Macau Business Daily July 27, 2016 by Business Daily

Chief Executive plans Portugal trip Politics Page 2

Wednesday, July 27 2016 Year V Nr. 1095 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Kelsey Wilhelm Business

Angela Leong: gov’t was ‘hasty’ and didn’t consider impact on Canidrome employees Page 2

Employment

Job fair hiring for 3,000 positions Page 2

www.macaubusinessdaily.com Land

Construction industry representatives want accountability in land reclaiming process Page 6

Parisian to open its doors Sept 13 Gaming Sands China president Sheldon Adelson believes that the new Cotai project will become another iconic casino-resort in the SAR. Stabilization in the local gaming market is becoming apparent as the shift to mass gaming solidifies the operator’s strength in the local market, as reflected in its stock trading. Page 7

The local mobile phone games market has a way to go to reach the heights achieved by the companies making games such as Pokemon Go and Candy Crush. The China market offers huge potential but has strong restrictions on app availability. Top games played locally are developed outside the SAR, but there is room for developers and casino operators to take their piece of the digital pie. Page 5

Bonds sales A mix of compelling features is attracting global investors to Chinese local governments’ debt. Nomura estimates the market for these bonds will triple to US$30 billion by 2017, as China steps up infrastructure projects. Page 8 HK HSI July 26, 2016 22,129.73 +136.29 (+0.62%) Best Performers Galaxy Entertainment

+6.49%

Sands China Ltd

+5.82%

China Merchants Holdings

+4.38%

Sino Land Co Ltd

+2.31%

China Resources Power

+2.20%

Bank of Communications

GDP

South Korea’s growth rebounds thanks to consumption Page 12

Rate hike

U.S. Federal Reserve considers inflation at monetary policy meeting Page 14

+1.73%

China Unicom Hong Kong

+1.73%

AIA Group Ltd

+1.53%

China Life Insurance Co

+1.48%

Ping An Insurance Group

+1.10%

Worst Performers CNOOC Ltd

-2.72%

Lenovo Group Ltd

-1.36%

PetroChina Co Ltd

-1.31%

Li & Fung Ltd

Siam takes flight

Following a four-day suspension of flights between the SAR and Bangkok, Siam Air has resumed its flights. The local airport operator says that the Thai-based airline has resolved its financial problems and it doesn’t anticipate further issues with the low-cost carrier.

-0.77%

Kunlun Energy Co Ltd

-0.67%

Tencent Holdings Ltd

-0.64%

Hang Lung Properties Ltd

-0.60%

Link REIT

-0.44%

China Construction Bank

+0.23%

29° 32° 27° 32° 28° 32° 26° 33° 27° 32° Today

Thu

Fri

I SSN 2226-8294

Aviation Page 3

-0.19%

Hengan International

Sat

Sun

Source: Bloomberg

Apps

Local to global

Source: AccuWeather

Gotta catch ‘em all

2 Business Daily Wednesday, July 27 2016

Macau Construction

Fourth Macau-Taipa connection open for public feedback GDI to assess the project feasibility by collecting public opinion and undertaking environmental assessments. Annie Lao annie.lao@macaubusinessdaily.com

he Infrastructure Development Office (GDI) is doing a two part evaluation regarding a potential fourth bridge connecting Macau and Taipa, according to a press release from the GDI yesterday. Starting yesterday, the GDI is collecting public opinions and comments on the construction project for a fourth bridge connecting Taipa island to the Macau peninsula, as well as undertaking an environmental study on the effects of the project. The study will be conducted by the South China Sea Institute of Planning

The new bridge is proposed to occupy a total sea area of 21.5 hectares and cover 367 meters of coastline, the infrastructure office notes.

Information regarding the construction project was published for public review and commentary on the GDI’s official website yesterday. All the feedback collected will be handed to the relevant research units for analysis and to prepare an environmental impact assessment with the aim of assessing the project’s feasibility.

and Environment Research, SOA, and will focus on the impact of the project by conducting a preliminary analysis of the environmental impact, predictions for future impacts, the current environmental quality, field monitoring and analysis of pollution sources. Dates for the launch of the study were not released by the GDI. The project for the new connection involves a 3.5 kilometer-long bridge running between the eastern side of the new land reclamation Zone A to the artificial port island of the Hong Kong-Zhuhai-Macau Bridge, and continuing to the Taipa reclamation zone E1, with a total cross-sea section extending 2.87 kilometers, notes information from the GDI.

Career

Youth Career Expo to be held this weekend About 3,000 job positions are available for job applicants.

Mr. Chan said and this year’s event is set to host the same number of participant companies, notes Lao Cho Chon, vice president of the Macao New Chinese Youth Association.

Annie Lao annie.lao@macaubusinessdaily.com

Job hunting

The event will provide information on occupational training, consultation

services on career opportunities and assessments on potential employment for job seekers to assist them in finding jobs. “We provide a platform for the job seekers to find employment information and give them the opportunity so they can expand their networks in order to gain

About 3,000 job vacancies – ranging from part-time to full-time – will be offered by 60 companies during this year’s Youth Career Expo 2016 – now in its 11th edition. About 40 different types of job opportunities will be presented, according to the deputy director of the Labour Affairs Bureau (DSAL), Chan Un Tong, speaking at a press conference yesterday. The event will run for two days over the weekend. It is estimated that about 4,000 people attended last year’s event,

employment opportunities in the job market,” Mr. Chan said. The hospitality service industry offers the largest number of job vacancies compared to other industries in the city, Mr. Chan added. The participating companies and organizations are from the tourism, education, aviation, real estate, telecommunication, insurance, gaming, hotel, technology, property management, food and beverage, trading, retail and design sectors. The expo will be divided into various sections, encompassing enterprise, career consultation and education. In addition, the event will hold a talk on career paths - represented by different business sectors – to help young people learn more about which career path is suitable for them. The event is organized by the DSAL, the Macao New Chinese Youth Association and the General Association of Chinese Students of Macao.

Politics

Canidrome

CE to visit Portugal in September

Angela Leong urges gov’t to take proper follow up measures

Chief Executive (CE) Fernando Chui Sai On will visit Portugal in September for his second official trip to the country, according to news agency Lusa. “The office of the Chief Executive has received an invitation from its Portuguese counterparts to carry out an official visit which at present is in the appraisal phase,” a Macau government spokesman said to Lusa. During the visit, for which an official date has yet to be set, the Chief Executive will meet with Portugal’s President Marcelo Rebelo de Sousa, and the country’s Prime-Minister António Costa. The trip to Portugal will take place before the planned Fifth Ministerial

Conference in November, an event organised by the Forum for Economic and Trade Co-operation between China and Portuguese-speaking Countries (Forum Macao). The trip marks the CE’s second visit to Portugal, with the last occurring in 2010, months after his election, to meet the country’s then-President, Cavaco Silva and Prime-Minister José Sócrates. On the first visit, Chief Executive Fernando Chui Sai On’s delegation was comprised of 65 people, including then-Secretary for Economy and Finance Francis Tam Pak Yuen, Legislative Assembly President Lau Cheok Va and other government representatives. N.M.

Joanne Kuai joannekuai@macaubusinessdaily.com

Legislator Angela Leong On Kei is urging the SAR government to take proper follow up measures to deal with the relocation of Macau’s greyhound racing track. The head of the local greyhound racing concessionaire Macau (Yat Yuen) Canidrome Co. Ltd, and also the acting Executive Director of SJM Holdings Ltd, Angela Leong has criticized the government for a ‘hasty decision’ claiming it ‘neglect[ed] to consider the arrangement of employees’. At a meeting with the government last week, the company was told to relocate or shut down the greyhound-racing track within the next two years. In a statement, Angela Leong voiced her hope that ‘the authorities and relevant companies could negotiate how to properly organize the followup arrangement of the employees

and relocations of the dogs’. 'Considering the special nature of most of the employees working at the Canidrome, it may be hard for them to find another job. The authorities should provide them professional training so that they can have the ability to find another job, as well as providing them with financial aid, so that they won’t need to worry about their livelihood while undergoing training,' reads the statement. In regards to the future use of the land where the track is located, Ms. Leong has proposed to keep the site as an outdoor sports venue for local residents. She also criticized the government’s measures to close down the Imperial Palace Hotel in Taipa over the weekend, claiming that the action has left the hotel employees and guests shocked and helpless, and has damaged tourists’ impressions of Macau.

Business Daily Wednesday, July 27 2016 3

Macau Aviation Local airport operator says financial problems have been cleared up by Thai carrier

Siam Air resumes Macau-Bangkok route Siam Air Transport Co. Ltd resumed its flight connections between the city and the Don Muang Airport in Bangkok, Thailand yesterday, following a four-day suspension at the request of the local airport operator. The Thailand-based airline was ordered by the Macau International Airport Company Ltd (CAM) to halt its Macau-Bangkok flights last Friday, as it had failed to settle its fees

payable to the company, Business Daily reported on Monday. But a spokesperson for CAM told the newspaper yesterday that the financial problems of the low-cost carrier have been resolved and it was thus permitted to resume its operations. The same source previously stated that the airline “can start operations in Macau again whenever they can solve the [financial] problem,” and

also indicated that the temporary suspension was mutually agreed upon by the two parties. According to the Civil Aviation Authority (AACM), the budget airline’s current seasonal operating permit will last until October 29, after which time it will need to apply for renewal. In response to an enquiry by Business Daily yesterday, an AACM spokesperson noted that it would be up to CAM to decide whether the airline will be ordered to suspend its operations in the future if it is encounters further commercial or financial issues.

“For now, we do not see other financial problems for the airline,” the CAM representative told us on the phone yesterday. Siam Air launched its Macau-Bangkok route last December. It is currently providing one daily round-trip flight between the cities. Meanwhile, the Thai carrier’s services between Hong Kong and Bangkok are still suspended. According to information from the Airport Authority of Hong Kong, the company’s flights are under the status of ‘cancellation’ until this Thursday. The Thai carrier stopped flying the route on July 19. K.L.

Insurance

FWD Macau launches new headquarters FWD Life Insurance Company (Macau) Ltd. opened its new headquarters at Fortuna Business Centre (FBC) yesterday, aiming to expand the company’s business in the local market. “We are focused on growing the FWD brand here in Macau and our investment in a new office facility will support our goal of becoming a leading insurer in the market,” the Chief Executive Officer of FWD Group, Thanh Phong said at the opening ceremony yesterday. According to the insurer, the move of the company’s office to the new site is in response to its growing business in the Special Administrative Region.

Official data from the Monetary Authority of Macau shows that the life insurer generated gross premiums of MOP349.7 million (US$43.7 million) for the whole year of 2015, a jump of 23.4 per cent compared to MOP283.4 million one year ago. Despite the increase in gross premiums, the company still remained in the red for last year, posting a loss of some MOP3.9 million, significantly less than its losses of MOP62.6 million seen in 2014. The group, established in Asia in 2013, also operates in Hong Kong, Thailand, Indonesia, the Philippines and Singapore, in addition to Macau.

4 Business Daily Wednesday, July 27 2016

Macau

Business Daily Wednesday, July 27 2016 5

Macau Gaming Experts suggest casino operators could do more to penetrate the mobile games market

can range from US$4.99 to US$49.99 for ‘boxes of diamonds’, the currency used in the game. “There’s even this underground economy in China where people pay other people to play games so they can go up to certain levels,” Andrew Pearson, Vice-President of Macau-based electronic sports association Grow uP eSports told Business Daily.

Underexplored gaming

Most popular mobile games in the world

Elisa told Business Daily. With the Pokemon Go application – a geocaching game in which a user pursues various characters located at GPS coordinates and ‘catches’ them - sweeping the globe, and currently available in Hong Kong, the Macau market is still on the sidelines of the phone gaming scene. This is largely due to limitations, such as Google Play – the application store for Android smartphones - being unavailable in China, and Google Play games requiring payment being blocked in Macau.

China opportunities

According to statistics analysts Statista, global revenue from online games for smartphones and tablets in 2016 is estimated to reach US$7.9 billion (MOP143 billion), with an estimated increase to US$25.5 billion in 2019.

downloaded game in the world’s biggest online game markets from the United States to Japan, but also the most downloaded app. According to a Business Daily poll - 100 per cent of respondents had heard of the game, 33.3 per cent think it will be popular for one year, and 38.9 per cent see it as game focused on people between 20 and 25 years old. Although 83.3 per cent of respondents stated they did not have an interest in playing the game, they believe a lot of their acquaintances would be interested. Five per cent of respondents said they were even willing to pay over MOP100 for use of the app.

Even without allowing the use of the Pokemon Go app, which needs Google Maps to operate, China surpassed the United States as the biggest country for iOS revenues in the second quarter of 2016, according to mobile games analyst website App Annie. Most of that increase was due to locally developed games such as multiplayer online role-playing games like Fantasy Westward Journey, Westward Journey Online and multiplayer online battle arena (MOBA) games like Hero Moba (similar to the World of Warcraft game whose film adaptation has been topping box offices in China). According to Forbes, quoting analytics firm DataEye, total revenue from mobile games in China was placed at US$7.94 billion, with mobile games growing from 5.4 per cent of all gaming in the country in 2012, to 36.6 per cent in 2016.

Monetizing play

Locally made phone games are rare, and the most popular mobile games in the SAR are still developed outside of the territory, with most of the money flowing outside the city’s borders. When Business Daily contacted the Macau New Technologies Incubator Centre (MANETIC), one of the city's biggest startup incubators, they noted that no local mobile game company had been created in their centre so far. In terms of gross revenues, yesterday the Macau iOS mobile game market was being topped by Boom Beach - a game by Finish game developer Supercell - followed by Clash of Kings created by Chinese company Elex Technology, and PES Club Manager by Japanese company Konami, also a manufacturer with physical products present in the local casino industry. Most phone games operate on a freemium mode: where content is given out for free but payment is required to surpass certain levels or challenges, or through inn-app purchases where gamers pay to purchase game objects or currency. For example, in Boom Beach, a strategy war game, in-app purchases

“The game market here is, I would say, underexplored. Macau is not really on a lot of the radars of the software publishers who are making these kinds of games, so it’s hard for them to put up the development money if they don’t see a possible huge payoff,” Pearson told Business Daily. For Kevin Li, the CEO of Inteplay, an i-gaming software company based in Macau, the mobile games industry has grown rapidly since it first appeared six years ago, but has started to slow down in recent months. “The population in Macau is small and some kinds of games are restricted and can’t be downloaded, like the ones for Android users which, compared to Apple users, are more numerous. But it’s still a young and bright industry,” Kevin Li told Business Daily.

More casino games

Both mobile games experts believe the city has a lot of potential for the phone games business, and that casino operators should be looking into ways to market to gamers in China in order to get a piece of the pie. Kevin Li thinks local casino operators could follow the example of MGM Resorts International, which launched myVegas in the U.S. market, the resort’s free official app that allows users to play virtual slot machines and earn points for free rooms, meals, shows, and VIP club access.

“The population in Macau is small and some kinds of games are restricted and can’t be downloaded, like the ones for Android users which, compared to Apple users, are more numerous. But it’s still a young and bright industry.” Kevin Li, CEO of Inteplay Pearson, on the other hand, believes that popular online games could cross over with casino games, telling Business Daily that Grow uP eSports is talking to casinos to organise eSport events that could even include Candy Crush (a popular game) tournaments. “A lot of these games are mobile - they can be played on iPhones or tablets, so there’s no need for computers, just wi-fi, and you can have a few hundred players for maybe a three-day event,” Pearson commented. Attempts to bridge casino games with online games are not uncommon, as Pearson describes how Amazon recently organised a crossover eSport event where three professional poker gamers played against three professional gamers of Hearthstone, a popular free-to-play online collectible card video game. However both experts admit one thing: they don’t know when Pokemon Go will be available in Macau.

6 Business Daily Wednesday, July 27 2016

Macau

Construction Contractors association suggests accountability system for land-reclaiming process

Precious land Representatives of the construction industry have voiced their views on proposed “compensatory clauses” for public projects, saying they are “unnecessary”. Joanne Kuai joannekuai@macaubusinessdaily.com

n regards to reclaiming plots of land that face expiring land grants, the SAR government should set up an independent, transparent and fair mechanism, and should review each case individually as well as clarifying responsibilities so as to guarantee the law is implemented in a just and fair manner, suggested the Macau

Association of Building Contractors and Developers, as reported by local Chinese media TDM Radio. Tommy Lau Veng Seng, President of the General Assembly of the association, indicated that since the new Land Law came into effect and the government has been taking back undeveloped land for which land grants have expired, the ‘investment atmosphere in Macau has been hurt’. As an incumbent legislator appointed by the Chief Executive, Mr.

Lau admitted that he voted in favour of the Land Law when it was being voted on at the Legislative Assembly. However, he stressed that the association supports the government sticking to the rule of law, and when in accordance with the law - consequences and accountability need to be well planned. Additionally a comprehensive mechanism should be established so as to avoid any negative impact brought by possible litigation, he added. Paul Tse See Fan, President of the Board of Directors of the association, also indicated that it remains to be seen whether the land management mechanism is comprehensive enough and if there is room for improvement. He reiterated his respect for the new Land Law but stated that the association has an obligation to point out problems.

Stabilizing housing market

The association’s work report indicates that in the first half of this year, Macau’s property market was still undergoing an adjustment period. However, the decrease in housing prices has slowed in comparison to the second half of last year. One of the directors of the association, Gregory Ku Ka Ho, who is also the Managing Director of Jones Lang LaSalle Macau, notes that after ‘profound adjustment’ seen last year, housing prices are now at a reasonable level and purchasing power has been accumulated throughout this period. He suggests that the government should ease the requirements for citizens when purchasing their own homes, such as lowering the percentage for down payments on mortgages for first-time buyers. Mr. Ku adds that the low-end market - units cheaper than MOP6 million has ‘stabilized to a reasonable level’, but he believes the high-end market still has room for further price drops. In regards to the rental market, as the revision of the rental affairs bill is still under review at the Legislative

Assembly, the association objects to government intervention as “it’s still a free economy, so too much intervention in the investment market will put even more pressure on the rental market.”

Not necessary

Vong Kock Kei, Vice President of the Board of Directors of the association, adds that since the Noise Control Law came into effect, some construction work that used to be carried out during the night has had to be arranged during the day, which in his opinion, causes traffic congestion. He indicates that the association and the industry have been communicating with the authorities in the hope of coming up with better solutions and a more reasonable interpretation of the law. Also stated in the association’s work report is the objection to the introduction of “compensatory clauses” for public projects. Mr. Vong says that it’s normal that construction works, subject to constraints of venue and climate, may be delayed and undergo fee changes. In his opinion, the introduction of “compensatory clauses” would be unfair to contractors, and he believes the “punitive measures” in current public works contracts are enough. The issue of whether compensatory clauses should be introduced for public works contracts has been undergoing public debate. Legislator Ella Lei Cheng I argues that the aim of introducing the new clauses is to ensure contractors complete their projects on schedule, and to avoid delays and cost overruns for public works projects- such as the current problems being encountered in the construction of the Light Rail Transit (LRT) system. However the government is inclined to maintain the current system of contracts for public works projects. The Secretary for Transport and Public Works, Raimundo Arrais do Rosário said in March that the system now in place mandates punitive clauses rather than compensatory clauses. He said that the current system “is not necessarily worse” and changes will take time to implement.

Business Daily Wednesday, July 27 2016 7

Macau Gaming Sands China boss says mass-market revenue picked up in June

The Parisian Macao to open its doors Sept 13 Sands China president Sheldon Adelson believes that the new Cotai project will become another iconic casino-resort in the Special Administrative Region, while stabilization in the local gaming market is becoming apparent. Kam Leong* kamleong@macaubusinessdaily.com

he Parisian Macao, the n e w C o ta i p r o j ec t o f gaming operator Sands China Ltd, is set to open its doors on September 13, the group’s chairman Sheldon Adelson announced on Monday. “We are well on track and I am pleased to announce today that we plan to open The Parisian Macao on the 13th of September,” the American casino mogul said during a conference call on the second quarter results of Las Vegas Sands Corp, the parent company of Sands China. The group’s rival operator, Wynn Macau Ltd, earlier announced its plans to unveil its new Cotai project - Wynn Palace - on the 22nd of August, about three weeks ahead of the Parisian Macao. But the Sands boss is confident that his new Cotai project, which features a replica of the Eiffel Tower, will become another “must-see” resort destination in the city. “I have not a shadow of a doubt that The Parisian Macao will replicate the success of The Venetian Macao, as another themed, iconic and ‘mustsee’ integrated resort destination for Macau’s visitors,” the businessman claimed. The Parisian’s opening will be a “key inflection point” giving the company a competitive advantage, with nearly 12,700 hotel rooms by the end of 2016, according to the latest

note by Sanford C. Bernstein & Co. “The positioning of The Parisian Macao caters well to both the current Macau market conditions and the long-term growth trends in Chinese outbound tourism,” Mr. Adelson said, adding that: “I am extremely confident that with the opening of The Parisian Macao we will see growth in Macau”.

Mass market pick up

For the second quarter of 2016, Sands China saw its net income drop by 39 per cent year-on-year to US$237 million, while its earnings before interest, taxes, depreciation and amortization (EBITDA) fell 14 per cent to US$487.7 million in the same period, missing analysts’ estimates of US$528 million. Market-wise, the city’s total gaming revenue for the three months totalled some US$6.45 billion (MOP51.6 billion), down by 9.3 per cent compared to US$7.1 billion (MOP56.9 billion) one year ago. But the American gaming mogul said on Monday that the market is stabilizing, pointing out that the company’s mass-market gaming revenue in Macau rose in June for the first time in two years. “Our mass revenue growth in June, despite the arrival of new competition on Cotai, represents an important data point supporting the ongoing stabilization of the Macau mass market,” he said during the call, adding: “we’re very happy that there’s one month that hit the bottom

and we have no reason to believe that that’s not going to continue”. For the quarter, Sands’ flagship property in the city, The Venetian Macao, saw total revenue reach US$666.1 million, with revenue from its casino down by 10.3 per cent year-on-year to US$568.5 million. Meanwhile, adjusted EBITDA fell 4.2 percent year-on-year to US$244.4 million. “We believe Sands China’s product offering is one of the best positioned to capitalize on Macau’s paradigm shift,” to focus on recreational gamblers, wrote the Bernstein analysts led by analyst Vitaly Umansky yesterday. Umansky rated the stock as 'outperform', citing its portfolio of hotel, retail and conference facilities as being “key drivers” in continuing to attract recreational gamblers and tourists, he wrote. Sands China had risen as much as 6.7 percent as of 10:25 a.m. in Hong Kong trading Tuesday, the highest intraday rise since March 18. In addition, shares of Las Vegas Sands rose as much as 4.1 percent to US$49.75 in extended trading after the results were announced. The stock gained one percent to US$47.80 at the close of regular trading in New York. “Something good happened in June,” Rob Goldstein, Sands’ president, said on the call. “The gaming floors are busy, especially on weekends. Macau is morphing into the world’s greatest mass market. Hopefully we’ll see it for the rest of the summer.” Casino betting in the city has been in a two-year slump amid a Chinese government crackdown on corruption that has prompted high rollers to cut back on conspicuous consumption. The market is showing signs of recovery, with the overall drop in betting moderating and visitor traffic on the upswing. *With Bloomberg

Opinion

José I. Duarte Final runs At last, the government has taken a stand on the issue of dog racing – or to be more precise, a kind of stand. The operators have been granted a two-year period to relocate the activity or close it down. So the bets (pun intended) are now that the activity will close down. Other issues aside (see the declaration at the bottom of this column), it is difficult to see how this activity can continue being economically viable. Can space be found in the city that is big enough, and cheap enough, to guarantee a decent level of profitability for the activity, either by itself or when compared with alternative uses of such space? In this sense, it seems a somewhat cynical take by the administration. It has not decided to force the closure explicitly, but has set a condition that in all likelihood cannot be met. Bearing in mind the fact that most of the city space is public, unless the administration is willing to provide an alternative space, or authorize a change of purpose of some previously existing land concession, such a space does not seem to exist. (Not to mention that such a development would get us to another dimension in cynicism, which we presume not to be the case.) But the past teaches us that there is great creativity in this domain, so we cannot ever rule out fully any – yes, any – possibility. When a few interests align, no ‘solution’ or ‘interpretation’ appears to be beyond the conceivable. But until then, we have to assume this activity is doomed. It helps that the neighbors’ association seems to concur. They want the activity out of their area of residence – which is understandable - and they want the space to have a public usage – which is laudable. If that happens – for example, the space becomes a park with sporting and other public facilities – it will be an achievement almost as amazing as the winding down of the dog races themselves. Such a plot of prime land would make many salivate metaphorically of course; I’m not talking here about dogs running after a makebelieve rabbit. (Declaration of interest: for the sake of transparency, I have to declare that I am a member of Anima, an animal welfare organization that has long argued for the closure of the activities associated with the dog races in Macau, and is actively promoting an international boycott on the transportation of new dogs to Macau.) José I. Duarte is an economist and permanent contributor to this newspaper.

8 Business Daily Wednesday, July 27 2016

Greater China Debt

Local government bond risks flow to yield-hungry foreign buyers The appeal of bonds comes from expectations of government support in the event of a default. Umesh Desai

combination of towering leverage, stunted cash flows and illusory guarantees could deliver a salutary lesson to foreign investors dabbling in the rising flow of bonds from Chinese local governments onto global markets. Local Government Financial Vehicles (LGFVs), created by China’s local authorities to bypass restrictions on their borrowing, have so far this year issued US$3.4 billion of high-yielding dollar-denominated bonds, within reach of the US$4 billion record for the whole of 2015. Nomura estimates the market for these bonds will triple to US$30 billion by 2017 as China steps up infrastructure projects and Beijing’s determination to hit growth targets demands ever more credit. That will constitute a growing proportion of the estimated 1 trillion yuan (US$150 billion) of total LGFV bonds, as borrowers find it more costly to raise funds at home amid rising defaults. In an era of ultra-low interest rates globally, top asset managers such as Schroder’s, Blackrock and PIMCO are snapping up these products in the hunt for yield, even though they are mostly guaranteed by asset-light offshore subsidiaries of local government entities. The asset managers did not respond to requests for comment. “China LGFVs have weak fundamentals - the leverage is high, cash flows are weak and onshore banks are becoming selective in their lending,” said Lombard Odier analyst Tracy Wang. She said banks’ reluctance to lend to LGFVs was one of the factors pushing them into bond financing. But weak cash flows has not stopped LGFV bonds from selling. Beijing Infrastructure Investment

and Guangzhou Metro Group, two LGFVs that manage urban transport systems, were able to sell global bonds even though at the current pace of cash generation it would take them 324 and 750 years, respectively, to repay their debt, according to DBS Group Research.

Selective guarantees

The investor appeal of LGFV bonds comes from expectations of government support in the event of a default, which secures investment grade rating for bonds that would otherwise be rated as junk. Tianjin Binhai, which develops infrastructure in the Binhai new Area, would have been rated eight notches

lower than its A3 rating from Moody’s without the very high level of support from the Tianjin Government, according to Moody’s, which said in March the vehicle had a “weak standalone profile with little commercial viability”. When it launched its US$500 million, five-year bond in 2015, Tianjin Binhai received orders for over US$1.9 billion as investors were attracted by its pricing at 245 basis points over corresponding U.S. Treasuries. But recent bond failures suggest the assumption of support has never looked more doubtful, as authorities appear increasingly willing to sit on their hands when borrowers come unstuck. In April last year, Baoding Tianwei Group failed to make an interest payment on a bond, the first time a state-owned firm had been allowed to default.

Investors say they tend to prefer LGFV bonds if they are linked to sectors that are critical to social well-being in China, such as urban metro operators, though these typically have the worst credit profiles. At the other end of the spectrum were land development and affordable housing, which have a much lower priority for government and are therefore less likely to be bailed out. “Legally there is no explicit guarantee from government. There is only the implicit government support that investors rely upon,” said Carol Yuan, analyst with Aberdeen Asset Management. To avoid getting burned, investors will have to lend a more critical eye to valuations, said Luke Spajic, Singapore-based portfolio manager for PIMCO. “We believe LGFV debt trades quite rich. It’s a growing asset class with the bulk of the demand curve being local. Credit quality differentiation should play a great role in the future,” he said. Reuters

Reform drive

State firms to dump some costly social burdens by 2018 State companies’ total liabilities rose 17.8 per cent on year to 83.55 trillion yuan at the end of June. China’s government-run enterprises will work to rid themselves of some costly “social functions” like heating, water and power supplies by 2018, the state asset regulator said on Monday, part of broader efforts to rejuvenate its

lumbering state sector. Beijing has vowed to make its state firms stronger and more competitive, and said in a reform plan published last year that it would create “multi-channel funding” and “appropriate

cost-sharing mechanisms” to help them relinquish their costly social burdens. Most of China’s giant state firms were hived off from government departments and many have retained the government’s original social and administrative responsibilities, providing not only heat and power to local communities, but also schools, retirement homes, police services and pensions. Xiao Yaqing, chairman of the StateOwned Asset Supervision and Administration Commission (SASAC), said removing “social functions” and “resolving the historical problems of state-owned enterprises” was an important part of China’s overall reforms of the state sector, according to a notice posted on SASAC’s website. He said new policies aimed at reforming the role of SOEs in health, education and even fire fighting would be released at the end of this year. According to a delegate at this year’s full-session of parliament in March, China’s central government-administered enterprises spent 850 billion yuan (US$127.28 billion) a year on schools, pensions and other “social functions”, with local government-run firms paying even more. State companies have long been urging the government to speed up efforts to free them from their social responsibilities, especially in sectors like coal, which is already struggling with an economic downturn, falling prices and a bloated workforce. The Longmay Group in Heilongjiang, which is laying off thousands

Profits at China’s state-owned firms fell 8.5 per cent in the first six months of 2016 from a year earlier, the Ministry of Finance said

of workers as a result of dwindling coal demand, has an annual bill of 300 million yuan and was responsible for the pensions of 180,000 retirees and the upkeep of 42 hospitals and 130 schools in the region. China has been talking about removing “social functions” from SOEs for

Business Daily Wednesday, July 27 2016 9

Greater China Baosteel restructuring

In Brief

An arranged marriage in national steel industry troubled from the start

Commodities

Net gold imports via Hong Kong fall Top consumer China’s net gold imports via main conduit Hong Kong fell 38.5 per cent in June, a month after hitting its highest for the year, data showed yesterday. Net gold imports fell to 70.886 tonnes in June, down from 115.29 tonnes in May, according to data emailed to Reuters by the Hong Kong Census and Statistics Department. Total imports fell to 83.042 tonnes from 121.71 tonnes in May. Gold prices rose about 9 per cent in June. The yellow metal has risen about 25 per cent so far this year and has been one of the top-performing commodities.

Ratings agency Moody’s said any merger would be “credit negative for Baosteel because it would increase Baosteel’s leverage” and says it could downgrade the company’s ratings. Ruby Lian

It may be the Chinese government’s idea of creative destruction. Beijing appears to be on the brink of forcing the most modern and competitive Chinese steelmaker, which is itself struggling amid a global steel glut, to rescue a loss making and heavily indebted rival in what some securities and credit analysts see as potentially a marriage made in hell. Listed units of Baosteel Group, the second-largest Chinese steelmaker, and Wuhan Iron and Steel Group, the sixth largest, said in separate stock exchange announcements on June 26 that they are planning on restructuring together. While the two state-owned enterprises (SOEs) didn’t provide any details on what that entailed, industry experts say one possibility is that Baosteel may have been ordered by Beijing to take over all or a majority of Wuhan Steel amid a broader push to reduce the number of state-owned enterprises. The way in which the restructuring is done will be a major indication of how the government plans to transform other smoke-stack sectors of the economy where SOEs dominate. Investors will in particular be watching whether Baosteel is allowed to shutter much of the highcost production at Wuhan Steel or whether profits have to be sacrificed to jobs retention as the government seeks to avoid any threat to social stability. Spokespersons for Baosteel and Wuhan Steel declined to comment, but sources familiar with both firms said the two companies will be discussing various options from a full merger to a cross-holding of ownership over the coming months. Ch i n a’ s S t a t e- o w n e d As s e t s Supervision and Administration Commission, which directly owns

both companies and the Ansteel Group, did not respond to a faxed query for comment.

Cool reception

The prospects for a deal are not being greeted with enthusiasm inside either firm, said sources familiar with the thinking at the two companies. Baosteel is reluctant to take on an additional burden at a time when it is struggling to ensure its own profitability, while Wuhan Steel is not keen to lose control of its own destiny. “There is no market incentive for the two companies to do restructuring,” said a Baosteel official, who declined to be named. Hurt by a drop of more than 60 per cent in benchmark Chinese steel prices since 2012 amid shrinking demand and massive overcapacity in the domestic industry, Baosteel has been trying to streamline.

Baosteel shut 3 million tonnes of capacity in Xinjiang last summer It shut 3 million tonnes of capacity in Xinjiang in the far west of the country last summer, and plans to close another 9.2 mln tonnes of capacity between 2016-18. In 2015, it produced 36.1 million tonnes of crude steel. Wuhan Steel, which produced 26.8 million tonnes last year and owns a series of 40-50 year-old mills, has also been trying to cut costs after the government made a former Baosteel executive Ma Guoqiang its general manager in July

State companies have long been urging the government to speed up efforts to free them from their social responsibilities, especially in sectors like coal

decades, but it has struggled to push through reforms, with giant state firms often the only source of social support and political authority in some remote and impoverished regions. Data this year have suggested the world’s second-largest economy has become more reliant on government

spending and the state sector for growth as private investment cools, raising questions about whether the government will proceed with SOE reforms. Profits at China’s state-owned firms fell 8.5 per cent in the first six months of 2016 from a year earlier, the Ministry of Finance said on Monday. Reuters

Traffic

Nanjing researches licence plate restriction policy 2013 and promoted him to chairman last year. Ma told local media in March that the company planned to cut its 80,000-strong workforce in half. Wuhan Iron & Steel, its mainly listed unit, reported a 7.5 billion yuan (US$1.12 billion) loss in 2015, and its gross profit margin slumped to minus 4.5 per cent, the first time it has been negative since the company’s listing in 1999. Its debtto-asset ratio jumped to almost 70 per cent in 2015 from 62 per cent a year earlier.

Creating giants

Securities analysts and industrial officials said that state-owned steel firms should let the market decide their fate, and they should go bankrupt if necessary rather than be rescued through Beijingarranged mergers. “Baosteel is having a difficult time too, given the industry downturn, and the government-led restructuring will put more burden on the company,” said Hu Yanping, an analyst with industry website Custeel.com. Hu said that Baosteel had more modern equipment, management thinking, and a long-term strategy, while the other state-owned mills “are not thinking that far.” Nonetheless, the government appears intent on consolidating output among the most modern producers and shuttering inefficient plants, and has decreed that 60 per cent of national output should come from the top 10 steel makers by 2025, compared with less than 40 per cent currently. “The government’s policy has always been creating giant groups and increasing the level of concentration, but this will only work by letting the market shut down outdated ones and letting the surviving ones expand and have higher market share,” said Jiang Feitao, a steel researcher with the China Academy of Social Sciences, a state think-tank. Baosteel Group, founded in 1978 when China’s economy first opened up after the Mao era, has 130,000 staff, some new plants, and a highly regarded research institute. Baoshan Iron & Steel, its main publicly traded unit, reported an 82.5 per cent slump in 2015 net profit to 1.01 billion yuan, and its gross profit margin dropped to a three-year low of 8.95 per cent. Its recent takeover history is less than stellar. The Xinjiang Ba Yi Iron & Steel Co, taken over by Baosteel in 2006 for 3 billion yuan, suffered a loss of 2.5 billion yuan last year. SGIS Songshan Co, acquired in 2011, lost 2.6 billion yuan in 2015. The Chinese steel industry’s recent history is littered with mergers that have failed to deliver any substantial cost cuts or efficiency gains. Industry experts say little suggests that a combination of Baosteel and Wuhan Steel will buck this trend. Reuters

China’s eastern Nanjing city is studying whether to restrict the issuance of vehicle licence plates, a policy enacted in other major cities that is blamed for severely curtailing car sales, according to a government report posted Monday. If Nanjing enacted such a policy, it would be the first city to restrict plate issuance since a downturn in the auto market began last year as economic growth weakened, prompting the government to support sales through a tax cut on small-engine cars. The city is researching a wide range of policies to reduce traffic. Private drive

Peak Sport says chairman wants to take it private The chairman of China’s Peak Sport Products, which sponsors several U.S. basketball teams, plans to the take the company private for around US$310 million, saying the sportswear maker’s weak share performance had hurt its reputation. Peak Sport flagged earlier this year that it might be taken private, joining a growing queue of mainland firms looking to exit the city’s stock market. A firm owned by Chairman Xu Jingnan is offering HK$2.60 per share, a 10.6 per cent premium over Peak Sport’s last trading price, to buy all the shares not owned by Xu or firms he controls, the company said. Results

Huawei global smartphone shipments jump China’s Huawei Technologies Co Ltd, the world’s thirdlargest smartphone vendor, yesterday said it shipped 60.5 million smartphones globally in the first half of 2016, a 25 per cent rise from a year before. Shenzhenbased Huawei, which competes with Samsung Electronics Co Ltd and Apple Inc, reported a 41 per cent increase in its consumer business group revenue to 77.4 billion yuan (US$11.6 billion) thanks to strong sales of high-end smartphones, the company said in a statement.

10 Business Daily Wednesday, July 27 2016

Greater China ‘The G20 meeting came at a sensitive time for China-U.S. relations’

Taro Aso, Japan’s Deputy Prime Minister (R) reacts to Lou Jiwei (L), China’s Minister of Finance before a group photo for the G20 Finance Ministers and Central Bank Governors meeting in Chengdu, Sichuan Province, China, 24 July 2016. Chengdu meeting

G20’s deference for Mainland’s policies irks Japan Nippon government has failed to win support to curtail a strengthening currency. Pete Sweeney and Tetsushi Kajimoto

hina dodged criticism of its economic management at a G20 meeting it hosted on the weekend, even winning plaudits for yuan transparency, much to the frustration of Japanese officials who are calling for more reforms from Beijing. It was a marked contrast to a February G20 gathering of finance heads in Shanghai, when Chinese policymakers were on the defensive about the risk of another devaluation of the yuan. While the world’s second-largest economy has slowed and the yuan has fallen to 5-1/2 year lows against the dollar over the past five months, G20 finance ministers and central bank chiefs appeared more concerned about the fallout from Britain’s June vote to leave Europe.

“We have been very polite with China,” said a European official at the meeting in the south-western Chinese city of Chengdu, adding Tokyo failed to keep its concerns about China’s economic performance - a major risk for Japan - on the table. “China’s growth problems and exchange rate decline have not been much of an issue here. Japan with its concerns has been left a bit alone, no one wanted to join in,” the official said. Japan has already failed this year to win support from its industrialised peers to curtail a strengthening yen, which has soared to 2-1/2 year highs against the dollar even as the economy faltered and exports fell. “Japan remains concerned about China’s economy and we will call on the U.S. and Europe not to shift attention away from China,” a Japanese official said, but added that Tokyo had decided to “be quiet” on currency during the meeting. The yuan has fallen over 5 per cent against a basket of currencies tracked by Thomson Reuters since the G20 finance ministers meeting in February.

The yen, meanwhile, has become both stronger and more volatile this year, surging on safe-haven buying even as Japan adopted negative interest rates in its so-far futile effort to escape deflation. Data on Monday showed Japan’s quandary, with exports falling 7.4 per cent in June from a year earlier, the ninth straight month of decline. The rising yen has weakened Japan’s export engine as China increases its share of global trade. At the G20 meeting, Japanese Finance Minister Taro Aso said it was closely watching the impact of a declining yuan, and that he had agreed with U.S. Treasury Secretary Jack Lew on the need for structural reform in China and transparency in the forex market.

The right direction

In contrast to Japan, the United States, a long-time critic of China’s currency policies, appeared satisfied with Beijing’s recent handling of the yuan. Lew complimented Beijing’s improved transparency and said the yuan had been moving in response to market factors. U.S. officials even

noted China had actually been intervening to prevent the yuan from falling too quickly. The G20 meeting came at a sensitive time for China-U.S. relations after the Permanent Court of Arbitration in the Hague earlier this month ruled Beijing’s claims to vast swathes of the South China Sea invalid. It also immediately followed the nomination of Donald Trump as the Republican Party candidate in the U.S. presidential election. Trump has said if elected he would have China declared a currency manipulator as one of his first acts in office. Sources at the G20 said there was little discussion of China’s new regulations on cybersecurity, seen as regulating foreign software companies out of the domestic market. There was also little progress in opening protected parts of China’s economy to foreign investment, sources said, although the final communiqué did express concern about protectionism. However, the G20 did refer to worries about industrial overcapacity, particularly in the steel sector. Many of China’s trading partners accuse it of dumping excess steel in overseas markets to avoid massive layoffs in its state-dominated steel sector, in turn eroding steel employment in other countries. Reuters

IMF currency

New SDR calculation method to prepare for yuan’s entry The dollar has risen in value significantly against these currencies since the decision. The International Monetary Fund said it adopted a new methodology for calculating the currency amounts in the Special Drawing Rights (SDR) the fund uses for transactions, partly to ensure that China’s yuan meets the IMF Board’s intended weighting. The changes will apply to a historic rebalancing of the SDR basket on October 1 to include the yuan for the first time, a step that gives China prized reserve currency status and moves the yuan a step closer to being freely usable internationally. The relative amounts of dollars, euros, yen, pounds and yuan to achieve these weightings in the SDR basket will be set on September 30 and will be fixed for five years. But the IMF said its previous method of calculating currency amounts in past rebalancings had caused deviations from the intended weights due to complex rounding calculations and other issues. In the 2010 rebalancing, the old method resulted in a dollar weighting that was nearly half a percentage point above the board’s

“The amended methodology allows final currency amounts to produce currency weights that are very close to the weights adopted by the IMF” IMF statement

intended target. The new method will involve simpler rounding calculations out to five significant digits, with the potential to round to six digits to more accurately match intended weightings. The IMF said the method will be easier to replicate on a simple spread

sheet, providing more transparency to market participants. In November 2015, the board agreed to introduce the yuan into the SDR basket with a weighting of 10.92 per cent. It left the dollar relatively unchanged at 41.73 per cent, and reduced weightings for the euro, yen

and pound to 30.93 per cent, 8.33 per cent and 8.09 per cent, respectively. In the run-up to the yuan’s introduction into the SDR, the IMF said it will publish weekly the prospective calculations of the currency amounts in the SDR basket using the new method. Reuters

Business Daily Wednesday, July 27 2016 11

Asia Trade

Surge in Philippine imports signals solid domestic demand Imports climbed 39.3 per cent in May, the biggest annual gain for any month since 1994. Karen Lema

hilippine imports climbed the most in nearly two decades in May, the statistics agency said yesterday, driven by a surge in purchases of capital goods that points to strong domestic activity in the second quarter.

posted a much stronger sequential expansion.” The percentage rise for electronics imports, which are mostly reexported as electronics products, was lower than in April, suggesting that a strong increase in exports is not in the offing. “We do not see strong factors for a rebound (in exports) and this

environment is expected to linger in the near term while domestic demand continues to support growth,” said Jingyi Pan, economist at Forecast Ltd in Singapore. Exports in the first five months of 2016 were down 6.6 per cent from a year earlier, and the trade deficit so far this year is US$9.8 billion, nearly triple the gap in the same period of 2015. Philippine economic planning chief Ernesto Pernia has said growth in the second quarter will likely be faster

than the 6.9 per cent annual pace in the first three months due to public and private investments. P e r n i a sai d M a y ’ s “ b u l l i sh performance of imports is a clear signal that our domestic economic conditions remain robust despite the weak global economy”. President Rodrigo Duterte, who began a six-year term on June 30, has pledged to raise infrastructure spending from 4 per cent of gross domestic product in 2015 to 5 per cent this year and 5.2 per cent next year. His government has also pledged round-the-clock construction of infrastructure projects, which should support economic activity in coming months. Reuters

Key Points May’s import rise y/y biggest for any month since 1994 Electronics imports up 44.5 pct y/y to US$1.67 bln May trade deficit US$2.02 bln vs year-ago surplus of US$65 mln Jan-May trade deficit US$9.8 bln vs US$3.34 bln gap a year ago Electronics, the top import item, rose 44.5 per cent from a year earlier to US$1.67 billion, and there were bigger percentage increases for transport, power generating and industrial machinery equipment, as some companies placed orders ahead of the country’s May 9 general election. “This is mainly domestic demand driven,” said Vaninder Singh, economist at RBS in Singapore. “We are seeing only a slow reaction on the exports side, but imports have

President Rodrigo Duterte has pledged to raise infrastructure spending

Growth outlook

Japan to miss fiscal year 2020 GDP target Nominal GDP for fiscal 2020 was previously forecast to be 620.7 trillion yen in August 2013. Minami Funakoshi

Japan will not meet its goal of reaching nominal gross domestic product of 600 trillion yen (US$5.7 trillion) in fiscal 2020, and may not achieve it even by fiscal 2024 if growth stays sluggish, the

government’s projections showed yesterday, adding pressure on policymakers struggling to revive the economy. The world’s third-largest economy now expects nominal GDP of 551 trillion yen in the fiscal year beginning in April 2020 assuming the current

pace of growth, the Cabinet Office said. Japan also expects to have a primary deficit of 9.2 trillion yen if growth remains weak, and to fail to reach its target of a primary budget surplus even in fiscal 2024. The forecasts assume mid- to long-term real economic growth of 1 per cent or less, but do not take into account a massive stimulus package expected this autumn, the Cabinet Office said. Japan has repeatedly retreated further from its ambitious goal of boosting nominal GDP to 600 trillion yen. Despite Prime Minister Shinzo Abe’s “Abenomics” recipe of massive monetary easing, fiscal stimulus and structural reforms, the government has revised down its nominal GDP forecasts three consecutive times since Abe returned to power in late 2012. Abe, however, remains optimistic. He told reporters after a meeting of the Council on Economic and Fiscal Policy, the government’s advisory panel, that Japan will work toward achieving its 600 trillion yen GDP target through reforms in spending, and added that it is sticking to its goal of reaching a primary budget surplus in fiscal 2020. Even under a rosy scenario that assumes economic growth would

pick up, Japan is set to miss its GDP target and its goal of achieving a primary budget surplus in fiscal 2020. Assuming real economic growth of 2 per cent or more, Japan still sees nominal GDP of 582.7 trillion yen in fiscal 2020, and a primary budget deficit of 5.5 trillion yen, the Cabinet Office said. “We will firmly proceed with fiscal reform step by step,” Economy Minister Nobuteru Ishihara told reporters after the government panel meeting.

Key Points Japan to miss FY2020 GDP target of 600 trln yen - govt forecast Will not meet GDP target even in FY2024 if growth remains weak GDP forecasts revised down repeatedly since PM Abe took office Weak economic growth, fiscal health problems for Japan

The primary budget, which excludes debt servicing costs and income from bond sales, is a key measure of fiscal health. In June, the prime minister delayed a sales tax increase to October 2019 from next April because of growing risks to the economy - a step some economists worry would worsen Japan’s fiscal discipline. Reuters

12 Business Daily Wednesday, July 27 2016

Asia In Brief Commerce

New Zealand posts monthly trade surplus New Zealand posted a monthly trade surplus of NZ$127 million (US$88.8 million) in June as kiwifruit exports continued to hit record levels, data from Statistics New Zealand showed yesterday. The annual deficit for the year to end-June 2016 was NZ$3.3 billion. Economists polled by Reuters had forecast a monthly surplus of NZ$150 million and an annual deficit of NZ$3.3 billion. Exports totalled NZ$4.26 billion for the month while imports were NZ$4.13 billion. “Export values of kiwifruit for the months of May and June 2016 are the two highest on record,” international statistics senior manager Jason Attewell said. Domestic market

Thai car sales to fall at smaller pace Thailand’s domestic car sales are expected to fall at a smaller-than-previously-projected pace of 7.5 per cent this year, as government stimulus measures are likely to boost spending in the second half, Toyota Motor Corp’s Thai unit said yesterday. In January, Toyota said local car sales would decline by 10 per cent to 720,000 cars. Thailand is a regional production and export hub for the world’s top carmakers, and the sector accounts for around 10 per cent of the nation’s GDP. Car sales have declined almost every month on a yearly basis since May 2013.

Growth evolution

South Korea GDP rebounds in second quarter Markets shrugged off the data as offshore factors diverted investor attention. Christine Kim

outh Korea’s economy grew at an unexpectedly robust 3.2 per cent annual rate in the second quarter, driven by firmer domestic consumption and capital investment, but analysts said the lift would probably be temporary. The June quarter’s annual 3.2 per cent outperformed a poll forecast of 2.9 per cent, and topped the 2.8 per cent year-on-year growth seen in the first quarter. It was the fastest expansion seen since third-quarter 2014. Gross domestic product expanded 0.7 per cent in April-June, following 0.5 per cent growth in the first quarter, Bank of Korea (BOK) estimates showed yesterday. Analysts at Australia and New Zealand Banking Group said it would be “beyond surprising” if this economic momentum were to continue. “The challenges that lie ahead for the South Korean economy in terms

of the scope of corporate debt restructuring in a low-trade environment (and with monetary policy nearing its lower limit) are formidable,” ANZ said in a note. The data were in line with a median 0.7 per cent seasonally adjusted gain tipped in a Reuters survey and matched 0.7 per cent growth in the fourth quarter of 2015. Although yesterday’s news offered some hope as Asia’s fourth-largest economy struggles to escape low growth, an on-going overhaul of the country’s shipping and shipbuilding industries may prove a hurdle as tens of thousands of jobs are expected to be lost in the process. Exports have been falling since January 2015 and policymakers see headwinds hindering private consumption. In a surprise move, the Bank of Korea cut interest rates to a record-low 1.25 per cent in June, and most market analysts see one more cut by year-end. Capital investment rose 2.9 per cent

after tumbling 7.4 per cent in the first quarter. This was the fastest rise seen since it posted 3.5 per cent growth in the fourth quarter of 2014, but a BOK official said a sustained recovery in capex was doubtful anytime soon.

Key Points Q2 GDP +0.7 pct s/adj q/q (Reuters poll +0.7 pct) Q2 GDP +3.2 pct y/y (Reuters poll +2.9 pct) Capital investment growth at 1-1/2 yr high Analysts doubtful of strong recovery Private consumption rose by a seasonally adjusted 0.9 per cent in the second quarter after slipping 0.2 per cent over January-March period, but it was mostly on temporary factors such as an expired tax benefit scheme for local car purchases. The Bank of Korea and the government currently estimate this year’s GDP growth at 2.7 per cent and 2.8 per cent, respectively. Reuters

Results

Canon cuts profit forecast Canon Inc cut its full-year profit forecast yesterday, becoming Japan’s first major technology company to report a weaker outlook on the yen’s surge following Britain’s vote to leave the European Union. The world’s biggest maker of cameras and printers forecast group operating profit of 265 billion yen (US$2.54 billion) for the year through December, from 300 billion yen estimated three months prior. The new forecast, Canon’s second downward outlook revision this year, is below market expectations of 297 billion yen, based on estimates of 17 analysts surveyed by Thomson Reuters. M&A

Takeda sets bidding deadline for stake Takeda Pharmaceutical Co Ltd will accept initial bids for its 70 per cent stake in a chemicals company through August 16, with potential suitors including CVC Capital Partners Ltd and Carlyle Group Ltd, sources told Reuters. Takeda, Japan’s largest drug maker by market value, aims to sell its holding in Wako Pure Chemicals Industries Ltd to streamline operations, four people familiar with the plan said, declining to be identified as the matter was private. The winning bidder would likely buy out the remaining shareholders, taking the deal over 100 billion yen (US$957.95 million), the people said.

Exports have been falling since January 2015

Economic direction

Cranes stand idle as Myanmar businesses bemoan policy drift This June, officials from Myanmar Investment Commission said that there was a backlog of 102 projects awaiting approval. Timothy Mclaughlin

Aung San Suu Kyi’s ruling party will offer a glimpse of its plans for Myanmar’s economy this week, in a long-awaited announcement that seeks to reassure businesses and investors who have grown increasingly worried by a lack of firm policy detail. A burgeoning private sector had hoped the National League for Democracy’s (NLD) emphatic

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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triumph in a historic election last year would spur a quickening of reforms, but eight months on the NLD’s economic strategy remains largely a mystery. “We have not heard their broad economic policy and direction yet. Not much interaction has happened,” said Win Win Tint, the CEO of City Mart Holdings Co. Ltd., which runs the country’s largest supermarket chain. She said the company’s expansion

p l a n s f o r n e w s u p e r m a r k et, hypermarket and convenience store outlets were being scaled back for next year due in part to a lack of “encouraging economic policies”. While the government’s economic plans will add some clarity, they are unlikely to go far enough to fully quell concerns over the early economic direction of the government. The scrapping by parliament of developments approved by the last administration, and a sweeping review of construction projects that has halted work on half-built highrises that dot the Yangon skyline, has fuelled disquiet. A senior NLD official said the government would outline parts of its economic vision for the impoverished country of 51 million later this week. Han Tha Myint, a representative on the newly formed National Economic Coordination Committee (NECC), said

Business Daily Wednesday, July 27 2016 13

Asia

Injection plan

Japan to double direct spending in stimulus package The stimulus package will raise pay for workers at day care centres and elderly homes, two industries that are struggling to attract workers to meet surging demand. Leika Kihara and Stanley White

Japan’s government is likely to inject 6 trillion yen (US$57 billion) in direct fiscal outlays into the economy over the next few years under a planned stimulus package, double the amount initially planned, the Nikkei newspaper reported yesterday. The Finance Ministry had initially earmarked 3 trillion yen for direct spending from national and local governments under its draft fiscal stimulus plan. But the amount was doubled on requests for bigger spending by government officials and ruling party lawmakers, the Nikkei said without citing sources. Finance Minister Taro Aso told

reporters the government is still debating the size of stimulus spending but hopes to make a decision soon. A draft plan obtained by Reuters yesterday shows spending will focus heavily on infrastructure. Prime Minister Shinzo Abe, emboldened by a large election victory earlier this month, is gambling on infrastructure spending to revive growth amid disappointment that his reforms have not done enough to improve the economy. “The prime minister’s instructions are to focus on investment for the future,” Aso said at a press conference. “We need a bold and comprehensive package, but it will take a little more time to finalise it.”

Suu Kyi is the ultimate decision maker in the government that took power in April

policies would focus on agricultural development and the creation of jobs in the private sector. But he admitted the policy paper would be light on detail. “It covers many things, but is not very specific, it’s quite general,” he said.

A stumbling start

Myanmar’s long-closed economy is now one of the world’s fastestgrowing, expanding at 7-8 per cent a year since the military relinquished direct control in 2011, ushering in a period of wide-ranging reform under former President Thein Sein. A l t h o u g h ba r r e d f r o m t h e p r esi d e n c y b y th e m i l i ta r y drafted constitution, Suu Kyi is the ultimate decision maker in the NLD government that took power in April. But the Nobel laureate’s chief focus has been on the ethnically divided

country’s complex peace process, and without her driving the economic agenda critics in the commercial world say that decision-making has been sluggish. “It seems they have not put business as a priority,” said City Mart’s Win Win Tint. R es p o n si bi l i t y f o r st e e ri n g economic policy rests with Kyaw Win, the Minister of Finance and Planning, a career civil servant who heads what was previously two separate ministries that were merged by the NLD. With just one deputy minister, and responsibilities that include also heading the Myanmar Investment Commission (MIC), there are concerns he is overstretched. The reformation of MIC, a key body that approves domestic and foreign investment projects, did not take place until June, more than two

The size of spending could increase further as the government presents the draft stimulus plan for negotiations with ruling party lawmakers from yesterday, the Nikkei report said. The total size of the package, which could be announced as soon as August 2, could exceed 20 trillion yen, the Nikkei said. To fund part of the package, the government will compile a supplementary budget for the current fiscal year of around 2 trillion yen, the paper said. The rest will be funded in the budget for the next fiscal year beginning in April 2017, it said.

bring forward the construction of a maglev line by up to eight years and expand the conventional bullet train network.

Direct, indirect support

The package will also invest in hotels and improving public transportation to welcome more tourists, including the increase in visitors expected for the 2020 Tokyo Olympics. The government plans to increase infrastructure spending to boost agriculture exports and to shore up infrastructure in Japan’s many natural disaster-prone areas. The draft also shows the government plans to tighten enforcement of labour laws to narrow the pay gap between regular and part-time employees doing the same work. Reuters

months after President Htin Kyaw’s inauguration. The delay led to a backlog of US$2.3 billion in foreign investment projects awaiting approval and, business officials said, was an early indicator that the NLD’s focus lay elsewhere. Kyaw Win Tun, director of the Directorate of Investment and Company Administration, said the MIC has meet twice since it was reformed last month and approved 11 foreign investments and eight local investment projects totalling around US$123 million. According to MIC figures, over the same period last year the government approved 64 foreign investment projects and 30 domestic projects, totalling around US$2.8 billion in proposed investment. “The whole government machine seems to be slowing and stalling,” said a Yangon-based business advisor. “People are waiting for the ministers to make decisions and the ministries are overloaded because they have never done this job and they don’t dare make decisions either.”

were announced earlier this month. Most will need to make significant changes to their plans, a move that has angered developers. They say that if the suspended projects were scrapped it could cost more than US$5 billion in losses.

The draft spending plan obtained by Reuters showed details of the stimulus package, which expands loan guarantees and lowers lending rates on funding schemes for smalland medium-sized companies. The Japan Bank for International Cooperation will use lending schemes to support small companies operating overseas amid concerns that Britain’s exit from the European Union could hurt access to credit. The government will use public-private investment to

High-rise halt

The government’s biggest - and most visible - business-focused announcement to date has been a sweeping review of high-rise construction projects in Yangon that were approved by the previous administration. The review, which the government said was to check compliance with safety or zoning regulations, has suspended work on 185 construction sites across the commercial capital. The results for the first 12 projects reviewed by the Yangon government

Key Points Govt is in final stages of compiling stimulus Draft plan shows emphasis on infrastructure PM Abe emboldened to spend after big election victory

Key Points Suu Kyi’s party won November election, took power in April Business says still waiting for clear economic strategy Policy announcement due soon, but expected to lack detail Ruling party leader focused on complex peace process Investment approvals backed up, construction projects halted “We are disappointed,” said Thiha Zaw, the general manager of PSWN Development Company, who was told that his company’s 31-storey luxury apartment project would need to be cut to 12 storeys. The company has already invested US$9-10 million of the projected US$80 million cost, according to its own estimates, and will now need to look at ways to reconfigure its plans. The decision had started a domino effect in the industry, Thiha Zaw said, forcing construction workers to be laid off, sub-contractors to lose jobs and customers to question if purchased apartments would be completed. “If these people cannot build, everybody connected to these projects will suffer,” he said. Reuters

14 Business Daily Wednesday, July 27 2016

International In Brief Weak UK data

Bank of England’s Weale shifts stance Bank of England policymaker Martin Weale said he saw the economic outlook differently after much weakerthan-expected British purchasing managers’ data, a week after saying he needed firmer evidence before backing an interest rate cut. Weale, speaking to the Financial Times, did not state explicitly if he would back a rate cut when the central bank announces its next policy decision on August 4, after it meets for a second time since Britain voted to leave the European Union. But he did say that Friday’s purchasing managers’ data were “a lot worse than I had thought”. NY Fed leak

Fed prepares action against Goldman The U.S. Federal Reserve is preparing an enforcement action against Goldman Sachs Group Inc related to a leak of confidential government information to one of its employees, the New York Times reported on Monday. The action will include a penalty of less than US$50 million, the Times said, citing people briefed on the matter. The Fed is also considering taking action against a former Goldman executive who had access to the leaked material, according to the Times, which did not name the former executive.

Monetary meeting

Fed seen holding rates steady as inflation watch continues The U.S. central bank is scheduled to issue its latest policy statement at 18:00 GMT on Wednesday. Ann Saphir

he U.S. Federal Reserve is expected to keep interest rates unchanged this week, deferring any possible increase until September or December, as policymakers hold out for more evidence of a pickup in inflation. Central to the debate at the Fed’s July 26-27 policy meeting will be how to reconcile upbeat U.S. economic data, highlighted by strong job gains in June, with a global growth slowdown and other headwinds threatening the inflation trajectory. For San Francisco Fed President John Williams, one of the 17 members participating in the central bank’s rate-setting deliberations, all that is needed is a bit more confidence that inflation is indeed headed toward the Fed’s 2 per cent target. The inflation measure the Fed prefers to track is currently at 1.6 per cent. With monthly job gains well above the level needed to prevent an uptick in unemployment, and no signs of a rise in productivity, some Fed policymakers are likely to argue for a quick increase in rates to avoid a surge in inflation.

“That is the danger - and you can be sure that the hawks are going to be arguing that,” said Alan Blinder, a Princeton University professor and a former Fed vice chairman. “I have a hunch that they will talking in July about September.” Other policymakers, like influential New York Fed President William Dudley, have signalled they would rather wait for more tangible signs of a rise in inflation before pulling the trigger on a rate increase. “There’s not a lot of reason to raise rates until inflation goes up,” said Kevin Logan, chief U.S. economist at HSBC in New York.

Headwinds

The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade, and signalled four rate hikes were coming in 2016 as it moved to “normalize” the ultra-stimulative monetary policy adopted in response to the 2007-2009 financial crisis. But headwinds in the global economy, financial market volatility and uncertainty over the impact of Britain’s decision to leave the European Union forced it to delay a rate hike and scale back

the number of projected hikes to two for the year. Still, absent a shock to markets or a reversal in U.S. economic data, even dovish policymakers like Dudley have signalled that their cautious approach to normalizing monetary policy likely allows for at least one rate hike this year.

Key Points Fed policymakers want further signs of inflation pickup Economists expect one rate hike later this year -poll Global headwinds, Britain’s EU vote muddy the waters After Wednesday, the Fed has three more policy meetings scheduled this year - in September, November and December. A November rate hike is seen as highly unlikely, as that meeting comes one week before the U.S. presidential election. Economists polled by Reuters expect the Fed to hold rates steady until after the election. “Rate normalization has fallen down the Fed priority list and will remain there until the dust is well settled on the financial markets and the economy,” Jefferies economists predicted in a note last week. Reuters

Public spending

Portugal’s budget deficit falls Portugal’s budget deficit fell to euros 2.867 billion in the first six months of 2016, or euros 971.2 million less than in the same period of 2015, according to figures from the Portuguese Budget Office (DGO) issued on Monday. According to the DGO figures, the drop in the budget deficit of public administrations was due to revenue growth of 2.9 per cent alongside expenditure growth of just 0.2 per cent. However, compared with the deficit posted to May there was an increase of over euros 2.4 billion in June alone as the budget deficit of public administrations to May totalled euros 394.9 million. Results

BP misses profit expectations British oil major BP reported lower-than-expected profit for the second quarter due to weak refining margins and oil prices, prompting another cut to its 2016 investment budget to below US$17 billion. BP reported a second-quarter underlying replacement cost profit, the company’s definition of net income, of US$720 million, down from US$1.3 billion in the same quarter last year and US$120 million below an analyst consensus provided by the company. Its refining margins were the weakest for a second quarter in six years, BP said.

M&A

Brewer AB InBev raises offer for SABMiller after pound dive The deal is expected to boost world-leader AB InBev’s prospects in developing markets in Africa and China. Alex Pigman

The world’s top brewer Anheuser-Busch InBev raised its offer for rival SABMiller yesterday after a major slump by the British pound due to the Brexit vote threw the blockbuster deal into doubt. Angry shareholders of Londonbased SABMiller were increasingly resisting the giant buyout, which before the Brexit vote was valued as much as US$121 billion. In a statement, the Belgium-based brewer of Budweiser and Stella Artois said it raised its all cash offer for SABMiller from 44 pounds per share to 45 pounds in what was its final proposal. The transaction now values SABMiller’s entire “issued and to be issued” share capital at around £79 billion (US$103 billion), ABInbev said. That includes a restricted share offer that is less attractive to investors as they must wait five years before cashing out. AB InBev agreed in November to

buy SABMiller whose brands include Foster’s, Grolsch and Peroni. The Leuven, Belgium, based brewer said the new offer represents a premium of approximately 53 per cent to SABMiller’s closing share price when news of the negotiations first broke in September last year. In a statement SABMiller said it “notes” the announcement by AB InBev. “The board will continue to consult with shareholders and will meet in due course formally to review ... the revised offer and a further announcement will be made thereafter,” the company said. AB InBev’s acquisition of the London-based SABMiller is in line to be the third largest in history if it clears all regulatory hurdles. But the deal’s value fell sharply given the plunge in the value of the pound after Britain’s vote to leave the European Union. “The increase will cost AB InBev an additional 1.5 billion pounds or US$2.0 billion at the current exchange

rate,” said ING bank in a note to clients. “However, when comparing the previous offer at the prevailing exchange rate before Brexit ... with the increased offer at the current exchange rate, the latter is actually (more than) US$3 billion lower in value,” it added. The mega deal was on its final stretch before the complications from Brexit, with approval secured by EU, US and South African regulators.

“The increase will cost AB InBev an additional 1.5 billion pounds or US$2.0 billion at the current exchange rate” ING bank in a note to clients AB InBev has agreed to a series of concessions to win the greenlight from the competition authorities, including the sale of stakes in Snow Breweries in China. It also agreed to sell most of SABMiller’s European businesses, including Peroni and Grolsch which were bought by Japanese brewer Asahi. AFP

Business Daily Wednesday, July 27 2016 15

Opinion Business Wires

The Star Expectations are building up for Bank Negara to reduce the statutory reserve requirement (SRR) by between 50 and 100 basis points (bps) this year to release more liquidity into the banking system amidst the slowing economy. This comes following the recent 25 per cent bps cut in the overnight policy rate that has caused a compression in the net interest margins of banks. Economists and analysts concurred there was still room for further cuts in the SRR to boost liquidity in the banking system, which to an extent could ease pressure on NIMs that would impact banks’ earnings.

The globalization disconnect

W The Phnom Penh Post American sporting goods giant Nike has opened its first dedicated retail store in Cambodia in what observers have described as another sign the Kingdom’s strong economy and rising incomes had not gone unnoticed by international retail giants. The opening of the outlet store in central Phnom Penh marks the first time that Nike goods such as sport shoes and apparel can be purchased from a dedicated brand outlet. According to Julie Chung, Charge d’ Affaires at the US Embassy in Phnom Penh, Nike’s retail launch underscores the Kingdom’s economic development and its ability to attract major name-brand American products and investment.

The Times Of India State Bank Of India (SBI) and Indian Oil Corporation (IOC) have tied up to implement the bank’s financial inclusion programme for farmers through the oil company’s Kisan Seva Kendras, an official said. Under the agreement, SBI will provide access to banking services for the farmers utilising the IOC’s kiosks and also supplement their incomes by earning revenue on banking transactions. The IOC has set up around 6,500 KSKs in rural and remote areas which provide various agricultural services like diesel, seeds, fertilisers, pesticides and the like to the farming community.

The Jakarta Post Indonesia needs to take measures to combat state-owned enterprise monopolies in the logistics and transportation sectors to create a healthy business climate, the Indonesian Logistics and Forwarders Association (ALFI) has said. ALFI chairman Yukki Nugrahawan Hanafi said Monday in Tangerang, Banten, that state airport operator Angkasa Pura and state port operator Pelindo had started to provide logistics services, which did not fall under their purview. “The impact is huge. In ALFI alone, there are 3,612 logistic companies that might be affected by this action,” Yukki said, adding that existing unfair competition regulations had yet to stop the cartels.

hile seemingly elegant in theory, globalization suffers in practice. That is the lesson of Brexit and of the rise of Donald Trump in the United States. And it also underpins the increasingly virulent anti-China backlash now sweeping the world. Those who worship at the altar of free trade – including me – must come to grips with this glaring disconnect. Truth be known, there is no rigorous theory of globalization. The best that economists can offer is David Ricardo’s early nineteenth-century framework: if a country simply produces in accordance with its comparative advantage (in terms of resource endowments and workers’ skills), presto, it will gain through increased crossborder trade. Trade liberalization – the elixir of globalization – promises benefits for all. That promise arguably holds in the long run, but a far tougher reality check invariably occurs in the short run. Brexit – the United Kingdom’s withdrawal from the European Union – is just the latest case in point. Voters in the UK objected to several of the key premises of regional integration: free labour mobility and seemingly open-ended immigration, regulation by supranational authorities in Brussels, and currency union (which has serious flaws, such as the lack of a fiscal transfer mechanism among member states). Economic integration and globalization are not exactly the same thing, but they rest on the same Ricardian principles of trade liberalization – principles that are falling on deaf ears in the political arena. In the US, Trump’s ascendancy and the political traction gained by Senator Bernie Sanders’s primary campaign reflect many of the same sentiments that led to Brexit. From immigration to trade liberalization, economic pressures on a beleaguered middle class contradict the core promises of globalization. As is often the case – and particularly in a presidential election year – America’s politicians resort to the blame game in confronting these tough issues. Trump has singled out China and Mexico, and Sanders’s opposition to the Trans-Pacific Partnership – the proposed trade deal between the US and 11 Pacific Rim countries – has pushed Hillary Clinton, the Democratic Party’s nominee, to adopt a similar stance. In short, globalization has lost its political support – unsurprising in a world that bears little resemblance to the one inhabited by Ricardo two centuries ago. Ricardo’s arguments, couched in terms of England’s and Portugal’s comparative advantages in cloth and wine, respectively, hardly seem relevant for today’s hyper-connected, knowledge-based world. The Nobel laureate Paul Samuelson, who led the way in translating Ricardian foundations into modern economics, reached a similar conclusion late in his life, when he pointed out how a disruptive lowwage technology imitator like China could turn the theory of comparative advantage inside out. Nor is it just a problem with an antiquated theory. Recent trends in global trade are also flashing warning signs. According to the International Monetary Fund, annual growth in the volume of world trade has averaged just 3 per cent over the 2009-2016 period – half the 6 per cent rate from 1980 to 2008. This reflects not only the Great Recession, but also an unusually anaemic recovery. With world trade shifting to a decidedly lower trajectory, political resistance to globalization has only intensified.

“

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

Of course, this isn’t the first time that globalization has run into trouble. Globalization 1.0 – the surge in global trade and international capital flows that occurred in the late nineteenth and early twentieth centuries – met its demise between World War I and the Great Depression. Global trade fell by some 60 per cent from 1929 to 1932, as major economies turned inward and embraced protectionist trade policies, such as America’s infamous Smoot-Hawley Tariff Act of 1930. But the stakes may be greater if today’s more powerful globalization were to meet a similar fate. In contrast to Globalization 1.0, which was largely confined to the cross-border exchange of tangible (manufactured) goods, the scope of Globalization 2.0 is far broader, including growing trade in many so-called intangibles – once nontradable services. Similarly, the means of Globalization 2.0 are far more sophisticated than those of its antecedent. The connectivity of Globalization 1.0 occurred via ships and eventually railroads and motor vehicles. Today, these transportation systems are far more advanced – augmented by the Internet and its enhancement of global supply chains. The Internet has also enabled instantaneous cross-border dissemination of knowledgebased services such as software programming, engineering and design, medical screening, and accounting, legal, and consulting work. The sharpest contrast between the two waves of globalization is in the speed of technology absorption and disruption. New information technologies have been adopted at an unusually rapid rate. It took only five years for 50 million US households to begin surfing the Internet, whereas it took 38 years for a similar number to gain access to radios. Sadly, the economics profession has failed to grasp the inherent problems with globalization. In fixating on an antiquated theory, they have all but ignored the here and now of a mounting worker backlash. Yet the breadth and speed of Globalization 2.0 demand new approaches to cushion the blows of this disruption. Unfortunately, safety-net programs to help tradedisplaced or trade-pressured workers are just as obsolete as theories of comparative advantage. America’s Trade Adjustment Assistance (TAA) program, for example, was enacted in 1962 for the manufacturing-based economy of yesteryear. According to a report published by the Peterson Institute, only two million US workers have benefited from TAA since 1974. The design of more enlightened policies must account for the powerful pressures now bearing down on a much broader array of workers. The hyper-speed of Globalization 2.0 suggests the need for quicker triggers and wider coverage for worker retraining, relocation allowances, jobsearch assistance, wage insurance for older workers, and longer-duration unemployment benefits. As history cautions, the alternative – whether it is Brexit or America’s new isolationism – is an accident waiting to happen. It is up to those of us who defend free trade and globalization to prevent that, by offering concrete solutions that address the very real problems that now afflict so many workers. Project Syndicate

Sadly, the economics profession has failed to grasp the inherent problems with globalization

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16 Business Daily Wednesday, July 27 2016

Closing Diversification

Chow Tai Fook plans U.S. wholesale business

Chow Tai Fook Jewellery Group Ltd. plans to expand in the U.S. market by selling diamonds to retailers there, as it seeks to offset effects of a slowdown in China that has hurt luxury sales and led profits to plunge. The world’s largest publicly traded jewellery chain plans to start the new U.S. wholesale business within a year and has set up a team to conduct feasibility studies, Chow Tai Fook Managing Director Kent Wong said. Unlike the company’s U.S. unit Hearts on Fire, which

mainly sells its own-branded diamond jewellery to franchisees, Chow Tai Fook will sell polished and rough diamonds to other retailers, he said. ”We are interested in the U.S. market because it has the largest demand for diamonds in the world. It contributes to 40 per cent of diamonds sales,” said Wong in an interview. Chow Tai Fook in 2014 bought Hearts on Fire for US$150 million in a bid to introduce the U.S. luxury diamond brand to Mainland China, a move that’s met challenges as the country’s slowdown damped the buying habits of highend consumers. Bloomberg News

Trade

Hong Kong June exports fall again as Brexit to deepen pain Hong Kong’s imports from China in June rose 0.2 per cent, while the value of total exports to China climbed 1.8 per cent. Donny Kwok and Twinnie Siu

ong Kong’s total exports in June fell for the 14th straight month, dampened by a slowdown in China, with the city’s factories bracing for more pain in coming months from the impact of Brexit. Open and trade-dependent economies in Asia such as Hong Kong are expected to be among the most vulnerable to a slowdown in global trade from Britain’s shock vote to leave the European Union as the effects filter through factory supply chains, analysts say.

For the first half of 2016, total exports value dropped 3.9 per cent, while imports fell 5.6 per cent. The city recorded a visible trade deficit of HK$199.6 billion for the first half period, equivalent to 10.8 per cent of the value of imports. “Looking ahead, the external trading environment remains challenging given the uncertainties associated with the outcome of the UK referendum in favour of leaving the EU, slow recovery in the advanced

markets, monetary policy divergence among major central banks and heightened geopolitical tensions in various regions,” the government said, adding it will monitor the situation closely. Domestic exports to the United Kingdom, which accounted for 2.2 per cent of the total, plunged 48.2 per cent in June. Analysts have said Hong Kong, Vietnam, Malaysia and Singapore look the most vulnerable to a slowdown in Europe. “We think the main channel through which Brexit could impact Asia will be via trade, with the UK likely to fall into a recession and euro zone economy slowing down,”

Credit-Suisse wrote in a research note in June. “Should the Brexit event result in a meaningful global growth slowdown, the economies which are most vulnerable will be the most exportoriented ones with limited policy space to respond to shocks. By these metrics, Hong Kong, Malaysia, and Vietnam look most exposed, while China, India, and Indonesia should be more resilient,” Credit-Suisse said. Hang Seng Bank has revised Hong Kong’s economic growth lower to 1.3 per cent for 2016, from 1.5 per cent previously, amid increased uncertainty from Brexit. There have been concerns of massive fake trade invoicing from China to Hong Kong, following a big discrepancy in China’s reported exports to Hong Kong in December, and the value of goods recorded by the financial hub for the same period. Reuters

Key Points Hong Kong’s June exports -1.0 pct y/y; imports -0.9 pct y/y Exports to China rise 1.8 pct y/y, imports up 0.2 pct HK most exposed to global slowdown after Brexit - Credit Suisse Hong Kong’s total exports in June fell 1 per cent from a year earlier to HK$296.5 billion (US$38.2 billion), government data showed on Tuesday. Total imports fell 0.9 per cent, in its 17th straight month of decline, to HK$342.1 billion. In May, annual exports slipped 0.1 per cent while imports dropped 4.3 per cent.

Iron ore imports

Manpower

Real estate

Chinese miners call for anti-dumping probe

Singapore tightens conditions Mainlanders underpin for hiring foreign professionals HK luxury rents

Chinese iron ore miners have called for an antidumping investigation into imports of the steelmaking raw material from top suppliers Australia and Brazil. More than 20 Chinese miners in a statement on the Metallurgical Miners’ Association of China website said “a huge volume of low-priced imported iron ore has had a severe impact on the domestic mining industry and even posed a big challenge for the security of steel production”. “The capacity of major iron ore miners has continued to grow and requires a massive Chinese market to absorb their great excess,” the statement posted yesterday said. Australia’s BHP Billiton and Rio Tinto, along with Brazil’s Vale, have embarked on massive expansion programmes in recent years. “Vale, Rio Tinto and BHP Billiton which have dominated global iron ore trade have defied the market and are still expanding despite prices being low since their strategy is to use low-priced dumping to crowd out higher-cost miners,” the association said. Imports accounted for about 85 per cent of China’s total iron ore consumption, driving down capacity utilization at domestic iron ore miners and causing losses and shutdowns, the association said. Reuters

Singapore will raise the salary criteria for foreign managers and specialists that companies can hire starting next year, a move that may add to the competitive challenges faced by local firms amid slowing economic growth. The qualifying monthly salary for employment passes (EP) will be raised by 9 per cent to S$3,600 (US$2,650) from S$3,300 starting January 1, 2017, the Ministry of Manpower said yesterday. Firms must apply for the passes when hiring foreigners in managerial, executive or specialised jobs. “This change is part of the Ministry of Manpower’s (MOM) regular updating of the EP qualifying salary to keep pace with rising local wages, maintain the quality of our foreign workforce and enhance their complementarity to the local workforce,” the ministry said, adding that it was the first such update since January 2014. The change is likely aimed at preventing the salary criteria from becoming too low compared with rising wage levels seen in Singapore in the past few years, economists said. The nominal median gross monthly income from work for full-time employed residents rose by 4.7 per cent year-on-year as of June 2015, after rising 1.8 per cent the previous year. Reuters

Chinese mainlanders are underpinning high-end residential apartment rents in Hong Kong as expatriate housing budgets in the financial industry are being slashed, according to Savills Plc. Vacancies for luxury apartments remain low and budgets of HK$40,000 (just over US$5,000) to HK$100,000 per month are the most popular, according to a note from the London-based real estate services company. Savills said it has “noticed a shift in tenant profiles over recent months as mainlanders who have recently obtained Hong Kong ID cards look for top end apartments to rent,” Simon Smith, senior director research for the Asia-Pacific region, wrote in the report. “Many of these tenants would have moved to Hong Kong seven years ago and are typically wealthy professionals or business owners rather than bank employees.” Housing allowances for Hong Kong-based finance and banking expats have been slashed or scrapped as banks such as Barclays Plc and Bank of America Corp. eliminated positions and exited businesses. Sentiment turned after China’s equity markets crashed, the Federal Reserve began raising interest rates and the political divide in the U.S. and Britain widened. Bloomberg News