Hong Kong bourse maintains negative trend Markets Page 9
Wednesday, July 5 2017 Year VI Nr. 1332 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Kelsey Wilhelm Animal abuse
Secretary for Security says suspension of dog-beating PJ officer “not light” Page 2
Unfounded pessimism Estimates, often made without any scientific basis but the mere intuition of those who make them - no matter how specialised in the matter they might be - are worth what they are worth. When related to gaming revenues, however, when forecasts are made by analysts, increases or decreases have immediate repercussions on the stocks of the companies involved. And it is well known that gaming stocks are, by nature, very little constant and sometimes nothing reliable. To consider that the nearly 26 per cent year-on-year growth of the gross gaming revenue last month has been ‘disappointing’, as titled by the CNBC television chain, just because certain analysts forecast 26.8 per cent growth, is something difficult to understand. It is true that the basis of comparison, 2016, is not one of the strongest. But if we take into account that in the previous years after the boom Macau would be satisfied with monthly revenues of MOP18 billion, and that MOP20 billion (US$2.5 billion) is at least extremely satisfactory, this pessimism is incomprehensible. Unless the subliminal negative message that we want to associate with the growth of gaming revenues in Macau has another purpose, which might not be that difficult to believe. After all, the government is on the cusp of announcing the new rules of the game. And the new public tender. If, of course, it wants to respect the law it created in 2001.
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Flag
Portugal’s bond with China: Pioneering debt sale founded on close ties Page 7
Upside down China flag at Outer Harbour Ferry Terminal causes uproar Page 2
Intense rains force partial stoppage of hydro plants on Mainland Page 8
Who are you?
ATM
New measures for ATM machines require cardholders to show ID. And complete facial recognition when withdrawing with UnionPay cards issued on the Mainland. A straw poll discovered little information at borders, casinos or websites. Targeting gamblers, the new measures closed down non-‘Know Your Customer’ machines. Some 834 machines already have the new features installed, says AMCM. Pages 4 & 5
Digital shield
Legislators push for Pearl Horizon resolution
Data protection The new co-ordinator of the Office for Personal Data Protection believes the new ATM measures are easy to implement. Although there’s still no deadline for implementation of the new Personal Data Protection law. Still “no information at this stage” for the junket database, either - but information exchange ongoing between departments, says co-ordinator. Page 6
Nine legislators have submitted a petition for the stalled Pearl Horizon development project. Seeking to resolve the case by repaying the land debt, via a special land concession, or granting the concession to the bank involved. Legislator Kwan Tsui Hang said the main point is to ‘allow the developer to continue its responsibility for the project’.
Filling the leadership vacuum
Property Page 2
25,389.01 -395.16 (-1.53%) Worst Performers
PetroChina Co Ltd
+2.73%
Link REIT
-0.25%
Tencent Holdings Ltd
-4.13%
China Resources Land Ltd
-2.82%
CNOOC Ltd
+1.29%
Hong Kong & China Gas Co
-0.28%
Galaxy Entertainment Group
-3.56%
Want Want China Holdings
-2.81%
Kunlun Energy Co Ltd
+0.74%
HSBC Holdings PLC
-0.34%
Geely Automobile Holdings
-3.54%
AIA Group Ltd
-2.58%
Hang Lung Properties Ltd
+0.20%
Sun Hung Kai Properties Ltd
-0.35%
China Shenhua Energy Co
-3.19%
Cheung Kong Property
-2.46%
Lenovo Group Ltd
-0.40%
China Resources Power
BOC Hong Kong Holdings
-2.37%
+0.16%
-3.04%
28° 31° 27° 30° 28° 30° 28° 30° 28° 32° Today
Source: Bloomberg
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THU
FRI
I SSN 2226-8294
SAT
SUN
Source: AccuWeather
Globalization Germany and China seem to be fated to occupy the throne. Vacated by Uncle Sam’s retreat from the international stage. With the G20 summit imminent, the countries’ leaders await commitment from the world’s superpower. Page 16
HK Hang Seng Index July 4, 2017
China Petroleum & Chemical
Energy
2 Business Daily Wednesday, July 5 2017
Macau Pearl Horizon
Legislators: Let’s resolve Pearl Horizon case Suggestions include ways of repaying the land debt, special land concessions, and granting the concession to the bank involved Cecilia U cecilia.u@macaubusinessdaily.com
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esterday, nine legislators submitted two suggestions at Government Headquarters with the objective of moving towards a resolution on the Pearl Horizon case. The first suggestion proposed by the legislators advocated combining ways of repaying the land debt and special concession in order to allow the developer to continue the construction of the supposed plan. The suggestions urged the MSAR Government to use part of the land plot for the Pearl Horizon construction to repay the previous owner of another land plot in Ilha Verde, in which the owner of the plot in Ilha Verde is a subsidiary of Polytex Polytex Corporation Ltd., the developer of the Pearl Horizon project. If the subsidiary company obtained the plot, it would be required to develop it in order to resolve the case of Pearl Horizon, according to the proposal. Moreover, the legislators suggested that in the first case the reclaimed land from Polytex could be granted via special land concession procedures in line with the new Land Law. The new land contract would thus include special responsibilities, such as exploiting part of the facilities - for example, car park or residential units - for public use or accommodation
for civil servants. The developer obtaining the land would also be required to pay the land premium payment and bear the responsibility to compensate off-plan unit buyers who had already paid, according to the suggestion. The second suggestion, in accordance with the new Land Law, is to grant the returned land to the responsible bank involved in the project, with the exemption of public land bidding. Article 55 of the Land Law defines the protection of third party benefits, in this case the benefits of the bank offering the mortgage service. The nine legislators presenting the suggestions were Kwan Tsui Hang, Chan Meng Kam, Lam Heong Sang, Si Ka Lon, Ella Lei Cheng I, Song Pek Kei, Ho Ion Sang, Chan Hong and Wong Kit Cheng.
Suggestions based upon legal framework
The spokesperson of the group, legislator Kwan Tsui Hang, said: “The main point is to find solutions in line with the current law as much as possible and allow the developer to continue its responsibility for the project”. She assured that the suggestions delivered by the group were based upon the current legal framework, while adding that the legislators had spent some two months composing the proposal. Kwan also said it is necessary to
slightly alter the new Land Law, explaining that problems could have been solved in the beginning if the law had properly fit the situation. “Obviously, whether it is feasible depends upon the government’s analysis,” said Kwan. “But better than the government not providing any solutions until now.” The legislator noted that one of the most important points of the dispute is whether the developer would bear responsibility. Corresponding to a previous petition signed by 19 legislators and submitted two months ago, Kwan reiterated that the Pearl Horizon case should be handled individually. Meanwhile, when asked by the press the reason for a decrease in the number of legislators vis-à-vis the previous petition Kwan explained that the petition two months ago was
Kwan Tsui Hang to step down
Legislator Kwan Tsui Hang, the chairman of the first standing committee of the Legislative Assembly, confirmed that she will not participate in the upcoming elections.
urging the government to deal with the case individually based upon the current law, adding that some legislators had not participated in composing the proposal in question, while others had publicly announced the submission of their own suggestions to the government. Kwan also explained that the reason for disclosing possible solutions to the public was to prevent the accusation of transfer of benefits among related parties, as well as to keep the public well informed and allow more opinions to be aired. Last Friday, the Court of Second Instance ruled in favour of Pearl Horizon developer Polytex Corporation Ltd’s request that the MSAR Government be called to a trial initiated by the buyer of a housing unit in the contentious residential project. Another new residential project by Polytex - located on plots T and T1 on reclaimed Areia Preta land received its Occupation Permit from the MSAR Government on Monday. The developer managed to complete the project before the deadline of the land concession on July 5 this year, meaning that buyers of the property’s off-plan units would not endure similar circumstances to the purchasers of the Pearl Horizon project.
After serving the city for 21 years, Kwan said it is inevitable to remove oneself from the process in order to allow new blood to take part. “It’s time for me to retire,” said Kwan.
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Animal welfare
PJ dog beater “not lightly punished” In the recent case of an agent of the Judiciary Police severely beating his dog, captured on camera and broadcast via social media, the Secretary of Security, Wong Sio Chak, said that the punishment meted out to the officer in question – suspension from duty – is not considered a “light punishment”, according to a release by the
Government Information Broadcast System. The Secretary told media that stating the length of the suspension of the agent in question is not “adequate to divulge […] given that the process has yet to be concluded,” and given that the agent called on his right to appeal, according to the release.
Politics
Chan Meng Kam unlikely to participate in elections Legislator Chan Meng Kam is unlikely to be involved in the coming legislative elections in September, local broadcaster TDM has reported. The owner of Hotel Golden Dragon and Chairman of City University of Macau, Chan will probably not run in either the direct or indirect elections. The legislator, however, has yet to confirm his participation, or lack thereof.
The businessman has been an elected legislator since 2005: the last election ranked his list first, with 18 per cent of the votes cast, securing three seats for himself plus incumbent legislators Song Pek Kei and Si Ka Lon. According to Song, the final decision on whether Chan will join the list of candidates for the election will be announced in the coming days. C.U.
Incident
Upside down The incident involving the national flag of China flying upside down outside of the Outer Harbour Ferry Terminal was “unacceptable,” said the Secretary of Security, Wong Sio Chak, reported local Portuguese-language broadcaster TDM. The security head notes that the incident was either “intentional”
or committed out of “negligence” - regardless the incident will be investigated. Images of the upside down flag were widely spread via social media networks before any response was forthcoming from the security forces or those of the Macao Customs Service. Alex Vong, the Director of Customs apologised for the incident and promised to treat it with “severity”.
Business Daily Wednesday, July 5 2017 3
Macau
4 Business Daily Wednesday, July 5 2017
Macau Opinion
José I. Duarte* Population forecasts Many people living or visiting Macau some twenty years ago will remember that the limited population size was regarded as a barrier to bigger development ambitions. Among the various pieces of ‘common wisdom’ was the idea that the long-term sustainability of the economy would require a significant increase in population. Many would claim, invoking higher authorities, that the city needed to reach the one million people threshold to become sustainable. Let us leave aside what was understood specifically as development, the desired path to get there, or what sustainability might mean in the context. Let us assume the million people, once reached, would bring in benefits to society and the economy that would not be attainable otherwise. Well, we are in for a disappointment. The media have just quoted a population report published by the United Nations that ‘places’ that figure in the year 2085 – almost 60 years from now! It is very disappointing. Even accounting for the increasing life expectancy, if no significant health or conflict disruptions occur, that means most of those currently living in this city, including me and most of those reading these lines, will not do it. We will not see the advent of Macau, the day the city reaches the sustainability threshold. We will not join the million people march and celebration. In the meantime, we have possibly to live with more limited ambitions. Unsustainable as it may be to live below the million people mark, we would do well to focus on improving the management of what we have – and deal appropriately with the needs of those already here albeit just about 600,000 of us. Better planning and management of public infrastructure would be a good start – transportation and congestion issues, waste processing and recycling, more efficient utilities and telecommunications, to name the most obvious, spring to mind. Likewise, thinking afresh about the known stresses in the labour and real estate markets, or education and health facilities, would not go amiss. Moreover, unless these issues are addressed, one million people living here might well become a sustainable hell. Unless the central authorities integrate Hengqin in the SAR – not an unreasonable or novel suggestion, but unlikely – maybe it is just as well that most of us will not be here to witness that day. And, of course, it is entirely possible that the future will be very different from the forecast. But that is another story. *economist and permanent contributor to this newspaper.
ATMs
Nowhere to hide A new regulation mandates Mainland-issued China UnionPay cardholders verify their identification via KYC technology for cash withdrawals from the city’s ATMs Cecilia U with Oscar Guijarro and Reuters cecilia.u@macaubusinessdaily.com
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ainland - issued China UnionPay (CUP) cardholders now have to undergo a verification process in order to withdraw cash from ATMs in the city, according to an announcement by the Monetary Authority of Macao (AMCM). The measures came into effect yesterday. The monetary authority suspended cash withdrawals for ATMs that had not yet installed the ‘Know Your Customer (KYC)’ technology for Mainland CUP cardholders. Now CUP cardholders are required to provide proof of identification namely the ‘Second Generation China Resident ID card’ - as well as having their face recognised by a camera installed in the ATM. Business Daily visited some of the ATMs without the KYC function located opposite the Grand Lisboa Hotel and casino, discovering that overall CUP cardholders were not aware of the new regulation. About a dozen of them failed to withdraw cash from ATMs that were not equipped with the KYC function despite having their ID cards on hand.
One Chinese tourist surnamed Liu told Business Daily that he had been attempting to withdraw money from many ATMs, including those inside the casinos, and was unable to do so, complaining: “We didn’t know anything [about the new regulation],” said Liu. “It wasn’t on websites, in casinos, or even when we were crossing the border.” Regarding payment method, although the majority of tourists choose to bring cash to exchange when entering the city, Liu revealed that he himself has over 10 cards due to the daily cash withdrawal limit. AMCM tightened the withdrawal limits of Mainland Chinese-issued bank cards at local ATMs to MOP/ HKD5,000 per transaction (US$625) in December last year, while daily limits remain unchanged at RMB10,000 (MOP11,583/US$1,448). Liu said he had not tried the KYC function previously but had been informed by recent ATM transactions that the ID card is required for future cash withdrawals. Another Chinese tourist, who preferred to remain anonymous, said the new regulation, in addition to the current withdrawal limits, would have little effect upon tourists who come to Macau for shopping and
eating only, but would have a large impact upon gamblers. “A very limited number of people would spend MOP10,000 per day if they don’t gamble,” said the Chinese tourist. He admitted that the new regulation posed inconveniences, while remarking that the restrictions would be advantageous in preventing gamblers from over-gambling. AMCM also stressed in Monday’s announcement that relevant services at the machines in question will be resumed as soon as the KYC function is installed. According to AMCM, as at July 2 some 834 ATMs had been equipped with the KYC function. Macau residents and holders of cards issued by banks from other jurisdictions are not affected by the new arrangement, stated the government department. Business Daily also withdrew cash using a CUP card, with the transaction successfully completed in less than five minutes. The further tightening of policy does not include other Mainland bankcards, but AMCM pledged that KYC techniques for verification of identity will be extended to other Mainland bankcards at a later stage. The policy, as stated by AMCM, is to ‘promote the integrity of the financial system of Macau and to enhance the protection of the legal rights of Mainland cardholders’, such as money laundering and controlling capital outflows from the country.
Business Daily Wednesday, July 5 2017 5
Macau The monetary authority statement said it ‘has been requesting banks to speed up implementation and is striving, in collaboration with each bank, to cover all ATMs in Macau including those in casinos and in their surrounding areas by this year-end’.
Reining in outflows
The controls adopted by domestic authorities reflect the curbs the central government implemented in order to reduce yuan outflows in 2016. Capital outflows from China surged last year to a record US$725 billion, the Institute of International Finance said in February, partly on expectations that the yuan would weaken against the dollar, as the Fed was abandoning its easing. The country’s foreign exchange regulator required in January that citizens who wanted to move money abroad would need to provide extra information on bank forms introduced on January 1, including a pledge that the funds would not be used to purchase property. Beijing has made several attempts to rein in the nation’s appetite for overseas purchases. In November, the government imposed a ban on foreign property purchases worth US$1 billion or more by state-owned enterprises. Later, even the US$50,000 that every individual was allowed to convert each calendar year could henceforth be used only for non-investment purposes such as travel or medical services. About 70 per cent of Chinese outbound property deals between 2013 and the first half of this year were valued at less than US$1 billion, according to CBRE Research. Offshore trading companies - under the cover of export and import invoicing - have more leeway to move money in and out of the country, offering another route that could be
used to finance overseas property purchases. China has acknowledged a problem with fake invoicing. Still, a more stringent clampdown would risk disrupting trade at a time of weak growth. Capital controls are inevitably porous, especially for a country that is as plugged into the global trade and economic system as China; and the demand for offshore property remains seemingly insatiable. Rich Chinese seek to have at least a third of their wealth outside the country and real estate is their most popular overseas investment, according to the Hurun Research Institute. About 60 per cent of surveyed individuals said they plan to buy offshore property in the next three years, the wealth researcher said in an October report. The reasons for the exodus are well known. China’s economy has been
slowing, with domestic real estate becoming increasingly unaffordable and the yuan depreciating. Under these circumstances, foreign property promises capital preservation. The greatest value of the latest controls could be in the signal they sent to the general population: China is serious about reining in outflows, and those who are caught abusing the system will be dealt with severely.
Relaxing curbs
Six months later China’s central bank relaxed some of its curbs on cross-border capital outflows. The first loosening of the curbs came as China’s leaders and financial markets were feeling more confident that pressure on the yuan and the country’s foreign exchange reserves had diminished, thanks largely to a pullback in the surging U.S. dollar.
With less incentive for capital flight and the economy on steadier footing, the country’s foreign exchange reserves clawed back above the closely watched US$3 trillion level. While the world’s second largest economy still has the largest stash of forex reserves by far, it has burned through over half a trillion dollars since August 2015 trying to support the yuan. Chinese businesses complained that the curbs were damaging their plans for overseas investments and acquisitions, while foreign firms were more reluctant to invest in China for fear of having trouble repatriating profits. While Beijing says it supports legitimate overseas investment, regulators have warned they will pay close attention to ‘irrational’ investment in property, entertainment, sports and other sectors, sources say. advertisement
6 Business Daily Wednesday, July 5 2017
Macau Personal data
Data waves expanding The new co-ordinator of the Office for the Protection of Personal Data says both the attendant law and junket database are still pending approval whilst claiming handling the new facial recognition technology for ATMs presents no problem Sheyla Zandonai sheyla.zandonai@macaubusiness.com
T
he recently appointed co-ordinator of the Office for the Protection of Personal Data (GPDP), Yang Chongwei, says there is still no deadline for the implementation of the new Personal Data Protection Law. “There was a rapid development regarding the personal data protection [work], and we are closely monitoring the progress. Most of the principles in our data protection are still valid and they are still quite good [for] protecting our personal data,” said Yang. The GPDP co-ordinator was speaking on the sidelines of a seminar organised yesterday by the GPDP on the theme of client data protection with a focus on international tendencies of criminal activity with credit cards. Yang, who has been with
the Office for the last ten years, added that while considering the “review [of] the data protection act” he does not discard the possibility of using or issuing “some guidelines to data controllers to impose [upon] the private and public sector to protect the personal data they are handling.” Yang explained that over the years the Office has already issued several guidelines and instructions, adding that it also closely follows developments unfolding from the European case to be contemplated in the local revision process. “The European Union passed a new, general regulation on data protection and we still await some guidelines and opinions from [there] to be used as a reference for our society,” he claimed.
‘Know Your Customer’ technology
According to Yang, part of GPDP’s work consists of
tuning personal data protection with the latest technology in order “to protect the cardholder and the stability of [the] financial system, including [combating] the anti-money laundering regime.” Responding to questions about the new facial recognition technology implemented in local ATMs for Mainland China UnionPay cardholders – labelled ‘Know Your Customer’ – which commenced on Monday, the GPDP co-ordinator said that the technology itself “is not very new.” “We have a lot of knowledge on that so I can say it’s
not a very serious problem in Macau to implement this kind of new system,” he claimed. Nevertheless, Yang acknowledged that such technology involves an important volume of personal data, explaining that GPDP has been working in collaboration with both the banking industry and the Monetary Authority of Macao (AMCM) in order to assess eventual needs for improving the “practice.” Regarding the question of whether the data collected will be held by each banking institution or centralised within AMCM, Yang
claimed that at this stage they “could not disclose too much regarding the database.”
Junkets database
Responded to questions about the junket database, Yang said that because “there is still exchange of information between different departments, [my] Office cannot advance more information at this stage.” He also highlighted that GPDP should act with “caution . . . [as] . . . it is important to consider the rights and interests of both parties, given it involves a huge amount of personal data.” advertisement
Business Daily Wednesday, July 5 2017 7
Macau
Portugal’s Prime Minister Antonio Costa. Lusa
Markets
Portugal’s bond with China: pioneering debt sale founded on close ties The European nation is currently the top destination for Chinese investment in Europe as a share of its economy John Geddie and Dhara Ranasinghe
P
ortugal is looking to build on its economic and cultural ties with China by becoming the first euro zone country to borrow in the US$9.5 trillion Chinese bond market, potentially opening the way for other European governments. Beijing is tentatively removing barriers to foreign issuers as it seeks to internationalise its renminbi or yuan currency and open up sources of finance for its planned “One Belt, One Road” trade route that stretches as far as Europe. Portugal, whose location on Europe’s Atlantic coast is some 10,000 km from Beijing, further away than any of its euro zone peers, plans to sell “Panda” bonds -- debt sold by foreign entities to investors in Mainland China. “In practical terms, the issue aims to diversify the sources of financing of Portugal, opening a new market for its debt, and support the internationalisation of the (renminbi),” a spokesman for the office of Prime Minister Antonio Costa told Reuters. He said strengthening trade links between the two countries would benefit both populations. Just a handful of foreign entities -- including sovereigns Poland and South Korea -- have sold Panda bonds in recent years, although Hong Kong’s smaller, offshore, yuan-denominated “dim sum” market is well established. Panda bond issuance increased nine-fold last year to RMB130 billion (US$19 billion), and is expected to grow by another 50 per cent in 2017, according to JPMorgan.
Stronger ties
Portugal’s ties with China date back some 500 years to the settlement
of Macau, the trading post-turnedgambling hub that was Europe’s last colony in Asia until it was handed back to China in 1999, just as Portugal joined the euro. After a crippling recession that pushed the indebted country into a bailout in 2011, Chinese cash helped aid its recovery. Portugal is currently the top destination for Chinese investment in Europe as a share of its economy, according to figures from Spain’s ESADE Business & Law School, and a number of Chinese firms have taken stakes in Portuguese companies.
Key Points Portugal plans to sell government bonds in China Would be first euro zone state to issue in renminbi Deal could strengthen cultural, economic links Other European countries keeping close eye on progress China Three Gorges owns 21 per cent of Energias de Portugal while private conglomerate Fosun upped its stake in bank Millennium bcp to 24 per cent in February. Last year, Costa told Chinese state television that Portugal wanted to “actively participate” in Beijing’s plans to develop a maritime sea route as part of the trade route initiative, dubbed the new Silk Road. He highlighted port capacity at Sines in Portugal’s south. Hong Kong-based Richard Mazzochi of law firm KWM, who has been involved in a number of Panda bond deals, said linking to a specific project could help get Portugal’s planned
debt sale off the ground. “Applications are easier to make where there is already an established connection and if an issuer would use the proceeds in connection with One Belt, One Road initiatives, that would be helpful,” he said. A deal could raise eyebrows among European authorities suspicious of China’s plans to spread its global influence and concerned about transparency and access for foreign firms to the scheme. Major European countries have even mooted the idea of blocking Chinese investment on the continent. The EU is assessing whether a Beijing-funded rail project in Hungary, which has issued debt in China’s offshore market and is eyeing the onshore market, complies with EU law.
Financial reasons
Finance Minister Mario Centeno told Reuters in May that selling a bond in the Chinese currency would allow Portugal to take advantage of growing demand for its debt, especially as a strengthening economy raises hopes for a credit rating upgrade. The planned end in December of the European Central Bank’s bond-buying scheme means diversifying into China -- the world’s third-biggest debt market, behind the United States and Japan -- might appeal to other euro zone states. Contacted by Reuters, the debt offices of Ireland, Italy and Belgium said they were open to issuing in yuan, while France, Spain and the Netherlands said they had no such plans. A German government source said such a transaction “had been on the table one or two years ago” but for “cost reasons” Berlin decided against it. Bankers at Standard Chartered and HSBC told Reuters they were working with European sovereigns on deals, but gave no details. Although China is nervous about capital outflows, a foreign government issuing there would serve as an endorsement of plans to
internationalise the currency and its standing as a global economic power. Mushtaq Kapasi, chief representative, Asia-Pacific at the International Capital Market Association, said Portugal’s sovereign would also “give Chinese investors a level of trust”. In October, the yuan was added to the International Monetary Fund’s small basket of reserve currencies, while the ECB added the Chinese currency to its foreign reserves this year.
Barriers to entry
Spencer Maclean, a banker at Standard Chartered, said a sovereign bond sale would be a “precursor” for private firms from the country to tap Chinese markets. But barriers to entry remain. Bankers told Reuters that some countries may be nervous about the legal framework under which the bonds would be sold. As Greece and Argentina experienced during their debt crises, it is hard to restructure bonds issued under foreign law. The most common concern expressed by issuers is whether they will be able to get the cash they have borrowed out of China. “The Chinese allow capital to flow in but it is still quite a challenging situation to convince the Chinese to use the proceeds abroad,” said Alexander Liebethal, head of new issues at German development bank KfW, which has issued in the Chinese offshore market. “If you look at the Panda market you will see a lot of issuers active there that have operations in China, like some German car manufacturers.” New guidelines on Panda bonds expected from Chinese regulators should add some clarity, bankers and lawyers said. And for all that Portugal’s deal is innovative, it may not be imminent. “These sort of projects take time,” said Portugal’s debt agency chief Cristina Casalinho. “It would be a novelty for us.” Reuters
8 Business Daily Wednesday, July 5 2017
Greater china Energy
In drastic move, top hydropower plants slash capacity Hydropower is China’s second largest electricity source after coal
T
he Three Gorges and Gezhouba, two of China’s top hydropower plants, have closed capacity by as much as two-thirds, state media said yesterday, as torrential rains across the south triggered drastic steps to ease pressure on the Yangtze River. Days of heavy rainfall have pushed water levels in more than 60 rivers in southern China above warning levels. Floods have damaged crops, forced hundreds of thousands from their homes and killed at least 33, while the north has wilted in a heat wave and drought-like conditions.
Key Points Three Gorges plant
Scale of cuts equivalent to 13 coal-fired power stations Hydro is China’s 2nd biggest power source Closures come as physical coal prices in Australia rally The Three Gorges dam is the world’s biggest power station by far, with an installed generation capacity of 22,500 megawatts (MW), equivalent to about 20 coal-fired stations. The two power stations in Hubei province have stopped 26 generators, due to flood pressure in the middle and lower reaches of the Yangtze River, Asia’s longest river, the staterun Xinhua News Agency said, citing the Three Gorges Corp , the world’s largest hydroelectric power producer.
Hydropower is China’s second largest electricity source after coal. The shutdowns have cut capacity by 13.52 gigawatts (GW) to just 7.5 GW. The Three Gorges plant has reduced capacity to 6 GW from 18.12 GW, while Gezhouba, some 38 kms (23 miles) away, has halved capacity to 1.5 GW from 2.9 GW. Phones calls to Three Gorges were unanswered. Hydropower schemes can shut during times of high rainfall to to prevent flooding downstream or to protect their turbines. Such measures are frequent during the rainy season in China’s south, but Li Rong, power analyst with consultancy SIA Energy, said the size of the current
shutdown was unprecedented. He estimated it at 200 GW hours of daily electricity output, about 40 per cent of demand in Shanghai, China’s most populated city, during the summer peak season. While the heavy rainfall has led to short-term power shutdowns, it is also helping to replenish reservoir levels in the country’s south, which had been falling in recent months, hurting output of hydro power. Most of the nation’s hydro power plants are located in the southern provinces of Hubei, Hunan, Sichuan and Guizhou. Any prolonged closure of the generators will renew concerns about higher demand for coal to fuel the
nation’s thousands of thermal power plants as a weeks-long heatwave scorches the north. Traders said that it would take at least a dozen large fossil fuel or nuclear power stations to make up for the hydro restrictions. In recent weeks, Beijing has urged coal mines to ramp up output to ensure electricity supplies during peak hours as a prolonged bout of hot weather across the north has boosted demand for air conditioning. Yesterday, coal for export from Australia’s Newcastle terminal hit their highest since April, with mining outages tightening supply amid strong northern hemisphere summer demand. Reuters
Leadership
Beijing’s restraint two decades ago forged an anchor from crisis A vivid illustration of the yuan’s anchor role came in the summer of 2015, when a tweak to the fixing formula rattled global markets Enda Curran
When the financial crisis swept across Asia in the late 1990s, China took a decision that provided a crucial firewall. As currencies and stock markets around the region collapsed, the government in Beijing held the yuan steady. It was a bold move for a nation that was relying on cheap exports to fuel its rapid economic development. To reinforce the message, top Chinese officials appeared on television, in newspapers and used speeches to ram home that the yuan wouldn’t be allowed to weaken. The move ultimately helped stem contagion from the tumult in Indonesia, Malaysia, Thailand and South Korea. The alternative scenario, where China weakened its then-pegged yuan to keep its exports competitive, would have spurred deeper and more wide-spread devaluations. “Everyone was nervous the Asian Crisis was going to escalate, so the fact that China held the exchange rate steady was a great source of stability for the region,” said Paul Gruenwald, the chief Asia Pacific economist at S&P Global Ratings and a former official at the International Monetary Fund during the Asia crisis. Not only that, China also offered more than US$4 billion in financial
aid, contrasting with an initial reluctance by America to get involved -- Bill Clinton famously described the chaos that was engulfing the region’s markets by November 1997 as a “few small glitches in the road”. Now, with the lens of history, these were early signals that a new global economic order was beginning to emerge. Today, that new order has arrived. The world’s second-biggest economy and largest trading nation, China now commands a place at the top table of global finance that it could only have dreamed two decades earlier. China has a much bigger say at the International Monetary Fund through more voting rights and high-level representation. The yuan has joined the IMF’s basket of reserve currencies, and a decision by MSCI Inc. to add Chinese stocks to their benchmark indexes last month was hailed as another landmark step. It has its own development bank, the Asian Infrastructure Investment Bank, and a web of foreign exchange lines with more than 30 central banks. And in the face of protectionist rhetoric stemming from Donald Trump, Chinese leaders are emerging as the new champions of globalization.
Globalization champion
“That rallying cry has been picked up
by other countries,” IMF First Deputy Managing Director David Lipton told reporters in Beijing last month. “China as playing a very supportive role to our institution, and to the mission of our institution, which is cooperation in pursuit of growth and financial stability -- and global stability.” A vivid illustration of the yuan’s anchor role came in the summer of 2015, when a tweak to the fixing formula rattled global markets. Federal Reserve Chair Janet Yellen cited China as among reasons for delaying a rate increase later that year. The resulting blow to confidence spurred capital outflows from China that forced authorities to reverse reforms and tighten up restrictions
on the movement of money across borders. And so today, China in some ways finds itself in a similar position to where it was back in 1997 -- low foreign debt levels and capital constraints keep it insulated. The key difference: its now much, much bigger. China’s dominance is most keenly felt in its own backyard. It’s now the biggest trading partner for the four Southeast Asian nations and South Korea who were worst hit by the crisis 20 years ago. In 1997, U.S. trade with the five nations was four times bigger than China’s. Today, China’s is twice as large. “The role of China is even more critical now than twenty years ago,” said Gruenwald. Bloomberg News
Business Daily Wednesday, July 5 2017 9
Greater China Markets
In Brief
Hong Kong stocks tumble most in eight months There was “a lot” of “technical selling of stock futures” once the gauge fell below 25,500 and 25,600 Jeanny Yu and Justina Lee
Hong Kong stocks sank the most since November as profit taking in some of the city’s top performing shares sparked a wider selloff. The Hang Seng Index dropped as much as 2.1 per cent before paring declines to 1.5 per cent at the close. Tencent Holdings Ltd., Galaxy Entertainment Group Ltd. and Geely Automobile Holdings Ltd. were the biggest losers on the gauge, sinking at least 3.5 per cent. All but five stocks on the 50-member measure declined. Tencent alone accounts for more than a quarter of the Hang Seng Index’s 15 per cent advance this year, as investors piled into China’s largest Internet company. The benchmark equity gauge has lost momentum in the past month as it struggled to sustain gains above the 26,000 level. Analysts attributed the deepening of yesterday’s slump to selling of index futures after the measure fell below 25,500. “Many investors were betting 25,500 was the supporting level for the Hang Seng Index and have bought lots of futures on it. As the index fell below that level this morning, some people panicked and chose to sell their holdings,” said Kenny Wen, a strategist at Sun Hung Kai Financial Ltd. in Hong Kong. Tencent’s 4.1 per cent slide pared its gain this year to 42 per cent. The People’s Daily blasted the company’s most profitable smartphone title in an editorial, citing it as an example of how addictive games spread “negative energy” and have even led to deaths. “Tencent is a leading stock, which is big and has been very profitable for all investors,” said Ben Bei, director
of Hong Kong and China strategy at CIMB Securities Ltd. “People need to think about other positive news to lift the market higher. Over the past one to two weeks the market has started to consolidate. Then it cannot break upward, so some people will take profits.” The selloff comes amid growing concerns about risks in the world’s fourth-largest equity market after a series of spectacular stock plunges.
China Huishan Dairy Holdings Co. fell 85 per cent in a single day in March, while a string of small cap shares collapsed last month to erase US$6 trillion. Volume in Hang Seng Index futures was 65 per cent higher than the fiveday average for the morning session, with activity spiking as the market sold off toward the break. There was “a lot” of “technical selling of stock futures” once the gauge fell below 25,500 and 25,600, which “lots of index futures are tied to,” said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. The gauge ended the day at 25,389.01. Bloomberg News
Internet
New framework for ‘sharing economy’ policy China’s economic planner has set new guidelines for authorities on how to set policy for the country’s booming “sharing economy,” in an effort to remove barriers and better regulate an industry deemed an important new driver of economic growth. China’s “sharing economy” is expected to grow about 40 per cent this year to 4.83 trillion yuan (US$705 billion). By 2020, it could account for around one tenth of China’s gross domestic product. The explosive growth of the sector has been seen in the large spurts of funding Chinese bike-sharing firms such as Mobike and ofo have received. Debt
Huishan Dairy plans seek ‘white knight’
HK market outlook
Galaxy Entertainment dropped 3.6 per cent for its biggest loss in two months, while Geely lost 3.5 per cent to trim its advance this year to 128 per cent. AVIC Aircraft Co. rose 2.2 per cent to its highest close since May 9 as Mainland defence shares rose after North Korea’s missile test. North Navigation Control Technology Co. reversed a loss in the morning to climb 3.3 per cent for its strongest close since May 4. Internet game
developers fell on the mainland after The People’s Daily targeted Tencent. Wuhu Shunrong Sanqi Interactive Entertainment Network Technology Co. slid 5 per cent for its biggest tumble this year, and Youzu Interactive Co. lost 4.4 per cent. Energy producers gained as investors rotated into underperformers and oil climbed late Monday. PetroChina Co. and Cnooc Ltd., the biggest losers on the Hang Seng Index this year, rose more than 1.2 per cent.
Embattled China Huishan Dairy Holdings Co Ltd is planning to carve up shares in the company among its creditor banks and existing shareholders as part of restructuring plans as it struggles to pay back billions of dollars of debt. The dairy, which has admitted facing “tremendous difficulties” getting a clear picture of its finances, said in a filing to the Hong Kong exchange it was ultimately looking for a “white knight” to financially support the firm. Huishan’s woes came to light when its stock plunged 85 per cent in March before being suspended. Internationalization
Markets
Tencent’s online publisher files for Hong Kong IPO IFR has previously reported that the deal could raise between US$600 million and US$800 million Elzio Barreto
China Literature Ltd, a Tencent Holdings Ltd unit and the country’s largest online publishing and e-book company, has filed for a Hong Kong initial public offering that is expected to raise as much as US$800 million. The deal is also boost for the Hong Kong bourse, which has failed to attract a significant volume of technology deals despite being the world’s top destination for new listings in 2016. The company, which is looking to raise funds for potential acquisitions and expand its mobile reading business, has hired Bank of America Merrill Lynch, Credit Suisse and Morgan Stanley as sponsors of the offering, it said in a filing late on Monday. Although the structure of the deal was not disclosed, Tencent has said it plans to hold at least 50 per cent of China Literature after the spin off and that the offering will consist of 15 per cent of the firm’s enlarged share capital. Thomson Reuters publication IFR has previously reported that the deal
could raise between US$600 million and US$800 million. China Literature has a business akin to Amazon.com Inc’s Kindle Store, operating a platform with 8.4 million literary works from 5.3 million writers. The firm saw revenues jump 59 per cent last year to RMB2.6 billion (US$377 million), while it posted a net profit of RMB30.4 million, compared with a loss of RMB354.2 million a year earlier. It is its first net profit since it began disclosing financial data in 2014. Tencent started its online reading business in 2004 and it grew substantially after the acquisition of Cloudary Corp in 2014 for US$729.6 million.
Cloudary had filed to go public on the New York Stock Exchange in 2011 and 2012, before withdrawing the listing application in 2013 “due to market conditions”, the filing showed. Tencent controls China Literature with a 62 per cent stake. Private equity firm Carlyle Group LP owns 12.2 per cent while Trustbridge Partners, a private equity firm founded by Shujun Li, the former CFO of Shanda Interactive, holds 6 per cent. Fundraising by tech firms in Hong Kong accounted for an average 2.5 per cent of all IPOs since the global financial crisis in 2008, Thomson Reuters data shows. That compares with 13.6 per cent for the New York Stock Exchange. Reuters
Tencent office in Shenzhen
Mainland to raise RQFII quota for Hong Kong
China’s cabinet has approved an increase of quota under the Renminbi Foreign Institutional Investor (RQFII) scheme for Hong Kong to RMB500 billion (US$73.55 billion) to further meet demand for yuan asset allocation by Hong Kong investors, the central bank said yesterday. As a pioneer to promote the yuan’s internationalisation, Hong Kong was granted a RMB270 billion quota under the RQFII scheme in 2011 to facilitate crossborder foreign investment. Auto industry
Hyundai China sales down South Korean automaker Hyundai Motor saw its China sales slump 64 per cent to 35,049 vehicles in June from a year earlier, extending their slide due to political tensions between the two countries, Koh Tae-bong, an analyst at Hi Investment & Securities said, citing company data. Hyundai affiliate Kia Motors also saw its China sales skid 58 per cent to 19,003 vehicles during the month, he said on. The automaker group does not provide monthly China sales data to media or comment on it.
10 Business Daily Wednesday, July 5 2017
Greater China Debt
Mainland court freezes LeEco assets over late payments The Shanghai court’s freeze took effect June 29 and will last three years till June 2020
L
eEco is trying to resolve a dispute with one of China’s largest banks over unpaid interest on debt, a spat that’s prompted a Shanghai court to freeze RMB1.24 billion (US$182
million) of assets held by the tech conglomerate and its billionaire founder Jia Yueting. The ailing firm’s disagreement with China Merchants Bank Co. arose over loans to a smartphone subsidiary called Leview Mobile, both companies said separately yesterday. That unit ignored several requests for interest payments, the lender said. It eventually went to a court in Shanghai, which then ordered the freeze on assets held by three LeEco
affiliates, Jia and his wife, according to the Xinhua News Agency. LeEco is now in negotiations with its creditor and has enough capital to service its debt, the company said in an emailed statement. Merchants Bank said the court’s decision had since brought business risks under control, without elaborating. “The bank does not rule out the possibility of solving this issue through friendly negotiations with LeEco,” it said in an emailed statement provided
by a representative. Jia is fighting to revitalize a conglomerate he once portrayed as superior to Tesla Inc. and Apple Inc., but is now grappling with a cash squeeze after expensive forays into cars and smartphones. It’s been forced to slash costs and employees and has mentioned plans to sell assets to address the crunch. The entrepreneur told shareholders last week the cash shortage afflicting LeEco had worsened in past months.
‘LeEco said is now in negotiations with its creditor and has enough capital to service its debt’
LeEco founder Jia Yueting
The Shanghai court’s freeze took effect June 29 and will last three years till June 2020, Xinhua cited the court document as saying. LeEco has been trying to come to terms with a larger than anticipated debt burden. Jia expected RMB9 billion to be enough to solve its funding issues last year and managed to raise RMB9.7 billion, he told shareholders in a transcript supplied by LeEco. Instead, he and the company jointly paid off about RMB15 billion in debt that year. Bloomberg News
Financing
Belt and road investors see opportunity in capital limits China may keep capital controls in place for at least another 12 months Matthew Burgess and Brett Foley
Chinese constraints on capital outflows could benefit overseas investors looking to bankroll President Xi Jinping’s cornerstone ‘Belt and Road’ initiative, an Australian infrastructure fund manager said. With China needing offshore support if its plan to revive the ancient Silk Road is to succeed, foreigners could fill a gap created by tight controls keeping Chinese capital at home, said Grant Dooley, Asia Pacific head of Hastings Funds Management Ltd. “There appears to be an inherent contradiction in the Chinese government policy at the moment,” Dooley said in an interview in Melbourne. “It’s an opportunity.” In May Xi pledged RMB540 billion (US$79.4 billion) in financing to build roads, railways, ports and pipelines across 65 countries in Asia and beyond -- the majority of which have less than investment grade credit ratings -- as part of his push to secure a central role for China in world trade and diplomacy. Credit Suisse Group AG estimates the plan could funnel investments worth as much as US$502 billion. Hastings, a Melbourne-based infrastructure manager with A$12.8 billion (US$9.8 billion) in
funds under management, is a subsidiary of Westpac Banking Corp. with offices in London, Singapore, New York and Seoul. Hastings owns energy assets in Australia and the U.K, and has partnerships with several Chinese firms including Fosun International and China Merchants Group. “The Chinese need someone like us,” Dooley said. “They want to invest but they have these headwinds, so there’s a real opportunity to bridge that.”
Political sensitivities
The nation’s leaders last year made it harder for companies to shift profits offshore in a bid to stabilize its currency. Cross-border acquisitions by Chinese companies plunged to US$96.3 billion in the first six months of this year, about 47 per cent down from
the US$180.6 billion of announced outbound takeovers in the same period last year, according to data compiled by Bloomberg. While Chinese companies are allowed to invest in projects linked to the Belt and Road initiative, some analysts say that many are using it as a way to get around the capital controls. There are also political sensitivities associated with Chinese investment in developed countries such as Australia. “There are degrees of unease about the extent of Chinese investment in those economies,” said Andrew Parker, Sydney-based Asia practice leader at PwC, in a phone interview. “They wonder and worry about the costs being a little more than just the interest charge that they have to pay on the loan.” China may keep capital controls in place for at least another 12 months, despite expectations they will be relaxed after a national
Communist Party congress scheduled later this year, Parker said. PwC has had deals as large as US$1.5 billion fall through because Chinese firms were uncertain of getting the money out. “They’ll be quite strategic and quite cautious in the outbound transactions that they’re allowing over the next 12-months,” Parker said in a phone interview. “It could be a longer period of time.”
‘Hairy bits’
The delay may not necessarily be a problem for Western asset managers looking to tap lucrative Chinese capital. The capital controls in the longrun are “a good thing” once regulators find a consistent way of applying the rules, Parker said. Hastings had funding from Chinese groups in its unsuccessful bids for National Grid Plc’s U.K. gas distribution assets and Australian electricity distributor Endeavour
Security staff member at Belt and Road Forum in Beijing in May. Lusa
Energy. Other potential investments by Chinese companies, including the privatization of another Australian power distributor, Ausgrid, were blocked on national interest grounds. “Australia, the U.K., the U.S., Europe all want Chinese money, they just don’t want the hairy bits,” Dooley said.
Nearer home
The U.S. is also big opportunity if President Donald Trump can give clarity to his US$1 trillion infrastructure plan and how that will involve the private sector, Hastings Chief Executive Officer Andrew Day said in an interview. Closer to home, Hastings is considering a bid for the WestConnex road project in New South Wales, Day said. A sale process for WestConnex, which is expected to cost up to A$16.8 billion to build, may be announced early in 2018. Hastings’s owner Westpac ran a process to sell the manager last year, and while any further plan to divest is a matter for the Sydney-based lender, Day said the bank thinks “there is a better longterm owner’’. “As Hastings becomes more global in its alignment, the most likely owner is unlikely to be an Australian bank,’’ Day said. “We shop internationally on purpose because you never know when the best opportunity is going to come up.” Bloomberg News
Business Daily Wednesday, July 5 2017 11
Asia Poll
Bank of Japan survey shows pickup in corporate inflation expectations Core consumer prices, which include oil products but excludes fresh food prices, rose 0.4 percent in May from a year earlier Stanley White
J
apanese companies’ inflation expectations picked up slightly in June from three months ago as labour shortages and high material costs pointed to an acceleration in consumer prices over the next few quarters. Companies surveyed by the Bank of Japan (BOJ) expect consumer prices to rise 0.8 percent a year from now, higher than their projection for a 0.7 percent increase three months ago. Companies also expect consumer prices to rise an annual 1.1 percent three years from now, up from a 1.0 percent annual increase seen in the previous BOJ survey. The data come one day after the BOJ’s tankan survey on corporate sentiment showed big manufactures are
the most confident in three years, offering some hope that prices will rise, albeit at a gradual pace. “Labour shortages will push up inflation expectations over time,” said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.
Key Points Inflation expectations key element of BOJ policy Labour shortages starting to affect price expectations Companies more optimistic, but inflation still lagging
“However, this is a slow process, so the BOJ’s monetary policy will be on hold
for the time being.” Core consumer prices, which include oil products but excludes fresh food prices, rose 0.4 percent in May from a year earlier, marking the fifth straight month of gains and accelerating from a 0.3 percent increase in April, data last week showed. However, consumer prices were unchanged in May after
stripping out the effect of energy costs, underscoring the BOJ’s struggles to push inflation to its 2 percent target. The BOJ is likely to cut its consumer price forecast for the current fiscal year at a quarter review of its projections in July, people familiar with its thinking told Reuters. However, a slight uptick in inflation expectations,
combined with increased optimism in the corporate sector, could give the BOJ reason to keep its longer-term price forecasts unchanged. The BOJ started the survey on corporate price expectations from the tankan in March 2014 to gather more information on inflation expectations, key to its current stimulus programme. Reuters
Technology
Samsung plans US$18.6 bln S.Korea investment amid chip boom The firm will also add a production line to its NAND plant in Xi’an Se Young Lee and Joyce Lee
Samsung Electronics Co Ltd said yesterday it plans to invest at least 21.4 trillion won (US$18.63 billion) in South Korea as it seeks to extend its lead in memory chips and next-generation displays for smartphones. The world’s biggest memory chip maker by revenue said the spending includes 14.4 trillion won by 2021 on its new NAND factory in Pyeongtaek. It will invest 6 trillion won in a new semiconductor production line in Hwaseong, but did not elaborate on timing or product. The firm will also add a production line to its NAND plant in Xi’an, China, in response to booming demand for long-term data storage chips. It has not set an investment amount or time frame. Samsung and other memory makers are widely expected to post record profit in 2017 as a persistent shortage and demand for more capability in smartphones and servers lift prices. Industry sources and analysts said the shortage is more acute for NAND chips due to increasing adoption of high-end storage products. Some analysts said Samsung’s production technologies are at least a year ahead of rivals such as Toshiba Corp and SK Hynix Inc. Samsung routinely invests more than US$10 billion in semiconductors annually, helping build its lead, and analysts
said the latest investment seeks to widen the gap. Samsung, Toshiba and SK Hynix have committed tens of billions of dollars to boost NAND output in recent years, yet analysts and industry sources said shortages are likely to persist at least through 2017 as new facilities will not make meaningful supply contributions until next year. Some analysts said the additional capacity could cause slight oversupply in early 2018, but that price crashes are unlikely as smartphone makers opt for greater internal storage. Demand for high-end server
storage for cloud computing and virtual reality applications will also continue to grow. “I believe NAND market conditions will continue to favour suppliers until 2020,” said HMC Investment analyst Greg Roh. Any oversupply issues will be temporary and limited to seasonally weaker periods, he said. Samsung’s investment plan comes as new South Korean President Moon Jae-in calls on local businesses to create more jobs and help reinvigorate the economy. Samsung said its South Korea investment could create up to 440,000 jobs through 2021 and will help boost the economy. In China, some South Korean firms have suffered from sales decline or
have been forced to scale down operations after retaliatory measures from Beijing over the deployment of a U.S. anti-missile defence system outside Seoul, but components makers such as Samsung have not yet been affected. Chinese smartphone makers are among the biggest buyers of memory chips and displays, many from Samsung.
Key Points To spend 14.4 trln won on NAND plant To spend 6 trln won on a further semiconductor line To also add NAND production line in China Display unit to invest 1 trln won in OLED displays The South Korean firm accounted for 40.4 per cent of global memory chip revenue in January-March, showed data from researcher TrendForce, making it difficult for electronics makers to entirely avoid buying its chips. China is trying to grow its own memory chip producers but it may take several years before Chinese companies can compete with existing makers. Samsung yesterday also said unit Samsung Display plans to invest around 1 trillion won on a new organic light-emitting diode display complex in South Korea. Reuters
12 Business Daily Wednesday, July 5 2017
Asia Prices
S. Korean inflation eases, but stays near c. bank target Core inflation, which strips out volatile food and fuel prices, was up 1.4 per cent on-year, after similar growth in May Cynthia Kim
C
onsumer inflation in South Korea eased slightly in June partly as tourism costs dropped due to a ban on Chinese tour groups by Beijing and on falling utility rates, but the overall price impulse suggested a steady improvement in consumption and broad economic growth. The consumer price index rose 1.9 per cent in June from a year earlier, data showed yesterday, down from the 2 per cent increase in May, and lagging the 2.0 per cent forecast in a Reuters poll. Asia’s fourth largest economy grew at its quickest pace in six quarters in January-March period, thanks to robust construction sector activity and exports. Moderate price pressure near the Bank of Korea’s target of 2 per cent since early this year
suggested private consumption is steadily improving. “Agricultural product prices have been volatile, but gains in service costs have been sustaining the overall price pressure,” Park Jung-woo, an economist at Korea Investment and Securities said. Yesterday’s data showed the costs for electricity, gas and tap water declined 1.6 per cent on-year. That was partly offset by inflation from fresh food products, which stood at 10.5 per cent in June, reflecting rapidly rising egg prices sparked by an outbreak of avian influenza. Service costs gained 1.9 per cent in June from a year earlier, though package tourism costs tumbled 9.1 per cent from a year earlier. “The overall service costs are holding up but group tour costs are dropping in Korea as fewer and fewer number of inbound Chinese tourists
are squeezing local travel agencies. The impact from the Thaad is still here,” an official from the Statistics Korea said. The number of inbound Chinese tourists dropped 34.7 per cent through January to May this year from the same period in 2016 after China banned group tours to South Korea, data from the Korea Tourism Organization shows. China has launched a series of boycotts against South Korean businesses
after Seoul decided to deploy of a U.S. missile defence system, or the Terminal High Altitude Area Defense (THAAD), out of fear its powerful radar could see deep into Chinese territory. “Inflation is expected hover around 2 per cent throughout this year, and won’t accelerate much further to a level that calls for a change in monetary policies,” Park said, adding that he believes the Bank of Korea to keep the base rate at a record-low 1.25 per cent for the time being. Reuters
Prices
Slowing inflation restrains India’s robust growth record In the January-March quarter, India grew at 6.1 per cent from a year ago, well below the average seen in the past five years Anirban Nag
India’s economy is struggling to recover its strong growth record, beset by record low inflation, a widening output gap, and short term uncertainty from the introduction of a uniform sales tax. That will build pressure on the Reserve Bank of India (RBI) to jettison its neutral monetary policy bias adopted just five months ago, setting the scene for lowering interest rates perhaps as early as next month, besides reminding yield-chasing investors that putting money in India is not without risks. Any reduction in interest rates will be in contrast to what major central banks are trying to signal -- a rise in borrowing costs-- and could trip the Indian rupee which hit a 20-month high in April. This would be bad news for a country that needs to attract billions of dollars in foreign investments to make up a shortfall in domestic capital. Having already ceded the crown of the fastest growing major economy to China in the January-March quarter, India is “significantly under-performing compared to its potential now for quite some time,” according to Ravindra Dholakia, a member of India’s rate-setting committee and an economist at the country’s premier management institution. An arch-dove on the six-member panel, Dholakia voted for a 50 basis points cut at last month’s meeting. Part of the reason is a self-inflicted goal in the form of a cash ban from which India is still recovering. And the combination of over-leveraged companies and banks struggling with the problem of bad loans means businesses are not borrowing to invest
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and banks are not lending much in Asia’s third-largest economy. “The big problem is revival of investment and that is being held back because of the twin-balance sheet problem,” Vijay R Joshi, Emeritus Fellow of Merton College at University of Oxford and the author of the book ‘India’s Long Road -- The Search for Prosperity’, said over the phone. He added it would take a long time for capital spending to recover as India goes about repairing the health of its banking system. Bank credit to industry contracted by 2.1 per cent in May from a year earlier, in contrast to an increase of 0.9 per cent in May 2016, the RBI said on Friday. Demand for loans from sectors like infrastructure, food processing, basic metal, metal products and textiles all contracted. In the January-March quarter, India grew at 6.1 per cent from a year ago, well below the average seen in the past five years when it expanded at 6.9 per cent. While that is still a
robust rate in the western world, it is not good enough to help it provide employment to the millions joining the workforce every year. It doesn’t bode well for Prime Minister Narendra Modi’s government which is aware the economy needs to grow at double digits to generate jobs and keep social tensions at bay.
Inflation softens
The US$2 trillion economy will expand 7.3 per cent in fiscal year 2018, according to the June survey conducted by Bloomberg News. Growth forecasts were lowered slightly for this year and next year when compared to a survey conducted in May. Amid slowing growth and a drop in food prices, economists also lowered their consumer price inflation forecasts for the 2018 and 2019 fiscal years to 4 per cent and 4.75 per cent, respectively, from 4.5 per cent and 5 per cent in May’s survey. Meanwhile, the latest purchasing managers’ index for the manufacturing sector released on Monday showed growth slowing in June to 50.9 from 51.6 in May. “India’s current growth rate is below potential,” said Kaushik Das, chief India economist at Deutsche
Bank. “Growth is mainly supported by private consumption at this juncture with private investment remaining anemic due to the high leverage of the corporate sector and weak demand. In other words, the quality of growth is not optimal at this stage.” Policy makers are, of course, optimistic this won’t last long. They predict reforms like the goods and services tax, opening various sectors to foreign direct investments and scrapping a bureaucratic board that oversaw these flows will make it easier to do business in India. “India’s potential growth is rising, not falling. That is the conclusion to be drawn from a raft of structural reforms unleashing the economy’s productive power,” said Abhishek Gupta, economist at Bloomberg Intelligence. “At the same time, actual growth is lagging due to demonetization and high real interest rates. The upshot -a widening output gap that is pulling down inflation,” Gupta said. “That point may be lost on the central bank, which shifted to neutral from accommodation this year. The Reserve Bank of India needs to cut rates to let growth catch up to the economy’s potential.”
Supply chains
The introduction of GST is likely to have a marginal impact on inflation. Some economists say price pressures may have eased further in June as businesses offered hefty discounts before the tax was implemented from July 1. In the first quarter of the fiscal year, “growth will be depressed due to GST-related inventory draw down,” Ashutosh Datar, an economist with IIFL Institutional Equities, wrote in a June 23 report. If supply chains are normalized by September, “growth is likely to see a sharp uptick due to the post-GST inventory restocking.” Bloomberg News Founder & Publisher Paulo A. Azevedo, pazevedo@macaubusinessdaily.com Editorial Council Paulo A. Azevedo; José I. Duarte; Mandy Kuok Newsdesk Mike Armstrong; Óscar Guijarro; Nelson Moura; Kelsey Wilhelm; Matthew Potger; Cecilia U; Sheyla Zandonai Group Senior Analyst José I. Duarte Design Aivi N. Remulla Photography Cheong Kam Ka, Ruka Borges, Gonçalo Lobo Pinheiro, António Mil-Homens, Carmo Correia Contributors Albano Martins; James Chu; João Francisco Pinto; José Carlos Matias; Larry So; Pedro Cortés; Ricardo Siu; Rose N. Lai; Zen Udani Assistant to the Publisher Lu Yang, lu.yang@projectasiacorp.com Office Manager Elsa Vong, elsav@macaubusinessdaily.com Agencies Bloomberg, Reuters, AFP, Xinhua, Lusa, Project Syndicate Printed in Macau by Welfare Ltd. Address Block C, Floor 9, Flat H, Edf. Ind. Nam Fong, Av. Dr. Francisco Vieira Machado, No. 679, Macau Tel. (853) 2833 1258 / 2870 5909 Fax (853) 2833 1487 E-mail newsdesk@macaubusinessdaily.com Advertising advertising@macaubusinessdaily.com Subscriptions sub@macaubusinessdaily.com Online www.macaubusinessdaily.com
Business Daily Wednesday, July 5 2017 13
Asia Monetary policy
Australia’s central bank steers steady course on rates, knocks A$ The RBA did sound optimistic about future economic growth Swati Pandey and Wayne Cole
Australia’s central bank stuck to a neutral stance on the economy and interest rates yesterday, a marked divergence from some of its peers abroad who have recently signalled an intent to tighten monetary policy. The Australian dollar sank half of a U.S. cent after the Reserve Bank of Australia (RBA) finished its July policy meeting with rates staying at a record low 1.50 per cent, where it has been since August last year. Investors had bid the currency up on speculation the central bank would turn hawkish like its counterparts in Europe and Canada. Instead, its statement was anodyne. “The Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the
economy and achieving the inflation target over time,” it repeated. Indeed, it even refrained from highlighting the recent pick up in employment, noting only that the indicators remain “mixed.” Official data showed employment blew past forecasts to jump 42,000 in May, a third straight month of upbeat outcomes that drove the jobless rate to a four-year trough of 5.5 per cent. The RBA’s reticence to play up the numbers even led the futures market to pare back the probability of a hike in interest rates. The December contract implied a 4 per cent chance of a move higher, down from 12 per cent on Monday. Su-Lin Ong, head of fixed income strategy for Australia and New Zealand at Royal Bank of Canada, said the central bank’s statement showed a “firmly neutral bias” on policy. “Following the shift in global central banking rhetoric in recent weeks, the hawks were disappointed by the RBA today and we expect that to remain the case for some time,” she said.
The RBA did sound optimistic about future economic growth, but cautioned against record high household debt in the country’s red-hot property market especially as wages growth was stuck at its slowest pace ever. The central bank fears that trend of household debt outpacing income growth was eating into spending elsewhere in the economy.
Consumers show panache
Earlier, data from the Australian Bureau of Statistics (ABS) showed the country’s retailers enjoyed another strong month of sales in May as shoppers splurged on household goods, a sign that the economy picked up speed after a disappointing first quarter. Retail sales rose 0.6 in May, beating expectations for a meagre 0.2 per cent increase. It also follows a solid 1.0 per cent jump in April, marking the best two months of sales since end-2013. The data should comfort the RBA which had feared ballooning debt in the sizzling property sector was pinching consumers’ ability to spend elsewhere in the economy. “Two firmer months together do suggest the consumer was doing more of the heavy lifting when it comes to economic growth in the second quarter,” said Michael Blythe, chief economist at Commonwealth Bank. But “the fundamentals are still poor - people are worried about losing their jobs or ever getting a wage rise. So it’s hard to say this is a definitive turning point.” Reuters
Ratings
Indonesia hopes for additional US$10 bln inflows after S&P upgrade Widodo said he would have a bilateral meeting with U.S. President Donald Trump Eveline Danubrata and John Chalmers
Indonesia is hoping for additional inflows worth US$10 billion from pension funds and other institutional investors over the next two years following Standard & Poor’s upgrade of its credit rating to investment grade, President Joko Widodo told Reuters. The government will also ease foreign ownership restrictions on certain industry sectors in August, Widodo said in an interview at the presidential palace in Jakarta on Monday. For the first time in almost 20 years, Indonesia is rated investment grade by all three major rating agencies after S&P on May 19 raised its outlook to ‘BBB-’ from ‘BB+’, matching the ratings already awarded by Fitch and Moody’s. The upgrade was “very important” because it would encourage more capital inflows and reduce borrowing costs, said Widodo, a former Jakarta governor who was elected to lead Southeast Asia’s biggest economy in 2014. “Now the pension funds look to Indonesia,” he said, adding that some of the money will go into the country’s stock and bond markets. “After that the companies here can take and invest to the real sector, to the infrastructure, to the factory.” While growth in Indonesia’s gross domestic product has slowed from a peak of more than 6 per cent several years ago to around 5 per cent due to a commodity downturn, its vast domestic market is still seen as an engine of growth. F o r e i g n c o m p a n i e s h av e
complained that vested interests are blocking them from gaining more access to the country of 250 million people, at a time when neighbours such as Vietnam are actively courting investment dollars. Widodo, who often points to his background as a former furniture exporter to show that he understands the language of business, said he is committed to keeping Indonesia’s economy open and competitive.
Warning against protectionism
Widodo’s government has introduced 15 economic stimulus packages since late 2015, including the easing of foreign ownership restrictions on dozens of business sectors such as tourism, transportation and movie theatres last year. “We will revise again the negative list of investment in August in some sectors,” Widodo said, referring to the list of sectors that are partially or fully closed to foreigners. He declined to say which sectors
would be opened up. Transport Minister Budi Karya Sumadi said last month that the government was considering easing rules on airport operation services. Foreign ownership in that sector is currently capped at 49 per cent. Trade openness will be high on Widodo’s agenda when he travels to Hamburg, Germany, to meet other world leaders at the G20 summit later this week. Widodo said he would have a bilateral meeting with U.S. President Donald Trump, whose administration had put Indonesia on a list of 16 countries to be reviewed over trade surpluses with the world’s largest economy.
Key Points S&P upgrade to lower borrowing costs - Widodo Indonesia to open more sectors to foreigners in August “Trade protectionism can result in trade war” - Widodo “On international trade, going back to trade protectionism can result in trade war, which we must avoid,” Widodo said. “Open economy is very important for us.” Reuters
In Brief Philippines
Duterte plans to lift 2018 spending Philippine President Rodrigo Duterte plans to hike state spending 12.4 per cent next year to a record 3.77 trillion pesos (US$74.6 billion), his spokesman said yesterday, in line with his aim to spend heavily on infrastructure to keep growth robust. Duterte, who has been in office one year, has vowed to usher in the “golden age of infrastructure” and spread wealth more evenly in the country of more than 100 million people. The anticipated 2018 budget compares with this year’s 3.35 trillion peso spending plan and would be equivalent to 21.6 per cent of gross domestic product, spokesman Ernesto Abella told a briefing. M&A
Toshiba seeks dismissal of injunction request Toshiba Corp has asked a U.S. court to dismiss a Western Digital Corp request for an injunction to prevent a sale of the Japanese firm’s chip business, saying the court has no jurisdiction and that an injunction would cause irreparable harm. Western Digital, which jointly runs Toshiba’s main semiconductor plant, has claimed that its partner has breached joint venture contracts as it pursues an US$18 billion sale of the unit and is seeking an injunction to prevent any deal without its consent. Toshiba is scrambling to get a deal done as fast as possible as it needs funds to cover billions in cost overruns at now-bankrupt unit Westinghouse. Insurance
Malaysia’s c. bank says no new policy on foreign ownership Malaysia’s central bank said yesterday that foreign shareholders of local insurers must honour their commitment in maintaining specified levels of domestic shareholding. Bank Negara Malaysia (BNM) said there is no new policy on foreign ownership in insurance companies, and that the requirement is part of commitments made by foreign shareholders when they applied for entry into the Malaysian insurance market. “As the regulator, Bank Negara Malaysia expects adherence to these agreements and will play a facilitative role to ensure these commitments are met,” the central bank said in a statement. Poll
NZ business confidence broadly steady New Zealand business confidence was broadly steady in the second quarter of 2017 but a smaller number of firms intended to raise prices, reinforcing the central bank’s determination to keep interest rates on hold. A net 18 per cent of firms surveyed expected general business conditions to improve compared with 17 per cent in the previous quarter, the New Zealand Institute of Economic Research’s quarterly survey of business opinion showed. While growth was expected to average a solid 3 per cent this year, firms were struggling to pass on higher costs to consumers and capacity pressures were easing.
14 Business Daily Wednesday, July 5 2017
International In Brief Ride-hailing app
New EU court blow for Uber over French taxi case Uber suffered a new setback in Europe yesterday when an EU court adviser said France was entitled to charge local managers of the U.S. ride-hailing app firm with running an illegal taxi service. Uber played down the non-binding opinion from an advocate general at the Court of Justice of the European Union, saying it applied only to a service using unlicensed drivers known as UberPOP which it had already discontinued in France. Judges will make a final ruling later this year. Petrochemical industry
Total nears deal to invest up to US$2 bln in Iran Total and Iran have reached a preliminary agreement to build three petrochemical plants in a deal that if finalised could see the French oil major investing up to US$2 billion in Iran, an Iranian oil official said yesterday. “In the latest talks, the two sides have reached agreement for construction of petrochemical plants with the total capacity of 2.2 million tonnes of petrochemical and polymer products per year,” the managing director of Iran’s National Petrochemical Company was quoted as saying yesterday by SHANA. “We predict that Total would invest US$1.5 to US$2 billion in Iran’s petrochemical industry if we reach final agreement,” Marzieh Shahdaei added.
M&A
Spain’s Gas Natural targets US$40 bln EDP merger The move could trigger a long expected wave of consolidation among Europe’s biggest utilities Andrés González
S
panish power and gas company Gas Natural has approached Portuguese rival EDP about merging to form Europe’s fourth biggest utility by market value, people familiar with the matter said this week. Talks over a potential 35 billion euro (US$40 billion) deal and its potential structure are still at an early stage and there is no certainty over their outcome, four sources said, although Gas Natural chairman Isidre Faine has already sounded out his Portuguese counterpart Antonio Mexia about a tie-up. A deal would create an Iberian champion competing with France’s Engie and EDF and not far behind heavyweights Enel and Iberdrola. And it could trigger a long expected wave of consolidation among Europe’s biggest utilities as they seek
to gain scale and shift their revenue streams towards renewables to protect profits from steep competition and narrower margins.
Key Points Combined group would create fourth European utility Shareholder Criteria wants smaller stakes in bigger groups Gas Natural-EDP merger seen as good strategic fit -sources A Gas Natural-EDP merger is seen as a good strategic fit as EDP has made big headway in renewable power while Gas Natural remains strong in gas-fired or coal generated electricity. The two have a complementary footprint, especially in Latin America where the Spanish firm is strong in Chile and Mexico and the Portuguese
Funds
Abu Dhabi fund eyes direct private equity investments The Abu Dhabi Investment Authority (ADIA), one of the biggest sovereign wealth funds in the world, is looking for direct investment opportunities in private equity and alternative investments after returns slowed in 2016, it said yesterday. ADIA last year increased its exposure to direct private equity transactions and broadened its focus in Asian private equity markets particularly China and India, it said in its annual review. ADIA’s 20-year and 30-year annualised rates of return in U.S. dollar terms were 6.1 per cent and 6.9 per cent respectively in 2016. That compared with 6.5 per cent and 7.5 per cent respectively in 2015.
EDP’s head Antonio Mexia
Mozambique’s president, Filipe Nyusi, said on Monday in Maputo that the uncertainty about the International Monetary Fund (IMF) assistance programme was a great challenge for the country and called on investors to make the most of the advantages the country could offer. The president said it was important to manage the country’s financial operations under the current scenario of no foreign aid coming into the country and that it was necessary to consider the restart of IMF aid as a great challenge. The Mozambican economy, he said, was beginning to show signs of recovery, but it continued to face obstacles.
Cross-border deals
Any attempt to consolidate Europe’s fragmented energy market has so far raised eyebrows among European competition authorities who fear it could translate into higher prices. But sector insiders say the mood for cross-border deals has changed since the French election victory of Emmanuel Macron who has been a strong advocate of creating European champions. Meanwhile, Spain’s prime minister Mariano Rajoy and his Portuguese counterpart Antonio Costa, are working on increasing connections between the energy grids of the two countries and with Europe and none of either group’s main shareholders is seen as raising objections if the price is attractive. A merger would also mark the latest effort by Spain’s Criteria, which owns direct or indirect stakes in Caixabank , Abertis, Gas Natural, Repsol or Telefonica, to restructure its portfolio. The holding company, which is also managed by Faine, wants to focus on smaller stakes in bigger companies with potentially less political influence but higher financial returns. Criteria, which is reviewing a potential tie-up between toll road operator Abertis and Italy’s Atlantia, declined to comment. But it has a track record for such deals and in 2014 exchanged 100 per cent of Agbar for 5 per cent of Suez. “Faine has done it with Agbar and is about to do it again with Atlantia and Abertis,” a source with knowledge of the deal said. “Now, he is looking towards Portugal to replicate the move with Gas Natural and EDP.” Reuters
Possible collusion
Russia probe accelerates as House Committee plans interviews Former Trump campaign adviser Roger Stone is set to testify to the panel behind closed doors on July 24
Mozambique
President says IMF uncertainty a ‘great challenge’
group in Brazil as well as in the United States. “The combination of the two companies is quite attractive as Gas Natural lacks power generation in Latam and renewables. But the key to the deal is the politics”, said a major shareholder in one of the two firms. EDP declined to comment. Gas Natural said it was not in merger talks with EDP.
Billy House
The House Intelligence Committee is accelerating its probe of possible collusion between President Donald Trump’s campaign and Russia, with plans to hold closed-door interviews with former campaign officials Michael Caputo and Paul Manafort. Caputo, a former Trump adviser, is scheduled to appear on July 14, according to his lawyer, Dennis Vacco of Buffalo, New York. Manafort, the former Trump campaign manager, previously said he’d speak with the committee and hasn’t scheduled a date yet, said his spokesman, Jason Maloni, on Monday. The planned interviews represent progress for a panel that’s been so divided by partisan mistrust that its members have struggled to agree on their probe’s mission and scope. The committee’s Senate counterpart has conducted far more interviews. Caputo has said he wants to testify
to dismiss any notion of collusion between the Trump campaign and Russian officials. Caputo worked in Russia in the 1990s and in the early 2000s for a Russian conglomerate that supported President Vladimir Putin. Manafort consulted in the past for the pro-Russian former president of Ukraine, Viktor Yanukovych. Last week, Bloomberg News reported that Ukrainian prosecutors found no proof of illicit payments to Manafort for his work for the party of the nation’s ousted leader. Anti-corruption investigators in the ex-Soviet republic said last year that they’d found ledgers showing $12.7 million in undisclosed cash payments between 2007 and 2012 earmarked for Manafort from Yanukovych’s Party of Regions. Former Trump campaign adviser Roger Stone is set to testify to the panel behind closed doors on July 24, his lawyer Grant Smith said last week.
Former President Barack Obama’s national security adviser, Susan Rice, also has agreed to testify, though no date has been set, according to a committee official who sought anonymity.
‘Committee officials have said they’re also seeking interviews with Jared Kushner, Trump’s sonin-law and top White House aide’ Committee officials have said they’re also seeking interviews with Jared Kushner, Trump’s sonin-law and top White House aide. They committee has subpoenaed Michael Flynn, Trump’s fired national security adviser, and Trump lawyer Michael Cohen. Bloomberg News
Business Daily Wednesday, July 5 2017 15
Opinion
Hedge funds walk into bear trap in oil John Kemp a Reuters columnist
H
edge fund managers had amassed a record number of short positions in petroleum futures and options by the start of last week, which primed the oil market for a sharp shortcovering rally at the end of the month. Hedge funds and other money managers held short positions in the five major contracts on crude, gasoline and heating oil amounting to 510 million barrels on June 27, according to regulatory and exchange data. Fund managers have added 200 million barrels of extra short positions since the end of May and 377 million barrels since crude prices peaked in the middle of February. Hedge funds were even more pessimistic than in January 2016, with more short positions than when oil prices were touching their cyclical lows below US$30 per barrel. Overall, fund managers were running net short positions of 20 million barrels in gasoline and 32 million barrels in heating oil on June 27. Funds still had a net long position of 357 million barrels in crude but it had been cut from 589 million barrels on May 30 and a record 951 million barrels on Feb. 21. Growing doubts about the effectiveness of OPEC’s production cuts, coupled with increases in crude output from Libya, Nigeria, Canada and the United States have prompted a wave of short-selling. And concerns about the health of gasoline demand and high level inventories in the United States have added to the bearishness within th e h e dg e f u n d community. Fund managers have ramped up short positions in NYMEX WTI by 86 million barrels over the last four weeks, in the most aggressive short-selling cycle since the start of 2015. But the sheer number of short sales left the market looking imbalanced and vulnerable to a short-covering rally (“Hedge funds hold near-record short positions in petroleum”, Reuters, June 27). Crude prices have now risen for seven consecutive trading sessions as the pace of short sales slows and some hedge fund managers have been emboldened to start adding long positions in anticipation of a rally. Hedge funds quietly added 3 million barrels of extra long positions in gasoline, 0.7 million in heating oil and 9 million in WTI in the week to June 27 (though this was offset by a continued reduction of 20 million in Brent). Fund managers are likely to have closed out at least some of their short positions as prices have risen consistently over the last week. The U.S. oil rig count fell slightly last week for the first time since early January which accelerated the short covering and provided a boost to oil prices at the end of the week. The critical question for the market is how many of those short positions have been closed out and how many more are still open. If many of the extra short positions have been closed, prices are likely to stabilise around current levels, but if most remain open, upward pressure is likely to continue. Reuters
‘Growing doubts about the effectiveness of OPEC’s production cuts, coupled with increases in crude output from Libya, Nigeria, Canada and the United States have prompted a wave of shortselling’
Chinese companies can stand more sunlight
F
or all their national pride and natural boosterism, Chinese officials don’t seem to think much of their own companies. Regulators have sought to limit everything from high-speed trading to short-selling, arguing Chinese firms can’t yet handle the vagaries of modern financial markets. They’re particularly leery of greater transparency, for fear of what might be exposed. Only last week, the China Banking Regulatory Commission was accused of secretly tipping off key banks to dump bonds of companies that were under investigation. Whether such efforts are meant to protect important companies, stabilize markets or avoid national embarrassment, they’re preventing China’s markets from growing up. And it’s increasingly clear that they’re unnecessary. Anyone who questions whether Chinese companies can deal with pressure to disclose information faster and more accurately should read a new paper from Aaron Yoon, a doctoral student at Harvard Business School. Yoon looked at how firms in Shanghai responded to demands from sophisticated foreign investors for greater transparency. Many did so quite well -- and they’ve been rewarded for it. As Yoon notes, the Shanghai Stock Connect, launched in 2014 to allow international investors to trade in mainland stocks, inadvertently created an excellent natural experiment. With 568 stocks available to trade and 382 ineligible firms, the system allowed Yoon to study how companies seeking international investment performed compared to those focused solely on domestic punters. The divergence was striking. Companies available for trading tripled “the frequency of corporate access events” and almost doubled English-language conference calls for investors. In other words, they actively increased the flow of information in hopes of courting foreign investors and securing a lower cost of capital. Greater disclosures led to tangible gains. Companies that shared information more openly after the Shanghai trading link opened saw higher levels of foreign ownership (though still small by total stock float). When Chinese stocks peaked in June 2015 and started falling, those firms that actively communicated with investors “exhibit[ed] significantly higher foreign institutional ownership and lower return volatility.” In other words, by attracting more stable institutional holders rather than fickle Chinese investors, they were able to lower their stock price risk.
“
Christopher Balding a Bloomberg View columnist
By contrast, look at the top 10 listed banks in China: They have a weighted price-to-earnings ratio of 6.8. That’s up from the past year or two, when major banks traded under 5, but it’s still effectively expecting a complete loss of equity. The market is obviously casting doubt upon the reliability of Chinese bank financial statements. Strenuous efforts by Chinese regulators to ensure market stability are having the opposite effect. Infantilizing Chinese firms -- which is effectively what they’re doing -- prevents the professionalization of management and improvements in corporate governance. By limiting information, officials only encourage investors to see red flags everywhere. The CBRC recently ordered a review of loans made to major companies, given the uncertainty around the total amount of outstanding debt owed by several firms. The order sent a range of stocks linked to major conglomerates plunging. Chinese stock regulators have on more than one occasion had to release statements or take other actions to dispel rumours that have significantly moved markets. Information quality should hardly be so poor that markets can be jolted repeatedly by whispers. What officials seemingly fail to appreciate is that sunlight is the greatest disinfectant. If China truly wants to stabilize its markets, officials need to enforce new regulations to promote the timely, accurate and regular disclosure of information by companies to investors. Major institutions and retail investors will make better decisions, while firms that currently fudge their numbers will be encouraged to improve their corporate behaviour. Conversely, if they want to build a credible global financial market, regulators must also punish unauthorized or illegal information leaks. There is a small mountain of research suggesting that insider trading is widespread in Chinese markets. This gives rumours greater credence and makes the job of regulators that much harder. Information is vital to global capital markets and China is no different. Its regulators should join forces with those markets rather than fighting them, and demand greater responsibility and greater transparency from China’s own companies. The best among them will be able to meet the challenge. Bloomberg View
Strenuous efforts by Chinese regulators to ensure market stability are having the opposite effect
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16 Business Daily Wednesday, July 5 2017
Closing G20
China, Germany step up as U.S. retires from world leadership Xi will make his second state visit to Germany just before the G20 summit Marc Champion, Peter Martin and Brian Parkin
T
he U.S. traditionally takes point in the search for common approaches to the big global issues of the day at G-20 summits. Not this
time. When world leaders meet in Hamburg on Friday, China and Germany will move in to usurp the U.S.’s role. The two industrial powerhouses of Asia and Europe are being nudged into an informal alliance to pick up the leadership baton that the U.S. is accused of having dropped since President Donald Trump’s inauguration earlier this year, according to diplomats and officials from several Group of 20 members. The situation has crystallized ahead of this year’s annual G-20 meeting, which will be held in Germany’s busiest commercial port. That’s in part because, for the first time since the group’s founding, the U.S. will be represented by a president who embraces protectionism, abandoning decades of American cheer-leading for free trade. “The strategic character of Chinese-German relations is steadily gaining in importance,” Chinese President Xi Jinping said in an op-ed article published Tuesday in German newspaper Die Welt. The two countries “should intensify cooperation on implementing China’s ‘One Belt, One Road’ and jointly make contributions to the security, stability and prosperity of neighbouring countries.” The U.S. was also isolated on climate change at a May summit of the smaller Group of Seven club in Italy, where the final communiqué split six-to-one on the issue. This time, Trump risks finding himself alone against a united front of European allies, neighbours such as Canada and Mexico, and America’s former Cold War foes on the two biggest summit items. As the previous and current hosts, Xi and Germany’s Chancellor Angela Merkel would in any case have worked together on the G-20 agenda. Yet three visits to Germany by Chinese Premier Li Keqiang to date, the latest just last month, suggest the two nations are aligned on stepping
more broadly into a space that the U.S. has, at least temporarily, left vacant under Trump’s presidency. “China and Germany’s new closeness is something that happened because of the Trump episode,” said Diego Ramiro Guelar, ambassador to Beijing for G-20 member Argentina. “The two most important leaders in the world are President Xi and Chancellor Merkel at the moment.”
Panda diplomacy
Ties between China and Germany have been strengthening for years, driven by common economic interests and unobstructed by the kinds of geopolitical rivalries that were complicating relations between Beijing and Washington long before Trump’s election. Germany needs markets for its high-end industrial machinery and motor vehicles, and China wants them -- so much so it bought German robotics company Kuka AG. Xi will make his second state visit to Germany just before the summit. Two giant pandas that China will loan to the Berlin Zoo arrived already, a gesture sometimes described as panda diplomacy. China gave two pandas to the U.S. in 1972, after President Richard Nixon made his historic first visit to Communist China. “Relations between China and
Germany are at their historic best,” said Michael Clauss, Germany’s ambassador to Beijing, in a recent briefing with reporters. “The economic and political dynamic from a German perspective is moving toward the east.” The U.S. has “left somewhat of a vacuum” in the region by abandoning the proposed 12-nation Trans-Pacific Partnership free-trade agreement, Clauss said. The deal sought to build a U.S.-centered free-trade bloc among Pacific Rim countries from Chile to Vietnam, as an alternative to more China-dominated initiatives such as One Belt One Road. Trump withdrew the U.S. from the TPP plans within a day of taking office.
Trump vacuum
The Trump vacuum is still more evident when it comes to climate change, after he announced last month that he was pulling the U.S. out of the 2015 Paris Agreement to slow global warming. The accord was signed by more than 190 countries, including all of the G-20 members. The U.S. and China, the two biggest polluters, had formed a de facto G-2 for climate change, during the administration of former President Barack Obama. Other partners were brought in only once the big two had settled on the framework they wanted for reducing harmful emissions; neither wanted the quota-based approach favoured by the European Union. That format for climate change
negotiations disappeared with Trump’s election. A new vanguard group comprising Canada, China and the EU met for the first time in May. A bilateral China-Germany working group on climate change met in Berlin last week, when each side jointly re-committed to take “an ambitious” approach to implementing Paris agreement goals, and to press that collective approach in Hamburg. “There’s a clear recognition of our leaders that German-Chinese leadership is now needed,” said Karsten Sach, Merkel’s main climate-change sherpa for the G-20, speaking at a conference in Berlin on Friday. “Both nations are very strong exporters and in terms of the technology aspects of fighting climate change I see very strong cooperation.” There are still significant limits to how far a Germany-China tandem can go, reflecting frustrations at what Merkel -- like Trump -- sees as lopsided terms of trade. Germany sold more than US$85 billion worth of goods to China last year and was Europe’s largest investor in the Middle Kingdom. But it thinks those figures could be much higher, if the Chinese didn’t impose barriers that don’t exist in Europe. In 2016, Chinese direct investment across the EU rose by 77 per cent over the previous year, building on years of annual 30 per cent increases, according to a study by the Rhodium Group and the Mercator Institute for China Studies. Kuka and resource recovery firm EEW Energy from Waste GmbH were among the prime targets. Yet European investment in China fell for the fourth year in succession, with hurdles in industries such as insurance, onerous joint venture requirements and concerns over a new cybersecurity law, which some foreign investors fear could be used to disadvantage them. China meanwhile prefers to lean on Germany rather than the EU due to wider disputes with the bloc which continues to oppose the granting of market economy status to China at the World Trade Organization. Some foreign policy baggage China carries could also hinder its ability to create international consensus around its goals, such as its unacknowledged role as protector for North Korea. On Tuesday, Pyongyang successfully tested an intercontinental ballistic missile for the first time, landing in Japanese waters. Bloomberg News
Transportation
Currency
GST
Vietnam’s capital to ban motorbikes by 2030
PBOC will maintain prudent and neutral monetary policy
Indian cinemas shut in tax protest
Officials in Vietnam’s traffic-choked capital Hanoi vowed yesterday to banish motorbikes by 2030 to ease environment and congestions woes, a decision that swiftly divided a city where two-wheelers are the main means of transportation. Hanoi is famed for legions of motorbikes -- sometimes stacked with entire families or overloaded with deliveries -- that clog roads in a fast-growing city with limited public transportation. There are five million motorbikes among a population of about seven million, compared to half a million cars on the road. Yet critics have blamed the emissions-heavy motorbikes for Hanoi’s deteriorating air quality and worsening traffic congestion. The decision to ban motorbikes by 2030 was approved by 95 out of 96 city councillors at a meeting yesterday. Officials said the number of vehicles was growing at an “alarming” rate, according to a report on the city government’s website. “Traffic jams and air pollution will become serious in the future if no immediate management measures are in place,” the report said. It added that authorities would increase public transport options to wean people off their scooters. Opinions of the decision were sharply divided on social media. AFP
China’s central bank said yesterday that it would continue to implement a prudent and neutral monetary policy, and keep liquidity in the country’s financial system basically stable. The People’s Bank of China switched to a modest tightening stance at the start of this year to help cool explosive growth in debt, but it injected substantial liquidity last month to avoid a quarter-end cash crunch, market participants said. The PBOC will use various policy tools to maintain stable liquidity and will guide reasonable growth in money supply, credit and social financing, it said in a statement summarising the second-quarter monetary policy committee meeting. The central bank also said the country’s economic and financial operations were basically stable, but it would closely monitor changes in international capital flows. The global economy is recovering gradually but some emerging economies still face challenges and there are “risks and hidden dangers” in international financial markets, it said. The central bank injected a net RMB99.5 billion (US$14.65 billion) into the financial system via short- and medium-term liquidity tools in June, up 95 per cent from the previous month. Reuters
More than 1,000 cinemas in the Indian state of Tamil Nadu have closed in protest at a hike in taxes after the government introduced a nationwide levy. Movie theatres in the southern state darkened their screens from Monday, saying a state tax of 30 per cent on tickets on top of the new national tax of 28 per cent will deter cinema-goers and encourage piracy. The government introduced a new goods and service tax (GST) on Saturday in India’s biggest-ever fiscal reform. It intends to replace more than a dozen national and state levies with a single unified tax code. But as part of negotiations to get states to accept the GST, the government agreed some could impose additional local levies. Tamil Nadu has targeted cinema tickets. “The tax rate on tickets is 58 per cent, the highest in the country,” Tamil Nadu Theatre Owners and Distributors Association President Abhirami Ramanathan told AFP. “It is a burden on movie-goers and defeats the objective of the new tax regime,” he said. AFP