Macau Business Daily October 28, 2016

Zhongshan linked to with the SAR to promote yacht culture in the Delta SPECIAL REPORT Pages 6 & 7

Friday, October 28 2016 Year V Nr. 1161 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Oscar Guijarro Shadow banking

China tests a gauge to assess risks of questionable financial products Pages 5-7

Results

www.macaubusinessdaily.com

CPC meeting

OCBC Wing Hang bank profits fall

Xi Jinping’s status elevated after key political summit Page 16

Page 2

Telecom

Government to implement new system to manage CTM concession assets Page 5

SAY THE WORD Diversification

After the visit of Premier Li to the territory this month, ‘diversification’ is now the word in everybody’s economic lexicon.

As a key concept linked to Macau’s economic development, the Economic Development Committee gathered yesterday to discuss how diversification should be implemented in the real economy, and some of its members explained what we can expect. Page 3

China-Portuguese-speaking countries commerce shrinks

Good old friend

That faithful old chap, employment data, is back in town to confirm its good health; faithful because the unemployment rate has not changed for the past 16 months, and healthy because 1.9 per cent is a dream result for most parts of the world.

Trade with China Trade between China and Angola, Brazil, Guinea-Bissau, Portugal and East Timor fell in August. Total trade value of merchandise between the group and China reached US$60.23 billion from January to August. Page 3

Galactic head start

Results Union Gaming analysts have praised the latest performance results of Galaxy Entertainment Group. Experts highlight almost every single aspect of the strategy adopted by the operator, especially in the VIP sector. Page 8

Slower stability Job market Page 5

HK Hang Seng Index October 27, 2016

23,132.35 -193.08 (-0.83%) Worst Performers

BOC Hong Kong Holdings

+0.91%

Wharf Holdings Ltd/The

-0.09%

Belle International Holdings

-3.29%

China Mengniu Dairy Co Ltd

-2.25%

Cheung Kong Property

+0.63%

China Unicom Hong Kong

-0.11%

Sands China Ltd

-2.96%

China Shenhua Energy Co

-2.06%

Sino Land Co Ltd

+0.45%

Hong Kong & China Gas Co

-0.13%

CNOOC Ltd

-2.67%

PetroChina Co Ltd

-1.99%

Sun Hung Kai Properties Ltd

+0.35%

Power Assets Holdings Ltd

-0.14%

AAC Technologies Holdings

-2.37%

Cathay Pacific Airways Ltd

-1.92%

China Overseas Land &

+0.00%

China Resources Power

-0.15%

Swire Pacific Ltd

-2.37%

AIA Group Ltd

-1.72%

25° 30° 22° 28° 23° 26° 21° 28° 20° 25° Today

Source: Bloomberg

Best Performers

SAT

sUN

I SSN 2226-8294

Mon

Tue

Source: AccuWeather

China’s industry Profits of China’s industrial corporations are holding up this year thanks to a boost from steel and refining, even as last month’s earnings slowed from a three-year high. The National Bureau of Statistics released the data remarking that debt is taking its toll on the secondary sector. Page 10

2 Business Daily Friday, October 28 2016

Macau

Society

Gov’t to spend MOP15 mln for ‘Latin Parade’ The budget for the annual event celebrating the city’s handover is slightly less than that of last year

T

he government is splashing out MOP15 million (US$1.9 million) to hold this year’s ‘Parade through Macao, Latin City,’ an annual parade held since 2011 to celebrate the anniversary of the city’s handover to China.

Compared to last year, the budget for the event has decreased by MOP1 million. The director of the Cultural Affairs Bureau, Guilherme Ung Vai Meng said yesterday at a press briefing that the reduced budget is due to the Bureau having gained more experience in holding the parade

over the previous years.

The event, which will take place on December 4, comprises over 50 local and foreign performing groups, with a total 1,200 participants. The parade will start from Rua de S. Paulo at 4:30 pm and end at Tap Seac Square around one hour later.

According to the Bureau, a new alternative route will be added to this year’s parade, which will allow some performing groups to depart

from Senado Square and join other groups at the Ruins of St. Pauls.

The Cultural Affairs Bureau expects this new route will boost the total number of audience by between 20 and 30 per cent, from the average of 100,000 recorded in the past years.

The year’s parade is themed ‘ VIVA’s Adventures through Shan Hai,’ taking the Chinese ‘Classic of Mountains and Seas’ as its inspiration. K.L.

results

OCBC Wing Hang quarterly profits drop

Legislation

Consumer protection law amendment bill may be halted But the MSAR government believes it will be able to hand in the amendments to taxi regulations within this legislative year Cecilia U cecilia.u@macaubusinessdaily.com

The bill to amend the city’s consumer protection law might not be submitted to the Legislative Assembly within this legislative year, the Secretary for Administration and Justice, Sonia Chan Hoi Fan said yesterday, in order to ensure the quality of the bill, according to local broadcaster TDM Radio.

Speaking to reporters on the sidelines of an event yesterday morning, the secretary indicated that a total of 90 articles are covered in the bill, which will require more time for deliberation at the legislature, because the quality of the bill may be affected if the Assembly is given too little time to evaluate the proposal.

The current tenure of the Legislative Assembly is in its last legislative year, ending next August. All submitted bills to the Assembly may become

invalid if legislators cannot finish the two readings of these proposals by the end of its tenure.

Meanwhile, Secretary Chan told reporters that the amendments to taxi regulations have reached the final draft stage.

She also revealed that verbal sexual harassment will not be included in the latest proposed amendments of the criminal code, given that the crime of insulting contained in the current laws could be applied in such circumstances.

On the other hand, the Secretary said her office would strive to complete the bill to amend the judicial origination framework law, which aims to resolve issues involving cases being directly heard by the Court of Final Appeal.

She added that these cases do not violate human rights according to international norms, despite the fact that in such cases defendants cannot not file any appeals.

Meanwhile, parent company OCBC Bank’s net profits up 5 pct Kam Leong kamelong@macaubusinessdaily.com

OCBC Wing Hang Bank saw its net profits for the third quarter of the year fall by 13 per cent year-on-year to HK$448 million (US$55.8 million), compared to HK$513 million in the same period last year, its Singaporean parent company Overseas-Chinese Banking Corporation Ltd (OCBC Bank) announced yesterday.

For the three months, OCBC Wing Hang’s total income increased by 13 per cent year-on-year to HK$1.3 billion, but due to a 29 per cent year-on-year growth in operating expenses to HK$767 million, the subsidiary’s quarterly operating profits fell by three per cent yearon-year to HK$589 million, OCBC Bank’s financial results indicate.

Currently, the Singaporean banking group operates 110 branches and offices in Hong Kong, China and Macau under OCBC Wing Hang.

The branches in Hong Kong and Macau were previously named Wing Hang Bank and Banco Weng Hang respectively, until 2014 when OCBC Bank acquired the branches in the two SARs for HK$38.4 billion and rebranded them as OCBC Wing Hang.

During the quarter, OCBC Wing

Hang’s deposits increased by five per cent year-on-year to HK$199 billion, while total loans amounted to HK$160 billion, up by four per cent year-on-year. The unit’s loanto-deposit ratio fell by 1.1 percentage points to 80.6 per cent.

For the same period, parent company OCBC Bank reported a net profit after taxes of S$943 million (HK$5.2 billion), up by five per cent year-on-year. Of the total profits, those contributed by OCBC Wing Hang accounted for S$71 million, a drop of two per cent year-on-year.

According to the group, the earnings performance over the same period last year was ‘underpinned by strong performance in non-interest income, particularly fees from wealth management and profit from life assurance’.

For the first nine months of the year, the net profit of OCBC Wing Hang totalled HK$1.45 billion, a slight decrease of six per cent compared to HK$1.54 billion one year ago. Meanwhile, that of its parent company totalled S$2.7 billion, a drop of nine per cent year-on-year. Of the total profits, S$222 million were contributed by OCBC Wing Hang, seeing a decrease of four per cent year-on-year.

Business Daily Friday, October 28 2016 3

Macau MICE sector

Diversifying local economy Davis Fong, Director of the Institute for the Study of Commercial Gaming, says next year will be the best time for developing the city’s MICE industry further Annie Lao annie.lao@macaubusinessdaily.com

With the support of the central government and more facilities already built in Macau, the city’s MICE (Meetings, Incentives, Conventions and Exhibitions) industry is expected to grow strongly in the next year, Davis Fong Ka Chio, Director of the Institute for the Study of Commercial Gaming said.

Talking to reporters after attending a meeting held by the Economic Development Committee to discuss the city’s diversifying economic policy yesterday at the World Trade Center Macau, the director said he believes “Macau can hold large size meetings and events. This highlights its increasing competitiveness in the short and medium term.”

One of the 19 measures announced

by Premier Li Keqiang this month includes supporting Macau to expand its capacity to hold large size meetings and events, and further developing Macau’s MICE industry.

“More new casino resorts will open up in the future, which can increase the supply of hotel rooms in the city to accommodate event participants staying in Macau,” Director Fong added.

Director Fong noted that the city’s tourism and gaming industry has started to rebound.

“As long as the tourism and gaming

industry is performing stable and improving towards the upward trend, it can help boost up local business confidence. Especially, it is important to have consumer confidence raised among Mainland Chinese tourists,” Director Fong pointed out.

Still early

Director Fong commented that following the adjustment period of

Other issues

Davis Fong Ka Chio, Director of the Institute for the Study of Commercial Gaming

Trade

Less Chinese demand China, Portuguese-speaking countries’ trade sees 11 pct drop m-o-m in August The value of merchandise traded between China and Portuguese-speaking countries hit US$8.37 billion (MOP66.86 billion/HK$ 64.92 billion) in August, nearly an 11 per cent drop from the previous month, as trade between China and Angola, Brazil, Guinea-Bissau, Portugal and East Timor fell by 35 per cent, 5 per cent, 30 per cent, 13.5 per cent, and 4.8 percent, respectively, compared to the same period last year. The data was announced yesterday by the Forum for Economic and Trade Co-operation between China and Portuguese-speaking Countries, and originates from China Customs.

The drop comes on the back of a 14.8 per cent year-on-year decrease in Chinese demand for exports from the countries, hitting US$5.94 billion, while imports of merchandise products from China to the countries contracted just 1.5 per cent, hitting US$2.78 billion.

The only two countries of the group to register strong increases in trade with China were Cape Verde, with a 112 per cent year-on-year increase for the month, and São Tomé and

the local economy over the past 27 months, the gaming industry has entered into a stable stage since August, but he said more time would be needed to see if the local economy can still grow steadily in the long term.

“Gaming results were positive in August and September, although the positive increases were still very small. For October’s results, it is possible to be positive again and even better than the previous month, given that October is traditionally a popular month in the year as it includes the National Golden Week holiday,” he commented.

However, he stressed that different industries are facing different

situations, meaning that the local economy as a whole has not yet completely recovered from the adjustment period.

“Some industries have recovered faster than others. It takes time to reach a stable stage in the local economy by getting out from the bottom,” he said.

Nevertheless, due to uncertain economic factors in the neighboring regions, he predicted that in December, it is most likely that some other countries will increase their interest rates, especially in the US. “It will cause the world economy to be unstable. We have to prepare in the medium and long term that rising interest rates will happen in the future and it could have a negative impact on Macau’s economy,’ he explained.

Príncipe, with a 63.4 per cent increase year-on-year. However, both countries registered trade deficits with flat or extreme decreases in exports to China during the same period.

In total, China’s merchandise imports from Portuguese-speaking countries reached US$5.95 billion during the month, a 14.8 per cent decrease compared to July, while China sold merchandise valued at US$2.78 billion to the countries in the period, down 1.5 per cent compared to July.

For the first eight months of the year, the value of China’s merchandise exports to Portuguese-speaking countries hit US$18.58 billion, a drop of 28.24 per cent compared to the same period last year. A lesser drop of 0.74 per cent year-on-year was seen in goods sold by Portuguese-speaking countries to China, amounting to US$41.68 billion.

Total trade values of merchandise between the group and China reached US$60.23 billion in the eight-month period, an 11.2 per cent decline yearon-year. K.W.

He also said that the supply of local manpower has always been an issue in the city. Regarding such issues, the Economic Development Committee members agreed that the input of non-resident talent could make up for the lack of human resources in the city, in order to improve the development of the local economy, Vong Kok Seng, Vice President of Board of Directors of Macau Chamber of Commerce said to reporters after the meeting.

More education and training programs should be provided to locals in order to enhance local talent, he added.

The President of the Macau Chamber of Commerce, Kou Hoi In, also speaking after the session, highlighted that in order to further develop the domestic economy, the different characteristics of each local community have to be taken into consideration.

4 Business Daily Friday, October 28 2016

Macau Opinion

Pedro Cortés*

Should we expect anything until 2019?

It is quite clear that the elections for Chief Executive of the Macau Special Administrative Region, to take place in 2019, are already in the minds of the potential and putative candidates.

Those who were not distracted by the fireworks in September and the events of October may feel that all steps taken have been with a purpose: to earn prestige with the PRC officials who are going to decide who the next Chief Executive will be, for a decisive period of Macau’s economy, when the term of the gaming concessions are due to expire (2020 and 2022).

Some players consider that it is more important to get in the good graces of the Motherland than to govern the city. It is human nature.

Power attracts more power and, quite often, obfuscates what should be the real focus: governing Macau and making this city attractive for residents and non-residents, and for local and overseas investors.

We should not then, expect any disruptive measures from January 2017 until December 2019. Well, I am not saying that we have seen major policies or progress since this Government has been in office.

Only Macau and Macau people will suffer with this inaction. Almost 17 years since the handover, we are probably, except for public works and, sometimes, cultural and social affairs and economy and finance, passing through the worst period of government inactivity we have ever experienced. The bureaucracy says thank you loudly.

We need action, my dear friends. We need a government that instead of governing for the spot lights, will govern for the people and for the people of the Macau Special Administrative Region.

It is not an easy task. But in case there is not enough competence, why not hire from overseas? Why not follow the great examples of Singapore and of certain countries of Europe, and go there and make a job offer for top officials, technicians, and people with vision who can boost Macau up to be a top Asian city and a high class tourism destination?

Mindsets would be changed and instead of feeding the hidden forces we could feed the real population with a view for the city in line with the vision the PRC Government has for Hengqin Island, which can complement the offer. *lawyer and frequent contributor to this newspaper.

Dispute

Getting it back Terra Capital is on track to get back a US$1.9 million bond from court proceedings against the local tax authority Failing to ‘timely file’ arguments in order to meet a deadline set for the Macau Tax Authorities’ appeal in a case against real estate investment fund Terra Capital Plc (Terra Capital), may smooth the way for the company to receive its US$1.9 million bond paid to the court at the beginning of the legal process, according to a statement sent out by Terra Capital yesterday.

The appeal, regarding taxes relating to the sale of the now-AIA Tower building, had previously been ruled

on by the MSAR Administrative Court in favour of Terra Capital, reducing the amount of tax paid on the property ‘by about US$1.9 million’, according to a previous company statement. Given the government department's failure to file in time, Terra Capital has now effectively won the case against the tax authorities, notes the release.

‘Counsel has now received a decision from the Court that as a result of the failure to timely file arguments, the appeal filed by the Tax Department

against the Administrative Court award, is considered to have been “deserted”. This means the appeal by the Tax Department is no longer effective and has no further standing and the earlier decision in the Company’s favour is the final decision,’ states Terra Capital, noting that the decision is expected to add a further two cents per share to the company’s net asset value (NAV), returning it to the same level as when the initial court decision was announced.

The case dates back to 2012, when the company sold the property to insurance company AIA for HK$1.2 billion (US$150 million/MOP1.03 billion). The government had until September 15 to submit a complete appeal after which time, if not submitted or incorrectly submitted, the court decision in favour of Terra Capital would become final. K.W.

Retail

TSL interim net profit drops 24.1 pct The luxury jewellery retailer said sales declines in Macau and Hong Kong were the major reason for the decreased profit for the six months Kam Leong kamleong@macaubusinessdaily.com

Sales decreases in Macau and Hong Kong dragged down the interim net profit of Tse Sui Luen (TSL) Jewellery (International) Ltd by 24.1 per cent year-on-year for the first half of its fiscal year ended August 31.

According to the company’s filing with the Hong Kong Stock Exchange yesterday, its net profit attributable to owners of the company amounted to HK$11.7 million (US$1.5 million) for the six months, a decrease of HK$3.8 million, compared to HK$15.5 million for the same period last year.

For the half-year period, the group’s turnover dropped by 11.6 per cent year-on-year to HK$1.55 billion, compared to HK$1.75 billion one year ago. In particular, those generated from Hong Kong and Macau slumped by 32 per cent yearon-year to HK$592.1 million, down from HK$867.6 million.

‘Hong Kong and Macau businesses witnessed a continuation in the drop of the number of tourists visiting from Mainland China together with a weakening in their overall consumption sentiment,’ the jewellery retailer noted in the filing, ‘all of which conspired to result in a decrease in overall tourist and other customer’s spending in these markets’.

It added that the sales decrease in the two cities was also driven by an increase in gold prices of more than 6.9 per cent for the first half, which resulted in the total weight of gold sold in the period falling by almost 27 per cent.

According to the filing, the company’s same-store sales for all businesses in the two Special Administrative Regions recorded a drop of 31.4 per cent year-on-year.

Sales in Mainland up

However, the jewellery seller saw its retail business in the mainland register year-on-year growth of five per cent, amounting to HK$934.1 million, compared to HK$860.2 million one year ago. In addition, same-store sales in the country rose slightly by

1.5 per cent year-on-year during the six months.

Projecting the business environment in Hong Kong and Macau would remain ‘challenging,’ TSL believes the demand for luxury jewellery from the mainland market, especially from the rising middle class in the country, will remain strong.

‘The rising disposable income, in particular among the female population, and the rising women’s job market participation rate, is the strong force behind this belief,’ it explained.

For the first fiscal half, the company declared an interim dividend of 1.5 HK cents per ordinary share, which is the same as that for the first half for the previous financial year.

Business Daily Friday, October 28 2016 5

Macau Economy

Local unemployment rate stays at 1.9 pct The local unemployment rate for July to September remained unchanged from the previous quarter Cecilia U cecilia.u@macaubusinessdaily.com

T

he MSAR’s unemployment rate hovered at 1.9 per cent for July to September, remaining unchanged for the past 16 consecutive months, the latest data from the Statistics and Census Service (DSEC) reveals.

During the three months, the underemployment rate saw an increase of 0.1 percentage points to 0.5 per cent, compared to the data recorded

for the June-to-August period.

The total labour force in the city totalled 401,800 in the three months, while the labour force participation rate stood at 72.9 per cent, an increase of 0.2 percentage points compared to the previous period.

Of the total labour force, the employed population reached 394,200 for the period, an increase of 1,600.

Meanwhile, the number of unemployed was 7,600, up by 200.

According to DSEC, fresh labour force entrants searching for their first

job accounted for 23.7 per cent of the total unemployed, which grew by 3.2 percentage points period-to-period.

In the July-September period, the city’s employment in gaming and junket activities, and construction saw period-to-period declines of 1.3 per cent and 0.8 per cent, to 80,500 and 45,100, respectively.

By contrast, employment in restaurants (27,200), hotels (31,200) and wholesale and retail trade (45,600) posted increases of 1.6 per cent, 2.7 per cent and 3.5 per cent, respectively, compared to the June-August period.

The official data shows that recreational, cultural and gaming industries employed the largest proportion of the labour force in the city, with the number of workers accounting for 23.3 per cent of the total.

The official data, meanwhile, shows that the median monthly earnings of the employed population in general was recorded at MOP15,000 (US$1878) while that of local employed residents was MOP18,000. In particular, the average earnings of those engaged in gaming and junket activities, and construction came in at MOP19,000 and MOP15,000, respectively.

The Secretary expects that this mechanism could be in place from next year, so that the accounts of the government and the company on these assets can be separated.

Commenting on the new tariff reduction scheme announced by the telecom operator on Wednesday, the official told reporters that he is “very satisfied” with the new scheme, as the company had made its first step.

On Wednesday, CTM announced it would reduce tariffs on its local leased circuits (LLC), international private leased circuits (IPLC) and direct Internet access (DIA) services for the city, resulting in average tariff reductions of 37 per cent, 49 per cent and 50 per cent, respectively.

But legislators at the follow-up committee for Public Administration Affairs did not feel the same as the

Secretary, the committee’s president, Chan Meng Kam, told reporters after the meeting with the official.

According to Legislator Chan, his committee members were unanimously dissatisfied with the attitude of CTM when the latter described the new tariff reduction as “the biggest in its history” and the “the best it can do”.

The legislators believe that cutting service charges is part of the job of the operator, noting the company’s efficiency in reducing tariffs used to be “as slow as snails,” Mr. Chan said.

On the other hand, Secretary Rosario stressed yesterday that the government’s current concession contract with CTM should be automatically renewed at year-end, as long as there are no major violations conducted by the company, or any issues harming public benefits.

Industries

Telecom

Gov’t to set up new mechanism for concession asset management Secretary Rosario said he is ‘very satisfied’ with CTM’s latest tariff reduction, but legislators feel differently Kam Leong kamleong@macaubusinessdaily.com

The government will establish a new mechanism for managing its telecom concession assets with concessionaire Companhia de Telecomunicações de Macau (CTM) next year, the Secretary for Transport and Public Works, Raimundo do Rosario said yesterday.

According to the official, the government’s work on defining the proportion of concession assets and mutual assets with the telecom operator

is almost complete.

“We have basically agreed with CTM on the proportion of concession assets, such as which part belongs to the MSAR government, or which part belongs to the company,” the Secretary told reporters after a closed-door meeting with a sub-committee of the Legislative Assembly (AL).

“For the future, we will have a mechanism to define whether each future purchase of [assets] will belong to the government or to the company,” he added.

6 Business Daily Friday, October 28 2016

Macau

Yachting Members of the local yachting community consider the current 129 berths available in the city as insufficient for any increase in yacht arrivals

Open Waters

Members of the Macau and Pearl River Delta yacht owner and business community, believe that the implementation of the ‘Free Yacht Travel Scheme’ in June of next year will bring numerous benefits for the local economy, but suggest the city still has a lot to develop in terms of docking capacity Nelson Moura nelson.moura@macaubusinessdaily.com

A

fter many years of discussions about the timing for the implementation of the Free Travel Yacht Scheme allowing yachts to travel from Zhongshan, the date was suddenly defined for June of 2017.

The unexpected announcement came after China’s Premier Li Keqiang included the scheme as part of Beijing’s 19 initiatives during the 5th Ministerial Conference for the development of the MSAR. The announcement, made by the Director of the Macao Government Tourism Office (MGTO), Helena de Senna Fernandes, was received with enthusiasm by members of the Macau and Pearl River Delta yachting community and businesses, who consider this as the first step to turning the city into the Monaco of Asia.

The scheme was supposed to have been in effect since last year, however the implementation has suffered multiple delays due to negotiations between authorities of the two regions, relating to customs and immigration issues. Now, finally with a set date, members of the region’s yachting community expect the city will adapt to accommodate a larger amount of vessels.

The Monaco of Asia

MayWall Corporation Zhuhai is a company that produces and sells luxury yachts in Zhuhai, China and exports them mostly to the US. For

its General Manager, Jerry Wallace, the scheme will be a test that, if successful, will see the Chinese government allow more cities to join and help develop a leisure marine culture in the Pearl River Delta.

“Macau, in my view, is predominantly gambling, but there seems to be a push towards other forms of entertainment. It’s fairly well documented in places all around the world that the marine economy brings value, in many different aspects and not just for the super rich,” Mr. Wallace told Business Daily.

Ac c o r d i n g t o t h e M a y Wa l l Corporation Zhuhai GM, this scheme will be the first step towards allowing yachts and class A vessels to come from abroad and dock in China.

“Yachting is kind of new in China, and having boats coming and going is not how the system was set up here. The Chinese government has been toying for almost eight years, and going from concept into a practical enforcement takes time, but it’s getting there,” Mr. Wallace told Business Daily.

Yacht dreams

One project that is sure to benefit from the scheme’s implementation is the RMB2.5 billion (MOP2.9 billion/ US$368.6 million) Keppel Cove luxury marina housing project in Zhongshan, developed by the Keppel Corporation, a Singaporean company that specializes in marine, property and infrastructure businesses.

The Keppel Cove project will include over 400 berths, including 250 landed homes with individual

Environment

“The typical yacht owner is in the high income bracket and is a very demanding client that won’t necessarily go shopping at the Macau cookie shops, but will spend more in the city than the average tourist in the high end market” Henrique Silva, Macau Sailing CEO “The travel scheme was part of the Keppel Cove project with the intention being to leverage the infrastructure

Exciting waters

For many members of the yachting community, the announced individual travel scheme for yachts and individual visas for those arriving in the MSAR by yacht and originating from coastal cities in Mainland China, is not just a great opportunity for the Macau yachting industry to grow, but it will also lead to an increase in businesses connected to yachting such as maintenance, cleaning and sales.

“This can create a lot of new business for Macau, not just travelling and entertainment, but with people buying yachts and travelling freely from Guangzhou and Mainland China and shopping here. Macau has the potential to be like Monaco and Cannes in southern France and the local yachting industry people

Politics

MSAR, HK ink environmental accords The agreement seeks co-operation of both regions in environmental protection works C o - o p e rati o n ag r e e m e n ts o n environmental protection have been signed by Raymond Tam Vai Man, Director of Macau’s Environmental Protection Bureau, and Donald Tong, Director of Hong Kong’s Environmental Protection Department, according to local broadcaster TDM Chinese radio news.

Th e ag r e e m e n t c o v e rs t h e prevention of air pollution, wastage

private berths, and an additional 158 berths for the yachting community.

Selected by the Macau and Guangdong governments as the pilot port for the scheme, it will be the first Customs, Immigration, Quarantine and Port-clearance (CIQP) building for leisure vessels in China, offering one-stop services covering customs clearance, border inspection and quarantine.

to increase the entire yacht industry in the Pearl River Delta,” the General Manager of Keppel Cove, Simon Goh, told Business Daily.

According to Mr. Goh, most Macau yacht owners dock their boats in Hong Kong, due to the lack of a waterways and yachting industry in Macau, but they will now be able to dock in the Zhongshan port, set to be inaugurated this November, in an opening ceremony to be attended by Chief Executive Fernando Chui Sai On, and the Governor of Guangdong province, Zhu Xiaodan.

As a test of the new yacht scheme, on November 3 a group of four to five boats will be the first to sail from the Zhongshan port to Macau to participate in the Macau International Yacht Import & Export Fair between November 4 and 6.

“This will only be the beginning, since maybe later the government will open up the waters until Hong Kong and for international yachts.

When this happens, Macau will be part of a bustling centre of the yacht lifestyle, boosting the local industry in maintenance, services and hospitality. A whole chain of business will come up,” Mr Goh told Business Daily.

and water management, plus environmental monitoring and research. The two cities will also co-operate in the announcement of major cross-border environmental emergencies and the development of the environmental protection industry.

The MSAR government recently released the latest publication of ‘Macau’s Environmental Condition in 2015’ report last Wednesday, revealing a couple of significant environmental issues that the city is experiencing.

In particular, the index of nonmetallic water pollution last year reached a new record high for the past 10 years.

Meanwhile, wastage in the city was recorded at 500,000 tonnes, which is higher than other neighbouring cities on a per capita basis. C.U.

CE to visit Beijing to discuss territorial waters planning The MSAR’s Chief Executive (CE), Fernando Chui Sai On will pay a visit to Beijing to discuss future plans and management of the city’s territorial waters with related departments. The official trip will start on November 2

and last for four days.

During the visit, the CE will meet with the National Development and Reform Commission, Ministry of Transport, Ministry of Water Resources, General Administration of Customs and the State Oceanic Administration.

In addition, the visit seeks to produce in-depth knowledge in order for Macau to be fully involved in the development strategy ‘One Belt, One Road’.

The local delegation to the capital city includes Commissioner of Macao Customs Service Vong Iao Lek, and Chief of CE Office O Lam. The city’s territorial waters occupy some 85 square kilometres, which were demarcated by the central government last December. The development of gaming projects in the future land reclamation zones in the territorial waters is prohibited. C.U.

Business Daily Friday, October 28 2016 7

Macau are very excited,” said Joanna Chang, Nam Kwong International Conference & Exhibition Co., Ltd Project Manager.

This will be the sixth year that Nam Kwong has organised the Macau International Yacht Import & Export Fair, but it will be the first time the event will have the presence of yachts that have sailed from Mainland China to Macau.

For Ms. Chang, immigration control issues were the main reason for the delays in the implementation of the scheme, but she believes that in the next two years, Hong Kong yachts might be able to register in Macau, and that in the future, yacht owners from Singapore, Thailand and other Southeast Asian countries could be docking in Macau, attracted by the city’s luxury hotels.

A similar view is shared by Albert Chock, President of the Macau Yacht Club, and Henrique Silva “Bibito”, CEO of local sailing company, Macau Sailing.

“With a few hundred docks, we can have a larger business, maintenance, cleaning and engineering. Besides this, yacht owners will bring their families and that will contribute to the consumer market,” Mr Chock told Business Daily.

For Mr. Silva, Macau has totally lost its maritime tradition since becoming a gaming centered economy, and the new measures will be a great opportunity to diversify, not just the maritime economy, but the overall economy of the city.

“The typical yacht owner is in the high income bracket and is a very demanding client that won’t necessarily go shopping at the Macau cookie shops, but will spend more in the city than the average tourist in the high end market. Monaco makes a lot of money from the yacht economy, but I think Macau wants to be more like a Las Vegas near the sea. But for Macau to be a

maritime centre like Monaco, will require a large amount of investment and will take some time,” Mr. Silva told Business Daily.

“This will only be the beginning, since maybe later the government will open up the waters until Hong Kong and for international yachts. When this happens, Macau will be part of a bustling centre of the yacht lifestyle, boosting the local industry in maintenance, services, and hospitality.

A whole chain of business will come up” Simon Goh, General Manager of Keppel Cove

Space in the water

One of the main issues raised following the announcement of the free yacht travel scheme, is the lack of capacity in Macau to dock the number of vessels that are very likely to increase after the travel scheme is

implemented.

Currently there are 57 berths off Lam Mau Pier on the Macau Peninsula managed by Macau Yacht Club, and 22 others at Macau Fisherman’s Wharf, with the Marine and Water Bureau (DSAMA) having announced 50 provisional floatable buoy berths to be installed near the Coloane Pier, fronting Concordia Industrial Park.

With these additions, the total number of berths in Macau will increase to 129, and according to sources that talked to Business Daily, there are 200 active members of the Macau Yacht Club and around 50 yachts registered and docking in its harbour, with 100 yacht owners from Macau that dock their vessels in Hong Kong to also take into account.

The local yachting community believes Macau still has very little in terms of infrastructure capacity, and the quality of the local docks would have to be improved for the city to even receive an extra 50 vessels.

“Before the government opens the waters, it needs to make sure there are enough parking slots. The current docking capacity can’t meet industry needs,” Mr. Chock stated.

Docking space

According to the GM of MayWall Corporation Zhuhai, the original idea was that Macau and Hong Kong would join the scheme, however due to a lack of infrastructure and policies in place, Hong Kong refused to join the scheme last year.

According to data provided by the Hong Kong Marine Department, last year Hong Kong marinas registered a total of 250 leisure vessel arrivals, meaning Macau would have to increase its maritime capacity considerably.

“Macau has an opportunity to revitalise some of its historical harbours; the old shipyard is

dilapidated and falling down. In Hong Kong shipyards are being eaten up by real estate and the number of berths is being reduced,” Mr Wallace told Business Daily.

“The Lam Au harbour embarrasses the city by not having the minimum requirements to receive outside yachts. The Fisherman’s Wharf Dock is fantastic in terms of equipment and location, but has the problem of being near the ferry terminal, which creates some wave curling problems.

Maybe after installing a breakwater it would be perfect,” Mr. Silva told Business Daily.

The Macau Sailing CEO considers that a new marina could maybe be built in Hengqin, near the Science Museum or in the Cotai canal, and that currently there is the technology to create foldable marinas that you can move to different areas.

An accessible customs an d immigration system would also have to be put in place, according to the member of the local yachting community. Currently, any yacht owner docking in Hong Kong has 24 hours to obtain a clearance, while Macau yacht owners have to call the Maritime Authority and wait in the marina to obtain clearance.

According to recent regulations announced by DSAMA, yachts travelling under the MacauGuangdong Free Yacht Travel Scheme can stay in Coloane for a maximum of 14 days.

“Macau has a vast experience of patrolling our coast for illegal immigrants, so I don’t think having immigration in every harbour would be that complicated,” Mr. Silva told Business Daily.

Ready or not, one thing is for sure,

by June of 2017, yacht owners will be allowed to do something they haven’t been allowed to for many years - a simple voyage from Mainland China to Macau.

8 Business Daily Friday, October 28 2016

Gaming Results

Analysts: GEG Outperforming Strong performance seen in the third quarter, say analysts. Although stating ‘luck’ had a hand in it, predictions are still strong for upcoming years Kelsey Wilhelm kelsey.wilhelm@macaubusinessdaily.com

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alaxy Entertainment Group (GEG) has ‘hit its stride’ and just ‘at the right time’ according to analysts at Union Gaming, reflecting a positive, and surprised, opinion across the board by all analysts in regards to the operator’s third quarter results, released on Wednesday.

‘Galaxy outperformed the market across all segments, but most importantly outperformed in the high-margin segments […] and slots despite the significant addition of new supply during the quarter,’ note the analysts at Union Gaming, led by Grant Govertsen. GEG’s revenue beat estimates by eight per cent, coming in at HK$12.9 billion (MOP13.39 billion/US$1.66 billion), a five per cent year-on-year increase and a full HK$1 billion above forecasts by the rating agency.

Analysts at Bernstein stated that GEG’s revenue for the quarter was in line with their estimates, but noted the results for EBITDA (earnings before interest, taxation, depreciation, amortization) were 13 per cent over their estimates. This was slightly further off than the 10 per cent above estimates by analysts at J.P. Morgan, who attributed the increase to being ‘mainly from luck factor’.

Analysts at Bernstein however, hold their reservations in regards to overall

luck continuing in the territory, stating they remain ‘cautious on calling a recovery (especially in VIP) just yet’. The group sees the strong turnout in VIP, up three per cent quarter-to-quarter, yet down four per cent year-on-year, as ‘what may be a short term burst’, but also noted that GEG sees ‘strength in the grind and highly profitable midtier segment’.

Even better times ahead

‘Galaxy continues to transition (better than we had expected) from VIP to Mass’ note analysts at Bernstein, given that VIP gross gaming revenue saw a five per cent and two per

cent drop, year-on-year and quarter-to-quarter, respectively for the third quarter, with the continuing and strong transition to mass a ‘key factor’ for GEG. This will especially stand the group well in future operations, notes Union Gaming, with ‘Galaxy being the only Big 6 operator with the ability to meaningfully increase its supply following the current wave of development’. This refers to the future Phases 3 and 4, providing lower-end room supply and more non-gaming in the next few quarters ‘giving Galaxy an extended runway of growth in the out years’. The analysts, led

by Govertsen, predict net revenue for full-2016 to hit HK$50.7 billion, a three per cent increase on estimates, with a 3.7 per cent yearon-year reduction the following year, down to HK$48.84 billion.

Analysts at Bernstein are less optimistic, expecting gross revenue to remain flat, however hitting HK$51.52 billion, further increasing to HK$52.53 billion for full-2017.

Analysts at J.P. Morgan see similar figures for full-2016, however predict higher increases for 2017, with HK$51.45 billion for full-2016 and HK$52.64 billion for 2017, representing increases of one and two per cent year-on-year, respectively.

Union Gaming predict that for the future, Galaxy will be able to ‘hold its own against new supply and generally avoid cannibalization’, aided by a ‘generally positive impact on non-premium mass for the market as a whole’ from the opening of The Parisian Macao in September.

Analysts at Bernstein also acknowledge the continued positive position of Galaxy in the market, but have yet to include predictions regarding the later Phases 3 and 4 of the group, which ‘at this stage lacks certainty around timing and scope’.

Business Daily Friday, October 28 2016 9

Greater China

Smartphone market

OPPO uses sales rep army, ad blitz to leapfrog over rivals From nowhere a few years ago, OPPO has jumped into fourth place in smart phone sales in the world Eveline Danubrata and Sijia Jiang

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hinese s m a rt p h o n e company OPPO doesn’t believe in subtle marketing.

It has built a massive network of 320,000 retail outlets across China and other parts of Asia, its sales representatives earn commissions on every phone they sell, and it has filled the airwaves and covered thousands of billboards with advertising based on the endorsement of some of the hottest Asian pop stars.

The company also keeps total control of just about everything, from design to distribution, and making the phones itself rather than farming production out to contract manufacturers. OPPO also sells a lot of devices through its own stores, deals directly with any retail partners rather than through layers of middlemen, and provides them with sales reps and generous incentives.

The aggressive strategy has been working, allowing OPPO to leap ahead of some of its largest rivals who rely much more on online marketing and the network providers to flog their products.

From nowhere a few years ago, OPPO has jumped into fourth place in smart phone sales in the world. In the third quarter, it jumped into first place in China with 17 per cent market share, according to research firm Counterpoint. It is No. 2 in Indonesia, and is rapidly growing in India.

In many ways OPPO’s marketing success is a testament to how commoditized the smart phone market has become and how the big Asian markets have become increasingly important.

OPPO’s phones aren’t much different from the medium-priced

range of products made by rivals, such as Samsung Electronics and Xiaomi. OPPO, though, has managed to generate a lot of buzz for its phones, such as the R9 “Selfie Expert” that targets Asia’s mass of social media users with a relatively powerful camera, making it the best selling smart phone in China in the third quarter.

It has been helped by recent stumbles by Apple Inc, which posted its third successive quarter of declining iPhone sales on Tuesday, and Samsung, which halted production of its fire-prone Galaxy Note 7 phones.

“I think the model is stable, but the growth going forward may be slow and require more investment” CK Lu, an analyst at research firm Gartner “No other brand could match OPPO’s sales bombardment tactic,” said a Shijiazhuang, Hebei-based executive with a mobile phone distributor that sells many rival brands.

The big question is whether the strategy is sustainable. OPPO’s marketing cost base is higher than brands focused more on online selling, and increasing at a rapid clip. That is fine while it is expanding quickly but may not work if the growth rate slows either because it in any way

lags rivals on product development or there is a wider economic dislocation, analysts say.

“I think the model is stable, but the growth going forward may be slow and require more investment,” said CK Lu, an analyst at research firm Gartner.

Another issue is that in some markets where sales are dominated by the network operators the strategy doesn’t work - one reason why it hasn’t yet made a play for the United States market.

It failed in Mexico after selling through local carriers. Low brand awareness and pricing that was higher than rivals contributed to its problems there, said Strategy Analytics analyst Woody Oh.

Big commissions

The blitz marketing tactics were on full show at a shopping mall in Jakarta one recent morning. As well as boasting spacious and flashy stores, the company sent at least a dozen sales representatives - mostly young women - around the mall to ask shoppers if they want to try an OPPO phone.

The incentives help to create a driven workforce. One OPPO sales representative said in his best month he can earn commissions of US$1,500 - six times the minimum wage in Jakarta.

Its big physical presence across a country such as Indonesia also works well in smaller cities and towns where online shopping is less developed and people are more likely to want to walk into a shop to buy a new phone, analysts say.

“We manufacture all our phones o u rs e l v es . . . W e d o n ’ t e n gag e distributors, we want to make sure we have end-to-end control over the consumer experience,” said Sean Deng, chief executive of OPPO Singapore, who also introduced OPPO to Indonesia.

OPPO’s strategy can be traced back to BBK Electronics, a main street retail brand and manufacturer of phones, DVD players and other electronics goods, that has been a household name in China since the 1990s.

Set up to target the overseas market

by BBK’s founder Duan Yongping and his right-hand man Tony Chen, OPPO entered the mobile market in China in 2008 when smart phone sales started to soar following Apple’s iPhone launch.

Altogether, the combined sales of the four phone brands that come under the BBK-Duan umbrella OPPO, Vivo, OnePlus and imoo - put the group in the No. 2 sales position in the world behind Samsung, according to research firm IHS Markit. Vivo was No.2 in the China market, just behind OPPO, in the third quarter, according to Counterpoint.

U.S.-based Duan, nicknamed “Duanfett” in China because of both his own success and his admiration for American billionaire investor Warren Buffett, built his fortune from BBK and on successful investments in Chinese Internet technology company NetEase and U.S. online media company Yahoo in the early 2000s.

He has since shifted part of his focus to philanthropy, and he is no longer engaged in the day-to-day operation of the companies, according to people familiar with him.

OPPO’s rapid ascent has caught its Chinese rivals who rely more on online marketing, such as Xiaomi and LeEco, flatfooted.

Xi a o m i , o n c e Chi n a’ s m o st valuable tech start-up on the back of the online buzz surrounding its affordable products, has seen i ts f o rt u n es st ea di l y d ec l i n e over the past three years, as its online-focused marketing failed to penetrate deep into rural areas, while its growth in big cities sharply slowed. Reuters

10 Business Daily Friday, October 28 2016

Greater China Debt impact

Slowing industrial profits show rising economy’s hurdles Earnings in industries such as electronics, steel and electricity were hit by a significant drop in growth, a statistics official said

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rofit growth in China’s industrial firms slowed sharply as some key manufacturing sectors stumbled on weak activity and rising debt, suggesting the world’s second-biggest economy remains underpowered despite emerging signs of stability.

The September data from National Bureau of Statistics (NBS) underlined the daunting task facing policy makers as the nation’s vast manufacturing industry grapples with slack demand, overcapacity and ballooning debt.

Industrial sector profits last month rose 7.7 per cent to RMB577.1 billion, slowing markedly after surging 19.5 per cent in August, NBS figures released on its website showed yesterday.

Earnings in industries such as electronics, steel and electricity were hit by a significant drop in growth, He Ping, a NBS official said in a note accompanying the data.

“Although industrial profits have got

back on track with more stable growth, unfavourable factors still exist,” He said, noting weak demand at both home and aboard, and delayed payments put a strain on firms’ cash flow.

The official also cautioned about rising debt levels in the coal and steel sectors, stressing the importance of controlling debt risks as capacity cuts and structural reforms get implemented.

China’s debt has soared to 250 per cent of GDP and the Bank for International Settlements (BIS) warned in September that a banking crisis was looming in the next three years.

Recent data showed some signs of stability, with annual economic growth of 6.7 per cent in the third quarter matching the previous quarter, as increased government spending and a property boom offset stubbornly weak exports.

But the profits data suggest China’s economy continues to face a host of challenges as authorities try to wean businesses off cheap credit-fueled

growth, temper a surge in home prices and curb rising debt levels and shadow banking activity.

“If you look at the structure of the economy, it’s actually worsening because the growth of SOEs and public sector growth is relatively stronger, but private sector growth is much weaker. This shows the quality of the growth is deteriorating,” said Yang Zhao, economist at Nomura.

Outlook subdued

Profits in electricity tumbled 23.2 per cent on-year, as electricity prices were adjusted lower and revenue growth slowed. Earnings in general and special equipment manufacturing also turned negative, dropping 10.8 per cent on-year.

Total profits for the first nine months stood at RMB4.64 trillion (US$684.77 billion), up 8.4 per cent from the same period a year ago, the same pace as in the January to August period.

Industrial overcapacity, mainly in the traditional sectors, have been a drag on profits in recent months and analysts say the outlook for earnings in the sector could hinge on the progress made by policy makers to cut capacity.

Beijing has embarked on a campaign to cut capacity in the coal and steel sectors in the economy’s most significant transformation in two decades.

The August profit growth - the fastest pace in three years - was helped

by Beijing’s splurge on infrastructure projects and a booming real estate industry and so was seen as unsustainable.

China’s producer prices rose in Sep-

“Although industrial profits have got back on track with more stable growth, unfavourable factors still exist” He Ping, a National Bureau of Statistics official tember for the first time in nearly five years, thanks to higher commodity prices.

“Profits were largely driven by a restoration in commodity prices such as coal and steel,” David Qu, economist at ANZ said in Shanghai.

But Qu said the outlook for steel prices remain cloudy, as “the tightening in the property market means potential demand could shrink.”

Indeed, a subdued property market is expected to drag on growth in the first two quarters next year, as policy makers introduce curbs to cool home prices.

“We are optimistic that stable growth will last through end of this year, because they have to finish the projects started earlier,” said Merchants Securities economist Xie Yaxuan in Shenzhen.

“But property and its related industries will definitely affect growth in the first or second quarter next year,” Xie said. Reuters

Shadow banking

Beijing testing scheme to gauge risk People’s Bank of China intends to broaden its regulatory oversight to include wealth management products often sold by banks and not counted on their balance sheets China is still testing a scheme to include off-balance sheet financing in assessing the health of commercial banks before rolling it out more widely, an influential newspaper quoted the central bank’s top economist as saying.

The scheme is designed to give the authorities a better sense of, and control over, the country’s growing debt problem and underscores worries among analysts that unsustainable credit could hit an already-slowing economy hard.

“The central bank is collecting relevant data and doing tests at the moment,” Ma Jun, chief economist of the central bank’s research bureau, said in an interview with China Business Network published yesterday.

“The central bank will continue to study the timing and the plan, and will guide commercial banks to strengthen the risk management of their off-balance sheet businesses,” Ma said, adding that it would ultimately be implemented in a smooth way.

Sources told Reuters this week that the People’s Bank of China would make changes to its so-called Macro Prudential Assessment (MPA) risk tool to broaden its regulatory oversight to

include wealth management products often sold by banks and not counted on their balance sheets.

By mid-year, the total amount of wealth management products, or WMPs, at banks was 26.3 trillion yuan (US$3.88 trillion) - equal to about a third of GDP last year - and up 12 per cent from the beginning of the year, according to the latest report by the banking sector’s WMP registration and custodian centre.

Banks’ WMPs are mainly invested in bonds, deposits, and so-called “non-standard assets”, which are mainly credit-like financial products.

Zhou Hao, senior emerging market economist at Commerzbank AG in Singapore, wrote in a note that the new rules would apparently require banks to reserve more capital.

“This is part of the ‘risk control’ policy package as shadow banking activities have picked up strongly due to monetary easing,” Zhou wrote, adding that Chinese authorities have also become wary of a property bubble.

Reuters reported in July that China’s banking regulator was drafting new rules to tighten control over the sprawling WMP industry.

“The most important indications are that WMP yields will continue to fall and the phrase of rapid expansion of WMPs will be over. But the slowing growth of bank WMPs will be good news for other types of asset management products,” said Ma Kunpeng, chief financial sector analyst at China Merchants Securities.

The central bank introduced the macro-prudential regime at the beginning of this year. The new assessment system has also been used to monitor banks’ interest pricing to prevent them from engaging in “vicious competition”. Reuters

Business Daily Friday, October 28 2016 11

Greater China Currency

In Brief

HKMA assigns two new offshore yuan primary liquidity providers To enhance the transparency of the yuan market liquidity, the HKMA will also publish information on the intraday and overnight yuan use of the Liquidity Facility The Hong Kong Monetary Authority (HKMA) said yesterday that it had designated two new banks as Primary Liquidity Providers (PLPs) for offshore yuan in Hong Kong, bringing the total to nine.

“We believe the expansion of the scheme ... will further strengthen the liquidity and resilience of the CNH market”

PLPs with a yuan repo facility of RMB2 billion (US$295.13 million) to facilitate their liquidity management when they carry out market-making activities and provide liquidity in the CNH market.

“We believe the expansion of the scheme from seven PLPs to nine PLPs, with the total PLP facility increased from RMB14 billion to RMB18 billion, will further strengthen the liquidity and resilience of the CNH market,” said Mr Norman Chan, Chief Executive of the HKMA.

To enhance the transparency of the yuan market liquidity, the HKMA will also publish information on the intraday and overnight yuan use of the Liquidity Facility as well as use of the PLP facility from Nov.1.

Hong Kong’s overnight yuan borrowing rates became very volatile in September as banks turned cautious about lending out yuan funds ahead of holidays and worried about the yuan’s short-term liquidity.

Market players say a rapidly shrinking pool of yuan deposits in Hong Kong will leave overnight and other short-term yuan interest rates in Hong Kong susceptible for the rest of the year.

The city’s yuan deposits fell to 652.9 billion yuan in August, its lowest level since February 2013. Reuters

China is set to hit its 2016 target for crude steel capacity cuts by late October, with additional reductions expected in the last two months of the year, an industry association said yesterday. The China Iron & Steel Association (CISA) also said on its website that the country had by the end of last month completed more than 80 per cent of this year’s capacity reduction target of 45 million tonnes.

A worldwide steel glut has stoked trade disputes between China, the world’s top maker of the construction material, and other producers such as the United States and the European Union.

Small engine cars

China is considering extending a tax cut for small engine cars, an industry ministry official said on Wednesday, a move that could help sustain a sales rebound in the world’s largest auto market. “We are working with related agencies to study incentives for energy-saving and new energy vehicles,” said Qu Guochun, a deputy director at the Ministry of Industry and Information Technology (MIIT). “For example, we are studying an extension of the tax cut for 1.6-litre energy saving cars.”

China is “in the process of optimising and adjusting its subsidy policies for new energy vehicles”, Gu said.

The city’s de-facto central bank has added Agricultural Bank of China and Bank of Communications as PLPs, in addition to the existing PLPs, namely Bank of China (Hong Kong), BNP Paribas, China Construction Bank (Asia), Citibank, HSBC, Industrial and Commercial Bank of China (Asia) and Standard Chartered Bank (Hong Kong).

The HKMA provides each of the

Financial Supervisory Commission

Taiwan’s new watchdog head vows to prioritise probe into Mega Financial The FSC is also under fire for its handling of a case involving Taiwanese gaming software maker XPEC Entertainment

Taiwan’s new top financial cop has said he will personally work to tackle a money laundering scandal that has engulfed the island’s top financial officials and led to the resignation of his predecessor.

Lee Ruey-tsang, who took over as chairman of the Financial Supervisory Commission (FSC) yesterday, said he will prioritise an investigation into whether Mega Financial Holding had breached United States money laundering rules.

The FSC launched the probe in August after the New York’s financial regulator fined the Taiwan bank

Mainland to exceed 2016 target cuts

Authorities considers extending tax cut

Mr Norman Chan, Chief Executive of the HKMA

Faith Hung

Steel capacity

US$180 million for money laundering breaches at its New York branch.

“Investigating Mega Financial a n d st r e n g t h e n i n g m ea s u r e s against money laundering are my main priorities,” Lee told Reuters late on Wednesday. “I’m confident the FSC can effectively investigate Mega. There are many lessons to learn.”

Lee, 65, was appointed to the role last week after his predecessor Ding Kung-Wha stepped down earlier this month amid mounting public criticism over the watchdog’s effectiveness.

Taiwan President Tsai Ingwen said the Mega scandal has

damaged Taiwan’s reputation and created public mistrust around the supervision of Taiwan’s financial sector.

Tsai’s administration has ordered an investigation into Dung, a serving finance minister and four other regulators over their culpability in the scandal.

The FSC is also under fire for its handling of a case involving Taiwanese gaming software maker XPEC Entertainment, after investors lost money when an offer for a stake in the company by a Japanese suitor went sour, a case Lee told Reuters earlier in the week he would also be looking into.

Key Points New financial regulator takes office amid Mega Financial scandal Lawmakers question whether he has necessary experience Lee says can handle challenge, will restore FSC’s public image Some lawmakers have questioned the appointment of Lee, a career public servant, saying he may not have the experience necessary to oversee the banking, insurance, and broking sectors.

“Lee is a complete layman,” said Lai Shyh-bao, a prominent legislator on the finance committee with the opposition Kuomintang Party. “They could not find anybody else who would take this tough job.”

Lee, who was previously chairman of Bank of Kaohsiung , said he was confident the FSC could address the challenges and that he would seek to restore the public image of the regulator.

“My superior asked me to b o o st m o ra l e o f th e FSC . I ’ m v e r y ex p e ri e n c e d w i th that, ” Lee said. Reuters

Co-operation

Sino-EU business fair to open in Chengdu Representatives from over 150 European companies will gather in southwest China’s Sichuan Province next month for the 11th EU-China Business and Technology Cooperation Fair. The event, set to last from Nov. 3 to 6 in Chengdu City, will organize 800 negotiation sessions between Chinese and European enterprises. The companies will focus on agreements in areas such as new energy, bio-medicine, machine manufacturing, aerospace, and innovation. Forums on EU-China green economy development and EU-China innovation and entrepreneurship will be held to promote trade and scientific exchange and cooperation between China and the EU. Oil industry

CNOOC and Total in talks over Uganda’s pipeline China National Offshore Oil Corporation (CNOOC) and France’s Total are in final talks over the construction of Uganda’s oil pipeline that will run up to the Tanzanian seaport of Tanga. Li Yong, Executive Vice-President of CNOOC limited, in a meeting with Uganda’s President Yoweri Museveni said the oil firm was ready to undertake the US$4-billion pipeline project. Li, according to a State House statement issued on Wednesday, said they are in talks with Total regarding the necessary modalities to ensure the take-off of the project.

12 Business Daily Friday, October 28 2016

Asia In Brief Results

Nomura Holdings profit jumps Nomura Holdings Inc, Japan’s biggest brokerage, said second-quarter profit jumped nearly a third as investors ploughed money into currency hedging and bonds amid uncertainty over the global economy stoked by Britain’s vote to leave the European Union and the run-up to the U.S. presidential election.

Nomura said in a statement its July-September net profit climbed 31 per cent to 61.2 billion yen (US$586 million) from 46.6 billion yen in the same period a year earlier.

Smartphones

Samsung Elec vows mobile rebound Samsung Electronics Co Ltd yesterday said it aims to recover quickly from the disastrous withdrawal of the fire-prone Galaxy Note 7 that dragged third-quarter mobile earnings to their lowest level in nearly eight years. The South Korean giant said it was expanding its probe into the Note 7 fires beyond batteries, as it tried to reassure investors that it would get to the bottom of one of the worst product failures in tech history. It also held out the prospect of greater returns by disclosing considerations of a share buyback, talked up its semiconductor business and promised to consider proposals for a corporate makeover from U.S. hedge fund Elliott Management.

Profits

NAB says business under margin pressure National Australia Bank (NAB) posted a small rise in annual cash profit but warned its entire business was under margin pressure, further heightening expectations that it will have to cut its dividend next year. Australian lenders are competing aggressively for deposits, new mortgages and business loans at a time when wholesale borrowing costs have risen and low interest rates have limited returns on government bonds. There are also concerns future regulatory changes could force them to hoard additional capital. “All parts of our business are under real pressure,” NAB Chief Executive Andrew Thorburn told analysts yesterday.

Pokemon overwhelmed

Nintendo results hit by strong yen

Japanese videogames maker Nintendo Co cut its annual profit outlook by a third on Wednesday as a strong yen erodes income earned overseas and overwhelms an earnings bounce from its surprise hit smartphone game Pokemon GO. But the Super Mario creator, which earns over two-thirds of revenue abroad, also offered an upbeat view of the future in which mobile games would be a profit driver, albeit secondary to console gaming. The popularity of Pokemon GO sparked expectations of an earnings renaissance at Nintendo.

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Official visit

Malaysia’s Prime Minister aims to strengthen ties with Beijing Najib is eyeing more Chinese investment in infrastructure and manufacturing Praveen Menon

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alaysian Prime Minster Najib Razak heads to China next week to build closer ties and seek investment, which may further dent U.S. aims in Southeast Asia after a push by President Rodrigo Duterte of the Philippines to bolster China ties.

Najib is travelling to China with dozens of government leaders and business people. In statement on Wednesday, he said Malaysia was committed to strengthening friendship with China and pushing ties to “new highs”.

“We will be signing many new agreements and understandings that will elevate the relationship between our two nations to even greater heights,” the prime minister said.

The Oct. 31-Nov. 6 visit comes days after Duterte’s Beijing trip, where he declared a “separation” with old ally the United States and said he had “realigned” with China.

Both Malaysia and the Philippines are in dispute with China over rival claims in the South China Sea but Duterte has softened the Philippine position in his push to build China ties and China could ease the dispute with Malaysia by offering economic benefits, an analyst said.

“If it wields its cheque-book diplomacy shrewdly, it may either tie Malaysia’s hand on its dispute over the South China Sea, or even split ASEAN further on the South China Sea,” said Yang Razali Kassim, senior fellow at the S. Rajaratnam School of International Studies (RSIS), of Nanyang Technology University in Singapore.

The 10-member Association of South East Asian Nations (ASEAN), which both the Philippines and

Malaysia belong to, has struggled in recent years to present a united front to China on the South China Sea. Vietnam and Brunei are also ASEAN members and also have South China Sea claims.

“There are implications should Najib move to get deeper into Beijing’s embrace,” said Yang Razali.

Najib is eyeing more Chinese investment in infrastructure and manufacturing. Defence deals may also be discussed.

China’s increased assertiveness in the South China Sea has heightened U.S.-China tension, with the two trading accusations of militarising the waterway through which some $5 trillion in trade passes each year.

Last week, a U.S. navy ship undertook the fourth of what the United States calls freedom-of-navigation operations in the past year, to challenge what it sees as overreaching maritime claims by China in the South China Sea. The United States has seen the Philippines as an important ally in its

“rebalance” to Asia in the face of a rising China but Duterte’s threats to cut U.S. ties while making overtures towards China has raised questions over the U.S. strategy.

Chinese investment

Ties between Malaysia and China reached a new peak in December when China came to Najib’s rescue with a $2.3 billion deal to buy assets of scandal-hit state fund 1Malaysia Development Berhad (1MDB), helping ease Najib’s concern over the firm’s mounting debt.

China has since been pumping more funds into Malaysia.

For the first three months of 2016, Chinese investment in Malaysia’s manufacturing sector reached 1.5 billion ringgit (US$356 million), making it the largest foreign investor in its manufacturing.

Chinese firms have also secured major deals in Malaysia, including a US$7.3 billion port deal in the city of Malacca last month. China is widely expected to win a contract to build a high speed railway.

Malaysia’s China push comes amid strained U.S. ties after the U.S. Department of Justice filed lawsuits linked to a money-laundering investigation at 1MDB, the advisory board of which Najib chaired until recently.

Najib dismissed foreign interference in Malaysia’s affairs and questioned why the United States publicised the issue.

“The lawsuits were a strategic mistake by the U.S. ... China will look at this situation with glee,” said a person familiar with the matter but not authorised to speak to the media.

Ian Storey, senior fellow at ISEAS-Yusof Ishak Institute think-tank said there would not be a Dutertestyle about-turn in Malaysia’s foreign relations under Najib.

But the 1MDB case “might temporarily nudge Malaysia closer to Beijing and introduce a bit of turbulence in its relations with Washington”. Reuters

Commerce

New Zealand’s September trade deficit hits record high Of New Zealand’s top export markets, only exports to China were up, growing 13 per cent year on year A decline in demand for meat and falling dairy prices saw New Zealand’s goods trade deficit hit a monthly record in September, the government statistics agency said yesterday.

The September trade deficit hit NZ$1.4 billion (US$1 billion), or 41 per cent of exports, the largest

recorded monthly deficit, according to Statistics New Zealand.

Goods exports were down 5.7 per cent year on year to a value of NZ$3.5 billion NZ dollars (US$2.5 billion) last month, said a commentary from the agency.

Meat and edible offal, New Zealand’s second-largest export

Dairy, the largest export commodity group, fell in value by 1.2 per cent

commodity group, had the largest fall of any commodity group, down 35 per cent in value to NZ$281 million (US$200.88 million) and down 25 per cent in quantity.

Dairy, the largest export commodity group, fell in value by 1.2 per cent to NZ$616 million (US$440.62 million) in September, while the quantity was up 16 per cent.

Of New Zealand’s top export markets, only exports to China were up, growing 13 per cent year on year, driven by rises in logs, wood and wood articles.

Exports to all of New Zealand’s other main markets were down, led by the United States, where exports were down 19 per cent.

Meat and edible offal also led the fall in exports in the quarter to the end of September, which were down 15 per cent from the June quarter.

“We are seeing the effect of lower prices after the record meat season last year,” international statistics senior manager Jason Attewell said in a statement.

“In the year ended September, the actual value of meat exports has fallen by around 7 per cent, but quantities were little changed, down 1 per cent.”

The quarterly trade deficit was NZ$1.1 billion (US$786.83 million), equivalent to 9.5 per cent of exports. xinhua

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Business Daily Friday, October 28 2016 13

Asia WHO conference

India’s tobacco industry, government face off Smoking kills more than 1 million people a year in India, BMJ Global Health estimates.

The WHO says tobacco-related diseases cost the country US$16 billion annually.

Aditya Kalra

India’s US$11 billion tobacco industry has urged the government to take a softer line on tobacco control efforts when it hosts a WHO conference in New Delhi next month, but officials say the government will not bow to “pressure tactics”.

Delegates from about 180 countries will attend the Nov. 7-12 World Health Organization (WHO) conference on the sole global anti-tobacco treaty: the Framework Convention on Tobacco Control (FCTC). In force since 2005, the treaty aims to deter tobacco use that kills around 6 million people a year.

The industry in India, the world’s third-biggest tobacco producer, wants Prime Minister Narendra Modi’s government to soften its stance on what it says are tough FCTC measures that threaten livelihoods among the estimated 46 million people linked to the sector.

In documents obtained by a Reuters reporter under India’s Right to Information law, industry and farmer groups wrote to officials across government asking to attend the WHO FCTC conference and be part of India’s delegation, in an effort to protect their interests.

Global tobacco firms have criticised the biennial event for not being transparent, in part because proceedings have in the past not been

open to the public, including industry representatives.

The tussle comes at a time when the Indian industry is smarting from measures imposed this year forcing companies to print bigger health warnings on tobacco products.

A tobacco farmers’ group this month questioned the legality of India implementing the FCTC treaty, and asked the Delhi High Court to compel the government to allow farmers to attend the WHO FCTC conference.

A judge last week asked the government to “consider” the plea, but did not rule on the other requests.

“If we take them in the delegation,

Key Points Tobacco industry lobbying for softer laws - documents India hosts WHO anti-tobacco conference Nov. 7-12 Tobacco industry, farmers want bigger say at conference India health officials say won’t bow to “pressure tactics”

the government of India may feel embarrassed,” said one health ministry official, who didn’t want to be named because of the sensitivity of the matter. “We will not act on these (lobbying documents)”.

Around 1,000 tobacco farmers staged silent protests yesterday outside the federal health ministry and the WHO regional office, both in New Delhi, appealing to the government to boycott the conference.

The WHO FCTC Convention Secretariat in Geneva told Reuters it welcomes India’s decision, saying its guidelines state that no country should have delegation members linked to the tobacco industry.

Conference decisions on treaty provisions - designed for eventual implementation at national level by signatories - have a direct bearing on the global tobacco industry that Euromonitor International estimates

is worth US$784 billion this year.

Topics for debate at the WHO FCTC conference include alternative livelihoods for tobacco farmers, e-cigarettes and trade and investment issues.

Letters, signature campaigns

The nation’s main cigarette industry body, the Tobacco Institute of India (TII), and farmer groups wrote to the agriculture ministry demanding to have their views represented and to be allowed into the WHO FCTC conference.

In a September 28 letter, the TII said “there is no obligation on any signatory to the FCTC to comply with or implement any provision of the FCTC”. The WHO, however, says the treaty is legally binding on its member countries.

The ministry also received a near6,000-page petition signed by more than 100,000 farmers seeking protection from FCTC rules.

The TII - which represents cigarette makers including ITC , which is partowned by British American Tobacco ; and Godfrey Phillips, the local partner of Philip Morris International - also sent the health ministry a ‘handbook’ detailing how FCTC proposals are a threat to farmers’ livelihoods.

It asked the government to ensure that “unreasonable and impractical” proposals are not adopted at the WHO FCTC conference.

The TII did not respond to Reuters queries on the make-up of the Indian delegation or the legality of the FCTC. In another letter, a group representing traditional Indian cigarette makers urged Modi to ensure the health ministry does not make any anti-tobacco commitments before or after the conference, fearing the potential impact on those tied to the industry. Reuters

14 Business Daily Friday, October 28 2016

International In Brief Portugal

BPI small shareholders unhappy with takeover price An association of small shareholders, called ATM, is preparing various court cases if the price Caixabank is offering to take over Portuguese bank BPI is not increased, and one of the cases will be against the bank’s board of directors. Association chairman Octávio Viana, said he had a meeting this week with the chairman of the Portuguese Stock Exchange Commission and his vice, Gabriela Figueiredo Dias (who has been chosen to be the regulator’s future chairwoman), who they told that the consideration offered by CaixaBank, of €1.134 a share was not enough.

Financial sector

Euro zone lending growth levels off Growth in loans to euro zone companies and households is levelling off, European Central bank data showed yesterday, keeping the pressure on the ECB to maintain its aggressive stimulus policy for months to come. Lending to companies grew by 1.9 per cent year-on-year in September while household loans rose by 1.8 per cent, keeping the steady but slow pace seen since the start of the summer. With the euro zone recovery remaining timid and plenty of risks at its doorstep the ECB is nearly certain to continue buying bonds beyond its March target, sources have told Reuters.

Key data

U.S. business spending tepid; labour market firming Growth estimates for the third quarter are currently as high as a 3.3 per cent annualized rate Lucia Mutikani

N

ew o r d e r s f o r U . S . manufactured capital goods unexpectedly fell in September amid weak demand for computers and electronic products, which could temper expectations for an acceleration in business spending in the fourth quarter.

Other data yesterday showed a drop in the number of Americans applying for unemployment benefits last week, pointing to sustained labour market strength and firming economic growth.

The Commerce Department said non-defence capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 1.2 per cent after three straight months of strong gains.

These so-called core capital goods orders increased by an upwardly revised 1.2 per cent in August.

Economists had forecast core capital goods orders rising 0.3 per cent last month after a previously reported 0.9 per cent increase in August.

“This is a bit of a discouraging

handoff to the fourth quarter. There is a reluctance to boost capex (capital expenditure) meaningfully,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

Shipments of core capital goods rose 0.3 per cent last month after being unchanged in August. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement.

Despite last month’s increase in shipments, business spending on equipment likely remained weak in the third quarter. The government will publish its first estimate of thirdquarter GDP on Friday.

Growth estimates for the third quarter are currently as high as a 3.3 per cent annualized rate, reflecting a solid pace of consumer spending and strong exports. The economy grew at a 1.4 per cent pace in the second quarter.

Tightening labour market

The improving economic picture was underscored by a separate report yesterday from the Labour Department showing initial claims

Post poll data

UK economy escapes short-term Brexit hit Britain’s economy slowed only slightly in the three months after the Brexit vote and carmaker Nissan said it would build more cars in the country, tempering fears about the immediate economic impact of the decision to leave the European Union.

The stronger-than-expected growth figures published yesterday further diminished the likelihood of the Bank of England cutting rates as soon as next week, prompting investors to sell British government bonds.

But finance minister Philip Hammond sounded cautious, saying he still planned to provide support for the economy as Britain launches tough negotiations with the EU next year.

Results

Twitter beats estimates, cuts jobs Twitter Inc said yesterday it would cut 9 per cent of its global workforce to keep costs down as the micro blogging service reported quarterly results that beat Wall Street expectations.

Third-quarter revenue growth slowed sharply but topped analysts’ expectations. Revenue rose about 8 per cent to US$616 million, above the average analyst estimate of US$605.8 million. The company reported a 20 per cent rise in revenue in the previous quarter and 58 per cent last year.

for state unemployment benefits decreasing 3,000 to a seasonally adjusted 258,000 for the week ended October 22.

That marked 86 straight weeks that claims have been below the 300,000 threshold, which is normally associated with a strong job market.

That is the longest stretch since 1970, when the labour market was much smaller.

While overall business spending rebounded modestly in the second quarter, investment on equipment has been subdued since late 2015 as a strong dollar and lower oil prices squeezed companies’ profits, forcing them to cut budgets.

Key Points Core durable goods orders fall 1.2 per cent in September Core capital goods shipments increase 0.3 per cent Weekly jobless claims fall 3,000 With the dollar’s rally appearing to have peaked and oil and gas drilling activity rising in recent months, there is cautious optimism that the worst of the equipment spending rout is over.

Still, any rebound is likely to be modest. Heavy machinery maker Caterpillar this week reported a 49 per cent drop in third-quarter profit from a year ago and lowered its fullyear revenue outlook for the second time this year.

Caterpillar said demand for new heavy machinery had been undercut by an “abundance” of used construction equipment, a “substantial” number of idle locomotives and a “significant” number of idle mining trucks.

A 0.8 per cent drop in demand for transportation equipment pushed down overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, by 0.1 per cent last month.

That followed a 0.3 per cent increase in August. There were declines in orders for primary metals and fabricated metal products. Orders for machinery and electrical equipment, appliances and components rose last month. Reuters

Employment

Spanish jobless rate drops to lowest in nearly seven years The per centage of temporary staff hit almost 27 per cent, its highest level since the end of 2008, National Statistics Institute says A record summer for tourism helped push Spanish unemployment down to its lowest in nearly seven years, though the still hefty 18.9 per cent level puts Spain’s incoming government under pressure to extend the recovery with further reforms.

Hiring in the services sector in the third quarter pulled down the jobless rate, data from the National Statistics Institute (INE) showed yesterday, exceeding economists’ expectations.

Cementing the turnaround will be a major priority for politicians expected to finally form a government after a 10-month delay on Saturday, following a deep recession that caused mass layoffs.

The number of unemployed still stands at 4.3 million, and the jobless rate is the second highest in Europe after Greece.

Labour policy is expected to be the source of big clashes between right and left-wing forces, who will struggle to pass laws in a fragmented parliament.

Mariano Rajoy, leader of the conservative People’s Party (PP), is set to return to power this weekend, but his party no longer enjoys an absolute majority.

A job market overhaul from 2012 which reduced the cost of hiring and firing is credited by economists with helping the labour turnaround, but is unpopular with many unions and workers.

Politicians agree Spain’s employers are still overly reliant on short-term hires. Some want a one-size-fits all contract system while others want to reinforce labour inspections to crack down on fraud.

The jobs spurt in the third quarter was almost entirely fuelled by temporary hires, chiming with the seasonal recruitment usually driven by restaurants, hotels and resorts during the summer months.

Company lobby group CEOE welcome the fall in the unemployment rate in the third quarter, but called on leaders to do more.

Key Points Spanish unemployment drops to 18.9 pct in Q3 - INE Recovery largely driven by services and temporary hires Further labour reforms needed, economists say The number of unemployed fell by 253,900 people in the third quarter from the previous three months, or by 5.5 per cent, INE said, a slightly slower fall than the one registered in the same period a year ago.

But job creation was stronger quarter-on-quarter than in the same period in 2015, rising 1.24 per cent or by 226,500 in July to September, from the previous three months. Reuters

Business Daily Friday, October 28 2016 15

Opinion

Bank of China’s offshore gaze is a comfort not concern Nisha Gopalan a Bloomberg Gadfly columnist

Y

ou wouldn’t expect a Chinese bank with large offshore exposure, low levels of bad debt and a comparatively small amount of wealthmanagement products to be unpopular with investors. Yet that’s the reality Bank of China Ltd. is facing.

The nation’s fourth-largest lender, which reported third-quarter earnings Wednesday, has about 25 per cent of its assets overseas, well above larger rival Industrial & Commercial Bank of China Ltd. at 19 per cent. Nonperforming loans in the first half came in at 1.47 per cent, compared with an industry average of 1.7 per cent and as high as 2.4 per cent at Agricultural Bank of China Ltd. They were 1.48 per cent in the three months ended Sept. 30. There’s also relatively little high-risk shadow banking activity versus say, China Merchants Bank Co. Bank of China also has a tendency to dispose of assets, reaping a neat windfall for shareholders. There was the almost US$9 billion sale of Nanyang Commercial Bank Ltd. last December that resulted in a firsthalf special dividend, and the IPO mid-year of its aircraft leasing unit. The Beijing-based lender still has plans to sell its interest in Chiyu Banking Corp., too.

Combined, those factors should make Bank of China a choice pick, yet its stock has, per cent for the most part, Bank of China’s underperformed 12-month share over the past 12 performance months.

One reason could be its lower net interest margins, or the difference between the rate at which a bank borrows and lends. Bank of China’s larger offshore exposure necessarily means those margins are bound to be lower than at other banks, considering rates domestically are much higher than in the West. Its net interest margin for the first nine months narrowed to 1.85 per cent from 2.14 per cent a year earlier.

Still, that bigger overseas presence could also mean investors are ignoring the lender at their peril.

While all banks have been getting proactive on cutting back advances to zombie stateowned firms hurt by the economic slowdown and beefing up business with households instead, a property correction would hit Bank of China less hard than competitors with more skin in the home game.

Foreign currency-denominated investments rose 27.4 per cent year-to-date, Wednesday’s figures showed, exceeding yuan-denominated investments and increasing their share of the total balance to 25.4 per cent as at the end of the third quarter. CICC Research, which did note asset quality deterioration was worse than expected, has a buy rating on the bank’s Hong Kong-traded shares and a HK$4.51 target price, or 28.1 per cent upside.

What’s more, China’s central bank is conducting a trial monitoring of banks’ offbalance-sheet wealth-management products under its macro-prudential assessment system, according to people familiar with the matter. That will put significant pressure on the likes of China Merchants Bank and even ICBC, which has more than 10 per cent of total assets in such products compared with just 6 per cent for Bank of China, according to JPMorgan Chase & Co. In a world where real estate wobbles pose a constant threat and lenders that have overreached will struggle, investors may soon wish they were bigger fans of China’s oldest bank. Bloomberg Gadfly

7.6

Rising inflation spells end of low-volatility boom

T

he boom in “low-volatility” stocks may be coming to an end.

A long period of outperformance of shares with lower volatility has helped to give rise in recent years to what amounts to a new investment style, low volatility, with more than US$15 billion flowing into this type of mutual fund and exchange-traded fund in the first seven months of the year, according to Morningstar data. They now account for 13 per cent of U.S. ETF assets under management.

A recent period of lagging returns, both in the U.S. and Europe, may be a signal that this run is in the early stages of an extended return to mean. While the long-term performance data of low-volatility vs high-volatility stocks still looks good, some of the underlying drivers, particularly interest rate movements, may be headed for either a cyclical or secular reversal.

If, as appears likely, the so-called low-volatility effect was driven in large part by falling inflation and momentum flows from trendfollowing investors, then a potentially vicious unwind may be at hand.

Falling interest rates do appear to help the performance of stocks, such as the staples sector, which fall into the low-volatility category. Yet new demand from all of the low-volatility funds and investors has, as you would expect, driven an expansion of the market price for a given dollar of earnings by a lowvolatility company.

“Our analysis tilts us towards the bears. Multiple rerating has indeed driven outperformance,” analysts from the Barclays European Equity Strategy team, led by Dennis Jose, write in a note to clients.

“Furthermore, we find that the dominant driver of the re-rating of low-vol stocks was a deceleration in global inflation. However, with inflation having bottomed out, low-vol stocks could hereon underperform, in our view.”

Low-volatility funds are a subset of smart beta funds, a set of techniques which tries to improve on index investing by adjusting away from the typical cap-weighted style to take advantage of supposed factors which can drive outperformance.

That low-volatility stocks can outperform highervolatility stocks is, on the face of it, a puzzle, given that investors usually find high volatility unattractive, implying that the market should offer better returns in compensation.

“

James Saft a Reuters columnist

January 2002 U.S. low-volatility stocks have outperformed by one per centage point annually, while their European peers have beat the index by three points a year.

An academic study from Holland, released this month, finds that low-volatility stocks are geared to falling interest rates, and that interest rate movements can explain up to 80 per cent of the otherwise mysterious outperformance.

“We find that portfolios consisting of stocks with low idiosyncratic volatility are exposed to more interest rate risk than portfolios with stocks that have higher volatility.

Our results imply a strong implicit exposure to bonds of low-volatility portfolios, increasing the returns,” Joost Driessen and Ivo Kuiper of Tilburg University and independent researcher Robbert Beilo write.

In other words, if you wanted to make the damage that rising inflation and interest rates would do to your mixed portfolio via bonds that much worse, low volatility is the strategy for you.

Of course, while long bonds have crept higher in recent weeks there is no assurance that we will see rising inflation or rates. Indeed, it is possible that a period of extended secular stagnation is at hand.

Headline inflation in many developed economies, notably the U.S., has risen off of its lowest levels.

Core inflation in the U.S. is now at 2.3 per cent, helped in large part by chunky wage inflation of 3.3 per cent. If this short trend is extended, we might expect to see low-volatility shares lose their attractions and underperform.

And low-volatility shares are not only expensive by some measures, their performance has been driven by a re-rating by investors of the value of a given dollar of their earnings. Looking just at European stocks, Barclays finds that, unlike earnings growth and dividends, price/equity multiple expansion for low-volatility shares has been much greater than for the broad market. Data in the U.S. tell a similar story.

So what, do you suppose, will happen to low-volatility inflows during a period of underperformance? Inflows may well turn to outflows, investors being what they are.

And what will happen to valuations if low-volatility funds rather than being big buyers turn sellers?

Rinse and repeat, as they say on the back of the shampoo tubes. Reuters

While long bonds have crept higher in recent weeks there is no assurance that we will see rising inflation or rates. Indeed, it is possible that a period of extended secular stagnation is at hand.

Rising rates = underperforming low-vol?

One thing is uncontroversial: the period during which low-volatility shares have outperformed has been coincident with a period of falling and then very low inflation and interest rates. Since

”

16 Business Daily Friday, October 28 2016

Closing Key meeting

China Communist party raises Xi’s status ahead of reshuffle The party also approved a host of new disciplinary measures, bolstering its anti-graft watchdogs and establishing a code of conduct for cadres and institutions

C

hina’s Communist Party declared President Xi Jinping as its “core,” a designation that strengthens his hand ahead of a twice-adecade power reshuffle next year.

The announcement was made at the end of a four-day party conclave in Beijing, the official Xinhua News Agency said, citing an official communiqué. The semantic change is significant in China’s elite politics, which has for more than three decades stressed collective leadership to avoid the Mao Zedong-style personality cult blamed for fuelling the social chaos of the Cultural Revolution.

The party’s communiqué called on members to “closely unite around the CPC Central Committee with Xi Jinping as the core.” At the same time, it said collective leadership “must always be followed and should not be violated by any organization or individual under any circumstance or for any reason.”

The designation gives Xi an elevated status lacked by his predecessor, Hu Jintao. Mao was often referred to as the party’s “head” or “great helmsman.” The “core” concept appears to have been introduced by late

paramount leader Deng Xiaoping to anoint then-little-known Jiang Zemin as his successor in the aftermath of the crackdown on pro-democracy protesters in 1989.

‘Common aspiration’

“The new title will pave the way for Xi to install his people ahead of the plenum next year,” said Zhang Lifan, a Beijing-based historian who previously worked at the Chinese Academy of Social Sciences. “It technically gives him the absolute power inside the party.”

Bloomberg News reported in February that several provincial level party bosses had begun publicly proclaiming Xi as the party’s central status and pledging to uphold his leadership.

Identifying Xi as the core was “in line with the common aspiration of all party members, all the soldiers and people from all ethnicities across China,” China Central Television said, citing a commentary in the Friday edition of the party’s People’s Daily newspaper. The designation was needed to drive the country’s development and guarantee the Communist Party’s leadership, the state broadcaster said.

The party also approved a host of new disciplinary measures, bolstering its anti-graft watchdogs and establishing a code of conduct for cadres and institutions. The code of conduct pledged greater scrutiny of senior leaders, up to and including members of the Politburo’s supreme Standing Committee. The moves served to institutionalize Xi’s fouryear-old anti-graft campaign, which has helped him consolidate power while punishing more than 1 million officials.

The meeting was the wider party elite’s last scheduled opportunity to discuss political plans before the party congress, in which five of the seven Standing Committee members are due to retire. The months ahead are expected to bring intense behind-the-scenes politicking, as Xi narrows the field of potential successors in 2022, when his own tenure is expected to end.

Such party gatherings are carefully choreographed affairs. This week’s plenum - with its party discipline theme - rounded out Xi’s four top policy priorities, dubbed the “ four comprehensives.” Previous plenums focused on expanding economic reforms, improving the legal system and increasing national strength.

‘Strategic design’

“All priorities have been put on the table and deliberated,” said Zhu Lijia, a public affairs professor at the

Chinese Academy of Governance in Beijing, a research institute under the State Council. “This is President Xi’s strategic design for the country.”

The meeting confirmed that the next congress - the 19th since the party’s founding in 1921 - would convene in the “second half of the year.” The events are usually held in the fourth quarter of the year. The

“This is President Xi’s strategic design for the country” Zhu Lijia, a public affairs professor at the Chinese Academy of Governance in Beijing

last congress in 2012 saw Xi elevated to party chief and military leader and set up his ascension to the presidency.

The more than 350 full-and-alternate Central Committee members approved two documents on party discipline. One, a code of conduct, updates a landmark 1980 document that Deng used to enshrine collective leadership and consensus-based decision-making after the tumultuous Cultural Revolution. The other amended a 2004 internal disciplinary rule, strengthening the party’s graft-busting bodies.

The new disciplinary measures detailed dozens of behaviours that would be run afoul of inspectors, including being “two-faced,” conducting cover-ups, inflating achievements, forming political cliques, currying favour or flattering bosses. It even stipulated that leaders must be honest while promoting their work and should avoid excessive compliments.

Joseph Fewsmith, a political science professor at Boston University who studies China’s elite politics, said the party’s statement showed an effort to balance Xi’s new status with the institution of collective leadership.

“Xi will have a smooth path to the 19th Party Congress and will be able to promote the people he wants to promote,” Fewsmith said.

“Now we will see how he will use this power.” Bloomberg News

Results

NPL

Balance sheet

Air China third-quarter profit jumps

China Construction Bank bad loans decline

Ping An Insurance third-quarter profit rises

Air China Ltd, the country’s flag carrier, said its third-quarter net profit rose 61.7 per cent to RMB3.77 billion (US$556.02 million) over the same period last year, helped by strong summer travel demand.

Revenue over the quarter, traditionally the peak travel season for the Chinese airlines, rose 2.22 per cent year-on-year to RMB31.9 billion from RMB31.3 billion, against a 9.2 per cent rise in passenger traffic, the airline said yesterday.

“Benefiting from a relatively strong summer holiday, domestic passenger demand grew steadily and the outbound tourism stayed robust. However, the cargo business continued to be sluggish,” the company said in an e-mailed statement.

This contributed to a 15.1 per cent rise in January-September net profit to RMB7.23 billion from a year earlier, it said.

The company said operating costs rose 5.81 per cent as international oil prices rose slightly, though they remained low. Airlines are seeing previous cost savings from low fuel prices evaporate as oil prices, which plunged in mid-2014, regain ground.

Passenger capacity, measured by available seat kilometres, rose 7.63 per cent, while the passenger load factor edged up by 1.18 per centage points to 82.92 per cent, Air China said. Reuters

China Construction Bank Corp reported its bad loans declined for the third quarter, the first drop since 2012, signalling that a slide in asset quality at the country’s top state-owned commercial banks may be reaching a pause.

China’s second-biggest lender by assets said its non-performing loan (NPL) ratio dipped slightly to 1.56 per cent, as the bank’s volume of NPLs fell to RMB179.7 billion (US$26.5 billion) by end-September, down from RMB181.9 billion at end-June.

It was the first quarterly decline in CCB’s NPL volume in more than four years.

Bank of China Ltd , another of the country’s Big Five lenders, reported a slight rise in its NPL balance when it announced its results on Wednesday.

China’s top state banks have been under pressure to continue to report profit growth, even as they have wrestled with mounting bad debts and margins in their core lending business continue to shrink.

CCB said profit for the quarter reached RMB60.4 billion, up 1.3 per cent from RMB59.7 billion a year earlier. That compared with an average forecast of three analysts of 0.9 per cent profit growth, according to data compiled by Reuters. Reuters

Ping An Insurance Group Co of China Ltd , the country’s second-largest insurer by market value, yesterday said third-quarter net profit rose 15 per cent due to strong insurance sales.

The insurer produced a strong performance even though Beijing has tried this year to limit the growth of short- and mid-term life insurance products to reduce risks from insurers using short-term funds to invest in stocks and longterm assets.

Ping An and China Life Insurance Co Ltd, which also reported third-quarter results earlier yesterday, have both outperformed other Chinese insurers.

Ping An’s net profit was RMB15.73 billion (US$2.32 billion) in the quarter ended September, compared with RMB13.63 billion the same period last year, it said in a Hong Kong stock market filing.

In the first three quarters of 2016, its written life insurance premiums hit RMB282,153 million, an increase of 26.6 per cent compared with the same period last year.

Ping An is the only Chinese and Asian insurer named by regulators as one of nine insurers considered as systemically important globally.

Reuters