Business Daily #1342 July 19, 2017

Asia sovereign investors in hunt for private deals Markets Page 13

Wednesday, July 19 2017 Year VI Nr. 1342 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Kelsey Wilhelm Labour

DSAL supports Youth Career Expo – providing 4,700 employment placement opportunities Page 2

Cyber

Closer cooperation between Judiciary Police and INTERPOL to help combat cybercrime Page 6

www.macaubusinessdaily.com

Transportation

Cybersecurity

Passengers perceive low overall quality of bus service, only liking the price: study Page 2

Global governments take propaganda to social media Page 16

Challenges ahead Real estate

Tough times ahead for property transactions, says property agency Centaline. A bleak market outlook for the coming months, with few to no new projects in the pipeline. Q3 transactions expected to reach only 700 or 800 versus 500 to 600 in July alone.

Mortgage loan ratio adjustments and revisions to rental bill to blame. Page 3

From drummer to teacher, to business owner. Such is the path of Fu Chan, co-founder of Aces Music Centre – a local business providing music lessons, instrument sales, recording and workshops. Starting up with his own money, and seeing a gap in the market, the business grew from 20 students to nearly 300, by partnering with teachers – who number around 20, with proceeds split 50/50.

Interview | Local business Pages 4 & 5

HK Hang Seng Index July 18, 2017

The weight of the mass

Gaming Gross gaming revenue could reach US$46 bln by 2022, say analysts at Union Gaming in a special report. Implied in the increase is a flip-flop of VIP and mass percentages, with VIP dropping to 43 pct from the current 60 pct. Revenue growth for this year set at 14 pct y-o-y, while hotel room supply set to grow 6 pct y-o-y. Page 7

Tight measures relaxed for developers in China Financing Since late last year, regulators have made it harder for developers to sell onshore corporate bonds in a bid to help cool an overheating property market. Analysts say that if liquidity continues to be tight, some bond defaults could happen next year. Page 9

26,524.94 +54.36 (+0.21%) Worst Performers

AAC Technologies Holdings

+6.83%

AIA Group Ltd

+0.86%

Geely Automobile Holdings

-2.89%

Want Want China Holdings

-0.75%

China Mengniu Dairy Co Ltd

+1.71%

Hengan International Group

+0.85%

China Merchants Port Hold-

-1.06%

Cathay Pacific Airways Ltd

-0.64%

China Shenhua Energy Co

+1.01%

Swire Pacific Ltd

+0.85%

China Resources Land Ltd

-1.02%

Bank of Communications

-0.52%

Wharf Holdings Ltd/The

+0.99%

Link REIT

+0.74%

Bank of China Ltd

-0.79%

China Resources Power

-0.52%

Galaxy Entertainment Group

+0.99%

Tencent Holdings Ltd

+0.63%

China Life Insurance Co Ltd

-0.78%

Bank of East Asia Ltd/The

-0.44%

27° 30° 26° 30° 27° 31° 26° 32° 26° 30° Today

Source: Bloomberg

Best Performers

THU

FRI

I SSN 2226-8294

SAT

SUN

Source: AccuWeather

Drum solo

2 Business Daily Wednesday, July 19 2017

Macau Labour market

Finding employment DSAL is investing MOP700,000 to organize the 12th edition of the Youth Career Expo, opening up opportunities for Macau residents, mostly Sheyla Zandonai sheyla.zandonai@macaubusiness.com

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asinos and hotels are still the main sectors of economic activity attracting young Macau residents in the local labour market, according to Lao Cho Chon, deputy executive-director of the Macao New Chinese Youth Association.

Speaking on the sidelines of a press conference organized yesterday by the Labour Affairs Bureau (DSAL) to introduce the Youth Career Expo 2017, Lao explained one of the main reasons young residents “seek more work opportunities within the casino and hospitality sector has to do with their pay offer,” as well as the diversity of sectors – from accounting to food and beverage.

According to DSAL’s Employment Department head, Margaret Mang Sui Yee, the job air aims to improve access

to information on working opportunities for young residents in a context marked by “increasing competition.”

This competition comes despite the fact that a “resort to imported or non-resident labour force will usually only follow if demand cannot be supplied locally,” explained Tam Si Loi, Director of Career Life Planning of the Macao New Chinese Youth Association.

Considering these conditions, a recent initiative by the Talents Development Committee, encouraging local ‘talents’ to return to the MSAR to live and work, would allow for more local ID holders returning to the MSAR to take on these positions, however there “is still no collaboration with the Talents Development Committee,” notes the deputy executive-director of the Macao New Chinese Youth Association. Still, the two work along similar lines and

do not discard the possibility of considering “co-operation venues maybe in the future,” he opines.

The expo is costing the DSAL some MOP700,000, according to information provided on the sidelines of the press conference, and exhibitors, “mainly companies invited by the bureau,” do not have to pay.

“We invite the companies that we think can assist the young graduates and young residents who are seeking job opportunities,” Lao noted.

The event will be held at

Fisherman’s Wharf from July 22 to 23.

Expo numbers and opportunities

Nearly 70 local companies and institutions will be present at the expo, providing a total of some 4,700 employment placements, covering roughly 30 different types of work.

The offer includes working opportunities in the fields of hotels, gaming, technology, retail, aviation, real estate and communications, among others.

In addition, information on professional training and capacitation, career planning, and assessment of professional capabilities will be available.

DSAL has also invited specialists from different sectors to give seminars at the event.

The number of visitors to the expo slightly increased in last year’s edition, to 4,240 from the 4,104 visitors registered in 2015, according to information provided by Wong Sin Leng, Vice-deputy of the General Association Chinese Students of Macau.

Public transportation

Unhappy passengers Half a million people use Macau’s public buses every day, but apparently they do not enjoy the experience.

Only the price is good, says a study published this year João Paulo Meneses

Users are dissatisfied with the services provided by the three public bus concessionaires in Macau, concludes research conducted as part of a master’s degree program in the MSAR. The results leave no room for doubt: “the overall quality of the public bus service is perceived as low.

In general, all dimensions analysed by the author are rated below average,” the research reveals.

Even if the conclusions simply offer a more scientific version of what seems to be a common sense notion, the research made by Adriano Filipe Gaspar, and presented at the Polytechnic Institute of Macau last May, provides results that should not be

ignored: more than 510,000 people use public buses every day (in the year 2015 a total of 197,229,121 passengers were transported on buses). This is in line with the Transport Bureau focusing its strategy on the “primacy of public transport” and on indirect efforts to reduce the use of individual private transport by the creation of an exclusive bus lane.

According to the Policy Address for the financial year 2016, highlights the researcher, traffic is one of the concerns of Macau residents that affects various elements of transportation including the efficiency of travel, road safety and the environment.

The Address also points out that the government wants to begin studies on future bus

services and to expand and implement exclusive public transport routes at certain times of the day.

But if the quality of service perceived by users is low, it will be more difficult to persuade other users to opt for the services of the three concessionaire companies.

And this is precisely what is demonstrated by the study Perceived Quality by Public Bus Users of Macau (Qualidade Percebida pelos Utentes de Autocarros Públicos de Macau, in the original Portuguese version) available online.

The analysis concludes that: “the perception of the overall quality of public bus services is negative, highlighting the ‘Responsiveness’ dimension, since it is the dimension that presents the lowest perceived quality level of the service.”

Adriano Filipe Gaspar interviewed 387 users of public transport and analysed various criteria, from timetables to the image of buses, the training of drivers to the need of people to use them, and “in general, all dimensions have values lower than three on a seven-point scale.”

In fact, of the dozens of questions asked of the respondents, only one obtained a value of above four points: “Is the price of the fare adequate for bus services?” which resulted in an average of 4.02 points out of a total seven possible points.

Some examples:

The question “How do you rate the overall quality of services provided by public bus service providers in Macau?” received an average score of 3.04 on the seven-point scale.

“We can conclude that the users are dissatisfied with the service provided by the three concessionaires of public buses.”

The image of public buses also generated low values, with an average of 2.66 points.

When the author asked: “What suggestions do you consider relevant to propose for the improvement of the public buses services?” the category of “More training for drivers” was the most frequent response.

“This study intends to understand the quality of public bus services in Macau, thus contributing to a better understanding of this issue. The study could later be used as an aid in the definition of strategies by public transport companies and the MSAR Government,” suggests the author.

Property

SSD increased m-o-m in June The total amount paid for the Special Stamp Duty (SSD) in the month of June was MOP2.77 million (US$344,774), skyrocketing from the MOP227,251 collected in May, the city’s latest Financial Services Bureau (DSF)’s data shows.

The amount covered SSD collected from residential, commercial, office and car parking units.

Of the total amount collected, MOP2.67 million was tax received from four residential properties and MOP99,910 was from one parking lot unit.

Meanwhile, for the additional 10 per cent stamp duty imposed on residential properties purchased by non-residents and companies, the DSF data shows that a total of MOP35.02 million

was collected in the month of June, relating to 34 residential units.

Th e a m o u n t i n J u n e demonstrated a drop of 38.4 per cent when compared to the MOP56.84 million recorded in May, in which 48 units were sold.

I n t o ta l , t ra n sacti o n s involving 1,129 units required paying the extra 10 per cent additional stamp duty since the regulation was imposed in 2012, amounting to some MOP764.66 million. C.U.

Business Daily Wednesday, July 19 2017 3

Macau Property

Centaline: challenge ahead The real estate agency predicted that transactions would stay at 700 to 800 due to the ongoing regulations as well as the revised rental bill.

Cecilia U cecilia.u@macaubusinessdaily.com

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e estimate that th e r e will be around 500 to 600 [residential property] transactions in July and the outlook for August would be similar,” remarked the senior director of property agency Centaline, Jacky Shek, during a first half year review of the market yesterday.

Shek said that the market would stay bleak in the coming months if no new big scale property projects were to roll out sales, noting that no new projects are in the pipeline.

In terms of sales for the whole third quarter, the real estate agency estimates transactions to only reach 700 to 800, with the price remaining stable throughout the period.

Shek explained that the somber outlook is due to the new mortgage ratio adjustment rolled out in May, with buyers now reluctant to purchase new property.

The news about the revised rental bill, still under debate, is also slowing down investors from purchasing properties for renting out, she noted.

The senior director also indicated that the upcoming implementation of these two policies by the government were the major factors that drove the transactions in May to increase, adding that the new property project in Taipa - Nova Grand - had attracted buyers and also boosted the sales volume for the month.

When asked whether the completion of several largescale projects in Cotai would assist demand for the city’s rental market, Shek said that most non-resident workers would rather choose to live at Zhuhai and only management-level workers choose to live in the city, therefore the impact would be small.

Restricted Hengqin

Meanwhile, the neighbouring Chinese city Hengqin is limiting property purchases to only Zhuhai residents.

The most recent, and the only available, project with units for sale in Hengqin was

only available for local Zhuhai residents, with some 400 units sold, reversing the norm of buyers from Macau being the major clients.

According to Centaline data, a total of 502 units were sold in the previous quarter, up around 30 per cent year-on-year.

For the first half of the year, the real estate agency revealed that the transactions in Hengqin had dropped significantly, given that fewer new projects were introduced during the period. However, with new properties to be introduced in the second half of the year, the market performance in Hengqin would improve, the group revealed.

Offices in the lead

“We are more optimistic over commercial and industrial units in the second half of the year, in particular we see that

offices have the most heated performance, with the price of offices in the Nam Van district increasing the most,” reported the director of Centaline, Roy Ho. The reason being, explained Ho, is the previous price was low and the price in Hong Kong increased at a fast rate, “so the price in Macau is comparatively cheaper,” he stated.

When asked about whether many public departments moving out of private offices would cause any impact on the market segment, Ho said that the moving of public offices “would not have an instant impact, they tend to affect [the market] gradually.”

Overall, the agent believed that pressure on the office market would not be significant, given that more companies are being set up in Macau.

Regarding the prices for

offices in the coming months, Centaline perceived that the market would increase the sales price by 25 per cent, believing it could reach over MOP10,000 per metre square in the next one to two years’ time.

Reflecting on the first half of the year, with the introduction of the new ‘Carat’ property, located in NAPE, more stores were sold, with Ho revealing that investors are now tending to invest in commercial and touristic zones.

Meanwhile, more industrial units were transacted, but the rental market for industrial units had decreased, given the recent cases of license issues for businesses located inside industrial buildings.

“Fewer young entrepreneurs are renting industrial units because of the license restrictions, [so] they need to seek out [rental spaces in] malls instead,” said Ho. advertisement

4 Business Daily Wednesday, July 19 2017

Macau

Q&A

Keeping the beat After playing for eight years in local indie metal band Blademark, teaching music and studying business at the Macau Polytechnic Institute, Fu Chan decided to combine the two passions and founded the Aces Music Centre in 2013.

Now with two centres in Macau providing lessons, instrument sales and repairs, recording services and workshops, the Aces business has evolved into a full music business endeavour.

Fu tells Business Daily how to keep a music business alive in a city where quality teachers are scarce and how to make a living out of music.

Nelson Moura nelson.moura@macaubusinessdaily.com

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hat is your role in Aces Music Centre?

I’m one of three owners here, part of the management partnership.

One is a local and the other one is from Hong Kong. Initially I was also a teacher, now I do administration and anything else.

How did Aces come about?

Aces started in 2013. Around 12 years ago I went to Los Angeles to study drumming at the now-named Los Angeles College of Music. It was a very intense one-year programme.

When I came back to Macau I graduated in Business and Management at the Macau Polytechnic Institute (IPM). After graduating I applied for classical training, but I quit after one semester, I just didn’t have any time to do it.

Aces actually was my homework, the business plan for the school was made at IPM, with a model inspired in the school I studied at in LA. Did you use your own money or did you attract investors for the school?

I personally used my own money.

The initial capital we started with was around MOP1 million (US$124,000).

In the beginning all the school’s music equipment was my own equipment.

The area where we opened the centre, in Avenida da Praia Grande, was empty for almost 10 years, completely abandoned. It was costly to change it.

At the time the rent wasn’t that high, it was around MOP20,000 and the contract stated a steady

rate of increase. Now it’s too high.

We opened the one at Rua de Santo Antonio in 2015.

What did you do before starting the business?

After I graduated from the course in the U.S. in 2006 I came back and started doing some freelance jobs, teaching, performing. During my study time in IPM I worked as a

full-time musician, with my initial money coming from that period. I was in the local band Blademark for around eight years. I also worked as a Radio DJ, in TV music programmes as a band-leader in backup bands.

During my teaching I realised that people in Macau couldn’t practice music, making the teaching process very slow, especially for drumming.

The school in the U.S. had many small

rehearsal rooms. That was the concept I wanted for the school.

I used to teach at a shopping mall in Rua do Campo but it just had one room, and if my students wanted to practice they would have to do it in the same place.

Now we provide rental services and people come here often to rehearse by themselves or with bands. If the areas are free and you’re an Aces student you can practice for free.

We have four drum rehearsal rooms, four for piano and three for guitars in the centre at Avenida da Praia Grande while the centre in Rua de Santo Antonio has three drum rooms, four piano rooms, and one guitar room.

Do you consider that currently it’s easier to find rehearsal or recording spaces in Macau than before?

I think it is. During my teenager time there was just one place to rehearse: at the YMCA, which only cost MOP10 to MOP20 an hour. There was also one at the industrial area.

Now it’s easy but quite expensive, around MOP4,000 for one month for one large room in the industrial building, which is not very flexible

Business Daily Wednesday, July 19 2017 5

Macau teachers, but we don’t see them as employees, we create a partnership with them.

We see them as our internal customers. In traditional companies the customers are outside, the students, with the teachers being the employees, which can leave room for mistreatment. That’s not our aim.

They receive their monthly salary but we have a duty to provide them some support. We provide them with good quality instruments and our salary is 50-50. For each MOP10 we receive MOP5 goes to the teacher and the other MOP5 we use for the service, instrument maintenance and support.

It’s quite hard to find good teachers in Macau but luckily we have them.

We charge around MOP300 for lesson, which is low compared to Hong Kong.

Has the government’s Continuing Education Development Plan which assists local citizens aged 15 or above to participate in local or overseas educational programmes by disbursing MOP6,000 per person - helped your business?

It did help our sales a lot.

since some people just want to rehearse for less than five hours a week.

How many students, employees and teachers do you have right now?

In the beginning I brought all my previous students, around 20. I think now the number should be around 200 to 300. We have three employees for administration and over 20

Which do you prefer more, music or business?

Actually I think the music business is not about music because you deal with customers, management. Of course you must have the musical knowledge to see what teachers have good ability before hiring them.

Sometimes they have a music certificate but their skill is so-so or they’re not good at teaching.

How has the business evolved?

In the beginning business was very bad but it improved a lot. I think we reached profit two years ago. No firm is perfect and there’s always something to improve but people ask if

we’re going to open another centre, maybe in Taipa, and I don’t think so in the near future, maybe five years. I think Macau human resources power is too weak. It’s possible to open a new centre but we can’t make sure the quality of the teaching won’t go down.

What is one of the best takeaways from starting this business?

It’s very different from studying it in school! The practical environment forces you to solve all your problems by yourself, you need to learn stepby-step. Everyone always thinks ‘I’m ready’, but you need to make yourself ready in the moment. School doesn’t teach you how to apply for what licences or permits in Macau, to which department of the government you need to go.

How do you see the Macau industry at the moment?

It’s an interesting question, I could do a 10,000 page paper on the subject as I’ve been thinking of this topic for more than 10 years. I think it has become easier to make a living as a musician. Some 10 years ago I still had chances to play on TV and some playing gigs but I think chances are created by people. If you want to make a living you can maybe perform, teach or produce, I try to do a bit of all now. Teaching is the most stable way to make money, the musician is just a slash [teacher/ musician].

What are the differences in the music scene between Macau and Hong Kong?

Very different. Having performances starts from the artists, if you have the artists then you have the songs and the recordings. In Macau, musicians don’t tour in mainland China or Asia, so it’s hard to get that experience.

Some locals go to Hong Kong to get

a chance and they manage to do a good job, getting chances to play with artists and perform. Hong Kong is the closest way to make a living.

Currently there’s the Hush festival, which is a good opportunity to play, but maybe there should be more music events in-between to create more chances to play.

It’s like football, if you don’t build stadiums how do you expect to have players coming from the city to go play in Barcelona?

If Macau had a jazz club or a regular performing place it would be nice.

LMA is okay but it’s hard to play there, you have to pay the rent if you want to play a show there.

We had a jazz club before and it was the only way to listen to jazz because records were hard to find.

However one point Macau is better than Hong Kong: the government is more flexible in letting you play in the industrial buildings’ rehearsal rooms.

Does the Noise Law affect your business?

When playing the music we can only surpass 5dbs more than the noise level when we aren’t playing, after that residents can call the police.

That’s why we have our centres in basements.

A lot of bars with live music in Macau don’t hire locals, why do you think that is?

Because local musicians are expensive and the pay is too low. I think in general the pay will be less than MOP1,000 for four hours of playing, maybe even with rehearsal. Locals can get more money teaching.

Do you currently play in a band?

Yes, at the Hong Kong Takh-oo’ Gospel Ensemble - a funk/RnB group. Sometimes we perform in Macau but mainly Hong Kong. advertisement

6 Business Daily Wednesday, July 19 2017

Macau Police

MSAR works with INTERPOL on cybercrime In the Global Cybersecurity Index (GCI) for 2017 China holds the ranking of 32nd worldwide Kelsey Wilhelm kelsey.wilhelm@macaubusinessdaily.com

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he connection between local security forces and international law enforcement group INTERPOL is strong and regularly reinforced, according to a Judiciary Police response to Business Daily’s enquiries.

The most recent regional largescale meeting by the world’s largest international police organization took place in Singapore during the first week of July, and was attended by five representatives of the local Judiciary Police (PJ). This year’s focus for the four-day event was ‘Cybercrime, the future of policing in global cities, and identity management’ and one of the goals of the international authority for this year’s edition was to increase ‘access to the broadest range of data in order to provide member

countries with accurate, critical analysis of current and evolving threats,’ it points out in a press release about the event. MSAR authorities joined the 34 countries and 220 companies that took part in the event.

Since the beginning of the year, the PJ response points out, local authorities ‘have participated in 10 Southeast Asia security congresses and 6 further abroad security congresses, including fields of cybercrime, counter terrorism and organised crime, etc’.

In addition, prior to the July visit to Singapore, local authorities participated in the ‘Project PACIFIC Working Group Meeting on the Nexus between Organized Crime and Terrorism in Southeast Asia,’ held in Thailand in June.

“In the future, the threats from the illicit use of technology and cyberspace will continue to grow. We will face new challenges beyond our imagination in terms of scale, speed

Working safety

Follow Singapore

In the Global Cybersecurity Index (GCI) for 2017, created by the International Telecommunications Union (ITU), China holds the ranking of 32nd worldwide, and is classified as a ‘maturing’ country, together with 76 other countries including the Philippines, Bahrain, Luxembourg and Malta. Leading markets, amounting to 21, include the United States, Japan, and the UK. In total

96 countries are classified as at the ‘initiating stage’, according to the report, these include Afghanistan, Guatemala and Liechtenstein.

Statistics quoted in the report noted that last year ‘one-in-131 emails sent were malicious, the highest rate in five years’ and that ‘attackers are demanding more and more from victims with the average ransom demand in 2016 rising to US$1,077 (MOP8,650), up from US$294 a year earlier’.

Leading this year’s index is Singapore, followed by the United States and Malaysia, while the Asia Pacific region’s top-ranked was Singapore, Malaysia and Australia.

The index concludes that ‘while increased Internet access and more mature technological development is correlated with improvement in cybersecurity at the global level, this is not necessarily true for countries with developing economies and lower levels of technological development,’ and that ‘there is a need for the developed world to help train local experts in cybersecurity, and more cooperation should be initiated between developed and developing countries to assist them in cybersecurity development’.

The next large INTERPOL event, it’s 86th General Assembly, is set to take place in Beijing and run between September 26 and 29. The international organizations’ governing body at the event ‘takes all the major decisions affecting general policy, the resources needed for international cooperation, working methods, finances and programmes of activities […] It also elects the Organization’s Executive Committee,’ notes the Interpol website. The event will welcome the representatives of the organizations 190 member countries as well as over 800 senior officials from law enforcement agencies. K.W.

Education

Still no resumption of construction at Morpheus Work is still suspended on the construction site of City of Dream’s fifth tower, Morpheus, after the death of a

and influence,” stated INTERPOL President Meng Hongwei at the event in Singapore.

“We must combine our global efforts to stay one step ahead of ever-evolving criminals by enhancing the capabilities of all stakeholders to confront these increasingly ingenious and sophisticated challenges,” stated the President.

Aside from visits of local representatives to the meetings, in September of 2015, ‘the Assistant Director of the INTERPOL Asia and South Pacific Sub-Directorate paid a visit to Macao Judiciary Police,’ the responses note.

33 year-old worker from mainland China, and a review of safety procedures and policies might follow after the investigation conducted by the Labour Affairs Bureau (DSAL) at the construction site is concluded, Melco Resorts and Entertainment Ltd. told Business Daily.

‘As a responsible operator, we will assess the findings from the investigation and implement any further measures to ensure our highest standards of safety at our sites,’ a Melco spokesperson said in a email.

The company added they are providing ‘full assistance’ to the investigation being currently conducted by the bureau.

Last week, the DSAL ordered the suspension of works on some 20 construction sites after having carried out oversight work in 74 sites in the city. S.Z.

1,535 new local students admitted by UM this year For the coming academic year 2017/2018 - the University of Macau (UM) has admitted 1,535 local students, the university revealed via press release.

Of the total, 394 admissions were approved through the Principals’ Recommended Admission Scheme (under which students can apply for scholarships), while 59 of the new local students ranked first in their class.

Meanwhile, some 1,200 students were admitted by taking part in the joint admission test, 52 of whom will

benefit from the University of Macau Golden Lotus Scholarships.

According to the academic institution, some of the admitted students had outstanding performance not only academically but also in areas such as sports, music and science, with students taking part, and winning awards, in international competitions.

These include winners of the International Mathematical Modeling Challenge, the International Teenager Science and the Technology Practice Contest.

Meanwhile, the sand supply for Zone A had already been finalised in June, and the construction of the dike on the island is also expected to be completed by the end of the year.

The halt of the sand supply for the construction of Zone A was caused by work on the immersed tube tunnels of the Hong Kong-Zhuhai-Macau

Bridge in early January of last year.

According to the project tender proposal, from the Infrastructure Development Office, the construction of the dike for the land was planned to complete by mid November of 2015, while recent estimations predict its completion by year end, indicating a two-year delay.

New land

Zone A moving forward With the completion of the Hong Kong-Zhuhai-Macau Bridge by yearend, it is expected that the construction of the linkage between Zone A and the artificial island will be

completed by October, according to local newspaper Macao Daily.

The connection between the new land and the city has gradually started construction.

Business Daily Wednesday, July 19 2017 7

Gaming Forecast

Gaming revenue to reach US$46 bln by 2022: Union Gaming analysts The EBITDA contribution from just the gaming segments of local integrated resorts should exceed US$12 billion by the same year Kelsey Wilhelm* kelsey.wilhelm@macaubusinessdaily.com

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ross gaming revenue could reach US$46 billion (MOP369.78 billion) by 2022, according to estimates by analysts at Union Gaming, published in the ‘Macau Almanac: A market primer and compendium’.

As part of this mixture, however, a reversal in the ratio of VIP and mass is on the horizon, point out the analysts, noting ‘we expect VIP to go from 60 per cent of gross gaming revenue in 2014 to 43 per cent in 2022,’ notes the almanac. For the near future, analysts Grant Govertsen and Felicity Chiang point to ‘high-single digits to end the year [2017],’ with an overall 14 per cent growth year-on-year for 2017.

For next year, expectations are for 9 per cent year-on-year growth and

8 per cent year-on-year growth in 2019, followed by 7 per cent annual gross gaming revenue growth for the ‘out years’.

Factors such as the opening up of gaming regionally, such as in Japan, and an expectation for ‘significantly greater cannibalization of VIP play than mass market play,’ align with five main factors supporting mass, according to the analysts: -‘An extraordinarily deep market (Asian population base) with a propensity to gamble’ -‘The wealth effect’

Self-exclusion

In total 82 requests for exclusion from casinos were received in the second quarter of the year, according to data from the Gaming Inspection and Coordination Bureau (DICJ),

-‘Countless infrastructure projects in mainland China that will enable increased visitation and ease of access to Macau’ -‘Significant new supply (Cotai), which historically has been a large driver of demand’ -‘The potential for increased liberalization of the Individual Visa Scheme’

Non-gaming

Regarding the MSAR’s hotel room supply increase for this year, the analysts point to a 6 per cent growth year-on-year, increasing to 7 per cent growth in 2018.

‘By the end of 2018 we expect there to be no less than 41,280 hotel rooms in Macau, or an increase of 48 per cent from 2014,’ notes the report. In addition, the analysts predict that ‘65 per

69 of which were for self-exclusion, while 13 were for third party exclusion. In the first half of the year 179 requests were received, 149 for self-exclusion and 30 for third party exclusion.

cent of total room supply’ in the MSAR will be 5-star, ‘followed by 4-star at 19 per cent,’ with ‘all other classes combined’ totalling 16 per cent.

While non-gaming’s contribution to EBITDA (earnings before interest, taxation, depreciation and amortization) for the properties ‘is quite low today, this should increase over time’ given that the next developments on Cotai ‘will have a decidedly greater non-gaming focus relative to previous development’.

However, ‘the EBITDA contribution from just the gaming segments of Macau casino-resorts should exceed US$12 billion in 2022,’ estimate the analysts.

Looking forward for non-gaming, ‘Macau should not do more of the same, e.g. throwing more identical retail outlets at the problem,’ note the analysts. However, ‘the answer is going to require a fair amount of trial and error on the part of gaming concessionaires and sub-concessionaires,’ they point out, noting that ‘we strongly believe that heavily themed properties can be very successful in Macau’. *Special thanks to Union Gaming

Opening

Gongzi Jeju opens with 40,000 square feet of gaming One of the latest casino offerings on the South Korean island of Jeju, opened last Sunday, is the Gongzi Jeju Casino, a 40,000 square foot ‘expansion gaming

area’ including 45 gaming tables and two-dozen slot machines, according to a company press release. The company’s CEO Lysa Evans, at the opening

ceremony of the property stated “we have brought to Jeju all the latest gaming technologies and integrity parallel to Macau, Singapore and other world

class gaming destinations […] to create a gaming experience in a location that was accessible, with fantastic natural scenery and relaxing entertainment’.

Gongzi Jeju lies 10 minutes from the Jeju International Airport, according to the release. advertisement

8 Business Daily Wednesday, July 19 2017

Greater china State media

President Xi calls for more imports and more ‘open economy’ He said “an open economy” with fewer restrictions to foreign access will serve to “promote balance of payment under the current account”

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hinese President Xi Jinping has called for an increase in imports and fewer restrictions for foreign investors as Beijing comes under pressure from the U.S. and Europe to provide a more level playing field for companies in the country.

Donald Trump has railed against China’s massive trade surplus while the European Union and U.S. companies have complained about a lack of access to the huge market.

on exports and state investment to one driven by domestic demand, though that has led to a slowdown in growth to 26-year lows.

Xi also said “an open economy” with fewer restrictions to foreign access will serve to “promote balance of payment under the current account”, according to the China Daily.

The large U.S. trade deficit with China was a major talking point for Trump during last year’s presidential

campaign, when he claimed Beijing had “stolen” millions of jobs from Americans.

He also accused China of manipulating its currency to support its exports -- a charge he has dropped since taking office in January.

In his statement on Monday, Xi called for measures to liberalise trade and simplify import procedures while reducing tariffs on certain consumer products.

He stressed keeping the yuan currency’s value “basically stable at a reasonable and balanced level”, and steadily pushing it “to become an international currency”, Xinhua state news agency reported.

At the World Economic Forum in Davos, Switzerland, at the start of the year, Xi stood out as a defender of free trade and globalisation in the face of Trump’s protectionist rhetoric.

But foreign firms in China have long pointed out the obstacles to doing business in the country, where they say domestic companies enjoy distinct advantages.

“A market environment featuring fair play should be created in the country,” Xi said in his statement, noting that “national treatment in laws and policies should be granted to foreign-funded companies after they enter the market.” AFP

‘The President of China stressed keeping the yuan currency’s value “basically stable at a reasonable and balanced level”’ Speaking to a Communist Party committee on financial and economic affairs, Xi called for “expanding imports while stabilising exports”, state-run media reported yesterday.

China’s leaders trying to transform the economy from a reliance

Real estate

Property market slows, Beijing prices down for first time since 2015 More than 45 cities have imposed varying levels of restrictions Yawen Chen and Ryan Woo

Home property prices in Beijing fell for the first time in more than two years in June, while Shanghai further declined and Shenzhen stalled, pointing to significant cooling in China’s biggest real estate markets, official data showed.

Nationwide, home price growth slowed slightly in June as government efforts to keep prices in check weighed on larger cities, though smaller cities maintained rapid growth.

People in the industry expect home price growth in China’s largest cities to stay on a mild slowing trend for the next 12 months.

In June, average new home prices in China’s 70 major cities rose 10.2 per cent from a year earlier, decelerating from May’s 10.4 per cent gain, according to Reuters calculations based on an official survey out yesterday.

On a monthly basis, new home prices rose 0.7 per cent in June, the same as the previous month’s reading, Reuters calculations based on data issued by the National Bureau of Statistics (NBS) showed.

“China’s 15 hottest property markets, mostly first- and second-tier cities, remained stable in June as a city-based property policy continued to take effect,” the NBS said in a statement accompanying the data release.

More than 45 cities, most of them top-tier cities with a sizable population, have imposed varying levels of restrictions since last October to curb fast-rising prices, with most of the latest measures introduced in late March.

These measures have started taking some heat out of the market, with sales and investment in property cooling slightly in the second quarter.

The cooling effect is most visible in China’s the biggest cities. Price growth in Shenzhen, Shanghai and Beijing slowed to 2.7 per cent, 8.6 per cent and 10.7 per cent, respectively, from a year earlier.

From a month earlier, prices in Beijing fell 0.4 per cent, marking the first fall since February 2015.

Shanghai prices slipped by a further 0.2 per cent, while Shenzhen prices remained unchanged.

Declining sales

The value of new personal home mortgages in Beijing, Shanghai and Shenzhen in the first half of 2017 was equal to 30 per cent of the total value of home loans in 2016, a Chinese state newspaper reported.

“Sales declines in the biggest cities were quite significant, so prices are certainly not going to rebound,” said

Rosealea Yao, a property economist with Gavekal Dragonomics.

“I think the mild declining trend will continue through at least the first half of 2018,” Yao said.

Nonetheless, real estate investment and sales growth both sped up in June after slowing in May, most likely due to more robust demand in smaller centres that have been encouraged to reduce inventory and are not subject to the strict curbs at work in bigger cities.

Key Points June new home prices +0.7 pct m/m vs +0.7 pct in May Yearly growth in June +10.2 pct vs May’s +10.4 pct Declining affordability raises housing market risk Luoyang, a third-tier city in central Henan province, topped the list in June, with prices of new units up 2.3 per cent on month, compared with a 1.3 per cent gain in May, taking the annual growth to 10.2 per cent.

That has also been reflected in stronger credit demand in the month from households.

Household loans - mostly mortgages - in June rose to RMB738.4 billion from RMB610.6 billion in May, according to Reuters calculations based on data released by China’s central bank.

Keeping a lid on price fluctuations has become a priority for policymakers in a politically important year, with a major leadership reshuffle expected this autumn.

But to make sure the market is neither too hot nor too cold, authorities have increasingly resorted to administrative measures that many analysts warn are anti-market in nature.

For example, sales prices for new units in a few cities like Zhengzhou capital of Henan - are not allowed to be higher than the price level seen last October for new units in the vicinity.

Fading affordability

The upsurge in house prices since 2001 in most major Chinese cities has spurred growing concerns about affordability.

A typical two-bedroom new home in Beijing now costs around RMB6 million (US$870,000), about 69 times the average per capita disposable income in the city, much higher than the ratio of less than 25 times for New York City.

Economists worry that slowing growth in incomes, which had been rising at double-digit rates for decades, will no longer be able to cushion financial risks in an extremely inflated housing market.

On average, China’s disposable income was up 8.1 per cent on-year for city-dwellers in the first half of the year, official data showed, slower than the 10.2 per cent annual property price growth in June. Reuters

Business Daily Wednesday, July 19 2017 9

Greater China Financing

In Brief

Authorities ease bond issuance curbs for property firms New regulations governing many land auctions and setting limits on home prices in some Mainland cities are threatening many developers’ business models China has relaxed curbs on property firms seeking funds in offshore and onshore bond markets, people familiar with the matter say, a move that could allow fresh capital into a sector that has struggled to refinance after a slew of tightening measures.

Since late last year, regulators have made it harder for developers to sell onshore corporate bonds in a bid to help cool an overheating property market. Separately, the National Development and Reform Commission (NDRC) stopped granting new quotas for offshore dollar bond issuance in the second quarter of this year.

However, a bond underwriter told Reuters that the NDRC, the regulatory body that approves offshore corporate debt sales, in June lifted the curbs on offshore bond issuance by developers. A number of developers have already issued into the offshore market in recent weeks.

“There are no written words, but the message was communicated in meetings with officials. This way, policies can be flexible,” the underwriter said, declining to be named as he was not authorised to talk to the media.

Meanwhile, three developers told Reuters they can once again apply for onshore issuance with the China Securities Regulatory Commission, the agency responsible for onshore bond oversight.

New regulations governing many land auctions and setting limits on home prices in some Mainland cities are threatening many developers’ business models, which in turn is hurting their cashflow.

If liquidity continues to be tight, companies and analysts said the

market might start to see bond defaults next year when many bonds reach maturity, especially in the onshore market.

According to the NDRC’s website, 10 property companies, including Longfor, Country Garden, CIFI and Greentown China have been given the green light since June 23. Five have already completed their bond issuance.

Neither the NDRC nor the CSRC replied to a request for comment.

However, one of the developers that applied to issue offshore said that the amount approved was less than what the company had sought, a sign regulators are still keeping a tight rein on financing in the property sector.

“There seems to be some progress for approvals after the hiatus although

further approvals still seem uncertain at this point. We think that for refinancing and more solid developers, approvals will still be forthcoming but it won’t be a floodgate situation,” S&P analyst Christopher Yip. For onshore bonds, developers such as China Vanke and Shanghai Shimao announced the sale of corporate bonds earlier this month, although both were using a 2015 quota so required fresh approval from the CSRC for the issuance. Agile also sold RMB3 billion bonds last Wed. “The tightening seems to have relaxed a bit in May, they now resume the review process and our application is waiting to do that now,” said a state-owned developer.

Developers are looking for alternative refinancing channels after the bond window at the main exchange was shut for months.

Beijing Capital Land Ltd said on Friday it plans to sell a bond worth up to RMB2 billion on the Beijing Financial Assets Exchange (CFAE), a listing where CSRC approval is not required. Reuters

China’s top planning body said yesterday that the country has sufficient coal supplies to meet its current power demands, as Beijing seeks to ease concerns about tightening supply due to earlier government-enforced cutbacks. The National Development and Reform Commission (NDRC) said in a statement it would “properly deal” with the impact of cutting capacity in the world’s top consumer of the fuel, and would try to stabilise supplies and prevent supply disruptions. “A total of around 200 million tonnes of net increased coal capacity will be launched this year,” the NDRC statement said.

PBOC

New committee to coordinate financial market China’s new financial stability committee will help to coordinate on financial reform and regulation of markets as well as monetary and industrial policy, a central bank official told the official People’s Daily in an interview published yesterday. The committee was set up because financial oversight in China is not coordinated, said Lu Lei, who heads the financial stability department at the People’s Bank of China (PBOC). There has been a lack of supervision of the market, he said, describing the situation as “full of chaos”.

Mainland approves RMB463.8 bln worth of projects in H1

Government eyes merger of metals giants If carried out, this would be the second marriage of metals companies overseen by Beijing as part of the government’s goal to fight overcapacity

China is considering a merger between China Minmetals Corp, one of the country’s largest miners and metals traders, and China National Gold Group, as Beijing pushes consolidation of its state-run firms, sources with knowledge of the matter said.

Three sources with knowledge of the discussions said the two stateowned firms have been in negotiations for months, though any agreement could still be some time away.

The talks between two of China’s largest metals producers are part of Beijing’s broad efforts to shake up its indebted and inefficient state sector, streamline the number of companies and create globally competitive firms in sectors including power generation, shipping and metals.

Minmetals, which controls Hong Kong-listed unit MMG, said it was not aware of any discussions over a tie-up and said it would publish any statement on its website. China National Gold - one of the top gold miners in a country that has become the world’s largest producer - declined to comment.

The State Assets and Supervision Administration Commission (SASAC), which oversees the sector and favours an overall shakeup, did not respond to a request for comment.

Beijing says coal supply is sufficient

Fixed-asset investment

M&A

Kane Wu and Julie Zhu

Power demand

A combination of Minmetals, one of China’s biggest state-owned enterprises, and much smaller, precious metals-focused CNG would not be without challenges, not least in terms of scale. It was not immediately clear how a combined group would be managed.

China Minmetals, already a major mining company, became the world’s largest metallurgical construction and operation services company after merging with stateowned China Metallurgical Group in 2015.

Key Points Potential merger is part of China’s state sector shake-up Firms in talks for months but deal may be some time away Merger faces challenges as firms are of vastly different sizes With total assets of around US$236 billion globally, Minmetals became one of the world’s largest copper miners when it bought Australia’s Oz Minerals in 2009 and Glencore’s Las Bambas copper mine in Peru for US$7 billion in 2014 - one of China’s largest overseas acquisitions at the time.

Debt racked up as a result of the

Peru deal, combined with plunging global commodities prices then dragged Minmetals to a loss. It reported an RMB18.2 billion (US$2.7 billion) loss in 2015. That turned around to a RMB4.1 billion profit in 2016.

It signed an exploration deal with Rio Tinto last month, and employs over 240,000 people.

China National Gold is a much smaller company, with combined total assets of around US$9 billion from its two listed entities. It is China’s only gold industry firm directly managed by the central government, with operations also in silver, copper and molybdenum.

China Minmetals owns eight listed companies in China and Hong Kong, including Metallurgical Corporation of China which has a market capitalisation of around US$15 billion, and MMG with a US$3 billion market value.

The two listed units under China National Gold have a combined market value of around US$5.8 billion.

If carried out, this would be the second marriage of metals companies overseen by Beijing as part of the government’s goal to fight overcapacity in its bloated heavy industries.

Last year, Baosteel’s takeover of its smaller, debt-laden rival Wuhan created China’s largest steelmaker.

Coal giant Shenhua Group Corp Ltd and top-five state power producer China Guodian Corp are in talks to merge some assets, Reuters reported in June.

Reuters reported in May that chemical giant Sinochem was in talks with ChemChina, which completed its US$43 billion acquisition of Swiss seeds company Syngenta AG. Reuters

China’s National Development and Reform Commission, the country’s top economic planner, said yesterday it approved RMB463.8 billion (US$68.58 billion) worth of fixed-asset investment projects in the first half of 2017.

In June alone, it approved projects worth RMB29.6 billion, a commission spokesman said in a regular briefing in Beijing. In the first half of last year, China approved projects worth RMB461.6 billion. China’s economy grew a better-than-expected 6.9 per cent in the second quarter from a year earlier, the National Bureau of Statistics said on Monday, leaving headroom for policymakers to home in on goals to defuse financial risks.

Markets

Hong Kong stocks end slightly higher Hong Kong stocks rose for a seventh straight session yesterday as gains in the technology and energy sectors offset losses in financial stocks. The Hang Seng index finished 0.2 per cent, or 54.36 points higher at 26,524.94. Record gains by Apple supplier AAC Technologies, which rose as much as 8.5 per cent, helped drive up the technology sector, while respective 0.8 per cent and 1.35 per cent advances in Petrochina and China Shenhua shares supported the energy sector. Big banks proved major drags on the benchmark with the financial index down 0.2 per cent.

10 Business Daily Wednesday, July 19 2017

Greater China Regulator

Bank watchdog to tighten risk control amid shake-up It said failure to catch, flag and deal with financial risks in a timely manner would be treated as a dereliction of duty

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hi n a’ s b a n king regulator will tighten control over risks in the financial markets, work more closely with the central bank and other regulators, and “resolutely follow” the leadership of a newly-formed financial stability committee, it said late on Monday.

The China Banking Regulatory Commission’s comments come after President Xi Jinping said on Saturday that the central bank would take a bigger role with a Financial Stability and Development Committee to be set up under the State Council.

Beijing sees financial security as a vital part of national security and has been looking to crack down on risky behaviour in the financial markets, such as insurers selling high-risk products and companies taking on excessive debt.

The China Banking Regulatory Commission (CBRC) said in the statement on its

website it would strengthen controls to avoid financial risks, including those related to liquidity, credit and shadow banking. It said there was a “step-by-step” plan to reduce “chaos” in the market, without giving details.

‘Beijing sees financial security as a vital part of national security’ The regulator will also boost cooperation with other bodies, something Beijing sees as key to cutting risks. Regulators now oversee different parts of a complex financial sector, but no single watchdog has a complete picture of the overall system.

“CBRC will resolutely follow the leadership of

the Financial Stability and Development Committee, actively coordinate with the People’s Bank of China to fulfil macroprudential management duties, and strengthen cooperation with other financial regulators, ministries and local government,” it said.

The two other main financial regulators are the China Securities Regulatory Commission and the

China Insurance Regulatory Commission.

The banking watchdog added failure to catch, flag and deal with financial risks in a timely manner would be treated as a dereliction of duty, parroting comments made by Xi at the once-infive-years government work conference that ended on Saturday.

In 2015, a poorly coordinated response to a stock

market crash in China led to scrutiny of the government’s response, with Premier Li Keqiang openly criticising financial regulators’ performance.

The CBRC will also convene a meeting in the near future with banking regulators from around the country to discuss how to implement measures decided at the work conference.

Reuters

Citigroup study

Mainland to lure US$3 trillion as foreigners can’t resist The Citigroup team is betting that in time international investors will overcome their concerns Eric Lam

China has opened a path for a transformation of its financial markets that could see them match the U.S. in size and lure more than US$3 trillion in capital from abroad by 2025, according to a study by Citigroup Inc. While the country’s initial efforts to internationalize its currency hit a bump in 2015, policy makers have shifted tack to focus on developing domestic financial markets rather than opening up the capital account, Citigroup analysts led by Liu Li-Gang, chief China economist for the bank in Hong Kong, wrote in a note. Steps like the bond and stock “connects” with Hong Kong represent this new approach, they wrote.

“In years to come, 2017 could be viewed as a tipping point for global asset allocation,” Liu and his colleagues wrote. “Removal of restrictions to entry, together with eventual inclusion of China in various global capital market indexes, will raise foreign ownership of Chinese assets, likely creating further momentum for market broadening and deepening.”

Among the team’s projections: China’s nominal GDP, which is unadjusted for inflation, will reach US$28

trillion by 2025 compared with US$26 trillion for the U.S. based on anticipated growth rates and a gradual appreciation of the yuan to 5 per dollar from 6.8 now. Some US$3.36 trillion in new capital will flow in from abroad, with US$779 billion to the bond market, US$200 billion into equities and US$2.38 trillion to bank assets (which are typically loans). Based on their historical relationship with GDP, U.S. financial markets will total US$137 trillion by 2025, and Citigroup assumes China’s would have about the same in yuan equivalent.

As it stands, China’s banking sector currently dominates

its financial industry, with a two-thirds share, according to the economists. The bond market is forecast to almost triple in size to RMB188 trillion (US$38 trillion at the anticipated 2025 exchange rate), while equity markets will grow at a similar rate to RMB154 trillion.

“If that is indeed reality in the not-so-distant future, institutional investors would no longer have the option of staying away from China’s markets if they wanted to achieve above-benchmark returns,” Liu said. “Acceleration of reform of China’s capital markets in the next five to 10 years has the potential to reshape the allocation of global assets.”

China is effectively rewriting the playbook for opening up its financial markets -read about that here.

Past f o r ecasts f o r

game-changing developments from China have returned mixed results. In 2012 HSBC Holdings Plc analysts led by Qu Hongbin predicted a “ Big Bang” of reforms from new leaders that would revolutionize the country’s financial system, including making the yuan fully convertible by 2017.

“China’s nominal GDP will reach US$28 trillion by 2025” Citigroup study Citigroup analysts didn’t mention political risks, as President Xi Jinping prepares

to oversee a once-in-fiveyears Communist Party leadership gathering later this year. Nor did they discuss whether the yuan would emerge as a rival to the dollar in the global financial system.

Some foreign investors have expressed concern about pouring money into China given a panoply of political and regulatory risks that are hard to understand.

Overcoming fears

The Citigroup team is betting that in time international investors will overcome their concerns.

“Initially, they would likely be cautious given structural imbalances, regulatory risks, capital controls and a still opaque tax regime,” the group wrote. “But we see those concerns as being gradually eclipsed as conviction solidifies about China’s reform agenda and given the sheer size of the market opportunity.”

Citigroup also saw China’s new approach toward keeping controls on the capital account in place while foreign investors are gradually welcomed to participate in domestic markets as one that would avoid the kind of instability seen during the 1990s Asian financial crisis.

“This sequencing policy should help China avoid unnecessary mistakes and mean it is spared the financial crises that have blighted other economies,” they wrote.

Bloomberg News

Business Daily Wednesday, July 19 2017 11

Asia RBA minutes

Australia’s central bank sees more “positives” in domestic, world economy Data out yesterday also showed new vehicle sales climbed for a fourth straight month in June Swati Pandey and Wayne Cole

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ustralia’ s central bank has turned more upbeat on the economic outlook, citing an improving labour market, stronger public investment and a pick up in household consumption.

The mood was clearly brighter, with the word “positive” appearing repeatedly in the five-page minutes of the Reserve Bank of Australia’s (RBA) July meeting and catapulting the local dollar to a more than two-year high of US$0.7905.

While traders bid the Aussie higher, economists said the RBA would be in no hurry to raise rates anytime soon as it remained watchful on risks to jobs and housing.

“We would need to see an upgrade to inflation and wages forecasts to change our view of policy on hold until well into next year,” said Kristina Clifton, economist at Commonwealth Bank.

Besides, analysts suspect the recent sharp rise in the local dollar would itself add to the case against a hike. The RBA has long warned that a

rising currency would hurt the economy’s transition away from a decade-long mining investment boom.

Since the RBA’s July meeting, the Aussie has rocketed nearly 4 per cent to a level that will be highly unwelcome to policy makers in the face of weak inflation at home.

Domestic financial conditions had been further tightened by a recent increase in mortgage rates at Australia’s major banks, which followed

a clamp-down by regulators on risky lending.

The RBA’s policy board also discussed estimates of the neutral level of interest rates - that which neither stimulates the economy nor retards it. This was put at around 3.5 per cent, which was down from 5 per cent in 2007 but still implied the current rate of 1.5 per cent was “expansionary.”

“The discussion around neutral rates caught the market off guard,” said Michael Turner, strategist at RBC Capital Markets. “They are not necessarily laying the groundwork for a hike but this would be the first step if they were moving in that direction.”

Futures market now implied a 24 per cent chance of a rate rise by December, up from just 8 per cent previously. It is fully pricing in an increase of 25 basis points by mid-2018.

The positives

The RBA welcomed the broad-based recovery in the world economy which had led some other central banks to upgrade their outlooks for growth and interest rates.

At home, the RBA noted a run of stronger employment outcomes augured well for wages, where growth has been stuck at a record low 1.9 per cent.

Household consumption

growth was showing signs of a pick up with retail sales rebounding for two months.

Indeed, data out yesterday showed new vehicle sales climbed for a fourth straight month in June to hit record highs.

Key Points RBA more positive on jobs, consumption Members talk about neutral real interest rate The Aussie shoots up to a two-year peak of $0.7905 A new development was an upturn in fiscal spending which was now expected to be stronger in 2017/18 than previously expected, mainly thanks to public infrastructure.

Still, there were a few notes of caution in the minutes. “...The outlook for growth and inflation meant that developments in the labour and housing markets continued to warrant careful monitoring,” the RBA said.

“The Board judged that holding the accommodative stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

Reuters

IMF

Sri Lanka’s inflation still high, more policy tightening “desirable” The IMF also said the new Inland Revenue Act will support fiscal consolidation The International Monetary Fund said yesterday that further monetary policy tightening in Sri Lanka “is desirable” until there are clear signs that inflationary pressures are subsiding, and called for more measures to curb strong credit growth.

In a statement after completing its second review of a US$1.5 billion loan approved in May last year, the global lender said Sri Lanka’s performance under its program has been “broadly satisfactory”.

Sri Lanka has tightened monetary policy four times since December 2015, including a 25 basis point hike in March. “ I n f l a t i o n a n d c r e dit growth remain on the high side. While monetary policy was tightened in March, further tightening

is desirable until clear signs emerge that inflation pressures and credit expansion have subsided,” Mitsuhiro Furusawa, acting chair and deputy managing director, said in a statement.

“While financial soundness indicators remain stable, banks’ capital adequacy ratio has declined due to rapid credit growth. Financial sector supervision should be strengthened, and macro-prudential measures could be deployed to rein in credit growth if needed.”

The IMF also said the new Inland Revenue Act, which the government has presented in the parliament for tax and revenue reforms, will support fiscal consolidation, make the tax system more efficient and equitable, and generate resources for social and development programs.

The IMF delayed the completion of the review after Sri Lanka missed its end-December foreign exchange reserves target due to heavy outflows after some foreign investors sold government securities.

Key Points Further monetary tightening is desirable - IMF IMF completes delayed second review of US$1.5 bln loan Sri Lanka awaits US$167.2 mln third tranche of loan New Inland Revenue Act will support fiscal consolidation - IMF The central bank last week said the authorities have achieved all end-June targets set by the IMF. “Fiscal performance has been strong. Targets for the fiscal balance and tax revenue

have been met....Nevertheless, Sri Lanka’s high debt burden and gross financing needs require further revenue-based consolidation,” Furusawa said.

“Timely progress in structural reforms, including tax administration and energy pricing, will strengthen

the platform for durable consolidation.”

The completion of the second review will enable the IMF to release a third tranche of aid of about US$167.2 million, bringing total disbursements under the arrangement to the equivalent about US$501.5 million. Reuters

12 Business Daily Wednesday, July 19 2017

Asia Monetary policy

Board reshuffle may complicate Japan’s central bank retreat from radicalism The addition of Goushi Kataoka, an advocate of massive money printing, could deepen a rift in the nine-member board Leika Kihara

A

reshuffle in the Bank of Japan’s (BOJ) board will tip its balance more in favour of aggressive stimulus just as the bank quietly retreats from its radical monetary experiment, complicating the task of bureaucrats seeking to whittle down its bond purchases.

With inflation still well short of the bank’s 2 per cent target, the BOJ is nowhere near dialling back stimulus even as its U.S. and European counterparts eye an exit from ultra-loose policies.

Given the bank’s dwindling policy ammunition, however, many BOJ bureaucrats want to temper market expectations of additional easing and - through careful, delicate communication - lay the grounds for a smooth tapering of asset purchases.

The task could be made more difficult by a reshuffle in the BOJ’s decision-making policy board this month, when two sceptics of huge stimulus leave. One vacancy will be filled by a vocal proponent of huge asset purchases.

The change comes at a time when the BOJ, having failed to drive up inflation for years, shifts its focus to target interest rates instead of the pace of money printing.

“The impact on monetary policy may not come immediately, but the board will clearly have more

advocates of big asset buying,” said Hideo Kumano, a former BOJ official who is now chief economist at Daiichi Life Research Institute.

“That could complicate the BOJ’s efforts to educate markets that its primary focus has become interest rates, not the pace of asset purchases.”

The addition of Goushi Kataoka, an advocate of massive money printing, could deepen a rift in the nine-member board.

Kuroda and a majority in the board believe the BOJ should allow its bond purchases to fall as long as it can keep yields capped at its zero per cent target.

But two in the board - Deputy Governor Kikuo Iwata and board member Yutaka Harada - are opposed to any significant slowdown in the BOJ’s bond purchases.

Kataoka, who co-wrote a book with Harada, has stressed the key role big

Bank of Japan headquarters in Tokyo

money printing plays in heightening inflation expectations, suggesting he would fall under the camp of Iwata and Harada.

“Full-blown monetary and fiscal policies coupled with a growth strategy are crucial to break completely out of prolonged economic stagnation,” Kataoka, an economist at Mitsubishi UFJ Research and Consulting, wrote in a research note in January.

In September last year, he called on the BOJ to expand stimulus at an early stage to prop up weak inflation expectations. The view runs counter to that of most BOJ policymakers, who prefer to hold off on additional easing given their dwindling policy ammunition.

Kataoka declined to comment, when approached by Reuters this month on whether he maintains these views.

Counter-balance

The other vacancy will be filled by Hitoshi Suzuki, a bank executive who analysts predict will take a neutral stance on monetary policy. That would leave the nine-member board with four swing voters.

While most of them will likely side with Kuroda, the increasing presence of those favouring big asset buying could confuse markets if they openly voice opposition to tapering at a time the BOJ’s main scenario is to gradually slow purchases.

“At some point, the BOJ probably wants to abandon a pledge to keep buying bonds at the current pace.

That could become difficult with the new board,” said a source familiar with the bank’s thinking.

The BOJ also loses a counter-balance

to Kuroda’s radicalism with the departure of Takehiro Sato and Takahide Kiuchi, who dissented to most of his monetary-easing steps.

Sato and Kiuchi were against Kuroda’s pledge in 2013 to set a two-year deadline for hitting his 2 per cent inflation target and voiced doubts that heavy money printing can change the public’s perception that deflation will persist.

Their views were dismissed until last September, when stubbornly low inflation forced the BOJ to concede it would take a long time for inflation to hit its target and that changing people’s perception on future price moves wasn’t easy.

Izuru Kato, a long-time BOJ watcher who is chief economist at Totan Research, said Kuroda could have avoided such an about face if he engaged more with the dissenters.

“Instead of taking into account the views of the dissenters, Kuroda rejected them,” he said. “Now he’s paying the price.”

The BOJ is set to cut its inflation forecasts but keep monetary policy steady at a two-day rate review that ends on Thursday, which will be the final policy meeting for Sato and Kiuchi.

The first policy-setting meeting for the newcomers will be held on Sept. 20-21.

Having outliers in the board is important as it helps central banks justify shifting course on monetary policy when the current approach isn’t working, said another source familiar with the BOJ’s thinking.

“In Japan’s case, they could have helped lay the grounds for a future withdrawal of stimulus.” Reuters

Strategy

Asian sovereign investors face off with funds in hunt for private deals Temasek is increasing investments in unlisted firms, while CIC is looking to expand its U.S. direct investments Anshuman Daga

Asian sovereign investors are increasingly adding non-public firms to their portfolios amid pricey stock markets, a strategy that could be risky as they compete head-on for such deals with cashed-up private funds.

Such investments of China Investment Corp (CIC) and Singapore’s Temasek Holdings, two of the biggest state investors in Asia, were in the spotlight this month at the investors’ annual performance reviews where they warned of pressure on returns from a challenging environment for equities investing.

Temasek is increasing investments in unlisted firms, while CIC is looking to expand its U.S. direct investments.

“Today when the public markets are very expensive, we are more towards the private side,” said Rohit Sipahimalani, joint head of Temasek’s portfolio strategy and risk group.

The share of unlisted assets

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in Temasek’s S$275 billion (US$200.88 billion) portfolio rose to a record S$110 billion, or 40 per cent for the year ended March 2017, up from 22 per cent in 2011. This included an US$800 million minority investment in Verily Life Sciences, a spin-off from Google’s Alphabet.

Key Points State investors warn of pressure on returns in pricey markets Temasek’s investment in unlisted assets at record high Analysts see risks for investors in crowded market place CIC agreed to buy Logicor, Blackstone’s European logistics business for 12.25 billion euros, outbidding an Asian private group and a state investor in the region’s biggest private equity real estate deal, sources said.

Globally, sovereign wealth funds (SWFs) are trying to make their assets work harder as returns are under pressure. Singapore sovereign wealth fund GIC said it is prepared for a period of protracted uncertainty and low returns.

As funds fight for negotiated deals, risks are rising in a crowded market place, analysts said.

“Sovereign wealth funds tend to have long time horizons and no explicit liabilities, which makes them the ideal investor for illiquid instruments. So yes, I do believe that they will be turning more to private deals,” said Veljko Fotak, assistant professor of international finance, University at Buffalo.

“I think SWFs will enjoy

pretending to be venture capitalists, and will get burned for it, because too much capital is already playing in a field that is simply too small.”

Asia-focused private equity firms, which have also stepped up investments in non-public companies, have raised huge funds, adding to US$136 billion in so-called “dry powder” as of last year.

But they are not the only competitors to sovereign investors.

“It’s not just the dry powder that PE firms have, it’s the dry powder that sovereign wealth funds have, pension funds have, family offices have. It’s definitely a challenge to get returns with that sort of competition,” said Dilhan Pillay Sandrasegara, joint head of Temasek’s

investment group.

Negotiated deals offer Temasek an opportunity to build its portfolio away from the heat of competition.

“We almost never win in an auction. We are very bad at auctions,” said Sipahimalani, referring to Temasek’s investments in U.S. and European firms in the latest year.

Amid the growing competition for deals, co-operation may be the way forward, some analysts said.

Last year, GIC said it would become a minority owner of U.S. tech firm Neustar Inc after the company said it would be acquired by a private equity-led group.

State funds are co-investing with private equity funds and family offices, said Javier Capapé, director at the Sovereign Wealth Lab research centre at the IE Business School in Madrid.

A partnership with private-sector entities signals a commitment to shareholder value over political priorities, said Fotak, who is also a senior researcher at the Sovereign Investment Lab of Italy’s Bocconi University.

“Of course, there is an element of if you can’t beat them, join them.” Reuters

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Business Daily Wednesday, July 19 2017 13

Asia In Brief Government

Australia creates Home Affairs ministry

Energy

Asia’s naphtha trapped in downward spiral as supply glut hits Japan and South Korea are also running their refineries at more than 90 per cent of capacities on average Seng Li Peng

Asia is being hit with a naphtha supply glut that could push the market down further, after spot prices in South Korea already flipped from premiums to discounts in late June for the first time since March.

Discounts in South Korea, Asia’s top naphtha importer, widened four times - to US$4 a tonne less than benchmark Japan quotes on July 13 - versus a discount of around US$1

on June 28.

Naphtha’s front-month outright price for second-half August physical cargoes on July 14 was US$3 a tonne lower than for the following month, the deepest contango value since mid-October 2016. The contango weakened to US$2 on Monday.

In a contango market, prompt deliveries are cheaper than those further out, indicating ample supply.

“The reason for the naphtha weakness is mainly coming from weakness advertisement

in gasoline and more regional production ... exports from the Middle East have increased compared with last year,” said Premasish Das of consulting firm IHS. Naphtha is a key feedstock for petrochemicals and a gasoline blending component. Asian gasoline demand has mostly been firm, but uncertain U.S. demand for the motor fuel has meant that Europe has been directing more of its naphtha volumes to Asia.

Japan and South Korea are also running their refineries at more than 90 per cent of capacities on average, while Chinese refineries’ June throughput was the second highest on record.

Key Points Asia to be hit by at least 200,000 T of surplus naphtha in Aug Spot prices still pressured after flipping to discounts in June Naphtha market to stay weak at least until Sept, winter demand Though Asia will remain structurally short of naphtha, the high run rates mean it will have more of the feedstock from local refiners than usual.

Middle East’s naphtha supplies to Asia are expected to reach nearly 3.0 million tonnes this month and 2.9 million tonnes in August, data from Thomson Reuters Oil Research showed, higher than the 2.8 million-tonne monthly average for January to June.

Additionally, naphtha volumes arriving in Asia next month from the West, including Europe and the Mediterranean, are running at 1.3 million tonnes for the third straight month. That is 18 per cent above the monthly average for 2016.

Based on typical Asia demand for naphtha, this means the region will be hit by at least 200,000 tonnes of surplus supply next month, industry sources said.

At the same time, demand in Taiwan will take a dive as Asia’s top individual naphtha importer Formosa Petrochemical Corp will shut the largest of three crackers down for maintenance from mid-August.

“Prices have not reached bottom ... Until end-September, we will be struggling hard,” said a Singapore-based naphtha trader who expects as much as 400,000 tonnes of surplus supply.

This will likely keep naphtha margins in the red until winter, said IHS’s Das. Winter demand for naphtha typically picks up as rival petrochemical feedstock LPG is used for heating homes. Reuters

Australia will create a Home Affairs ministry to boost anti-terrorism links between government agencies, in the nation’s biggest security shakeup in more than 40 years, Prime Minister Malcolm Turnbull said. To be led by current Minister for Immigration and Border Protection Peter Dutton, the portfolio will be based on the UK's Home Office and have oversight of federal police, intelligence agencies and border forces, Turnbull told reporters yesterday in Canberra. “This is driven by operational logic,” Turnbull said. “You have a domestic security challenge which gets greater all the time.”

Banking

India’s most valuable bank vies for bond crown HDFC Bank Ltd. is threatening to end Axis Bank Ltd.’s decade-long reign as the largest arranger of rupee-denominated corporate bonds as sales climb to a record for a third straight year. India’s most valuable bank has managed 481.5 billion rupees (US$7.5 billion) of offerings so far this year, jumping 11 notches from 2014 to number two on Bloomberg’s league table. The lender is 95 billion rupees away from claiming the top slot, the data show. Businesses in Asia’s third-largest economy have sold 3.6 trillion rupees of notes since Jan. 1, and may close 2017 raising twice that amount.

Legal battle

Idemitsu to proceed with share sale Idemitsu Kosan Co said it would proceed with a US$1.1 billion sale of new shares, after a court rejected the founding family’s petition to block the stock offering, potentially clearing the way for a takeover of Showa Shell Sekiyu. The descendants of the Idemitsu founder, Sazo Idemitsu, have been locked in a battle with the Japanese refiner’s management over the proposed buyout. The new share sale would dilute the family’s stake and make it harder for them to oppose the deal.

Insurance

Prudential Financial enters Indonesian market U.S.-based Prudential Financial Inc has entered the Indonesian life insurance market in a joint venture with a unit of CT Corp in Jakarta, the companies said yesterday.

Prudential’s Pruco Life Insurance Company unit has acquired a 49 per cent stake in PT Asuransi Jiwa Mega Indonesia, the life insurance subsidiary of Indonesiabased CT Corp, the companies said in a statement.

Financial terms were not disclosed. The deal presents Newark, New Jersey-based Prudential Financial with an opportunity to tap the expanding middle class of Indonesia, the world’s fourth-largest country by population.

14 Business Daily Wednesday, July 19 2017

International In Brief Portugal

Free market in electricity up 6.8 per cent on year The free market in electrical energy in Portugal achieved a cumulative number of around 4.85 million clients in May, up 0.4 per cent from April and up 6.8 per cent from May of 2016, according to the market regulator, the ERSE. The monthon-month increase was, the regulator said, “growth similar to that recorded the previous month”. The average monthly increase since May last year has been 0.5, it added.

Electricity consumption by customers in the free market in May represented some 92.4 per cent of total consumption in mainland Portugal, it noted.

Sentiment survey

German investor optimism drops again German investors are experiencing a bit of mid-year doubt.

Investor confidence dropped for a second month in July, according to the ZEW Center for European Economic Research.

Its index of expectations, which aims to predict economic developments six months ahead, slid to 17.5 from 18.6 in June. Economists surveyed by Bloomberg predicted a decline to 18. Germany is entering a period of uncertainty as it heads toward September elections and the European Central Bank starts discussing when it might wind down euro-area monetary stimulus. Still, the DAX Index is picking up again after sliding in June.

Tax reform

U.S. House Republicans unveil 2018 budget The nonpartisan Congressional Budget Office has forecast economic growth of 1.9 per cent from 2017 to 2027 David Morgan

R

epublicans in the U.S. House of Representatives took a first step toward tax reform yesterday, with the release of a fiscal 2018 budget plan that would allow a tax reform package to pass the U.S. Congress without support from Democrats.

The US$4 trillion blueprint, which must be approved by both the House and Senate, would also set the stage for a Republican-only repeal of the 2010 Dodd-Frank Wall Street reform law and US$203 billion in savings from mandatory federal programs including food stamps over the next decade.

The plan aims to move the U.S. fiscal position from a US$472 billion deficit in 2018 to a US$9 billion budget surplus in 2027. The change is based in part on a committee forecast of 2.6 per cent annual U.S. economic growth that assumes future changes in tax, healthcare and financial laws, as well as deregulation.

The nonpartisan Congressional Budget Office has forecast economic

growth of 1.9 per cent from 2017 to 2027.

Covering the year beginning Oct. 1, the budget plan represents the latest Republican attempt to show they can govern since the party took control of both the White House and Congress in January. But the cloud of party infighting already hangs over those prospects.

The House and Senate are still struggling to enact legislation to dismantle and replace Obamacare and have not yet addressed other priorities including spending legislation for 2018 or a measure to raise the federal debt limit.

The House budget plan would spend US$621.5 billion on defence and US$511 billion on nondefense discretionary spending in 2018.

The House Budget Committee is expected to approve the plan later this week and send it to the floor of the chamber for a full vote. But conservative lawmakers are already balking over mandatory cuts they think are too small and demanding to see a tax reform plan before supporting the measure.

The plan is vital to Republican aims

of overhauling the U.S. tax code while avoiding a Democratic filibuster in the Senate.

The plan requires the tax-writing House Ways and Means Committee to find US$52 billion in savings, a directive that allows Republicans to pass a tax bill with a simple majority in the Senate, which they control by a 52-48 seat margin. Without reconciliation, tax reform would require 60 Senate votes.

‘The budget plan represents the latest Republican attempt to show they can govern since the party took control of both the White House and Congress in January’ A US$14 billion savings instruction for the House Financial Services Committee would allow the same procedure for legislation to replace Dodd-Frank, which passed the House in June. Reuters

Angola

Central bank’s currency sales fall 6 per cent in last week The sale of foreign currency by the National Bank of Angola (BNA) to the country’s commercial banks decreased 6 per cent last week, compared to the previous week, to 221.6 million euros, despite covering the operations of airlines for the second week in a row.

The information comes from the BNA’s weekly report on the evolution of the money and exchange markets between 10 and 14 July, and follows 236.4 million euros and 166.4 million euros provided in the previous two weeks. According to the report, accessed by Lusa, the currency sold - exclusively in euros for more than a year were the equivalent of US$247.6 million.

Prices

UK inflation rate’s unexpected drop UK inflation unexpectedly slowed in June, giving respite to Bank of England policy makers concerned that price growth was getting out of hand. The inflation rate slipped to 2.6 per cent, the Office for National Statistics said yesterday. It’s the first drop in the annual rate since October, and economists had forecast that it would hold at the four-year high of 2.9 per cent reached in May. The data weakens arguments for an immediate interest-rate hike that a minority of policy makers supported at the last BOE decision as inflation looked set veer further above the 2 per cent target.

Eurozone

ECB says banks loosened loan rules in second quarter Banks said that pressure from competitors for borrowers’ business was the main factor behind the changes Eurozone banks offered businesses and households easier access to credit and more lenient repayment conditions in the second quarter, the European Central Bank said yesterday, confounding expectations the market would tighten.

“The net easing of credit standards... followed a net easing in the previous quarter, despite expectations in the previous survey round that they would tighten slightly,” the ECB said in a press release.

Banks loosened standards they use to judge creditworthiness both on loans to businesses and mortgage lending to households, the Frankfurt institution found in a June survey of 142 banks in the single currency area.

ECB figures showed lenders eased requirements for businesses by 3.0 per cent, accelerating the 2.0 per cent loosening seen between January and March.

Banks said that pressure from

competitors for borrowers’ business was the main factor behind the changes.

Meanwhile, creditworthiness standards were 4.0 per cent looser for mortgages, a slight slowdown from the previous quarter’s 5.0 per cent.

‘European Central Bank figures showed lenders eased requirements for businesses by 3.0 per cent’ The central bank also found that banks had offered more generous terms and conditions in all categories of loan contracts in the second quarter, continuing a trend seen in

the first three months.

On the demand side, “merger and acquisition activity and fixed investment made an important and increasingly positive contribution to demand for loans to enterprises,” the ECB pointed out.

Historic low interest rates also encouraged both companies and households to borrow money, while mortgage borrowing was boosted by a rising housing market.

Low rates are one of the ECB’s massive interventions in the economy, alongside buying tens of billions of euros of government and corporate bonds every month and a programme of cheap loans to banks.

Central bank governors designed their policies to pump cash through the financial system and into the real economy by encouraging banks to lend, aiming to power growth and drive inflation towards their target of just below 2.0 per cent.

While many observers anticipate the ECB will announce later this year that it will wind down its controversial bond-buying programme, president Mario Draghi is expected to hold course for now at a policymakers’ meeting Thursday. AFP

Business Daily Wednesday, July 19 2017 15

Opinion Business Wires

Taipei Times The Chinese Nationalist Party (KMT) has refused to pay Cabinet-ordered compensation of NT$864.88 million (US$28.43 million) for selling properties appropriated from the Japanese colonial government, with the party saying that the properties were legally acquired and that it would appeal the order.

The Ill-gotten Party Assets Settlement Committee on June 15 ordered the KMT to pay for 458 properties appropriated from the former Japanese government, which were later sold or expropriated. The payment was due on Monday and failure to meet the deadline could result in the freezing of assets and detention of the KMT chairperson, who acts as the party’s legal representative.

The Asahi Shimbun Mazda Motor Corp. is recalling 19,000 cars in South Africa due to airbag safety concerns as the Japanese carmaker extends a global recall to cover a wider manufacturing period, its local unit said on Monday. The recall was prompted by investigations in Japan and North America for three different types of Takata Corp. manufactured airbags over safety concerns that inflators were defective. The U.S. National Highway Traffic Safety Administration said in July that new testing was prompting Takata Corp. to declare 2.7 million air bag inflators defective in Ford Motor Co., Nissan Motor Co. and Mazda vehicles.

Record Chinese steel output rests on record speculative interest

A

nother month, another Chinese steel production record.

China’s giant steel sector churned out 72.78 million tonnes of the stuff in June. That was equivalent to annualised production of 891 million tonnes.

The previous monthly output record was set in May 2014 at 71.16 million tonnes. This year, however, that historical landmark has been exceeded in every month since February.

There may be some statistical smoke and mirrors at work behind this record-breaking production run.

But the underlying reality is that China’s steel mills are being incentivised to lift production rates by strong prices. That of Shanghai steel rebar, used primarily in the construction sector, was last week trading at levels not seen since the end of 2013.

There are solid fundamental foundations for this price performance.

But there is a lot of speculative money in the mix as well with open interest on the Shanghai Futures Exchange’s (ShFE) steel contracts also notching up fresh records on a near daily basis.

Beijing is no doubt keeping a wary eye on the Trump Administration’s national security investigation into imports of foreign steel, but the most pressing threat to China’s steel producers might be the country’s own investors.

Capacity down, production up

Inquirer The Inquirer Group of Companies announced the Prieto family’s move to sell its controlling stake in the media conglomerate to businessman Ramon S. Ang, ending a quarter-of-acentury stewardship of the country’s top newspaper led by its chair, Marixi Rufino-Prieto. Speaking to employees of the Philippine Daily Inquirer and its sister companies in a town hall meeting on Monday, the family matriarch described the deal as “a strategic business decision that will maximize growth opportunities for the Inquirer Group.... We are confident that Mr. Ang will support our commitment to pursuing the highest standards of journalism,” Prieto said.

The Straits Times Singapore took further steps towards water security yesterday with the launch of a new US$2.5 million water research facility, and the inking of two agreements with other countries to facilitate the sharing of knowledge and expertise in the water sector. The new research facility, which will open in Jurong in January 2018, will be run by Japanese firm Kurita Water Industries and supported by PUB and Singapore’s Economic Development Board. It is the firm’s first research facility in Asia outside of Japan, and will focus on developing technologies for desalination and the recycling of waste water.

The strength of China’s steel production might appear strange, given the government’s efforts to close outdated, polluting capacity.

Beijing claims to have phased out 65 million tonnes of capacity last year and another 42 million tonnes in the first five months of this year.

As such, it’s well ahead of its stated five-year target of closing between 100 and 150 million tonnes.

So how come the country is producing record amounts of steel then?

Because the official capacity closure targets come with two important caveats.

The first is that a significant part of what has been “closed” wasn’t actually producing steel anyway.

Dismantling older, unutilized production lines has been an easy way for China’s steel producers to tick Beijing’s supply-side reform boxes.

Secondly, the official targets don’t include the elimination of what the Chinese call “DeTiaoGang”, substandard steel, particularly rebar, produced by smaller operators using scrap rather than iron ore as a feed.

Since Beijing classifies “DeTiaoGang” as illegal, unapproved capacity, it does not count towards the official capacity cut targets.

And crucially, it has never been included in the official production figures either.

Its unofficial status means that nobody knows for sure how much “DeTiaoGang” is produced but the consensus estimate is that it is definitely more than 100 million tonnes per year. To put that figure into context, China’s official production last year was 808 million tonnes.

What this means is that part of the current strength of Chinese steel production is a statistical illusion, official countable output rising to fill the gap left by the closure of unofficial, uncounted output.

“

Andy Home a Reuters columnist

area rose by 14.0 per cent in June, which was the fastest rate of growth since October 2016.

Strong demand and falling supply, even if statistically elusive, go a long way to explain the strength of Shanghai steel rebar prices.

...Stronger speculation

There is, however, a third element in this bullish steel cocktail.

Open interest on the Shanghai rebar contract has also been setting fresh records.

It ended May at 4.61 million contracts, comfortably exceeding the previous end-month record of 4.0 million dating from November 2015.

By the end of June open interest had exceeded the 5.0-million mark for the first time ever. It has been holding above that level in the two weeks since.

Rising open interest has coincided with a rising price, suggesting that speculative money has come in on the long side.

Now, it wouldn’t be the first time that Chinese investors have crowd-surged into the commodities space. Such was the speculative frenzy seen in the first part of last year that it took multiple hikes in trading fees across multiple exchanges to drive them back.

This time around, however, things look a bit different.

Last year’s speculative bubble was characterised by spikes in trading volumes but with little change in open interest, a combination indicative of a day-trading crowd.

Volumes on the Shanghai rebar contract are currently high but a long way off the elevated levels seen last year.

The inference is that the speculative flows currently entering the market are both more structured and controlled by larger entities happy to leave positions in place for days if not weeks.

Something similar seems to be happening with the ShFE’s contract for hot-rolled coil (HRC), a steel product with manufacturing rather than construction applications.

The HRC contract was only launched in March 2014 and is therefore something of a little sister to the more mature rebar contract. But it too has seen open interest hit record levels above 800,000 contracts in the last couple of days.

As with rebar, the build in open interest has coincided with rising prices but with no dramatic spike in trading volumes.

The underlying reality is that China’s steel mills are being incentivised to lift production rates by strong prices

Strong fundamentals...

The authorities claim to have closed 600 “DeTiaoGang” steel producers with combined capacity of 120 million tonnes in the first half of the year.

The stated aim is to completely eliminate all such “backward” capacity by the end of this year.

The effectiveness of the on-going clamp-down seems to have led to pockets of tightness in the domestic steel supply chain.

Even with production running at record levels, there has been no discernible build in steel inventory in the country and exports remain subdued, falling by 28 per cent, or 16 million tonnes, in the first half of the year.

Demand from the construction sector remains robust.

The latest batch of real estate indicators out this morning showed investment in the sector slowing marginally in the second quarter relative to the first but still running at a brisk pace.

Crucially, new construction starts measured by floor

”

Betting the house on home-building

Chinese investors, it seems, are betting the house on more home-building and more steel capacity closures.

There is nothing right now to suggest they are wrong to do so but the size of their collective positioning in Shanghai should ring alarm bells.

Because markets don’t move in straight lines and at some stage a price correction will come. The danger is the next one will trigger a disorderly stampede for the exit door, compounding pricing weakness and sending shock waves along the steel supply chain.

It may yet be Chinese funds not the U.S. president that trump the current positive dynamic in China’s steel sector. Reuters

16 Business Daily Wednesday, July 19 2017

Closing CEO comments

Cathay Pacific’s first-half performance disappointing

in the first half of 2017 continued to be disappointing.”

Cathay Pacific shares have rallied 23 per cent Cathay Pacific Airways Ltd.’s operating environment remained challenging in the first this year as the airline embarked on a threehalf of the year, Chief Executive Officer Rupert year transformation that included eliminating 600 jobs in the company’s biggest revamp Hogg said, dashing expectations of an early in two decades. Challenges at Hong Kong’s recovery for the carrier that’s cutting jobs marquee airline and its rival Singapore following the first annual loss in eight years.

Airlines Ltd. show how some of Asia’s biggest “We said that we expected the operating airlines are faring amid intense competition environment in 2017 to remain challenging,” Hogg said in a statement the premium airline from Chinese and Middle Eastern rivals, and a surge in capacity that is pummelling ticket sent to the stock exchange yesterday. “This prices. Bloomberg News has been the case. Our airline’s performance

Private report

Government ‘cyber troops’ manipulate social media The tactics are deployed by authoritarian regimes, but also democratically-elected governments, the authors said Adam Satariano

G

overnments around the world are enlisting “cyber troops” who manipulate Facebook, Twitter and other social media outlets to steer public opinion, spread misinformation and undermine critics, according to a new report from the University of Oxford.

Adding to growing evidence of government-sponsored efforts to use online tools to influence politics, researchers found 29 countries using social media to shape opinion domestically or with foreign audiences.

“Social media makes propaganda campaigns much stronger and potentially more effective than in the past,” said Samantha Bradshaw, the report’s lead author and a researcher at Oxford’s Computational Propaganda Research Project. “I don’t think people realize how much governments are using these tools to reach them. It’s a lot more hidden.”

Online behaviour of the government-backed groups varies widely, from commenting on Facebook and Twitter posts, to targeting people individually. Journalists are harassed by government groups in Mexico and Russia, while cyber troops in Saudi Arabia flood negative Twitter posts about the regime with unrelated content and hashtags to make it

harder for people to find the offending post. In the Czech Republic, the government is more likely to post a fact-check response to something they see as inaccurate, said the report.

Governments also use fake accounts to mask where the material is coming from. In Serbia, fake accounts are used to promote the government’s agenda, and bloggers in Vietnam spread favourable information. Meanwhile, government actors in Argentina, Mexico, the Philippines, Russia, Turkey, Venezuela and elsewhere use automation software -- known as “bots” -- to spread social media posts in ways that mimics human users.

“Cyber troops are a pervasive and global phenomenon,” said the report published by the group that is studying how digital tools are being used to manipulate public opinion.

Propaganda has long been a dark art used by governments, but digital tools are making the techniques more sophisticated, according to Bradshaw.

She said governments over the past several years have taken note of the way activists have used social media to spread a message and build support, and are adopting some of the same methods. Online tools such as data-analytics software allow governments to more effectively tailor a message for specific groups of people, maximizing its impact.

Bradshaw said that while Russia and authoritarian regimes get most of the attention for manipulating social media, Western democracies have been using similar techniques.

In the UK, the British Army created the 77th Brigade in 2015, in part for psychological operations using social media. Bradshaw said democratic governments aren’t forthcoming about their digital propaganda efforts.

“They are using the same tools and techniques as the authoritarian regimes,” she said. “Maybe the motivations are different, but it’s hard

to tell without the transparency.”

Following the U.S. election, Facebook and Twitter have been criticized for not doing enough to filter out fake news and offensive content.

Facebook, which had no immediate comment on the report, has hired more human curators and partnered with fact-check organizations in an attempt to keep misinformation out of people’s feeds.

Twitter spokesman Ian Plunkett referred to a June a blog post that said the company “should not be the arbiter of truth,” and that others on the site do a better job of highlighting wrongdoing. The company has taken steps to crack down on the use of bots.

Bradshaw said there isn’t an easy solution when balancing the benefits of sharing information across the Internet against the problems with spreading propaganda. She said one improvement would be tools that make it more clear when a government is involved. “There’s a fine line,” she says, “between free speech and censorship.” Bloomberg News

Portugal

Privatisation

Budget

Government says Sines terminal ideal as ‘energy hub’ for Europe

Air India eyes bumper staff buyout

Japan to set aside US$36 bln for education

The port of Sines, south of Lisbon, “makes every sense as an energy hub in the area of gas”, Portugal’s secretary of state for energy, Jorge Seguro Sanches said, stressing that to make this happen there is a need for “infrastructure” such as “interconnections” with the rest of Europe.

After a visit to the liquefied natural gas (LNG) terminal at Sines, Sanches recalled that his first public speech on taking office was precisely on this topic.

“The deep-water port, which is indeed the westernmost port in Europe, has great potential, if we invest in infrastructure, for us to be able to export to other countries,” the secretary of state told Lusa.

“That makes every sense,” he reiterated, arguing that the terminal - which is managed by Redes Energéticas de Nacionais (REN), Portugal’s privatised energy grids operator, could thus “come to provide [energy] security to other countries” in Europe.

For that to happen, there is a need to create gas “interconnections” between European Union countries - as the Portuguese government has long argued - Sanches pointed out.

He recalled that the EU is discussing “a very important legislative package on energy” that the government backs. Lusa

Air India is drawing up a proposal to offer voluntary buyouts to just over a third of its 40,000 employees, a senior company official said, one of the largest such offers in India’s state sector, as the carrier slashes costs ahead of a 2018 sale.

The official, who could not be named as the plans are not public, said the state-owned airline had also put fleet expansion on hold, scrapping a proposal to lease eight Boeing 787 wide-body aircraft. Air India’s board approved the proposal in April but nothing further had been done.

India’s flag carrier is on the block after Prime Minister Narendra Modi’s cabinet last month approved plans to privatise the loss-making airline - selling part or all of the company and ending decades of state support.

Founded in the 1930s and known to generations of Indians for its Maharajah mascot, Air India has a complex fleet, too many staff relative to its peers and US$8.5 billion in debt. Since 2012, New Delhi has injected US$3.6 billion to keep it afloat.

An official in Modi’s office said the leader, under pressure to cut spending and boost basic infrastructure like ports and roads, is in “no mood” to provide fresh monetary assistance to any loss-making public sector company. Reuters

Japan will set aside roughly 4 trillion yen (US$35.6 billion) in the next fiscal year’s state budget for measures that focus on education as part of Prime Minister Shinzo Abe’s strategy to spur growth, government sources told Reuters yesterday.

While setting aside money to develop Japan’s growth strategy, the government will curb spending in other areas such as public works by 10 per cent from this fiscal year, the sources said on condition of anonymity as the plan has not been finalised.

The 4 trillion yen pool will be spent on steps that include the nurturing of talented people, making education free of charge and boosting service-sector productivity, by allocating funds saved by cutting spending elsewhere, the sources said.

The plan will be part of an outline on the budget for the next fiscal year that begins in April 2018.

Based on the outline, to be approved by Abe’s cabinet later this week, the Ministry of Finance will gather spending requests from government ministries by the end of August.

The government will not set a ceiling for total expenditure, the sources added, indicating the premier’s stance of attaching greater importance to growth than fiscal consolidation. Reuters