S. Culture revenue up 4.9 pct in H1 Retail Page 5
Wednesday, August 24 2016 Year V Nr. 1115 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Kelsey Wilhelm Gaming
Bernstein: Wynn to spark 10-day pickup in gross gaming revenue Page 6
www.macaubusinessdaily.com
Olympics
Gaming
MSAR to host Rio gold medallists’ trip for MOP12 million Page 4
Imperial Pacific says Saipan resort to open for CNY Page 6
Hotel Occupancy Rebounds Hospitality
A notable increase in the number of overnight visitors in July. Boosting average hotel occupancy rates in the city, according to MGTO data. Check-ins reached an average 90.2 pct during the month, up 5.2 percentage points y-o-y. The highest occupancy rate was registered by the city’s 3-star hotels, at 94.2 pct. Attributable in the main to the continuous decrease in hotel room rates. Page 2
Mainland’s fund managers flock to Hong Kong markets as assets gain charm Page 10
PBOC
Chinese bond futures fall sharply as investors expect more liquidity injections Page 16
Land Law quagmire
The property sector respects the new Land Law. This, according to President of the Macau Association of Building Contractors and Developers Paul Tse in an exclusive interview with MBtv. He cautions, however, that when exercising the law the gov’t should not prosecute those adhering to the spirit of the law.
Tourism Visitor arrivals to the city in July totalled 2.79 mln. Up 5.5 pct y-o-y, according to DSEC data. Tourists from the Republic of Korea continue to increase, at 40.3 pct y-o-y. An increase of 12.4 pct y-o-y in the number of overnight visitors was also posted - hitting 1.46 million during the month. The majority of Mainland visitors continue to originate from Guangdong Province. Page 2
One for all
Infrastructure The operation of the HKZM bridge may be delayed. Because the super bridge will only open for traffic as a completed entity, according to Chinese officials, commenting that progress on the bridge is nevertheless smooth. Page 3
Removing barriers
Private investment China is to fling open sectors. Including oil and gas drilling to private capital. To counter record-low investment growth by non-state firms. Political barriers to private investment are to be removed. Some 165 projects are outlined in the country’s 13th 5-year plan, according to the government’s top economic planning body. Page 8
Interview | Land Page 5
HK Hang Seng Index August 23, 2016
22,998.93 +1.02 (+0.00%) Worst Performers
Link REIT
+1.33%
Belle International Holdings
-2.29%
Bank of East Asia Ltd/The
-1.09%
Swire Pacific Ltd
+1.41%
Cathay Pacific Airways Ltd
+1.26%
China Resources Land Ltd
-2.06%
Hong Kong Exchanges and
-1.04%
Wharf Holdings Ltd/The
+1.37%
Sino Land Co Ltd
+1.16%
China Overseas Land &
-2.05%
China Resources Power
-0.74%
China Merchants Port Hold-
+1.36%
CK Hutchison Holdings Ltd
+0.97%
China Unicom Hong Kong
-1.73%
Lenovo Group Ltd
-0.57%
New World Development
+1.33%
CLP Holdings Ltd
+0.88%
CNOOC Ltd
-1.13%
China Mengniu Dairy Co Ltd
-0.46%
+3.58%
26° 32° 26° 32° 26° 31° 26° 32° 26° 31° Today
Source: Bloomberg
Best Performers
Tingyi Cayman Islands
Tourism uptick
Wed
Thu
I SSN 2226-8294
Fri
Sat
Source: AccuWeather
Stock connect
2 Business Daily Wednesday, August 24 2016
Macau
Tourism
Tourist arrivals increase in July The total number of tourists visiting the city reached 2.79 million in July; tourists from the Republic of Korea continue to increase, at 40.3 pct year-on-year. Cecilia U cecilia.u@macaubusinessdaily.com
V
isitor arrivals to the city in the month of July totalled 2.79 million, up 5.5 per cent year-onyear, according to the official data released yesterday by the Statistics and Census Services (DSEC). The growth in July does not show a significant increase in total visitor arrivals in the first seven months of 2016 when compared to last year’s
results, however, posting a marginal increase of just 0.9 per cent. Official data also reveals an increase of 12.4 per cent year-on-year in the number of overnight visitors, at 1.46 million during the month. By contrast, there was a decline in sameday visitors, down 1.0 per cent yearon-year at 1.34 million, DSEC shows. Visitors from Mainland China to the MSAR totalled 1.84 million in July, an increase of 4.7 per cent year-onyear, of which those travelling under the Individual Visit Scheme (IVS) increased 6.7 per cent to 879,423.
The majority of Mainland visitors originated from Guangdong Province – amounting to 824,903. Other major Chinese provinces include Hunan (84,148) and Fujian (70,745).
Continued growth in non-Chinese tourists
DSEC data reveals continued growth in the number of visitors from most non-Chinese origins last month, in particular those from the Republic of Korea, who soared 40.3 per cent year-on-year to 51,992. Despite the year-on-year increase, Korean visitors only occupied 1.9 per cent of total visitor markets. Visitation from Hong Kong, Taiwan and Japan also increased - 5.5 per cent, 10.5 per cent and 4.5 per cent, respectively. However, visitors from the U.S.A. and Canada dropped
year-on-year by 0.7 per cent and 5.6 per cent, respectively. Meanwhile, visitors from Thailand posted the highest percentage growth in same-day visitation, increasing 94.7 per cent year-on-year. Visitors from the Republic of Korea, on the other hand, posted the highest percentage increase in overnight visitors, up 39.8 per cent compared to the month of July in 2015. DSEC data also indicated a 20.5 per cent increase in the number of arrivals by air year-on-year, whilst those who arrived by sea and land registered 4.0 per cent and 4.7 per cent growth yearon-year, respectively. Land arrival continued to be the major mode of transport, occupying 56 per cent, whilst arrivals by air occupied 8 per cent of total visitor arrivals, according to Business Daily calculations.
Tourism
Hotel occupancy jumps 5 pct in July Local hotel occupancy increased last month as visitors stayed longer in the territory. Kam Leong kamleong@macaubusinessdaily.com
The notable increase in the number of overnight visitors in July boosted average occupancy rates throughout the city, according to the latest data released yesterday by the Macao Government Tourism Office (MGTO). Last month, average hotel occupancy reached 90.2 per cent, up 5.2 percentage points compared to the 85 per cent occupancy rate registered
for the same month one year ago. Compared to a rate of 83.6 per cent seen in June, the rate also grew by 6.6 percentage points. Local 4-star hotels, in particular, recorded the highest growth in occupancy throughout the month, an increase of 5.7 percentage points yearon-year to 91.8 per cent, compared to 86.1 per cent one year ago. However, the highest occupancy rate was registered by the city’s 3-star hotels, which climbed by 5.1
Airline
Tigerair Taiwan increases frequency to Macau Low-cost carrier Tigerair Taiwan a joint venture between Taiwan’s China Airlines (CAL) and Singapore’s Tiger Airways - will increase its daily flights between Taoyuan, Taiwan and Macau between October 30 and December 14, according to Focus Taiwan. The flights will be on Wednesdays and Saturdays. The airline currently operates two
to three daily flights to the MSAR but due to an expected boost in tourism in the Autumn based on major events and festivals to be held in the territory the group has increased its offerings. Two round-trip flights will be added from December 15 to March 25 on Mondays and Thursdays, lifting the total to 23 flights per week, notes the publication. A.L.
percentage points to 94.2 per cent, compared to 89.1 per cent during the same month last year. Meanwhile, 5-star hotels saw their occupancy increase by 4.9 percentage points to 88.7 per cent from 83.8 per cent registered during the same month of 2015.
Dropping prices
The increase in occupancy may also be attributable to the continuous year-on-year decreases in hotel room rates. In July, a hotel room in the city cost MOP1,232 (US$154) per night on average, down 13.9 per cent compared to MOP1,430 one year ago; 3-star hotels offered the largest decrease in room rates last month, down 20.8 per cent year-on-year to MOP779 per night, compared to MOP983 one year ago. The average cost of staying one night in a 4-star hotel was cut by 14.4 per cent year-on-year to MOP736, compared to MOP861 for the same month in 2015, while 5-star hotel rooms were sold at MOP1,569 per night on average during the month,
13 per cent cheaper when compared to MOP1,803 in July 2015. The MGTO data, provided by the Macau Hotel Association, includes 40 hotels in the city ranging from 3-star to 5-star. For the first seven months of the year the city’s average hotel occupancy rate was slightly down, by 0.5 percentage points, while that of 5-star hotels decreased by 1.7 percentage points year-on-year to 80.1 per cent. Nevertheless, both 3-star hotels and 4-star hotels registered year-onyear growth of 1.9 percentage points with regard to occupancy during the seven months, amounting to 88.3 per cent and 83.2 per cent, respectively. Meanwhile, the average hotel room rate dropped by 14.3 per cent yearon-year to MOP1,312 per night in the seven months. The room price for 5-star hotels is down by 12.4 per cent year-on-year to MOP1,673 per night on average, whilst that of 4-star hotels and 3-star hotels declined by 17.4 per cent and 17.5 per cent yearon-year to MOP769 and MOP863, respectively.
Business Daily Wednesday, August 24 2016 3
Macau Infrastructure
Delta bridge operation may be postponed
T
he National Development and Reform Commission of China has confirmed the possibility that the operation of the Hong Kong-Zhuhai-Macau Bridge may be delayed if the whole bridge cannot be completed by its scheduled opening date. The vice chairman of the Commission, Hu Zucai, told reporters at a press briefing yesterday that the construction of the Hong Kong part and some other parts of the bridge are facing delays, local broadcaster TDM Radio reported. When asked by reporters whether the authorities would first allow
traffic on the bridge for the Zhuhai and Macau segments if the works on the Hong Kong section could not catch up with the overall progress the Chinese official stressed that the
super bridge would only be opened for traffic as a whole. The cross-region links between the three cities were initially slated for operation by the end of this
year. But the Hong Kong Highways Department said last November that the estimated completion date for its part of the bridge will be put off to late 2017 due to ‘construction difficulties and challenges’. The Chinese official said yesterday that experts are now evaluating the construction progress of the infrastructure, claiming that overall progress is smooth. The bridge, on which construction started in 2009, includes a 29.6-kilometre dual three-lane carriageway and an immersed-tube tunnel of about 6.7 kilometres in addition to two artificial islands. K.L.
Tourism
Culture
Renovation to be completed late September
Alexis Tam in Brunei
The Cultural Affairs Bureau (IC) announced yesterday that an estimated MOP6.4million (US$800,000) will be spent upon the renovation of the Taipa-House Museums, with the project completed by the end of September. The renovation will be undertaken by the IC in conjunction with the Institute for Tourism Studies (IFT) and the Macao Government Tourism Office (MGTO). Its aims are to conserve the environs of the houses, as well as to maintain the original features of the buildings. The renovated area will provide a platform for promoting the Portuguese culture by catering Portuguese cuisine, exhibitions, performances and the sale of cultural and creative products, according to the IC. Alterations to the museum
will also include a change in name for the five houses, one of which will be used for exhibiting the cultural life of the Macanese community. IFT will also supervise the management of the restaurant, as reported by Business Daily in December. This renovation is considered the major project on the houses since the first opening of the museum in 1999. C.U.
Secretary for Social Affairs and Culture Alexis Tam is representing the MSAR as part of an official delegation from the People’s Republic of China at two separate ASEAN (Association of Southeast Asian Nations) meetings in Brunei, having left Macau yesterday. The Secretary will present an overview of the MSAR’s social, cultural, tourist and educational development at the two meetings; namely, the 7th Meeting of the Ministers Responsible for Culture and Arts of the ASEAN nations (plus China, Japan and Korea) as well as the 3rd China-ASEAN Ministers Responsible for Culture and Arts Meeting. The meetings take place in Bandar Seri Begawan, Brunei, with the delegation to the meetings led by Vice
Minister of Culture of China Ding Wei. Secretary Tam is expected to return to Macau on August 26. A.L.
4 Business Daily Wednesday, August 24 2016
Macau Opinion
José I. Duarte
Summer surprises August is usually known as the silly season. Insofar as the media is concerned, nothing is supposed to be happening. By some kind of tacit complicity, we all want to agree on that. And yet, the world keeps rotating. In fact, the idea that nothing happens is possibly no more than a convenient justification for the indolence that Summer settles on most of us. Somehow, readers want to be less attentive, and guilt-free of the world’s incidents. The media obliges by providing a lighter menu of news. Several examples might be called upon to underscore how vain such a pretence is. Let us just pick one case most of us are quite sensitive about, especially at this time of the year. It’s hard to avoid the impression that the city’s restaurants have connived to kick up their prices while many of us were not around and looking. That is slightly astonishing, as a rapid look at a few indicators will suggest. The long-term trend for food prices has surely been upwards. The Consumer Price Index component that reflects prices in food went up by about a quarter in the last four years. Eating out seems to be a significant factor in that growth. Nonetheless, nothing appears to easily explain the recent hike. In the first half of the current year, prices have been virtually stagnant. The overall pressure of demand also seems to be lessening. The volume of retail sales went down by some ten per cent in the last full year. Furthermore, import prices for some of the main food items have stayed mostly unchanged. While they are often fast singled out as the top culprits for internal food inflation prices, available data show they were stable in the most recent months. A lot of our food, especially fresh produce and live animals, is imported from Mainland China, where inflation is low. Moreover, the exchange rate changes are making imports cheaper in MOP terms. If anything, we might even (oh, innocence?) expect food supply prices to go down a bit. The same can be said about wholesale prices and, although with greater volatility, the retail prices. That is the case of products that feature prominently on our menus such as, for example, meat products, including pork and chicken. The usual suspects cannot easily justify the sort of hikes seen in most restaurants. It seems we need to look elsewhere. José I. Duarte is an economist and permanent contributor to this newspaper.
Sports
MOP12 million to host gold medallists List of gold medallists visiting Macau not yet confirmed. Annie Lao annie.lao@macaubusinessdaily.com
T
he list of exactly which Rio Olympic gold medallists will be coming to Macau has yet to be determined despite the fact that the medallists are scheduled to arrive in Macau next Monday. The athletes will stay in the city for four days during which time they will visit the World Heritage Sites of the city, exchange with local young people, visit the local communities and attend two gala events.
The 26 athletes who won gold will comprise the delegation, as well as others who, although they did not win gold, have a fan following. Government spokesman Victor Chan Chi Ping said that the specific list of gold medallists has yet to be confirmed by the General Administration of Sport of China and will be announced to the public soon. Mr. Chan said that as a show of appreciation to the gold medallists they will be presented with a gift of appreciation, made up of donations from local communities
– collected by the government - in the form of money, although the total amount of money has not yet been confirmed.
Budget
The budgeted expense for the fourday visit amounts to MOP12 million (US$1.5 million), the same amount spent in 2012 for running a similar event, according to the spokesperson. On August 30, the medallists will meet with 1,500 local young people and students to exchange sports knowledge. The Sports Bureau will distribute 4,500 tickets and 1,200 tickets to local residents at the Tap Seac Multi-sports Pavilion on Thursday and Friday, respectively, for two gala events held for the gold medallists, Pun Weng Kun, President of the Sports Bureau, said at the press conference. Each local resident is eligible to collect two tickets by showing his/ her ID card. Illegal sale of the free tickets is prohibited and violators will be reported to the police and relevant departments, Mr. Pun added.
My own ticket
José Maria da Fonseca Tavares, head of the Civic and Municipal Affairs Bureau (IACM), who went to Rio, Brazil to participate in an exchange activity as a consultant to the Portuguesespeaking Sports Committee clarified that his visit was not related to his duty at IACM and specified that he went to Rio on his own leave to meet the Committee. All the travel and accommodation expenses were covered by the Committee and not the Bureau, he added. When asked whether the International Olympic Committee would change its regulations to allow Macau athletes to participate in the Olympics, he responded that during his visit in Rio he did not have a chance to meet relevant people to discuss the issue.
Infrastructure Cultural Bureau Director says price based on MOP28,000 per square metre
MOP900 million budgeted for Central Library The new Central Library, set to occupy the former court building on Praia Grande on the Peninsula, will cost MOP900 million, the Cultural Affairs Bureau (IC) confirmed to Business Daily yesterday. The figure, advanced by Portugueselanguage publication Hoje Macau, was included in a written response to an enquiry by Legislator Chan Meng Kam. In the document, IC Director Ung Vai Meng noted that the library has “very large dimensions” as it is to occupy 33,000 square metres. He also described the project as a “cultural reference” for the city. ‘Taking into reference the average cost of construction works of large scale in 2015 and an inflation rate of 5 per cent, the costs of the construction work, in 2018, will be around MOP28,000 per square metre, from which it’s estimated that the costs of the construction […] will amount to about MOP900 million,’ reads the response.
Long time coming
The publication notes that the Old Courthouse building was originally turned over to the IC in 2007, with the consecutive two years dedicated to tenders for the plans for the new library space. This process was eventually abandoned by the government - who started afresh, readjusting the plan and submitting a new one to the government,
which encountered problems in the condition of the building that led to technical problems, reducing the size of the building by two floors. A new plan was drawn up following the exit of the Judiciary Police as tenants of the building, allowing for more disposable space and subsequently another plan was submitted in 2014 to the Land, Public Works and Transport Bureau (DSSOPT) and in 2015 the DSSOPT proceeded to open tenders for service providers for the design, execution and oversight of the preliminary works of ‘environmental requalification’. The building was slated in 2015 to open in 2020, with building to be finished in 2019 – the year that the Tap Seac library would be transferred to the former court building. Ung Vai Meng, however, is still uncertain on whether the date will be final, noting that the work on the refinement of the project is predicted to finish in 2018 and only after, once the building has been turned over to the DSSOPT, will the Bureau be able to begin the execution and accompaniment of construction works. “The final date for the opening of the new library depends upon the development of the tender process and of necessary administrative procedures for the implementation of different works,” notes the IC Director. K.W.
Business Daily Wednesday, August 24 2016 5
Macau Land
Respect of property rights paramount “We respect the land law”, says the President of the Macau Association of Building Contractors and Developers. But the law “should not punish people unjustly,” says Paul Tse.
T
he property sector respects the new Land Law is the straight answer Paul Tse See Fan, president of the Macau Ass o ci atio n o f Building Contractors and Developers, gives with regard to all the recent controversy surrounding the city’s land resources. “I give total respect and support to the Legislative Assembly and the SAR Government for the tremendous work they have put in on the law,” he said in a wide-ranging interview with our group of publications, covering several of the latest hot topics of the territory - from land and urban planning to housing prices and supply. “But we need to make sure that when exercising the law it doesn’t punish people unjustly if they have followed the spirit and instruction of the law, or indications from the government,” notes Tse. He refers to the new Land Law - coming into force in March 2014 to replace a 1980 version - that has polarised the city, following the decision of the authorities to take back some land plots following the lapse of their 25-year concession period. While some support the government to follow the law and take back the parcels due to the incompletion of development on the site, some developers emphasise it is not always the fault of lessees for not completing the development, and the
current land law does not look into such an issue. Describing the land concession period as a football match of 90 minutes, Mr. Tse said a football match was sometimes paused due to substitution, injuries and other reasons but stoppage time was always added at the end to compensate for loss of time. “This is the simple, fair and accurate description of what really should happen [concerning
P.A.A./T.L.
S. Culture revenue up 4.9 pct in H1 S. Culture International Holdings Ltd., saw a 4.9 per cent increase in its revenue for the first half year, according to a filing with the Hong Kong Stock Exchange. The retailer sells footwear products, operating in Hong Kong, Taiwan and Macau. For the six months ended June 30, the company’s revenue increased to HK$282.6 million (MOP291.1 million/ US$36.45 million) from HK$269.4 million in the same period of 2015. During the first half year, the group operated two retail outlets in Macau, from which part of its increased revenue was derived due to a high return on sales in the territory considering the environment. ‘The Group had maintained a comparable scale from its retail networks in Macau to reap the highest return amid the current level of economic conditions experienced in Macau,’ the statement notes.
Mr. Tse only responded he would leave the matter to the government and legal professionals. But he noted: “I was told by several legislators it was made very clear during the committee stage [of the discussion of the law] in 2013: if there was any problem coming up after the implementation [of the law] the administration would take a second look at it about whether they can put in certain administrative measures to make sure that everyone’s property rights are protected.” Talking about the outlook of the local housing market, Mr. Tse said the market for end-users has long found a bottom over the stable salary level of residents and their housing demand. But there might still be some instability for the speculative market, like the pre-sales of unfinished homes, given the global economic uncertainties, he added. With home prices plunging more than a third from their peak in 2014, some property agents and developers have urged the authorities to ease some property curbs, namely the special stamp duty - a levy of up to 20 per cent on the sale of a property if it is sold within two years of being purchased - and mortgage lending rules. While Mr. Tse is against any “punitive taxes” on property, he remarked: “The government by nature is cautious . . . particularly with [the Legislative Assembly] elections coming up [next year] so the taxes are going to stay for a while longer.” Full interview in September’s Macau Business and Business Intelligence editions. Check the interview out on MB.tv at www.macaubusiness.com
Retail
Annie Lao annie.lao@macaubusinessdaily.com
some of those land plots taken back by the authorities],” he said. Ch i e f E x e c u t i v e-a p p o i n t e d legislator Gabriel Tong Io Cheng has recently submitted a bill on the “interpretation” of the new Land Law so that the authorities could extend the concession period for some parcels if it was not the fault of lessees for the lack of development of the site. But Legislative Assembly President Ho Iat Seng deemed the bill an amendment to the Land Law rather than an interpretative bill, meaning an approval by the Chief Executive is needed. Asked whether the authorities should conduct a public consultation on whether the law should be revised,
The Group, in the first half of the year, opened one retail outlet in Hong Kong and four new outlets in Mainland China, while closing three in Taiwan, during the period. Currently, the group operates 74 outlets in Hong Kong, two in Macau, six in Mainland China and 48 in Taiwan. The brand showed an ‘encouraging performance’ from its sales of The Flexx brand, maintaining growth in sales of 11.5 per cent during the period. Additionally its Clarks footwear products increased 10.5 per cent in sales as well as its Josef Seibel footwear – increasing 19.5 per cent during the period. ‘Looking forward, the global economy was clouded under uncertain economic and political outlook with a slowdown and adjustment in the economy of Mainland China. At this juncture, we remained cautious in rationalising the existing mix and network of our retail outlets against the high costs of operations,’ notes the group in its release.
6 Business Daily Wednesday, August 24 2016
Macau
Gaming Bernstein: Wynn to spark 10-day pickup in gross gaming revenue
Telsey: ‘More positive than expected’ Kelsey Wilhelm kelsey.wilhelm@macaubusinessdaily.com
G
ross gaming revenue for the month of August is up 4.9 per cent yearon-year month-to-date acc o r di n g t o rati n gs agency Telsey Advisory Group. This is based on an assumed electronic game estimate placing monthly gross gaming revenue at HK$18.96 billion (MOP19.53 billion/US$2.45 billion). The agency notes that there ‘is an expectation that numbers for the remainder of the month could rise further’ due to the opening of the Wynn Palace property on the Cotai strip. ‘With signs continuing to suggest that the Macau market is improving, we believe the context for the opening of new properties in the coming
weeks is therefore more positive than expected,’ notes the industry update filed by the company.
Flipside
Analysts at Bernstein hold a very different viewpoint, indicating their estimates on gross gaming revenue month-to-date have only reached MOP12.25 billion, implying an average daily rate (ADR) of about MOP571 million, ‘2 per cent below the similar period last year and below last week and prior month,’ note their analysts led by Vitaly Umansky. ‘Assuming an ADR of MOP580-620 [million] for the remainder of this month (we expect some pick up in the 10 days for the month following Wynn Palace opening), August gross gaming revenue would be MOP18.118.5 billion, representing a year-onyear decline of 3 per cent to 1 per cent
(and a month-on-month increase of 14 per cent to 16 per cent,’ comment the analysts. The report notes that this ‘figure would be disappointing’ given that they were expecting a flat year-on-year increase in gross gaming revenue.
New and fresh
‘We remain keenly focused on the upcoming Macau openings, with Wynn’s Palace opening today and LVS’ Parisian in two weeks,’ note analysts at Telsey, ‘we expect Wynn to be a taker of share upon its opening (irrespective of table game allocation) while other operators’ existing properties could experience market share pressure in the near term’. Bernstein analysts also note that with regard to the ‘Thriller Live’ show, set to run at The Parisian from September 30th to November 13th,
‘if the show has a successful run it may signal that the market may be ready for more ‘Las Vegas style’ show entertainment,’ while a visafreeze on visitors to the Mainland through Macau or Hong Kong should not ‘have any ramifications on the Macau market’. Wi th r ega r d t o th e o v e ra l l gaming environment analysts at Bernstein note that ‘China’s GDP growth will continue in the midsingle digits, the economy will continue to shift towards greater consumer spend and the numbers of individuals achieving income levels sufficient to visit Macau will continue to grow,’ while threats to MSAR revenue would include a deterioration in China’s economic situation or a number of factors including a change in consumer attitudes towards casino gaming.
Gaming The company’s gaming profit in South Korea recorded increases
Landing Int’l posts widened net loss The company said expenses for the construction of its new casino-resort in South Korea had increased Kam Leong kamleong@macaubusinessdaily.com
Landing International Development Ltd. saw its net loss expand more than 2.5 times to HK$526.6 million (US$65.6 million) for the first half of the year, despite total revenue surging more than threefold in the same period, it announced in a filing with the Hong Kong Stock Exchange yesterday. For the six months, the company’s total revenue jumped to HK$445.3 million compared to HK$109.2 million during the same period of last year. It claimed that the increase is attributable to the Landing Casino on Jeju Island in South Korea. The gaming property, operated by the group’s wholly-owned subsidiary Magical Gains Group, reported a net profit of HK$60.7 million in the period, while revenue from the business totalled HK$232.1 million. The casino, in fact, was once a joint venture between the company and Genting Hong Kong Ltd., a Hong Kong-listed operator of cruise ships and gaming business. Last October, Genting sold back its 50 per cent interest in Magical Gains to Landing International. ‘The net profit [of the casino] was
approximately 5.5 per cent higher when compared to the corresponding period last year when Magical Gains was a joint venture of the company,’ Landing wrote in yesterday’s filing. The company, a Chinese real estate developer, added that total casino profit, including that from the Les A Club in London in the United Kingdom that it acquired in April
this year, totalled HK$82.1 million for the period. The group also explained the widened interim net loss is due to the increased operating expenses incurred in the construction and planning stages of its integrated resort project - Myths and History, on Jeju Island. The project, a venture between the company and Genting Singapore Plc, will see its phase one of construction, including hotels and theme park facilities, completed during the
third quarter of 2017, according to the filing. ‘It is expected that both facilities will soft open subsequently upon the issue of the relevant temporary occupation permits,’ the developer added, expecting the whole project would be fully completed by 2019 as scheduled. Meanwhile, the developer said in the filing that it remains bullish on the development of the gaming industry in South Korea. ‘Given the great potential of the tourism of South Korea, the gaming industry in South Korea is expected to gain advantage from such booming tourism,’ it perceives.
Business Daily Wednesday, August 24 2016 7
Macau Gaming
Imperial Pacific to unveil Saipan casino-resort by CNY The VIP operation on the island has saved the company from the red for the first six months of the year. Kam Leong kamleong@macaubusinessdaily.com
C
asino operator Imperial Pa c i f i c I n t e r n a t i o n a l Holdings Ltd. has announced that its casinoresort project on the island of Saipan will open before the Chinese New Year period at end-January next year. ‘The Board aims to commence opening of the Imperial Pacific Resort by 2017 Chinese New Year with the opening of the hotel tower by the end of March 2017,’ it said in a filing with the Hong Kong Stock Exchange on Monday night. The integrated resort, previously named the Grand Mariana Casino and Hotel Resort by the operator, is to offer 200 to 300 new gaming tables as well as 300 to 400 slot machines on the Pacific island. According to the filing, the operator has invested an additional US$83 million (HK$666.7 million) in design and construction of the new casinoresort, making a total investment in the property of US$143 million. ‘Topping out of the four storey podium that will eventually encase the casino was finished by the end of July 2016 and it is estimated that the same will be accomplished for the fourteen storey hotel tower by the end of October 2016,’ the operator said.
I m p e r i a l Pa c i f i c’ s g a m i n g concession on the island, granted by the archipelago’s local authorities in August 2014, is under a local unit called Best Sunshine International Ltd. and carries a term of 25 years. Since last November, the operator has operated a so-called ‘temporary casino’ on the island.
VIP dominance
For the first half of the year, the company posted a net profit of HK$837.6 million (US$104.3 million) compared to a net loss of HK$168.8 million one year ago, according to the same filing releasing the company’s interim results.
‘The turnaround from loss to profit is mainly attributable to the gaming profit generated by the temporary casino,’ it said. During the six months, the operator’s casino revenue from the temporary casino amounted to nearly HK$4 billion, of which HK$3.82 billion was generated by its VIP segment. VIP rolling chip volume at the property amounted to HK$104.6 billion in the six-month period, with a win percentage of 3.65 per cent. According to the operator, most of its VIP patrons were from China, Hong Kong, Macau, and South Korea, in addition to Saipan. ‘The temporary casino has received significant VIP patron visits which would be favourable to the Group’s continued development,’ it remarked. As at the end of June, the company operated 16 VIP gaming tables, 32 mass gaming tables and 144 electronic
table games and slot machines at the temporary casino. Revenue from the mass gaming tables reached HK$121.2 million during the first half of the year, while that derived from electronic table games and slot machines amounted to HK$26.8 million. For the future, the company said it would continue betting on the VIP segment. ‘Our efforts to grow the VIP business will continue to centre around enhancing the gaming experience of our customers,’ it said. ‘The Group shall continue to allocate most of its resources for development of the integrated resort on the Island of Saipan. In addition, the Group is also actively looking for other investment opportunities around the world to develop tourist resort facilities (including gaming facilities),’ the operator added. Meanwhile, the same filing revealed that the company had ceased its business of processing and trading food products in May of this year. The casino operator has not proposed any dividend for the period.
8 Business Daily Wednesday, August 24 2016
Greater China Infrastructure projects
Beijing further paving way for private investors Planning body official said airports, telecom infrastructure and oil and gas extraction are areas that should be further opened to private investment
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hina’s top economic planning agency said yesterday that it would take measures to ensure private investors can compete fairly with state firms in infrastructure projects, traditionally the domain of government-backed enterprises. The government has sought ways
to increase private investment in infrastructure projects, leery of worsening the balance sheets of already indebted state-owned enterprises and local governments. Big-ticket infrastructure projects have been a policy focus this year to help cushion a slowdown in the world’s second-biggest economy. But with
private investment growth easing to the single digits, the state has had to do much heavy lifting. Government spending soared 13 per cent in Januaryto-July from a year earlier. A two-year-long effort to guide private capital into projects such as metro systems and hospitals via public-private partnerships (PPP) has generated little interest. China is working on a draft law to govern PPPs, which the government says have been deterred by imperfect and inadequate legislation. “We have to create a clear and
predictable market environment for private investment,” Hu Zucai, vicedirector for the National Development and Reform Commission (NDRC), told a press conference yesterday. He added that “innovative” forms of private investment such as PPPs should be encouraged if necessary. Hu said the 165 key infrastructure projects specified in the government’s current five-year plan provide clear direction on how “social capital” - a phrase China uses for private investment - can enter each industry. “I heard some private investors say they have the capital but are not sure where to invest in. I think the plan provides very clear guidance,” Hu said. H e sai d ai r p o rts, t e l ec o m infrastructure and oil and gas extraction are areas that should be further opened to private investment. So far, fewer than one-quarter of projects announced by the government as PPPs have found private investors, official data shows. Investors had signed up for 619 of 2,531 projects with a total value of 1 trillion yuan (US$150 billion) through the end of July, NDRC said on Tuesday. In July, the cabinet said the government will implement reforms to attract more private investment into railway, petroleum, natural gas, power and telecommunications sectors, partly via PPPs. To further lure investment, the cabinet on Monday said authorities plan to cut the annual tax burden for businesses by more than 500 billion yuan (US$75 billion) within the next one to two years. Reuters
Results
Government on hook fo
In recent months company a dozen listed banks have re for raising capital, mainly th
Laundering probe
Taiwan investigating Mega Financial Mega International Commercial Bank is one of Taiwan’s largest banks by asset size. Liang-Sa Loh and J.R. Wu
Taiwan is investigating whether Mega Financial Holding Co and its banking unit broke local criminal laws, as the company’s chairman said it did not help customers launder money overseas. The investigation comes after New York authorities on Friday slapped Mega International Commercial Bank with a US$180 million fine for anti-money laundering violations, the first time in a decade that a Taiwan-based financial institution has been penalized by U.S. authorities. It also comes as money laundering controls at banks in Greater China are under intense scrutiny abroad, following a series of high-profile judicial investigations and regulatory probes in the United States and Europe. Authorities are examining documents from state-controlled Mega Financial and its banking unit as part of the investigation, Chang Chieh-chin, deputy head prosecutor with the Taipei District Public Prosecutors Office, told Reuters by telephone.
Chang said prosecutors also are reviewing information from the island’s finance ministry and Financial Supervisory Commission regarding the matter. “We are gathering information and will review it to see if there has been any violation of criminal law in Taiwan,” Chang said. Shiu Kuang-si, chairman of the bank’s parent company, told Reuters yesterday that Mega International Commercial’s New York branch failed to report a “suspect transaction” to U.S. authorities, as required. The New York state’s financial regulator said the anti-money laundering violations included lax attention to risk exposure in Panama. Mega Financial is viewed by analysts as a well-connected financial group and its head is appointed by the government. Shiu, the brother-in-law of Taiwan’s central bank governor, was appointed by the finance ministry this month as chairman of Mega Financial. He had been president of the holding company till 2014, before leaving to join other
Sumeet Chatterjee
state-run banks in Taiwan. Last year the U.S. Federal Reserve instructed both Bank of China (BOC) and China Construction Bank Corp to improve their anti-money laundering (AML) procedures. In Spain, six Industrial and Commercial Bank of China bankers were arrested in February, suspected of facilitating money laundering and fraud. The bank has said it implemented AML regulations and operated strictly within the law.
Key Points Mega Financial chairman says bank didn’t launder money Taiwan prosecutors gathering documents for local probe In Italy, prosecutors are also seeking a trial for BOC officials in a money laundering investigation into billions of euros allegedly smuggled back into China. BOC has denied any wrongdoing. Many Chinese banks are now beefing up their risk management and compliance controls in response to the crackdown, Reuters reported in June. Reuters
Hit by bad loans, Chinese banks are expected to show a weakening in their capital strength in first-half earnings, raising the prospect that government might have to inject more than US$100 billion to shore them up, according to some analysts. There are early signs that government is already taking action to help some of the smaller banks, which are struggling to maintain their capital ratios as China’s economy slows, interest margins fall, and bad debts climb. “We believe the recapitalisation and bailout process is already discretely underway. However, it has gone unnoticed as it has started with the smaller, unlisted banks,” said Jason Bedford, sector analyst with UBS. “We expect this process to accelerate sharply in 2017, particularly among listed joint stock banks,” Bedford told Reuters, adding closing the capital shortfall would require an infusion of US$172 billion. The largest banks, including Agricultural Bank of China Ltd and Bank of Communications Co Ltd, start reporting earnings this week, and brokerage Daiwa estimates sector-wide profit growth in the first six months of 2016 will remain at just 0.7 per cent. In the April-June quarter, the banking sector’s core capital adequacy ratio, on average, declined by an average
Business Daily Wednesday, August 24 2016 9
Greater China M&A
In Brief
State construction giants to merge The new group will have total assets of more than 500 billion yuan China National Building Materials Group Corp (CNBM) will take over smaller rival China National Materials Corp (Sinoma), after an agreement between the two companies was approved by the government, the country’s state assets regulator said. The deal is part of an ambitious plan by China under president Xi Jinping’s leadership to revamp its lumbering and debt-ridden state sector, with the goal of creating globally competitive multinationals through mergers, asset swaps and sweeping management reforms.
Key Points CNBM to take over Sinoma Deal among biggest such deals so far of SOEs
the first half of the year, down 8.5 per cent on the year, with total liabilities up 17.8 per cent to 83.55 trillion yuan, according to the Ministry of Finance. Amid concerns about plunging profits, soaring debt and chronic inefficiency, China’s reform programme is aimed at eliminating duplication, waste and “cut-throat competition” between firms with nearly identical business structures. CNBM, already the country’s biggest construction materials producer, will be renamed the China Construction Materials Group. Sinoma’s listed vehicle, China National Materials Co. Ltd , will become a subsidiary of the new merged entity, Sinoma said in a statement to the Hong Kong stock exchange. The new group will have total assets of more than 500 billion yuan, China’s
Securities Times newspaper reported on Tuesday. CNBM has been struggling with industrial overcapacity, plunging cement prices and a downturn in the construction sector. Its listed vehicle, the China National Building Material Co. Ltd, warned earlier this month that its profits for the first half “will decrease very substantially”. SASAC is currently responsible for 104 enterprises in sectors ranging from energy to telecommunications. The number is down from 111 at the start of the year, and it could eventually fall to just 40, according to state media reports. Last year, the China Power Investment Group, one of China’s biggest state power generators, began merger procedures with the State Nuclear Power Technology Corporation, a reactor designer. Two regional railway manufacturers were also merged to form the CRRC Corporation. And Baoshan Iron and Steel Group and the Wuhan Iron and Steel Group, two of China’s biggest steel producers, are drawing up plans to restructure together. Reuters
Is part of China’s plans to create globally competitive MNCs According to a notice by the Stateowned Assets Supervision and Administration Commission (SASAC) on Monday, the CNBM deal was given the go-ahead by the State Council, China’s cabinet. China’s state firms made profits of 1.13 trillion yuan (US$169.99 billion) in
or domestic banks’ shrinking capital
filings show at least half eceived approval hrough preference shares. 27-28 basis points from the preceding quarter, Daiwa said in a report, citing data released by the regulator. Bedford said in a report earlier this month that fundraising by smaller banks was partly driven by local government pressure to maintain credit growth and cushion the economic slowdown. At the same time, the banking regulator wants banks to clean up their balance sheets by providing more for doubtful loans and cutting exposure to shadow lending, which for weaker banks could require extra capital or mergers with the strong. While the country’s top five banks had a substantial capital buffer of around 14 per cent at the end of 2015, smaller banks are sailing much closer to the wind, putting the sector’s weighted average Tier 1 capital at 10.69 per cent at end-June, down from 10.96 per cent a quarter earlier. That is barely above the 10.5 per cent minimum that the banks in China would need to achieve by 2018. China Banking Regulatory Commission did not respond to requests for comment.
Bad debt hangover
Roshan Padamadan, equities fund manager with Singapore-based Luminance Global Fund, expects China’s banks will need about US$100 billion a year over the next few years, while Wei Hou, senior equity analyst for China banks at research firm Sanford C. Bernstein in Hong Kong, estimates they will need US$75 billion over the next year. “If ... government or the bank management teams decide to take a big bet and write off most of the bad loans in the next year or two, then that will create much higher capital pressure for mid and smaller banks,” Hou added. Chinese banks’ non-performing loans are at nearly 2 per cent, the highest since the global financial crisis in 2009,
according to the CBRC, but some analysts believe the ratio could be between 15 and 35 per cent, as many banks are slow to recognise problem loans or park them off balance sheet. Not all analysts think the banks will need government cash. Of the 10 China-focused analysts and fund managers who spoke to Reuters, three, including a leading global credit rating agency, said the lenders could avoid it by repackaging non-performing loans into marketable securities.
Key Points China banks start reporting H1 earnings this week Banks’ profit growth seen flat, capital ratios falling Banks under pressure to lend more, write down bad loans Small banks’ capital near new regulatory lower limits First examples of recapitalisation already beginning If they do need funding, however, they will struggle to persuade private investors to part with their cash, as most Chinese bank shares are trading below the book value of their assets, and rating agencies have a negative outlook on the sector.
That leaves government on the hook for capital shortfalls, a phenomenon reminiscent of the bailouts seen in the West after the global financial crisis of 2008. The mechanisms for getting government cash into the banks are already being limbered up. In recent months company filings show at least half a dozen listed banks including China Everbright Bank, China Minsheng bank and Bank of Beijing have received approval for raising capital, mainly through preference shares. Analysts say the shares are likely to be taken up by state-backed insurance firms and provincial governments. Mid-tier lender Industrial Bank last month raised US$3.9 billion via a private placement of shares from provincial governments and state-owned China Tobacco. And at the weekend online financial magazine Caixin said Bohai Steel Group, the indebted state-owned conglomerate whose creditors include the Bank of Beijing, may receive help from a local government bailout fund to restructure its debts. “Banks are set to write off (bad debts) with ... provisions, or perhaps to try other market measures, such as securitization or asset management companies,” said Qinwei Wang, an economist at London-based asset manager Pioneer Investments. “Should this not be enough, governments and the PBOC (People’s Bank of China) are ultimately expected to step in,” he said. Reuters
Fiscal stance
Most provinces plan to cut corporate taxes The vast majority of Chinese provinces have announced specific measures to cut costs for companies to take pressure off industries being hit by the slowing economy, according to China News. These measures are expected to save Chinese businesses in 25 provinces more than 700 billion yuan (US$105 billion) this year, with tax cuts making the biggest contribution at 500 billion yuan, the newspaper reported. It said lowering taxes will continue to be the focus of reform measures, while value-added tax cuts in the manufacturing sector are already in the pipeline. Urban plan
Shanghai envisages financial centre China’s largest metropolis Shanghai has released a plan for its future through to 2040 that leaves virtually no room for population growth. In a draft development plan released yesterday, the city’s authorities aim for the financial industry to make up about one fifth of local economic output. That’s up from 16.2 per cent last year, based on data from the city’s statistics bureau. The plan will cap the permanent population at about 25 million, versus 24.2 million in 2015. Authorities plan to raise the per centage of newly-built small and medium-sized apartments and rental housing in the city, and limit the supply of land. Going public
Domestic photo app maker losses widen as IPO nears Chinese photo app maker Meitu Inc’s first-half 2016 losses widened as, in keeping with accounting norms, it booked losses for a jump in the value of shares issued to investors ahead of a planned IPO, the company’s listing documents showed. Meitu’s losses widened to 2.19 billion yuan (US$330 million) for the six months ended June 2016, compared with 1.27 billion yuan in the same period in 2015. Losses for all of 2015 reached 2.22 billion yuan, versus the 1.77 billion yuan losses in 2014, according to a preliminary IPO document posted on the Hong Kong stock exchange. Results
Top train maker sees overseas orders soar CRRC Corp. Ltd., China’s largest rail transportation equipment maker, saw its overseas orders more than double in the first half (H1) of 2016 despite the lacklustre world economy, latest company data showed. Newly signed overseas orders amounted to 14.88 billion yuan (US$2.24 billion) in H1, an increase of 126 per cent year on year, according to a CRRC filing with the Shanghai Stock Exchange yesterday. The CRRC said a contract it won in March to build 846 metro cars for Chicago was a metro vehicle export to developed countries record for China.
10 Business Daily Wednesday, August 24 2016
Greater China Markets
Mainland’s fund managers ramp up stock connect marketing as regulations ease Onshore interest in Hong Kong shares coincides with a weakening trend in the Chinese economy and in the exchange rate which has driven some domestic investors to try to get out of yuan-denominated assets. Samuel Shen and Pete Sweeney
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hinese i n v e s t m e n t managers, taking advantage of a significant step to open up investment flows in and out of China, are aggressively marketing well-priced Hong Kong shares to mainland investors through stock connect schemes. The reform, a complete lifting of aggregate investment quotas on both the newly announced ShenzenHong Kong Connect scheme and the existing Shanghai-Hong Kong Connect, means mainland investors will be able for the first time to buy unlimited volumes of Hong Kong listed shares. At least 23 Chinese mutual funds have already been established this year to buy Hong Kong shares via the Shanghai-Hong Kong Connect channel, according to Reuters calculations, a sharp rise from the seven such funds launched in 2015. The Shenzhen-Hong Kong stock connect scheme is expected to go live by December. Money managers say mainland investors can find bargains in Hong Kong compared to the inflated valuations on China’s domestic exchanges.
This marketing pitch is bolstered by the recent recovery in the Hong Kong’s Hang Seng index, which has gained 25 per cent from a bottom hit in February to stand up 4 per cent year-to-date, versus a 10 per cent fall in the onshore CSI300 index. “Compared with U.S., Europe and emerging markets, Hong Kong stocks are in a low-lying land in terms of valuation,” Shi Cheng, co-CIO at First
Seafront Fund Management Co. said in an on-line advertising presentation for a new fund which it says will let mainland investors join the “Hong Kong gold rush”. Orient Securities RuiHua Shanghai & Hong Kong Mixed Fund hit its fundraising target on its first day of sales, on July 28, raising 6.4 billion yuan (US$965 million), the company said in a statement. The fund can invest up to 50 per cent of assets in Hong Kong stocks. Invesco Great Wall Hong Kong & Shanghai Selected Fund said it achieved a 7.2 per cent return in July alone after it added Hong Kong shares to its holdings. China’s benchmark CSI300 rose 1.6 per cent in July. Among the fund’s top 10 holdings,
eight are Hong Kong-listed firms, with CK Hutchison Holdings Ltd weighted at 7.1 per cent and Tencent weighted at 4.9 per cent of assets, according to the fund’s disclosure last month. “Regarding the Hong Kong market, we think international investors are too pessimistic toward China, making stock prices there (in Hong Kong) very attractive,” the fund manager wrote.
“Chinese demand for overseas investment is getting stronger and stronger” Ivan Shi, head of research at fund consultancy Z-Ben Advisors
Shanghai-Hong Kong Stock Connect opening day
“Chinese demand for overseas investment is getting stronger and stronger,” said Ivan Shi, head of research at fund consultancy Z-Ben Advisors, adding that many Chinese mutual funds have exhausted their overseas-investment quotas, so they must rely on the Connect schemes to get money out. For ordinary Chinese investors using a mutual fund has significant advantages; there is no paperwork hassle and no minimum investment as there would be if they were to trade directly. Reuters
M&A
National investors buy ad tech Media.net The deal gives the acquired start-up access to the Chinese online advertising market Anya George Tharakan
Advertising technology startup Media.net, founded by tech entrepreneur Divyank Turakhia, said on Monday it had been acquired for about US$900 million by a group of Chinese investors. The deal would represent the thirdlargest in the ad tech industry, after Alphabet Inc unit Google’s acquisition of DoubleClick and Microsoft Corp’s deal for aQuantive. “We got an incredible amount of interest just because ad tech is a
large and growing space and, at the same time, the number of companies that have been successful in it have been limited,” Turakhia said in an interview. The company’s products, which are licensed by various publishers and ad networks, auto-learn and display the most relevant ads to users. Media.net, a Yahoo Inc ad partner, attracted seven bidders, including a publicly listed company based in the United States. However, the bid fell through following a substantial decrease in
the company’s stock value, Turakhia said. The deal gives Media.net access to the Chinese online advertising market, which is currently the second largest in the world, Turakhia said. Digital ad spend in China is expected to reach US$40.42 billion in 2016, a 30 per cent jump from a year earlier, according to research firm eMarketer. Media.net, which is based in Dubai and New York, gets 90 per cent of its revenue from the United States. The company posted revenue of US$232 million in 2015, with more than half of that coming from mobile users.
The Chinese consortium will buy Media.net from Turakhia’s Starbuster TMT Investments and has already made a payment of US$426 million.
‘Digital ad spend in China is expected to reach US$40.42 billion in 2016’ The group is led by Zhang Zhiyong, the chairman of telecom firm Beijing Miteno Communication Technology Co. Miteno’s shares have been halted since December. Reuters
Business Daily Wednesday, August 24 2016 11
Asia Markets
Hedge funds eye Japan stocks again Funds that focus on the currency are now watching policy, rather than fundamentals, as the market’s main driver.
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apan-focused hedge funds may be ready to start nibbling at Tokyo shares again after suffering losses earlier this year by betting on a weaker yen. Though the outlook for the yen remains as murky as ever ahead of Bank of Japan and U.S. Federal Reserve policy reviews later this month, some fund managers think Japanese stocks are looking attractive again after tumbling 13 per cent from January. Foreign and domestic hedge funds are anxious for payback, after average losses of 4.2 per cent in the first seven months of the year, according to data tracker Eurekahedge. Many had shorted the yen betting the Fed would hike interest rates several times this year, boosting the dollar, while the BOJ’s negative interest rate was seen keeping a lid on the yen. Since the yen and Japanese stocks are closely correlated - stocks generally fall when the yen rises and vice versa - investors who got the yen wrong generally got stocks wrong, too. They were further wrong-footed by the yen’s surge as investors scrambled for safe havens after Britain’s surprise vote in June to leave the European Union. Hedge funds now think the market’s repricing has created some opportunities in equities. BlackRock’s largest mutual fund said last week
that equities were now cheap and that it was increasing its holdings to about 10 per cent. Other funds are looking to the next round of earnings soon from some of Japan’s top firms to help them assess valuations after the first-half’s fire sale. “The initial reaction when a macro thesis fails is for all equities to get punished,” said Edward Rogers, founder of Tokyo-based fund of hedge funds Rogers Investment Advisors.
new technologies and strategies may outperform. “Because there’s been a diversion between monetary policy-makers’ intentions and market directions, some hedge funds are not able to produce returns as they used to. On the other hand, funds that make full use of latest-generation technologies, such as big data, are doing well.”
Yen still a big question mark
The yen has risen from 120.30 against the U.S. dollar at the start of the year to around 100. “These investors planned to make money on both sides of the trade.
However, as the yen grew stronger, that trade didn’t work, people had to unwind large short positions,” said Frank Packard, president of TAP Japan, an investment advisor. So-called long-short hedge funds - which bet on stocks rising and falling - have lost an average 3.82 per cent this year versus gains of 5.72 per cent in the same period last year, the Eureka hedge data showed. Longonly funds lost an average 7.44 per cent, versus a rise of 11.25 per cent. Activist hedge funds that buy shares and push for management change have lost 5.7 per cent this year, versus gains of 16.7 per cent. Reuters
Key Points Hedge funds book losses after bets on rising stocks, weaker yen Trade stumbles in H1 average fund down 4.21 pct BlackRock says good time for bargain-hunting; earnings eyed Japan Post Bank to start hedge fund investment this year “Of 20 companies, if 10 have way better numbers, then all of a sudden people go out and buy that stock again, so our managers benefit from holding that stock.” Katsunori Sago, chief investment officer of Japan Post Bank, which plans to start hedge fund investment later this year, says hedge funds with
Monetary policy
New Zealand signals more rate cuts but at slower pace S&P Global Ratings said the economic risks facing financial institutions operating in New Zealand have heightened. New Zealand’s central bank yesterday signalled further rate cuts to stoke anaemic inflation but said that moving too fast risks inflaming a hot housing market, triggering a jump in the kiwi dollar. While New Zealand’s official cash rate is already at a record-low 2.0 per cent after the latest cut in August, it is still the highest in the developed world - a major draw for yield-hungry investors and a complication for the central bank as a higher kiwi further dampens imported-led inflation. But with rapid rises in house prices flashing warnings of a bubble in the property sector, Reserve Bank of New Zealand Governor Graeme Wheeler took pains to balance his message to financial markets. “We do not believe that the outlook and balance of risks warrants a position of no policy change, nor a position of rapid easings,” said Reserve Bank of New Zealand Governor Graeme Wheeler in a speech to businesspeople in Dunedin, the text of which was released on the bank’s website.
At 2.0 per cent, New Zealand’s cash rate is well above those in Britain at 0.25 per cent and even Australia’s 1.5 per cent.
With rates at near zero in the United States, and negative in Japan and Europe, the differential is a powerful lure for carry trades, in which investors borrow at ultra-low rates in currencies such as yen or sterling and buy high-yielding assets such as the kiwi. Despite 150 basis points of easing since June 2015 the New Zealand
Reserve Bank of New Zealand Governor Graeme Wheeler
dollar is 2.5 per cent higher on a trade weighed index basis than before the rate cuts started. This is complicating Wheeler’s task of stoking inflation, currently running at 0.4 per cent, well below the central bank’s 1-3 per cent target range. While the central bank clearly plans to cut rates again, Wheeler reiterated that “rapid on-going decreases in interest rates” would further inflame “an already seriously overheating property market.” New Zealand’s booming housing prices are now 45.4 per cent above the previous market peak of late 2007, and officials warn the rapid increases pose a risk to financial stability. The central bank recently announced new macro-prudential tools aimed at curbing high-velocity house price growth. S&P Global Ratings said the economic risks facing financial institutions operating in New Zealand have heightened, partly due to continued strong growth in residential property prices. While retaining its ratings on the financial institutions S&P noted “the risk of a sharp correction in property prices has further increased.” Reuters
12 Business Daily Wednesday, August 24 2016
Asia In Brief Currencies
Thai baht’s strength not good for economy Thailand’s central bank governor said yesterday a rapid rise in the baht was not good for the country’s economic recovery although it was not causing exports to decline. Thai exports have faced several problems, including falling behind in technology innovation and a slow recovery in export markets, Bank of Thailand Governor Veerathai Santiprabhob, told reporters. But the baht’s rapid appreciation in certain periods “is not conducive to the economic recovery and the central bank will closely monitor it,” he said. The currency has risen by 4 per cent against the dollar this year. Trade
South Korea’s export volume growth slows South Korean exports in terms of volume increased for three straight months, but the growing pace slowed in July, raising concerns about the economy’s main growth engine, central bank data showed yesterday. Export volume index stood at 139.61 in July, up 0.8 per cent from a year earlier, according to the Bank of Korea (BOK) data. It marked the third consecutive month of increase, but the rising pace slowed from 5.9 per cent in May and 3.6 per cent in June. The country’s exports, which account for about half of the economy, kept a 19th straight month of decline through July. M&A
Baltic Exchange board backs SGX bid for London firm The Baltic Exchange board has unanimously backed a takeover bid from Singapore Exchange Ltd, a deal that will give SGX access to a trading platform for the multibillion-dollar freight derivatives market. The exchanges have agreed on the terms of the SGX offer, they said in a joint statement on Monday, with Baltic shareholders entitled to 160.41 pounds per share plus 19.30 pounds per share as a final dividend, giving the business a total valuation of about 87 million pounds (US$114 million). Trade
Vietnam’s coffee export volume to hit record high Vietnam is estimated to export some 1.7 million tons of coffee in 2015-2016 crop year, up 41 per cent year-on-year, hitting a record high in export volume, according to Vietnam Coffee-Cacao Association (Vicofa) yesterday. The country is expected to earn around US$3.1 billion from coffee exports during the crop year, up 19.2 per cent year-onyear, local Vietnam Economic Times quoted the Vicofa as saying. Including at least 102,000 tons of coffee domestically consumed, Vietnam’s total coffee consumption in 2015-2016 crop year will hit a new record of over 1.8 million tons, said the association.
Economic drive
Beyond war on drugs, Philippines’ Duterte seen setting up boom President’s reputation of carrying out his promises has given businesses plenty to look forward to - for instance his vow to make spending on infrastructure a priority.
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ess than two months in office, Philippines President Rodrigo Duterte is getting high marks from the business community for policies that could engineer an economic surge and companies say they are making new investments as a result. While Duterte may be getting headlines for a bloody war against drug dealers and users, less attention has been paid to one of Asia’s few economic success stories. The groundwork was laid by Duterte’s predecessor, President Benigno Aquino, who took growth above 6 per cent over his six-year term, but executives are also cheering the new administration’s focus on building new infrastructure and say it could spell the start of a long-term boom. Some even see Duterte’s violent and highly controversial anti-drugs campaign as potentially positive. Last week, the government announced that the Philippines’ economy grew at 7 per cent in the second quarter from a year earlier, its highest level in three years. It makes the Philippines the fastest growing among all countries that have reported so far for the second quarter. When Duterte won the May presidential election, there were questions marks over how he would handle the economy - Duterte, who is nicknamed “the Punisher”, has been unapologetic over unleashing the police on drug users and dealers. Philippine National Police Chief Ronald Dela Rosa said on Monday that there have been 1,800 drugrelated deaths since Duterte took over as president, with 712 of those at the hands of the police.
Domestic expansion
Jollibee Foods Corp, the biggest fastfood chain in the country, plans to open 200 more domestic stores this year. So does Robinsons Retail, taking its total to over 1,500. BDO Unibank Inc, the country’s biggest lender, plans to open 50-100 new branches this year. However, the Philippines has a worrying precedent of a strongman leader. In the 1960s, when the country had one of the highest per capita incomes in Asia, Ferdinand Marcos took over as
Speed up, or else
In May, Duterte told the country’s main telecom providers to speed up the internet, or he would junk laws that prohibit foreign competition. Duterte’s economic plan also includes lowering corporate and income taxes and a commitment to invest in education, to reap the demographic dividend of the country’s young population. About two-thirds of the Philippines’ 100 million people are of working age, between 15 and 64, rising from about 56 per cent of the population in 1990. In 2030, about 70 per cent of the 125 million people will be of working age, the government has projected. Reuters
President Rodrigo Duterte speaking during a press conference in Davao City
Australia gaming
Sports betting to be blamed for record gambling losses Advertisements constantly running at professional sporting events and on television promise to fuel an almost exponential growth An increased saturation of sports betting advertising in Australian media has been attributed to a spike in gambling losses, with new figures showing Australians lost US$17.5 billion through gambling in 2015. The Australian Gambling Statistics (AGS) have shown that Australians lost around US$950 per head over the course of 2014-15, with pokie machines providing the largest windfall for game operators, with losses totalling US$8.85 billion. But, surprisingly, a 30-per cent
increase in sports gambling losses was recorded, contributing to an overall increase of 7.7 per cent in gambling losses for the 2014-15 financial year. Sports betting is considered a relatively small market for b o o k m a k e rs . H o w ev e r, w i th advertisements constantly running at professional sporting events and on television, the almost exponential growth is expected to continue. Public Health expert Charles Livingstone told Fairfax Media the growth in sports betting
losses was expected due to the spike in advertising, but it was a “phenomenal” increase all the same. “It demonstrates why we need to better regulate promotion and advertising. Otherwise we’re facing big growth in gambling problems and harm from young men and women,” Livingstone said yesterday. Meanwhile Samantha Thomas, associate professor of public health at Deakin University, said those losing the most were being harmed by addiction. She said while it’s fine for companies to make a windfall, lawmakers must not shirk its responsibility to remind punters that betting is dangerous. She said the bombardment of gambling advertising - particularly in sport - in Australia was “prolific” and having a negative effect on society. “While not all losses equal harm, a lot of them do. It’s time for governments to start to seriously consider the factors that are contributing to these growing losses and implement effective evidencedbased strategies to reduce harm,” Thomas told Fairfax. “This includes addressing the factors from industry, such as prolific advertising that may be contributing to harm.” Xinhua
Paulo A. Azevedo, pazevedo@macaubusinessdaily.com Editorial Council Paulo A. Azevedo; José I. Duarte; Mandy Kuok Newsdesk Mike Armstrong; Óscar Guijarro; Kam Leong; Joanne Kuai; Nelson Moura; Annie Lao; Kelsey Wilhelm Group Senior Analyst José I. Duarte Design Aivi N. Remulla Web & IT Janne Louhikari Photography Cheong Kam Ka, Ruka Borges, Gonçalo Lobo Pinheiro, António Mil-Homens, Carmo Correia Contributors James Chu; João Francisco Pinto; José Carlos Matias; Larry So; Pedro Cortés; Ricardo Siu; Rose N. Lai; Zen Udani Assistant to the Publisher Lu Yang, lu.yang@projectasiacorp.com Office Manager Elsa Vong, elsav@macaubusinessdaily.com Agencies Bloomberg, Reuters, AFP, Xinhua, Lusa, Project Syndicate Printed in Macau by Welfare Ltd. Address Block C, Floor 9, Flat H, Edf. Ind. Nam Fong, Av. Dr. Francisco Vieira Machado, No. 679, Macau Tel. (853) 2833 1258 / 2870 5909 Fax (853) 2833 1487 E-mail newsdesk@macaubusinessdaily.com Advertising advertising@macaubusinessdaily.com Subscriptions sub@macaubusinessdaily.com Online www.macaubusinessdaily.com Founder & Publisher
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The new president has launched a crackdown on online gambling, vowed to destroy oligarchs, warned that the country could live without a mining industry if environmental standards were not met and called the U.S. ambassador a “gay son of a whore”. But Duterte has a 91 per cent approval rating in the latest public survey and businesses are lining up to announce expansion plans. The mainstays of the economy remittances and the outsourcing sector - are flourishing and boosting domestic consumption.
president. Two decades of dictatorship, corruption and plunder by Marcos left the Philippines in a shambles. Supporters of Duterte say even as the long-term mayor of the southern city of Davao, where he earned his reputation for busting crime, he created the conditions for business to flourish. Government data show that the Davao region’s economy grew by 6.6 per cent on average in 2010-14 compared with 6.3 per cent for the whole country. According to one estimate, there were more than 20,000 people in outsourcing jobs in the city in 2013, and this sector was growing at more than 20 per cent a year.
Business Daily Wednesday, August 24 2016 13
Asia Key Points BOJ annual ETF buying jumps to 6 trln yen from 3.3 trln yen Investors worry about price distortion, speculative trade Nikkei components have benefited more than TOPIX-listed shares BOJ’s Kuroda insists increased buying won’t warp market
Market distortions
Bank of Japan’s rush into stocks raises fears The buying, although broad-based, benefits some shares over others. The Bank of Japan’s (BOJ) near doubling of its purchases of Tokyo shares is causing investors to worry the central bank will dominate financial markets, which could lead to price distortions as it continues to grease the economy. The BOJ’s buying spree will make it harder for investors to sift good companies from bad, and raises a host of other problems including misallocating capital, making equities trading more speculative and reducing incentives for companies to meet shareholder needs, analysts say. More than three years of massive monetary stimulus has already resulted in the central bank cornering the Japanese government bond (JGB)
market and distorting interest rates. The BOJ doesn’t dominate the stock market as it does JGBs, but its revved up buying of index-based shares has shifted attention to the central bank’s behaviour and away from how companies perform. That’s contributed to outsized gains for stocks such as Fast Retailing Co, Uniqlo’s brand owner, which features prominently in the Nikkei share average. Some liken the increased purchases by the BOJ - the only central bank in the world that buys stocks at the moment - to failed government efforts over more than two decades to prop up the market by pressing government-related financial institutions to buy after the bursting of the late-1980s asset bubble. The BOJ has sought to boost economic activity and dispel decades of deflation by flooding the system with cash through massive asset
purchases. These have been mostly JGBs, but have included real-estate investment trusts, corporate bonds, commercial paper and stocks, in the form of exchange-traded funds, or ETFs. With foreign investors largely staying away, disappointed at the lack of progress in Japan’s structural reforms, the BOJ is almost sure to be the biggest buyer on the Tokyo Stock Exchange for the foreseeable future.
JGB-ification
Some worry the stock market could start to resemble the bond market, where the BOJ’s purchases - about 110-120 trillion yen annually - have made traders fixate on its bond buying and pay scant attention to economic data. BOJ Governor Haruhiko Kuroda insists increased buying isn’t intended to boost share prices and wouldn’t warp the market.
Analysts estimate the central bank allocates about 60 percent of its buying in ETFs that track the Nikkei, 30 percent to the broader Topix and the rest to the new JPX 400. That reflects the size of available ETFs but disproportionately benefits the 225 companies in the Nikkei over the nearly 2,000 companies listed in the Topix. The Nikkei and Topix should roughly track each other, but the Nikkei has risen 0.7 percent while the Topix has fallen 0.3 percent since the BOJ’s announcement. Moreover, the Nikkei is a simple average, not weighted by market capitalisation, as the Topix is. That means a handful of high-priced shares that have outsized weightings in the Nikkei benefit the most. Fast Retailing, which accounts for more than 8 percent of the Nikkei, has risen 12.4 percent since the BOJ’s decision. Softbank Group Corp, another heavyweight, has jumped 21.0 percent, even as the tech and investment firm’s profit outlook has hardly changed. Reuters
14 Business Daily Wednesday, August 24 2016
International In Brief Weak pound
UK manufacturing export orders highest in 2 years Orders for British manufacturing exports rose to their highest level in two years in August helped by the Brexit-induced fall in sterling but the weaker pound also pushed up price expectations to their highest in over a year, a survey showed. An index measuring overall factory orders dipped slightly in August to -5 from -4 in July but export orders improved to -6 from -22, their highest since August 2014, the survey by the Confederation of British Industry showed. A measure of output expectations for the three months ahead rose to +11 from +6 in July. Guinea-Bissau
MPs call for urgent session to end stalemate A group of 57 members of the Guinea-Bissau parliament have handed a petition to the president of the National Popular Assembly, the country’s parliament, Cipriano Cassamá, demanding an urgent call for a parliamentary session. The Guinean parliament came to a halt nine months ago due to differences between the two main parties, the PAIGC and the PRS. The PAIGC, which won the last elections, but has been kept from power, accuses the PRS of seizing governance, and because it has a majority decided to block all work all parliamentary work from going ahead.
Surveys data
Euro zone business growth stable But pressure remains on the European Central Bank to announce more easing.
S
urprisingly strong growth in France supported stable euro zone private business activity during August but factories could face a tougher September as new order growth stumbled, surveys showed yesterday. Muddying the outlook for the coming months is the United Kingdom’s vote in late June to leave the European Union, although so far the economic repercussions seem to have been confined to Britain, not its main trading partner. France’s private sector shrugged off its neighbour’s vote and accelerated to levels last seen just before the militant attacks in Paris in November, as an upturn in the service sector offset continued weakness in manufacturing. Those attacks, and the recent one in Nice in July, hit the country’s service industry - the hotel and restaurant sector in particular - and resulted in lower demand for travel to Europe. Still, the brighter overall picture should alleviate fears the French economy continued to slow down this quarter after unexpectedly stagnating in the second quarter of the year.
German private sector growth slowed in August, but remained robust overall, its PMI showed, suggesting Europe’s biggest economy is set to keep on expanding in the summer months after it grew more than expected in the second quarter.
Under pressure
Markit’s flash composite Purchasing Managers’ Index for the euro zone edged up to a seven-month high of 53.3 from July’s 53.2, where any reading above 50 indicates growth. A Reuters poll of economists had predicted a slight dip to 53.1. Markit said the PMI pointed to GDP expanding 0.3 per cent this quarter, matching a Reuters poll earlier this month that showed the euro zone economic outlook stable but lacklustre, about half the speed at the start of the year. Pressure remains on the European Central Bank to announce more easing as it has so far been unsuccessful in getting inflation anywhere close to its 2 per cent target ceiling. It is currently at just 0.2 per cent year-on-year. But there is little confidence amongst economists about just how
much firepower the ECB has left. Of some concern, having only trimmed their prices in July, firms returned to deeper discounting this month. The euro zone output price index fell to 49.5 from 49.8. Discounting helped drive a PMI covering the bloc’s dominant service industry up to 53.1 from 52.9, also confounding expectations for a dip to 52.8. The manufacturing PMI was predicted to have held steady at July’s 52.0 but fell to 51.8.
Key Points Strong growth in France helps euro zone stay stable German growth rate slows, but still expanding The factory output index, which feeds into the composite PMI, nudged up to an eight-month high of 54.0 from 53.9. However, new order growth was at its weakest since early 2015, falling to 51.5 from 52.2, suggesting the headline manufacturing PMI may decline next month. Service firms were also less optimistic about the year ahead. The business expectations index fell to 60.2 from 60.9, its lowest reading since late 2014. Reuters
Pensions
Brazil committed to reform The Brazilian government is committed to overhaul its expensive pension system despite an incipient economic recovery that could ease social security expenditures in the short run, pension secretary Marcelo Caetano said on Monday. Caetano, who is helping draft the unpopular reform that is expected to be submitted to Congress this year, said in an interview that the overhaul is crucial to sustain a pension system that represents more than a quarter of the country’s overall expenditures. Commodities
LME cuts ring dealing fees in half The London Metal Exchange has cut fees in half for open outcry trades during August as a goodwill gesture after it had to vacate its premises because of structural problems, it said. Ring trading moved to its disaster recovery site in Chelmsford, east of London, in July after a potential safety issue was discovered in the building that houses its offices in London’s financial district. The exchange, the world’s oldest and largest market for industrial metals, said in a statement that the combined trading and clearing fees would fall to 25 cents from 50 cents per lot during the month.
Annual meeting
Investors sceptical of Fed’s rate policy ahead of Yellen speech The Fed’s current position is that it is data-dependent, with a rate rise possible at any meeting. Jason Lange and Lindsay Dunsmuir
Federal Reserve Chair Janet Yellen may struggle later this week to convince financial markets she can steer a divided U.S. central bank to raise interest rates at least once in 2016 after it started the year with four hikes on its radar. Yellen will deliver the keynote speech at a global central banking conference in Jackson Hole, Wyoming, on Friday, an event that Fed chiefs have traditionally used to signal the direction of monetary policy. Fed policymakers began this year with the wind at their backs, having pushed through a rate increase in December, the first such move in nearly a decade. Their forecasts at the time suggested an economy strong enough to withstand four more hikes in 2016. But the Fed has been buffeted by a global growth slowdown, financial market volatility - first over concerns about China’s economy and then later Britain’s decision to quit the European Union - and choppy U.S. data. With only three policy meetings left in the year, investors wonder whether it has dug itself into the side-lines. “You can talk all you want but let’s face it: In the last seven years we
have had one measly 25-basis-point hike. Show me the money,” said Don Ellenberger, a portfolio manager at Federated Investors in Pittsburgh. Prices for Fed funds future contracts suggest investors see almost no chance for a rate increase at the September or November meetings and roughly even odds at the last meeting of the year in December. If Yellen’s Fed fails to convince Wall Street about the policy path, a rate increase could trigger financial turmoil of the sort seen in 2013, when investors were caught off guard by the central bank signalling an end to its bond-buying program. “She has a tough job,” St. Louis Federal Reserve President James Bullard told reporters last week. Bullard, who has criticized the Fed’s communications strategy as being too confusing for the public, said he was surprised the gap in expectations between the central bank and markets remained so wide. In December 2015, investors were betting on two rate increases over the coming year compared to the four signalled by the Fed. That was roughly the same outlook each camp had a year earlier in December 2014. The gulf is now wider, with policymakers expecting three rate increases
in 2017 in addition to two hikes this year. Financial markets, however, show investors see only one rate increase from now through the end of 2017. “We still have got this disconnect between markets and the Fed,” Bullard said.
‘Credibility problem’
A few Fed policymakers worry the U.S. economy, which has delivered strong job gains but worryingly weak rates of inflation, could be stuck on a low growth path that requires low rates for years as well as new policy tools. Tensions between those who believe now is the right time to hike rates and those who want to wait were apparent with the release last week of the minutes from the Fed’s July 26-27 meeting. Yellen has sought to move the Fed away from its so-called “forward guidance” approach, a communication tool that was used to provide reassurance that monetary policy would remain accommodative. The Fed’s current position is that it is data-dependent, with a rate rise possible at any meeting. The Fed had to push markets by specifically mentioning in its policy statement last October that it might raise rates at its “next meeting” in December. Barclays economist Michael Gapen says Yellen could use her Jackson Hole speech to deliver a concrete message that a rate hike will happen in the coming months if U.S. job growth stays strong. Otherwise, investors will keep doubting future rate increases, he said. Reuters
Business Daily Wednesday, August 24 2016 15
Opinion Business Wires
The Asahi Shimbun Tokyo Governor Yuriko Koike (pictured) is preparing for a strenuous workout with the next Summer Olympics headed her way. The practice started when she received the Olympic flag Sunday in the official handover ceremony from her Rio counterpart, Mayor Eduardo Paes. “I hope the flag is not too heavy,” she joked the day before. “Although I have trained my muscles to receive it properly.” The Tokyo organizing committee’s operating budget was 350 billion yen in the original bid document. But officials say it will be revised upward to account for inflation and unexpected costs.
Reform or divorce in Europe
T New Zealand Herald The number of home loans and amount being borrowed has dipped ahead of further lending restrictions, but one mortgage broker says it could be six months before full effects are known. Weekly figures released by the Reserve Bank show 5668 home loans were approved in the week ending August 12 - down from 6332 in the week ending July 15 - the week before the latest plans to tighten lending were announced. The amount borrowed also fell from NZ$1.413 billion in the week before the announcement to NZ$1.233 billion in the week ending August 12.
Thanh Nien News The (Vietnam) finance ministry is seeking the government’s approval to legalize sports betting under a plan that has however been slammed by critics for keeping the maximum stake too low. Nguyen Hoang Hai, deputy chair of the Vietnam Association of Financial Investors, said he is disappointed the ministry has stuck to proposals made in a 2010 draft. “No one will bet within the proposed limit of US$45 a day. Or they will have others to bet for them. “Betting should be either banned or legalized. But it should not be half allowed like this.”
The Phnom Penh Post Investors in Cambodia’s garment industry are increasingly purchasing modern equipment as they look to produce higher value-added products to compete in the international market and counter rising labour costs, an industry insider said. Ly Tek Heng, operation manager at the Garment Manufacturers Association in Cambodia (GMAC), said rising factory worker wages were thinning margins on the production of low-value garments and footwear in the face of fierce global competition. “If we produce low-value products while the cost of labour keeps rising, we cannot compete,” said Heng.
o say that the eurozone has not been performing well since the 2008 crisis is an understatement. Its member countries have done more poorly than the European Union countries outside the eurozone, and much more poorly than the United States, which was the epicentre of the crisis. The worst-performing eurozone countries are mired in depression or deep recession; their condition – think of Greece – is worse in many ways than what economies suffered during the Great Depression of the 1930s. The best-performing eurozone members, such as Germany, look good, but only in comparison; and their growth model is partly based on beggar-thy-neighbour policies, whereby success comes at the expense of erstwhile “partners.” Four types of explanation have been advanced to explain this state of affairs. Germany likes to blame the victim, pointing to Greece’s profligacy and the debt and deficits elsewhere. But this puts the cart before the horse: Spain and Ireland had surpluses and low debt-to-GDP ratios before the euro crisis. So the crisis caused the deficits and debts, not the other way around. Deficit fetishism is, no doubt, part of Europe’s problems. Finland, too, has been having trouble adjusting to the multiple shocks it has confronted, with GDP in 2015 some 5.5 per cent below its 2008 peak. Other “blame the victim” critics cite the welfare state and excessive labour-market protections as the cause of the eurozone’s malaise. Yet some of Europe’s best-performing countries, such as Sweden and Norway, have the strongest welfare states and labour-market protections. Many of the countries now performing poorly were doing very well – above the European average – before the euro was introduced. Their decline did not result from some sudden change in their labour laws, or from an epidemic of laziness in the crisis countries. What changed was the currency arrangement. The second type of explanation amounts to a wish that Europe had better leaders, men and women who understood economics better and implemented better policies. Flawed policies – not just austerity, but also misguided so-called structural reforms, which widened inequality and thus further weakened overall demand and potential growth – have undoubtedly made matters worse. But the eurozone was a political arrangement, in which it was inevitable that Germany’s voice would be loud. Anyone who has dealt with German policymakers over the past third of a century should have known in advance the likely result. Most important, given the available tools, not even the most brilliant economic czar could not have made the eurozone prosper. The third set of reasons for the eurozone’s poor performance is a broader right-wing critique of the EU, centred on eurocrats’ penchant for stifling, innovation-inhibiting regulations. This critique, too, misses the mark. The eurocrats, like labour laws or the welfare state, didn’t suddenly change in 1999, with the creation of the fixed exchangerate system, or in 2008, with the beginning of the crisis. More fundamentally, what matters is the standard of living, the quality of life. Anyone who denies how much better off we in the West are with our stiflingly clean air and water should visit Beijing. That leaves the fourth explanation: the euro is more to blame than the policies and structures of individual countries. The euro was flawed at birth.
“
Joseph E. Stiglitz a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute
Even the best policymakers the world has ever seen could not have made it work. The eurozone’s structure imposed the kind of rigidity associated with the gold standard. The single currency took away its members’ most important mechanism for adjustment – the exchange rate – and the eurozone circumscribed monetary and fiscal policy. In response to asymmetric shocks and divergences in productivity, there would have to be adjustments in the real (inflationadjusted) exchange rate, meaning that prices in the eurozone periphery would have to fall relative to Germany and northern Europe. But, with Germany adamant about inflation – its prices have been stagnant – the adjustment could be accomplished only through wrenching deflation elsewhere. Typically, this meant painful unemployment and weakening unions; the eurozone’s poorest countries, and especially the workers within them, bore the brunt of the adjustment burden. So the plan to spur convergence among eurozone countries failed miserably, with disparities between and within countries growing. This system cannot and will not work in the long run: democratic politics ensures its failure. Only by changing the eurozone’s rules and institutions can the euro be made to work. This will require seven changes: abandoning the convergence criteria, which require deficits to be less than 3 per cent of GDP; replacing austerity with a growth strategy, supported by a solidarity fund for stabilization; dismantling a crisis-prone system whereby countries must borrow in a currency not under their control, and relying instead on Eurobonds or some similar mechanism; better burden-sharing during adjustment, with countries r u n n i n g c u r r e n t-a c c o u n t surpluses committing to raise wages and increase fiscal spending, thereby ensuring that their prices increase faster than those in the countries with current-account deficits; changing the mandate of the European Central Bank, which focuses only on inflation, unlike the US Federal Reserve, which takes into account employment, growth, and stability as well; establishing common deposit insurance, which would prevent money from fleeing poorly performing countries, and other elements of a “banking union”; and encouraging, rather than forbidding, industrial policies designed to ensure that the eurozone’s laggards can catch up with its leaders. From an economic perspective, these changes are small; but today’s eurozone leadership may lack the political will to carry them out. That doesn’t change the basic fact that the current halfway house is untenable. A system intended to promote prosperity and further integration has been having just the opposite effect. An amicable divorce would be better than the current stalemate. Of course, every divorce is costly; but muddling through would be even more costly. As we’ve already seen this summer in the United Kingdom, if European leaders can’t or won’t make the hard decisions, European voters will make the decisions for them – and the leaders may not be happy with the results. Project Syndicate
if European leaders can’t or won’t make the hard decisions, European voters will make the decisions for them
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16 Business Daily Wednesday, August 24 2016
Closing Gems
World’s largest pearl to be on display in Philippines The world’s largest natural pearl will be put on display in the Philippines soon, after the US$100-million treasure was recovered from a burned house. According to Aileen Amurao, a Philippine tourism officer, the pearl was first discovered in 2006 by a fisherman of the Palawan Island. The fisherman didn’t know how much it was worth and tucked the
pearl away as a good luck charm, Amurao said, adding the fisherman only thought to hand in the find to the authorities after his house was burned down by a fire. “We now need help from gemologists to fully certify it,” Amurao said. The pearl is 67 cm long, 30.5 cm wide and weighs 34 kg. The previous record was held by the Pearl of Lao Tze, which weighs 6.4 kg and is worth US$35 million. It was also retrieved near Palawan Island. Xinhua
Central bank injections
China treasury futures tumble as short-term liquidity eyed The central bank has injected a net 654.3 billion yuan (US$98.44 billion) through open markets year to date by the week ending August 20.
C
hina bond futures posted their sharpest fall in three months yesterday as the prospect of more liquidity injections by the central bank into the financial system reduced expectations of more aggressive policy easing. Traders said the People’s Bank of China (PBOC) asked banks about demand for 14-day reverse bond repurchase agreements for the first time since February, suggesting it may be expanding its strategy of using targeted, short-term injections rather than cutting interest rates or banks’ reserve requirements (RRR).
The People’s Bank of China (PBOC) has relied on issuance of seven-day reverse repos in daily open market operations this year, injecting cash on a regular basis to manage short-term money supply. The adjustment may imply the PBOC is preparing to extend the tenor of its short-term money management strategy. The PBOC has not cut RRR since March, and has not cut long-term
guidance interest rates since October. While China’s economy appears less at risk of a hard landing than feared last year, it remains wobbly, indicating that traditional monetary easing has become less effective at boosting growth than in the past. More aggressive monetary policy easing could also put unwanted additional pressure on the yuan currency, which is near six-year lows, and risk more capital outflows. In addition, policymakers have clearly grown more concerned recently about the risks of prolonged, debt-fuelled stimulus, and appear to have turned their focus to more government spending instead.
Money markets were mixed after the PBOC’s move, with the volume weighted average of the 14-day repo down just two basis points (bps) to 2.7 per cent and the seven-day weighted average rate up six bps at 2.40 per cent. Although the 14-day repo rate has been moving higher in recent days, the weighted average remains far below its recent peak of 2.82 per cent in late July. With the central bank conducting seven-day reverse repos on a nearly daily basis, the benchmark seven-day rate has remained steady for most of 2016, but the 14-day has been more volatile. It has also injected funds through medium-term lending facilities which allow it to channel money to more vulnerable sectors such as agricultural firms or small businesses. Reuters
‘The price of Chinese 10-year treasury futures for December delivery fell 0.38 per cent’ “The market interprets the move as another sign that the central bank won’t cut interest rates and RRR for now as it injects more short-term money into the banking system,” said a senior trader at a major Chinese state-owned bank in Shanghai. “That is likely to set a floor for the fall of the yields of government bond futures, and thus investors sold the futures on the news.”
People’s Bank of China headquarters in Beijing
Reviving spending
Environment
M&A
Mainland to slash limits on foreign investment
Nation’s oil firms to propose Casino operator Rank still CO2 benchmarking plan on lookout for opportunities
China will further open its economic borders to investors from abroad in a move intended to counter sliding confidence in the outlook for the world’s second-largest economy. The nation will continue opening its education, finance, culture and manufacturing sectors to foreign investors, the vice minister of commerce Wang Shouwen said at a briefing in Beijing yesterday. Measures will focus on boosting investment in inland, western regions, Wang said. Foreign capital utilized by the country declined by 1.6 per cent in July. While global investors fuelled China’s economic boom by building factories, shops and infrastructure in the nation since 1978, some lucrative service sectors such as finance and telecommunications are largely closed to them. China also is considering using a nationwide “negative list” to relax those regulations, which means only industries listed are closed to investors from overseas. The negative list is now applied only in free-trade zones, while other areas can limit all sectors that aren’t specifically cleared. Bloomberg News
China’s oil refining, petrochemical and chemical companies will propose a plan to benchmark their carbon dioxide (CO2) emissions as the first step toward setting up an emissions market for the sector, the group’s industry association said yesterday. The China Petroleum and Chemical Industry Federation (CPCIF), China’s oil industry lobbying group, plans to make a proposal by September on how to set benchmarks for the CO2 produced while manufacturing products ranging from diesel fuel to benzene, it said in its China Chemical Industry News newsletter. The benchmarks will be used to set CO2 emissions caps for nearly 2,400 companies in the sector under the national carbon market that will start next year, the CPCIF said. China, the world’s second-largest oil consumer, will need to benchmarks to help create reduction targets for its large petrochemical and chemical factories that are responsible for up to 70 per cent of the sector’s CO2 emissions, the CPCIF said. China plans to bring in up to about 8000 companies in eight industries into its national carbon trading programme, including from the power, steel, cement and transportation sectors. Reuters
British casino operator Rank Group Plc is still on the lookout for M&A opportunities after talks over a joint bid for William Hill Plc ended last week, and will expand its online services to strengthen its business. Gambling faces higher taxes and tighter regulations in Europe, and a series of mergers has intensified competition as firms market themselves to younger sports fans betting via mobile apps. Rank and online gambling firm 888 Holdings Plc had wanted to jointly take over rival William Hill but they gave up their pursuit on Thursday, saying they had not been able to meaningfully engage with William Hill’s board. Rank, whose business is predominantly in Britain where it owns the Mecca Bingo and Grosvenor Casinos chains, was still scouting for deals, its head said yesterday, after the company posted a 4 per cent rise in annual profit but lifted its full-year dividend by 16 per cent. Rank is 56 per cent owned by Hong Leong Company (Malaysia) Berhad, according to Reuters data. Reuters