying “it would be inexplicable to people” if the measures are not applied. “Neither country managed to comply with the commitments in 2015 and in order to defend its credibility, the European Commission must approve sanctions against Portugal and Spain”, Gunther Oettinger said, adding that the matter would be discussed this week.

Stock markets

Israel cabinet approves bill to make Tel Aviv bourse for profit Trading volumes this year have averaged 1.28 billion shekels (US$333 million) a day. Steven Scheer

Israeli cabinet ministers on Sunday unanimously approved a bill to change the structure of the Tel Aviv Stock Exchange (TASE) to a for-profit entity, a move to make the bourse stronger and more competitive. Finance Minister Moshe Kahlon last week said he would submit the bill to a cabinet vote. TASE’s members approved a demutualisation plan last year for Israel’s bourse, which is struggling with falling trading volumes and a declining number of listed companies. “This is process that will bring economic growth, strengthen the stock exchange and allow it to return to its rightful place as a central engine of growth of the Israeli economy,”

Kahlon said in a statement. Also as part of the bill, the TASE would shift to Monday through Friday trading from its current Sunday to Thursday format, to align itself with global - mainly European - markets. The move would also make Israel’s stock exchange more competitive, enable it to cooperate with foreign exchanges and end Israeli banks’ control over the exchange, he said. The bill still needs parliamentary approval, a process that could take months given the summer recess. Under the plan, announced in 2014, member brokerages and Israeli and foreign banks including Citicorp, UBS and HSBC would become shareholders. Modern stock exchanges in Western countries have also adopted for-profit structures, with a separation of ownership and companies on the bourse. Trading volumes this year have averaged 1.28 billion shekels (US$333 million) a day, down from 1.45 billion in 2015 and well below 2 billion a day

in 2010. The number of companies listed on the bourse has dropped by 200 over the past decade to 455. The bourse’s struggles began in 2010 after index compiler MSCI upgraded Israel to developed market status from an emerging market and consequently lost large passive emerging markets investments.

“This is process that will bring economic growth, strengthen the stock exchange and allow it to return to its rightful place” Moshe Kahlon, Israel’s Finance Minister The global financial crisis added to the exchange’s woes, while many of Israel’s growing high-tech firms bypass the TASE in favour of private funding or going public on Nasdaq. Reuters

Business Daily Tuesday, July 5 2016 15

Opinion Business Wires

The Jakarta Post The Taxation Directorate General has decided to postpone a plan to collect credit card transaction data until the scheduled end of a planned tax amnesty in March next year. Tax office spokesman Hestu Yoga Saksama explained that the policy, which was initially aimed at improving the tax database, had been postponed due to mixed perceptions regarding the issue. As stated in a finance minister regulation, credit card data was to be collected monthly starting May 31. “It has been postponed until the expiration of the tax amnesty program,” Yoga added.

Is China the next Japan?

D The Japan News Economic relations between Bangladesh, whose capital Dhaka was the site of a recent terrorist attack, and Japan have been rapidly deepening. An increasing number of Japanese companies choose the country rather than China as a production base due to its low labour costs. Because Bangladesh’s economy has continued to have high growth, Japanese companies are hopeful about not only the country’s demands for infrastructure, but also it being an attractive consumer market in the near future. If this terrorist attack raises the risk sentiment about the country’s security conditions, it is feared that the business activities ... may be negatively impacted.

The Phnom Penh Post The (Cambodian) Ministry of Commerce has extended the deadline for companies to register online after yet another poor response to its automated online business-registration system, a ministry official said yesterday. Om Dararith, director of the ministry’s commercial registration department, said only 10,248 companies – or about 20 per cent of the total due – had fulfilled their obligation to register online by the end of June. He said the ministry would grant the remaining companies another three months to complete the registration procedure, warning of penalties to those that fail to comply.

The Age One (Australian) dollar is fast becoming the market rate for Australian coal mines, after another Queensland mine sold for the most meagre of sums. This time it was Rio Tinto’s Blair Athol coal mine that sold for the paltry price, with a tiny ASX-listed company called TerraCom the buyer, subject to some more paperwork being worked through. TerraCom had some good inside knowledge; the junior’s chairman is Cameron McRae, a 28-year veteran of Rio Tinto, who spent time in the company’s Queensland coal and Mongolian copper divisions.

espite deepening concerns about China’s economy, the country is not heading toward “lost decades” of Japanese-style stagnation. And yet a worrisome ambiguity clouds this verdict. Japan’s fate was sealed by its reluctance to abandon a dysfunctional growth model. While China’s embrace of structural rebalancing distinguishes it from Japan, it is struggling to implement that strategy. Unless the struggle is won, the endgame could be similar. The same conclusion emerges from a seminar on “The Lessons of Japan” that I have taught at Yale for the past six years. The course is primarily one in forensic macroeconomics – distilling key lessons from the rise and fall of the modern Japanese economy and then figuring out the relevance of those lessons for other major economies. The seminar culminates with student research papers aimed at assessing which candidates might be the next Japan. As recently as 2012, the United States was the top choice, as it struggled to regain its footing in the aftermath of the Great Financial Crisis of 2008. Not surprisingly, by 2013, the focus had shifted to crisis-battered Europe. But this year, more than half of the students in the seminar (13 of 23) chose to examine whether China might be the next Japan. An academic setting provides a wonderful intellectual laboratory. But a couple of quick trips to China after the end of the spring term gave me a different perspective. In extensive discussions with Chinese officials, business leaders, academics, and investors, I found great interest in the lessons of Japan and how they might bear on China’s conundrum. The topic du jour was debt. China’s nonfinancial debt has risen from 150 per cent of GDP in 2008 to 255 per cent today, with two-thirds of the increase concentrated in the corporate sector, largely stateowned enterprises (SOEs). As the world’s largest saver – with gross domestic saving averaging 49 per cent of GDP since 2007 – surging debt hardly comes as a surprise. High-saving economies are prone to high investment, and the lack of capital-market reform in China – exacerbated by the bursting of the equity bubble in 2015 – reinforces the disproportionate role that bank credit has played in funding China’s investment boom. The Japan comparison is especially instructive in assessing the risks of debt-intensive growth. At nearly 390 per cent of GDP in late 2015, Japan’s overall debt ratio is about 140 percentage points higher than China’s. But, because Japan has such a high saving rate – averaging 24 per cent of GDP since 2007 – it basically owes its debt to itself. That means it is not vulnerable to the capital flight of foreign investors that often triggers crises. With China’s saving rate double that of Japan’s since 2007, that conclusion is all the more pertinent for its debt-intensive economy. The China scare of early 2016 – stoked by hand-wringing over capital flight and currency risk – missed this point altogether. Fears of a hard landing stemming from a Chinese debt crisis are vastly overblown. Zombie firms – the economic walking dead – are also a topic of intense discussion in China. Key actors in Japan’s first lost decade during the 1990s, zombie

“

Stephen S. Roach a faculty member at Yale University and former Chairman of Morgan Stanley Asia

corporates were kept alive by the “evergreening” of subsidized bank lending – masking an outsize build-up of nonperforming loans (NPLs) that ultimately brought down the Japanese banking system. Significantly, the insidious interplay between zombie corporates and zombie banks clogged the arteries of the real economy – sparking a sharp slowdown in productivity growth that Japan has yet to reverse. In recent public statements, the Chinese leadership has made explicit reference to zombie SOEs. But, unlike Japan, which remained in denial over this problem for close to a decade, Chinese authorities have moved relatively quickly to rein in excesses in two key industries – steel and coal – while hinting of more to come in cement, glass, and shipbuilding. China’s deteriorating loan quality is also reminiscent of Japan’s experience. The official NPL ratio of 1.7 per cent for listed banks is only the tip of the iceberg. Beneath the surface are “special mention loans” – where borrowers are in the early stages of repayment difficulties – along with bad credits in the shadow banking sector, both of which could raise China’s fullyloaded NPL ratio to around 8 per cent. In that case, the authorities will eventually need to inject capital into the Chinese banking system. None of this is a dark secret in Beijing. On the contrary, an interview in early May with an “authoritative insider,” published in China’s flagship official newspaper, People’s Daily, underscored an increasingly open and intense debate among senior officials over how to avoid ending up like Japan. The insider, purportedly close to President Xi Jinping, highlighted the insidious connection between China’s debt and zombie problems that might well culminate in a Japanese-like “L-shaped” endgame. This gets to the heart of the China-Japan comparison. Two and a half lost decades (and counting) is simply an unacceptable outcome for China. But knowing what it doesn’t want is not enough to guarantee that China won’t fall into a Japanese-style trap of its own. Reforms are the decisive differentiating factor. Japan’s failure to embrace structural reforms was a hallmark of the 1990s, and it is an equally serious impediment to the current “Abenomics” recovery program. By contrast, China’s strategy emphasizes the heavy lifting of structural change and rebalancing. In the end, success or failure will hinge on the willingness of the Chinese leadership to confront the powerful vested interests resisting reform. Interestingly, of the 13 students in my seminar who chose to consider China as the next Japan, two-thirds ultimately rejected the comparison. They argued that the lessons of modern China – especially the reforms and opening up spearheaded by Deng Xiaoping – are more important than the lessons of Japan. And they got good grades. Project Syndicate

In the end, success or failure will hinge on the willingness of the Chinese leadership to confront the powerful vested interests resisting reform

”

16 Business Daily Tuesday, July 5 2016

Closing Graft trial

China sentences ex-presidential aide to life for corruption

A Chinese court sentenced a former top aide to retired President Hu Jintao to life imprisonment in a closed-door trial, capping a series of prosecutions against a Communist Party faction dubbed the “New Gang of Four.” Ling Jihua, 59, who once served as Hu’s chief of staff, was convicted yesterday of taking bribes, illegally obtaining state secrets and abusing power, the official Xinhua News Agency said, citing the verdict from a Tianjin court. He pleaded guilty June 7 during a

one-day trial that was held in secret because the charges involved state secrets, said the court, which handed down a life sentence in a similar case last year against former security czar Zhou Yongkang, a retired member of the Politburo’s supreme Standing Committee. The indictment comes almost a year after the party expelled Ling and accused him of corruption and discipline violations, including carrying on extramarital affairs. He was formally charged in May, having previously been stripped of his post as vice chairman of the Chinese People’s Political Consultative Conference. Bloomberg News

Data forecast

Analysts expect weak figures in Chinese trade and FX reserves China’s trade surplus is forecast to hit US$46.6 billion in June, from around US$50 billion in May. Elias Glenn

flurry of data from China in coming weeks is expected to show continued weakness in trade and investment, sluggish industrial output and another drop in foreign reserves, reinforcing views that Beijing will roll out more economic support measures soon. W ea k fac t o r y s u r v e y s a n d heightened economic uncertainty following Britain’s vote to leave the European Union have added to views that authorities will ramp up fiscal stimulus and ease monetary policy by cutting interest rates and banks’ reserve requirements in coming months.

Reuters reported on Thursday that the People’s Bank of China (PBOC) also would tolerate a fall in the yuan to as low as 6.8 per dollar in 2016 to support the economy, if it did not trigger a backlash from major trading partners. Economists polled by Reuters expected June exports fell 4.1 per cent, the same rate as in May, while imports likely dropped 5 per cent, renewing their decline after only a marginal drop in May raised hopes that domestic demand was reviving. China’s trade surplus is forecast to hit US$46.6 billion in June, from around US$50 billion in May. The consumer inflation rate may have dipped slightly to 1.8 per cent in June, which would be a five-month

low, while producer deflation may show further signs of moderating, easing strains on companies’ profit margins. Factory-gate prices are expected to have declined 2.5 per cent, which would be the slowest decline since October 2014. Loan and money supply data may also show signs of moderating. After record lending by Chinese banks in the first quarter, policymakers seem to have put the breaks on credit as it became clear it was not translating into faster economic growth, while adding to already elevated debt levels. Banks likely extended 1 trillion yuan (US$150 billion) in new loans in June, up slightly from May, the polls showed. Based on the June estimate, total new loans in the first half of 2016 were less than 10 per cent more than the year-ago period, and would put loan growth slightly off the record

pace seen in China’s massive stimulus during the 2009 crisis. Growth in M2 money supply may have fallen to a 13-month low in June, in line with recent calls from the government to reduce leverage. Forex reserves likely dropped US$20 billion to US$3.17 trillion, after falling in May to their lowest since December 2011.

Key Points June trade seen weaker, prices mostly stable from May Exports seen -4.1 pct y/y (May -4.1), imports -5.0 (May -0.4) CPI f’cast +1.8 pct y/y (May +2.0); PPI -2.5 (May -2.8) New yuan loan f’cast 1.04 trln yuan vs May’s 985.5 bln yuan M2 money supply f’cast +11.5 pct (May +11.8) Forex reserves seen easing to US$3.17 trln from May US$3.19 trln After stabilising early this year, China’s forex reserves have begun declining again amid renewed pressure on the yuan, which tumbled 3.1 per cent against the dollar in the second quarter, the biggest quarterly depreciation since China established the domestic foreign exchange market in 1994. Forex reserves data are expected to be released later this week, with trade, inflation and loan figures out next week. Industrial output, investment and retail sales will be released on July 15 along with second-quarter gross domestic product (GDP). Reuters

Automotive sector

Monetary chief

Oil industry

Immigration, economy driving Sri Lanka’s new central bank car sales in New Zealand head to ‘uphold credibility’

Top Indian refiner plans expansion as demand climbs

Immigration and a thriving business sector helped drive another record month in new car sales in New Zealand in June, the Motor Industry Association (MIA) said yesterday. The economic factors were bolstered by the staging of the country’s largest agricultural expo, Field Days, in the North Island city of Hamilton, MIA chief executive officer David Crawford said in a statement. “The 2016 new vehicle market continues to perform beyond expectations with sales in June up 5.1 per cent on June 2015 and delivering a steady 5.3-per cent growth for the year to date,” said Crawford. New registrations of 13,699 vehicles made it the strongest month of June since 1982 and the second highest month ever on record. In the year to date, 69,057 new vehicles had been registered in New Zealand compared to 65,653 for the same time last year. “There were 9,186 passenger vehicle registrations and 4,513 commercial vehicle registrations, which was once again the highest month of June on record for c o m m e rci a l v ehi c l e r egi st rati o n s, ” sai d Crawford. Xinhua

Indian Oil Corp. will spend about 400 billion rupees (US$6 billion) to boost capacity by almost 30 per cent in the next six years to feed the booming fuel demand in the world’s second-most populous nation. “Fuel demand is rising and India’s excess capacity is very small,” Sanjiv Singh, director of refineries at India’s biggest processor, said in an interview Friday. “We all need to expand if demand sustains.” The expansion comes as Indian refiners are racing to add capacity amid rising fuel consumption. India is poised to surpass Japan as the world’s third-largest oil user this year and will be the fastest-growing crude consumer in the world through 2040, Paris-based International Energy Agency estimates. The state-run company aims to increase its capacity to about 104 million metric tons a year, or about 2 million barrels per day, over the next six years by expanding the existing refineries across the country, said Singh. Indian Oil currently can process 80.7 million tons of crude a year from its nine plants and two owned by its unit Chennai Petroleum Corp., accounting for 35 per cent of the nation’s total, according to its website. Bloomberg News

The new governor of Sri Lanka’s central bank Indrajit Coomaraswamy pledged yesterday to uphold its credibility after allegations of insider dealing that forced his predecessor to leave. Sri Lanka’s president bowed to pressure to replace Arjuna Mahendran after he was accused of leaking information to his son-in-law’s firm, which allegedly made millions of dollars in profits from central bank bond auctions. The scandal came with Sri Lanka’s economy under stress - last month the country began receiving a US$1.5 billion bailout from the International Monetary Fund. Yesterday Coomaraswamy told staff the bank was “one of the great institutions in this country”. “I am acutely aware that a primary responsibility, arguably the primary responsibility of the governor, is to uphold this reputation and credibility,” said the 66-year-old former director of economic affairs at the Commonwealth Secretariat, an intergovernmental agency of Commonwealth countries in London. Mahendran, a Singaporean national of Sri Lankan origin, has consistently maintained his innocence and had indicated he wanted to stay on after his term expired on June 30. AFP