UMAC offers emergency hospitality . . . at a price Succour Page 2
Wednesday, August 30 2017 Year VI Nr. 1372 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Oscar Guijarro Financial system
BlackRock: Higher structural risks evident than in 2008 Page 16
Corporation image
Neptune changes name following diversification Page 6
Results
Suncity nongaming business reports loss Page 7
www.macaubusiness.com Support
DSE extends help to SMEs Page 2
Markets
Bond Connect improving thanks to strength of RMB Page 9
Insurance industry insiders optimistic Insurance
The devastation lingers. With the effects of Typhoon Hato still very much apparent. As the city starts to recover, its financial resolve will be tested as insurance claims mount. The industry anticipates big payouts – but the seeds of opportunity to educate, too. Page 3
End of the line
Construction noise and pollution. Rapidly turning off Pousada de São Tiago’s clientele. But all in the cause of building the light train hub in Barra. SJM sources say the gov’t has yet to broach the subject of compensation.
New project ageing fast
Headquarters Macau Red Cross left their longtime HQ a year ago. Making room for a ‘new project’ for their lakeside premises. No information has yet surfaced about what the owner is planning to do with the old building. Page 5
Stable workforce
Labour A recent official survey of the manpower situation in the city shows no big changes in 2Q. Slight increases are apparent in almost every category. Page 2
Mainland house prices on the rise
LRT Page 4
HK Hang Seng Index August 29, 2017
27,765.01 -98.28 (-0.35%) Worst Performers
AAC Technologies Holdings
+3.07%
Hang Seng Bank Ltd
+0.74%
Wharf Holdings Ltd/The
-1.66%
Hengan International Group
-1.04%
Galaxy Entertainment Group
+2.69%
China Resources Land Ltd
+0.64%
China Life Insurance Co Ltd
-1.58%
Bank of Communications
-0.99%
CITIC Ltd
+1.85%
CK Infrastructure Holdings
+0.50%
China Shenhua Energy Co
-1.53%
Tencent Holdings Ltd
-0.99%
Sands China Ltd
+1.32%
Power Assets Holdings Ltd
+0.44%
Hong Kong Exchanges &
-1.49%
New World Development
-0.96%
Want Want China Holdings
+1.16%
China Unicom Hong Kong
+0.35%
China Resources Power
-1.11%
AIA Group Ltd
-0.92%
27° 33° 27° 32° 27° 32° 27° 31° 27° 30° Today
Source: Bloomberg
Best Performers
THU
FRI
I SSN 2226-8294
SAT
SUN
Source: AccuWeather
Private poll A survey by Reuters is revealing. Measures are in place to contain the property bubble in China. But prices will increase thanks to the push of small cities. Page 8
2 Business Daily Wednesday, August 30 2017
Macau Exclusive news
Hostel UMAC The University of Macau generously offered to help staff affected by the catastrhophic impact of Hato, opening the tertiary accomodation to those in need. At a price Cecilia U* cecilia.u@macaubusinessdaily.com
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he city’s University of Macau (UMAC) offered ‘assistance’ to their staff and respective families in getting over the difficult situation created by Typhoon Hato. During these Summer holidays, rooms are now available. A chariritable gesture? Not exactly. Charges will apply to those who seek help by staying at the Postgraduate House (PGH) - S1 Hostel. Claiming to help staff to overcome difficulties from the suspension of power and water supply endured by the majority of the city’s households, the university is charging a daily rate of MOP220 for a single room and MOP310 daily rate for a shared room which can accommodate two, according to an internal
communication obtained by Business Daily. While for staff who wish to stay for six nights the prices are MOP880 for a single room and 1,250 for a shared room. The source also revealed that the maximum length of stay is 14 nights. However, the provision of the room does not include hot water supply, with the reason for the suspension of hot water remaining unexplained. According to the university website, the room rate for staff is only accessible with a username and password. “As we join hands to support each other, we have been handling the disaster very well and our recovery will be speedy,” stated the source. Business Daily tried to reach out for a comment from the Office of Administration, which is responsible for the aforementioned measure, but was
the Postgraduate House of the UMAC
informed that no direct response can be made by the Office, with enquiries transferred to the Public Relations Section Communication Office.
No concrete response was forthcoming from the Office - and two other departments – prior to this story going to print. * with Alex Lee
Labour
Manpower survey suggests stable panorama Released yesterday, the results for the second quarter of the local Survey on Manpower Needs and Wages indicated a stable situation devoid of sharp changes from previous periods DSEC said that wholesale & retail trade in Q2 employed 59,971, up 6.1 per cent yearon-year, with 38,110 working in retail. Average earnings in June (excluding bonuses) of full-time employees rose 3.6 per cent year-on-year to MOP13,050, according to the figures. Some 11,538 people were
engaged in the field of transport, storage & communications, meaning a rise of 6.1 per cent year-on-year. Average earnings in this sub-area dipped 1.2 per cent year-onyear to MOP20,460. Official figures also showed that the security activities area engaged 10,760 persons, down 1.7 per cent year-on-year.
Average earnings were up 4.4 per cent year-on-year to MOP12,960, while public sewage & refuse disposal activities employed 866 persons, up 3.2 per cent year-onyear, with average earnings increasing 3.8 per cent yearon-year to MOP18,150, the Survey revealed.
Vacancies
According to DSEC, at the end of the second quarter, wholesale & retail trade had 3,476 vacancies (59.2 per cent in retail trade), down 344 year-on-year. In terms of recruitment, the majority of vacancies in security activities (75.6 per cent), transport, storage & communications (53.9 per cent) and wholesale & retail trade (47.0 per cent) required only junior secondary education or lower,
said DSEC. For language skills, 86.0 per cent and 51.6 per cent of vacancies in the retail trade required knowledge of Mandarin and English; the corresponding rates in security activities were 59.5 per cent and 33.7 per cent, the report states. Other data in the study shows that the recruitment rate (6.6 per cent) in the retail trade rose 1.3 percentage points year-on-year while the vacancy rate (6.3 per cent) fell by 2.1 percentage points, suggesting that some of the vacancies had already been filled. In addition, the vacancy rate (6.8 per cent) in transport, storage & communications dropped 1.6 percentage points year-on-year, while the turnover rate (5.2 per cent) and recruitment
rate (5.0 per cent) rose by 1.0 and 0.4 percentage points, respectively, indicating an easing in demand for human resources in this sector. As for security activities, the vacancy rate (8.5 per cent) and the recruitment rate (3.8 per cent) fell by 2.0 and 0.6 percentage points, respectively, while the turnover rate (3.9 per cent) went up 0.2 percentage points, indicating that some of the vacancies had not been filled. DSEC also said regarding vocational training that a total of 14,146 participants had attended 878 training courses provided by the establishments in the period (including courses organised by the establishments or in conjunction with other institutions, and those sponsored by their employer).
Support
DSE increase to aid SME recovery The Macao Economic Services (DSE) has increased the amount of subsidy available to SMEs (small and medium size enterprises) to help them recover from the havoc caused by Typhoon Hato. The amount rises from MOP300,000 (US$12,408) to MOP500,000 after the
department received opinions from SMEs. The department revealed that some 334 applications for the subsidy have been approved, with the total amounting to MOP10.02 million. DSE announced that those whohadappliedforthesubsidy
earlier would automatically receive MOP500,000 once an application is approved, while those who had received the lesser amount before the adjustment would receive the difference later. As of Monday, a total of 3,150 applications had been received.
Power supply
China Southern Power Grid lends a hand Chinese power supplier China Southern Power Grid has 53 power generators to Macau to recover the city’s power supply, according to Xinhua. In addition, the Chinese power supplier has appointed four technicians to support the recovery. The supplier supplied three generators which produce 1.2 million kilowatts, 40 which produce 100,000
kilowatts and 10 which generate 1,000 kilowatts within the batch of machines. The 1.2 million kilowatts generator is currently operating the lighting of the underground bus stop at the border gate, while the others are being used for water drainage of three affected underground car parks. Meanwhile, local power supplier
Companhia de Electricidade de Macau - CEM, S.A. confirmed to Business Daily that it has received a letter from the Hong Kong Electric Company to re-explore the feasibility of supplying power from HK Electric - listed on the Hong Kong Stock Exchange - to CEM, according to Sing Tao Daily. The Managing Director of HK Electric, Wan Chi-tin, suggested in
the letter that the MSAR consider outsourcing other power suppliers for insurance in order to lower the level of impact of having only one supplier. In response to Business Daily enquiries, CEM wrote that ‘CEM is always open to study any energy supply proposal which is to Macau’s advantage’.
Business Daily Wednesday, August 30 2017 3
Macau Ahter-Hato
Challenges, opportunities for local insurance industry Member of the insurance industry and academics believe the superstorm could improve business performance in the long run Cecilia U cecilia.u@macaubusinessdaily.com
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he chairman of the board of Macau Insurance Agents & Brokers Association, Chui Chi Kin, told Business Daily that the destruction wrought by Typhoon Hato last Wednesday could improve the insurance business in the long run. “I think the storm can pose a positive impact,” said Chui. “It might have increased people’s awareness.” A similar opinion is held by the Dean of the Faculty of Business Administration of the University of Macau, Jacky Yuk Chow So. “After this superstorm incident I think people won’t save the money of not buying insurance,” said So. As a result, although the insurance industry would suffer a bit in compensating claimants, in the long run more people would be willing to insure their properties, opined So. Right after the typhoon struck, Jiang Yidao, President of the Macau Insurers
Association and Managing Director of China Taiping Insurance (Macau) Company Ltd., told Macao Monetary Authority (AMCM) that the city had lost over MOP1 billion due to the typhoon, saying that the insurance industry will face a great challenge ahead, in particular regarding the number of personnel required to handle claims. Chui, on the other hand, said the amounts of claims were uncertain given that renovations are still ongoing. “We need to gather information from all insurance companies in the city and send it to AMCM; there are currently five to six insurance companies,” indicated Chui. The chairman said most people are claiming money for the insurance of their houses since many had suffered broken windows during the typhoon. “Those who wish to claim money from their insurance company may find themselves in need of paying a basic price, let’s say MOP1,000, in order to claim the rest of
the amount,” said Chui. As such, more would approach the government instead since the government has just rolled out funding offering MOP30,000 to households which had their windows broken during the storm. “Claimants cannot get the money from both the insurance company and the government,” the chairman pointed out.
Regarding the usual preference of insurance, Chui said the majority subscribe to third party liability (TPL) cover, which does not include damage from flooding. “Fewer would purchase comprehensive cover to cover flooding because it is quite expensive [in comparison to TPL],” said Chui.
Serving claimants
Local insurance companies
have set up a 24-hour hotline to anwser queries from claimants. Urged by AMCM, insurance companies have appointed staff to approach clients who have purchased insurance services. AMCM also requested the industry to submit a report within this week on data related to the loss and claims created by the supertyphoon. advertisement
4 Business Daily Wednesday, August 30 2017
Macau Opinion
José I. Duarte*
Before and after When disaster touches us, our greatest desire is to move on, not to brood on what has happened. However, we should not hastily overlook what we went through. We must reflect upon the events of last week lest we miss the opportunity to learn from them. Unfortunately, some signals suggest our soul-searching will only go so far. First, the ritual sacrificing of the meteorological services misses the essential point. Technical and procedural faults may have happened there, and they should be investigated. But that is not the main issue; it casts our sight away from where it really matters. The core task of that service is to produce a weather forecast, a primarily technical question. It is not that service’s mission to assess the corresponding risks for the population and to decide what measures are required, a quintessentially administrative and political task. In that one, the civil protection services, it seems plain to realise now, failed before, during and afterward. They could not tell us of any significant preventive or mitigating measures taken beforehand, and the chaos after the typhoon had passed was patent. An image that circulated on the Internet became some how emblematic - a police officer trying to cut a fallen tree with a small handsaw, under the gaze of a few even less equipped colleagues. It suggests a service that was wholly unprepared for the situation and failed to deploy the personnel with the semblance of a proper plan or adequate tools. And yet, with big fanfare, last May they inaugurated a new and more modern co-ordinating centre. Try to read what the media reported at the time and realise how sloppy and crude all that looks now. Recognising that not enough was made was (and is) an understatement, but is a start. But we are fast falling back into the usual prescriptions. First, throw some money around. Whether it will do more than procuring some complacency we will see later. Second, create a new commission to re-think the civil protection services - as if there was a need to reinvent the wheel. We had names, and functions, and organograms, and rules, and budget lines. All that gave us the illusion there was a structure to protect us. We just found out that behind the façade, there was little of substance. It is unlikely that showering some money around and setting up a few meetings (with the usual suspects?) will change much. *economist and permanent contributor to this newspaper.
Pousada de São Tiago in Barra
Hotels
Holding the fort Five months after Pousada de São Tiago suspended operations due to nearby construction of the Light Rail Train (LRT) public transport interchange at Barra, representatives from SJM told Business Daily the company had not received compensation from the MSAR Government but that it had the right to pursue it Nelson Moura nelson.moura@macaubusinessdaily.com
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ccording to Sociedade de Jogos de Macau S.A. (SJM), the MSAR Government has not so far provided compensation for the almost five months of suspension of business at Pousada de São Tiago or Santiago Hotel caused by the nearby construction of the Light Rail Train (LRT) public transport interchange at Barra. An SJM representative said the group would “reserve the rights to discuss this compensation issue with the government” in the future with the estimated losses caused by the suspension having not yet been “fully calculated”. The 5-star hotel suspended operations on April 1, with the Executive Director of SJM Holdings Limited, Angela Leong On Kei, saying at the time that since the construction of the LRT transport exchange centre had been initiated, the property had had trouble receiving guests. Ms. Leong also added that the hotel would resume operations when the LRT interchange was completed. Meanwhile, SJM told Business Daily that due to the closing of the property some of the 44 workers had been relocated to several of ‘SJM’s related companies and Ms. Leong’s own properties/business’ with some employees remaining at the property to assure the daily maintenance of the hotel.
Nearby works
According to the Infrastructure Development Office (GDI) the LRT public transport interchange in Barra development was initiated in 2015 and is expected to be finished in 2019. The development of the transport centre contract was granted to a consortium composed by Companhia de Construção de Obras Portuárias Zhen Hwa, Limitada and Companhia de Engenharia e de Construção da China (Macau), Limitada for MOP1.23 billion (US$152.6 million). As of now the project piling works have been completed with excavation and construction works still in progress, GDI has confirmed. The project will integrate the LRT
with buses, taxis and pedestrian walkways, with three underground levels projected to allow the parking of tourist buses and 500 light vehicles and motorcycles. When questioned about the construction’s impact upon the hotel, the GDI only informed Business Daily that it ‘will closely supervise the contractor with relevant units to ensure that the construction is in compliance with statutory requirements’.
Confusing ownership
Although the official response regarding the Pousada de São Tiago Saintiago was provided by SJM representatives, these same contacts stated the property was not owned either by SJM or its mother company, Sociedade de Turismo e Diversões de Macau (STDM), but by Ms. Leong herself. Located at the 17th Century Portuguese São Tiago da Barra Fortress, the hotel was planned by architect Nuno Maria Roque Jorge, in a project developed by Saint Tiago Hotel and Tourism Company Limited - a company created in 1978 with the sole purpose of developing and exploiting the hotel, which opened in 1982. According to information from the property registry, in 2003 a 1,452 square metre land plot in Estrada da Penha adjacent to the original hotel was granted to Saint Tiago Hotel and Tourism Company Limited without a public tender for MOP8.4 million, with the purpose of expanding the existing 5-star hotel. According to the Official Gazette release at the time, the concession contract was signed by the company’s manager, Hong Kong businessman David Cheng Kai Ho, as a 25-year concession. According to a report from 2004 by TTG Asia, in that year the hotel was allegedly acquired by the founder of STDM, Stanley Ho Hung Sun,
Close call
Enquiring about possible damage caused by Typhoon Hato to Pousada de São Tiago and the LRT transport exchange centre, SJM told Business Daily that only some trees had been damaged
through Florinda Hotels International for US$12 million (MOP96.7 million) with 90 per cent of the property previously held by David Cheng. Information from the commercial registry indicates that as of 2005 Saint Tiago Hotel and Tourism Company Limited had capital of MOP500,000 provided by two companies based in Hong Kong, with MOP450,000 provided by Folka Limited and MOP50,000 by Capital Union Holdings Limited. The commercial registry also stated that at that time the company had as co-chairmen Angela Leong, Ng Chi Sing and Ambrose So, both COO and Chief Executive, respectively, of SJM Holdings. The company ceased functions in 2005 with quotas being transferred, commercial registry information revealed. In 2014, Ms. Leong stated that the hotel expansion had not yet been concluded due to the cultural heritage status of the property and environmental protection issues. Business Daily contacted the Cultural Bureau and Macao Government Tourism Office (MGTO) in regard to the hotel expansion but no response had been received by the time this newspaper went to print. The information in the property registry indicates a fine was applied to the concession in June of 2015 for failure to fulfill the 36 months deadline for hotel expansion, with the hotel offering 12 suites upon its recent closing. The concession contract indicated that a MOP17,424 annual rent defined until the land plot exploration had finalised, and a MOP76,116 annual rent after the proposed expansion was concluded. The initial contract also stipulated the concessionaire would be able to renew its concession until December 2049.
at the property with GDI stating it had ‘inspected the [public transport interchange] and instructed the contractor to repair damaged facilities such as site hoardings’ with the contractor gradually resuming construction.
Business Daily Wednesday, August 30 2017 5
Macau Property
Former Red Cross site languishes in Sai Van The former home of the Macau Red Cross overlooking Sai Van Lake is still closed after more than a year of the relief organisation relocating to Areia Preta district headquarters located in Senado Square, the site of Albergue in Saint Lazarus Parish, the nearby Home for the Elderly, located on Rua D. Belchior Carneiro, Largo da Companhia, and the Rehabilitation Centre for the Blind located on Avenida General Castelo Branco near the greyhound dog racing track, the Canidrome.
Sheyla Zandonai sheyla.zandonai@macaubusiness.com
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he Red Cross, a relief and humanitarian organisation, left the premises (pictured) it had occupied in Sai Van Lake since the 1990s over a year ago, according to information provided to Business Daily by the organisation’s spokesperson. The Red Cross left the house located at No.58-60, Avenida da República on 28 February 2016. The house, known by its Portuguese name as ‘Mansão do Poente’ (Sunset Mansion), is the property of the Holy House of Mercy. “They said they wanted to use the place to develop a
Macao Red Cross
Founded in 1920, the Macao Red Cross became a member of the Portuguese Red Cross in 1922. Following Macau’s handover to China, the local Red
Heritage-related property
Old premises of the Red Cross in Sai Van Lake
new project,” the Red Cross spokesperson told us. Contacted by Business Daily, the President of the Holy House of Mercy, José Maria de Freitas, briefly explained to us that they “still did not have a project approved” for the facilities and that “it would
be announced when a decision was made.” Red Cross has since relocated to facilities in northern Macau. “We found the place in Areia Preta before we left the house [in Sai Van],” the organisation said.
Cross ‘transitioned’ to an autonomous branch of the Red Cross Society of China. The Holy House of Mercy is one of the oldest institutions in Macau, created in 1569 by Bishop
D. Belchior Carneiro with the mandate ‘to give organised expression to the moral duty of solidarity and social justice within the catholic spirit and of Christian charity.’
During the time Red Cross occupied the premises owned by the Holy House of Mercy, it paid rent “on a nominal basis . . . [of] . . . some MOP1,000 per month with no significant adjustments incurred during the period,” according to information provided by the Red Cross. Now renting out its current facilities from a private contractor, a “business” person, the humanitarian organisation has to pay “market price” for its current premises in Areia Preta. Other properties of the Holy House of Mercy in Macau include the institution’s
Contacted by Business Daily, the Cultural Heritage Department of the Cultural Affairs Bureau (IC), said the house located at No. 58-60 Avenida da República ‘is not included on the classified immovable properties list, but rather in the Buffer Zone of the World Heritage Historic Centre of Macao,’ following indications defined within the Cultural Heritage Protection Law. IC does not seem, however, to have the most updated information on the property, saying that ‘currently, the building is used by the Macao Red Cross mainly to provide non-emergency medical escort services to wheelchair users,’ advertisement
6 Business Daily Wednesday, August 30 2017
Macau ECOSYSTEM
Protecting and employing the rainforest Following accusations it would negatively impact the Kuranda rainforests in the Australian state of Queensland, the management of the under-development KUR-World resort project told Business Daily that the project would not just preserve the areas ecosystem but provide considerable job opportunities for the local indigenous population Nelson Moura nelson.moura@macaubusinessdaily.com
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he management of the KUR-World resort project currently being developed in the Australian state of Queensland told Business Daily that it will not have the negative environmental impact stated by an environmental scientist, and will considerably assist the region’s economy. The project is currently being developed by Reever & Ocean Developments Pty Ltd, (R&O), a company owned by developer Ken Lee, an Australian citizen with offices in Macau and Australia, resort representatives told Business Daily. Last week, William F. Laurance, a professor at James Cook University in Cairns, stated the eco-resort would have a considerable impact upon the Kuranda rainforest where it is being developed. Mr. Laurance also said he expected the project to be “dissected to shreds” by experts after its Environmental Impact Statement (EIS) is released later this year. In its response to Business Daily, Geraldine McGuire, Manager of Community Engagement at KURWorld, said the project would have a positive impact upon the region’s economy, while preserving its ecosystem. The statement argues that 80 per cent of the 672 hectare site will retain the original natural vegetation, while preserving the section that links the northern and southern sections of the World Heritage area known as the Envirolink Corridor. ‘Discussions have been held with nationally recognised conservation land managers and state government
agencies regarding join management arrangements into the future,’ the release announced. Around 20 per cent of the site would be designated as a breeding and foraging habitat of the Myola tree frog, while buffer areas would be established to protect the habitat of ‘other important species such as the Myola Palm and the Southern cassowary’.
Bringing jobs back to the rainforest
According to the statement, the project will involve a ‘total investment in resort infrastructure facilities and accommodation in the order of A$860m over a six-year period
2018-19 to 2023-24’, with A$536m of direct investment in resort infrastructure and A$328 million of investment to purchase the property. The note stated it would bring considerable employment opportunities for its indigenous population with a peak of 1,300 jobs expected to be created in the six-year development period and 2,700 positions once the property is fully operational. The project is to include a 5-star resort with 200 luxury villas; an 18-hole golf course and clubhouse; a 3-star leisure and business resort with 270 rooms, a retail and dining village hub, a tertiary education campus, a business centre, sports facilities, together with health and wellbeing
services which will include a medical retreat with 70 suites. The statement also indicated the project would cater to an expected increase in visitation to the Tropical North Queensland region in the next eight years of 1 million visitors, increasing from the current 2.8 million to 3.8 million. ‘KUR-World therefore presents an opportunity to revitalise the Kuranda community by providing significant employment when fully operational for a younger age demographic in a range of jobs and employment opportunities for the indigenous population and unemployed and part time work for currently under-employed,’ the statement announced.
not affecting any of the rights of existing shareholders. As for the reasons for the proposed change, the group noted that the current name of the company ‘does not reflect the diversity of
businesses conducted by the group.’ While ‘still engaged in its gaming business by receiving profit streams from junket operators, the group now focuses more on its money lending business and management and operation of hotel business,’ the company said. Since the end of 2016, Neptune has started diversifying its portfolio by engaging in such operations. A series of cut-offs in its VIP room operations preceded and followed the company’s decision to broaden lending provision. By late July, Hou Wan, a junket service provider operated by the company, received notice from The Venetian of the termination of operations on the property, effective August 30. The termination of business involving Hou Wan came after the Sands China Ltd. operation had terminated other Neptune business, suspending the operation of 14 VIP tables run by another subsidiary of the company, Hao Cai Sociedade Unipessoal Limitada, effective June 30. In 2015, Neptune closed its VIP table business in StarWorld, a casino of Galaxy Entertainment Group, following a slump in VIP business.
Lending business
Neptune spins off into new orbit Local junket operator Neptune Group Limited has proposed changing the English name of the company to Rich Goldman Holdings Limited, according to a filing of the company with the Hong Kong Stock
Exchange (HKEX) yesterday. Change will also apply to the English stock short name of the company for trading in the shares of the HKEX, subject to confirmation, with the proposed changes
Business Daily Wednesday, August 30 2017 7
Macau Property
Suncity reports loss on non-gaming segment The Hong Kong-listed junket operator’s investment in real state in Mainland China has not yet yielded positive results, but travel services in Macau are paying off Sheyla Zandonai sheyla.zandonai@macaubusiness.com
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unket operator and property developer Suncity Group Holdings Limited has announced RMB1.05 billion (US$160.15 million/MOP1.29 billion) in loss attributable to the owners of the company from non-gaming business segments during the six months ended June 30, mainly due to ‘forfeiture of deposits from purchasers,’ according to a filing with the Hong Kong Stock Exchange on Monday after trading hours. Losses incurred during the same period a year earlier amounted to RMB64.91 million. A significant increase in other losses during the period were mainly attributable to change in fair value of financial derivatives of nearly RMB697.7 million and loss and provision for litigation in the aggregate amount of some RMB411.8 million. During the period, revenue of the company amounted to RMB333.21 million, a 38.31 per cent increase from the RMB205.52 registered in the same period a year prior. The company further noted that the increase in revenue was mainly attributable to RMB122.10 million generated in Macau from the
provision of travel agency services by Sun Travel Ltd., an indirect wholly-owned subsidiary acquired by the company in August 31, 2016 – revenue from the local travel services segment amounted to RMB4.84 million a year earlier. G r o ss p r o f i ts a m o u n t e d t o RMB145.36 million from RMB98.76 million the year before, with the group noting that gross profit margin in property development has increased to 60.56 per cent in the first half of 2017 from 41.36 per cent in the first half of 2016.
App development
Suncity also said in the filing that ‘it is devoting time to optimise its business platform,’ by broadening sales channels such as the development of its own Online Travel Agency (OTA) mobile phone application this year. OTA App will provide customers with hotel accommodation, ticket reservation service, and other travel related products. By mid-month, the group had announced the launch of mobile phone app ‘Sun Finance,’ which enables VIP clients to keep track of their account information, earnings history, and rolling chip activities. The company said then it was planning to create within the new app an
embedded link to another app the company referred to as ‘Sun Travel,’ which would enable the promotion of the group’s products and services via the identification of travel spending patterns of clients.
Property investment
Other revenue of the company during the six months under review was generated by the leasing of property in Shenzhen, and the development and sale of property in Shenzhen (completed project), Zhongmiao Town in Anhui Province and in the Fushun Economic Development Zone in Liaoning Province (projects under development). Properties developed by the group consist mainly of high-rise and
luxury high-rise buildings and a villa, totalling some 6,454 square metres of aggregate mass floor. In June 2017, Suncity also entered into a memorandum of understanding to acquire Star Admiral Limited – a company indirectly owned by Suncity’s Chairman and Executive Director Alvin Chau Cheok Wa – with a 34 per cent equity interest in an integrated resort (IR) in Hoi An, Vietnam. The company noted that during 2016 Suncity Group Management and Consultancy Limited, another indirectly wholly-owned subsidiary of the company, ‘has been set up for the opportunities of hotel and integrated resorts in Asian countries such as Korea, Malaysia and Vietnam.’ advertisement
8 Business Daily Wednesday, August 30 2017
Greater china Private poll
Mainland’s home prices to rise 6.8 pct this year A majority of surveyed analysts are convinced current real estate measures will remain in place for the next one to two years Yawen Chen and Elias Glenn
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hina’s home prices in 2017 are likely to rise more than previously estimated despite a flurry of government curbs to crack down on speculation, a Reuters poll showed yesterday, soothing fears the economy would slow sharply. Property prices will continue to creep steadily higher amid heavy government intervention helped partly by a shift in demand to the country’s smaller cities, according to the poll which surveyed 13 property analysts and economists from Aug. 21-28. Average nationwide home prices were expected to rise a median 6.8 per cent this year compared with a median expectation of 2 per cent growth in the last poll in February. Prices of new homes in China grew 12.4 per cent in 2016, the fastest rate since 2011. A resilient property market will be good news for China’s policymakers, who want to keep the real estate market stable ahead of a once-in-five-years Communist Party congress. The authorities have defences already in place to guard against bubble risks in its hottest markets but the home-buying frenzy has reached the smaller cities, where local governments offer cheap credit and impose next to no restrictions. The majority of the analysts surveyed are convinced current measures, first introduced in late 2016 and since fortified, will remain in place for the next one to two years. Most of them expect policymakers
to roll out more long-term measures targeting structural imbalances, such as a property tax, pointing out that current administrative curbs are anti-market in nature and unsustainable.
‘Prices of new homes in China grew 12.4 per cent in 2016, the fastest rate since 2011’ “Usually tightening policies won’t last for more than 3 years; it’s impossible to always tighten and the
effects wane as time goes by,” researchers at the Bank of Communications said. “That’s exactly why there’s more urgency to establish a long-term mechanism to stabilise the housing market,” they said in a research report. But authorities have been walking a fine line between curbing excessive price gains and clamping down too hard on a sector which accounts for about 15 per cent of the economy. Beijing has tightened monetary conditions this year to tackle its growing debt pile as mortgages soar, but credit is still growing faster than economic output and most China watchers don’t expect the central bank to tap too hard on the brakes. As deleveraging continues after the economy clocked 6.9 per cent
GDP growth for the first two quarters on a surging property market and an infrastructure binge, analysts expect slightly slower economic growth in the coming quarters. “We think the biggest risk facing the housing market is that China’s real economy may continue to slow, prompting the government to continue to oversupply credit, which would then flood the property market,” wrote Sun Binyi, a researcher with China Real Estate Appraisal. When asked to rate affordability of Chinese housing on a scale of 1 being the cheapest and 10 the most expensive, the median answer was 7. That is in line with what analysts rated in the last poll, though some analysts have pointed out smaller cities are much more affordable than the biggest cities. Reuters
Markets link
Bond Connect trade picks up as yuan strengthens The connection does not yet offer mainland investors access to offshore markets through “Southbound” trade Andrew Galbraith
Trading by offshore investors in a type of short-term debt through China’s Bond Connect scheme rose sharply last week, suggesting that a strengthening yuan may be helping the two-month-old programme pick up steam after a slow start. The total settlement value of Bond Connect transactions received by the Shanghai Clearing House, one of China’s two bond settlement systems, nearly quadrupled in the week of
Aug. 21 to RMB11.8 billion (US$1.8 billion) from the week before, data from the Shanghai Clearing House showed yesterday. Trade was concentrated in negotiable certificates of deposit (NCD), a type of short-term debt popular with smaller banks, accounting for more than 88 per cent of settlement value. High rates and a surging yuan may have piqued investor interest in NCDs, said Albert Leung, a Hong-Kong based rates strategist at Nomura.
“If you have the conviction that the RMB will trade O.K. in the next (one to three months) and the yields are high, it’s actually not a bad position to own, because first you get 4.5 per cent yield and also you gain some potential currency appreciation,” Leung said, using another term for the yuan. The short-term debt has drawn increasing attention from regulators trying to control banking system risk, as banks raised funds by issuing NCDs, effectively borrowing from each other in the the interbank market to get around tight conditions. The yield on AAA-rated threemonth NCDs stood at 4.53 per cent on Monday - the most recent day for which the China Foreign Exchange Trade System has data - 89 basis points above the yield on 10-year treasuries on Monday. As of midday yesterday, the yuan had gained 1.8 per cent against the dollar in August, and is on course for its best month since July 2005. The Bond Connect scheme, launched on July 3, permits eligible institutional investors in Hong Kong and overseas to buy and sell onshore bonds without a quota through what is termed “Northbound” trade. Billed as a mechanism to increase cooperation between mainland and
Hong Kong capital markets, Bond Connect does not yet offer mainland investors access to offshore markets through “Southbound” trade.
“If you have the conviction that the RMB will trade O.K. in the next (one to three months) and the yields are high, it’s actually not a bad position to own” Albert Leung, a Hong-Kong based rates strategist at Nomura
Data from the Shanghai Clearing House is limited to trading of bonds cleared through the institution, and as such does not include forms of debt cleared through China Central Depository & Clearing Co. (CCDC), such as Chinese treasuries. Reuters
Business Daily Wednesday, August 30 2017 9
Greater China Markets
In Brief
Dividend superstars mask stinginess of state firms While investors are aware of the challenge posed by SOE leverage, low or non-existent dividends have been a persistent bug bear Fox Hu and Moxy Ying
Eye-catching dividends from PetroChina Co. to China Mobile Ltd. have got investors excited, hopeful the country’s state-run behemoths are heeding Beijing’s call to revolutionize their approach to shareholder pay-outs. Problem is, they’re the exception -not the rule. Less than half of 334 Chinese central government-controlled companies (SOEs) tracked by Bloomberg have announced higher dividends since 2014, when officials intensified calls for SOEs to increase them. Excluding China Mobile’s pay-outs, which more than doubled the past two years, and China Shenhua Energy Co. -- it declared a surprise special dividend in March -- the overall value of SOE dividends dropped 4.4 per cent in the two years to 2016. “Pay-outs as big as Shenhua’s and China Mobile’s are exceptional cases,” said Dai Ming, a fund manager at Hengsheng Asset Management Co. in Shanghai, which oversees about RMB400 million (US$60 million). “Many companies saw their cash flow squeezed amid slower growth over the last two years. It’s hard to set an across-the-board rule on pay-outs for SOEs of very different profitability.” The problem for many is debt. Encouraged to ramp up spending in the wake of the financial crisis, SOEs boosted leverage at almost five times the rate they bolstered cash levels in the 20142016 earnings period, data compiled by Bloomberg show. While investors are aware of the challenge posed by SOE leverage, low or non-existent dividends have been a persistent bug bear, with China’s state-controlled companies seen as being more attuned to their masters in Beijing than the holders of the rest of their shares. Perhaps cognizant of that -- and its own potential windfall -- the government unveiled a plan to boost dividends in early 2014. Given the lack of progress since then, the chief of the securities regulator reiterated the call for bigger SOE pay-outs in April this year, threatening to punish “iron roosters which have the ability to offer cash dividends but never plucked a feather,” making use of a Chinese slang term for misers.
practice isn’t so easy, says Chen Xingdong, chief China economist at BNP Paribas SA in Beijing. China’s economy has only this year started to recover from a downturn that hit earnings and commodity prices. “While their directors understand the importance of dividends, many SOEs are strapped for cash to repay debts amid the slowdown,” he said. Total debt for the 332 companies -- minus Shenhua and China Mobile -- has climbed 37 per cent since 2014, versus the 8 per cent growth in combined cash and equivalent holdings. The original list of 334 state-owned firms was assembled using members of the CSI Central SOEs, a gauge compiled by China Securities Index Co. China Mobile was then added in. The world’s largest phone carrier, China Mobile seems to be heeding the call, announcing a special pay-out this month and a full-year dividend in 2016 results out in March. The company is unusual among SOEs, however, because it managed to boost its cash pile by about 14 per cent from end-2014 through June, while cutting total debt by 52 per cent, according to data compiled by Bloomberg.
‘Individual cases’ Likewise, Shenhua, China’s biggest coal miner, more than doubled its cash hoard from the end of 2014 to June amid a jump in raw materials prices, while debt rose by just 8 per cent. Interestingly, though Shenhua ignited a wave of anticipation over SOE dividends with its special payout earlier this year, the firm didn’t follow suit in its earnings for the first half of 2017 released late on Friday. The company announced a merger with China Guodian Group on Monday, creating the world’s largest power company. China Mobile and Shenhua are
“individual cases,” says Yang Delong, chief economist at First Seafront Fund Management Co. in Shenzhen. Both companies are at least 72 per cent owned by state-run parents, who have a political imperative to be seen taking part in SOE reform and also need cash to undertake mergers and acquisitions. “A key reason for them paying huge dividends is to benefit their parents,” Yang said. “Minority shareholders just benefit from it in passing.”
Not sustainable PetroChina, the country’s top oil producer, fuelled the buzz around SOE dividends with the announcement last week it will pay shareholders its entire half-year profit. But while the headline number might be impressive -- the state-controlled company will pass on almost RMB12.7 billion (US$1.9 billion) in dividends -- PetroChina’s 12-month pay-outs are down 32 per cent from two years ago, falling along with oil prices. The dividend is “a one off,” says Hao Hong, chief strategist at Bocom International Holdings Co. in Hong Kong. “It’s unlikely to be sustainable as it’s a large chunk of cash.” PetroChina’s shares have lost 0.6 per cent in Hong Kong since it announced the interim dividend on Aug. 25. China’s four biggest banks, all state-controlled, report second-quarter earnings this week. Between 2014 and 2016, all of them saw a reduction in dividend ratios. For a more meaningful and widespread turnaround in pay-outs, China’s SOEs will need to improve their balance sheets and profits, says Sam Le Cornu, co-head of Asian equities at Macquarie Investment Management in Hong Kong. “The potential for higher SOE pay-out ratios will rise as China re-balances its economy and continues its deleveraging programs,” he said. Bloomberg News
Cash strapped The message from Beijing has been heard “loud and clear,” though putting it into
Electric cars
Renault-Nissan to set up new JV with Dongfeng Motor A statement did not give details of financial commitments of the joint venture partners Norihiko Shirouzu
Nissan Motor and its alliance partner Renault are setting up a new joint venture in China with Dongfeng Motor Group to design and build electric cars, joining a list of global automakers aiming to make such vehicles in China. The automakers are attempting to tap into a boom for such cleaner “new energy” vehicles in the world’s biggest auto market and gearing up to meet its anticipated stringent plug-in car quotas. Ford Motor Co announced earlier this month it was exploring setting up a joint venture with car maker Anhui Zotye Automobile Co to build electric vehicles in China under a new brand. Tesla, Daimler AG and General Motors have already announced plans for making electric vehicles in China,
which wants electric and plug-in hybrid cars to make up at least a fifth of the country’s auto sales by 2025. The new joint venture, called eGT New Energy Automotive Co, will be owned 25 per cent each by Nissan and Renault with Dongfeng owning 50 per cent, Nissan and Renault said in a statement yesterday. They said eGT will design a new electric vehicle on a subcompact crossover SUV platform of the Renault-Nissan alliance. “The establishment of the new joint venture with Dongfeng confirms our common commitment to develop competitive electric vehicles for the Chinese market,” Carlos Ghosn, chairman and chief executive officer of the Renault-Nissan alliance, said in the statement. The statement did not give details of financial commitments of the joint venture partners or say by when the
vehicles will be launched. Dongfeng already partners Nissan in China. Both Nissan and Renault already market electric cars. Nissan’s Leaf compact hatchback has become the world’s top-selling electric car since its launch in 2010, while Renault began selling its Zoe model in 2012. The game changer for global automakers, many of whom until recently have resisted an industry shift to heavily electrified vehicles, is China an auto market with strong potential for growth where stringent policies favouring cleaner energy cars are being aggressively pursued. Under China’s latest proposals, electric vehicle sales quotas, which are expected to take effect as early as 2018, are due to require 8 per cent of automakers’ sales to be battery electric or plug-in hybrid vehicles by next year, rising to 10 per cent in 2019 and 12 per cent in 2020. Reuters
M&A
ACS sounds out Mainland funds to partner potential Abertis bid Spanish builder ACS is sounding out Chinese funds with headquarters in Hong Kong to partner on a potential counter-bid for toll road company Abertis, Expansion newspaper reported yesterday citing investment fund sources. ACS declined to comment on the report yesterday. ACS confirmed in July it was considering making an offer for Spain’s Abertis after Italian infrastructure group Atlantia, controlled by the Benetton family, bid more than 16 billion euros (US$18.6 billion) in May. Atlantia had offered 16.50 euros per share, looking to create the world’s biggest toll road company. Infrastructure
SPIC to participate in Brazil dam auctions China’s State Power Investment Corp plans to participate in the auction of four hydroelectric dams whose licensing was seized from Cia Energética de Minas Gerais SA in recent months, a person with direct knowledge of the situation said on Monday. The Chinese company, known as SPIC, has arranged the help of two unnamed investment banks to structure a proposal for the Miranda, São Simão, Jaguara and Volta Grande dams, said the person, who was not authorized to publicly discuss the matter and requested anonymity. Official trip
Mexican President to visit Mainland to boost trade Mexico’s President Enrique Peña Nieto will travel to China next week to discuss trade and investment, as Mexico looks for ways to decrease its dependence on NAFTA, especially trade with neighbouring United States. He will hold a bilateral meeting with China’s President Xi Jinping and participate in a summit of the BRICS nations, a grouping that includes Brazil, Russia, India, China and South Africa, on Sept. 4 and 5, Mexico’s Foreign Ministry said in a statement. Peña Nieto’s visit comes as U.S., Mexican and Canadian negotiators meet Sept. 1-5 in Mexico City for a round of talks to revamp the 23-year-old North American Free Trade Agreement (NAFTA). Infrastructure
Argentina approves construction of Chinese-financed dams Argentina’s government approved the construction of two hydroelectric dams in the southern Patagonia region after holding public hearings as required by the Supreme Court, according to a notice in the Official Gazette on Monday. The dams in Santa Cruz province will be constructed by China Gezhouba Group Co Ltd, which holds a majority stake in the project, and Argentina’s Electroingeniera SA. Together, the dams - to be named after former President Nestor Kirchner and a former regional governor - will represent 1,310 megawatts of hydroelectric capacity and produce an average of 5,171 gigawatt hours of energy, around 5 per cent of the country’s total electricity demand.
10 Business Daily Wednesday, August 30 2017
Greater China Going public
Mainland celebrity-backed fintech firm is said to pick IPO banks Backers of Quant include Star VC, the investment firm started by a group of Chinese celebrities Crystal Tse
Q
uant, a financial technology firm backed by Chinese movie stars, has picked JPMorgan Chase & Co. and Morgan Stanley to advise on a planned U.S. initial public offering that could raise about US$200 million, people with knowledge of the matter said. Beijing-based Quant filed confidentially with the U.S. Securities and Exchange Commission this month, the people said, asking not to be identified because the information is private. The company, which generates credit ratings and facilitates loans, plans to start gauging interest from potential investors in September, said the people. Quant is among Chinese fintech firms seeking funds in the U.S. equity market as consumers in the world’s most populous nation increasingly turn to non-traditional lenders. Fenqile, a Shenzhen-based online shopping mall that lets buyers pay in instalments, picked banks to work on a planned IPO that could raise about US$600 million, people with knowledge of the matter said in March. First-time share sales from Chinese companies raised US$2.1 billion in the U.S. over the past 12 months, four times the volume during the previous period, according to data
Beijing-based Quant filed confidentially with the U.S. Securities and Exchange Commission this month
compiled by Bloomberg. Quant reported US$15.7 million profit in 2016 after a loss of US$2.6 million during the previous year, according to preliminary offering documents seen by Bloomberg. The company facilitated RMB5.1 billion (US$767 million) of loans last year, compared with just RMB193.7 million in 2015, the documents show. The size and timeline of the
offering may change, the people said. Representatives for Quant and Morgan Stanley said they couldn’t immediately respond to requests for comment. A spokeswoman for JPMorgan declined to comment. Backers of Quant include Star VC, the investment firm started by a group of Chinese celebrities. Li Bingbing, an actress who appeared in “Transformers: Age of
Extinction,” and “Ip Man 2” actor Huang Xiaoming are among partners at Star VC, according to the website of fellow portfolio company Handu.com. Other investors include Guosen Securities Co. and billionaire Guo Guangchang’s Fosun International Ltd. Quant operates xyqb.com, which generates credit ratings using consumer information. Bloomberg News
Inc
Mainland’s No. 4 developer discloses overdue debt in first half This isn’t the first time a Greenland unit has had problems repaying debt Greenland Holdings Corp., China’s fourth-biggest developer by property sales, said it had overdue loans of RMB457.5 million (US$69.2 million) in some units in the northeast province of Liaoning at the end of June, underscoring concerns about the company’s debt problems.
“Investors should pay attention to whether the event will exacerbate the liquidity conditions within Greenland” CICC Research note on Aug. 25 Companies under Greenland’s unit in Liaoning had overdue short-term debt of RMB247.5 million, as well as RMB210 million in long-term obligations, according to Greenland’s interim report dated Aug. 25. The company told Bloomberg News last week its project in China’s northeast faced repayment problems due to
the region’s weak real estate market. China’s property market has turned “significantly” from the second quarter due to the heightened crackdown on the real-estate sector, the Shanghai-based firm, 46.4 per cent owned by the municipal government, said in last week’s report. The nature of the joint-venture in some projects and management issues were among reasons for the overdue loans, an investor relations officer at Greenland said in response to Bloomberg queries yesterday. “The impact of overdue loans on Greenland is reputational risk,” said Zhi Wei Feng, Singapore-based head of China corporate credit research at Standard Chartered Plc. “The company needs to improve transparency and communication with investors.” This isn’t the first time a Greenland unit has had problems repaying debt. Last year, Greenland affiliate Shanghai Yunfeng Group Co. was in default on RMB2 billion of privately placed notes after the triggering of early repayment clauses, according to a Caixin magazine report. Greenland’s US$600 million 2024 bonds fell about 1 cent on the dollar to 101.4 cents in the past 10 trading sessions, according to
Bloomberg-compiled prices. Its RMB8 billion onshore 2020 bonds dropped RMB2 to RMB94.7 over the same period. The banks involved in the overdue debt include Bank of Jinzhou Co., Bank of Yingkou Co., Shengjing Bank Co. and Hengfeng Bank Co. Greenland said the overdue loans in Liaoning will not trigger a cross-default clause on its dollar bonds and
is currently dealing with those loans with the aim of resolving the issue by the end of 2017. “The overdue loans reflect the fact that Greenland’s management of its units is a bit loose,” according to a CICC Research note on Aug. 25. “Investors should pay attention to whether the event will exacerbate the liquidity conditions within Greenland.” Bloomberg News
Business Daily Wednesday, August 30 2017 11
Asia Fiscal stimuli
South Korea to boost govt spending in 2018 The ministry will present the budget draft to lawmakers on Sept. 1 for parliamentary approval Cynthia Kim and Shinhyung Lee
S
outh Korea’s government plans to boost spending to a record 429 trillion won (US$383.05 billion) next year as policy makers step up fiscal stimulus to buttress overall economic growth by funding rising welfare costs, creating jobs and stoking domestic consumption. Total spending for 2018 will increase 4.6 per cent from a targeted 410.1 trillion for this year, which includes an 11 trillion won supplementary budget approved in July. “We proposed it to be expansionary to support the new administration’s policy pledges, as well as to aid job creation and growing needs for welfare,” the ministry said in a statement. The Moon Jae-in administration faces a hurdle in passing the bill in parliament, where Moon’s Democratic Party holds only 40 per cent of the 299 seats. The budget proposal “is the biggest boost in spending since the financial crisis,” Kim Gwang-lim, a lawmaker at the opposition Saenuri Party said in a meeting after the government announced the budget plan. Kim described the proposal as a “populism budget”, and added the increase in fiscal spending will amplify the financial burden for young South Koreans. Moon Jung-hui, an economist at KB Investment& Securities, said the size of the increase was in line with market expectations.
“As the new president has been emphasizing welfare and job growth, market expected next year’s budget to remain expansionary,” Moon said. The ministry will present the budget draft to lawmakers on Sept. 1 for parliamentary approval. The parliamentary vote is expected in December this year.
Aging dilemma
Growth in Asia’s fourth-largest economy almost halved in the second quarter, hurt by slowing construction and a slide in exports, though private consumption provided a surprising boost to output. The government has said it wants to step up fiscal spending to help spur household spending and lift economic growth.
Key Points S.Korea proposes record spending of 429 trln won for 2018 Spending for welfare, jobs takes biggest budget allocation of 34 pct Govt to submit 2018 budget plan for parliamentary approval on Sept. 1 After accounting for the higher spending budget, government debt as a proportion of gross domestic product will stay at 39.6 per cent in 2018, unchanged from this year. The fiscal deficit will be maintained at around 40 per cent of GDP through 2021, the ministry said, as it will
tightly control spending increases in the next few years. Policymakers expect a rapidly aging population to take a toll on the South Korean economy. The nation has the fastest-rising average age among the Organization for Economic Co-operation and Development (OECD) countries. Funding an ageing population with a shrinking workforce is an area of concern for policymakers as they look to boost jobs and household income. The Bank of Korea has cut interest rates eight times since 2012 to a record-low of 1.25 per cent, yet household spending has been slow to pick up. Welfare is set to receive the biggest allocation of 34 per cent, or 146.2 trillion won, to provide subsidies for companies creating jobs and fund the Moon government’s plans to increase social service jobs including
workers at nursing homes and childcare centres. Government budgeted expenditure for defence jumped 6.9 per cent to 43.1 trillion won as the nation seeks to modernize its military equipment to counter the rising threats from North Korea. Budget allocation for public infrastructure will shrink by 4.4 trillion won or by 20 per cent to 17.7 trillion won next year. The ministry plans to sell 106.6 trillion won of treasury bonds in 2018, up slightly from 103.7 trillion won for this year, finance ministry officials told Reuters separately. Budget for the FX equalization fund, a government fund used to stabilize currency market volatilities, will be 12 trillion won for the won-denominated bonds in 2018. A similar fund denominated in foreign currencies will have a budget of US$1 billion. Reuters
Trade
TPP countries consider amendments to stalled trade deal While Trump has said he will not change his mind on TPP, the remaining members are hopeful a future U.S. President will commit to the agreement The 11 countries committed to the Trans-Pacific Partnership are considering amendments to the trade deal, three sources said yesterday, as officials meet in Sydney for talks to re-energize the stalled agreement. Among the areas being discussed, Vietnam has raised the prospect of changes to labour rights and intellectual property (IP) provisions in the original pact, one source familiar with the talks told Reuters. Vietnam had been one of the countries expected to enjoy the biggest economic benefits from TPP through greater access to U.S. markets. However, the original 12-member TPP, which aims to cut trade barriers in some of Asia’s fastest-growing economies, was thrown into limbo in January when U.S. President Trump withdrew from the agreement. Trump’s move fulfilled a campaign pledge to put “America first” - a policy that aimed to bring manufacturing jobs back to the United States. Although the remaining members have publicly said they remain committed to the deal, implementation of the agreement linking 11 countries with a combined GDP of US$12.4
trillion has stalled - raising fears that other countries will follow the U.S. lead and withdraw. Eager to keep all members onboard, representatives from the remaining countries are considering changes to the original TPP deal, three sources familiar with the talks said. “We’re all open to evaluating what we can do and what viable alternatives there may be,” Edgar Vasquez, Peru’s deputy trade minister, told Reuters.
While no agreement is expected at the end of the three-day meeting, Vietnam’s desire to shelve the IP provisions around pharmaceutical data is likely to win broad support, with Japanese and New Zealand officials also indicating their support for the change, two other sources said. The original TPP agreement was seen as particularly onerous on Vietnam, which be forced to make significant reforms, analysts said. “There’s not much sense to agree
U.S. President Donald Trump shows the document ordering the withdrawal from the TPP agreement. Source: Lusa
to provisions they don’t really want such as stronger monopolies on medicines if they are not going to get access to the U.S. market,” said Patricia Ranald, research associate, University of Sydney. The original TPP offered an eightyear window before competitors can have access to proprietary pharmaceutical data, which critics said would impede development of cheap generics. Potential amendments, however, require delicate positioning. While Trump has said he will not change his mind on TPP, the remaining members are hopeful a future U.S. president will commit to the agreement, a cornerstone of former President Barack Obama’s pivot to Asia. But analysts said wholesale changes, while ensuring the support of smaller members, would repel the United States. “The more you change the agreement, it is going to be harder to get the U.S. to sign on when it is ready to,” said Shiro Armstrong, research fellow at the Crawford School of Economics in Canberra. Reuters
12 Business Daily Wednesday, August 30 2017
Asia Mixed data
Japan spending falls but tight jobs market offers hope of end to deflation Economy’s recovery at a testing point with escalating tensions in North Korea and uncertainty over U.S. President Donald Trump’s policies Leika Kihara
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apan’ s h o u s e h o l d spending unexpectedly fell in July though the labour market continued to strengthen, offering some hope wage gains will soon accelerate and help the world’s third-biggest economy overcome a decades-long battle with deflation. Many analysts expect the economy to extend its recovery at a healthy clip, with job availability at a fresh 43-1/2-year high in July and improving business confidence set to underpin corporate spending. But firms face a dilemma even as the economy is on course for its second longest postwar expansion - rising labour costs that cut into their bottom line and pressure to attract price-sensitive shoppers with discounts. “We’ll probably see a gap between companies that have the capacity and pricing power to raise prices and those that don’t,” said Mari Iwashita, chief market economist at SMBC Friend Securities. “It’s not back to days of deflation when you win just by cutting prices. That’s good for the economy. But it means companies are faced with a more complex business environment.” Household spending slid 0.2 percent in July from a year earlier after hitting a two-year high in June, government data showed yesterday, confounding a median market forecast for a 0.7 percent increase.
The jobless rate was flat at 2.8 percent in July and 1.52 jobs were available per applicant, the highest since 1974, separate data showed, a sign the economy continued to enjoy what many analysts consider as near full employment. “We are not too worried about the slowdown in household spending in July as strong job growth continues to support household incomes,” said Marcel Thieliant, senior Japan economist at Capital Economics. Still, consumption is likely to shave off economic growth in July-September after making a net contribution in the second quarter, as rainy weather kept shoppers home in August, analysts say.
Key Points July household spending down 0.2 pct yr/yr vs f’cast +0.7 Jobless rate flat, job availability at 43-year high Inflation remains subdued despite strengthening economy That leaves the economy’s recovery at a testing point with escalating tensions in North Korea and uncertainty over U.S. President Donald Trump’s economic policies raising risks for global growth.
Rising labour costs
Japan’s economy expanded at the fastest pace in more
than two years in the second quarter as consumer and company spending picked up. But price and wage growth remain stubbornly weak with firms still wary of passing on profits to employees, raising doubts over whether the second-quarter’s bounce can be sustained. The uncertain outlook on consumption has not only discouraged many companies from raising prices but has also driven some to cut prices. That highlighted the challenge faced by the Bank of Japan as it tries to spur inflation to its elusive 2 percent goal in its quest to defeat years of falling prices. Retail giant Aeon said last week it will cut the prices of 114 food and grocery items at 2,800 outlets to attract consumers, and make up the cost by streamlining operations.
Netherlands-headquartered furniture retailer IKEA’s Japanese unit also plans to cut prices amid intensifying competition from rivals like discount retailer Nitori. Just the same, not all are resorting to price cuts. The tightening job market has pushed up costs for some companies, prompting them to raise prices despite the risk of scaring away shoppers. Restaurant chain operator Skylark plans to raise prices from October due to rising raw material and labour costs. Torikizoku Co, another restaurant chain operator popular for its discount grilled chicken, said on Monday it will raise prices of its dishes from October for the first time in more than 28 years. “Various costs, including raw material and personnel costs, have risen and we expect this trend to continue,” the company said. “It’s
extremely unfortunate but we had to revise prices as we can no longer make up with cost-cutting efforts alone.” Private consumption which accounts for almost 60 percent of GDP - rose in the second quarter at the fastest pace in more than three years, a sign consumers finally have shaken off the impact of a sales tax hike in 2014. Some analysts were upbeat on household consumption, saying it has bottomed out. That augurs well for core consumer prices, which rose 0.5 percent in July from a year earlier - still quite a distance from the BOJ’s 2 percent target. “The upshot is that even though the tight labour market has yet to result in a marked pick-up in wage growth, strong job gains continue to support household incomes,” Capital Economics’ Thieliant said. Reuters
Real estate
Singapore’s home sales surge even as foreign demand subdued Property prices have dropped for 15 straight quarters Pooja Thakur
After years of declines, Singapore’s home sales are on a roll, even as purchases by foreign buyers have remained muted. Stringent stamp duties levied by the government have had the intended effect of damping speculative foreign demand, with foreign buyers accounting for just 6 per cent of purchases in the first half, data from Cushman & Wakefield show. That compares with 9 per cent as recently as 2013, when mortgage rules were tightened. Developers sold 7,147 private homes in the first seven months of the year, 50 per cent higher than in the same period a year earlier. So who’s buying all these homes? It’s local Singaporeans. Among foreign buyers, the biggest pullback was by Malaysian and Indonesian buyers, while Chinese
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demand held steady. Malaysian buyers among foreign purchasers dropped from 26 per cent in 2013 to 21 per cent in the first half of this year, while the Indonesian proportion slid to 6 per cent from
17 per cent in 2013. The Chinese share, the biggest of any group, has been at 29 per cent or 30 per cent since 2013. Developers are citing signs of a recovery in the housing market.
CapitaLand Ltd. Chief Executive Officer Lim Ming Yan said this month that the residential market may be “bottoming out,” while City Developments Ltd. Executive Chairman Kwek Leng Beng also saw signs of a pick-up.
‘Developers sold 7,147 private homes in the first seven months of the year’ Singapore’s property prices have dropped for 15 straight quarters, the longest slide since the data were first published in 1975, because of cooling measures rolled out since 2009. Home values are down 12 per cent from a 2013 peak. Bloomberg News Founder & Publisher Paulo A. Azevedo, pazevedo@macaubusinessdaily.com Editorial Council Paulo A. Azevedo; José I. Duarte; Mandy Kuok Newsdesk Mike Armstrong; Óscar Guijarro; Nelson Moura; Kelsey Wilhelm; Matthew Potger; Cecilia U; Sheyla Zandonai Group Senior Analyst José I. Duarte Design Aivi N. Remulla Photography Cheong Kam Ka, Ruka Borges, Gonçalo Lobo Pinheiro, António Mil-Homens, Carmo Correia Contributors Albano Martins; James Chu; João Francisco Pinto; José Carlos Matias; Larry So; Pedro Cortés; Ricardo Siu; Rose N. Lai; Zen Udani Assistant to the Publisher Lu Yang, lu.yang@projectasiacorp.com Office Manager Elsa Vong, elsav@macaubusinessdaily.com Agencies Bloomberg, Reuters, AFP, Xinhua, Lusa, Project Syndicate Printed in Macau by Welfare Ltd. Address Block C, Floor 9, Flat H, Edf. Ind. Nam Fong, Av. Dr. Francisco Vieira Machado, No. 679, Macau Tel. (853) 2833 1258 / 2870 5909 Fax (853) 2833 1487 E-mail newsdesk@macaubusinessdaily.com Advertising advertising@macaubusinessdaily.com Subscriptions sub@macaubusinessdaily.com Online www.macaubusinessdaily.com
Business Daily Wednesday, August 30 2017 13
Asia Mining
In Brief
Indonesia reaches agreement with Freeport on new permit Freeport has held talks with authorities since 2009 to work out the shift to a new mining permit at Grasberg after a new mining law was passed that year Wilda Asmarini and Hidayat Setiaji
Indonesia and Freeport-McMoRan Inc yesterday reached an agreement that lets the U.S. miner continue operating its giant Grasberg copper and gold mine, though crucial details on a planned 51 per cent divestment and new taxes remain unresolved. Still, by agreeing to the majority divestment, Freeport is giving what it calls a “major concession” to the Indonesian government to move closer to fully resolving the dispute over Grasberg, the world’s second-biggest copper mine. The agreement also reduces the risk of another stoppage to copper concentrate exports from Grasberg. Global prices for the metal jumped earlier this year when negotiations soured and exports were halted. Freeport can “immediately apply” for a 10-year permit extension to mine at Grasberg beyond 2021, said Indonesian Energy and Mineral Resources Minister Ignasius Jonan, and a second extension could be proposed before 2031. During Freeport’s five decades of operating Grasberg, in Indonesia’s eastern province of Papua, there has been frequent friction between the government and the company over revenue sharing and the mine’s social and environmental impact. “The mandate of the president, which has been agreed to by Freeport, is that the divestment should reach 51 per cent,” Jonan told a joint news conference, alongside Freeport’s Chief Executive Officer Richard Adkerson. “All that is left is to discuss the timing. The price will be negotiated later.” Freeport will need to divest a further 41.64 per cent of its Indonesian unit to comply with the local ownership rules introduced in January, on top of the 9.36 per cent stake it has already
divested. Freeport has insisted on a “fair market value” for the divested stake, while the government is seeking much lower figure and said it should not include unmined copper reserves. Last year, Freeport offered a 10.64 per cent stake in Grasberg for US$1.7 billion, valuing the mine at about US$16.2 billion. The government counter-offered at US$630 million. “The mechanics, valuation and timing of the 51 per cent divestiture are all absolutely critical issues which must be resolved before the dispute can be regarded as finally settled,” Jakarta-based foreign legal counsel Bill Sullivan told Reuters.
“Major concession”
Freeport has held talks with Indonesia since 2009 to work out the shift to a new mining permit at Grasberg after a new mining law was passed that year. The talks became more urgent this year as its existing 30-year contract is due to expire in 2021 and the government demanded the mine accept the new permit or copper concentrate exports would be stopped. The new permit would require Freeport to relinquish arbitration rights, pay new taxes and royalties, and develop a new copper smelter, among other terms.
Freeport is among the first miners to agree to new permits under the 2009 law and Energy Minister Jonan said last week this transition would be a “test case” for Indonesia’s mining sector. Freeport had sought an agreement that ran to 2041 and would have provided the same legal and fiscal rights as its current contract. It was seeking the certainty to proceed with a multi-billion dollar plan to move mining at Grasberg underground from an open pit. Adkerson said the existing contract of work would remain in place until everything was settled, but stressed that the company had given ground. “I want to emphasize that our willingness on the agreement to divest a 51 per cent (stake) and to build a smelter is a major concession and compromise on our part,” said Adkerson, adding the company plans to invest between US$17 billion and US$20 billion in Grasberg through 2031. Finance Minister Sri Mulyani Indrawati told the news conference the government was in the process of drafting new rules on taxes and royalties for miners. Under these rules, the government expects to increase its revenues from Freeport, and the miner could maintain tax rates for “the duration of its operations,” Mulyani said. Reuters
Election
NZ Labour Party promises tourist tax, social spending A record surge in tourism in the last three years has fuelled New Zealand’s impressive economic growth Charlotte Greenfield
New Zealand’s opposition Labour Party says it will slap a tax on tourists to help fund new infrastructure amid a tourism boom and pour billions of dollars into health and education if it is voted into office next month. The party unveiled its first detailed fiscal policy yesterday, just weeks away from the Sept. 23 national election. The election is shaping up to be a tight race as the centre-left Labour closes in on the governing National Party following the promotion of charismatic Jacinda Ardern to the Labour leadership earlier this month. Labour said on Monday it plans to charge every visitor a NZ$25 fee which would be ring-fenced for a NZ$75 million (US$54.4 million) fund to pay for infrastructure throughout the country.
The party would speak with customs and immigration officials to find the most efficient way to collect the levy, Labour tourism spokesman Kris Faafoi said via text message. A record surge in tourism in the last three years has fuelled New Zealand’s impressive economic growth, but left the Pacific nation’s infrastructure straining, with locals complaining of everything from clogged small town public toilets to once-tranquil nature walks crowded with people and rubbish. The small nation with a population of around 4.5 million saw visitor numbers leap 30 per cent since 2014 to 3.6 million in the year to June, according to data from Statistics New Zealand. The Treasury last week released a fiscal update showing parties would have less cash to spend on election promises than previously thought. It more than doubled the budget surplus
forecast this year but expects lower surpluses for the next three years compared with predictions made in May. Labour said yesterday its proposed spending, including NZ$8 billion extra on healthcare and NZ$6 billion on education, would be partly funded by ditching tax cuts planned by the National Party. “Now is not the time for tax cuts,” said Grant Robertson, finance
“Now is not the time for tax cuts” Grant Robertson, finance spokesperson for Labour spokesperson for Labour, in an emailed statement. The National Party has pledged to effectively deliver a tax cut by lifting income tax brackets across the board, lowering the amount paid at a higher rate, from April under a so-called “family package” to appeal to voters. Labour surged 13 points to 37 per cent on the popularity of newly-appointed Ardern in a poll released in mid-August, while the National Party dropped three points to 44 per cent. Both parties will need the nationalistic NZ First Party to form a coalition government. Reuters
Negotiations
Japan Finmin Aso to meet U.S. VP Pence Japanese Finance Minister Taro Aso said yesterday that he would visit the United States from Sept. 4 to hold informal talks with Vice President Mike Pence ahead of a second round of bilateral economic talks later this year. Aso, who doubles as deputy prime minister, also plans to meet top economic officials of U.S. President Donald Trump’s administration, government sources told Reuters on condition of anonymity. Asked if the two sides would discuss North Korea, Aso said Pence was not the person directly in charge of the matter so he did not know how the issue would be discussed. M&A
LG Elec bid for ZKW in estimated US$1.2 bln deal South Korea’s LG Electronics participated in a main bidding round to buy Austrian automotive light maker ZKW Group in a deal that could potentially fetch US$1.2 billion, Korea Economic Daily said yesterday. LG Electronics, South Korea’s No.2 smartphone maker after Samsung Electronics, has been preparing for the deal for more than one and a half years with its parent LG Corp as part of efforts to diversify its auto electronics business, the report said, citing an industry official. The report said a preferred bidder is expected to be selected next month. Oil industry
Vietnam’s crude output falls Vietnam’s crude oil output in August is estimated at 1.14 million tonnes (270,000 barrels per day), down 5 per cent from a year ago, the government said yesterday. Crude oil output in July was revised to 1.165 million tonnes, slightly lower than the earlier estimate of 1.17 million tonnes, the General Statistics Office said in its monthly report. Vietnam’s January to August crude oil exports rose 2 per cent year-on-year to an estimated 4.748 million tonnes. The following table updates production figures for Vietnam’s key energy products this month. Results
AirAsia to expand fleet as Q2 revenue hits record AirAsia Bhd said it would increase its fleet by 21 per cent in the second half of the year, in one of the fastest pace of expansions for the Malaysian lowcost airline, after reporting record quarterly revenues on rising travel demand. The group, which saw its second-quarter net profit crater mainly due to a oneoff charge, said it planned to add 22 planes to its fleet - at 106 as of end-June through a combination of finance and operating leases in the second half of 2017.
14 Business Daily Wednesday, August 30 2017
International In Brief Angola
Unconfirmed reports of Cabinda fighting Independence fighters from FLEC-FAC said on Monday they had carried out attacks on the Angolan army in Cabinda that they claim killed five Angolan soldiers since 23 August. The information was in a “war communiqué” sent to Lusa. LEC-FAC said they have been attacking “Angolan occupants in Cabinda” and the Massabi region “has been under fire” since 23 August, the day of the Angolan general elections. They said the first attack targeted an army position in Manenga and three Angolan soldiers were killed and another seven injured.
Electronics industry
Tim Cook reaps US$89.2 million stock award as Apple outshines S&P Anders Melin
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pple Inc. Chief Executive Officer Tim Cook collected 560,000 shares, half of them linked to the company’s performance and the maximum allowed under the iPhone maker’s long-term compensation program. The award was worth US$89.2 million when it was granted on Thursday, based on Apple’s US$159.27 closing price. He received the performance-linked stock because Apple shares outperformed at least twothirds of businesses in the S&P 500 Index over three years, according to a regulatory filing Monday. It’s
Cook’s fourth consecutive pay-out at the top threshold.
89.2 million US$ worth award when it was granted on Thursday, based on Apple’s US$159.27 closing price
Cook, 56, receives annual pay-outs from a giant stock award he got after succeeding Steve Jobs in 2011, which was set to vest in two phases over a decade. In 2013, at Cook’s request,
the board’s compensation committee tied about a third of those shares to Apple’s relative stock performance versus the S&P 500. For the three years ended Aug. 24, Apple shares returned 71 per cent, ranking it in the 81st percentile among index members, according to the filing. The rest of the award will vest as long as he remains on the job. Earlier this month, Apple shares surged to a record after the company reported a fiscal third-quarter profit that beat Wall Street estimates and boosted its revenue outlook for the year, forecasting strong iPhone sales. Cook said in 2015 that he plans to give most of his fortune to charity. Bloomberg News
Proposal
Tillerson outlines plan to cut envoy jobs in state overhaul U.S. Secretary of State Rex Tillerson unveiled his plan to eliminate several special envoys, including those for climate change and the Iran nuclear deal, in a sweeping proposal to put his stamp on the agency and meet President Donald Trump’s demands for deep budget cuts. In a letter to Republican Senator Bob Corker, chairman of the Senate Foreign Relations Committee, Tillerson detailed how the job of many envoys will be subsumed into other agencies, such as the special representative for Afghanistan and Pakistan. Each elimination is accompanied by the amount of money the change will save. Oil industry
Iraq braves break with tradition to get oil’s true worth OPEC’s second-largest producer is stepping up the campaign to get more for its oil by looking to revamp the way it sells crude to its biggest customers. Iraq is considering plans to use a new reference price for sales to Asia, according to traders, who received a notice from the state oil company SOMO. The producer is proposing to use a contract traded on the Dubai Mercantile Exchange as a benchmark for pricing Basrah crude, replacing the formula it currently uses along with competitors such as Saudi Arabia, Kuwait and Iran. Weather crisis
As France’s heat wave melts away, second weather crisis brews As southern France emerges from months of searing heat, the country is scrambling to avert getting caught out by a winter cold snap again. Natural gas that should be going into storage is being used to offset reduced hydropower output and to cool people down, meaning the nation may not have enough fuel to warm everyone up come winter. Storage levels are near a five-year low, while an infrastructure bottleneck that propelled the country’s gas prices to the highest in the world last winter hasn’t been resolved. To make matters worse, the nuclear fleet, France’s main source of electricity for heating, is mired in uncertainty and will be subject to inspections that could halt reactors for indefinite periods.
Tim Cook, Apple Chief Executive Officer
Financing
Ghana banks on IMF backing as country seeks ambitious growth The Finance Ministry said last month GDP growth may accelerate to 9.1 per cent next year, from a projected 6.3 per cent in 2017 Ekow Dontoh
Ghana’s President Nana Akufo-Addo is banking on good news from the International Monetary Fund after his predecessor nearly derailed an economic recovery plan through overspending. As the nation awaits the outcome of a review from the Washington-based lender, which may come as soon as today, on reforms since Ghana entered a US$918 million credit program with the lender in 2015, gross domestic product is growing at the fastest pace in more than two years, the central bank is cutting borrowing costs as inflation slows and bond yields are falling. Ghana’s economy had a soft landing under Akufo-Addo’s New Patriotic Party, with Finance Minister Ken Ofori-Atta announcing tax cuts in March and pledging to reduce the budget deficit by more than half over the next three years. While fiscal shortfall for 2016 was almost double the initial target under the auspices of former President John Mahama, his administration did much of the groundwork to steady inflation and boost growth. “The old administration started implementing some good policies especially with the IMF program, the currency became stable, inflation and interest rates started trending downwards,” Edem Harrison, a research analyst with Frontline Capital Advisors, said by phone from the capital, Accra. “They have
continued this trend into the new administration.” Still, after eight months some realities are now starting to show as Ofori-Atta said the government will have to cut spending due to weak revenue collection.
“The new administration’s weakness is that their programs and promises to Ghanaians are a bit overambitious” Edem Harrison, a research analyst with Frontline Capital Advisors said Ghana’s budget deficit for 2016 was 9.3 per cent of GDP compared with an initial target of 5.3 per cent under the IMF program. The government announced in January it discovered about 7 billion cedis (US$1.6 billion) in unplanned spending by the previous administration, startling markets and weakening the currency. The shortfall is forecast to narrow to 6.3 per cent this year. “The new administration’s weakness is that their programs and
promises to Ghanaians are a bit overambitious,” Harrison said. “They abolished some taxes, but we haven’t seen any innovative ways to reintroduce tax nets and bring in more revenue.”
Record Crop
The Finance Ministry said last month GDP growth may accelerate to 9.1 per cent next year, from a projected 6.3 per cent in 2017. Many of the government’s revenue and growth estimates in the March budget are based on projections of increased oil production and lower-than-expected crude prices could erode some of these gains. The world’s second-biggest cocoa producer may also not enjoy the full benefit of its largest crop in six years as a global oversupply has caused London prices to drop by more than a third in the past year. The IMF will consider an extension of its program with Ghana when its board reviews the country’s progress on reforms at a meeting today, the lender said by email. The nation is set to complete the program in December 2018, eight months later than planned, and has no intention to extend it further, according to Ofori-Atta. “The hole in the budget and the missed program targets for end-2016 only emphasize the need for the IMF program extension to sustain investor confidence,” Courage Martey, an Accra-based economist at Databank Group, said by phone. Bloomberg News
Business Daily Wednesday, August 30 2017 15
Opinion
HK tycoon Li Ka-shin
India sending Li a US$5 billion tax bill is so retro Andy Mukherjee Bloomberg Gadfly columnist
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ust because Vodafone Group Plc is in no mood to settle a US$2.2 billion withholding tax claim by New Delhi doesn’t mean the latter can turn around and ask Li Ka-shing’s CK Hutchison Holdings Ltd. to cough up US$5 billion. The more India engages in such antics, dragging on a five-year-old campaign of retrospective taxation, the greater the risk to its ambition of climbing 40 places in the World Bank’s easeof-doing business survey this year. It ranked 130th in 2016. CK’s Hutchison Telecommunications International Ltd. informed the Hong Kong stock exchange on Monday that it had received a penalty order from Indian tax authorities on Aug. 9. Include tax and interest demands made in February, and it appears India wants to help itself to more than 25 percent of CK Hutchison’s cash hoard. Here’s the genesis of that claim: Li’s company sold its mobile-phone business in the country to Vodafone a decade ago when the British carrier purchased a Cayman Islands-based investment firm that controlled, via other offshore entities, a 67 percent stake in Hutchison Essar Ltd. New Delhi wanted to tax Li’s windfall profit, but India’s top court held that it couldn’t, since the transaction was entirely offshore. Stung by that defeat, in 2012, billion HK$ India changed the tax CK Hutchison code retrospectively, penalty order giving itself the right to impose a levy in cases of indirect transfer of assets. In its 2014 election manifesto, Prime Minister Narendra Modi’s party accused the thengovernment of “tax terrorism,” giving rise to hopes that the dispute, which had spooked investors, was headed for a burial. The opposite happened. Even as the Vodafone case dragged on, making it impossible for the carrier to sell shares to the public in its Indian unit, New Delhi celebrated the fifth anniversary of its original mistake with customary bureaucratic overreach. Just before Christmas, tax authorities extended the Vodafone-Hutchison principle to the global funds management industry. If the U.S. state of Tennessee, which owns 15 percent of iShares India 50 ETF, makes a profit by selling some stock on Nasdaq, for example, then San Franciscobased BlackRock Fund Advisors is supposed to withhold a tax, which could be as high as 30 to 40 percent. When the money management industry rose up in alarm, claiming it would kill India-focused funds, authorities cancelled the harebrained plan. Meanwhile, Vodafone, which is merging its India unit with rival Idea Cellular Ltd., is one step away from leaving the country. Still, as the tax demand on Hutchison shows, India’s willingness to cut off its nose to spite its face is still intact. Will it hurt Li? Although the billionaire tycoon doesn’t have a major presence in India any more, he would surely prefer to end the matter. Otherwise, were Hutchison to even receive a dividend from an Indian company, the payout might be impounded. That’s what happened recently with Cairn Energy Plc, which too is battling a multibilliondollar retrospective tax bill in India in connection with a 2006 reorganization. When Vedanta Plc, having bought Cairn’s Indian operations, paid the seller a dividend on its 5 percent stake, New Delhi seized the US$105 million outlay. Li might be content to live with that risk. But the longer this retro tax lingers, the more damage it’s doing to India. Bloomberg Gadfly
39.2
How China’s giant coal merger could roil the world David Fickling a Bloomberg Gadfly columnist
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t’s tempting to view a merger between giant state-owned Chinese companies as a strictly internal affair. But make no mistake: The combination of the country’s largest coal miner with one of its top five power generators will have ramifications around the world. To see why, it’s worth looking at how the integration with electricity producer China Guodian Corp. will change miner Shenhua Group Corp. Shenhua’s size and reach give it a crucial position in China’s internal power market. It sold almost 400 million metric tons of coal last year, equivalent to about two-thirds of the amount used in power generation in the U.S. It owns a rail network that could reach from New York to Miami, stretching from the Mongolian border, through the Shaanxi coal belt, to Huanghua port on the Yellow Sea. It’s clearly the stronger of the two companies: Net margins at listed unit China Shenhua Energy Co. dipped below 10 percent just once over the past decade, coinciding with the only occasion when Guodian’s margins edged above 2 percent. Shenhua’s influence in setting China’s domestic coal prices is so great that it’s often been the target of ire from generators, which regard it as profiteering at their expense. Looking at the gap between what it costs Shenhua to produce coal and the amount it makes from selling the stuff, the power stations seem to have a point. The merged company, to be called Guoneng Investment Group, could make surprisingly dramatic changes to this picture. At present, Shenhua sells overwhelmingly to external customers. Production from its own mines comes in at around 300 million tons a year and a further 100 million tons is purchased from other companies. Of that total, some 85 million tons is then burned in Shenhua’s power stations, with the balance sold on the open market. Add Guodian’s coal demand and that changes dramatically. The 200 million tons that Guodian’s power stations consume, added to the 85 million tons burned in Shenhua’s own furnaces, would be sufficient to swallow up almost every ton that the combined company produces from its own pits.
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Over the past decade, miners and generators have been set up to compete with each other, and Shenhua has always sought the best price for its product. That’s about to change: As Guoneng, its largest customer will be its own power stations. The best way to increase group margins will be to sell to its generators at something close to cost prices, and then focus the group’s entrepreneurial energies on the trading business. There’s a risk to the global coal trade from such a shift. Domestic Chinese coal is generally lower in quality than what’s available in the seaborne market, but not universally so. Shenhua’s Shendong complex, its biggest coal asset, has a heating value of about 5,400 kilocalories per kilogram, in line with benchmark seaborne grades of 5,500 kcal/kg. A Guoneng that’s diverting more lower-quality product to its own generators may look to sell the better stuff to domestic and international customers. That risks reversing a trend that’s held over most of the past decade, during which China has been a net importer of the black stuff. Major coal miners already seem to be moving to upgrade their product quality above the 5,500 kcal/kg benchmark. Glencore Plc’s planned purchase of a stake in some of Yancoal Australia Ltd.’s mines north of Sydney will give it hundreds of millions of tons north of 6,500 kcal/kg, while the planned sale of its Rolleston pit would remove about 235 million tons of reserves that average 5,600 kcal/kg. Guoneng’s best prospects for generating profits over and above what’s permitted in the regulated utility business will involve giving its trading arm free rein to be a player on local and international energy markets. That means the interest in China creating the world’s biggest electricity generator may be missing the point. This deal doesn’t just create a new Electricite de France SA. Should Shenhua’s trading arm be taken off the leash, it may create a new Vitol Group, Trafigura Group Pte, or Glencore as well. Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore. Bloomberg Gadfly
Shenhua’s influence in setting China’s domestic coal prices is so great that it’s often been the target of ire from generators, which regard it as profiteering at their expense
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16 Business Daily Wednesday, August 30 2017
Closing Insurance
BlackRock finds US$5 trillion industry is now riskier than in ‘08 The company examined the insurers’ holdings as it pitches a service called Aladdin Sonali Basak
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nsurers got burned badly in the 2008 financial crisis. So almost a decade later, BlackRock Inc. scoured the industry’s US$5 trillion in U.S. investments to figure out how they would fare if markets crash so hard again. The answer: Worse. The world’s largest money manager mined regulatory filings of more than 500 insurance companies and modelled their portfolios in a similar downturn. Their stockpiles -- underpinning obligations to policyholders across the nation -- would drop by 11 per cent on average, according to its calculations. That’s significantly steeper, BlackRock estimates, than the group’s “mark-to-market” losses during the depths of the crisis. The reason is pretty simple. Insurers needed to make up shortfalls after the crisis. But in a decade of low interest rates they had to venture beyond their traditional holdings of vanilla bonds. They now own vast amounts of stocks, high-yield debt and a variety of alternative assets -- a bucket that can include hard-to-sell stakes in private equity investments, hedge funds and real estate.
“There is more risk being put into these portfolios every year” Zach Buchwald, head of BlackRock’s financial-institutions group for North America “There is more risk being put into these portfolios every year,” Zach Buchwald, the head of BlackRock’s financial-institutions group for North America, said in an interview. And such shifts may become permanent, especially because many of the allocations are hard to reverse, he said. The new diversity should provide a huge benefit, according to Buchwald. After all, it was concentrations
of investments in mortgage-backed securities and certain equities that proved the biggest pitfalls during the crisis, a study by the Organization for Economic Co-operation and Development found. But even piles of investments that appear diverse can suffer big losses if care isn’t taken to ensure the assets won’t drop at the same time. BlackRock examined the insurers’ holdings as it pitches a service called Aladdin. It’s trying to sell the companies analytics and advice, helping them test how complex portfolios may perform under various conditions, so they can design them to withstand catastrophe.
‘Stretched market’
The assessment comes at an interesting time. With U.S. stocks trading near record highs and the Federal Reserve starting to unwind years of extreme measures, there’s a raging debate on Wall Street over whether a big correction is looming -- and if so, whether unforeseen faults in financial markets might crack open, as they did a decade ago. “The strong ‘quest for yield’ remains visible in non-banks,” Allianz SE Chief Economic Adviser Mohamed El-Erian said in a Bloomberg View column this month. The group,
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which typically includes insurers, has pushed into asset classes “including what most deem to be a stretched market for high-yield bonds.” Some insurers have been vocal about their shifts. Athene Holding Ltd., an insurer that leans on Apollo Global Management to oversee investments, is wagering on complex, hard-to-sell debt. Its alternatives portfolio, representing about 5 per cent of total holdings, posted a 12.3 per cent return on an annualized basis in the second quarter. It’s among a handful of insurers backed by private equity firms betting they can earn better returns than peers focusing on traditional investments. But even MetLife Inc. and Prudential Financial Inc., two of the oldest and largest life insurers in the U.S., have said they’re pushing into commercial property bets and private market debt in search for yield.
Shifting holdings
BlackRock’s study showed that the industry’s forays into alternative investments haven’t always delivered yields on par with what the underlying money managers project. Insurers have to hold large amounts of capital against the investments they make -- money that isn’t free. When adjusting for those charges, private
Results
equity returns are generally less than 4 per cent, whereas they would have been above 6 per cent. That, according to BlackRock, indicates insurers would probably earn more on investments in mezzanine real estate debt and high-risk equity investments in global real estate and other real-asset financing. The view contrasts with a Goldman Sachs Group Inc. survey of more than 300 insurance executives this year, which found the respondents expected private equity to have the highest returns. After experimentation with different assets, some insurers have shifted wagers. By the end of last year, the industry’s funds held in private equity had soared 56 per cent to US$56 billion from 2008. That trend is levelling off, Buchwald said. Real estate investments, meanwhile, hit a seven-year high in 2015, then dropped by US$7 billion the next year to US$42 billion. Hedge fund holdings spiked to US$24 billion in 2015, only to drop to US$18 billion the next year. MetLife and American International Group Inc. were among those that began changing strategies. The key is to find “other, more predictable income generators,” Buchwald said, “things like infrastructure and real estate.” Bloomberg News
Trial
Juncker warns Brexit Southern Airlines first-half divorce terms before trade ties profit falls 11.6 pct
Bangladesh court jails Rana Plaza owner for graft
European Commission head Jean-Claude Juncker warned again yesterday that Britain must first agree its divorce terms with the EU before any discussion of post-Brexit ties can begin. “It has to be ultra clear that we will not begin any negotiation on the future relationship ... before all the separation issues are settled, that is the divorce of the UK from the European Union,” Juncker said. Juncker, a life-long proponent of closer EU integration, told an audience of EU diplomats that he was disappointed by the British government’s approach to the Brexit negotiations. “I have read with all necessary attention all the position papers drawn up by the UK government but none of them really give me satisfaction, so there is an enormous amount of questions that need to be resolved,” he said. Juncker’s comments came as the two sides continued a third round of Brexit negotiations in Brussels which got off to a rocky start on Monday. Chief EU negotiator Michel Barnier bluntly told his British counterpart David Davis as they went into the talks that London had to start “negotiating seriously,” with a March 2019 deadline looming fast. AFP
A Bangladesh court yesterday jailed the Rana Plaza owner for three years for graft, the first of many charges laid against him after the garment factory complex collapsed in 2013 and killed more than 1,130 people. Sohel Rana was given the maximum three-year sentence by a special court in Dhaka for failing to declare his personal wealth to Bangladesh’s anti-graft commission, one of a series of charges brought after the disaster. “This is the first time he has been convicted and jailed,” prosecutor Salahuddin Eskander told AFP. Eskander said Rana, who faces four charges including murder for his role in one of the world’s worst industrial tragedies, was in court for the verdict. He and 37 others could be sentenced to death if found guilty of murder over the factory complex’s collapse. But that trial has been delayed by appeals in the higher court. Rana was arrested just days after the accident at the border with India as he tried to flee Bangladesh. He became public enemy number one in the aftermath of the disaster as survivors recounted being forced to enter the building to work despite complaining about cracks appearing in the walls. AFP
China Southern Airlines yesterday posted a 11.6 per cent fall in first-half profit, as foreign exchange gains failed to offset the impact of higher fuel prices and lower returns on international flights. China’s largest airline by passenger numbers posted net profit attributable to shareholders of RMB2.77 billion (US$420.08 million) over the six months to June, on an 11.5 per cent increase in revenue to RMB60.3 billion. Passenger yields fell 2 per cent, dragged down by a 7.5 per cent slump on international routes, even as revenue per kilometre grew 12.5 per cent. Cargo yields rose 13.9 per cent on the back of a resurgence in cargo traffic globally. The company said it expected the number of passengers travelling outbound from China to exceed 140 million in the second half of 2017, an increase of 14.8 per cent. The Guangzhou-based carrier is experiencing pressure on international yields as it has expanded capacity rapidly in recent years while it has also cut lucrative routes to South Korea due to travel curbs enforced by Beijing. The cost of jet fuel rose 28 per cent over the first half, according to analysts from brokerage UOB Kay Hian. Reuters