Uber missing the MSAR Ride-Sharing Page 5
Thursday, August 17 2017 Year VI Nr. 1363 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Oscar Guijarro Reserves
Foreign exchange sales on Mainland fall Page 8
Election
Authorities say 36 campaign complaints received Page 2
Delta
Zhuhai unveils infrastructure plans to become a regional key actor Page 4
www.macaubusiness.com Markets
Amax justifies VR investment to local shareholder Page 6
Investment
M&A in Belt & Road countries not impacted by crackdown Page 8
Messy ownership Cheoc Van Parties Dig In
A series of communiqués and comments. Shoring up the positions of the actors involved in the Cheoc Van clubhouse kafuffle. An easy development solution is not on the horizon. Page 2
Macau’s Master Plan
Aid Scheme repayment revelations
Framework Architects and experts contemplate yesterday’s public tender. For Macau’s vaunted Master Plan. While time for submissions could be short, some are concerned that price will drive the decision. Page 4
The Deputy Director of Macao Economic Services says the repayment mechanism of loans granted under the Young Entrepreneurs Aid Scheme will reference tax legislation. And on a case by case basis.
Lotte dream a reality
Gaming Lotte is raising the ante on its Jeju project. Issuing bonds tomorrow to drive its Jeju Dream Tower Integrated Resort project on Jeju Island. A casino for foreigners, shopping malls, residential space and hotel make up the mix. Developed by Mainland real estate giant Greenland Group. Page 7
Beijing buying up bonds Young Entrepreneurs Page 3
HK Hang Seng Index August 16, 2017
27,409.07 +234.11 (+0.86%) Worst Performers
China Mengniu Dairy Co Ltd
+8.92%
Industrial & Commercial
+1.80%
China Resources Power
China Petroleum & Chemical
-0.18%
China Construction Bank
+2.15%
Cheung Kong Property
+1.78%
Kunlun Energy Co Ltd
-0.80%
MTR Corp Ltd
-0.11%
Hang Lung Properties Ltd
+1.76%
Wharf Holdings Ltd/The
-0.78%
China Unicom Hong Kong
+0.00% +0.00%
-1.03%
Hengan International Group
+2.04%
Galaxy Entertainment Group
+1.85%
CITIC Ltd
+1.73%
AAC Technologies Holdings
-0.52%
Sino Land Co Ltd
Want Want China Holdings
+1.83%
China Merchants Port Hold-
+1.49%
CK Hutchison Holdings Ltd
-0.20%
Hong Kong & China Gas Co
+0.13%
27° 31° 28° 32° 28° 32° 28° 32° 28° 33° Today
Source: Bloomberg
Best Performers
FRI
SAT
I SSN 2226-8294
SUN
MON
Source: AccuWeather
Treasuries China has reclaimed its position as top foreign owner of U.S. Treasuries. After increasing its holdings for the fifth consecutive month. Japan overtook China in October as the largest holder of American government bonds. Page 9
2 Business Daily Thursday, August 17 2017
Macau
A view of Cheoc Van
Land dispute
Cheoc Van clubhouse owner counterattacks The incumbent owner of the Cheoc Van clubhouse claims it will not abide by any promises made by the developer of Cheoc Van Hou Un Cecilia U cecilia.u@macaubusinessdaily.com
B
est May Limited, current owner of the Cheoc Van Hou Un clubhouse, posted a whole page statement in Chinese language newspaper Macao Daily yesterday declaring that it will not abide by any promises made by the developer of the plot - Companhia de Investimento Imobiliario Nissan. In response to the statement posted by a third group of alleged owners of properties in Cheoc Van Hou Un earlier this month, Best May claimed that it had legitimately followed every procedure in applying for re-development of the clubhouse into a budget hotel. ‘We do not know the original developer of Cheoc Van Hou Un Companhia de Investimento Imobiliario Nissan and we have never had any contact with the developer, directly or indirectly,’ stated the firm, adding
that the clubhouse was not obtained from the original developer. The previous statement made by the group of owners was followed by the announcement of a proposal during the 5th meeting of the Urban Planning Committee last month claiming that the original developer had failed to keep the promise of providing leisure and recreational facilities at the clubhouse for residents. Meanwhile, the group disclosed in the public letter that they had been paying taxes related to the complex every year to the management company, set up by the developer since 1995 for the allocation of the clubhouse complex’s land rental, while declaring that they have the right to the facilities of the complex. Best May, however, claimed that they had also been paying taxes every year to the Financial Services Bureau and that they had never appointed a management company, while noting that the right to the facilities of the complex alleged by the group ‘could
have constituted the violation of our private property rights.’ The firm further proposed the possibility that the amount paid by the owners could be the subscription of the services provided by an existing private clubhouse located on the other side of the residential area.
Budget hotel best choice
Given that the function of the clubhouse complex is only for commercial usage, the firm explained in the statement that it would have to seek other projects such as a food court, a karaoke, a [retail] outlet or a sauna if the proposal of building a budget hotel was turned down. ‘Businesses cannot survive by depending solely on nearby residents,’ the firm wrote. ‘Those other options of development [food court or karaoke] would definitely not be desired by nearby residents and it will be too late to repent if [alternative] decisions are made.’ The firm further proclaimed that
developing a budget hotel would cause less impact, with the inclusion of venues for MICE, restaurants, convenience stores, gym and yacht docks in the hotel project would benefit residents. Best May, moreover, pledged that the project would seriously consider the surrounding environment, claiming that the project will not alter the structure of the building. The statement also includes the denouncement made by the firm that ‘a small group of people have long occupied public facilities for private use,’ complaining this is limiting the long-term development of the city. Business Daily contacted lawyer Ho Kam Meng, representing the group of owners, who said the group had held a meeting yesterday although no information was revealed beyond the fact that they had contacted the original developer of the plot, adding that the group will meet the developer in later days.
Election
Early electoral campaigning prompts 36 complaints Electoral Commission Chairman and judge of the Court of Second Instance Tong Hio Fong has reported that the Commission currently has 36 cases referred to it apropos campaigning before the allowed official election campaign period. “We have discussed the cases during meetings and consider the cases have violated the regulation,” said Fong. “Related cases will be sent to the police for further procedures.” The chairman confirmed that four to five cases had broken the law, saying that related cases performed promotions via online platforms,
telephone calls and promotion on the street. According to the Electoral Law, a penalty of MOP2,000 to MOP10,000 would be levied on those who have campaigned prior to the approved period, namely September 2 to 15. Meanwhile, Fong reported that the fifth candidate of New Macau Dream has requested to pull out of the running. In addition, the chairman revealed that 32 voters had repeated nomination of candidates for the indirect election, claiming that the voting power of the related individuals would be invalidated.
Electoral Commission Chairman and judge of the Court of Second Instance Tong Hio Fong
Business Daily Thursday, August 17 2017 3
Macau Funding
Aid Scheme references tax legislation for loan repayment The deputy head of DSE perceived that the mechanism would prevent repeat applications for the funding scheme Cecilia U cecilia.u@macaubusinessdaily.com
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peaking on the sidelines of the introductory public session of the recently revised Young Entrepreneurs Aid Scheme, the Deputy director of Macao Economic Services, Lau Wai Meng, said the mechanism of repayment for applicants who failed in their businesses references the system of tax payment. The revised law for the scheme requires the borrower to repay the loans within 90 days once a concession is officially cancelled. “We reference the law for tax payment; for instance, taxpayers who fail to pay on time can make the payment within 90 days, while late payers have to bear heavy interest,” explained the deputy head. Similarly, Lau indicated that specific cases will be sent to the Financial Services Bureau (DSF) to represent the government in reclaiming the debt. “But disclaimers could negotiate with the DSF to repay
in instalments in accordance with the conditions,” said Lau. “It is important to take social responsibility when you do business.” When asked whether there would be a risk that shareholders of the same firm repeat applying for the scheme after altering the percentage of shares, the deputy head said “applications would be examined very carefully by the judging panel”. He explained that the legal person of a company has to be a permanent MSAR resident who has not previously applied for funding from the DSE. “The panel would also carefully examine the company’s operation, the usage of the amount and the loan credibility,” added Lau. He said that DSE has been keeping close contact with other government departments in order to share necessary details apropos approval. As of yesterday, DSE had received 1,499 applications and approved some MOP252 million (US$31.29 million). According to official data, 51.3 per cent of approved
cases relate to the retail industry and 10 per cent to services for companies. A resident surnamed Chan who attended the session told Business Daily that she wishes to open a real estate company on the Mainland, commenting that the business environment in Macau is pessimistic, with the market small and production costs high.
Learn before applying
With Macau Productivity and Technology Transfer Centre (CPTTM) offering courses in business administration or related fields, the senior manager of CPTTM, Helena Lei, said courses related to technical knowledge in running a business are currently in high demand. The revised scheme demands applicants demonstrate that they have pursued a minimum of 42 hours of technical or academic training in business administration or a related field. “As such, we will open courses related to technicalities for running a business every month,” said Lei. “But [applicants] may also
Lau Wai Meng, Deputy director of Macao Economic Services
pick other courses related to specific industries.” The senior manager added that a department in CPTTM is responsible for assisting parties who are interested in
starting a business but have no specific directions. She also noted that applicants could take courses held by other tertiary education institutions in the future. advertisement
4 Business Daily Thursday, August 17 2017
Macau Opinion
Ashley Sutherland-Winch* Our side of the wall We require many different types of software to function in the business world and some of the most important tools are found online. Dropbox, Google, Hootsuite, Instagram, Facebook Messenger are a few that I took for granted when I travelled across the Great Firewall this week. I was prepared for these to be blocked once I entered Mainland territory, but I was not ready for the deep analysis the Firewall would conduct on all the sites I visited. Even with the fastest wifi, the Macau Business website took several minutes to load. The painstaking process of accessing websites and software services online in the Mainland made me so grateful for the virtual Internet freedom we experience in Macau. If you travel to the Mainland frequently for business you may already know the myriad sites that are blocked; but for those who do not, take my word for it, open a Yahoo email account, forward all necessary communication streams, and load all important documents onto your devices or an external hard drive. In an ironic twist of fate; however, the firewall that blocks so many sites is now investigating a few of its approved social media giants this week. Tencent, Baidu and Sina are under deep scrutiny by China’s Cyberspace Administration after allegedly failing to regulate content such as pornographic, violent, extremist, or fake posts on their online sites. Across the world, social media companies are under fire and must tighten control of their content whether they are within the Great Firewall limits or in the outside world. It’s becoming clearer daily that people around the world do not want to experience negative content and some are demanding censorship. In China, where so much content is already censored, I find it so interesting that undesirable content is getting through the wall while inoffensive software sites continue to be blocked. Macau, the new smart city, is on the horizon as Alibaba Cloud begins its preparations. Through Big Data analysis, Alibaba and the Macau Government are expected to improve the city’s transportation, tourism, healthcare, talent development and governance. Since we can use all major social media and software companies in Macau, there will be infinite opportunities to glean information from locals and tourists. While we are still a Special Administrative Region of China, we should all take a moment to appreciate that we do not have to face the firewall hurdles that people do on the Mainland. Our businesses can openly thrive and flourish via all media and sites without major censorship. We are, indeed, lucky.
*Marketing and Public Relations Consultant and frequent contributor to this newspaper.
Urban affairs
Mastering the Plan The public tender for designing the Master Plan of Macau was launched yesterday. Architects talking to Business Daily claim that tendering out projects of such scope is a “common” procedure, but expressed mixed feelings about the short deadline for bidding Sheyla Zandonai sheyla.zandonai@macaubusiness.com
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he Master Plan of Macau might come to light soon. The Land, Public Works and Transport Bureau (DSSOPT) announced yesterday that it is opening a pre-qualification tender for the development of the Master Plan of Macau. The practice of tendering out this type of service provision is “common,” according to the architects who spoke to Business Daily. “If they [the authorities] think it is appropriate, and as long as they know what they are doing, I don’t see any problem,” opined the President of the Macau Architects Association (AAM), Jonathan Wong. Wong added that the offer suggests the government is seeking out “people with more expertise” from outside the government, to conduct the enterprise. In-house agencies such as the Urban Planning Committee (CPU) are in charge of conducting research and studies, as well as pointing out topics of concern in the urban agenda “but they need people to do the actual work, sit there every day for several weeks,” AAM’s President highlighted. Filomena Vicente, an architect with experience in the public and private sectors, argued that “a project of such scope should involve a multi-disciplinary team with extensive experience, which is not typically in the capacity of the government.”
The conditions of admissibility to the pre-qualification competition define that contenders can be a company or a consortium. There is no specific clause stating that they should be locally based. To Vicente, the “ideal” format would be “a consortium with at least one local company.” The architect claimed that this would particularly be the case given that the deadline for proposal submission, October 4, is rather short. “In order to deliver a quality-based project, a lot more time would be necessary,” she believes. Meanwhile, Wong said the time might be enough “if the government only requires minor details or minor works” to be presented in the initial stage.
Enough time?
Conversely, Vicente raised the point that considering the proposed timeframe sufficient or not would also depend upon the material made available in the dossier the candidates will access when they enroll in the tender process. For this type of competition, the government should collect, organise, and provide relevant information for the companies willing to bid. “For the design proposal of a Master Plan, that would include a huge amount of data, such as geographical and geophysical information, data on traffic patterns, sociological analysis, and so on. If the data is already
there,” said Vicente, “then it would rather be a matter of interpreting it, but still . . .” The fee for acquiring the tender dossier has been set at MOP1,000. Contacted by Business Daily, DSSOPT did not send the details requested about the information constituting the tender document by the time this story had gone to print. As the MOP1,000 for entering the bid process might already filter out some small-sized companies, the MOP1 million security deposit – to be provided in cash or legal bank guarantee – will determine that only large companies or consortia can secure the bid. “The price is reasonable, considering the value of stipends to be paid to the several technicians and specialists that might be involved,” Vicente explained. As for the proper tender process, it is defined in two phases. The first phase comprises evaluation via three sets of criteria; namely, the terms of service (35 points), the company’s capacity and experience (30 points), and the allocation of human resources for the project (35 points). The second phase addresses the contract award, for which criteria include price (60 points) and project (40 points). Weighting more on the price than on the quality of the work is a “typical” approach, according to Vicente. “The problem is that quality always loses out to price.”
Infrastructure
Zhuhai reveals strategy for regional hub Plans for the creation of a tourism distribution centre to be located near the Zhuhai link line of the Hong Kong-Zhuhai-Macau Bridge (HZMB) and the Hengqin North Interchange have been announced by the Zhuhai Government, according to information provided by an official portal yesterday. Other strategies announced by the neighboring municipality, north of Macau, include the construction of an international shipping hub and land port that will act as a transport and logistics connector between Zhuhai Airport, the HZMB, and the cross-border checkpoint integrated transport hub. The announcements are in line with Zhuhai’s positioning and development ‘implementation plan’ within the Belt and Road initiative, its government claims. It includes 33 tasks in several action
areas; namely, transportation, logistics, economy and trade, innovation, talent, and environment. The plan also foresees the establishment of a communication and co-operation mechanism with
countries and regions along the Belt and Road, reaching out as far as Latin America, in addition to the creation of a Sichuan-Guizhou-GuangdongSouth Asia International Logistics Channel. S.Z.
Business Daily Thursday, August 17 2017 5
Macau Banking
Close to closing Having seen its revenues fall 45.8 per cent year-on-year to MOP439.4 million the local branch of Portuguese bank Caixa Geral de Depósitos (CGD) has announced its closure by the end of this year Nelson Moura nelson.moura@macaubusinessdaily.com
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he Macau offshore branch of Portuguese bank Caixa Geral de Depósitos (CGD) registered net profits of MOP1.03 million (US$161,366) as at the end of the first half of this year, 40.5 per cent less than in the same period of last year. Caixa Geral de Depósitos, S.A. – Sucursal Offshore de Macau saw total revenues of MOP439.4 million, a 45.8 per cent year-on-year decrease
from the MOP810.9 million registered as of June 30 of last year. The Director of CGD, Paulo Macedo, announced in July that the bank would close
its offshore branches in the Cayman Islands and in Macau by the end of the year, with the two branches having stopped receiving deposits from non-Portuguese
residents since the beginning of this year. As of June 30, the amount of deposits in external currency at CGD Macau’s offshore branch was MOP4.3 billion, 33 per cent less than in the same period last year. Last year, the group announced it would scale down its international operations in order to focus on its operations in African Portuguese-speaking countries as well as in the MSAR, where it owns Banco Nacional Ultramarino (BNU). BNU provided the largest
contribution of the bank’s international operations in 2016, at 63.1 million euros (MOP538.7 million/US$67.3 million), according to a financial report from CGD. The Portuguese stateowned bank was subject to capitalisation by the Portuguese Government of approximately 4 billion million euros at the beginning of the year, having posted a historical loss of 1.86 billion euros in 2016. In the first half of this year CGD also registered losses of 50 million euros.
Ride-sharing
Uber: Gone but not forgotten The continuous attempts by users to crack open the ride-sharing service in the MSAR underscores the “importance of [Uber’s] continuous efforts to return to the city”, the company’s local General Manager told Business Daily Nelson Moura nelson.moura@macaubusinessdaily.com
The General Manager of car-hailing application Uber Macau, Trasy Lou Walsh, said in letter sent to local media that the company hoped the service would return to the city in the “near future”. According to Ms. Lou, since the company halted its services in Macau on July 21, the “demand for ride sharing remains undimmed . . . [with] . . . tens of thousands of users from 74 countries” attempting to use the service. The Uber Macau GM added that the statistics underscored the “importance of [Uber’s] continuous efforts to return to the city”, considering that the service provided “economic opportunities for residents” and contributed to the city developing into a “tech-savvy smart city”. She added that she was reminded by the recent agreement between the MSAR Government and Alibaba to develop Macau into a ‘Smart City’
enhancing tourism and transportation of the traffic issues the city had to address. “There remains room for improvement when it comes to transportation in one of the most densely populated cities in the world (…) The smart city programme brings with it hopes of solving the long awaited problems that residents and visitors experience in Macau when they try to get around. On average, passengers currently need to wait eight minutes for a taxi. That compares to under four minutes for a ride when Uber technology was available in Macau,” she added.
Troubled history
The ride-sharing service encountered several obstacles by local regulators since its arrival in Macau in December 2015, with authorities declaring it an illegal ride sharing service. According to previous information provided by the company, Uber drivers in Macau have been collectively fined around MOP$10 million (US$1.2
million), with the company repaying the drivers’ fines. The company suspended its services in August of last year, returning one month later after an online petition signed by 23,000 individuals demanded the MSAR Government consider the legalisation of the service. After the ‘Smart City’ agreement signing ceremony, Alibaba Cloud President Hu Xiaoming was asked about the possibility of bringing the Chinese ride-sharing app Didi Chuxing - owned by the Alibaba Group and Tencent Holdings Limited - to Macau, with the representative admitting it was a “possibility” but with nothing certain for now. Following Uber’s last suspension of service in Macau, the company stated it was “already exploring ways to serve the city again” having already held “initial discussions with business partners, including transport operators and hotels”. This method allowed the company to reinstate service in Taiwan in
February of this year, after its service was suspended for two months following the country’s decision to increase the maximum financial penalty for illegal passenger transportation services to NT$25 million (US$824,500).
“Our operations might be temporarily suspended in Macau, but we hope for a return in the near future” Trasy Lou Walsh, General Manager of Uber Macau The company was allowed to re-enter the Taiwanese market after partnering with local licensed rental car companies and tax services. advertisement
6 Business Daily Thursday, August 17 2017
Macau Technology
Amax addresses concerns of local shareholder A local shareholder of Amax International Holdings has questioned the group’s decision to purchase a company group specialising in augmented reality and virtual reality for HK$63.5 million Nelson Moura nelson.moura@macaubusinessdaily.com
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Macau shareholder of casino investor Amax International Holdings has questioned the commercial sense of the HK$63.5 million (US$8.1 million) purchase agreement to acquire a group of companies specialising in augmented reality, virtual reality and applications for smartphones and entertainment platforms. The agreement wad announced on July 18, with a wholly owned subsidiary of Amax to purchase a ‘target group’ comprising Explicitly Grand Investments Ltd. and Hong Kong incorporated company MostCore plus
subsidiary Inno Motion. In a Hong Kong Stock Exchange release the company filed yesterday, Amax International said it had received a letter from the legal representative of Shen Nan (Macao) Investment Co., Ltd, described as a ‘substantial shareholder’ in the company, holding 11 per cent of the total issued share capital. The letter expressed concern by the shareholder regarding the purchase deal, stating it saw ‘no apparent commercial reasons for the acquisition’ and the ‘legitimacy’ of the operations of casino gambling with [Augmented Reality/ Virtual Reality] technology. The shareholder also expressed concern that ‘limited information’ was available for shareholders to
make an informed assessment of the acquisition.
Addressing concerns
Previously, Amax stated that the investment was based upon ‘the growing popularity of virtual reality and augmented reality’ as well as the ‘future business prospects of mobile and digital industries’. In yesterday filing, Amax sought to clarify concerns that the acquisition was ‘highly speculative’ being an investment in an ‘infant business without a proven track record’. The company mentioned that the targeted group had registered a 2,527 per cent yearly increase in revenues of HK$1.41 million for the year ended 31 March 2017.
‘The Target Group, revenue and client orders are experiencing high growth in the recent year as the VR/ AR technology and related applications are growing rapidly as indicated by a number of third-party market research institutions,’ the release declared. The group to be purchased was also said to have entered into 10 service contracts since 2016 up to the date of the release, with outstanding contract sum to be completed amounting to over HK$4 million. Amax International also justified the consideration amount due to a HK$64.4 million valuation of the target group as of April 30 of this year, and on the ‘future business prospects of mobile and digital industries’. The purchase was also said to not require ‘immediate material cash outlay’ with the deal to be made through the allotment and issue of the consideration shares and promissory notes. Amax considered the purchase would enable the group to be equipped with the latest AR/VR technologies and research capabilities, while allowing the long term expansion of the group’s entertainment business into AR/VR apps and entertainment platforms.
All information granted
Explicitly Grand Investments Limited is a company incorporated in the British Virgin Islands with 50 per cent owned by Wong Kam Wah and the other 50 per cent by Cheng Wai Man. According to the filing the purchase would allow both men to hold 9.8 per cent of the total issued share capital of Amax International, with the company assuring neither would become a ‘substantial shareholder’. Amax International Holdings managed the casino hotel property formerly known as New Century, renamed Imperial Beijing Palace Hotel, with the hotel currently shut after its operating licence was revoked by the MSAR Government at the beginning of the year. In a filing in June, Amax International calculated the loss from its involvement in Greek Mythology casino - the gaming property inside the hotel - at HK$901.2 million for the financial year ended March 31.
A virtual reality headset
Public tender
Sino-Luso Services Complex costs announced next week In an update about the public tender for the design and construction of the Services Complex for Trade Co-operation between China and the Portuguese-speaking Countries, the Land, Public Works and Transport Bureau (DSSOPT) announced yesterday that it has tagged August 22 as the date to announce the ‘costs of works’ of the project. According to information provided by the Bureau, the announcement follows the completion of the first and second phases of the attendant public tender. Twelve companies have submitted proposals for the construction of the complex, to be developed near Nam Van Lake. DSSOPT notes competitors
and representatives must be present at the public act – scheduled to be held at 9:30am at DSSOPT headquarters – in order to clarify any doubts in relation to the documents presented. Should the Bureau be closed due to a typhoon or force majeure the date and time established for the public act of the competition will be postponed to the same hour of the first following business day. The public tender process for the complex has been delayed in the past due to additional time requested by the authorities to analyse the large amount of documents received as well as the complexity of content, DSSOPT explained in June. S.Z.
Business Daily Thursday, August 17 2017 7
Gaming
Jeju Dream Tower foundations almost ready Jeju
Cash to gamble Lotte Tour is issuing convertible bonds to buy its casino licence in the Korean holiday destination of Jeju. The hotel and foreigners-only casino is to become the biggest urban integrated resort in the country by September 2019 Paulo A. Azevedo in South Korea
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omorrow, Lotte Tour Development Co. Ltd. is issuing KRW40 billion (US$35 million) of non-guaranteed convertible bonds (CB) to acquire one of the existing foreigners-only casino licences in Jeju, a holiday destination island in South Korea. The company is already making progress on its double tower in downtown Jeju. The project - Jeju Dream Tower Integrated Resort - is a Korean-Chinese partnership between
Lotte Tour (59 per cent) and Mainland China’s largest real estate developer Greenland Group. Destined to become an island landmark, Jeju Dream Tower “will be the tallest and the biggest”, the company’s COO, Lawrence Teo, told Business Daily. One of the towers will have a 750-room hotel, foreigners-only casino, observation deck and shopping mall, owned by Lotte, while the second tower, housing 850 residences, will be commercialised by Greenland Group. The non-guaranteed CB have a
duration of three years with 0 per cent coupon rate, 1 per cent YTM and conversion price at par, KRW8,300 without discount. ‘The successful issuance of convertible bonds with an exceptional condition despite the financial market uncertainty due to North Korean’s nuclear crisis is a result of the high growth potential of Jeju Dream Tower, which will become a key tourist attraction’ on the island stated a company release yesterday following a board of directors meeting. Timefolio Asset Management (KRW22 billion), Pine Asia Asset
Management KRW8.5 billion), Shinhan Investment (KRW5 billion), KB Securities (KRW3 billion) and IBK Asset Management (KRW1.5 billion) will be participating in the convertible bonds. Mirae Asset Daewood is the investment banker in tomorrow’s fundraiser. At 38 storeys (169 metres tall) Dream Tower will be the only urban IR in Korea, 3km from Jeju International Airport and 7km from the island’s international cruise terminal. Construction on the project began in May last year and is slated to open its doors in September 2019. advertisement
8 Business Daily Thursday, August 17 2017
Greater china Forex
July net FX sales hit 21-month low as fund outflows ease The amount of individual purchases of foreign exchange in July fell 35 per cent from June
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et foreign exchange sales by China’s central bank fell to a 21-month low in July, as pressure from capital outflows eased due to tighter government curbs and a stronger Chinese yuan. The People’s Bank of China (PBOC) sold a net RMB4.6 billion (US$687.85 million) worth of foreign exchange in July - the lowest since October 2015, down from RMB34.3 billion in June, according to Reuters calculations based on central bank data released yesterday.
Key Points July c.bank net forex sales US$687.85 mln, lowest since Oct 2015 Commercial banks’ net forex sales US$15.5 bln, three-month low FX regulator expects cross-border capital flows to remain stable The data suggested the central bank had scaled back its intervention in the foreign exchange market in July. Separately, State Administration of Foreign Exchange (SAFE) data yesterday showed that commercial banks’ net sales fell to US$15.5 billion in July, the lowest in three months and down from US$20.9 billion in June. For the January to July period, commercial banks sold a net US$109.3
billion of foreign exchange. The SAFE said in an accompanying statement that it expects cross-border capital flows to remain stable in the future. The amount of individual purchases of foreign exchange in July fell 35 per cent from June, as market expectations of the currency further stabilised, SAFE added. Last year, China burned through nearly US$320 billion of reserves, but the yuan still slumped about 6.5 per cent against the dollar, its biggest annual drop since 1994. Following a flurry of measures to check the yuan’s volatility and
tougher rules on cross-border investments, the Chinese currency has rebounded and foreign reserves have risen to multi-month highs. China has said more than once that it will continue to monitor “irrational” overseas investments in property, hotel, entertainment, sports and movie industries. China’s non-financial outbound direct investment plummeted 44.3 per cent on year to US$57.2 billion in January-July, the commerce ministry said on Monday. Mergers and acquisitions by Chinese companies in countries that are part of President Xi Jinping’s
ambitious Belt and Road initiative, however, have soared. So far this year, the yuan has gained 3.9 per cent versus the dollar, and China’s foreign exchange reserves hit a nine-month high in July. But the yuan’s recent strengthening has not doused depreciation expectations, with many market participants expecting it will decline against the dollar in the next year. Beijing’s move to impose stability and contain risks in the financial system comes as China’s top Communist party leadership prepares to gather for a once-in-five-years congress in the autumn. Reuters
M&A
Belt and Road acquisitions surge despite outbound capital crackdown The largest deal in a Belt and Road country so far this year was a Chinese consortium’s US$11.6 billion buyout of the Singapore-based Global Logistics Properties Kane Wu and Sumeet Chatterjee
Mergers and acquisitions by Chinese companies in countries that are part of the Belt and Road initiative are soaring, even as Beijing cracks down on China’s acquisitive conglomerates to restrict capital outflows. Chinese acquisitions in the 68 countries officially linked to President Xi Jinping’s signature foreign policy totalled US$33 billion as of Monday, surpassing the US$31 billion tally for all of 2016, according to Thomson Reuters data. Unveiled in 2013, the Belt and Road project is aimed at building a modern-day “Silk Road”, connecting China by land and sea to Southeast Asia, Pakistan and Central Asia, and beyond to the Middle East, Europe and Africa. At a summit in May, Xi pledged US$124 billion for the plan, but it has faced suspicion in Western capitals that it is intended more to assert Chinese influence than Beijing’s professed desire to spread prosperity. The surge in Chinese companies’ acquisition-linked investments in the Belt and Road corridor comes as the volume of all outbound mergers and acquisitions from China has dropped 42 per cent year-on-year as of Monday, the Thomson Reuters data showed. Beijing’s move to prop up the yuan by restricting the flow of capital outside the country and clamp down on debt-fuelled acquisitions to ensure financial stability has made it tougher for buyers to win approvals for deals abroad. Regulators have tightened the screws further since June, reviewing
deal agreements in minute detail and ordering a group of lenders to assess their exposure to offshore acquisitions by several big companies that have been on overseas buying sprees, including HNA Group, Dalian Wanda Group and Fosun Group. The heightened regulatory scrutiny of overseas acquisitions comes after companies spent a record US$220 billion in 2016 on assets overseas, buying up everything from movie studios to European football clubs. The scrutiny, however, has not impacted Chinese companies’ pursuit of targets along the Belt and Road corridor, as those investments are considered strategic for the companies as well as the Chinese economy. “People are thinking in a long-term approach when making investments along Belt and Road countries,” said Hilary Lau, a corporate and commercial lawyer and partner at the law firm Herbert Smith Freehills.
“The acquisitions are also policy-driven. There are funds allocated by Chinese banks and state funds for Belt and Road deals,” he said. The number of Chinese deals targeting Belt and Road countries totalled 109 this year, compared to 175 in the whole of last year and 134 in 2015, the Thomson Reuters data showed.
Approval process
Companies enjoy a relatively smooth approval process for deals along the Belt and Road project as regulators tend to put them in a different basket when reviewing outbound investments, according to lawyers and dealmakers. “If you are doing One Belt, One Road, that becomes the first sentence in the document” to the regulators, said a senior investment advisor at a Chinese company that has acquired several overseas businesses. “It is a wise thing to point out early on,” said the advisor, who requested
anonymity because he was not authorised to speak to the media. Outbound deals currently take as long as six months to be approved by Chinese regulators. However, Belt and Road investments tend to get regulatory clearance within three or four months, according to a Hong Kong-based senior M&A banker. The largest deal in a Belt and Road country so far this year was a Chinese consortium’s US$11.6 billion buyout of the Singapore-based Global Logistics Properties. Other top deals include the US$1.8 billion purchase of an 8 per cent ownership interest in an Abu Dhabi oil company by the state-owned oil giant China National Petroleum Corp, and HNA Group’s $1 billion acquisition of a logistics company, CWT Ltd, which has not yet closed. The State Administration of Foreign Exchange, China’s foreign exchange regulator, said this month that domestic companies would still be encouraged to participate in Belt and Road activities. HNA, which has seen at least two overseas deals hit a hurdle as a result of the crackdown on transferring money, has said it plans to prioritize investments that are in industries and regions mapped out under the Belt and Road initiative. The belt and road acquisitions are predominantly in energy and infrastructure sectors, said Hilary Lau of Herbert Smith Freehills. “We’ve seen a lot of activities recently in Indonesia, Malaysia and Myanmar. The whole Sri Lanka, India and Bangladesh corridor is also hot as it’s connecting the East and West,” he said. Reuters
Business Daily Thursday, August 17 2017 9
Greater China Treasuries
In Brief
Mainland regains spot as largest foreign U.S. creditor Before China returned to being the largest U.S. overseas lender, Japan had held that spot for eight months China purchased the most Treasuries in six years in June, vaulting past Japan as the largest overseas lender to the U.S. government, possibly taking advantage of recent weakness in the dollar in a rising U.S. interest rate environment. Tuesday’s report from the U.S. Treasury Department also signalled that China has steadily ratcheted up its accumulation of U.S. government debt as it has burned far less of its foreign exchange reserves this year to defend the yuan currency. In 2016, China spent nearly US$320 billion of foreign exchange reserves in an effort to stem the yuan’s depreciation against the U.S. dollar. In the wake of tighter capital controls and a weaker dollar so far this year, China’s forex reserves, the world’s biggest, have grown in line with its Treasuries holdings. In June, China’s Treasuries holdings rose to US$1.147 trillion, which was the highest level since September when it was US$1.157 trillion. And in July, China’s currency reserves reached a nine-month peak at US$3.081 trillion. “They may have reshuffled their
portfolio a little bit and sold a few things. Maybe they think the dollar is attractive now and they increased those (Treasuries) holdings,” said Kevin Lai, chief economist Asia ex-Japan at Daiwa Capital Markets in Hong Kong. The recent increase in Treasury holdings possibly also reflects an incentive to by U.S.-dollar denominated assets amid rising U.S. interest rates. The pullback in the dollar over recent months allowed for a relatively cheaper entry point. Before China returned to being the largest U.S. overseas lender, Japan had held that spot for eight months. Japan held US$1.091 trillion in U.S. government debt in June, down from US$1.111 trillion in May. Japan’s drop in Treasuries holdings was the steepest since November, falling to a level last seen in December. Ireland was a distant third in holdings of Treasuries, with US$302.5 billion in June, up from US$295.8 billion in May. Overall, foreign investors bought US$19.73 billion in Treasuries in June, down from US$46.37 billion in May, which was the most since June 2015.
While there was speculation in recent years that China would use its massive Treasuries holdings to exert pressure on the United States, there has been little indication of that happening, even amid rising tensions between the two countries on issues ranging from trade to North Korea.
Key Points China holdings of U.S. Treasuries rise to 8-mth high of US$1.147 trln China may be taking advantage of recent weakness in dollar Japan sells most Treasuries since November “The PBOC’s primary motivation is to manage the FX reserves in a way that makes sure they are held in safe and liquid investments and that they make a decent rate of return”, said Julian Evans-Pritchard, a China economist at Capital Economics in Singapore. “I don’t think the primary motivations are going to be political.” Reuters
Blackouts
Taiwan probes massive power cut that affects millions of households Premier Lin Chuan promised to seek an external review of the island’s power supply network Jess Macy Yu and Jeanny Kao
Taiwan said yesterday it was investigating a massive power blackout that hit businesses and residential homes, affecting close to seven million households on the heavily industrialised island amid sweltering heat. President Tsai Ing-wen apologised for the crisis which left millions of homes without power and hit offices and factories on the island of nearly 24 million people late on Tuesday. The worst appeared to be over by yesterday afternoon, with power fully restored and little impact on Taiwan’s leading technology manufacturers. Taiwan Semiconductor Manufacturing Co (TSMC), the world’s largest contract chipmaker and a major supplier to Apple Inc, said its operations were not affected, as did electronics manufacturer Pegatron Corp. ChipMOS Technologies Inc said the outage did not have a big impact on its operations. Its shares fell 2 per cent in early trade but pared losses later to 1 per cent, lagging a flat broader market. Premier Lin Chuan promised to seek an external review of the island’s power supply network, and take questions in person at the legislature. Officials said a task force would be set up to investigate the cause of the outage. “The strength and stability of Taiwan’s power grid requires a largescale inspection, and also examination by outside investigators,” government spokesman Hsu Kuoyung said at a press conference. Residents complained as temperatures hovered around 32 degrees Celsius, while the blackout caused havoc as restaurants and small businesses were left without power, traffic lights stopped working and elevators stalled. The blackout was caused by “structural problems” and human error involving the replacement of equipment, which ultimately affected the operations of a state-owned Taiwan Power Co power plant, state-owned
Regulator
Rising stock indexes sign of reform success The Shanghai and Shenzhen stock indexes are showing a steady rise in value amid lower market volatility, an indication of the success of government efforts to guard against financial risk, China’s securities regulator said. The China Securities Regulatory Commission said that stable growth of the main indexes, lower volatility, more reasonable market valuation structures and a strengthening of the stability of market operations had helped to “realise the stable operation of capital markets.” Steady growth of the main indexes “is a full reflection of the stable growth of the macroeconomy and the significant results of supply-side structural reform,” the statement said. Results
Tencent Q2 profit jumps 70 pct on smartphone games China’s Tencent Holdings yesterday reported a forecast-beating 70 per cent jump in its second-quarter profit, buoyed by higher revenues from smartphone games, payment services and online advertising. The world’s largest gaming company raked in revenues of RMB56.6 billion (US$8.46 billion) over the period, up 59 per cent from a year ago and beating an average forecast of RMB52.98 billion from 10 analysts polled by Thomson Reuters. It posted a RMB18.23 billion profit for the three months ended June, beating analysts’ estimate of RMB14.15 billion. M&A
Testing firm urges blocking rival sale to China fund U.S. semiconductor testing company Cohu Inc is trying to block the sale of rival Xcerra Corp to a Chinese government-controlled fund citing national security concerns, the Wall Street Journal reported on Tuesday. Cohu sent its analysis of the risks related to the proposed sale to the Committee on Foreign Investment in the United States (CFIUS), according to documents and correspondence reviewed by the Journal. The CFIUS, headed by the U.S. Secretary of Treasury is a government panel that reviews acquisitions by foreign entities for potential national security risks, has cracked down on technology deals related to the semiconductor industry. Commodities
Beijing to ban primary mercury mining The Taipei 101 skyscraper stands dark as it is silhouetted on the evening sky during a power outage in Taipei on Tuesday. Source: Lusa
gas supplier CPC Corp said at a press conference. It said it would fully compensate Taiwan Power Co and take responsibility, although it did not provide an estimate of the costs. Taiwan Power Co said the outage at its plant in the northwestern city of Taoyuan caused six generators to stop working. President Tsai, in a statement yesterday, again apologised for the blackout, describing electricity supply as a national security issue and stressing the importance of ensuring the safety of the island’s infrastructure
facilities. Government spokesman Hsu said the question of whether the chairmen of Taiwan Power Co and CPC Corp should step down should be answered after they tended to their responsibilities. The administrative deputy minister for economics, Shen Jong-chin, temporarily assumed the duties of minister of economics affairs ChihKung Lee, who resigned over the incident. The blackout was the country’s most severe since the 1999 Jiji earthquake, Taiwan Power Co said. Reuters
China will ban the production and trade of a range of products containing mercury by 2020, including thermometers and blood pressure monitors, and ban primary mercury mining by 2032, as a global pact to cut pollution from the metal comes into effect. China - the world’s biggest miner and consumer of mercury - signed the Minamata Convention on Mercury in 2013. It was approved by the cabinet last year and takes effect yesterday. Mercury is highly toxic and poses severe public health risks when it contaminates food and groundwater.
10 Business Daily Thursday, August 17 2017
Greater China CNPC
Energy demand to peak in 2040 as transportation demand grows China has vowed to cap its energy consumption in 2017 in order to raise the use of cleaner fuels
C
hina’s energy demand will peak by 2040, later than the previous forecast of 2035, as transportation fuel consumption continues to rise through the middle of this century, state-owned oil major China National Petroleum Corp (CNPC) said yesterday. Energy consumption in China, the world’s sec-
Key Points Forecasts issued in annual long-term energy outlook Gasoline will peak as soon as 2025 Renewable fuel overtakes coal as primary power fuel by 2030 ond-largest economy, will peak then at 4.06 billion tonnes of oil equivalent, up from the previous forecast of 3.75 billion tonnes five years prior, CNPC said in its annual long-term energy outlook. CNPC raised its forecast because it predicts
transportation demand will rise through to 2050, twenty years longer than previously estimated. China’s oil demand will reach a ceiling of 690 million tonnes a year, equivalent to 13.8 million barrels per day (bpd), by 2030, CNPC said. The country is the world’s second-largest oil consumer. That compares with last year’s estimate of a peak of 670 million tonnes a year by 2027. Oil demand will grow at an annual rate of 2.7 per cent until 2020, slowing to 1.2 per cent until 2030, the report said. The headline number indicates that Chinese energy markets will continue to set the pace globally. However, the slowdown in oil consumption raises further doubt about the future role of oil in China’s energy mix as alternative fuels take a greater share of the transportation and power generation sectors. Gasoline demand will peak as soon as 2025, CNPC said. That would mean China’s
gasoline demand would peak only shortly after the United States. China has vowed to cap its energy consumption in 2017 in order to raise the use of cleaner fuels as part of a wider campaign to fight air pollution. Clean energy, including renewable fuels and natural gas, will replace coal power as the largest fuel source for power generation by 2030 and account for more than half of the nation’s power generation by 2045, it said. Natural gas consumption will rise to 620 billion cubic metres in 2030, said CNPC, up from 510 billion in last year’s report. Power demand will total 11.8 trillion kilowatt hours by 2050, the report said. Annual crude output will remain around 200 million tonnes, or 4 million bpd, until 2030, at which point it will start to fall. Gas output will reach 380 billion cubic metres by 2050. At that point, China will account for around 15 per cent of world’s gas production, it said. Reuters
Funding
E-car newcomer Future Mobility raises US$200 mln from Suning, others Earlier this year, Future Mobility announced plans to build a US$1.7 billion factory in Nanjing to capitalise on rising demand in China Norihiko Shirouzu
Chinese electric-car venture Future Mobility Corp, co-founded by former BMW and Nissan Motor executives, has raised US$200 million from investors including China’s Suning and Fullshare Holdings in its latest round of financing. Most of the money will be used for product development, said Daniel Kirchert, Future Mobility’s president. He has previously worked at Infiniti China, Nissan’s luxury vehicle division, and BMW Brilliance Automotive. Future Mobility, which plans to launch three vehicles by 2022, has a premium midsize crossover SUV ready to go into the next “serious” phase of development - that is preparing for production and sale in the world’s top two auto markets, China and the United States, as well as in Europe, Kirchert added. The company’s latest financing follows two initial funding rounds, which netted US$100 million as potential
investors Tencent Holdings and Taiwan manufacturing heavyweight Foxconn had to back out amid stricter implementation of China’s capital flow controls. The capital controls prevented investors from moving an undisclosed amount pooled in China into Future Mobility’s account because it is incorporated in Hong Kong, said Kirchert. “I have to say the investment environment has become much tougher,” Kirchert told Reuters in an
interview yesterday. “In an early stage one or two years ago there was a big hype, but now people have already seen some companies struggling and failing, so investors of course are getting more careful.” Future Mobility has since set up a mainland Chinese entity to help make the flow of funds easier. Future Mobility plans to launch the sport-utility vehicle by the fourth quarter of 2019 and another two - a sedan and a 7-seater
multi-purpose vehicle - by 2022. The SUV will likely be priced at around RMB300,000 (US$44,874) in China to be able to compete with the Tesla Model 3 sedan that may cost US$43,000, plus tax. Future Mobility will announce a brand name for cars it plans to sell in early September and is also looking to unveil the production-ready SUV at the Consumer Electronics Show in Las Vegas in January next year. “I am absolutely convinced that the tipping point is coming” for the electric car to take off in the marketplace, Kirchert said at Future Mobility’s office in Beijing. “Costwise we see signs that electric vehicles get more and more affordable.” Earlier this year, Future Mobility announced plans to build a US$1.7 billion factory in Nanjing to capitalise on rising demand in China which, struggling with high pollution levels in major cities, is aggressively pushing plug-in vehicles.
The investment needed to complete the construction of the factory, which will eventually have capacity to produce 300,000 cars a year, is being financed separately with bank loans and funds from investors and supporters, Kirchert said.
Key Points Investors include Fullshare Holdings, Chinese retailer Suning Firm plans to use most of proceeds for product development First Future Mobility vehicle to be launched by Q4 2019 There is plenty of policy support for smart, electric-vehicle ventures in China, but funds are getting harder to come by, while policymakers try to weed out companies with mediocre technology, analysts and executives at EV start-ups say. Reuters
Business Daily Thursday, August 17 2017 11
Greater China Warning from history
Could Japan-style crash hit China? Lessons from Japan suggest officials should have acted more quickly to bring in stricter banking regulations Hiroshi Hiyama
Sizzling property prices, a groaning debt load, wealthy tourists and tycoons willing to slap down eye-popping sums for art: China is starting to look like Japan before its economic bubble burst in the early 90s. The similarities are not lost on Beijing: President Xi Jinping has commissioned a study to help China avoid Japan’s pitfalls, according to Bloomberg, as growth slows and ratings agencies sound the alarm over its debt. Fears over China’s groaning debt load were heightened after the IMF warned Tuesday the world’s second largest economy was on a “dangerous” path, urging Beijing to take a more sustainable course and speed up structural reforms. China was also downgraded this summer by Moody’s with the credit rating agency citing the country’s ballooning debt, sparking an angry response from Beijing. Debt-fuelled investment in infrastructure and real estate has underpinned Chinese growth for years since the global financial crisis a decade ago decimated growth in Western markets that booming exporters relied on for growth. Japan was the original Asian tiger, with growth surging at an average 9.0 per cent annually between 1955 and 1973 in the long postwar boom, turning it into one of the world’s great economic powers. China has also basked in heady growth -- replacing Japan as the world’s number two economy in 2010 -- and has not seen a single recession in decades.
United in debt
Japan too is groaning under a huge national debt, the legacy of monetary
and fiscal policies aimed at boosting growth. Japan’s debt load is now more than 200 per cent of its Gross Domestic Product. China’s debt is around 260 per cent of GDP, up from around 140 per cent before the 2008 financial crisis. Eighties-era Japan kept interest rates low, creating excessive liquidity in its economy. Frenzied buying saw land prices quadruple in the mid-to-late eighties, and the Nikkei stock index hit almost 40,000 in 1989 -- double its current level. But it all came to an end when the central bank abruptly tightened policy. Stock and land prices plunged, businesses stopped investing, consumers stopped spending and bad loans piled up. That ushered in a period of low or no growth known as the “lost decades”. Chinese stock prices remain well off their 2015 highs. But mainland house prices have been soaring, particularly in hubs like Beijing, Shanghai and southern industrial powerhouse Shenzhen. Both countries saw their arrival on the world stage announced by striking acquisition of foreign assets, as Chinese overseas investment hit US$170 billion last year, surging 44 per cent from 2015. China’s Anbang Insurance bought New York’s Waldorf Astoria hotel for almost US$2 billion in 2014, while tycoon Liu Yiqian purchased Modigliani’s “Nu Couche” for a record US$170.4 million in 2015. Those big-ticket purchases bear the hallmarks of when Sony scooped up Columbia Pictures for US$3.4 billion in 1989 and Mitsubishi Estate paid nearly US$850 million for the controlling stake in the operator of New York’s Rockefeller Center.
In 1990, Japanese paper tycoon Ryoei Saito bought Vincent Van Gogh’s “Portrait of Dr Gachet” for US$82.5 million and Pierre-Auguste Renoir’s “Bal du Moulin de la Galette” for US$78.1 million. “What’s scary is that people in China are thinking, ‘China is special, so we are OK.’ That’s exactly how people felt in Japan during the bubble era,” said Kokichiro Mio, senior economist at NLI Research Institute.
Reining in the rhinos
Still, China is not a mirror image of Japan 30 years ago. The Chinese economy and its currency are tightly controlled by the state and shielded from foreign influence to a far greater extent than Japan. And Beijing has launched a crackdown on “grey rhinos” -- powerful private conglomerates -- amid fears they are racking up dangerous debt levels through buying frenzies and threatening financial stability. “The current circumstance in China is considerably better than that of Japan back then,” said He Chao, assistant professor at Shanghai University of Finance and Economics.
“The whole property market... is under relatively strong control of the Chinese government.” Lessons from Japan suggest officials should have acted more quickly to bring in stricter banking regulations to keep lenders from overextending themselves and better manage the economic slowdown. But Chinese “authorities are more able to regulate bank loans and the financing of speculative transactions, and they can intervene in markets”, said Ivan Tselichtchev, an economics professor Japan’s Niigata University. Others point out that China is not the advanced economy that Japan was at the time its bubble burst, meaning there is much more room for the economy to grow and increase productivity. But even if China is headed for Japan-style troubles, warnings from its neighbour may not mean much. “Unless you feel the pain, I think the message doesn’t quite hit home,” said Mio of NLI Research Institute. “China is not without people who are voicing concerns, but as it was in Japan, that doesn’t stop people from investing especially when you think prices will only go up.” AFP
Results
Geely beats expectations as Volvo pays off Sales jumped 89 per cent in January-July and last month Geely raised its 2017 sales target by 10 per cent China’s Geely Automobile Holdings Ltd said yesterday that first-half profit more than doubled, scoring its fastest earnings growth in eight years as cars designed with its Swedish unit Volvo won over domestic consumers. Although known at one point more for its copycat designs and lower quality vehicles, the Hangzhou-based firm has transformed itself into an automaker with up-market aspirations. Vehicles engineered with Volvo know-how, such as the GC9 sedan and the Boyue sport-utility vehicle, have been hot-sellers in China, the world’s biggest auto market. “So far in 2017, the group’s performance has exceeded management’s original expectations despite a generally weaker market in China during the same period,” the company said in a statement to the Hong Kong bourse. Net profit came in at RMB4.34 billion (US$648.96 million), 128 per cent higher than the RMB1.91 billion it made in the same period a year earlier
and eclipsing an estimate of RMB3.61 billion from CCB International. It said it had decided not to pay an interim dividend. Sales jumped 89 per cent in January-July and last month Geely raised its 2017 sales target by 10 per cent to 1.1 million vehicles. It sold 766,000
vehicles last year. Geely’s parent Zhejiang Geely Holding Group owns the maker of London’s black cabs and this year acquired a 49.9 per cent stake in Malaysian automaker Proton. The carmaker said that the business environment in its previous
key export markets in Eastern Europe and the Middle East remained weak and that it would continue to operate its exports business at the current restricted scale for the rest of 2017.
Key Points H1 profit up 128 pct, fastest growth in 8 yrs Result beats management’s own expectations Targeting 1.1 mln vehicle sales in 2017 In its next phase of expansion, Geely plans to market a third brand, Lynk & Co - in developed markets next year, beginning with Europe and the United States. Geely also plans to use more Volvo-developed technologies including small turbo-charged gasoline engines in Geely-brand cars. Reuters
12 Business Daily Thursday, August 17 2017
Asia Parliament address
Indonesian President pledges to tackle extremism, wealth distribution Despite its growing middle class, inequality in Indonesia remains high
nation address, Widodo said his administration’s focus this year was to ensure that the benefits from an average 5 per cent economic growth in the last few years should be felt by everybody. Despite its growing middle class, inequality in Indonesia remains high. Indonesia’s wealthiest 1 per cent control 49.3 per cent of its wealth, Credit Suisse said in a report issued last November, which placed Indonesia among countries with the most unequal distribution of wealth in the world. The president touched on efforts to cut red tape and said that moves to certify land would be accelerated. Disputes over land ownership
frequently hold up infrastructure projects. “For 72 years we have been independent, but while other countries are looking at outer space, we in our beloved country have not finished land certification for our people,” he said. On national security issues, the president said Indonesia needed to “resist the theft of our sea resources” and should not be afraid to keep sinking illegal fishing boats in its waters. Indonesia has sunk hundreds of illegal fishing boats and its navy and coastguard have had skirmishes with China and countries such as Vietnam over fishing in parts of the South China Sea. Widodo said graft continued to be a scourge for Indonesia’s competitiveness and pledged to strengthen the country’s corruption eradication commission (KPK). Indonesia ranked 90th out of 176 in Transparency International’s Corruption Perceptions index in 2016 and in July KPK named parliament’s speaker a suspect over an investigation in the alleged theft of US$170 million linked to a national identity card system. Setya Novanto has denied any wrongdoing. Reuters
Last year’s growth was 5 per cent, and many analysts say achieving this year’s target may be difficult after the annual rate in the first half was 5.01 per cent. Based on faster growth and other assumptions, Widodo said the government could probably collect 1,878.4 trillion rupiah (US$140.44 billion) in revenue next year, a 8.2 per cent increase from this year’s target. He set 2018 spending at 2,204.4
trillion rupiah, a 3.3 per cent rise from the total approved for 2017 but about 5 per cent higher than what the government actually expects to spend this year. That would make the estimated 2018 fiscal deficit 2.19 per cent of GDP. The 2017 budget deficit is officially set at 2.92 per cent, but the government has said the gap would likely be 2.67 per cent at the end of the year, as some approved spending may not take place.
Hidayat Setiaji and Bernadette Christina Munthe
I
ndonesia’s president said yesterday that the world’s most populous Muslim-majority country needed to pull together to meet the threat of extremism and safeguard a constitution that enshrines religious freedom and diversity. In an address to parliament ahead of today’s independence day, President Joko Widodo peppered his speeches with references to the need to address inequality in Southeast Asia’s biggest economy and tackle the threat of radicalism. Indonesian police have tightened security ahead of the independence day holiday and on Tuesday arrested five suspected Islamist militants and seized chemicals they said were being used to make bombs for attacks on the presidential palace. Religious tension in Indonesia has soared since late last year after Islamist-led rallies saw Jakarta’s then governor, a member of a so-called double minority who is ethnic Chinese and Christian, put on trial during city elections over claims he insulted the Koran. “We want to work together not only in creating an equitable economy, but also in ideological, political, social and cultural development,” said Widodo. “In the field of ideology, we have to strengthen our national consensus in safeguarding Pancasila, the 1945 Constitution, the unity of the Republic of Indonesia and “Bhinneka Tunggal Ika” (unity in diversity),” he said. Pancasila is Indonesia’s state ideology, which includes belief in god, unity, social justice and democracy, and which enshrines religious
Indonesian President Joko Widodo (C) delivers his annual address at the parliament building in Jakarta yesterday. Source: Lusa
diversity in an officially secular system. But there are worries about growing intolerance undermining a tradition of moderate Islam in a country where Muslims form about 85 per cent of the population, alongside substantial Buddhist, Christian, Hindu and other minorities. In April, the then Jakarta governor Basuki Tjahaja Purnama, an ally of Widodo, lost the bitterly fought city election to a Muslim rival and was later jailed for blasphemy, a sentence rights groups and international bodies condemned as unfair and politicised.
Corruption fight
In a second speeches, a state of the
2018 budget proposal based on 5.4 pct GDP growth
Indonesian President Joko Widodo yesterday proposed to parliament a 2018 state budget that focuses on addressing inequality and assumes the growth rate in Southeast Asia’s largest economy will accelerate next year. Widodo said Indonesia’s gross domestic product (GDP) will likely expand 5.4 per cent in 2018, faster than his target of 5.2 per cent in 2017.
Monetary policy
Thai c.bank, lacking cause to change policy, holds key rate again Inflation has been very low, and that gives the Bank of Thailand room to cut its key rate Orathai Sriring and Kitiphong Thaichareon
Thailand’s central bank yesterday left its key interest rate where it has stayed for more than two years, as there continues to be no incentive to cut and no need to raise it now. As expected, the Bank of Thailand (BOT)’s Monetary Policy Committee voted unanimously to keep the oneday repurchase rate at 1.50 per cent, where it has been since April 2015. The MPC reiterated its long-held view that the current rate supports economic recovery, and that domestic liquidity is ample. It said Thailand’s growth outlook “improved further on the back of the expansion in merchandise and services exports. Meanwhile, domestic demand continued to expand at a gradual pace, although it was not sufficiently broad-based.” Inflation has been very low, and that gives the BOT room to cut its key rate, but the central bank doubts a cut would aid growth and
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it could exacerbate problems with already-high levels of household debt. BOT Assistant Governor Jaturong Jantarangs told reporters that there was no need to cut rates further, even though inflation might return to its 1-4 per cent target range later than expected. Many economists agree the central bank can keep policy unchanged.
No pressing need
baht, now at more than two-year highs against the U.S. dollar, has been getting increasing attention. Jaturong said the strong baht is affecting businesses that have not hedged against currency risks, and that the central bank will closely monitor the foreign exchange market. The baht is emerging Asia’s strongest currency this year, appreciating about 7.5 per cent against the dollar.
To try to reduce the level of household debt, the BOT last month announced tighter rules on credit cards and unsecured loans. At its July 5 meeting, the BOT raised its forecast for economic expansion this year slightly to 3.5 per cent, due mainly to stronger exports, traditionally a key growth driver. The economy grew 3.2 per cent last year. Reuters
“There is no pressing need for the BOT to adjust rates any time soon,” said Shilan Shah of Capital Economics. “With the economy showing clear signs of recovery, monetary loosening seems unlikely.” All 21 economists polled by Reuters forecast no policy change yesterday, and most expect no change for the rest of this year. While the central bank is counting on fiscal spending to aid economic growth, which still lags regional peers, public investment growth was softer than expected, the MPC said. In Thailand, the strength of the 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 Thursday, August 17 2017 13
Asia Wages
In Brief
Australian salaries growth subdued; threatens spending, inflation Tepid consumer prices led to two interest rates cuts last year for a record low of 1.50 per cent Swati Pandey
Australian wages growth had languished at record lows for an entire year by the end of June quarter, official data showed yesterday, an outcome that threatens to sap consumer spending by heavily indebted households and to drag on already-anaemic inflation. The Australian Bureau of Statistics (ABS) said that its wage price index rose just 0.5 per cent in April-June, matching forecasts and compared with an upwardly revised 0.6 per cent the previous quarter.
Key Points
Miners get biggest pay hike in the qtr, annual rate feeble growth...supports our view that the low-wage, low-inflation climate will mean the RBA won’t raise interest rates next year as the markets expect,” said Paul Dales, chief economist at Capital Economics. “With households’ real wages having been unchanged over the last year, consumption growth will surely slow soon.” The RBA is worried about the impact on the A$1.7 trillion (US$1.3 trillion) economy from surging household debt, which is already at 190 per cent of disposable income. Policymakers hope wages growth
will eventually tick higher given a recent revival in employment and the end of a slump in mining investment. Yet, there was scant sign of a pickup in yesterday’s report. Not a single industry from manufacturing to healthcare raised wages more than 2.6 per cent annually. Miners got the highest pay rise in the quarter but their annual pay hike was still the smallest of all industries at a mere 1.1 per cent. Wage hikes were more attractive in the public sector at 2.4 per cent, compared with just 1.8 per cent in the private sector. Reuters
South Korea finance minister said yesterday the government will act to stabilise financial markets if they become more volatile because of tensions between Pyongyang and Washington, but noted markets are already showing signs of stability. “The government will closely monitor (financial) markets, and take measures to stabilize markets as needed in coordination with the Bank of Korea,” Kim Dong-yeon said before a meeting with Bank of Korea Governor Lee Ju-yeol. Lee said there was no need for serious concern because South Korea’s economic fundamentals were strong. Commmodities
Commodities
Thailand to host rubber council meeting amid price worries Thailand, Indonesia and Malaysia together produce nearly 70 per cent of the world’s natural rubber Asia’s top rubber producers will meet in Thailand in September, an official at Thailand’s rubber authority said yesterday, with export curbs to help boost prices likely to be on the agenda The International Tripartite Rubber Council (ITRC), made up of the world’s top producers of natural rubber Thailand, Indonesia and Malaysia, normally meets once a year. “The ITRC meeting usually discusses a range of issues including export mechanisms ... the important thing
Vietnam fired a vice trade minister yesterday for wrongdoings at electricity firm Dien Quang Lamp, the government and state media said, amid a wider crackdown on corruption. Deputy trade minister Ho Thi Kim Thoa lost all her positions at the ministry after the Central Inspection Committee found her responsible, state media said. Public denouncements and dismissals of high-ranking officials are rare in the one-party state but have become more frequent since last year as the party moves to tackle corruption, especially at inefficient stateowned enterprises.
S.Korea fin min says will act to stabilise markets if needed
Annual wage growth stood at a record low 1.9 per cent
Annual wage growth held at 1.9 per cent, the lowest on record. That was less than half the growth rate workers enjoyed a decade ago when a mining boom boosted pay across Australia. The slowdown has contributed to an unwelcome decline in underlying inflation, which sits below the Reserve Bank of Australia’s (RBA) target band of 2-3 per cent. “The stagnation in annual wage
Vietnam fires vice minister amid corruption crackdown
Intervention
Wages grow at 0.5 pct in June qtr, matching consensus
Wage hikes more attractive in public sector vs private
Graft
is ministers from the three countries will hold discussions,” Nakorn Tangavirapat, Deputy Governor of Rubber Industry and Rubber Production Rubber Authority of Thailand, told Reuters. Rubber prices, which have suffered in recent years from oversupply, surged late last year after floods in key growing regions, but have since largely subsided. Thailand, Indonesia and Malaysia together produce nearly 70 per cent advertisement
of the world’s natural rubber. The three countries agreed last year to cut exports to boost the market, but their targets have not always been met. Tangavirapat said Malaysia had formally accepted an invitation for the Sept. 12-15 meeting, while Indonesia had yet to confirm.
‘Officials expect rubber output from Thailand and Malaysia to decline this year due to low rubber prices and bad weather’ Senior officers from the ITRC and the board of its operational arm, the International Rubber Consortium (IRCo), met on Aug. 3 in Bangkok, according to an ITRC press statement. They expressed concerns “on the current downward rubber price trend” and discussed measures to improve the price of rubber, the statement said. Officials expect rubber output from Thailand and Malaysia to decline this year due to low rubber prices and bad weather, including heavy rain and floods in northern Thailand. Benchmark TOCOM rubber futures edged lower on Wednesday as investors made position adjustments amid light trade, with many dealers away for summer holidays. Reuters
Malaysia keeps palm oil export tax at 5.5 pct Malaysia, the world’s second-largest palm oil producer after Indonesia, will maintain its crude palm oil export tax at 5.5 per cent in September, the same rate as the previous month, according to a government circular yesterday. The Southeast Asian nation calculated a palm oil reference price of 2,677.91 ringgit (US$623.57) per tonne for September. A price above 2,250 ringgit incurs a tax, which starts from 4.5 per cent and can reach a maximum of 8.5 per cent. Palm oil benchmark prices fell 1.2 per cent to 2,633 ringgit at the close of trade on Tuesday evening. Taxes
Vietnam’s finance ministry proposes raising VAT Vietnam’s finance ministry said it has proposed increasing value-added tax (VAT) to 12 per cent in 2019, from 10 per cent currently, as part of measures to reduce record public debt. The ministry forecasts public debt will reach 64.8 per cent of gross domestic product in 2017 - only 0.2 per cent off the limit set by the government for the years 2016 to 2018. The ministry proposed increasing the sales tax in a report on Tuesday that also raised the possibility of a further rise in VAT to 14 per cent in 2021.
14 Business Daily Thursday, August 17 2017
International In Brief Budget
Brazil softens deficit goals through 2020 Brazil’s government loosened its budget targets for all years through 2020, delaying prospects for a drop in the federal deficit after legislators repeatedly refused to raise taxes in the recession-hit economy. Cost-cutting measures were announced along with the new targets, in a bid to demonstrate President Michel Temer’s commitment to fiscal discipline even after his economic team cut forecasts for economic growth next year. Brazil’s government set a new primary deficit target for this year and next of 159 billion reais (US$49.7 billion), up from 139 billion reais this year and 129 billion reais for 2018. ECB
UK banks behind schedule in post-Brexit preparations
GDP
Euro zone Q2 annual growth estimate upgraded The recovery in the bloc is gathering steam, with recent unemployment figures showing their lowest reading since 2009
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he economy in the 19 countries sharing the euro currency expanded by more than previously forecast in the second quarter compared to the same quarter in 2016, the European Union’s statistics office Eurostat said yesterday. Euro zone gross domestic product (GDP) expanded by 0.6 per cent in the second quarter compared to the first, as previously estimated, but the annual figure was upgraded to 2.2 per cent growth, compared to 2.1 per cent previously. The flash estimate for annual growth was also higher than the 2.1 per cent expected in a Reuters poll
of 28 economists. Compared to the previous quarter, economic growth was strongest in the Netherlands and Latvia, with the Spanish economy also growing above average. While the German economy, the euro zone’s largest, expanded at the same pace as the euro zone average in the second quarter, France, and Italy lagged slightly behind. Evidence of robust economic expansion will be weighed by European Central Bank policymakers who will soon begin to debate recalibrating monetary policy after years of extraordinary stimulus. “With the economy maintaining
a healthy pace of growth, the ECB should feel fairly confident about tapering its asset purchases next year,” economists at Capital Economics said. The recovery in the bloc is gathering steam, with recent unemployment figures showing their lowest reading since 2009 and economic sentiment rising to a 10-year high in July. Industrial output figures for June released earlier this week, however, showed a larger than expected drop. Business and consumer confidence date due to be released at the end of August should paint a clearer picture as to where the euro zone’s economy is heading in the third quarter. Reuters
British-based banks seeking to relocate to the European Union before Britain leaves the bloc are behind schedule in their preparations for the move, a European Central Bank supervisor said yesterday. International banks based in London risk losing access to the EU’s single market once Britain leaves it in 2019, forcing many to consider moving parts of their businesses to the bloc and seek a license from the ECB, the sector’s watchdog. But Sabine Lautenschlaeger, who represents the ECB’s supervisory arm on the central bank’s board, said progress had been slower than hoped. Oil industry
Iraq sets up shipping, trading joint venture OPEC member Iraq has formed a joint venture with a shipping company owned by Arab states to transfer, store and trade crude and oil products, according to official documents and industry sources. Middle East oil producers are venturing into buying and selling oil to boost their incomes as a sharp drop in crude prices since mid2014 has forced the industry to become more efficient and commercially focused. The venture, Al-Iraqia Shipping Services and Oil Trading, will handle a “plethora of activities ranging from trading of petroleum products, ship chartering, oil terminals, various marine services, and bunkering”, according to a company statement. Watchdog
Accountants PwC fined record over RSM Tenon audit Britain’s accounting watchdog has fined audit firm PricewaterhouseCoopers LLP a record 5.1 million pounds (US$6.56 million) and given it a severe reprimand after it admitted misconduct when auditing collapsed accounting firm RSM Tenon. The Financial Reporting Council (FRC) said PwC and senior audit partner Nicholas Boden admitted a series of failures when they signed off RSM Tenon’s accounts for the year to June 2011. “The admitted acts of misconduct include failures to obtain sufficient appropriate audit evidence and failures to exercise sufficient professional scepticism,” it said in a statement.
Oil industry
Pullback in U.S. fracking sand use pressures producers Analysts and frack sand providers continue to forecast an overall rise in sand consumption as more wells are drilled and completed Arathy S Nair and Nivedita Bhattacharjee
U.S. shale oil companies are pulling back on the amount of sand they use to hydraulically fracture new wells, responding to rising prices of the material that are driving up costs. Investors worry a slowdown in sand use, combined with new mining capacity coming online, could lead to a glut of the material and bring down prices. The worries have pressured shares of sand companies. Sand prices soared in the last year as oil companies ramped up shale drilling and production. But with crude prices below where they started the year, oil producers are employing new well designs and chemical agents that lessen the use of sand that represents around 12 per cent of the cost of drilling and fracturing. The price of frack sand is expected to rise 62 per cent this year to average US$47 a ton, according to researcher IHS Markit. That is expected to drive oilfield service price inflation to 15 per cent over 2016, according to researchers at Wood Mackenzie. Oilfield services provider Halliburton Co, which buys sand for its drilling customers, last month reported its first decline in average sand used per well, saying customers wanted designs that consumed less of the material. Average sand volumes for each foot of a well drilled fell slightly last quarter for the first time in a year, said exploration and production consultancy Rystad Energy. Volumes are
expected to drop a further 2.5 per cent per foot in the current quarter over last, Rystad forecast. “As alternative strategies are optimised, sand density will fall on a foot by foot basis – dramatically in time,” said Dallas Salazar, chief executive of energy consulting firm Atlas Consulting.
Logistics problems?
Frack sand is mixed in a slurry and forced at high pressure into wells to free oil and gas trapped in rocks. Any weakening of sand demand would collide with several sand producers’ plans to open new mines.
‘The price of frack sand is expected to rise 62 per cent this year to average US$47 a ton’ Companies including Unimin Corp, U.S. Silica Holdings Inc , and Hi Crush Partners LP are spending hundreds of millions of dollars on new mines to address an expected increase in demand. On last Thursday, supplier Smart Sand reported it shipped less frack sand in the second quarter than it did in the first. Rival Fairmount
Santrol Holdings Inc forecast flat to slightly higher volumes this quarter over last. Some shale producers add chemical diverters, compounds that spread the slurry evenly in a well, and can reduce the amount of sand required. Anadarko Petroleum Corp and Continental Resources Inc are reducing the distance between fractures to boost oil production. The tighter spacing allows them to extract more crude with less sand. In the Denver-Julesburg Basin of Colorado, Anadarko said the new well designs have increased oil and gas production by as much as 35 per cent. It is “no secret we have experimented with less sand out there,” Bradley Holly, Anadarko’s head of U.S. onshore exploration and production, told analysts last month. Analysts and frack sand providers continue to forecast an overall rise in sand consumption as more wells are drilled and completed. Smart Sand last week blamed its decline on operational and logistics problems. “The cases where people were scaling back usage, that was probably due to logistics problems,” Duane Scardino, Hi Crush’s corporate development manager, said in an interview this week. “It’s hard for me to imagine what would be more cost effective than frack sand.” Still, Atlas Consulting’s Salazar said of the major U.S. shale basins, only two - Haynesville and Eagle Ford are pumping in more sand per well. Reuters
Business Daily Thursday, August 17 2017 15
Opinion
Christine Lagarde, head of the IMF
China’s debt unnerves IMF; the alternative is worse Daniel Moss a Bloomberg View columnist
C
hina’s budget and trade scolds should pause for reflection. D e b t ra c k e d u p b y Ch i n a’ s government, companies and households will likely balloon to almost 300 per cent of gross domestic product by early next decade, the International Monetary Fund projected in its annual review of the country’s economy. Big, for sure, and a risk to global financial stability. But anything less would be a risk as well. What would China’s economy and the world’s look like without this level of stimulus? Global growth since the 2007-2009 crisis would be slower and more dependent on the U.S., which is struggling to escape the world of 2 per cent growth. If that isn’t significant enough, American companies would have likely had fewer buyers for services like banking, education and software. For all the wailing about the U.S. merchandise trade deficit, China itself has a small but growing services deficit with the rest of the world. The IMF acknowledged this point. It said gross domestic product, adjusted for inflation, would probably have grown only about 5.5 per cent annually over the past four years instead of 7.25 per cent. At some point, China will further cool its engines and accept slowing growth. IMF directors “noted that economic activity had recently firmed and saw this as an opportunity to accelerate needed reforms and focus more on the quality and sustainability of growth.” In the meantime, China’s relatively strong growth has benefits far from Beijing. China is shifting away from an export-and-investment-dependent economy. Some tables accompanying the IMF report show the trade surplus receding to 3 per cent of GDP in 2022 from 4.4 per cent last year. China’s deficit in services is going the opposite direction, widening to 2.5 per cent from 2.2 per cent in the same period. The current account surplus is on course to almost disappear. It will shrink to just 0.4 per cent of GDP in 2022. This is not the Chinese economy your grandfather warned you about. Are exports important? Sure. Is some stuff still cheaper when it’s made in China? Yes. Not everything. Not like it was when Deng Xiaoping began opening the country decades ago. What’s been lost in the American conversation about our largest trading partner is that there are rust belts in China, just as there are in the Midwest. You can see a big one outside Beijing, where steel is no longer big business. The future belongs to Chinese consumers. Starbucks Corp. may be more indicative of where the economy is going than most other Western businesses. Betting on an emerging urban middle class, Starbucks bought out its East China joint venture partner for US$1.3 billion, the biggest deal ever for the company. Where a textile mill once operated, an international company may now be serving lattes or screening Disney movies. As wrenching as that has been for local communities, the world economy is stronger for it. It’s not possible without the debt China is racking up. Bloomberg View
‘What’s been lost in the American conversation about our largest trading partner is that there are rust belts in China, just as there are in the Midwest’
South Korean protesters attend a rally against the South Korean and U.S. Government’s defence policy in front of the Seoul City Hall in Seoul on Tuesday. Source: Lusa
No one is paid to front run the apocalypse
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hat fund managers are rewarded for hugging the benchmarks they track is a big reason behind the otherwise puzzlingly mild reaction of financial markets to rising tensions and threats between nuclear powers the United States and North Korea. No one, and I mean this in the nicest, most humane way, no one is paid to help clients avoid the kind of massive stock market downdraft we’d see if the two went to war. Besides being, like the rest of us, badly positioned to predict what will happen, fund managers face disproportionately large career and portfolio risks if they try to sell up to prepare for a war, making going along for the ride the safest, easiest option. Last week, which saw President Donald Trump promise “fire and fury” and North Korea say it plans to fire missiles into the waters around Guam, brought a global markets selloff, but only a mild one. The MSCI World Index of stocks lost as much as 1.5 per cent at their worst point in the week, Korean shares fell 4 per cent and the S&P 500 by about 2. Markets recovered on Friday and Monday when further egging on by either side did not ensue. These were not big moves, considering the unfathomable damage that nuclear war could bring, or even the economic dislocation and human catastrophe that would likely come along with a conventional war, something which may not even be an option if a conflict erupts. People often imagine, based on a misunderstanding of the (anyway faulty) efficient markets hypothesis, that a market reaction to an event is a more or less unerring guide to its impact and the changing distribution of possible future events. Likelihood of horrible outcome goes up, stock market should go down. George Mason University economist Alex Tabarrok points out that a nuclear holocaust reduces the value of all the things one might buy with the proceeds of stock sales. “The bottom line is that selling stock doesn’t really help you to deal with a nuclear war or even to improve your life much before the nuclear war happens. The problem isn’t markets,” Tabarrok writes. “Since any actions you might take in the broader markets are fruitless or very high cost, knowing that the probability of a nuclear war has increased is mostly useless information. You might as well ignore useless information and proceed to buy
“
James Saft a Reuters columnist
and sell stock as if the information didn’t exist.”
Hugging the benchmark all the way down
That’s good advice, in that few of us, if any, can credibly think we are good at predicting what Trump might do, how the U.S. state and institutions would react or how North Korea will proceed. The idea that someone who finds herself running a hedge or pension fund will see betting on a nuclear war as a good and fruitful use of her skill set is laughable. Nothing is also broadly what happened on the stock market during the Cuban Missile Crisis in 1962, when the U.S. and the Soviet Union came far closer than we are today to what very likely would have been a war of mutually assured destruction. Stocks did very little, falling about 1 per cent during the crisis and then rising 3.5 per cent after it eased. In comparison, an attack by President Kennedy on U.S. Steel earlier that year for price rises had far more impact. As we are, as investors, and humans, not good at predicting apocalypses and not well placed to profit from them, so our instinct is likely to be to focus on lower-impact issues. And, as always in financial markets, in order to understand w hat i s ha p p e n i n g, y o u have to understand how the intermediaries are paid. There is a market for financial advice which proposes to save you from very bad events, but it is selling, not hedge or mutual funds, but, via AM radio, gold coins and freeze-dried food. The vast majority of active mutual and hedge fund managers are paid, in a real sense, not to frontrun low probability high-impact events but to beat a benchmark. Deviating from the benchmark, by selling when the risk of war rises, involves a very considerable career risk to the manager, who may well be dumped if war never comes and his fund lags. If war does come, well then ... The implication is that we shouldn’t be reassured by a calm market in the face of rising tensions. Just as the stock market is not the same thing as the economy, it is definitely not the same thing as humanity, and makes, when events turn extreme, a poor barometer of our future fortunes. Reuters
No one, and I mean this in the nicest, most humane way, no one is paid to help clients avoid the kind of massive stock market downdraft we’d see if the two went to war
”
16 Business Daily Thursday, August 17 2017
Closing Diplomacy
Trump praises N. Korean leader’s ‘wise’ decision to halt Guam missile test
North Korean leader Kim Jong Un inspecting plans to fire missiles towards the U.S. territory of Guam. Source: Lusa
on vacation in New Jersey were interpreted as raising the prospect of a U.S. nuclear attack against North Korea. US President Donald Trump yesterday praised North Korea’s leader for backing off on plans to fire The unpredictable and isolated North Korean leader on Tuesday had been briefed by his missile missiles toward the U.S. Pacific territory of Guam. forces on a “plan for an enveloping fire at Guam,” “Kim Jong-Un of North Korea made a very wise and well reasoned decision. The alternative would according to the North’s official KCNA news agency. have been both catastrophic and unacceptable!” But afterward, according to KCNA, he decided to Trump wrote on Twitter. postpone the operation to “watch a little more the Trump stunned the world last week by warning foolish and stupid conduct of the Yankees” and North Korea it faced “fire and fury” if it continued not to go ahead unless the U.S. commits more to threaten the US or its allies with its ballistic “reckless actions.” AFP missile program. His impromptu comments while
Mixed-ownership reforms
State-owned China Unicom to raise US$12 bln from Alibaba, Tencent, others Analysts say mixed ownership reform could be a game-changer for the company Clare Jim and Julie Zhu
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elecoms group China Unicom is ra i si n g US $ 11 . 7 billion from about a dozen investors including tech giants Alibaba Group and Tencent Holdings, as part of Beijing’s push for state-owned enterprises to be revitalized with private capital. The deal represents the largest capital raising in the Asia-Pacific region since insurer AIA’s 2010 market debut, as per Thomson Reuters data. It would also be the biggest deal in recent years under Beijing’s
“mixed-ownership” reforms. The Chinese government is seeking to rejuvenate state behemoths with private capital, with China Unicom among the first batch of stateowned enterprises slated for the mixed-ownership reforms, whose guidelines were issued in 2015. The board of China Unicom’s Shanghai-listed unit, China United Network Communications Ltd, has approved an issue of shares to the investors, who also include Baidu , JD.com and some other firms. Investors will get a combined 35.2 per cent stake in
the Shanghai unit and will be allotted three board seats, the group’s Hong Kong unit, China Unicom Hong Kong, said yesterday. Reuters had first reported about the fund raising plans in June. Other major companies that have agreed to invest in China Unicom include insurer China Life Insurance, ride-hailing company DiDi Chuxing, and Shenzhen-based Chinese technology conglomerate Kuang-Chi Group. “The mixed ownership will raise the innovation capability of the company ... allowing us to transform from a traditional operation
to an integrated operator,” said Lu Yimin, president of China Unicom Hong Kong. The deal is expected to be completed by end of the year, he said. China Unicom group, formally known as China United Network Communications Group Co Ltd, is one of the world’s largest mobile carriers by user numbers but has faced a fiercely competitive market. China Unicom group plans to use the proceeds to enhance its “4G capability, conduct 5G technical network trials and related business functions”, as well as invest in “innovative” businesses, the Hong Kong unit said in a presentation.
Game-changer?
China has thousands of stateowned enterprises, many of them bloated and debt-ridden, and its mixed-ownership reforms are aimed at reviving the sector with private capital, creating stronger conglomerates capable of competing on the global stage. Other state-owned enterprises selected to carry out Beijing’s pilot mixed-ownership reform scheme include China Eastern Air Holding, China Southern Power Grid and China State Shipbuilding Corp. China Eastern Air in June
Results
Protection
sold almost half of its freight unit to four firms, including Legend Holdings and Global Logistic Properties, in the Chinese aviation sector’s first mixed-ownership reform deal. For China Unicom, analysts have said mixed-ownership reform could be a game-changer - even if substantial restructuring will be difficult, with or without private investors. The investors will subscribe to about 9 billion new shares and purchase 1.9 billion shares of the Shanghai-listed unit from China Unicom group at a price of RMB6.83 per share, resulting in a total investment of about RMB78 billion (US$11.65 billion). China Unicom group’s holding will fall to 36.7 per cent from 62.7 per cent after the deal. Share trading in China Unicom’s Shanghai-listed unit has been halted since it said in early April it would be part of the government’s mixed-ownership pilot. It gave no further details at that time. The stock’s last close was at RMB7.47. Prior to that suspension, the unit’s market value topped US$23 billion. A person with direct knowledge of the matter told Reuters yesterday that the Shanghai shares were expected to begin trading on Thursday. Reuters
Commodities
Cathay Pacific posts worst Beijing pledges wider opening India bans exports of gold first-half loss in at least 20 years to foreign investors products of over 22 carats Hong Kong’s Cathay Pacific Airways Ltd yesterday said it did not see operating conditions improving over the rest of 2017 after posting its worst firsthalf loss in at least two decades as it continued to lose customers to lower-cost rivals. The airline has in recent years seen its market share on international routes eroded by aggressively expanding mainland Chinese and Gulf airlines. This, with poor fuel hedges and its lack of a budget arm, have hurt its competitiveness. Yesterday, it reported a loss of HK$2.05 billion (US$262.07 million) for the six months ended June, versus a profit of HK$353 million a year ago, putting it on track for its first ever back-to-back annual loss since it was founded in 1946. Group revenue edged up 0.4 per cent to HK$45.9 billion and its fuel costs grew by 33.4 per cent in the first half to HK$2.87 billion. “We do not expect the operating environment in the second half of 2017 to improve materially,” Cathay Chairman John Slosar said in the statement. The airline posted an annual loss last year for the first time since the global financial crisis and is also in the midst of a three-year reorganisation plan, the benefits of which Slosar said would begin to surface in the second half of 2017. Reuters
China, facing a possible decline in foreign investment this year, will become more open for international investors and take steps to better protect intellectual property, its cabinet said yesterday. In recent months, the Chinese government has made multiple statements about further opening its economy to outside investment, though details and timetables have been lacking. A document published on the website of the State Council yesterday said that more sectors will be opened to foreign investors, including new-energy vehicle manufacturing, ship design, aircraft maintenance and railway passenger transportation. No details on those sector openings were provided. The State Council also reiterated that the banking, insurance and securities industries will be further opened to foreign investment, adding that a firm timeline for changes will be set. On Tuesday, the commerce ministry said foreign direct investment into China in January-July fell 1.2 per cent from a year earlier to RMB485.42 billion (US$72.66 billion). Foreign businesses in China, as well as foreign governments, have long complained about a lack of market access and restrictive policies that run counter to Chinese pledges to free up its markets. Reuters
India has banned the export of gold products with a purity above 22 carats in a move a trade group said was a bid to curb a practice known as “round tripping”. The Directorate General of Foreign Trade issued a notification dated Aug. 14 that stated exports of jewellery or medallions, containing gold of 8 carats and above up to a maximum limit of 22 carats shall only be permitted, without giving a reason. “Round tripping to Dubai will come down due to the move,” an official with India Bullion and Jewellers Association Ltd said. A trader, via round tripping, can import gold products at a lower import tax and re-export the same stock without any value addition. The ban affects jewellery, including partly processed jewellery, coins and medals. “Until now, traders only had to pay a lower import tax – or no tax at all – on gold jewellery and gold coins so long as they re-exported the gold,” Commerzbank analyst Carsten Fritsch said in a note. India’s gold imports in July nearly doubled from last year to US$2.1 billion, while the country’s trade deficit narrowed to US$11.45 billion in July from a month ago, following a slowdown in merchandise imports. Reuters