Macau Business Daily August 1, 2016 by Business Daily

Wynn sees 3.6 pct revenue increase y-o-y in Q2 Gaming Page 5

Monday, August 1 2016 Year V Nr. 1098 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Kelsey Wilhelm

www.macaubusinessdaily.com

Gaming

Infrastructure

Land reclamation

Further delays for Macau Legend’s purchase of Savan Vegas Page 5

Lowest bid for DSF building in Ilha Verde at MOP2.68 mln Page 2

New land Zone B to hold temporary parking lot Page 2

Taking online - offline Franchising

Managers of franchising associations from around the world discuss development trends in the new Internet era and explore how the industry can achieve potential growth with online-to-offline businesses. Page 4

China and UK regulators in talks to strengthen cooperation Page 10

M&A

A Chinese consortium buys Caesars’ online gaming unit Page 16

Learning and growing in the SAR

Duarte Tavares Alves shares his stories from the business world. He advises aspiring young Macau people to learn from others’ experience before starting their own business and encourages them to be creative and take advantage of the local developing scene. The slowdown in the gaming industry will make society healthier, he says, believing that sustainable, promising, prospects lie ahead in the future. Interview | Entrepreneurs Pages 6 & 7

Merchandise trade drops 20 pct in H1

Trade Total merchandise trade value plunged by 19.4 per cent year-on-year for the first half of the year, as total imports and exports both dropped. The city’s trade value totalled MOP38.7 billion (US$4.84 billion), with imports accounting for MOP33.6 billion, while exports amounted to MOP5.1 billion, a year-on-year decline of 21.1 per cent and 6.5 per cent, respectively. Page 3

Six cases of violence against dealers

Labour Local gaming labour union says that it has received reports of at least six cases of violence against local dealers in the past three months, and is urging the city’s gaming regulator to ban protagonists of misconduct from entering casinos. The Gaming Inspection and Coordination Bureau (DICJ) says they are cooperating with the Judiciary Police (PJ) to investigate the cases. Page 5

Taiwan returns to positive growth

GDP report Taiwan’s economy posted year-on-year growth of 0.69 per cent in the second quarter this year. The economy was mainly shored up by better-than-expected exports of local commodities. However, observers are not optimistic about strong economic growth on the island for the rest of the year. Page 8

HK Hang Seng Index July 29, 2016

21,891.37 -282.97 (-1.28%) Worst Performers

China Shenhua Energy Co

+1.65%

Galaxy Entertainment Group

-0.19%

Belle International Holdings

-3.57%

CITIC Ltd

-2.33%

Power Assets Holdings Ltd

+1.20%

MTR Corp Ltd

-0.23%

Want Want China Holdings

-3.26%

China Mengniu Dairy Co Ltd

-2.26%

Cathay Pacific Airways Ltd

+1.12%

Hong Kong Exchanges and

-0.31%

CNOOC Ltd

-2.93%

Hengan International Group

-2.25%

Cheung Kong Infrastructure

+0.00%

CK Hutchison Holdings Ltd

-0.33%

China Petroleum & Chemical

-2.82%

Tingyi Cayman Islands

Bank of East Asia Ltd/The

+0.00%

Hang Seng Bank Ltd

-0.43%

Sino Land Co Ltd

-2.40%

AIA Group Ltd

-2.19% -2.04%

26° 35° 27° 29° 27° 30° 28° 31° 26° 31° Today

Source: Bloomberg

Best Performers

Tue

Wed

I SSN 2226-8294

Thu

Fri

Source: AccuWeather

Financial framework

2 Business Daily Monday, August 1 2016

Macau Trade 15 franchise cooperation agreements and 3 contracts signed at local expo

Expo-sure

327 companies and franchises met at two expos over the weekend to promote business cooperation and increase trade. Nelson Moura nelson.moura@macaubusinessdaily.com

total of 327 companies and franchises were drawn to two simultaneous expo events held over the weekend, both aimed at promoting inter-regional and international trade and business. The Macao Franchise Expo 2016 (MFE) and the Guangdong and the Macao Branded Products Fair were organised with the support of the Macau Trade and Investment Promotion Institute (IPIM), and took place at The Venetian. During the event, 15 franchise cooperation agreements and three contracts were signed between 28 parties, mainly from Macau, Hong Kong and Mainland China. Both trade fairs showcased products and services from franchises within the territory and internationally.

Franchising in the new era

“This year MFE has attracted more than 180 brands and 160 exhibitors from Mainland China, Portuguesespeaking Countries and Southeast Asian nations,” Secretary for Economy and Finance Lionel Leong Vai Tac stated at the MFE opening ceremony. Since its inception in 2009, the MFE has hosted exhibitions, forums, business-matching sessions and promotional seminars, with different country representatives showcasing services in the fields of food and supply, retailing, education, entertainment, finance, real estate brokerage, fashion, accessories, consultancy and brand licensing.

This year a “VIP Buyers meeting” was also introduced, to enhance cooperation between representatives of venture capital funds and exhibitors.

Portuguese presence

Representatives from Portuguesespeaking countries were present at the MFE, including first-time visitors to the expo from East Timor and Mozambique, bringing with them franchises looking to use Macau as a launch pad into the Mainland China market, as well as looking for local partners. “It’s a great way to enter the Asian market with millions of people receptive to new concepts,” said the General Manager of the Portuguese Franchise Association, Maria Cristina Matos. The Portuguese representative mentioned that although the country “was facing a financial crisis”, some of the “healthier” companies were looking to enter the Asian market, such as the Portuguese retail company Sonae SGPS, S.A., and the accessory chain Parfois. This year the Portuguese Franchise Association, in collaboration with the Young Businessmen Association of Portugal – China (AJEPC) brought four Portuguese companies and ten representatives to the event, mainly from the beauty products sector. “We can see the fair is bigger every year, with more countries present. A lot of Brazilian food and fashion franchises are already present in China. Brazilian companies have a cultural facility in entering different world markets and there’s a large interest in the Macau and Mainland

Secretary Lionel Leong visits exhibitors at the two expos

China markets,” stated Gustavo Orlandini Schifino, President of the Ethics Commission of the Brazilian Franchising Association.

Guangdong deals

This year’s Guangzhou trade fair brought together 148 enterprises from the province at 195 booths, mainly from the food, hotel supplies and household electrical appliances sectors, according to a speech by the Vice-Governor of Guangdong province, He Zhongyou. “Last year, although Guangdong’s foreign trade went downwards and Macau’s economy experienced an adjustment, the import and trade v o l u m e b et w e e n G u a n g d o n g and Macau bucked the trend and increased 3.2 per cent. Also direct investment projects from Macau to Guangdong were 476, an increase of 65.3 per cent over the same period,” stated He. According to the Vice-Governor, last year the total value of contractual foreign investment reached US$1.7 billion (MOP13.5 billion), a year-onyear increase of 58.6 per cent, with the total amount of foreign capital invested reaching US$740 million. He also added that Macau and Guangdong have entered into a “new historical period” after the Guangdong-Macao Cooperation Joint

Conference, held in July. This year an Indonesia Products Exhibition and Sales Area was also added, bringing 43 Indonesian exhibitors in from the island nation to present Indonesian food, jewellery and accessories, gifts, fashion, leather goods and handicrafts.

Cross-border contacts

Guangdong businessmen attending the event saw it as an opportunity to promote their products and get to network with their Macau counterparts. Luo Lian from Funrest - a company from the hotel supplies sector - told Business Daily that this was the first time the company had attended the MFE and it was working to “find customers from the whole world to buy mattresses and pillows,” hopefully sourcing clients from some of the SAR’s numerous hotels. Pantang Food Co. Ltd on the other hand, has already attended the MFE a number of times, bringing food supplies from Guangzhou such as “prawn crackers, starch, candy and juice,” representatives noted. John Lee, speaking for Pantang Food, expressed that the event helped open new doors, noting that: “it’s a good opportunity to open the market and find demand from the Macau market for Guangzhou products.”

DSF

Transactions

Bids for new DSF warehouse received

Suspicious transactions jump 23 pct in H1

A public tender was held on Friday for the warehouse construction project for the Financial Services Bureau (DSF) to be located in Ilha Verde. The

lowest bid for the project was valued at MOP2.68 million, according to local Chinese-language broadcaster TDM Radio.

The project is expected to begin by the end of this year and a total of 18 bids were submitted through the public tender process, three of which were rejected and two which were accepted. The value of the bids ranges from MOP2.68 million to MOP5.33 million. The construction period is estimated to last for 180 days. The new warehouse will be located in between Estrada Marginal da Ilha Verde and Rua das Camélias, occupying an area of 290 square meters, including a new one-story warehouse building covering 180 square meters, according to the Land, Public Works and Transport Bureau (DSSOPT). A.L.

The number of suspicious transactions rose 22.85 per cent year-on-year in the first six months of 2016, according to data provided by the Financial Intelligence Office (GIF) to local broadcaster Radio Macau. Of the total 1,118 suspicious transactions cases, 780 cases were linked to the gaming sector, amounting to 69.8 per cent of the total, notes the broadcaster. Authorities also registered 305 suspected cases linked to financial institutions and insurance companies, as well as 33 cases linked to other entities. Altogether, 135 cases have been referred to the Public Prosecutions Office.

IACM

Infrastructure

102 fines for dripping air conditioners

Zone B to be developed into temporary parking area

The Civic and Municipal Affairs Bureau (IACM) issued a total of 102 fines in the first half of this year because of water dripping from air conditioners in public places, according to a press release from the bureau. The figures show a decrease of five per cent compared to last year. Up until mid-July of this year, IACM had issued a total of 692 improvement notices to tenants, requiring repair works to stop the issue of water dripping from air conditioners in public places. For cases where the problems had not been fixed, IACM imposed a fine of MOP600 (US$75) on tenants. A.L.

Zone B of the new land reclamation area, located on the Peninsula, will be developed into a temporary parking area for buses and heavy-vehicles, according to an announcement by the Land, Public Works and Transport Bureau (DSSOPT). The Bureau is now welcoming bids for the land formation and pavement works of the project until August 17, while the opening of tenders is scheduled for August 18. According to the DSSOPT announcement, construction on the project is expected to start during the first quarter of 2017, with a maximum duration of 210 working days.

Business Daily Monday, August 1 2016 3

Macau Trade Luxury goods still under pressure

Merchandise trade drops nearly 20 pct in H1 In the first half of the year, both exports and imports registered year-on-year decreases. Kam Leong kamleong@macaubusinessdaily.com

acau ’ s total m e rcha n di s e t ra d e value plunged by 19.4 per cent year-on-year for the first half of the year, as total imports and exports both dropped, according to the latest data released by the Statistic and Census Service (DSEC). During the first six months of the year, the city’s trade value totalled MOP38.7 billion (US$4.84 billion), a fall of 19.4 per cent compared with MOP48 billion seen a year earlier. Of the total, imports accounted for some MOP33.6 billion, while exports amounted to some MOP5.1 billion, representing a year-on-year decline of 21.1 per cent and 6.5 per cent, respectively. The merchandise trade deficit for the period widened by a further 23.2 per cent year-on-year, to MOP28.5 billion.

In addition, imports of gold jewellery fell by 23.8 per cent year-on-year to MOP2.56 billion; handbags and wallets dropped by 20.4 per cent year-on-year to MOP1.21 billion; and beauty, cosmetic and skin-care products also decreased by 10.2 per cent yearon-year to MOP1.35 billion. During the period, 36.8 per cent of the city’s imports were from the Mainland, followed by Hong Kong, France and Italy, which accounted for 8.9 per cent, 7.8 per cent and 7.7 per cent of the total, respectively. In terms of value, imports from the Mainland dropped by 21.6 per cent year-on-year to MOP12.4 billion,

while those from the European Union also decreased by 17.8 per cent yearon-year to nearly MOP8 billion.

Decreasing exports

On the other hand, exports of nontextile goods during the first half fell by 6.5 per cent year-on-year on average to MOP4.8 billion. In particular, exports of clocks and watches plunged by 32.5 per cent year-on-year to MOP534.2 million; and those of machines, apparatus and parts were also down by 21.7 per cent year-on-year to MOP482.2 million. Nevertheless, exports of electronic components during the first half surged by 46.2 per cent year-on-year to MOP576.5 million, while that of tobacco and wine also soared by 45.3 per cent year-on-year to MOP412.2 million.

The export of textiles and garments, meanwhile, fell by 6.4 per cent yearon-year to MOP354 million during the first six months. In terms of destinations, more than half of the city’s exports went to Hong Kong in the period, accounting for 58.7 per cent of the total. The value of exports to Hong Kong amounted to MOP3 billion, a decrease of 11.1 per cent compared to the same period last year. However, the export value for products destined for Mainland China increased by 4.1 per cent year-onyear to MOP890 million, accounting for 17.4 per cent of the city’s total. Other major export destinations included Japan, the European Union, the United States and the Philippines, which together received nearly 7 per cent of the SAR’s local exports.

Luxury imports fall

The city saw all of its principal merchandise imports register yearon-year declines for the six-month period, while more significant falls were apparent in luxury goods. In the first half of 2016, local imports of motor cars and motorcycles plunged by 56.7 per cent year-onyear to MOP593.4 million, while that of mobile phones and watches also declined by 47.6 per cent and 41.6 per cent year-on-year, to MOP2.3 billion and MOP1.96 billion, respectively.

Luxury product imports saw year-on-year declines for H1

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4 Business Daily Monday, August 1 2016

Macau Business Franchise businesses should target young online generation

Taking online business offline Managers of franchising associations from around the world gathered to discuss development trends in the new Internet era and explore how the industry can achieve potential growth with online-to-offline businesses. Nelson Moura nelson.moura@macaubusinessdaily.com

anagers of franchising associations from around the world attended the Franchise Expo 2016 opening day to debate the sector’s development trends for the Internet generation and how to explore business opportunities by transferring franchise businesses that only exist online to the real world. Franchising associations from Japan, Portugal, Brazil, Mainland China, Taiwan, Singapore, Hong Kong and Macau were present. “Franchising online has been a hot area for the international economy and young startups, so there are great opportunities for Macau businesses,” said Macau Trade and Investment Promotion Institute (IPIM) President Jackson Chang. Lei Iam Leng, CEO of MacaoFood Ltd., a local business, noted that e-commerce in the territory trading in products or services online - is still in its “infancy” and that more attention has to be given to developing online payments and offline-to-online business.

“Most transactions happen in mobile apps and most people access the Internet through smartphones, so the phone is more important than the wallet,” notes the businessman. “The number of mobile phones in Macau is 300,000, so can we try to encourage local people to look at Internet consumption as a habit to adopt? Online consumption is very low but we need to do it, it’s our responsibility to take Macau brands outside of Macau,” Lei stated.

Generation Z

A recurring topic at the expo was how the franchise businesses can cater to the new online generation and how data can be collected online to accumulate valuable customer information. “Generation Z has time for Netflix, Facebook and Snapchat but doesn’t have time to go to stores, their mindset is completely different from other generations,” notes Gustavo Orlandini Schifino, President of the Ethics Commission of the Brazilian Franchising Association. “They focus on pleasure, not on work or property and they like conscious consumption and sharing services,” stated Schifino.

Retail

Emperor Watch & Jewellery expects widened interim loss Emperor Watch & Jewellery Ltd is predicting a widening in its net loss for the first half of the year due to decreased revenue in the period, it announced in a filing to the Hong Kong Stock Exchange. “The Group expects to record an increase in net loss by not more than 30 per cent for the six months ended 30 June 2016 as compared to the corresponding period last year,” it wrote. The retailer explained in the filing that the expanded interim loss is due

to a decline in revenue derived from: ‘weakened consumption sentiment in Hong Kong resulting from a strong local currency and falling Mainland China visitor arrivals’. For the same period last year, the Hong Kong-listed company posted a net loss of HK$54.1 million (US$6.74 million), down from a net profit of HK$104.7 million seen in the first half of 2014, with revenue plunging by 21.1 per cent year-on-year to HK$2.4 billion in the period. K.L.

Secretary Lionel Leong at the MFE Opening Ceremony

The Brazilian representative argued that younger generations spend most of their time online and that they will represent 70 per cent of the world franchise businesses revenue in the next six years. He notes that any company planning their future franchise strategy without taking them into consideration “will be in trouble.” Amelia Wang, a Member of the Franchise Committee of the China Chain Store and Franchise Association commented that in regard to the franchise business in China “the Internet is already a way of thinking” and most franchises have an online presence, however a lot of businesses don’t know how to capitalize on that presence and are “even losing money by being online”.

“In Singapore the government motivates shoppers to use robots and decreases shop size. Recently we’ve had self ordering kiosks in McDonald’s, shops with systems to create your own Udon noodles or even nursing home rooms that use apps for families to keep track of elder relatives.” Albert Kong, Committee Member of Franchising and Licensing Association Singapore

“The Internet is all about size and branding. China is doing well because the market is very competitive and those who do well online have the right way of thinking. I believe that the next 20 years will be the golden era of the franchising business, thanks to online developments,” stated Wang. The China representative also considered that although the Macau market wasn’t “as scalable as other markets,” it offers other opportunities in online franchising. Ana Correia, founder of the MORE group from Portugal – specializing in marketing and digital communication, advised that any franchise looking to expand its brand, or buy the rights to a foreign franchise brand, should study the

online ecosystem carefully. Correia gave the example of how one of her companies “tried to enter the Brazil market using social media that wasn’t yet used in the country at the time.”

Precious customer data

A message from the Chairman of the Franchise Committee in Japan Small and Medium Enterprise Management Consultants Association, Kyo Ito, to expo attendees called attention to how often businesses can forget how easy it is to gather valuable customer information. The Japan representative stated how, unlike many Asian countries, Japan’s population declines yearly but franchises and store numbers have increased, thanks to innovation and data use. “Japan’s convenience stores are very revolutionary. They provide a lot of services with customers’ purchase information being stored - minor data that is collected about the shopper and that is sent to the head office. All this can really provide valuable data and your business needs to use the Internet in the same way,” Kyo stated.

From online to reality

Another topic of discussion at the expo was the online-to-offline (O2O) sector - drawing potential customers from online channels to physical stores - with Amelia Wang stating that in the future: “ all online businesses will have an offline presence too.” Amazon opening its first offline store in Seattle, was given as an example of how O2O is becoming important. This comes in the wake of groups such as Groupon already mass-selling wellness and beauty services online in 2008, which customers could then redeem at physical stores. Albert Kong, Committee Member of the Franchising and Licensing Association Singapore drew a parallel between the Macau and Singapore markets due to their small environment for online businesses but suggested that the MSAR could use innovation to create more O2O opportunities. “In Singapore the government motivates shoppers to use robots and decreases shop size. Recently we’ve had self ordering kiosks in McDonald’s, shops with systems to create your own Udon noodles or even nursing home rooms that use apps for families to keep track of elder relatives,” Kong stated. Ana Correia noted that Portugal is also a small market, with a lot of opportunities for development in the O2O market, highlighting some interesting marketing ideas. “Telepizza is a Portuguese pizza delivery business with an online ordering system. On Wednesdays 80 per cent discounts are available if you go to their physical shop with the idea in order to try to sell extra drinks and side dishes to the people attracted by the discounts,” Correia stated. The expo ended yesterday.

Correction In an article regarding OCBC appearing in the July 29 edition of Business Daily, the title should read as “OCBC sees y-o-y profit decrease in Q2” and the first sentence should read as “according to the company’s press release”. Business Daily apologises to the parties involved and to our readers for any inconvenience caused.

Business Daily Monday, August 1 2016 5

Macau Crime Six cases of violence against dealers in three months

Casino labour group urges blacklisting of attackers Kam Leong kamleong@macaubusinessdaily.com

he gaming labour union Macau Gaming Enterprises Staff Association says that it has received reports of at least six cases of violence against local dealers in the past three months, and is urging the city’s gaming regulator to ban protagonists of misconduct from entering casinos, according to TDM English News. At a press briefing held by the group on Saturday, a casino dealer surnamed Chio told reporters that she was physical abused by a gambler when she was on duty at a casino in Macau.

“He picked up the card as soon as I passed it to him. Not only did he crumple it but he threw it right at my face. What’s more, he slapped my face. I felt extremely humiliated and dizzy afterwards,” the broadcaster quoted her as saying. The director-general of the gaming association, Choi Kam Fu indicated that the trend for violence is increasing at local casinos. “ Th a t’ s w h y w e th i n k th e g o v e r n m e n t sh o u l d i n c r eas e monitoring efforts,” he told reporters, adding: “the authority should ban them from entering casinos if they have previously committed violent acts”. The Gaming Inspection and

Coordination Bureau (DICJ) responded by stating that they are cooperating with the Judiciary Police (PJ) to investigate the cases. The group

added that they welcome suggestions that can protect gaming workers. Meanwhile, the PJ told the broadcaster that they had received seven cases of casino dealers being physically abused this year, and all of the four suspected gamblers involved had been arrested and had their cases transferred to the Public Prosecutions Office.

Gaming

Wynn Macau’s Q2 net revenue up 3.6 pct y-o-y Annie Lao annie.lao@macaubusinessdaily.com

Wynn Macau Ltd announced a 3.6 per cent increase year-on-year in its net revenues for the second quarter of the year, reaching US$639.3 million (MOP 5.54 billion), compared to the

US$617 million seen for the same period in 2015, according to a filing to the Hong Kong Stock Exchange. Adjusted property EBITDA for the company (earnings before interest, taxes, depreciation and amortization) in the second quarter of 2016 amounted to US$190.4 million, an increase of 9.8 per cent year-on-year.

The company registered profit for the second quarter totaling US$609.8 million, a 5.2 per cent year-on-year increase. The table games turnover in the VIP segment amounted to US$11.84 billion, a 23.8 per cent decrease compared to US$15.54 billion in the same period last year.

Overall, VIP table games win as a percentage of turnover was higher than the expected range of 2.7 to 3 per cent, hitting 3.98 per cent for the quarter, while VIP tables suffered a year-on-year reduction to 183, down from 247 in the second quarter of 2015. A fall of 1.7 per cent year-on-year in the mass-market table drop brought the total to US$1.17 billion, whereas the win rate for mass table games was also higher than anticipated, at US$235.2 million – a 12.7 per cent increase from Q2 of last year.

Additional tables for Wynn Palace

Wynn Palace notes in its release that it has applied for and expects to receive approval from the local government for an additional allocation of 100 gaming tables, ‘with additional table games allocated to us post-opening,’ notes the filing. If the allocation is approved, the group will move an existing 250 table games from Wynn Macau to Wynn Palace for a total of 350 table games, leaving 270 table games at Wynn Macau. The Wynn Palace project, an integrated resort hotel in Cotai, is currently under construction and scheduled to open on August 22.

Gaming

Dynam gaming revenue up by 4 pct in Q2

Gaming

Macau Legend’s Savan Vegas sale deal delayed again Kam Leong kamleong@macaubusinessdaily.com

Casino and hotel operator Macau L e g e n d D ev e l o p m e n t L t d . ’ s acquisition of the Savan Vegas Hotel and Entertainment Complex in Laos will be further delayed until the end of this week, it announced to the Hong Kong Stock Exchange.

“As additional time is required to finalise the information and update the progress of the acquisition of [the hotel] in the circular, the despatch date of the circular will be postponed and the company expects to despatch the circular on or before 5 August 2016,’ it wrote in the filing. The operator has so far postponed the deal twice, in June and July, after

its initial announcement in May stating that it had entered into an agreement with the Laos government to purchase the hotel property, located in the Savannakhet Province, for US$42 million (MOP335.6 million). The deal between the local casino operator and the Laos government includes the right to a 50-year monopoly of casino operations in three provinces of the country, including the one where the hotel property is located. However currently, at least three lawsuits to block the deal have been filed by the hotel’s previous operator - Sanum Investments Ltd and its parent company, Lao Holdings NV. Ownership. M a n ag e m e n t o f th e Sa n u m property was taken over by the Laos government in 2012, following a seizure based on a claim that the company owed US$23 million in taxes and penalties. The authorities later appointed San Marco Capital Partners to handle the deal with Macau Legend. Sanum recently told Business Daily that the deal between the Laos government and the local casino operator was conducted ‘‘behind closed doors” and that it violated a previous settlement agreement between the company and the Laos government in 2014.

Pachinko hall operator Dynam Japan Holdings Ltd registered a slight increase of four per cent year-onyear in its gaming revenue for the second quarter of the year, totaling 37.83 billion yen (MOP2.96 billion/ US$370 million), with revenue from high-playing cost halls down marginally by 0.1 per cent year-on-year to 19.7 billion yen. According to its filing to the Hong Kong Stock Exchange, the operator’s gross pay-ins from high-playing cost halls fell by 5.1 per cent year-onyear to 126.9 billion yen, while those from low-playing cost halls jumped by 8.8 per cent year-on-year to 79.8 billion yen. In addition, gross pay-outs from the high-cost segment were also down by 6 per cent year-on-year to 107.2 billion yen. Those from the low-cost sector, however, increased by 8.8 per cent year-on-year to 61.7 billion yen. “During the first quarter, the utilization of pachinko machines has shown a downward trend and the entire pachinko industry has continued to face challenging business circumstances,” the operator noted in the filing. As at the end of June, the Japanese company was operating a total of 444 pachinko halls, of which 183 were high-playing cost halls and the other 261 were low-playing cost halls. K.L.

6 Business Daily Monday, August 1 2016

Macau Enterpreneurs

“Macau young entrepreneurs should be more creative and adventurous” Vice President of Macau Young Entrepreneurs, President of Macanese Youth Association, co-owner of a chain of restaurants, an executive at the Business Development Department of San You Development Co. Ltd and automotive engineer among many more titles, Duarte Tavares Alves shares with Business Daily his stories from the business world. He advises aspiring young Macau people to learn from others’ experiences before starting their own businesses, and encourages them to be creative and take advantage of Macau’s developing scene. The slowdown in the gaming industry will make society healthier, he says, believing that sustainable, promising, prospects lie ahead in the future. Joanne Kuai joannekuai@macaubusinessdaily.com

ou’ve been engaged in projects in various fields throughout the years. What are your latest projects? I am 33 this year. I believe that I am still at the age probably close to deciding what area I want to focus on more. Since a young age, my idea was that there is so much to learn. There’re so many different areas someone can learn about in business. There’re so many industries. Why should we focus straight away when we are 20 something? Why focus immediately on one path,

one career, especially if you want to take more of an entrepreneurial route? I have been involved in a few different projects. I worked in the gaming industry for a couple of years. I am now heavily involved in property development. On the side, I was lucky enough to have the opportunity to join San You to help out with all the projects they have. Then, with my brother, we have a few investments around in Macau and even outside. Lately, one of the latest projects, with one other partner, is the Global Language School. I have faith in it. I believe something that’s picking up in Macau is the interest in learning

languages, especially after all these years the central government and the Macau government have been focusing on Macau being the famous ‘platform’ between China and the Portuguese-speaking countries. With another group of friends, I’ve got a chain of restaurants. We have a mix of a few Japanese restaurants, a Thai restaurant, and we are opening up an Italian seafood place. That’s the F&B (food and beverage) area I’m also involved in. I have a few other things starting up that are still a secret. Hopefully, in the next couple of years, I believe something interesting will come out. Being from Macau, this is my home,

and I would love to contribute as much as I can to the development of my city, my region. From your point of view, as a young entrepreneur, what are the best businesses to be developed locally? It’s very hard to say. It depends on where you are in your career, if you are young, if you are experienced. It’s fairly easy to get started with the F&B industry and I think lately there has been a trend of very young entrepreneurs opening coffee shops, etc. which I would say is a good experience. For young entrepreneurs, you work in the F&B industry yourself. You have direct contact with the clients. It’s very hands-on. It’s a very good experience. And if you look at how the F&B side is developing in Macau, it’s getting more modern. Even the concept, it’s getting more and more creative. We are putting the creative industry in to F&B as well. But I believe for us, the young entrepreneurs, we have to be creative. We have to look for what’s missing in Macau. Macau is developing rapidly. It’s growing. People are looking at different things. So we can’t just look back and think that what succeeded before will continue to be successful.

“We are from Macau. We feel, or at least I feel, I want to be here. I am not here to make quick money and then go somewhere else. I am here to stay.” If you want to strive, you need to look at different ways. If you look around at the media side, there are companies that are growing very quickly. I have a friend who is the founder of MOME. They are everywhere. I am very proud of their achievements. That’s a prime example of someone who saw there was an area missing in media marketing in Macau and took advantage. The way he does things is not the usual conventional advertising marketing way. They try to add technology and different ideas, different concepts, different approaches, think outside the box. That’s what makes him successful. You are saying that more important than copying success stories is the mind-set… You have to be creative. It’s easy to copy what’s next door, what you have seen. For young entrepreneurs, I always think - and I am like this myself as well - it’s common for us when we finish university or our studies, we want to be our own boss and want to be an entrepreneur and open our own business. But I think it’s important to spend a few years actually working for companies and learning from other people’s experience. And one should also learn from one’s failures. You need to bump your head a few times into the wall, hit a few problems and find solutions for them. And if you can have the opportunity to work for someone who has been through that and will pass on their experience, your chances of succeeding will be much higher. My advice, for younger entrepreneurs, as I have around ten years of experience now, is: don’t be

Business Daily Monday, August 1 2016 7

Macau too eager to start up on your own so quick. You are still young. Take the opportunity to work with some other people with a lot more experience. Learn from their experience. What is the most characteristic feature the local business environment in your opinion? If you look at Macau historically, Macau is a very small place. The biggest families are well known. But it’s starting to diversify. The most traditional ways to invest in Macau are of course, property development.

“I think it’s important to spend a few years actually working for companies and learning from other peoples' experiences.” A few years ago, Macau was growing very quickly, but we are limited by the amount of land we have. There are not as many plots available as there used to be 15 years ago. It’s still a good area to invest in, because whatever is left now is prime real estate. It’s a good opportunity to invest, mainly because Macau is still growing. We are building reclaimed land. In maybe 10 to 20 years they will be ready to be developed. And of course I believe people can start thinking about society modernizing, as we are not a manufacturing-based town, because we are limited by space. So there are other areas we can invest in. We have a lot of office space. And things like technology, technology start-ups, etc. For example, we can use a lot of IT to help, to make everything much more efficient in Macau, from traffic to government operations, information about the city. There’s a lot we can do. And Macau is a very good place for you to, for example, develop an app, specifically for the tourism industry, because it’s such a small place with high rates of activity and turnaround. It’s a perfect place for you to experiment with your product. What do you perceive as the biggest challenges for young entrepreneurs running businesses in Macau? I will give you an example in F&B. If you open a restaurant, you need to commit. You have your advisers. You have experience. You think it will be OK to have an F&B license. So you put the deposit down and everything. It may take up to a year and a half, or two years before you actually open your restaurant. If you think about it, if your rent is HK$50,000 times 24 months, that would be your initial investment. You are already losing without making any money. That’s very challenging. The amount of time it takes… The licensing itself involves a lot of departments. You have the IACM [Civic and Municipal Affairs Bureau] the DSSOPT [Land, Public Work and Transport Bureau], and now also of course the Health Bureau to make sure things are fine sanitary-wise. It takes a long time. For start-ups, it’s not very straight forward for you get guidelines to tell you what the regulations are for you to build, to remodel, to renovate, to get the license for the ceiling heights. One documents says A, the other says B. I believe everything could be centralized. Not just for F&B. And then we are very short of labour and I believe it’s the same for a lot of industries. It’s difficult. Of course we want the locals to be involved but the unemployment rate is already very low. And for small enterprises, we cannot compare small companies to enterprises such as the big gaming operators. It’s not fair that we have to

fight and wait so long to get a couple of quotas to be approved when they are going by the hundreds. In that sense, it’s very hard. Sometimes we think we fulfil all the requirements, but the replies we get are not very straightforward. It’s not very easy to work around that. It’s one of the major headaches. What help could be provided? We are still developing. The policy is ‘one country, two systems’ and Macau being governed by its own people. That’s what we believe we are. But Macau, being limited by the number of people we have, for weaker sectors to develop, that will take time.

“I believe the slowdown in gaming revenue, will help calm things down.” If you look at the all the discussions we have in the Legislative Assembly, from my point of view, we are young, the legislators they don’t have experience in law-making, they may overlook things. I am not blaming people because they are not capable of doing things. It’s just that we are learning. We have to be more open-minded so that we can be more flexible so that everything happens more smoothly and we grow. What we have to be very conscious of is that we can’t stop the growth. We can’t stop the growth of the society. By working in a positive way, having an open mind-set, we need to solve problems, we need to be fair, so that we can grow. There was a comment by our Chief Executive a few days ago that ‘Macau young people need to be more involved’. I believe there are a lot of subsidies for people to study abroad and come back. I do also feel we need to be more adventurous. Personally, I left Macau to study when I was 16. I was away for 10 years. That has broadened my perspective. I came back with a different mind-set, as a different person. That’s why I have this motivation to stay in Macau and

keep working. Because I’ve been outside, I’ve seen and I think we can do the same or even better in Macau. If we work towards that direction, if everything works more efficiently, if the young people see Macau growing healthily and steadily and at a sustainable place, with an opportunity for all of us if we work hard, then Macau is a good place to be and an even better and better place to live. Has the slowdown in the gaming industry caused any concern? I’ve seen Macau grow since the handover at a very quick rate. I believe there are still some sectors of our society that are still trying to keep up with that rapid growth. When you say there is a big slump in the gaming revenues, I don’t see it that way. It’s a very small portion of our visitors that brought that amount of VIP gaming. Macau is growing too quickly, I believe. It was too much of a rapid growth. And all that can bring bad habits, in terms of how you run a company, in terms of the impact on society as well. There is suddenly too much money. It’s not healthy. That’s how I see it. I think the slowdown will make everything run more efficiently. Like for a business, it will make people think ‘what can we do to make our company more efficient and keep the profit at a good level?’ I believe it will make society more healthy. Of course for the government, it will make the system more healthy, because if inflation is rising, the government is raising the salary for public servants. What does that mean for us in the private sector? I believe it’s unheard of. Every year you raise your staff salaries six to seven per cent, the rents are going up ten per cent every year for retail, for shops. From my experience in F&B, how can we survive? Food costs are going up, labour is going up, it’s very hard to get foreign labour quotas. Hiring locals is getting very expensive. I am just left with raising the prices, otherwise how can I survive? Our F&B business, through a total of six restaurants now, the revenues have dropped 15 to 20 per cent. It’s not specifically just our restaurants. I believe it’s the market. Yet the landlord still raises our rent. People always ask for raises and they always use the

government as a reference point they are raising salaries six to seven per cent a year, we should too! As a small enterprise, it’s difficult for us. It’s very difficult. So I believe the slowdown in gaming revenue, will help calm things down. The companies will run more efficiently. I think there are more opportunities for talented locals to be involved in the gaming industry. The cost of hiring a local is far less than hiring a high-level management staff from overseas, which I think is a good idea. Something I felt when I was working in the gaming industry, I think there are a lot of talented people in Macau who can actually fight. It’s one of those things you can’t give up on. If you believe in yourself, you just have to keep working towards that direction. And I’m sure we will all be rewarded sometime. What’s needed? What we need is sustainability. To be sustainable, you can’t grow at that rate. It’s unheard of. If you grow too quickly, the chance of the bubble bursting is very high. At the level we are at now, I don’t find it alarming. If we were happy in 2010 with the revenue, why wouldn’t we be happy now? It’s a weird comparison – because I studied mechanical engineering – why do you have to make the engine much more efficient? To use less fuel but run the same distance. And I think it’s the same thing. How can we go further with the same amount? Be happier? I think what would help. With the slight drop in revenue, the housing prices are a bit lower, it’s more accessible to the local people, because in the end, people have to live somewhere. I have confidence. We don’t need to turn around. We are just making everything much more efficient so that we can have, Macau will have, or even our country will have a bright future for many years to come. We are from Macau. We feel, or at least I feel, I want to be here. I am not here to make quick money and then go somewhere else. I am here to stay. It’s my home. My roots are in Macau. We work for sustainability. I believe the young generation that’s booming have the same in mind. There are opportunities in Macau. We are here to stay.

8 Business Daily Monday, August 1 2016

Greater China Private report

Consumer products sales growth rebounds Modern trade in eastern and western China performed much better than southern and northern regions.

hinese consumer spending on fast moving consumer goods in the second quarter grew 4.6 per cent from a year ago, up from 2 per cent in the first quarter, according to a recent report. Fast-moving consumer goods (FMCG) refers to food and non-food everyday consumer products that sell quickly and at relatively low cost.

‘Continuous fast-moving consumer goods slowdown, combined with the impact of e-commerce growth in China, has pressured physical retailers into finding new solutions to drive growth’ Modern trade channels, including hypermarkets, supermarkets and convenience stores, showed a similar trend of improved growth - 1.4-per

cent growth in the second quarter compared to a decline of 0.5 per cent in the first quarter of 2016, global research company Kantar Worldpanel said in a report released late on Friday. Modern trade’s growth was most prominent in county-level cities and their surrounding urbanized counties, with their growth rates at 2 per cent and 3.9 per cent respectively. Kantar Worldpanel China measures household purchases over 100 product categories, including cosmetics, food and beverages and toiletry and household goods, through 40,000 sample families. Modern trade in eastern and western China performed much better than southern and northern regions. The eastern region grew at 2.8 per cent, helped by the strong performance of Sun-Art Group and Wal-Mart Group. Western China grew at 3.6 per cent, driven by Wal-Mart Group and Yonghui Group. U.S.-based Wal-Mart Group has seen relatively stable performance in 2016. However, other international retailers such as Carrefour, Tesco and Lotus suffered continued share erosion, resulting in the overall poor performance of international retailers. Sun-Art Group and Yonghui lead the growth among Chinese players. Sun-Art group managed to increase its shopper base through both continued

development of existing stores and incremental opening of new ones. Yonghui consolidated its position as a top-5 national retailer. Yonghui has continued to perform well in 2016 with fast growth in penetration and basket size, enabling its share to continue to exceed Lianhua Group in Q2 after first overtaking it in Q1. Continuous FMCG slowdown, c o m bi n e d w i th th e i m p act o f e-commerce growth in China, has pressured physical retailers into finding new solutions to drive growth.

According to Kantar Worldpanel, in the 52 weeks ending on June 17, total FMCG e-commerce penetration reached 49 per cent, adding another 10 percentage points from last year. Tmall and JD led online, with spending growth rates over 80 per cent. While continuing to experiment with their own e-shopping platforms, major retail chains are now seeking to bolster their performance through strategic partnerships with existing digital players. Xinhua

GDP

Taiwan returns to on-year growth The economy grew a mere 0.15 per cent in seasonally adjusted annualised terms from the previous quarter. Faith Hung and Roger Tung

Taiwan’s trade-reliant economy returned to on-year growth in the second quarter for the first time in a year as the slide in exports slowed, but global economic headwinds will keep pressure on the central bank to cut rates in the second half. The economy grew 0.69 per cent year on year in the second quarter, official data showed on Friday, better than the 0.56 per cent growth forecast in a Reuters poll. It also follows three consecutive quarters of onyear contraction in gross domestic product. The growth, however, is unlikely to change the government’s meagre full-year GDP estimate of 1.06 per cent with weak global demand maintaining pressure on the island’s central bank to trim interest rates again.

Key Points First on-year growth after three quarters of contraction Global uncertainties remain in 2016 Central bank expected to cut rate again in Sept “Although global economic growth is slow... the semiconductor industry is gaining momentum,” the Directorate General of Budget, Accounting and Statistics said in a statement. The economy grew a mere 0.15 per cent in seasonally adjusted annualised terms from the previous quarter and a 0.04 per cent seasonally adjusted quarterly rate. However, Sophie Wang, an official at the statistics agency, told a news briefing global uncertainties from Brexit and the threat of terrorism cloud the outlook for the rest of the year. The expected launch of Apple Inc’s new iPhone model later this year and typically stronger demand ahead of the Christmas shopping season are unlikely to provide much support for Taiwan’s exports in the second half of this year, some analysts said. Taiwan is a major Asian production house for global tech names such as Apple, making components for

smartphones, notebook PCs and other gadgets. Taiwan’s export orders, a gauge of global technology demand, contracted for the 15th straight month in June, though at a slower-than-expected pace while exports fell for the 17th month in a row. “Weak growth in Taiwan’s main trading partners is likely to continue to drag on export demand,” Gareth Leather and Krystal Tan, economists at Capital Economics, said in a research note. “China’s move up the value chain, which has led to Chinese companies producing more of the high-value semiconductors and other intermediate goods that were previously imported from Taiwan, will remain a drag.” Taiwan’s central bank is widely expected to cut interest rates again in its September quarterly meeting following four straight rate cuts since last September. “Taiwan will continue cutting rates because global central banks will not stop loosening monetary policy right away,” said Forest Chen, an economist at a unit of Yuanta Financial Holdings . Taiwan slashed its 2016 GDP outlook for the third time in May to 1.06 per cent, slower than the 1.47 per cent growth it had previously forecast. The 2016 export estimate was revised to a 3.65 per cent contraction, deeper than the 2.78 per cent fall predicted earlier. Reuters

Business Daily Monday, August 1 2016 9

Greater China M&A

In Brief

Fosun purchases fund manager Rio Bravo Company’s founder said the acquisition marks an important milestone in laying out Fosun’s globalisation strategy. Fosun Group said on Saturday it has agreed to buy Brazilian fund manager Rio Bravo Investimentos, in the Chinese conglomerate’s first acquisition in Latin America. Fosun did not disclose the value of the deal, but said in a statement that it expects to take advantage of the “exceptional period of change and economic renewal” taking place not only in Brazil but also in neighbouring economies. Reuters reported this week that Fosun was in advanced talks to buy Rio Bravo, citing a source familiar with the talks. . Sao Paulo-based Rio Bravo manages about 10 billion reais (US$3 billion) of clients’ money in liquid funds, real estate and private equity investments.

Its three main partners include former Brazilian central bank president Gustavo Franco, Paulo Bylik and Mario Fleck. Founded by billionaire Guo Guangchang, Fosun has grown into China’s biggest private conglomerate, with holdings ranging from medical companies to French travel group Club Med. “Brazil is geographically a conduit linking Latin America and Asia. With its own distinctive economic characteristics and large size, Brazil has a strong influence in the region,” Guo, a self-styled student of U.S. investor Warren Buffett, said in the statement. He said the acquisition marks an important milestone in laying out Fosun’s globalisation strategy of being present in important emerging economies.

Credit cards

Rio Bravo director Fleck said the deal also offers an opportunity to give its Brazilian clients a greater spectrum of financial products.

“Brazil is geographically a conduit linking Latin America and Asia. With its own distinctive economic characteristics and large size, Brazil has a strong influence in the region” Guo Guangchang, Fosun founder The Brazilian deal caps a busy week for Fosun in which it struck its first major Indian acquisition, with the US$1.3 billion purchase of KKR Co -backed Gland Pharma. Guo told Reuters in an interview in May that Fosun will be paying more attention to Russia, India, Brazil and Africa, after spending more than US$30 billion buying real estate, insurance companies and healthcare firms mostly in the developed markets. Reuters

Investment

Postal Savings Bank IPO stirs foreign interest Some fund managers, though, said they will steer clear of the deal and wait to see how PSBC shares perform post-listing. Elzio Barreto and Sumeet Chatterjee

Postal Savings Bank of China’s (PSBC) up to US$10 billion forthcoming IPO is drawing marquee foreign investors’ attention due to its clean balance sheet, sources said, though unattractive valuations may mean it will still need local cornerstone investors to succeed. Slots to meet with PSBC’s management were all snapped up this week when it held a series of meetings with investors in London, New York, Boston and in the U.S. west coast, bankers and investors directly involved in the Hong Kong IPO, expected to be the world’s biggest in 2016, told Reuters. The investors were eager to learn more about the last remaining big state-backed lender in the world’s second-largest economy to go public, they said. The strong foreign interest means that unlike most mainland listings in Hong Kong this year, PSBC’s IPO will be less reliant on purchases of the stock by Chinese state-owned cornerstone investors for the deal to succeed. It comes against a backdrop of a slowing Chinese economy and mounting worries about the health of its financial sector, with banks’ loan defaults at their highest since the global financial crisis in 2009. “We haven’t had any issue to get the highest profile, best possible investors in front of them (management) in late July,” one person familiar with the overseas road shows said. July is a typically slow month of the year when many advisers take vacations. “The road show was filled like this,” added the person, snapping the fingers. A PSBC spokeswoman declined to comment. The sources declined to be named as the discussions were

confidential. The bank has attracted interest from potential cornerstone and anchor investors, increasing hopes the listing will get done well before the U.S. presidential election in November, the sources said. Cornerstone investors buy big chunks of IPOs on a preferential basis in exchange for pledging not to sell the shares for at least six months. Their participation is viewed as a sign of confidence in an IPO.

No bargain?

Some fund managers, though, said they will steer clear of the deal and wait to see how PSBC shares perform post-listing. Valuations are a key consideration PSBC is offering its shares near 1 time its book value, while Chinese banks trade on average at 0.7 times their book value on the stock market. “They won’t sell it at a discount to book, while I can buy any of the other Chinese banks well below book value. So it won’t be a bargain at all,” said Roshan Padamadan, an equities fund manager with Singapore-based Luminance Global Fund, which holds Chinese shares in its portfolio. PSBC’s IPO advisers countered

arguments that it was pricey, saying the lender’s 40,000-plus branch network, low level of non-performing loans (NPLs) and growth potential warrant a premium valuation to its peers. PSBC’s NPL ratio of 0.81 per cent is less than half the 1.81 per cent for Chinese commercial banks, including Industrial and Commercial Bank of China Ltd and Agricultural Bank of China Ltd. ICBC’s NPLs stood at 1.66 per cent at the end of March, while AgBank’s was at 2.39 per cent.

Key Points Global funds throng PSBC meetings in New York, Boston, London Early initial interest seen helping launch IPO in two months PSBC expected top valuation a concern for some investors A comforting factor for prospective investors in the IPO would be that a group of pre-IPO investors, including UBS Group, JPMorgan and Canada Pension Plan Investment Board paid 1 times book when they invested US$7 billion in PSBC last year. “People want to get comfortable with the investment, but they’re doing their homework, asking lots of questions,” said another person directly involved in the listing. “Because of the sheer size of the deal and the bank, people are giving it the benefit of the doubt, they’re engaging.” Reuters

Bank card transactions soar in 2015 China’s bank card market continued to expand rapidly, with transaction volume soaring 86.9 per cent year on year in 2015, the latest data showed. Bank card transactions hit 1,420.8 trillion yuan (US$214 trillion) last year, according to a report released by the China Banking Association. Chinese banks issued 640 million new cards in 2015, bringing the total to 5.6 billion, or more than four cards per person, the report said. While the industry continued to grow, potential credit risks remained low. Outstanding loans on credit cards overdue for half a year or longer reached 38 billion yuan. Sector data

Major cultural businesses increasing Chinese major cultural industry firms raked in more than 3.6 trillion yuan (about US$540 billion) of revenues in the first half of 2016, official data showed Friday. The figure, without adjusting for inflation, reflects a year-on-year increase of 7.9 per cent, according to the National Bureau of Statistics (NBS). The NBS tracks 48,000 companies with annual sales over 2 million yuan and commercial enterprises with annual sales over 5 million yuan. China’s cultural industry saw its 10 sectors report revenue increases in H1, including six sectors engaged in cultural services and four in manufacturing of cultural products, NBS data showed. Dumping

Authorities criticize EU anti-dumping duties The European Commission’s imposition of heavy antidumping duties on Chinese steel bars is “unjustifiable protection for the EU steel industry,” the official Xinhua news agency reported, citing a statement from the Ministry of Commerce (MOFCOM). MOFCOM expressed regret that the move came just weeks after a Group of 20 nations meeting in Chengdu, China, where finance ministers had committed to avoid protectionism. China’s steel industry, swamped in overcapacity yet a major employer, has struggled to meet capacity reduction targets, and rising prices for steel have encouraged producers to ramp up production for export. Funding

Industrial Bank to boost capital Chinese commercial lender Industrial Bank Co Ltd plans to raise up to 26 billion yuan (US$3.9 billion) in a private placement of shares to shore up its capital in the face of a slowing domestic economy. Industrial Bank, based in the south-eastern province of Fujian, plans to issue up to 1.72 billion domestically listed A-shares at 15.10 yuan apiece, it said on Friday in a filing to the Shanghai stock exchange. “Competition among commercial banks in China is intensifying and it is becoming ever so important that banks ensure their capital base is strong,” the lender said.

10 Business Daily Monday, August 1 2016

Greater China Cooperation

UK and Mainland regulators discuss financial framework The formal cooperation between regulators signals that the financial projects at least are going ahead. Michelle Price

ritish a n d C h i n e s e securities watchdogs are discussing an agreement that will pave the way for landmark financial services projects between the countries, sources said, easing fears that Britain could be a less attractive partner for such deals after last month’s vote to leave the European Union. Britain’s Financial Conduct Authority (FCA) and the China Securities Regulatory Commission (CSRC) are cooperating on a regulatory framework for a scheme for distributing fund products in each other’s jurisdiction and a proposed London-Shanghai link for trading shares, two people with direct knowledge of the matter said. Britain, home to the EU’s biggest finance sector, has been pushing in recent years to deepen its financial services ties with China, which has agreed to these and other crossborder financial services schemes as part of the UK-China Economic and Financial Dialogue (EFD) programme. The UK’s former Chancellor George Osborne and Chinese vice premier Ma Kai said at last September’s EFD meeting in Beijing that they would explore the creation of a LondonShanghai equity link and mutual funds recognition scheme, but neither government has provided further details. Th e r e a r e, h o w ev e r, o th e r complications in the economic links between the two countries since the EU vote ended the premiership of Britain’s David Cameron, who along with Osborne had been keen to develop cooperation with Beijing. New Prime Minister Theresa May stepped in on Friday to delay a planned Chinese investment in a

new British nuclear plant to review security concerns, a former colleague and a source said on Saturday. Vince Cable, who was business secretary from 2010 to 2015, also told BBC Radio that during Cameron’s tenure May had made “quite clear she was unhappy about the rather gungho approach to Chinese investment”. Even so, the formal cooperation between the FCA and CSRC signals that the financial projects at least are going ahead, with one source saying the discussions had remained “very positive”. Some market watchers had raised concerns that leaving the EU, which puts in doubt the UK’s future access to the trading bloc and its “passports” to provide financial services there, could scupper such projects by limiting their potential scope and appeal. “So far none of the cross-border exchange initiatives has been derailed by the risk of Britain leaving the

European economic area and the associated passporting rights,” said Frederic Ponzo, managing partner at financial services consultancy GreySpark Partners in London. “What is clear is that the CSRC and the FCA will not stop cooperating after the vote to leave the EU,” he added.

Key Points Plans for funds, equity link schemes progressing despite Brexit FCA and CSRC closely cooperating on regulatory framework Details on regulatory agreement may be announced in the autumn A second source said the FCA and CSRC were exploring a regulatory agreement similar conceptually to a memorandum of understanding (MOU) inked by the CSRC and the Hong Kong Securities and Futures Commission (SFC) prior to the launch of the Hong Kong-Shanghai stock

trading link in November 2014. The Hong Kong-China MOU created a framework for policing the scheme, including sharing trading data and coordinating on investigations, although it was not clear if a UKChina cooperation would be as far reaching, the sources said. Details of the regulatory agreement may be announced at the next EFD meeting in the Autumn, though this has not been decided yet, both sources said. One said the UK and China may also unveil cooperation on so-called “fintech” initiatives. Both said, however, that Britain and China did not expect to announce any major new financial services initiatives at this year’s EFD meeting, the date for which has not been set but will likely be held in October or November in Britain, a third source said, while both countries analyse the implications of Britain’s exiting the EU. The FCA declined to provide comment. The CSRC, UK Treasury and Chinese Ministry of Finance did not respond to requests for comment. Reuters

HKMA

Hong Kong cases of negative home equity fall Some Mainlanders who were big purchasers of luxury flats have less money and Hong Kong businesspeople are also being squeezed. Clare Baldwin

The number of cases in Hong Kong where a home is worth less than the amount paid for it eased slightly in the latest quarter, the Hong Kong Monetary Authority (HKMA) said on Friday.

Negative home equity totalled H K $ 4 . 4 5 b i l l i o n ( U S $ 5 7 3 . 74 million) at the end of June, a drop of 9.5 per cent from the end of March. The amount that was unsecured was HK$157 million, which was also less than in March.

These figures are still significantly higher than at the start of 2016. Data from the de facto central bank showed the number of homes in negative equity was 1,307 at the end of June, compared with 1,432 at March 31. There were only 95 such homes at the end of December. The economic slowdown in China has put pressure on Hong Kong, one of the world’s priciest property markets, making some fear a dramatic decline in the sector accounting for almost one-fifth of the city’s economy.

Rating agencies and others say the HKMA data might not give the full picture. Its negative home equity data only includes mortgages from authorized institutions to first-time home buyers in situations where the lender is aware that the loan is underwater. Some buyers also take high-interest loans from unregulated finance companies.

‘Hong Kong Monetary Authority said home mortgage loan approvals dropped 3.2 per cent in June compared with May’ In the first quarter of this year, Hong Kong’s economy contracted 0.4 per cent from a year earlier. Secondquarter growth data for the Asian financial hub is due on Aug. 12. In a separate statement on Friday, the HKMA said home mortgage loan approvals dropped 3.2 per cent in June compared with May, to HK$22.3 billion. The number of mortgage applications also dropped. Data from the city’s Rating and Valuation Department showed home prices were flat in June while rents increased 0.5 per cent from May. Reuters

Business Daily Monday, August 1 2016 11

Asia Key Points June industrial output -0.2 pct s/adj m/m (Reuters poll +0.2 pct) Semiconductors cap output fall, autos sag Offshore uncertainties spell trouble ahead July numbers likely to be poor -ministry official

Official data

South Korea industrial output slips Service sector output rose by 1 per cent in seasonally adjusted terms in June on-month.

outh Korea’s industrial output in June missed expectations to fall slightly, government data showed on Friday, and exports are seen as unlikely to rebound from their current record falling streak - the longest on record. Industrial output fell by a seasonally adjusted 0.2 per cent in June from May, lagging a median 0.2 per cent gain forecast in a Reuters survey of analysts and sagged far below a revised 2.5 per cent rise in May. On an annual basis, industrial output rose 0.8 per cent in June after a revised 4.7 per cent gain in May,

outperforming a median 0.5 per cent incline tipped in the same survey. May figures were strong because of a one-off base effect due to a Middle East respiratory syndrome outbreak in May 2015. A finance ministry official’s c o m m e n ts s u gg est e d that i n government circles the fall may have been expected. “While the fall was smaller than what we had in mind, the figure relied heavily on semiconductors when most other industries struggled,” a finance ministry official said, adding that factory output for July may be weak.

Stephen Lee, an analyst at Samsung Securities, believes rate cuts are in play for September or October as exports may fall further in the next few months. “Not immediately in their August meeting, but (the Bank of Korea) could wait another month and take action in September or October,” he said. The central bank’s monetary policy board will next meet on August 11 to review its policy rate, currently at a record low of 1.25 per cent. For Huh Jae-whan, economist at Mirae Asset Daewoo Securities, falling industrial output and exports add to pressure on the Bank of Korea to cut. “We feel it will be difficult for exports to recover in earnest by year-end and this, in addition to the

on-going corporate restructuring, will pressure the central bank to cut rates again,” he said. Output of semiconductors jumped 11.1 per cent from a month earlier, while production of automobiles and transportation equipment fell 2.5 per cent and 6.1 per cent respectively. Service sector output rose by 1 per cent in seasonally adjusted terms in June on-month, posting the fastest jump since December and saving the overall output figure from falling further. A combination of uncertainties including Brexit and South Korea’s on-going corporate restructuring at home spelled trouble for South Korea’s growth in the months ahead, the finance ministry said in a statement following the factory output report. Factory utilisation fell 1.3 per cent in June from a month earlier after rising 2.4 per cent in May. Reuters

Economic guideline

Myanmar government launches thin policy The private sector has increasingly questioned the ruling party's commitment to business. Shwe Yee Saw Myint and Timothy Mclaughlin

Myanmar’s government released a long-awaited economic policy on Friday, but the document was noticeably light on specifics and will likely do little to ease the concern of businesses that have grown frustrated with the lack of a detailed plan. At just three pages, the policy, launched by the Ministry of Planning and Finance in the capital, Naypyitaw, comes some eight months after Aung San Suu Kyi’s National League for Democracy (NLD) won a resounding victory in a November election. The paper broadly outlined 12 policies ranging from prioritizing labour-intensive enterprises to the privatization of some state-owned ones, but it lacked detail or plans for how to accomplish the goals. “To create human resources w hi ch w i l l b e c o n d u ci v e t o economic development and to develop technologies and vocational education,” the government said in one of the points. Maung Maung Win, deputy minister of finance and planning,

told Reuters the policy document was an “overview”, and that more detailed plans on specific areas of the economy would be released in future. But he said he did not know when. “I cannot say the specific date,” he said. “It will come, it will come.” As well as NLD members and ministry officials, diplomats and representatives of international aid groups attended the launch. Han Tha Myint, a senior NLD member, said that those in attendance were hoping for more insight as to how the government planned to promote business and boost the economy in the impoverished country of 51 million. “They are asking for details, it is very vague,” he said. “There are no specifics, objectives or those things.” Members of the media were barred from attending. Dr Sid Naing, country director for the Marie Stopes international healthcare group, who also attended, said many people were disappointed about the lack of specifics. The private sector has increasingly questioned the NLD’s commitment

to business as Suu Kyi, the country’s leader, has focused her efforts on the country’s complex peace process. Since April, the government has approved just 19 foreign and domestic investment projects after a two-month delay in reforming an investment commission that lead to

a backlog of more than 100 projects. On Friday, Suu Kyi met members of two ethnic minority armed groups, including members of the United Wa State Army, believed to be the largest and most powerful such group in the country. The Wa, who control large swathes of land on the Myanmar-China border, have largely sat out the peace process started by former President Thein Sein. Reuters

Suu Kyi, the country’s leader, has focused her efforts on the country’s complex peace process

12 Business Daily Monday, August 1 2016

Asia In Brief Central bank

Indonesia sees 2016 GDP at 5.09 pct Indonesia’s central bank governor said the economy may grow by 5.09 per cent in 2016, with growth in the third quarter seen at 5.2 per cent. Bank Indonesia’s outlook for growth in the April-June quarter, due to be announced on August 5, remains 4.94 per cent, Governor Agus Martowardojo said. A successful tax amnesty programme will improve economic growth in 2017, he said, adding that if the programme attracts enough capital flows, “we will use the room we have for monetary easing.” State fund investigation

U.S. authorities subpoena Goldman in 1MDB probe U.S. authorities have issued subpoenas to Goldman Sachs Group Inc for documents related to the bank’s dealings with scandal-hit Malaysian state fund 1MDB, the Wall Street Journal reported late on Friday. Goldman received the subpoenas earlier this year from the U.S. Department of Justice (DoJ) and the Securities and Exchange Commission (SEC), the Journal reported, citing a person familiar with the matter. The authorities also want to interview current and former Goldman employees in connection with the inquiries, but none of those meetings had occurred by Friday, WSJ said. Results

ICICI Bank profit falls as bad loan provisions surge ICICI Bank Ltd, India’s top private sector lender by assets, reported first-quarter profit fell about 25 per cent as its provisions for bad loans more than doubled. Standalone net profit fell to 22.32 billion rupees (US$333 million) for its fiscal first quarter to June 30, from 29.76 billion rupees a year earlier, the bank said. The profit was, however, ahead of analysts’ expectations of 21.99 billion rupees. Indian banks have seen their bad loans surge after an asset quality review ordered by the Reserve Bank of India, which has set a March 2017 deadline for a sector clean-up.

Monetary move

Bank of Japan eases policy by doubling ETF buying The BOJ left unchanged the 0.1 per cent interest it charges on a portion of excess reserves that financial institutions park with the central bank. Leika Kihara

he Bank of Japan (BOJ) expanded stimulus on Friday by doubling purchases of exchange-traded funds (ETF), yielding to pressure from the government and financial markets for bolder action, but disappointing investors who had set their hearts on more audacious measures. The central bank, however, said it will conduct a thorough assessment of the effects of negative interest rates and its massive asset-buying programme in September, suggesting that a major overhaul of its stimulus programme may be forthcoming. BOJ Governor Haruhiko Kuroda said the bank was conducting the review not because its policy tools have been exhausted but to come up with better ways to achieve its 2 per cent target - keeping alive expectations of further monetary easing. “I don’t think we’ve reached the limits both in terms of the possibility of more rate cuts and increased asset purchases,” Kuroda told reporters after the policy meeting. “We will of course consider what to do in terms of monetary policy steps, based on the outcome of the assessment.” At the two-day rate review that ended on Friday, the BOJ decided to increase ETF purchases so its total holdings increase at an annual pace of 6 trillion yen (US$58 billion), up from the current 3.3 trillion yen. The decision was made by a 7-2 vote. But the BOJ maintained its base money target at 80 trillion yen, as well as keeping to the existing pace of purchasing other assets including Japanese government bonds. It left unchanged the 0.1 per cent interest it charges on a portion of

excess reserves that financial institutions park with the central bank. “The BOJ did not live up to expectations,” said Norio Miyagawa, senior economist at Mizuho Securities. “Increasing ETF purchases makes no contribution to achieving 2 per cent inflation. The BOJ won’t admit it, but it has reached the limits of quantitative easing and negative rates.”

Key Points BOJ keeps base money target unchanged Tops up ETF buying to 6 trln yen from 3.3 trln yen BOJ maintains pace of buying for JGBs, other assets Promised reassessment spurs talk of further easing BOJ can still deepen negative rates, buy more JGBs-Kuroda By coordinating its action with the government’s promised US$272 billion economic stimulus spending package, the BOJ likely aimed to maximise the effect of its measures on an economy that is struggling to escape decades of stagnation. “Japan is conducting a powerful mix of flexible fiscal policy and quantitative easing,” Kuroda said. “The government’s stimulus package helps reinforce this drive and is timely in achieving sustainable growth with price stability.”

More stimulus coming?

The BOJ maintained its rosy inflation forecasts for fiscal 2017 and 2018 in a quarterly review of its projections. It also left intact its timeframe for

hitting its 2 per cent price growth target, but warned that heightening uncertainties could cause delays. Kuroda justified Friday’s slight easing as aimed at preventing external headwinds, such as weak emerging market demand and Britain’s vote to leave the European Union, from hurting business and household confidence. But analysts say pressure from the government and markets was largely behind the move. Japan’s economy minister lobbied for more BOJ action in the wake of Prime Minister Shinzo Abe’s announcement of a bigger-than-expected 28 trillion yen stimulus package on Wednesday. “The BOJ seems to have had no choice but to ease policy this time as markets had factored in fresh stimulus measures significantly. In addition to that, there seems to have been political pressure,” said Tsuyoshi Ueno, senior economist at NLI Research Institute. Worried about their dwindling policy options, some BOJ policymakers have expressed doubts over the feasibility of expanding an already massive stimulus programme that has failed to boost inflation. Such concerns may be addressed when the BOJ conducts an assessment of the effect of its current policies at its next rate review on September 20-21, though Kuroda ruled out the chance of modifying the price target or the timeframe for hitting it. He stressed that there was still more room to deepen negative rates or expand bond purchases. Some analysts say the review may lead to more radical steps being proposed. “What’s noteworthy is that the BOJ has promised to review the effects of its policy at its next meeting, keeping alive expectations of further easing,” said Shunsuke Yamada, chief Japan currency strategist at Bank of America Merrill Lynch. “This makes the next meeting very important. The yen is likely to be volatile until then.” Reuters

GDP

Singapore growth to pick up in 2017 Singapore’s economic growth is expected to accelerate next year, supported by accommodative fiscal and monetary policies, but the weak global outlook remained a risk, the International Monetary Fund said. In its latest “article IV” assessment of Singapore’s economy, the IMF said growth was expected to slow to 1.7 per cent this year from 2 per cent in 2015, but will pick up to 2.2 per cent in 2017. “Economic activity will be supported by accommodative policies, along with low energy prices and the on-going global recovery,” the Fund said in a statement late on Friday.

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Business Daily Monday, August 1 2016 13

Asia Oil industry

Private bank clients may lose big amid Singapore’s credit woes Such entities accounted for almost half of investments into Singapore dollar corporate debt in 2014. Saeed Azhar and Aradhana Aravindan

Clients at Singapore’s private banks are likely to feel much pain from credit woes in the oil and gas sector after snapping up high-yield bonds in recent years, bankers say - a risk highlighted by the failure of oilfield services firm Swiber Holdings. Oil and gas services firms have aggressively tapped the local bond market, particularly in 2013 and 2014, but a subsequent collapse in oil prices, tumbling charter rates and delays to projects has sent the industry reeling.

w ha m m y f o r p ri vat e w ea l th investors,” Todd Schubert, managing director, fixed income research at Bank of Singapore, OCBC’s private banking arm. “In the first place, the financial position of some of the companies deteriorated and secondly if they wanted to reduce their positions or get out, there isn’t the liquidity there in the market to give them bids in a lot of these names.” Energy and offshore marine

companies in Singapore have bonds totalling nearly S$1.2 billion (US$880 million) due to mature over the next year and a half, according to IFR, a Thomson Reuters publication. Some of the firms seeking to relax covenants have been clearly struggling to service their debt, said a local debt capital markets’ banker, declining to be identified as he was not authorised to speak to the media. “These guys had cash but not enough cash generation, their ICR (interest rate cover) was under stress,” he said. Private banks accounted for almost half of investments into Singapore dollar corporate debt in 2014, a central bank report said last year.

During 2014, energy-related bond issuance accounted for 17 per cent of total issuance, according to research from Bank of Singapore, although it has declined sharply since then. Debt at individual firms can be quite sizeable. Swiber alone has five bonds with a combined value of S$551 million (US$408 million) including debt of 450 million yuan ($68 million) and S$150 million in Islamic bonds, that mature in 2016, 2017 and 2018. Singapore’s biggest lender, DBS Group Holdings on Thursday disclosed it had S$700 million exposure to Swiber while the citystate’s two other top banks have flagged concerns about loans to the sector. Reuters

Key Points Singapore private bank clients are major holders of corp debt Oil and gas service firms have aggressively tapped bond market Swiber failure highlights risk of these investments In addition to Swiber’s announcement on Thursday that it had filed for liquidation facing hundreds of millions in debt, smaller firm, Technics Oil & Gas Ltd was placed under judicial management this month. A number of firms have also sought bondholder consent to relax covenants such as those relating to waivers for potential noncompliance, banking sources said, adding that investors have had a hard time reducing their exposure. “It has been sort of a double

Singapore’s financial district

Real state

New Zealand building boom to help cool property Concerned by rising house prices, the central bank has introduced macro-prudential tools to alleviate house price inflation. Rebecca Howard

New Zealand’s construction boom led to a 35 per cent surge in building consents in the year to June, soothing concern over rising house prices to reinforce expectations that the central bank will reduce interest rates further. The Reserve Bank of New Zealand held interest rates at 2.25 per cent at its June review while voicing strong concern about rising house prices. Economists, however, are now expecting it to cut rates to 2.00 per cent at a policy review on August 11.

“New Zealand is in the midst of the largest building boom ever” Nick Smith, Building and Housing Minister The building consent figures released on Friday came hard on the heels of a report showing construction activity in 2015 topped an all time high of NZ$31 billion (US$22.02 billion) and was projected to reach NZ$37 billion next year. “New Zealand is in the midst of the largest building boom ever,” Building and Housing Minister Nick Smith

said after the government posted the latest numbers. On the month, residential dwelling consents were up 16 per cent nationwide, the strongest since June 2004. A surge over the past year has been driven by a massive increase in consents for apartments in Auckland, New Zealand’s largest city. Concerned by rising house prices, the central bank has introduced

macro-prudential tools to alleviate house price inflation and recently introduced new mortgage lending curbs in a bid to take some heat out of the market. House prices in June were 43 per cent higher than a previous market peak in 2007 and up 13.5 per cent on the year, according to government property appraiser Quotable Value. The central bank has consistently said the real solution lies in increased supply to meet demand pushed higher by a record level of migrants. “The lift in June consents is an encouraging sign that building demand is continuing to grow,” said ASB Senior Economist Jane Turner.

Earlier this week the Auckland City Council unveiled a new plan for housing that, if approved, will see much higher density housing in the nation’s largest city. The plan estimates some 13,000 homes will be built in Auckland next year. There are worries about inflationary pressures in the construction sector, however, due to shortages of skilled labour. A survey from the New Zealand Institute of Economic Research earlier this month indicated that construction firms intend to invest and hire more. Their plans could be hampered, however, as firms also reported the shortage of skilled labour was at its most acute since 2003. Reuters

14 Business Daily Monday, August 1 2016

International In Brief Outlook

UK firms expect growth to stagnate British businesses expect economic growth to grind almost to a halt over the next three months due to weaker investment and consumer confidence after June’s vote to leave the European Union, the Confederation of British Industry said yesterday. The CBI said the outlook was the weakest since December 2012 as the proportion of firms expecting lower output was now 3 percentage points higher than the share expecting growth. This marked a sharp turnaround from June, when there was a 16 percentage point margin in favour of those anticipating growth. Trade agreement

Argentina, Mexico deepen economic accord The presidents of Argentina and Mexico agreed to deepen a pre-existing commercial accord on Friday, in a bid to set the groundwork for a bilateral free trade agreement. The ACE 6, as the treaty is called in Spanish, lowers tariffs on some products and includes a number of principles regulating trade. It has been in effect since 1987, though leaders have attempted to renegotiate aspects in recent years. “Starting from the deepening of the ACE 6, we hope to have a free-trade agreement next year,” Argentine President Mauricio Macri said at the Argentina-Mexico Economic Forum in Buenos Aires.

GDP

Inventory reduction curbs U.S. economic growth Business spending has been hurt by cheap oil, which has squeezed profits in the energy sector, forcing companies to cut capital spending budgets.

.S. economic growth unexpectedly remained tepid in the second quarter as inventories fell for the first time in nearly five years and business investment weakened further, offsetting robust consumer spending. Gross domestic product increased at a 1.2 per cent annual rate after rising by a downwardly revised 0.8 per cent pace in the first quarter, the Commerce Department said on Friday. In addition, the GDP growth estimate for the fourth quarter was cut by five-tenths of a percentage point to a 0.9 per cent rate. The three straight quarters of growth rates around 1 per cent suggest a significant loss of momentum that puts the economy at the risk of stalling, but economists expect an acceleration in the second half against the backdrop of strong consumption. Though the inventory drawdown weighed on GDP growth, that is likely to provide a boost to output in the coming quarters as businesses order merchandise to restock depleted warehouses. Excluding inventories, GDP growth

rose at a 2.4 per cent rate and domestic demand increased at a 2.7 per cent pace. Economists had forecast the economy growing at a 2.6 per cent rate in the second quarter after a previously reported 1.1 per cent expansion pace in the January-March quarter. Economists believe other drags to growth during past quarters, including lower oil prices and a strong dollar, are fading. While growth is expected to rebound in the second half, expansion for 2016 will probably fall short of 2 per cent.

Robust consumer spending

Consumer spending, which makes up more than two-thirds of U.S. economic activity, increased at a 4.2 per cent rate - the fastest since the fourth quarter of 2014 and accounting for almost all the rise in GDP growth in the second quarter. Although that rate of growth is probably unsustainable, a tightening labour market, rising house prices and still higher savings should underpin spending for the rest of 2016. In the second quarter, income

Bank tests

BCP says stress test results positive Portugal’s largest listed bank, Millennium BCP, said on Friday it obtained “clearly positive” results in the latest stress test by the European Central Bank, even as it posted a first-half loss after impairments for bad loans to clean up its books. BCP, whose shares have lost over 60 per cent of their value so far this year due, in a large part, to concerns about its capital needs, said in a statement that its common equity Tier 1 phased-in ratio was 7.2 per cent under the adverse scenario, up from 2.99 per cent in a stress test carried out in 2014. Oil negotiation

Libya reach deal to reopen ports Libya’s U.N.-backed government has signed a deal with an armed brigade controlling the major Ras Lanuf and Es Sider oil ports to end a blockade and restart exports from the terminals shut down since December 2014. Reopening the ports would be a huge step for the North African state, which since the 2011 fall of Muammar Gaddafi has slipped into chaos that has cut its oil output to less than a quarter of pre2011 levels of 1.6 million barrels per day. No specific date was set for restarting exports.

at the disposal of households after adjusting for inflation increased at a US$13.92 billion rate from US$13.81 billion early in the year. A separate report from the Labour Department on Friday showed labour costs increasing at a steady 0.6 per cent rate in the second quarter, matching the prior quarter’s rise. Business inventories fell US$8.1 billion in the second quarter, the first drop since the third quarter of 2011, after increasing US$40.7 billion in the first quarter. Inventories sliced off 1.16 p e rc e n tag e p o i n ts f r o m G D P growth, the largest drag in more than two years. It was the fifth straight quarter that inventories weighed on output. The inventory drawdown was almost across the board, with big declines in farm, manufacturing and wholesale stocks. Some economists said the inventory drop probably reflected a more accurate accounting by the government for oil and gas industry stocks during the period when prices were plunging. Business spending on equipment contracted for a third consecutive quarter, the longest stretch since the 2007-2009 recession, though the pace of decline slowed. Business spending on equipment fell at a 3.5 per cent rate after declining at a 9.5 per cent pace in the first quarter. Investment in non-residential structures, which include oil and gas wells, declined at a 7.9 per cent pace in the second quarter after rising at a 0.1 per cent rate in the prior period. Outside the oil sector, economists say uncertainty over global demand and the upcoming U.S. presidential election are also making companies cautious about spending. Investment in residential construction and spending by the government fell, but economists expect a rebound. Despite the lingering effects of the dollar’s rally and weak global demand, trade contributed two-tenths of a percentage point to GDP growth. Reuters

Economic activity

Euro zone growth slows in quarter before Brexit The slowdown of the euro zone economy may strengthen the case for further stimulus from the European Central Bank. Francesco Guarascio

Economic growth in the euro zone slowed in the second quarter as uncertainty before the British vote to leave the European Union swirled, data showed on Friday, and economists said it could be a sign of future weaker growth. Gross domestic product (GDP) in the 19 countries sharing the euro rose 0.3 per cent quarter-on-quarter in the April-June period, halving from the 0.6 per cent growth in the first quarter of the year, European statistics office Eurostat said. A slowdown was expected after the strong euro zone growth in the first three months of the year, but it may have been compounded by the uncertainty preceding the 23 June British referendum. Although first confidence data after Brexit showed unexpected optimism in the euro zone, the economic impact of Britain’s decision to leave the union may be felt later. “The third quarter started on a good footing, but it is probably too soon

to start downplaying the potential negative impact of Brexit on euro zone growth,” said Peter Vanden Houte, economist at ING bank. After the Brexit referendum, the European Commission and the European Central Bank slightly revised down their forecasts on euro zone GDP growth this year and in 2017.

Key Points GDP growth halved to 0.3 pct in second quarter Economists see possible further slowdown of euro zone growth Inflation nudges up in July to 0.2 pct, still far from targets Beyond Brexit, weaker global trade and the lower positive impact of tailwinds may contribute to a further slowdown of the euro zone economy in the coming months. “We think that this slowdown in growth is a sign of things to come,”

Jack Allen at Capital Economics said. “We think euro zone GDP growth will slow further over the rest of the year,” he added citing the fading positive impact of low oil prices and the weak euro as causes for the possible further slowdown. The GDP preliminary estimates released by Eurostat did not include data on individual euro zone countries, but figures released earlier on Friday by the French statistics office showed a worse-than-expected flat growth in the second largest economy of the bloc. The disappointing French reading was due to weak consumer spending and a drop in business investment. The slowdown of the euro zone economy may strengthen the case for further stimulus from the European Central Bank, which has already cut its deposit rate to minus 0.4 per cent and buys 80 billion euros (US$88.5 billion) of assets per month in a bid to counter ultra-low inflation in the currency bloc. First estimates on euro zone inflation released on Friday by Eurostat showed a slight rise to 0.2 per cent in July from 0.1 per cent the previous month, but still far away from the ECB target of a rate close to 2 per cent, while core inflation remained stable. Reuters

Business Daily Monday, August 1 2016 15

Opinion Business Wires

The Times Of India At least 15 banks, both from public and private sectors, are ready to roll out the unified payments interface (UPI) starting yesterday. The UPI system is a kind of e-payment which can be authenticated using mobile phones. Existing bank apps can be UPI-enabled or have UPI apps. Customers can have a single virtual identity for a bank account through which they can make and receive payments digitally. The Reserve Bank of India had formally launched the system in April this year. At this moment, 17 banks are in advanced stage of rolling out the service.

What’s new about today’s low interest rates? Taipei Times President Tsai Ing-wen should make concrete promises to pass Aboriginal transitional justice legislation and protect hunting and other rights, Aboriginal activists said on Saturday, as hundreds of protesters descended on Taipei, days prior to a widely anticipated official apology to Aborigines today. Tsai has promised to issue an official apology to Aborigines for historic injustices on the nation’s Aboriginal Day. Details of a planned Aboriginal transitional justice commission overseen by the Presidential Office are also to be announced, with the Democratic Progressive Party promising to pass legislation to implement the Aboriginal Basic Act.

Philstar DBS Bank Ltd of Singapore sees (Philippines’) inflation breaching the lower end of the full-year two to four per cent target of the Bangko Sentral ng Pilipinas (BSP, pictured) due to higher food prices. DBS economist Gundy Cahyadi said inflation likely kicked up to 2.1 per cent in July from a 14-month high of 1.9 per cent last June amid the continued rise in food prices. “Inflation is set to continue ticking higher towards the year-end, partly due to the low base effects as well as pressure from food prices,” he said.

The Korea Herald Equity assets owned by Samsung Group Chairman Lee Kun-hee and his wife soared 1.6 trillion won (US$1.4 billion) in the past seven months helped by gains in its chip making affiliate, an industry tracker said yesterday. The value of equity assets, including shares in Samsung Electronics Co., held by the Samsung chief and his wife, Hong Rahee, jumped 13 per cent to 14.13 trillion won as of July 29 from 12.51 trillion won on January 4, data provided by Chaebul. com showed. The sharp gain in their combined equity assets was largely due to a rebound in the share prices of Samsung Electronics this year.

day seldom passes without articles appearing in the financial press pondering why interest rates have remained so low for so long. This is one of those articles. So let’s start by clarifying whose and which interest rates are low and what is and isn’t novel or unprecedented. Interest rates in emerging and developing countries are importantly affected by what happens in the world’s largest economies, and the on-going multiyear low-interest-rate cycle has its roots in the United States, Europe, and Japan. Low rates are predominantly the advanced economies’ “new normal.” Interest rates (short and long maturities) had been trending lower in most of the advanced economies (to varying degrees) since the 1980s, as inflation also fell sharply. In the years prior to the 20082009 financial crisis, former US Federal Reserve Chairman Ben Bernanke repeatedly stressed the role of a global “saving glut” (notably in China) to explain lower rates. More recently, former US Treasury Secretary Lawrence Summers argued that “secular stagnation,” manifested in sustained lower investment and growth in many advanced economies, has been a major force driving down rates. These hypotheses (which are not mutually exclusive) are especially helpful in understanding both why rates were drifting lower prior to the crisis and why the downturn has persisted. The financial crisis ushered in a new source of downward pressure on interest rates, as monetary policy turned emphatically accommodative. The US Federal Reserve led the charge among central banks, acting fast and aggressively in response to the global turmoil, by relying on a near-zero policy rate and massive asset purchases (so-called quantitative easing). In the post-crisis era, the Bank of Japan and the European Central Bank – both under new leadership – followed suit. Negative nominal policy interest rates are a more recent phase of these policies. Since 2010, I have been emphasizing the key role played by policy in keeping rates low in a postcrisis era characterized by large overhangs of public and private debt in the advanced economies and a tendency toward deflation. This combination potentially weakens financial, household, and government balance sheets. In other words, interest rates have been low, and remain low, because policymakers have gone to great lengths to keep them there. The policy mix has combined a “whatever it takes” approach to keeping policy interest rates low (and sometimes negative) with a heavier dose of financial regulation. If central banks were to act credibly to raise interest rates substantially (for whatever reason), they would not lack the tools or ability to do so. In this unlikely scenario, market expectations would adjust accordingly and rates would rise (saving glut and secular stagnation notwithstanding).

“

Carmen Reinhart a Professor of the International Financial System at Harvard University’s Kennedy School of Government

The behaviour of real (inflation-adjusted) interest rates helps clarify the role of the post-crisis monetary-policy shift. As shown by graphs plotting the share of advanced economies with negative long-term interest rates (ten-year treasuries yielding less than the rate of inflation) from 1900 to 2016. In the run-up to the crisis, there are no recorded negative real returns on government bonds; since the crisis, the incidence of negative returns increases and has remained high. Of course, the share of countries with negative short-term treasuries (not shown here) is even higher since 2009. But the graphs also shows that the 2010-2016 period is not the first episode of widespread negative real returns on bonds. The periods around World War I and World War II are routinely overlooked in discussions that focus on deregulation of capital markets since the 1980s. As in the past, during and after financial crises and wars, central banks increasingly resort to a form of “taxation” that helps liquidate the huge public- and private-debt overhang and eases the burden of servicing that debt. Such policies, known as financial repression, usually involve a strong connection between the government, the central bank, and the financial sector. Today, this means consistent negative real interest rates – equivalent to an opaque tax on bondholders and on savers more generally. So if a prolonged period of low and often negative real interest rates is not unprecedented, where is the novelty? More often than not, negative real rates were accompanied by higher inflation (as during the wars and the 1970s) than what we observe today in the advanced economies. Even when average inflation was modest (as in the 1950s and 1960s), it was still more volatile. In the 1930s, in the midst of economic depression and sharp deflation, US Treasury bills sometimes traded at negative yields (and real returns were still positive). In today’s low-inflation or outright deflationary environment, central banks may need negative policy rates (this is the novelty part) to produce negative real rates. In the eurozone and Japan, taxing banks that hold reserves (negativeinterest-rate policy) will also encourage more bank lending, and thus stimulate growth. In an era when public debt write-offs (haircuts) are widely viewed as unacceptable (witness the European Union’s position on Greece) and governments are often reluctant to write off private debts (witness Italy’s reluctance to impose a haircut on holders of banks’ subordinated debt), sustained negative ex post returns are the slow-burn path to reducing debt. Absent a surprise inflation spurt, this will be a long process. Project Syndicate

In other words, interest rates have been low, and remain low, because policymakers have gone to great lengths to keep them there

”

16 Business Daily Monday, August 1 2016

Closing Stock markets

Mainland brokerages see profit declines

brokerage incomes from submission fees and leverage financing fell substantially. Chinese stocks remained bearish in the All 25 listed securities firms posted sharp falls in net profits for the January- first half of the year with the benchmark June period, according to their half-year Shanghai Composite Index slumping financial reports or preliminary earnings more than 17 per cent as market sentiment has yet to recover from a estimate filed with stock exchanges. market crash last summer. Guotai Junan Securities, an industry However, analysts said that the leader, saw its profits shrink 47.91 per performance of brokerages started to cent from a year ago, while Shanxi Securities registered the biggest drop of improve in the second quarter and a mild recovery could be expected during 84.93 per cent. the rest of the year. Xinhua Weighed on by a market downturn,

M&A

Chinese consortium agrees deal for Caesars online games Caesars’ online games business, known as Playtika, makes its games such as Bingo Blitz and Slotomania available on Apple Inc’s App Store. Liana B. Baker and Allison Lampert

Chinese consortium that includes game developer Shanghai Giant Network Technology Co Ltd and e-commerce company Alibaba Group Holding Ltd founder Jack Ma has agreed to acquire Caesars Interactive Entertainment Inc’s online games unit for US$4.4 billion in cash, the companies said. Caesars Interactive Entertainment is currently owned by Caesars Acquisition Co (CAC) and Caesars Entertainment Corp. The sale will be a boon to the two affiliated companies, which are looking for cash as they embark on a complex merger. The deal follows a period of exclusive negotiations between Caesars Interactive Entertainment and Giant’s consortium that were first reported on July 21 by Reuters. Caesars Entertainment’s main operating unit, Caesars Entertainment Operating Co Inc (CEOC), is currently involved in a US$18 billion bankruptcy and is seeking creditor approval for a restructuring plan. The transaction between CAC and the Caesars Entertainment parent is part of a complex web of deals that have come under scrutiny by CEOC’s creditors. Chinese companies are eager to expand beyond their home country, which boasts the world’s largest online gaming market. In June, Tencent Holdings Ltd, China’s biggest gaming group, agreed to buy

a majority stake in ‘Clash of Clans’ mobile game maker Supercell from SoftBank Group Corp in a US$8.6 billion deal. Caesars’ online games business, known as Playtika, makes its games such as Bingo Blitz and Slotomania available on Apple Inc’s App Store. Playatika will continue to operate independently with its own management team and its headquarters remaining in Herzliya, Israel, following the deal, the companies said. Playtika players use virtual currency that cannot be exchanged for real money, although players can

spend money by buying items in the games. Caesars’ World Series of Poker and real-money online gaming businesses are not part of the deal, according to the companies. Giant is one of China’s biggest gaming companies, with nearly 50 million monthly active users and several top-grossing mobile titles. It was taken private in 2014 for US$3 billion by a group of buyers that included company Chairman Yuzhu Shi and private equity firm Baring Private Equity Asia Ltd. It is now valued at more than US$12 billion. The Chinese consortium involved in the deal also includes Ma’s private equity firm Yunfeng Capital, China Oceanwide Holdings Group Co, China Minsheng Trust Co, CDH China HF Holdings Company Limited, and Hony Capital Fund, the companies said.

The merger between the owners of Caesars Interactive Entertainment is intertwined with the bankruptcy of CEOC, whose restructuring plan hinges on billions of dollars of cash and equity from its parent. CEOC’s creditors have accused the parent company of looting choice assets from its operating unit and leaving it bankrupt. Caesars has said the acquisitions were done at fair value. While proceeds from a Caesars Interactive online games unit sale will help the bankruptcy estate, junior creditors may still object to the distribution of the funds because more money will end up in the hands of first lien banks and lenders. Junior creditors led by Appaloosa Management remain the biggest hold-outs in the CEOC bankruptcy, and have said they have as much as US$12 billion in claims against Caesars Entertainment and its private equity backers, Apollo Global Management LLC and TPG Capital LP. Reuters

Caesars’ Playtika players use virtual currency that cannot be exchanged for real money, although players can spend money by buying items in the games

Energy sector

Philanthropy control

Oil employment

Bangladesh gets lower than Jack Ma takes on murky charities India feeds thousands term deals in fuel oil tender in first blockchain foray of Gulf workers ‘in crisis’ Bangladesh Petroleum Corp (BPC) has received offers in its first tender to buy fuel oil at premiums lower that its term deals, two company sources said yesterday. The tender was issued as part of an effort to move away from direct-term deals with fuel products suppliers to try to buy at cheaper rates. A total of nine international oil and trading companies have been competing to win the tender for 160,000 tonnes of 180-centistoke high sulphur fuel oil. The tender closed on July 20 and is valid until October 2. Vitol came up with the lowest offer of a premium of US$15.80 a tonne to Singapore spot quotes, while the state-owned BPC imported fuel oil in the first half at a premium of US$24 in term deals with companies. “Vitol will get the tender if all other papers submitted by them fulfil terms and condition set out by the tender,” one source said, adding that other documents were being scrutinised. The tender was for delivery between August and December. A shortfall in supplies of natural gas has forced Bangladesh to burn oil, a more costly option, to generate electricity. Reuters

Chinese billionaire Jack Ma wants to pry the lid off China’s opaque charities. Ant Financial, the affiliate of Alibaba Group Holding Ltd. he controls, is using the technology behind bitcoin to record transactions and improve the accountability of the country’s philanthropic organizations. The company began a tamper-proof ledger based on blockchain technology to record donations made by its more than 400 million users of Alipay, the online payments and investment service. Donors will be able to track transaction histories and gain a clearer understanding of where their funds go and how they’re used, Chief Technology Officer Cheng Li said. That makes it tougher to alter records, and may help restore some of the trust that’s been squandered over the years. Chinese philanthropy rose 10-fold to US$15 billion in the decade through 2014, according to the Xinhua News Agency. But the sector’s been plagued by scandals and mismanagement. The Red Cross Society of China came under scrutiny after a woman who claimed affiliation with the agency posted photos of her lavish lifestyle in 2011. The charity has since denied she held any staff positions. Bloomberg News

New Delhi was working yesterday to feed more than 10,000 Indian labourers stranded in the Gulf with no wages after losing their jobs, in what Foreign Minister Sushma Swaraj called a “food crisis”. In a series of tweets, Swaraj said the migrant workers were facing “extreme hardship” and that two junior foreign ministers will be sent to Saudi Arabia and Kuwait to take up the issue with authorities. “Large number of Indians have lost their jobs in Saudi Arabia and Kuwait. The employers have not paid wages (and) closed down their factories,” Swaraj said late on Saturday. “As a result our brothers and sisters in Saudi Arabia and Kuwait are facing extreme hardship. While situation in Kuwait is manageable, matters are much worse in Saudi Arabia. “The number of Indian workers facing food crisis in Saudi Arabia is over ten thousand.” Indian media yesterday said the workers were “starving” in camps with no way of returning home, as Gulf countries face a drop in oil revenues from falling prices, promptin g a dow n turn in con struction and layoffs. AFP