Business Daily #1345 July 24, 2017

Chinese internet giants to invest in Unicom Telcos Page 8

Monday, July 24 2017 Year VI Nr. 1345 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Kelsey Wilhelm Inflation

Consumer price index up as education, health and transportation costs rise Page 3

Property

Real Estate industry calls for halt to rental bill revision Page 2

www.macaubusinessdaily.com

Transportation

AirMacau could lose pole position upon 2020 contract revision Page 3

Debt

President Xi Jinping deleveraging policy reaching stateowned firms Page 8

Sunny summer outlook Hospitality

Hotel industry experts are ready for stable occupancy and increases in room rates, with acceleration having commenced mid-July.

Currently, occupancy rates are at 80 to 90 pct, with estimates to hold at 90 to 95 pct in the coming weeks. Increases in room rates could hit 10 pct y-o-y, with increased demand outstripping additional supply. However, retailers are not feeling the uptick, with little increase compared to last year’s sales figures. Page 2

Room for improvement

Grand designs

Having worked on nearly a dozen LRT stations, the Robert Tung Ho Library, the Tai Fung Bank and more, architect and business owner Joy Choi Tin Tin talks to Business Daily about the growing talent in the city, out-dated regulations and laws, advantages for local architects, the importance of loving your projects and a green station for the LRT left indefinitely suspended.

Results A ‘solid but not great’ second quarter of the year, say analysts at J.P.Morgan, pointing out a leader in Galaxy, while noting MGM displayed ‘the worst’ results for EBITDA during the period.

Forecasts for H2 predict 5 pct h-to-h growth, for an overall 2017 result up by 15 per cent. Page 6

Mainland spearheads electronic payments revolution

Interview | Architecture Page 4

HK Hang Seng Index July 21, 2017

26,706.09 -34.12 (-0.13%) Worst Performers

Power Assets Holdings Ltd

+10.56%

China Mobile Ltd

+1.94%

AAC Technologies Holdings

-11.65%

China Life Insurance Co Ltd

CK Infrastructure Holdings

+5.93%

China Merchants Port Hold-

+1.84%

Geely Automobile Holdings

-4.56%

Hong Kong Exchanges &

-0.99%

Hengan International Group

+2.80%

China Resources Power

+1.43%

Ping An Insurance Group Co

-2.56%

AIA Group Ltd

-0.76%

Sands China Ltd

+2.56%

CITIC Ltd

+1.38%

Cathay Pacific Airways Ltd

-1.60%

China Mengniu Dairy Co Ltd

-0.73%

Lenovo Group Ltd

+2.06%

China Shenhua Energy Co

+1.17%

China Resources Land Ltd

-1.22%

China Petroleum & Chemical

-0.66%

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

-1.18%

Today

Source: Bloomberg

Best Performers

Tue

Wed

I SSN 2226-8294

Thu

Fri

Source: AccuWeather

Cash vs. digital Chinese were the first culture to use paper as money, and now they seem resolute to finish it off. A combination of economic and social circumstances is leading to the rapid adoption of digital technologies throughout the nation, regarding all kinds of payments. Page 16

2 Business Daily Monday, July 24 2017

Macau

Hospitality

Hotel industry holds positive outlook for 2017 summer holidays However, retailers remarked that sales have dropped when compared to the previous summer Cecilia U cecilia.u@macaubusinessdaily.com

“

I

believe the occupancy rate will remain stable and good,” stated Chan Chi Kit, president of the Macau Hoteliers & Innkeepers Association when asked about his predictions for the smmer holiday period.

Chan perceives that the rate will be “doing good after July 15”, given that the summer holidays start in July for Hong Kong and around that time for mainland China.

“The price of rooms will also increase a bit compared to last year,” Chan told Business Daily, explaining that the “comparison between 2015 and 2016 was half of the comparison between 2015 and 2014.”

The president of the association also revealed that some hotels have raised their prices a bit this year, opining that the market would be better this year.

The data released by the Macao Government Tourism Office (MGTO),

showing the city’s hotel occupancy rate and prices in June, demonstrates a rate increase of 3.1 percentage points year-on-year to 88.5 per cent, while average room prices dropped by 5 per cent to MOP1,174,8 (US$146.1) when compared to the same month last year.

“Once July starts, the price increases by 5 to 15 per cent,” noted Chan.

“For now the [occupancy] rate is hovering around 80 to 90 per cent, or over 90 per cent and even some [hotels] have had all their rooms reserved. Different hotels have different performance,” he pointed out.

With the improvement of the economy in mainland China, coinciding with an uptick in the city’s gaming revenue, Chan estimates that the occupancy rate will stay at 90 to 95 per cent after July 15.

Andy Wu Keng Kuong, president of Macau Travel Industry Council, also holds a similar outlook.

“The occupancy rate will be higher than usual, with the average rate to stay at over 80 per cent,” Wu told Business Daily.

Regarding price changes, Wu perceives that room prices will increase by 10 per cent when compared to the same period last year, while explaining that the demand for rooms has increased, despite more hotel rooms having been added to the city’s overall supply.

Chan points out that currently the

city has around 36,300 hotel rooms available, saying that the number has increased by a few thousand when compared to the same period a year ago.

The most recent hospitality establishment to open – the Macau Roosevelt – which had a soft opening late last month, brought an additional 368 rooms to the city’s supply.

Meanwhile, MGM Cotai is expecting to open in the last quarter of this year, which will bring an additional 1,400 hotel rooms to the city’s offerings.

Increased inbound and outbound travels

Regarding the number of visitors, Chan points to an increase of 1.9 per cent in the number of visitors to the MSAR from January to June.

However, Chan predicts that the number of guests staying at hotels will grow as much as 8 per cent yearon-year this summer, saying that visitors’ desire to stay in local hotels has increased.

Similarly, Wu perceives that the number of visitors to Macau “will increase by a single digit percentage year-on-year”, while adding that the length of stay at hotels will also increase.

DSEC data shows that the average length of stay for tourists in May of this year was 1.4 nights.

Regarding outbound tourists, Wu sees that more Macau residents are

favouring ‘one-day traveling’ to destinations such as cities in mainland China, predicting a year-on-year increase in the amount of outbound travel of 20 per cent.

Retailers: sales not as good as last year

Although more visitors are expected to visit the city this summer, retailers remarked that sales have not been as good as expected.

“It’s almost halfway through the summer holidays and honestly the sales for the time being still haven’t increased at all compared to last year,” said a salesperson surnamed Ng of Xu Xing Long Watch Limited, located near the Ruins of St. Paul’s.

Nevertheless, Ng expressed hope that the performance would improve during the rest of the holiday period.

Ng said that many crowds pass by the shop but not many enter and make purchases.

Workers from Pastelaria Yeng Kee, a souvenir shop also located near the popular tourist spot, said retail sales were unstable. “[There were] days that the sales were good but there were days that they were bad,” said one of the salespeople at the souvenir shop.

They revealed that retail sales had dropped by half when compared to the previous year, with only a few thousands patacas earned per day on some days.

Property

Real estate industry calls for a halt to rental bill revision Over 360 real estate agencies and companies posted a whole page statement in Friday’s issue of Chinese language newspaper Macao Daily, urging the government to suspend the revision of the rental law.

‘We believe that there will be an impact on Macau residents if the Legislative Assembly hastily passes the bill without improving the articles of the law,’ the statement reads.

The industry stressed that the statement was not an act of disagreement, but an expression of hope that the public would be allowed an opportunity to be well informed of the bill’s details, as well as wanting to ensure that the bill receives extensive approval before becoming law.

The current revision suggests a mechanism to allow the Chief Executive (CE) to cap rental prices by taking into account the city’s economic indicators, such as the inflation rate or unemployment rate, while the bill also clarifies that this mechanism, if applied, would be temporary and exceptional.

Moreover, the new bill proposes to increase the length of rental contracts, changing the current twoyear minimum to three years.

However, many representatives of the real estate market have voiced their opinion that the mechanism inappropriately allows the government to intervene in the free market.

Business Daily Monday, July 24 2017 3

Macau

CPI

Health, transportation and education drive consumer price increase

A

1.06 percentage point increase was registered in the composite consumer price index for June, when compared to the same month last year, as increased pricing of education, health and communication pushed up prices, according to the most recent data from the Statistics and Census Service (DSEC).

In particular, rising charges for outpatient services, eating out and domestic services, rising tuition fees and increases in vehicle prices and parking metre rates were primary contributors to the increase.

Education rates increased the most of all the market segments in question, year-on-year, with a 7.64 percentage point increase, while health saw a 5.15 percentage point increase year-on-year, despite only a 0.14 percentage point increase month-to-month.

Alcoholic beverages and tobacco also increased, by 1.36 percentage points, while transportation increased by 2.45 percentage points year-on-year.

A 5.82 percentage point year-onyear decrease was registered in the communication sector, with the data coming one day after the Secretary for Transport and Public Works Raimundo do Rosário noted that rates were going down, but that conditions still weren’t ideal.

When compared with the previous month, the consumer price index saw a 0.22 percentage point increase, driven by increases in clothing and footwear, alcoholic beverages and tobacco, recreation and culture, food and non-alcoholic beverages and transport. Clothing and footwear saw a 1.39 percentage point increase month-on-month, while the recreation and culture index rose 0.50 percentage points.

Alcoholic beverages went up 0.65 percentage points, while transport rose 0.09 percentage points month-on-month. The transport index increase was ‘due to higher parking meter rates, yet reduced gasoline prices tapered off part of the increment,’ notes the statistical body. K.W.

Source: DSEC

Airlines

AirMacau could lose pole position The renewal of Air Macau’s franchise, which has allowed it the position of sole home airline for the MSAR, will happen in 2020 and could leave room for another airline to enter the city’s aviation market, according to an interim report from consultants on the city’s future industrial development, cited by the South China Morning Post.

An academic interviewed by the publication noted that: “As Air Macau is mainly controlled by Air China and is also a partner of Cathay Pacific, the fact there is only one airline that has a dominant market position in Hong Kong and Macau suggests there should be a more liberalised regime for the operation of new airlines in Macau.” Dr. Law Cheung-kwok, a Chinese University aviation policy expert also told the publication that

“I would advocate for the liberalisation of the number of airlines and other supporting services in aviation operations,” in the MSAR. The airport is currently undergoing an expansion that will increase its capacity to 7.5 million passengers per year, having in late May launched a tender for a fixed base operator for both business and general aviation for a sub-concession term lasting six years.

4 Business Daily Monday, July 24 2017

Macau Architecture

Design attitude The architect currently in charge of renovating the Grand Hotel, Joy Choi Tin Tin, started her office in Macau in 2001 with a hit, the design of the Ho Tung Library facilities. Joy speaks with Business Daily about learning and drawing from diverse experiences, how opportunities have improved for Chinese architects in the city, and how she ended up designing a dozen LRT stations. But the architect urges that an update to the laws and regulations regulating the field is necessary Sheyla Zandonai sheyla.zandonai@macaubusiness.com

W

here were you trained and how did your early career develop?

I had the chance to join the national examination in China and be accepted in an architectural school in Canton (Guangdong province). In that fouryear time, almost every summer I was doing jobs in Macau, working at the archaeological site at Saint Paul’s ruins. During the university time, I also had the chance to go to Hong Kong University as a visiting student. In addition, in my family we are all in architecture and engineering professions, so this had given me a very early understanding of architectural design. Because of all of the training and background, I had a good opportunity to join Palmer and Turner Architects. Before joining Palmer and Turner, after I had graduated, I worked for Manuel Vicente for one year.

I stayed in Palmer and Turner for six years in total. While working there, I did the Bank of China building at Praia Grande. Another project I have worked on, in Beijing, is also a famous landmark complex, with a hotel, offices, and serviced apartments. These kinds of projects require the architect to have language skills, communication skills, technical skills, of course, and management skills as well; not only design skills. So it is a very comprehensive training, in addition to working and practice.

In which ways did your early student and professional experiences shape your practice?

During my time at university, I was more interested in vernacular Chinese architecture, following my professor, who is one of the founders of vernacular Chinese architecture in China. Vernacular architecture promotes local ways of building.

Material, climate, and colour are their major concerns in the design elements. In my time, in the 1990s, people didn’t really care too much about this, because in China [at that time] people liked modern, high-rising buildings, or copying architectural styles from anywhere in the world. When I went to Hong Kong University, or while practicing in that architecture firm, I had the opportunity to learn skills, techniques, and technological approaches [to architecture]. But concept and culture-wise, I am still looking back to the vernacular. The main question would be, how can we make use of culture and technology tools to develop the design? I believe it is better if you have a tailor-made design, which fits and then people can use it for a long time and can change it by themselves. So the designer and the architect provide the conditions for this to happen. That’s the concept of my own philosophy of what doing architecture is.

How was the overall local reception to incorporating local methods and culture into architectural design at that time?

I was lucky to be here in Macau and, with this vision, to still work in projects while following my own design philosophy and directions. I say I

am lucky because I also had many colleagues in China, and only a few of them are still in the design field.

Most of them have already changed their professional orientation, helping clients on the developer’s side; some are project managers, some of them are just running businesses, not really in the field of design. This also depends on the opportunities as well, and in Macau we have the opportunity, and people appreciate it. In the beginning, I remember when I was working for Palmer and Turner, my first project was the Tai Fung Bank [headquarters] located in the Dynasty Plaza area. For this project, the leading architect was in Hong Kong, and I was following him there. While I was working in Palmer and Turner, I was following the Hong Kong design team to carry out the projects, and this later became my basis for starting my own office.

When was your company founded?

It was founded in 2001. Not immediately after Palmer and Turner.

After Palmer and Turner I moved to MPS [Macau Professional Services], working with my former boss, [Jorge Miguel] Campina Ferreira, from CESL Asia Group, for three years. Under this group, they were running a lot of infrastructure projects, different facilities management, switch plant management, and a waste plant, in Taipa.

By mid-2001, I was leaving MPS, but actually planning to study in the United States, not really to open the office. I was applying for Yale University for a Master’s degree in law. The legal part has important implications in Macau and elsewhere, and clients would often come and ask how they could build. But I did not go [to Yale], because during the year I was preparing the application, I received several work invitations.

One was the Ho Tung library, which was the first project of my office, in 2002. We were not doing the whole project that now can be seen, because it was partially rebuilding it. Later on, we changed the contract, and signed another contract to design it.

“During my early career time, or nearly 15 years ago, we very much relied on the government, or some small private sector projects” The other one was an invitation by the [former] Public Works director, Jaime Carion. At that time, in 2001, I was doing research projects and doing lots of writing. I wrote a letter to the then secretary of Public Works, Ao Man Long, telling him there were very few opportunities for young architects to work in Macau.

I was lucky, because I was working for big firms, but there were so few opportunities for Chinese architects.

So I wrote a long letter to [the former Secretary] and he responded. He asked the director of Public Works to call me and he said there was a project for the interior design of the

Macau ID department at China Plaza [building], in 2002.

What was the situation back then and what has changed so far for people in your field now?

In 2001 and 2002, it was a very low season in construction in Macau. My ex-colleagues were very available, many of them, even in Palmer and Turner, were only working parttime. Actually I used to have a very good team, when I was working for my previous two companies, and we also had people outside, such as structural engineers, and we were always working together, with the architect leading the team.

[Nowadays] Chinese architects get more opportunities, for sure. There are many opportunities, because there are now different developers, not only the government. During my early career time, or nearly 15 years ago, we very much relied on the government, or some small private sector projects. Right now the variation is quite big, I would say half-half government and private.

But then, I would say, public projects are of one type, and private sector projects are of another type. In the public sector, social facilities such as schools, nurseries, and youth or community centres, have developed more in the past ten years. But it is also very difficult to work on that, because a lot of regulations are local, and we need to follow them, and the contractors are also local. So, local people or local architects are more suitable to handle those projects.

Are locals more suitable because they understand the law and regulations?

Yes, the law and the regulations, but also the people, and the methods and the material, and all those things. In our profession, the local practice is very different from that of people from China or people from Hong Kong. From China, architects or designers don’t approach the project material-wise, or follow the tendering part or the project part. They only do the design. Hong Kong is closer to Macau’s way of working, but it is also different from the Portuguese way. In Hong Kong, they run all the stages of the project, from the very beginning until the handing over of the key to the client, so that makes the fee higher. But the Macau type, Portuguese type, is just in-between Hong Kong and China. The architects [here] work with the material, the tender, the contractors, and the finishing, but the ‘fiscal’ [oversight], the supervision part would be another team. Those are the three different types. So if you are running a local Macau project, local people are more suitable. No matter if it is Portuguese or Chinese. They are good enough to work.

Since the new urban planning law and the new land law has been approved, has it become easier for you to work?

It is quite similar, because the latest regulations, or rather the guidelines we work with, called ‘circular,’ date from 2009. But it is not the most complete one. It is the one that is easier for architects and engineers to practice. So those are only selective.

But the fire law dates from 1995, which is very old, and the building

regulations are from 1963. It is really out of date. Between 1985 and 1990 a small ‘circular’ or updating on the building regulations was issued, in Portuguese, and it is still the one being used.

In your office, you have people coming from different parts of the world, with different training. Is it difficult to find enough qualified architects in Macau?

Yes, correct. It is not easy to find people, so we prefer to train them. We are a young company, so we have no problem in doing that. Everybody is young, with energy, patience, and we have the same vision, which I think is the most important. If our members don’t share the same vision, they usually won’t stay a long time.

Macau is a very quiet place, or as we say, everything is very low-key, not many positive ways of promotion, or encouragement. So it is very dependent on the architect himself or herself to understand or to appreciate their own profession. Design is a special profession. It is very particular. In some professions, with instruction and directions, you can immediately produce the work, but design is not like that. It is very subjective. It is not easy to keep people, and you need to explore yourself and explore others.

If you don’t have love for the project, you cannot do the project.

“The stations are semi-open, with no airconditioning systems, all of them, although the rain proofing is not perfect.

Under heavy rain and wind, it might affect people, and not be very convenient” Your office won several contracts to design the Light Rail Transit (LRT) stations. Had you previously acquired experience while working for companies like MPS to take on a project like this?

No, the LRT project is totally different from MPS’s kind of infrastructure, which is more industry-related and enterprise-based. For the LRT, the government launched an invited tender, for which they had certain criteria. You needed to have certain experience, a team of infrastructure engineers, and so on. So, they only invited infrastructure companies. They did not directly invite architects. But those from the infrastructure companies would invite the architects to join the team. We joined two teams, and they won the tenders. One team for one zone, which comprises around three to four stations, depending on the location. In the beginning, we joined two teams who won the tenders, so that means we were working in two zones, which makes around eight stations. Later on, another team had an architect who left, and they invited us to join them. So, finally, we were part of three teams, and that’s why we are doing eleven stations out of 23 in total.

Was it a first for your company to work on this type of project?

Yes, but we only designed the stations, it has nothing to do with the metro itself. Four stations are in Taipa, which are already built. But for this project, the government has some type of arrangements. The government has one typical station, which should apply to most of the stations’

Business Daily Monday, July 24 2017 5

Macau

Joy Choi Tin Tin , the architect currently in charge of renovating the Grand Hotel

designs. But they are still open for architects to design individually, because the locations are different, the environment is different, so we will tailor-make for the particular one [allowed by the government] not for the standard one, that is, the template for most of them.

How are the stations and what have you planned for the tailor-made ones?

The stations are semi-open, with no air-conditioning systems, all of them, although the rain proofing is not perfect. Under heavy rain and wind, it might affect people, and not be very convenient. We have also proposed one green station, but this project has been suspended. It is the one located in the NAPE area. There was a lot of fighting and discussion about having a station inside the garden and the park [Alameda Dr. Carlos d’Assumpção].

Actually if they managed to build the station, it would be very beautiful, a total eco-garden, with vertical green walls, a rainwater collection system for the plants, and also with solar

panels and a wind mill. But this station was suspended before the project was launched.

“In some professions, with instruction and directions, you can immediately produce the work, but design is not like that. It is very subjective” Is the LRT actually going to run on the Macau peninsula?

I guess so, because the train cars are already here, sitting somewhere. It is a matter of time, although on the Macau side it has been delayed too

much. For one, there are plans to change the China-Macau border, in Gongbei. They have a new urban planning there. And the Gongbei one is very important because it will be connected to Phase 2 on the Inner harbour side and it will also connect NAPE Harbour. We have also designed the station for the ferry terminal. One is at the Sands hotel, one is at the Wynn hotel, and one is at the science museum. Now the one in the garden has been removed.

Casinos are other large-sized projects, but they are not being designed by local architects, are they?

No, the design and the development come from the United States, or from Hong Kong. Macau architects only endorse the projects, because there should be a locally-registered architect to endorse the project. It is the same for the hotels. And also they don’t follow the Macau Law, they follow American standards in regards to design regulations. Say, for instance, in regards to fire escapes, their design is totally different, and

American architects know [about the American regulations] better than us, I cannot go into details. There are so many laws regarding the height, the width, the staircases, the space of the fire compartment, the arrangements for shops and the public area, the window openings. There are so many related to design that they don’t really need to follow Macau’s. They follow their own standards.

What about safety regulations?

For projects other than the casino-hotels, the local authority would not accept [to apply foreign regulations]. For Ho Tung library, we had to follow the local regulations. It is different, this is very technical. The scale is different, the regulation to be followed is another one. So this means the regulation needs to be updated anyway, anytime. It is a lot of work. There have always been discussions in the legislative assembly and at the executive council level, but the latest attempt has been banned at the top level. So it will have to be revised again.

6 Business Daily Monday, July 24 2017

Macau Results

Q2 Solid but not great: J.P.Morgan

C

oming off of a second quarter which was ‘solid but not great’, analysts at J.P.Morgan are pointing to Galaxy as the ‘best performer’, with flat earnings before interest, taxation, depreciation and amortization (EBITDA) quarter-to-quarter ‘due to its solid mass performance and continued cost discipline’.

On the flip side is MGM as ‘the worst’ given that its EBITDA fell 15 per cent quarter-to-quarter ‘due to share loss in mass and relatively unfavourable luck quarter-to-quarter’. Forecasts for the remaining operators are for ‘3-4 per cent declines in EBITDA quarter-to-quarter’.

For gaming revenues in the second half of the year, the analysts are expecting to see a growth of 5 per cent

compared to the first half, which is ‘more or less in-line with historical seasonality of 4 per cent (average since 2010)’. This would imply a 15 per cent year-on-year growth in gross gaming revenues for the whole-2017.

‘We think this is a reasonable assumption, as risks to upside (acceleration in VIP, better-than-expected China macro) and downside (mainly regulatory risk) seem balanced,’ opine the analysts.

In particular, the group points out that during the second quarter of the year a drive ‘by acceleration in VIP growth […] more than offset a modest slowdown in mass,’ noting that ‘such divergence between the two is almost unprecedented’.

Reasons for this include the fact that ‘end-demand

indeed has been solid, with old agents/players coming back to the market & new faces emerging,’ pointed out the analysts, opining that ‘this was driven by favorable macro drop of 2016 and slower anti-corruption

campaign (at least until early 2017) with some time lag’.

Regarding Galaxy, the analysts opine that ‘the property still has more legs to ramp up, especially in premium-mass segments, by yielding up tables/rooms

via data analytics and optimization of patron mix.’

Predictions are for samestore performance on the property to ‘continue to be impressive and surprise the market, in turn pushing the stock to grind higher’. K.W.

Appeal

Japan’s Universal loses Supreme Court appeal in Reuters case Japan’s Supreme Court rejected an appeal by Japan’s Universal Entertainment Corp to hear its defamation case against Reuters, upholding two lower court rulings that its case against the news agency lacked merit.

In a short written ruling on Wednesday, the Supreme Court said that Universal did not have grounds

for appeal. Yoshinobu Onuki was the presiding judge in the case.

Universal did not respond to a request for comment on the ruling.

Universal had sued Reuters in Tokyo in December 2012, demanding 200 million yen (US$1.79 million) and apologies, for stories relating to US$40 million in payments Universal made to a consultant in relation to

a casino project in the Philippines.

In 2015, the Tokyo District Court ruled that the Reuters’ articles were accurate, and the company then lost an appeal last year at the Tokyo High Court, which upheld the lower court’s ruling.

The Reuters articles were about Universal’s payments to Rodolfo Soriano, a close associate of the former

head of the Philippine gaming authority, and an investigation by the Nevada gambling regulator into the payments.

Universal denies any wrongdoing.

A Reuters spokesperson said: “We are pleased with this resolution, which upholds the right of the press to report on news in the public interest.” Reuters advertisement

Business Daily Monday, July 24 2017 7

Macau Opinion

Sheyla Zandonai*

Global city

Opinion

China’s Overextended Consumers Adding Even More Debt: Junheng Li Other than housing, there are few investment options available to most Chinese citizens, which helps explain why home prices keep rising, despite the government’s efforts to contain the speculative frenzy Junheng Li

Macau has long been regarded as a barometer of China’s economic activities. This makes sense as long as much of China’s economy continues to be driven by construction and manufacturing. That’s because few “internet bosses” frequent casinos to entertain business associates. It’s the coal bosses, steel bosses and real estate bosses who readily throw down large sums of money in the VIP rooms with their guests to lubricate business deals. Keep in mind that Macau is not -- and likely will never be -- Las Vegas. Macau is a place dominated by well-heeled gamblers, not those looking for US$5 slot machines.

In that sense, investors and economists are right to trumpet last week’s gross domestic product report that showed China’s economy expanded a stronger-than-forecast 6.9 per cent in the second quarter.

Gaming revenue in Macau’s fabled VIP rooms has bounced back from a long period of negative growth between mid-2014 and the end of 2016. In the second quarter, gaming revenue from VIP players rose the most in three years, jumping 38 per cent from a year earlier. That’s almost 27 percentage points more than the growth in the non-VIP, or mass customer, segment. This acceleration sends a strong signal that China’s old economy is not only back, but it’s booming.

Although officials have managed to steer China’s economy into a soft landing, the question is, at what cost? The reported GDP data for the first half of 2017 suggests that the three long-time engines of growth -- construction, manufacturing and exports -- remained key supports,

buying the Chinese government time to enact structural reforms.

Domestic consumption driven by the middle class, however, was stagnant, and leverage is high, which is why many, including the leadership in Beijing, are worried about the structural challenges facing China. During a two-day closeddoor conference on financial regulation last week, China’s leadership sent a strong message to the market that deleveraging and strengthening regulatory oversight were the themes for the financial sector in the next five years. Immediately after, coincidentally, the government cut off some funding for Dalian Wanda Group’s overseas acquisitions because of concern that the company is too highly levered.

‘Although officials have managed to steer China’s economy into a soft landing, the question is, at what cost?’

The housing market may hold the key to where China’s economy is headed. Other than housing, there are few investment options available to most Chinese citizens, which helps explain why home prices keep rising, despite the government’s efforts to contain the speculative frenzy. It can be said that home buyers have developed a sort of

psychological resilience to more restrictive policies, even viewing them as “buy signals.” Because it’s becoming more difficult to buy and sell in the more tightly regulated markets, speculative buyers are moving into the smaller cities surrounding the large cities.

According to the National Bureau of Statistics, new home sales jumped 13 per cent in the first half from a year earlier, driven by a 27 per cent increase in lower-tier cities. Since there is no evidence of any significant net increase in the population of those lower-tier cities, most of the increase in purchases likely came from speculative investors in larger cities nearby. A simple yet effective analysis that measures affordability by median household income divided by mortgage expenses and rental yield reveals a striking fact. Most homes are being bought in China not as residences by the working middle class, but by speculative investors. People’s Bank of China data suggests the average household is more indebted than ever. The data show that consumer loan growth is up 24 per cent from a year earlier at the same time that net savings deposits are down 5 per cent.

Auto sales are suffering as a result of rising household debt. Dealerships in China will say that higher monthly mortgage payments have made consumers less willing to buy or upgrade their cars -- the second-biggest item for consumer discretionary spending, Car sales are up just 1 per cent this year, the slowest since 2009. Even the less cyclical highend segment -- German luxury cars, for example -- has started to see growth decelerate.

As Wall Street economists get busy revising upward China’s growth outlook in the second half, investors would be well-advised to exercise caution.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Bloomberg Prophets

The state is overrated.

Think about the One Belt, One Road (OBOR) initiative and the Greater Bay Area.

Both are plans under China’s national strategy to systematize and re-organize its economy for the next several years to come.

But they aim at garnering results under different arrangements.

While the Belt and Road is an international strategy, the Greater Bay is one amongst various other plans of similar scope to optimize production and harness regional integration at the domestic level.

It is a two-fold strategy to secure the means for keeping the ball of growth rolling and fostering consumption. China creates markets.

Both initiatives concern Macau in a similar fashion. One calls the local government to adhere to the Road, mostly by harnessing connections with Portuguese-speaking countries. The other drives the city further down the ineluctable path of merging within the Cantonese cluster.

The Greater Bay is a reality.

The Belt and Road is a loose goal, at least as long as it is not, in what relates to Macau, tied to a funding agency that caters for and captures concrete projects.

Negotiated at the city level, the interregional cluster generates policy on customs, logistics, finance, and infrastructure.

And it moves capital. For instance, several Macau-based companies, from banking and real estate to law firms have opened representative offices in Hengqin.

Nothing of the sort here has materialized under OBOR. The MSAR Government can take advantage of initiatives that already exist, such as the Macau Forum, which acts as a connector with the Portuguese-speaking world.

But new projects are welcome for a city like Macau, in which there are continuous claims to internationalize.

It does not have to be complicated. The Portuguesespeaking thread is long, complex, and large enough to generate promising prospects.

To go back to my first point, agreements do not have to be crafted only at the nation-state level.

Several cities in South and South-east Asia, for instance, have populations who claim Portuguese-descent and speak some local form of Portuguese, in India, Indonesia, Malaysia, Cambodia and Vietnam. OBOR promotes development in infrastructure. But strengthening cultural links can cause no harm. Perhaps other opportunities in trade, business and policy exchange will follow.

Macau should make full and good use of its primary condition, that of being a city. And not just any city. A city with a global history, open to the world. * Journalist.

8 Business Daily Monday, July 24 2017

Greater China Debt

Xi Jinping turns deleveraging cross-hairs to fresh targets China’s deleveraging campaign is taking on its toughest target yet: the public sector itself

W

hile up to now policy makers have focused on a build-up of liabilities at smaller banks and big private-sector companies, President Xi Jinping has made clear that local government authorities and China’s behemoth state-owned enterprises too must restrain borrowing. Xi’s comments at a top financial-regulatory gathering last weekend were the latest signal of determination to head off any future destructive debt-bubble deflation.

It’s perhaps the hardest leverage nut to crack, because Communist Party officials have for decades risen through the ranks by borrowing to fund growth -- whether at local authority levels or atop an SOE (State owned enterprises) monopoly. The party has kept a national growth target, making it a challenge to change cadres’ mentalities. But with the economy exceeding expectations now, time could be ripe to crack down on borrowing.

“Policy makers will likely seize this rare opportunity to reduce leverage in the economy in a deeper, longer and more thorough campaign,” said Helen Qiao, chief greater China economist at Bank of America Merrill Lynch in Hong Kong. “We will see more measures being rolled out in the second half of 2017 and 2018,” she said.

A key underlying problem has been China’s inefficient use of credit, particularly after the leadership team

under Xi’s predecessor unleashed a record borrowing binge during the global crisis. Even before then, the country’s incremental capital-output ratio -- which measures how much extra output is yielded from additional investment -- was worse than other Asian economies during their rapid-development phases.

Before the crisis, China’s ICOR was about 4.4 (meaning it generated RMB1 extra output for each RMB4.4 invested), compared with 3.2 for Japan in the 1960s, according to Nomura Institute of Capital Markets Research.

More recently, China’s ratio deteriorated to over 6, show data cited by the International Monetary Fund.

Top priority

Xi’s remarks at the July 14-15 conference of top financial regulators showed he wants broad action to address wasteful borrowing. China should view curbing SOE leverage as “the priority of priorities,” and hold officials accountable “for a lifetime” for building up regional debt. Rather than stressing the need to limit credit in the financial system, he focused on reducing borrowing in the entire economy.

“Focusing on cutting excess leverage in real economy, instead of in the financial sector” came as a surprise to some, said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. “Cutting leverage means the gap between credit growth and nominal GDP growth will narrow -but that could have knock-on risks

President of China Xi Jinping. Lusa

and drag on economic growth itself.”

Gross domestic product climbed 6.9 per cent in the three months through June compared with a year before, data released Monday showed, above the target of around 6.5 per cent. Any move to set that target aside and reduce credit gains more systematically could unsettle bond and stock markets that have more recently grown comfortable with China’s pace of deleveraging. Yields on government and corporate bonds remain lower than highs reached in May and early June that followed steps to rein in shadow banking.

Five years

Last week’s National Financial Work Conference was designed to set priorities for the coming five years, though some analysts see initial steps being taken even in coming months to execute Xi’s priorities. Among potential options for addressing SOE borrowing, economists cite:

Debt-for-equity swaps Consolidation of the hundreds of state enterprises into a smaller group of national champions Forcing bankruptcy onto insolvent “zombie” companies Partial privatization, with stake sales used to pare back debt “As the central government becomes extremely serious in curbing SOEs’ financial leverage and expresses zero tolerance of local governments’ inability to curb debt growth, more corporate defaults are expected,” Raymond Yeung, the Hong Kongbased chief economist at Australia & New Zealand Banking Group Ltd., wrote in a note. “Banks would tighten their credit policy in the near term, risking the cash flows of some borrowers. Credit risks will increase.”

When it comes to local authorities and their financing vehicles, borrowing recently has been heading in the other direction: a total of RMB834 billion of debt sales has been announced so far in July, already the biggest amount since August last year.

SOEs have also increased borrowing of late, with them planning RMB295 billion of sales for July through Friday, according to data compiled by Bloomberg. JPMorgan estimates SOE debt at 90 per cent of gross domestic product, making up the majority of total corporate debt at 165 per cent.

“It’s encouraging to hear Xi name SOEs specifically because it gets the diagnosis right on the debt side,” said Andrew Polk, co-founder of research firm Trivium China in Beijing. “But this is one place where we really need to wait and see some genuine action before we can believe that the government will actually address the issue.” Bloomberg News

Telco

Baidu, JD.com to join others investing in Unicom The capital raising would give China Unicom the firepower to boost its spending on 5G Julie Zhu

Baidu Inc and JD.com will join other big Chinese technology firms to jointly invest about US$12 billion in the Shanghai-listed unit of China Unicom, the weakest of three big state-owned telecoms firms, two people with direct knowledge of the matter said.

The move is part of the Chinese government’s drive to rejuvenate state behemoths with private capital. Beijing added China Unicom last year to a first batch of stateowned enterprises to see mixed-ownership reform.

China Unicom, formally known as China United Network Communications Group Co Ltd, is one of the world’s largest mobile carriers by user numbers, but its recent earnings have struggled in a fiercely competitive market.

The carrier is widely seen as over-staffed, inefficient and slow to develop key technologies. It already lags state-owned China Mobile and China Telecom, and private firms have moved ahead in developing cloud and big data services, and mobile software.

Reuters reported last month

that Alibaba Group Holdings and Tencent Holdings would be among new investors putting a total of about US$10 billion into China United Network Communications Ltd, China Unicom’s Shanghai-listed unit.

Key Points Baidu to invest RMB10 bln in China Unicom unit source JD.com likely to invest RMB5 bln - source Tencent, Alibaba also likely to invest billions source Biggest new investor to be China Life Investment Hldg Share sale plan to be finalised by late-Aug sources

That total is likely to rise to about RMB80 billion (US$11.8 billion), with Baidu, China’s biggest internet search provider, investing about RMB10 billion (US$1.48 billion), and JD.com, the country’s second-largest e-commerce company, putting in about RMB5 billion, one of the

people said.

The China Unicom unit is likely to raise RMB15 billion from Tencent and RMB7 billion from Alibaba, while China Life Investment Holding Co Ltd would be the biggest new investor, with a RMB20 billion commitment, that person added.

Overall, it would be the largest capital raising in the Asia-Pacific region since insurer AIA Group’s 2010 initial public offering, according to Thomson Reuters data.

The majority of the capital would be raised through new share issues, while China Unicom would also sell part of its stake in the Shanghai unit, the two people said.

Both sources declined to be identified as the talks are not public.

Baidu and JD.com declined to comment, and China Unicom, Alibaba and Tencent

didn’t respond to Reuters requests for comment. China Life Investment Holding could not immediately be reached for comment.

China’s State-owned Assets Supervision and Administration Commission (SASAC), which oversees state enterprises, also did not respond to requests for comment.

5G push

After the share sale, China Unicom’s stake in the Shanghai-listed business would fall to just above 40 per cent, from 63 per cent currently, one of the sources said, and top investors, including China Life Investment and Tencent, would likely have seats on the firm’s board to engage in its operations and improve its management.

Both sources said teaming up with China’s big tech companies, particularly Tencent

and Alibaba, would help revive China Unicom by lowering the cost of attracting new users and shifting its focus from traditional telecoms services to digital information services.

The share sale also comes at a time when Beijing is pushing to build the world’s largest fifth-generation (5G) mobile network - bringing a significant speed upgrade from today’s 4G network.

China’s 5G market could be worth RMB1.1 trillion, or 3.2 per cent of GDP, by 2025, according to a recent research paper from the Ministry of Industry and Information Technology.

The capital raising would give China Unicom the firepower to boost its spending on 5G. Share trading in China Unicom’s Shanghai-listed unit has been halted since it said in early April it would be part of the government’s mixed-ownership pilot. It gave no further details at that time. Prior to that suspension, the unit’s market value topped US$23 billion.

A week ago, the unit said it was waiting for regulatory approvals over details of the mixed-ownership plans, and trading in its shares would remain suspended for another month.

The sources said the share sale plan is likely to be finalized by late August. Reuters

Business Daily Monday, July 24 2017 9

Greater China Futures

Domestic steel falls again on mounting concerns over supply glut Analysts said mills have been slowing down their restocking process China’s steel rebar futures fell for a second day on Friday on mounting concern that rising output from mills seeking to cash in on higher prices has glutted the market.

“Investors started to question if the market is turning to oversupply from short supply. The previous optimistic attitude has gone, which also reflects market concern over high margins at mills,” wrote analysts at Orient Futures in a note.

Stockpiles of rebar in 35 major cities in China rose 123,600 tonnes to 4

million tonnes by Friday compared with the previous week, according to data on the Mysteel Consultancy website. That’s up from 3.9 million tonnes a month ago.

The current margin on rebar was RMB1,128 (US$166.72) a tonne for this week, according to Mysteel. That was steady from last week but up from about RMB300 a year ago.

The most-active rebar futures contract on the Shanghai Futures Exchange fell as much as 3.2 per cent to RMB3,467 a tonne on Friday. It closed at RMB3,525, down 1.6 per cent.

Open interest in the most-active rebar futures contract fell to 3.78 million lots, equivalent to 37.8 million tonnes, on Friday, down from 4.83 million lots the week before.

Spot rebar rose 0.1 per cent to RMB3,945.06 a tonne on Thursday, according to Mysteel data.

“The increasing inventory in steel products along with the heatwave across the country curbing demand for steel products will fuel a bear market for steel and the ferrous metal market,” Orient Futures wrote.

The most-traded iron ore contract on the Dalian Commodity Exchange dropped 0.9 per cent to RMB521 a tonne on Friday.

Open interest in the September contract has fallen to 1.4 million lots as of Friday, down from 1.8 million lots on Tuesday and the lowest since March 31.

Key Points Long-buyers sell position over glut concern Rebar inventory builds Restocking demand wanes, curbing prices of raw materials Analysts said mills have been slowing down their restocking process, which put pressure on demands for raw materials.

China’s June iron ore output rose to 124.7 million tonnes, its highest level since October 2015, the National Bureau of Statistics reported on Wednesday.

Coking coal futures eked out gains after falling nearly 2 per cent during morning trade. It climbed 0.7 per cent to RMB1,262 a tonne. The September coke contract rose 0.7 per cent to RMB1,946 a tonne. Reuters

Lawsuit

HNA dealings with U.S. travel start-up to be probed Bank of America Corp. was said last week to halt transactions with HNA amid concerns about the conglomerate’s debt levels and ownership structures Tiffany Kary

Chinese conglomerate HNA Group Co., already under scrutiny from local regulators, will also be probed as part of the U.S. bankruptcy of one of the companies it invested in.

HNA Group’s dealings with San Francisco-based travel agency Travana Inc. will be investigated under bankruptcy law, which gives creditors the right to depose witnesses and seek internal records. U.S. Bankruptcy Judge Hannah L. Blumenstiel approved the request in San Francisco court on Thursday over objections from the company’s board.

“We think this is a sideshow, a hijacking” of the bankruptcy, Daniel Lanigan, a lawyer for Travana’s board, said in the court hearing.

HNA, once an airline operator, has taken on billions of debt from China’s banks as it has made more than US$40 billion of acquisitions over six continents, using billions in pledged shares as collateral. It has bought up large stakes in Hilton Worldwide Holdings Inc., Deutsche Bank AG, and most recently one of Brazil’s busiest airports.

Scrutiny in China

The relationship between HNA and Travana is already said to be under scrutiny from China’s banking regulator, as it tries to gauge how much risk the country’s banks face from lending funds to it and other top deal-makers. The European Central Bank is also said to be considering a

review of HNA for its stake in Frankfurt-based Deutsche Bank.

Earlier Thursday, Bank of America Corp. was said to halt transactions with HNA amid concerns about the conglomerate’s debt levels and ownership structures.

A group of former Travana executives brought the probe request in bankruptcy court, saying the online travel agency may have significant claims against HNA, which holds 90 per cent of its shares.

They sought testimony and documents from Shi Lei, who they say was appointed to oversee HNA’s investment in Travana and named president, and has a close relationship with Adam Tan, HNA Group’s chief executive. They alleged that the HNA executive overseeing the company decided to stop Travana from marketing activity and deny it from seeking funding, and said they wanted more information.

“It was not an ordinary business closure. The insolvency of Travana was entirely within the control of HNA, and accordingly, designed and directed by HNA for the benefit of HNA,” Travana’s former executives said in court papers.

HNA’s board objected, saying a Chapter 7 trustee overseeing the bankruptcy should be the one seeking the information.

An HNA spokesman said on Friday that the claims by former Travana executives are “riddled with hyperbole.”

“Following a thorough investigation, the HNA Group board decided that Travana management was unable to deliver a viable sustainable business model and that closing down the company was the most responsible step. Naturally, Travana employees are disappointed – as is HNA – but the decision to close the company was made after careful consideration,” he said in an emailed statement.

Blumenstiel said she will review subpoenas to make sure they’re appropriately narrow, after saying some of the executives’ request contained “hyperbole.” Bloomberg News

In Brief Management

LeEco’s listed company names Sunac’s Sun chairman Leshi Internet Information & Technology, embattled Chinese tech group LeEco’s main listed entity, said Sun Hongbin from investor Sunac China would take over as chairman from founder Jia Yueting. A frenetic pace of growth over 13 years, from a Netflix-like video website to a business empire spanning consumer electronics to cars, has left a gaping hole in LeEco’s finances. Jia, who has described the cash crunch as “far worse than expected”, stepped down from all posts at Leshi earlier this month to focus on LeEco’s electric car business and repay debts.

E-commerce

Louis Vuitton opens e-store Louis Vuitton has launched an e-commerce service in China, seeking to capitalize on a rebound in the world’s largest luxury-goods market, where online sales have been dominated by local Internet giants. The site will let customers buy Louis Vuitton leather goods, shoes, accessories, watches, jewellery, luggage and perfume, the LVMH-owned brand said in a statement Friday. The site will cover 12 cities, including Beijing and Shanghai, with others to be added later. Louis Vuitton began selling online in France in 2005 and has expanded to 11 countries, after the Chinese site went live Thursday.

Monetary policy

PBOC pumps in most funds since January China’s central bank used its open-market operations to boost the supply of cash in the financial system after demand driven by tax and dividend payments pushed the overnight money rate to a four-week high. The People’s Bank of China added a net RMB40 billion through reverse-repurchase agreements on Friday, bringing this week’s injections to RMB510 billion (US$75.4 billion) -- the most in six months. The nation’s interbank funding costs rose last week amid signs the government is in no hurry to let up on its efforts to reduce borrowing levels.

Auto industry

Toyota eyes mass EV output in Mainland Toyota Motor Corp is likely to begin mass production of electric vehicles (EVs) in China as early as 2019, the Asahi daily reported on Saturday. The model will be based on the C-HR sport utility vehicle and manufactured for Chinese market only, the report said without citing sources. The pace of production is to be decided after taking into account the regulations and the subsidies, the report said, adding that annual output could start with more than several thousand units. China is planning to set goals for electric and plug-in hybrid cars to make up at least a fifth of Chinese auto sales by 2025.

10 Business Daily Monday, July 24 2017

Greater China Markets

Equity funds, local debt top H1 emerging market performance tables Chinese stocks gained almost 5 per cent in June after MSCI’s decision to include Mainland A-shares in its emerging equity index fuelled a buying spree Claire Milhench

C

hinese and Indian equity funds sprinted away from th e i r e m e rg i n g market rivals in the first half of 2017, whilst local currency bond funds shone as the dollar weakened.

China funds filled the top five places in a league table of emerging equity funds based on Lipper performance data, and India strategies took the other slots in the top 10.

It was a turnaround from the end of 2016, when Asia funds brought up the bottom of the rankings which were led by Russia- and Brazil-focused funds.

Russia funds are this year’s worst performers.

Emerging equities rose over 17 per cent in the first half of the year, attracting net inflows of US$42.3 billion, according to EPFR Global.

They had suffered outflows of US$7.4 billion in the first six months of 2016.

On average, global emerging equity funds tracked by Lipper delivered returns of 14.8 per cent, versus 6.56 per cent in the first half of 2016.

Chinese stocks gained almost 5 per cent in June after MSCI’s decision to include Mainland A-shares in its emerging equity index fuelled a buying spree.

But Greg Kuhnert, manager of the Investec GSF All China Equity fund, which topped the equity table with a return of over 35 per cent, said the announcement was not really a factor in his outperformance.

Instead he cited overweights in consumer discretionary and tech stocks such as Geely Automobile Holdings and Sunny Optical, which makes lenses for smart phone cameras.

Kuhnert was “cautiously optimistic” for the second half despite China’s debt burden, which he said the government was addressing: “Investors have been climbing a wall of worry on these issues for a very long time and valuations are cheap while earnings are recovering.”

Brijesh Ved, lead advisor to Parvest Equity India, which came sixth, also highlighted an expected earnings recovery in the second half, helped

by the government’s focus on infrastructure projects.

I n d i a n s t o c k s h av e surged to record highs this year, bouncing back from 2016’s demonetisation-led correction.

Ved said other reforms such as the Goods and Services Tax should also ultimately benefit listed companies, notwithstanding the potential for short-term disruption.

Dollar decline

On the emerging debt side, local currency bond funds took nine of the top 10 places after the U.S. dollar fell almost 7 per cent in the first half.

“The U.S. dollar peaked in December 2016 approximately a month after (Donald) Trump was elected president. Since then (it) has sold off versus most developed and emerging currencies,” said Federico

Garcia Zamora, manager of the BNY Mellon EM Debt Local Currency Fund.

Garcia Zamora’s fund topped the Lipper table, returning 11 per cent, compared with an average fund performance of 5.96 per cent.

He has taken profits on some positions, reallocating to countries that lagged the emerging debt recovery. This meant cutting exposure to Russia and Brazil and adding South Africa, Turkey and the Czech Republic, he said.

The only hard currency fund to make it into the top 10 was Vontobel’s Emerging Markets Debt fund which tied for second place, returning 10.7 per cent.

Manager Luc D’hooge said he had taken advantage of cheap valuations in Argentine and Mexican debt.

“There were a lot of fears in the market at the end of last

year and that created very nice opportunities,” D’hooge said, citing worries about hefty bond sales from Argentina and U.S. protectionist measures against Mexico “Mexico is still a very good credit – they have risks with the U.S., but the bonds sold off to levels that were ridiculous.”

Emerging debt funds received net inflows of US$43.9 billion in first six months of the year, according to EPFR Global. D’hooge said finding attractive opportunities was now more difficult than a year ago, when valuations were “screamingly cheap”.

Emerging economies’ growth premium over developed peers is widening, tempting back investors after years of negative news: “That is driving flows and we are not at the end yet,” he said.

Reuters

Lawsuit

ZTO sued for ‘untrue statements’ in US$1.4 bln U.S. IPO The lawsuit comes at a time when Alibaba-backed Chinese logistics company, Best Inc, is preparing to raise up to US$750 million from an IPO in the United States Chinese courier ZTO Express and the underwriters of its New York stock market listing have been sued by a U.S. pension fund that alleges the firm exaggerated its profit margins to lure investors into its US$1.4 billion initial public offering.

Morgan Stanley and Goldman Sachs Group Inc, which spearheaded ZTO’s IPO, are named in the class-action suit filed in Alabama state court by the city of Birmingham’s pension fund which says that they failed to do adequate due diligence.

ZTO’s listing was the largest U.S. listing in 2016 and was the biggest by a Chinese company since the US$25 billion IPO of e-commerce giant Alibaba Group Holding Ltd in 2014.

“We believe the claims are without merit and intend to defend ourselves vigorously,” a ZTO spokeswoman said in an e-mail to Reuters on Friday.

In the lawsuit dated May 16, the Birmingham Retirement and Relief

System said ZTO had issued “untrue statements” and omitted “crucial realities” in its registration statement.

It also said ZTO inflated profit margins by keeping certain low-margin segments of its business out of its financial statements.

“ZTO used a system of ‘network partners’ to handle lower-margin pickup and delivery services, while maintaining ownership of core hub operations. By keeping the ‘network partners’ businesses off its own books, the company was able to exaggerate its profit margins to investors,” it said.

Morgan Stanley declined to comment. Goldman did not immediately respond to Reuters’ requests for comment.

In ZTO’s pre-IPO filings to the stock exchange it said it had achieved operating profit margins of 15.4 per cent and 25.1 per cent in 2014 and 2015, respectively.

In unaudited results for the quarter ended March published on May 17, ZTO posted a 48 per cent jump in net income from a year ago and a 34 per cent spike in revenue.

The lawsuit also names the ZTO IPO’s smaller underwriters China Renaissance Securities, Citigroup, Credit Suisse and J.P. Morgan. All the underwriters declined comment.

Individual defendants, including ZTO’s chief executive officer and chief financial officer, were also named.

Reuters was not immediately able to reach Greg L. Davis, the lawyer who filed the lawsuit on behalf of the city of Birmingham pension fund, for comment outside usual office hours. Reuters

Business Daily Monday, July 24 2017 11

Asia Spending

South Korea’s parliament approves extra budget plan The parliament has cut back about 150 billion won from the initial 11.2 trillion won plan Hooyeon Kim and Heejin Kim

S

outh Korea’s parliament approved an extra budget that had been caught up in a fight between the new government and the opposition for the past month.

The 11 trillion won (US$9.8 billion) in extra spending is the centrepiece of President Moon Jae-in’s plans to create tens of thousands of new jobs and boost growth. Budget approval was delayed after disagreement between the ruling and opposition parties over a number of issues, including the president’s nominations for various offices.

The extra money will help Korea return to 3 per cent GDP growth, President Moon said during a cabinet meeting in June, but the delay raised concerns about how the new government would actually implement its economic policies, given that it doesn’t have a parliamentary majority.

The parliament has cut back about 150 billion won from the initial 11.2 trillion won plan that would have created about 110,000 new jobs both directly and indirectly, according to the finance ministry. Most of those would be in the public sector, including police, fire-fighters, assistant

teachers and social workers. Due to the revision, a slight portion of the extra budget initially allotted for creating jobs will go to aiding recent drought damages and the upcoming Olympics.

Opposition lawmakers reviewing the extra budget plan last week raised questions about whether the country

should add new public-sector jobs.

Recruiting more civil servants will be a burden to future generations because public jobs have a guaranteed tenure, said opposition lawmaker Min Kyung-wook of Liberty Korea Party, who called the plan a “populist act.”

Some lawmakers also questioned whether an extra budget was necessary at all. South Korea’s economy has recently been showing signs of recovery with exports rising for an

eighth straight month. The Bank of Korea on July 13 raised the country’s growth forecast for this year to 2.8 per cent from a previous 2.6 per cent.

However, Finance Minister Kim Dong-yeon said last Sunday that the country’s employment problem is getting worse and the potential economic growth rate is projected to fall.

Youth joblessness has worsened in recent years, and is almost three times as bad as the overall unemployment rate. Bloomberg News

National Assembly Speaker Chung Sye-kyun bangs the gavel to announce the opening of a parliamentary session to vote on an extra budget bill at the National Assembly in Seoul. Lusa

Financial system

Japan regulator warns small banks they must change to survive A few regional banks have begun to merge, but some of them are finding their plans stymied by Japan’s antitrust regulator Sumio Ito

Japan’s financial regulator has told the country’s smaller banks they must find new ways to make profits if they are to survive, warning many face risks when interest rates eventually rise and that some are already in a precarious state.

Some lenders are only managing to stay in the black through bond-trading gains, Financial Services Agency (FSA) Commissioner Nobuchika Mori told regional bank leaders in closeddoor meetings last week, according to two participants.

The unusually blunt language for a Japanese bureaucrat indicated “a real sense of crisis,” said one of the participants, who declined to be identified as the discussions were private.

Japan’s more than 100 regional banks are struggling as lending opportunities wane with the shrinking of their local populations - pain that has been exacerbated by a squeeze on lending margins from the Bank of Japan’s negative interest-rate policy.

The FSA has been nudging them

for several years to shore up their finances, but Mori’s comments mark an escalation of concern that regional banks are failing to reform while they have the cover of essentially free money from the central bank.

The central bank’s massive buying of Japanese government bonds, part of its radical policies to stoke inflation, offer lenders almost guaranteed profits. But if market interest rates should rise and bond prices fall, regional banks would be left with huge

losses on their books.

“If institutions simply undertake securities investments to improve today’s earnings figures with no thought for tomorrow, or waste precious time getting immediate returns without thinking about customers, they will really run out of options and reach a dead end,” Mori was quoted as saying by the participants.

He told the bankers they must find sustainable business models while they still have time - remarks that one participant said he took as pressure on the banks to merge or take other drastic action.

The FSA declined to comment on the remarks by Mori, who was reappointed this month to a rare third

term as FSA chief.

Regional lenders, which hold about half the country’s US$4 trillion in outstanding bank loans, are grappling with stagnating local economies as the country’s overall population rapidly ages and as young people move to major cities.

But they have seen little in the way of consolidation in contrast to their bigger rivals, which shrank in number from more than 20 to just 3 “megabanks” in the years after a 1990s domestic banking crisis.

The 95 regional banks judged by domestic standards had overall capital equal to 9.86 per cent of risk-weighted assets at the end of June, down from 10.2 per cent a year earlier, FSA data show. By comparison, Japan’s megabanks saw their international capital-adequacy ratios improve to 16.29 per cent from 16.17 per cent over the same period.

A few regional banks have begun to merge, but some of them are finding their plans stymied by Japan’s antitrust regulator.

The FSA late last year began investigating banks’ ability to manage interest-rate risk and last month decided on a rule for regional banks to guard against potential bond losses in the event of sharp interest-rate swings. Reuters

12 Business Daily Monday, July 24 2017

Asia Commodities

Philippines plans new law to ensure responsible mining Duterte said he would invite all industry stakeholders to the presidential palace for a dialogue together with former environment minister Lopez and other antimining advocates Enrico Dela Cruz

P

hilippine President Rodrigo Duterte said on Friday the government will draft a new law for the country’s mining industry, which he said pays too little in tax and not enough in compensation for any environmental damage.

The fate of more than half of 41 mines in the Philippines, the world’s top nickel ore supplier, has been uncertain since February when then Environment Secretary Regina Lopez ordered their closure for causing environmental damage and violating laws.

Lopez led a 10-month industry crackdown until her dismissal in May by the Commission on Appointments following her mining orders, which included a ban on open-pit mining and a demand for a bigger government share in mining revenues.

She was replaced by Duterte’s friend, former military general Roy Cimatu.

“I’d like to tell you frankly, we will come up with new legislation ... we have to rearrange everything,”

Duterte said in a speech at a business conference in his home town, Davao City.

Duterte also said he would invite all industry stakeholders to the presidential palace for a dialogue together with former environment minister Lopez and other anti-mining advocates.

Duterte said he has always been supportive of Lopez’s pro-environment stance but could not stop mining because there is a law that allows the miners to continue to operate.

He also complained that the taxes miners pay are “too low” and lamented the lack of compensation to mining communities that suffer from environmental damage.

The Philippines’ No. 2 nickel ore producer, Global Ferronickel Holdings Inc welcomed Duterte’s invitation, saying a dialogue will help clarify problems with mining.

But Dante Bravo, president of Global Ferronickel, said his company has been paying a lot of taxes already, including a 30 per cent regular corporate income tax, a 5 per cent royalty on mineral reservation and a 2 per cent excise tax, both based on gross sales.

Key Points Duterte says miners pay “too little” in taxes Duterte plans to meet miners, anti-mining advocates Duterte seeks “fair arrangement” to benefit people “You sum it up, it is so heavy,” he told Reuters.

Duterte did not say when the meeting would take place but he said he planned to show industry

stakeholders footage shown to him by anti-mining advocates, including Lopez, about the environmental destruction, as well as examples of good practices in mining.

“I will tell (them), look at the slides about good practices of mining, and I will ask everybody to focus on that,” he said. “Then let’s also look at the slides on mining gone awry.”

He also urged mining companies to “come up with an arrangement that is fair to everybody.”

Lopez, now an environmental advocate and TV travel show host, immediately thanked Duterte and said his “fearless stand” will help the country “see the light of day.”

“I can assure you a green economy based on love (for the environment) will be much more dynamic and all-embracing than an extractive one based on greed and selfishness,” Lopez said in a message to Duterte via a Facebook post. Reuters

Deputy comments

Australia’s central bank in no hurry to raise rates Debelle emphasised that the recent outbreak of hawkishness by policymakers in the western world does not automatically mean that interest rates need to rise in Australia Swati Pandey and Wayne Cole

A top Australian central banker gave a clear signal on Friday that interest rates in the country were set to remain at record lows for a while yet, wrong-footing hawks and sending the local currency sliding from a two-year peak.

Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle, speaking at an event in Adelaide, quashed talk of domestic interest rate hikes which had gathered momentum after the Bank of Canada increased its policy rate to 0.75 per cent last week.

“Just as the policy rate in Australia did not need to decline to the very low levels seen in other parts of the world, the fact that other central banks increase their policy rates does not automatically mean that the policy rate here needs to increase,” he said.

The Australian dollar, which was perched near a two-year peak of US$0.7992, sunk almost 1 per cent to as low as US$0.7875 as markets recalibrated their positions following

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Debelle’s comments.

The speculation of a turn in Australian monetary policy had been further fuelled after the RBA’s minutes of July policy meeting revealed board members had discussed the neutral rate of interest - that which neither stimulates nor retards the economy.

But Debelle emphasised that the

recent outbreak of hawkishness by policymakers in the western world does not automatically mean that interest rates need to rise in Australia.

“Debelle has clearly taken the opportunity to hose down interest rate expectations for a rate rise and take some of the heat out of the currency,” said Kristina Clifton, an economist at the Commonwealth Bank of Australia.

“We don’t yet see a case for rate rises sooner than late 2018.”

Market attention now turns to second quarter inflation data followed

by Governor Philip Lowe’s speech next Wednesday.

The deputy governor said the resurgent Aussie was complicating the economy’s transition following the end of a decade-long mining investment boom.

A rising local currency could “counteract” the benefits of low cash rates and faster global growth, he said.

“While an easier monetary policy elsewhere in the world should lead to faster growth in the world economy, which is good for the Australian economy, an appreciating exchange rate works against this.”

Debelle also talked at length about the neutral policy interest rate which the RBA sees at 3.5 per cent compared to the record-low 1.50 per cent for official cash rate.

The discussion around neutral rates at its policy meeting this month was interpreted by some in the market as a hawkish message, a conclusion that Debelle rejected.

He said the policy rate in Australia was low because the neutral rate was lower than it used to be, meaning the current policy setting was not as expansionary as a 1.50 per cent cash rate would have been in 1990s or early 2000s.

“No significance should be read into the fact the neutral rate was discussed at this particular meeting.” Reuters

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Business Daily Monday, July 24 2017 13

Asia S. Korea data

In Brief

N.Korea 2016 economic growth at 17-yr high despite sanctions

Trial

China accounted for 92.5 per cent of all North Korean trade Christine Kim and Jane Chung

North Korea’s economy grew at its fastest pace in 17 years in 2016, South Korea’s central bank said on Friday, despite the isolated country facing international sanctions aimed at curbing its defiant pursuit of nuclear weapons.

Gross domestic product (GDP) in North Korea last year rose 3.9 per cent from the previous year when the economy contracted due to a drought and low commodity prices, the Bank of Korea said. The expansion, driven by mining and energy, marked the biggest rise since a 6.1 per cent gain in 1999.

North Korea, which counts China as its biggest trading partner, also boosted exports by 4.6 per cent, the most since an 11.8 per cent jump in 2013.

Still, the isolated state’s per capita gross national income in 2016 was just 1.5 million won (US$1,342), less than 5 per cent of the comparable number in South Korea.

North Korea does not publish economic data. The Bank of Korea has released GDP data on North Korea every year since 1991 based on information from government agencies including South Korea’s Ministry of Unification and the National Intelligence Service. The estimate is widely used by international organisations and researchers.

North Korea has been under UN

sanctions since 2006 over its ballistic missile and nuclear programmes and the Security Council has ratcheted up the measures in response to five nuclear tests and two long-range missile launches.

Missiles likely boosted output

The robust economic growth may partly be due to the North’s active nuclear and missile development programme, as the manufacture of components is included when calculating GDP growth, according to Shin Seung-cheol, an official at the BOK. Shin added North Korea had boosted electricity production in 2016 but could not confirm whether this was linked to missile manufacturing.

In February, China banned all imports of coal from its reclusive neighbour, cutting off its most important export. China is also restricting the flow of oil into the North.

The United States is mulling new sanctions on Chinese firms and bank advertisement

doing business with Pyongyang on top of trying to get China and Russia to back a new UN Security Council resolution imposing stiffer sanctions on North Korea following its latest missile test.

In 2016, China accounted for 92.5 per cent of all North Korean trade, according to data from the Korea Trade-Investment Promotion Agency (KOTRA) on Friday.

The North’s economy this year will “definitely” be impacted by China’s decision to ban all coal imports, said Kim Suk-jin, a research fellow at the state-run Korea Institute of National Unification (KINU).

“North Korea can bypass some sanctions but coal is critical for their economy and it is something that’s difficult to smuggle. Coal can be spotted easily when it’s being moved,” said Kim. Lim Soo-ho, a research head at the Korea Institute for International Economic Policy, said that sanctions didn’t bite hard last year, as China loosened some of its earlier restrictions in the second half after South Korea decided to deploy a U.S. anti-missile defence system.

“With expanding sanctions, there are more downside risks to its growth this year than last,” Lim said. “Pyongyang’s heavy industries and manufacturing sectors could be hit hard if China continues to cut fuel sales to North Korea.”

The Bank of Korea official declined to comment on how the Chinese coal ban and tightened international sanctions since last year would affect North Korea’s economy in 2017. The United Nations’ food agency said on Thursday North Korea is facing severe food shortages due to the worst drought since 2001.

Kim said it was too early to say whether North Korea’s crops will suffer, as the Korean Peninsula has seen much rain in recent weeks.

Fraction of S.Korea economy

North Korea’s 2016 GDP in real terms stood at 32.0 trillion won (US$28.50 billion), according to the Bank of Korea data - a fraction of South Korea’s 1,508.3 trillion won (US$1.34 trillion).

Mining and manufacturing make up the biggest portion of North Korea’s industry, accounting last year for 33.2 per cent of the sector.

Overall exports from North Korea, excluding trade with South Korea, rose 4.6 per cent last year to US$2.82 billion thanks to shipments of fishery products, which soared 74.0 per cent, the South’s central bank said.

North Korea imports rose 4.8 per cent to US$3.73 billion, led by plant products and textiles.

Although trade between the two Koreas plunged 87.7 per cent last year due to a shutdown of a joint industrial zone the North shared with the South just north of the border, the North’s headline trade numbers were barely affected, the data showed.

The Kaesong Industrial Zone was shut down early last year after the North tested a long-range rocket in February defying UN sanctions.

Reuters

Thai court to deliver verdict in ex-PM on Aug 25 A Thai court will deliver a verdict on Aug. 25 in the trial of former prime minister Yingluck Shinawatra, charged was negligence in overseeing a rice subsidy scheme that wasted billions of dollars, a judge said on Friday. Under the subsidy scheme, the government bought rice from farmers at above-market prices, resulting in 18 million tonnes of the grain in stockpiles, which the military government has been trying to offload since toppling Yingluck’s government in 2014. Yingluck will give a closing statement to the Supreme Court on Aug. 1.

Bank of Japan

Unique labour practice causes low wages, inflation A gap in pay and working conditions between temporary and permanent employees is preventing a tightening job market from pushing up overall wages and inflation, the Bank of Japan (BOJ) said in a rare analysis of the country’s job market. Wages for temporary workers are “clearly on the rise” as companies struggle to lure employees, with the job market having tightened to levels not seen since Japan’s asset-inflated bubble era in the early 1990s, the BOJ said. But permanent workers’ pay remains stagnant because labour unions representing these employees tend to prioritise job security over higher pay, it said in a report.

Labour

Freeport Indonesia mine workers extend strike An estimated 5,000 workers at the giant Grasberg copper mine operated by FreeportMcMoRan Inc’s Indonesian unit will extend their strike for a fourth month, a union official said on Friday, in an on-going dispute over layoffs and employment terms. The escalating labour issue comes as Freeport, the world’s largest publicly traded copper miner, is snarled in a lengthy and costly dispute with Indonesia’s government over rights to the Grasberg copper and gold mine. Freeport resumed copper concentrate exports from Grasberg, the world’s second-largest copper mine, in April after a 15-week outage related to that row, but a permanent solution is yet to be found.

Legislation

New Sri Lanka tax bill aims to widen tax net Sri Lanka’s new tax bill, demanded by the IMF as a condition for a third tranche of aid disbursed last week, will seek to ensure that all citizens pay direct taxes and cut indirect taxes, top finance ministry officials said on Friday. The new Inland Revenue Act, the island nation’s major tax reform since independence from Britain in 1948, will expand the tax net and seek to stamp out evasion, when implemented at the start of the next fiscal year on April 1, 2018.

14 Business Daily Monday, July 24 2017

International In Brief Antitrust regulators

EU say probing possible German car cartel EU antitrust regulators are investigating allegations of a cartel among a group of German carmakers, the European Commission said on Saturday, a measure that could result in hefty fines for the companies. The Commission and its German counterpart were tipped off about the possible cartel, the EU competition authority said.

“The European Commission and the Bundeskartellamt have received information on this matter, which is currently being assessed by the Commission. It is premature at this stage to speculate further,” the EU executive said.

Commodities

Cuba seeks to revive mining sector A new lead and zinc mine in north-western Cuba is on track to start production in October as part of the Caribbean island’s attempt to breathe fresh life in its mining sector, the joint venture Emincar overseeing the project said this week. While nickel exports are already one of Communist-run Cuba’s main foreign currency earners, the cash-strapped country has untapped potential in other mineral deposits, according to the U.S. Geological Survey. The US$278 million Castellanos mine will produce annually 100,000 tonnes of zinc concentrate and 50,000 tonnes of lead concentrate, said executives at Emincar, the venture between Swiss-based commodities giant Trafigura and Cuban state firm Geominera.

Foreign funds

U.S. regulators announce review of Volcker Rule Regulators are expected to launch a more comprehensive review of the rule in the months to come Pete Schroeder

U

.S. financial regulators announced on Friday they would review Volcker Rule regulations to ensure foreign funds that should be exempt from the ban on proprietary trading by U.S. commercial banks do not face regulatory scrutiny.

The agencies charged with enforcing the ban on proprietary trading, including the Federal Reserve, the Federal Deposit Insurance Corp and the Commodity Futures Trading Commission, said they would halt enforcement of the Volcker Rule for one year for qualifying foreign funds while they conduct the review. They added that they may need Congress to step in and alter the Dodd-Frank financial reform law to ensure those foreign funds are not subjected to the rule.

“The staff of the agencies are considering ways in which the implementing regulations may be

amended, or other appropriate action may be taken,” the regulators said in the announcement.

Regulators are expected to launch a more comprehensive review of the rule in the months to come.

‘Treasury Secretary Steven Mnuchin has identified easing the rule as a top priority’ The rule, a centrepiece of the 2010 Dodd-Frank law, is aimed at preventing federally insured banks from trying to boost profits with risky trades. Advocates called the rule is a critical check against the type of trading excesses that led to the 2007-2009 financial crisis, requiring taxpayer bailouts of banks.

Banks have complained that the

rule is too restrictive, arguing that it can be almost impossible to distinguish between prohibited trading from permitted activities like market-making.

On this specific fix, regulators said they had heard from a number of foreign banking entities and government officials, expressing concern that current regulations may be improperly applying the rule to some foreign funds.

If a fund is organized and offered outside the United States, it typically is excluded from the Volcker rule, which is primarily aimed at banks with U.S. federal deposit insurance.

But in some cases, certain governance structures and investment arrangements were leading to Volcker enforcement anyway.

Regulators said “complexities in the statute and the implementing regulations” were to blame for the rule’s improper reach.

T r e a s u r y S e c r e t a r y S t ev e n Mnuchin has identified easing the rule as a top priority, and regulators have said the existing rules could be revisited for refinement.

Regulators finalized the Volcker Rule in 2013, two and a half years after Dodd-Frank became law.

Reuters

Oil industry

U.S. weighs financial sanctions to hit Venezuela’s revenue The United States is considering financial sanctions on Venezuela that would halt dollar payments for the country’s oil, according to a senior White House official and an adviser with direct knowledge of the discussions. The move could severely restrict the OPEC nation’s crude exports and starve its socialist government of hard currency. Sanctions prohibiting any transaction in U.S. currency by Venezuela’s state-run oil firm, PDVSA, are among the toughest of various oil-related measures under discussion at the White House, the two sources told Reuters.

Fintech

Bitcoin averts split as miners back new software upgrade The upgrade attempts to address the bitcoin network’s limitations

Lawsuit

Deutsche Bank, JPMorgan to pay to end Libor cases in U.S. Deutsche Bank AG and JPMorgan Chase & Co have agreed to pay a combined US$148 million to end private U.S. antitrust litigation claiming they conspired with other banks to manipulate the yen Libor and Euroyen Tibor benchmark interest rates. The preliminary settlements, totalling US$77 million for Deutsche Bank and US$71 million for JPMorgan, were detailed in filings late Friday in the U.S. District Court in Manhattan, and require a judge’s approval. They followed similar settlements last year with Citigroup Inc and HSBC Holdings Plc totalling US$23 million and US$35 million, respectively.

Gertrude Chavez-Dreyfuss

Digital currency bitcoin on Friday averted a split into two currencies after its network supported an upgrade to its software that would enhance its ability to process an increasing number of transactions.

Bitcoin’s miners have signalled their support for the so-called Bitcoin Improvement Proposal (BIP) 91, avoiding a split of bitcoin into two blockchains. The miners represent a network of computer operators who secure the blockchain or a public ledger of all bitcoin transactions.

BIP 91 is the first step toward a larger effort to upgrade bitcoin through a software called SegWit2x. On Friday, the support for BIP 91 reached nearly 100 per cent, exceeding the required threshold of 80 per cent, according to analysts and market participants.

Some investors have warmed to bitcoin, wooed by its explosive

performance and potential to compete with gold and government-issued money as a means to store value.

Demand for bitcoin has grown in eight years to a market capitalization of more than US$40 billion.

But fears about the bitcoin split dampened demand for bitcoin in recent weeks. After hitting record high near US$3,000, bitcoin dropped as low US$1,830 on the Bitstamp platform. On Friday, it traded at US$2,647.

‘Analysts say a single bitcoin transaction costs on average 83 U.S. cents to execute’ The software upgrade attempts to address the bitcoin network’s limitations in processing millions of daily transactions. Bitcoin’s network has not kept pace with its growth and is unable to process all the transactions fast enough.

“BIP 91 unleashes the next wave of innovation because it has been a little bit stagnant of late for bitcoin,” said Rob Viglione, co-founder of ZenCash, a digital coin focused on privacy and security.

Before BIP 91’s endorsement, some bitcoin investors feared it could split into two independent currencies because core developers of the network and the miners each wanted different ways to increase bitcoin’s scale.

A compromise between the two groups has been reached through SegWit2x.

“Bitcoin now has a clear run to add features that allow for faster transactions with lower costs,” said Charles Hayter, chief executive officer of digital currency analytics firm Cryptocompare.

The upgrade to bitcoin’s network will not occur until autumn, said Viglione, because several things need to happen before the new software is activated.

Market participants have complained about the delay in transactions. Analysts say a single bitcoin transaction costs on average 83 U.S. cents to execute, which means micropayments are not feasible on the network.

The network is also limited to roughly seven transactions per second. In comparison, Visa on average handles 2,000 transactions per second. Reuters

Business Daily Monday, July 24 2017 15

Opinion Business Wires

The Times of India The impact of the demonetisation drive and the rollout of the goods and services tax (GST) will make it tough to deal in cash, leading to greater compliance, digitisation and widening of the tax base, Union finance minister Arun Jaitley said on Saturday. “Net impact of the demonetisation exercise coupled with the GST exercise... will certainly lead to greater compliances, greater digitisation.

The first signs of greater digitisation, expansion of the base of direct and indirect taxes are already visible,” Jaitley said in his opening address at Delhi Economics Conclave, a gathering of top economists and policymakers.

Global investors turn to stocks - canny bet or market top?

Viet Nam News The Vietnamese property market must improve market information transparency to attract investment and develop sustainability, experts said. Although there are currently many sources for market information-real estate associations, property services firms such Savills, CBRE, JLL and Cushman Wakefield as well as the Ministry of Construction--the information is rarely consistent among market research firms. In addition, the construction ministry has failed to provide regular market updates and transform the real estate market and housing information system into a reliable source. Ultimately, experts say that real estate market information of Vietnam still lacks accuracy and reliability.

The Korea Herald The number of counterfeit South Korean banknotes detected in the first half of this year rose 36.5 per cent from a year earlier, the central bank said yesterday.

A total of 912 counterfeit bills were found in the January-June period, up from 668 in the same period last year, according to the Bank of Korea. The increase came as 469 10,000-won (US$9) counterfeit bills with the same serial number were found.

In South Korea, the 10,000-won bill is the second-highest denomination behind the 50,000-won bill.

Philstar Nomura Securities Ltd. said it expects remittances to grow faster at 5.5 per cent this year from five per cent a year ago amid the continued strong demand for skilled Filipino workers abroad. Euben Paracuelles, economist at Nomura, said robust remittances would continue to support the sustained gross domestic product (GDP) growth in the Philippines.

The investment bank sees the country’s GDP expansion steady at 6.7 per cent from 6.8 per cent despite the absence of election-related spending to boost consumption. “This should support domestic demand and thus our GDP growth forecast of 6.7 per cent,” he said.

W

ith equity indexes at all-time highs, global mutual fund and ETF investors may be choosing now as the time to reverse a long-running move into bonds and out of equities.

That’s either in harmony with retail investors’ legendary ability to pick the top or a canny bet on global reflation.

Since the great financial crisis the broad global trend has been for mutual and exchange-traded fund investors to load up on bonds while trimming equities. Globally, funds held in equities vehicles went from above 90 per cent of the whole in 2007 to about 70 per cent now. And while that figure for U.S. funds bottomed at about 60 per cent in 2010 and is now at 67 per cent, equity funds have suffered net outflows for the majority of the last few years, except for a spike in inflows after the 2016 U.S. election.

This ‘de-equitisation,’ driven partly by battle-scarred individuals and partly by a large move into long-term debt by pension funds seeking to hedge long-term obligations, has been expensive.

Over the past five years, the S&P 500 has returned 13.4 per cent per annum, against just 2.3 per cent for 10-year Treasuries.

But now, what started as a mild trend in the U.S. of upping equity exposure seems to be going global, perhaps as the last bears capitulate in the face of a low-volatility march higher in equity markets.

There is also the fact that major central banks are signalling they may at last start to run down their own multi-trillion-dollar portfolios of bonds.

“We find increasing evidence that the deequitisation process, by which the weight of equity holdings in portfolios diminishes over time and is substituted by debt, has finally come to an end,” Alain Bokobza of Societe Generale wrote in a note to clients.

“The main driver for re-equitisation could be gradually rising bond yields (Make reflation great again). Rising bond yields imply losses on existing bond portfolios (underweight bonds) and, when bond yields move higher, the risk budget of investors tends to increase (overweight equity).”

In Europe, as bond yields bottomed, the equity share of fund holdings has crept higher this year, from a low below 60 per cent in mid-2016 to about 65 per cent now. Net flows to European equity funds have turned positive and assets, which decreased for about 18 months to January, have grown rapidly, indeed at a rate not seen since the

“

James Saft a Reuters columnist

bottoming of equity markets in 2009.

Canny bet or history repeats?

There is no question that a return to equity fund flows over bonds would have a significant market impact. A 10-percentage-point re-weighting into equities implies a global flow of US$2.3 trillion.

That compares with a cumulative net inflow into bond funds of almost US$1.8 trillion since 2007.

That inflow, notably, happened alongside massive official buying of bonds by central banks seeking to engineer a reflation. Those same central banks now seem ready to reverse course. The ECB is expected to announce its plans for tapering its bond portfolio sometime in the next several months, though it is currently committed to buying 60 billion euros a month until at least December. The Federal Reserve too is widely expected to start to allow its US$4.5 trillion stock of bonds to dwindle, perhaps by the end of the year if not sooner.

If that comes to pass it will surely change the relative attractions of stock and bonds. Longer-term Treasuries have already become more volatile than the almost comatose S&P 500.

But though central banks say they want to taper, the facts on inflation are a bit more stubborn.

U.S. inflation is heading further below the Fed’s 2 per cent goal, and in the euro zone core inflation remains stuck at about only 1 per cent.

That does not sound like an equity-friendly reflation. There is also the possibility that equity market volatility follows bond market volatility higher as central banks sell bonds, especially if tapering comes alongside mixed economic news, as it is very likely to do.

And while funds, especially ETFs, are widely held by institutions, it is a lot easier to see the intuitive sense of selling bonds with rates this low than buying stocks with prices this high.

In the run-up to both the dotcom bust and the great financial crisis retail investors did what they do best: buy what has just gone up in price.

A rebalancing of fund portfolios towards stocks may just happen, but it may, once again, prove a reliable sell signal. Reuters

What started as a mild trend in the U.S. of upping equity exposure seems to be going global

”

16 Business Daily Monday, July 24 2017

Closing Budget

Trump urges military funds boost

President Donald Trump urged Congress to pass a budget that provides for higher, stable and predictable funding for the U.S. military.

“Call that congressman and call that senator, and make sure you get it,” Trump said at the commissioning of the Gerald R. Ford, the Navy’s newest aircraft carrier. “We must end the defence sequester once and for all.”

Trump visited the US$12.9 billion nuclearpowered carrier to cap off the White House’s “Made in America” week, a series of events designed to highlight the administration’s

push to increase domestic manufacturing.

That effort was largely overshadowed by tumult within the administration, including Friday’s hiring of investment banker Anthony Scaramucci as White House communications director and the subsequent resignation of press secretary Sean Spicer. The president earlier in the week said in an interview that he regretted appointing Attorney General Jeff Sessions, and warned the special counsel leading a probe into Russia’s campaign meddling not to investigate unrelated dealings by his family business. Bloomberg News

Cash vs. digital

China cashing out as mobile payment soars Mobile accounted for eight per cent of the total value of retail payments in 2015 and is expected to reach 12 per cent in 2020 Allison Jackson

Y

ang Qianqian h o l ds o u t h e r smartphone to scan a barcode on the mobile of a vendor selling fresh fruit and vegetables at a bustling outdoor market in Beijing.

The dance student is part of an explosion in the use of mobile payment platforms in China as consumers increasingly take out phones instead of cash to pay for everything from a coffee to a language class or a gas bill.

“Even though I have cash on me it’s not convenient to get it when I am carrying a lot of bags,” said Yang, 25, clutching plastic bags filled with pears, potatoes and watermelon.

China was the first country in the world to use paper money but centuries later the soaring popularity of mobile payment has some analysts forecasting it could be the first to stop.

The gross merchandise value of third party mobile payment rose more than 200 per cent to RMB38 trillion (about US$5.6 trillion) in 2016 from a year earlier, according to China-based iResearch.

The growth of the cash-free system has been supported

by China’s rapidly expanding

e-commerce market as Chinese shoppers increasingly shun bricks and mortar stores.

“I think it’s really very possible that China becomes the first or one of the first cashless societies in the next decade,” said Ben Cavender, a director at China Market Research Group.

Cavender estimates China’s mobile payment market is already 40-50 times larger than the United States.

Cashless

Alipay, started by e-commerce giant Alibaba and now owned by its affiliate Ant Financial, and WeChat Pay, which is built into Tencent’s popular messaging service, have hundreds of millions of users between them and are China’s dominant payment platforms.

In Beijing it is hard to find a product or a service that cannot be purchased with a mobile.

At the fresh produce market, stallholders display barcodes on tables laden with fruit and vegetables for customers like Yang to scan -- though many shoppers appeared more comfortable with cash.

“People at my age don’t dare to use it,” said a woman in her 50s.

Some restaurants in the capital no longer accept bank notes while it is common for motorbike taxis, street food carts and hair salons to offer mobile payment.

Mobile accounted for eight per cent of the total value of retail payments in 2015 and is expected to reach 12 per cent in 2020, according to a report published in April by UN-backed Better Than Cash Alliance.

But cash is still king in China -- although less so than it used to be.

The Better Than Cash Alliance expects cash’s percentage of the value of retail payments to fall to 30 per cent by 2020. It stood at 61 per cent in 2010.

A key attraction of mobile payment is convenience.

People can carry little or no cash and avoid the problem of their debit or credit card being rejected due to the limited number of point-of-sale terminals in stores.

China’s relatively short history of using bank cards

also makes consumers more open to new technology, said Martin Utreras, vice president of forecasting at eMarketer.

“In China a lot of people never had any financial instruments that were automated in any way and the first thing they had was mobile payment,” he said.

‘Hands off’

But some have been reluctant converts to the cashless system.

Among them is a 63-yearold woman surnamed Song who sells hand-knitted sunflowers and peashooters from the popular video game Plants vs Zombies in a pedestrian underpass in Beijing.

She prefers cash but accepts mobile payment because some customers do not carry real money.

“Cash is more convenient for me because I’m getting older and have bad eyesight,” she said, standing next to her bright-coloured ornaments

neatly displayed on the ground.

Riding on their success, payment providers are expanding their businesses to offer consumer and business credit scoring, short-term lending and even investment products.

The shift fits with the Chinese government’s domestic agenda of boosting consumer spending and increasing access to financial services among ordinary people.

Alibaba and Tencent are also taking their technology -and deep pockets -- abroad as they target cashed-up Chinese tourists and nascent payment markets in developing countries.

Tencent earlier this month teamed up with German payments company Wirecard to launch WeChat Pay in Europe where Alipay is already available.

Security of mobile payment is a growing concern, however, after reports of criminals replacing real barcodes with fake ones carrying software that steals personal information or drains users’ bank accounts.

Authorities are still working out “the right balance between innovation and regulation”, according to Better Than Cash Alliance, but they have been “more active” in taking steps to reduce financial risk and fraud.

“The government doesn’t want to slow down adoption... that’s why they have kept their hands off,” said Cavender. AFP

Forecast

Oil industry

Wine production

IMF sees 2017 Saudi growth ‘close to zero’

Mainland June diesel exports rise on year ago

French grape harvest heading to historic low

Saudi Arabia’s economy will stall this year with growth “close to zero” due to lower oil revenue, the International Monetary Fund said.

The fund lowered its 2017 growth forecast to 0.1 per cent from 0.4 per cent, citing OPEC production cuts, uncertainty over oil prices and the structural reforms the country is undertaking to reduce its reliance on crude, it said in a statement on Friday concluding its Article IV consultation. The IMF also lowered its non-oil growth projection to 1.7 per cent from 2.1 per cent -- compared with actual growth of 0.2 per cent in 2016.

Lower oil prices and austerity measures are weighing on Saudi Arabia’s economy, which contracted in the first quarter for the first time since 2009 -- illustrating the scale of the challenge facing the country’s new heir, Crown Prince Mohammed bin Salman, as he implements his blueprint for a transition away from oil dependency. Even so, the fund said it welcomed the government’s direction, which it said would help the fiscal deficit “narrow substantially in the coming years.”

Saudi Arabia’s fiscal deficit is expected to narrow to 9.3 per cent of gross domestic product in 2017 and to just under 1 per cent by 2022, from 17.2 per cent last year, the fund said. Bloomberg News

China’s exports of diesel rose in June on a year ago as refiners turn to foreign markets to offload their excess product, while liquefied natural gas imports also rose, customs data showed yesterday.

Diesel exports rose 19 per cent in June to 1.31 million tonnes, figures from the General Administration of Customs showed. That is up from 1.23 million tonnes in May but less than the all-time high of 1.91 million tonnes hit in April.

Gasoline exports of 770,000 tonnes were down 30 per cent from a record 1.1 million tonnes last June, but were up from 639,799 tonnes in May. The data came after figures on last Monday showed that oil refineries in one of the world’s top crude importers ramped up throughput last month to the second highest on record, even as state oil majors prepared to take drastic steps to cut production during the peak summer season.

The high monthly shipments led to big increases in the first half and will reinforce concerns that China, one of the world’s top energy markets, is contributing to a fuel overhang as refiners churn out more products like gasoline and diesel than the market can absorb. Reuters

Knocked off course by a cold spring snap, French wine production from Bordeaux to Alsace has dropped dramatically this year and could hit “a historic low”, according to the agriculture ministry.

“At 37.6 million hectolitres the 2017 harvest is set to come in 17 per cent lower than in 2016, and 16 per cent below the average of the past five years,” the ministry’s statistics bureau Agreste said.

As such, the traditional August to October harvest of the world’s second largest wine producer “could be historically low and inferior to that of 1991, which was also hit by severe frost.”

The cold wrought havoc notably in southwest France, with Bordeaux suffering along with neighbouring Charente, as well as Alsace and Jura in the northeast. Some losses are also anticipated in the Burgundy region, Languedoc and the southeast.

The Mediterranean region was hit by a problem of a different variety as wind and rain caused the phenomenon of “coulure” where grapes, most notably the grenache variety in the Rhone valley, fail to develop properly after vines have flowered.

But wine sommeliers urged a bit of patience, dispelling the gloom with the old wine adage: “August makes the grapes, September makes the wine”. AFP