Hong Kong (April-May 2015)

Display to 31 May 2015 HK$40

THE changing taste of

Asian Art

Collectors

HK LOSING ITS LUXURY SHOPPERS

ONE BELT, ONE ROAD

+

TO GROWTH

ranking hotels

MICA(P) 244/07/2011 KDM No: PPS1645/3/2008

10 most liked pieces of

architecture

hong kong 2020: sprinting ahead billionaire battle: hk VS SG

Canadian International School of Hong Kong

le rs b i s de ce n po Lea llen s e nd ce R a Ex p s o l en ic e ev itiz dem D To al C Aca ob ugh l G ro Th

HONG KONG

FROM THE EDITOR

BUSINESS Established 1982 Editorial Enquiries: Charlton Media Group 19/F, Yat Chau Building, 262 Des Voeux Road Central Hong Kong. +852 3972 7166

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for a lucrative treat.

Our annual Art Report in this issue reveals that in the last five years, there has been a dramatic change in what Asian collectors are looking to buy. It turns out that during auctions, specialists representing Asian clients are now very active in acquiring western art.

And with an increasing number of ultra rich Asians with a great passion for art as an investment, the western art market is in

Our channel checks also reveal that it is high time to improve the quality of labour to mitigate the impact of a decline in the quantity of labor. With Hong Kong’s working age population predicted to post almost no growth over 2015 and 2016, analysts believe improving productivity could help the city cope.

In this issue, you will also find a comprehensive report on the latest trends in the mergers and acquisitions scene, as well as an industry brief on what’s happening in Hong Kong’s express cargo sector.

We have a lot in store for you in this issue so start flipping the pages!

Tim Charlton PriNting Gear Printing Limited Flat B, 3/F, Derrick Ind. Bldg., 49-51 Wong Chuk Hang Rd., Hong Kong.

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We will however take the gains.

Sold on newstands in Hong Kong, Macau, Singapore, London and New York

CNH: Will Qianhai jeopardize Hong Kong’s position? 6 Sep 2013

Interest rate strategy

CNH: Will Qianhai jeopardize Hong Kong’s position?

DBS Group Research

6 Sep 2013

In mid-2012, the China’s State Council approved the development of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone. Four industries were focussed upon: finance, logistics, information services and science & technology services. Particular emphasis was placed on finance, for which the government designated Qianhai to be built into an experimental zone for financial innovation and further opening-up to the outside world.

Back then, market watchers found it difficult to associate the mudflat with such bold plans. We, however, have been optimistic about the project. Specifically, we stated in earlier report that the zone’s development would be kicked off by the launch of a cross-border RMB lending scheme (see “CNH: RMB lending set to cross border in pilot plan”, 16 April 2012). In Jan13, only nine months after the approval has been granted, fifteen Hong Kong banks were authorized to offer a combined RMB2 bn of loans for Qianhai companies. More impressively, the first Qianhai land auction was held in July and construction is planned to start by October. It signals that the zone has already entered into an expansion period.

An analogy of Shenzhen SEZ in 1980s While many were previously skeptical about Qianhai’s future, they have now turned to the other extreme of worrying that its rise might jeopardize Hong Kong. Such fears are overblown. In our view, the Qianhai project is similar to the establishment of the Shenzhen Special Economic Zone (SEZ) in the 1980s, which has, in fact, bolstered Hong Kong’s competiveness.

Three decades ago, Hong Kong’s manufacturing industry was seriously hit by soaring costs

Three decades ago, Hong Kong’s manufacturing industry was hit by soaring costs. Factory rents and manufacturing labor wages ballooned 140% and 170% respectively during 1980-90. The city’s international competiveness was being challenged by several lower-cost developing countries in the region. For instance, the manufacturing labor costs in IndoneChart 1: Transformation of HK economic activities sia at the time was only during 1980-2000 one-fourth that of Hong Kong.

30% 90% Shenzhen became an expansion outlet for Hong Kong manufacturers and the timing could not have been better. The availability of abundant inexpensive land and labor in Shenzhen made it possible for Hong Kong manufacturers to move labor-intensive processes across the river. Meanwhile, more skill-inten-

Manufacturing 25%

Service (rhs)

85%

20% 80% 15% 75% 10% 70%

5% 0%

65% 1980

1984

1988

1992

1996

2000

Nathan Chow • (852) 3668-5693 • nathanchow@dbs.com 1

*If you’re reading the small print you may be missing the big picture    

HONG KONG BUSINESS | MAY 2015 1

CONTENTS

Express cargo firms clash 22 ANALYSIS in the e-commerce arena

CoVER STORY

changing taste of Asian art collectors 24 The bodes well for the Western art market

FIRST

38

OPINION

FIRST

06 Why is HK losing its

14 Hong Kong’s 10 most ‘liked’

luxury shoppers?

07 Slower property sales loom 08 Billionaire battle between

Hong Kong and SG

10 Hong Kong’s shaky demographics

further threatens productivity

12 Hong Kong’s treasure chest

now growing

pieces of architecture

16 Variably lets buyers and sellers

negotiate automatically

44 Ian Perkin: Budget 2015-16: Mature

debate on the age question

46 Tim Hamlett: What housing crisis?

Look harder

48 Hemlock: What if no LKY? Time to

REGULAR

18 Financial Insight 20 Economic Insight 30 Legal Briefing 32 CMO Briefing

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 2 HONG KONG BUSINESS | MAY 2015 262 Des Voeux Road Central, Hong Kong

ANALYSIS Hong Kong 2020: Sprinting ahead, sustaining growth, or sharing the stage?

find out

RANKINGS 28 Competition among Hong Kong

hotels gets tougher

For the latest business news from Hong Kong visit the website

www.hongkongbusiness.hk

News from hongkongbusiness.hk Daily news from Hong Kong most read

retail

Hong Kong 6th most popular retail market globally International expansion remains high on the agenda for retailers in 2015, despite uncertain economic prospects and cost escalation, and Hong Kong follows China as one of the most targeted markets in Asia Pacific for global retailers considering expansion. “Hong Kong is a key gateway city in Asia Pacific and we continue to see retailers looking to locate their first Asia store in the territory,” says CBRE.

RESIDENTIAL PROPERTY

Developers sold only 123 units in mid-March According to a research note from Barclays, compared to 323 units sold on the weekend before, this was weaker on a w/w basis.

Barclays said this is mainly due to fewer available units from developers.

TRANSPORT & LOGISTICS

MTR’s net profit climbs 34.5% y/y to HKD11.5b The MTR’s FY14 underlying net profit of HKD11,571m, up 34.5% y-y, was in line with Nomura’s forecast.

This is thanks to solid domestic railway (EBITDA +4%), mid-teens kiosk rental reversions, and a recovery in property development profits (from Austin Station project).

FY14 results beat Nomura’s and consensus estimates on both net profits and dividends. 2015F outlook also looks very solid.

retail

Changes in Individual Visit Scheme could impact the retail market The potential modification will affect the development trend of the local retail market. Knight Frank expects rents in core shopping centers to grow marginally in 2015 while rents of street shops in prime retail districts may fall 3-5%.

ECONOMY

Why a more dovish Fed is a temporary relief for Hong Kong UBS expects the Fed to delay the first hike to September and reduces the magnitude of increase this year to 50bps from 100bps earlier.

By end-2016, UBS expects the Fed funds rate to reach 2.125%.

For Hong Kong, which is importing the Fed policy via the HKD peg, a more dovish Fed might offer temporary relief but it does not change the fundamental headwinds facing the city.

MARKETS & INVESTING

Wharf Holdings net profit drops 32% y/y to HK$8.2b Its FY2014 results were below expectations with China property development the key source of disappointment. According to Barclays, underlying net profit of HK$8,247mn and missed their HK$10,708mn forecast.

FIRST jumping jobs

“Now you see them, now you don’t,” could be a good description for Hong Kong employees, as 1 in 4 plan to leave their jobs in the next 12 months. A survey by Randstad Hong Kong reveals that these employees cite low compensation (38%), limited career growth opportunities (28%), and a lack of recognition (26%) as the top motivations for jumping ship.

Incidentally, those under 25 are more likely to leave due to a lack of work-life balance (29%) and lack of interest in their jobs (29%).

Meeting the diverse needs of employees Peter Yu, director of Randstad Hong Kong, says the findings reflect the challenging landscape faced by employers in Hong Kong.

“Not only do employers need to deal with the tight labour crunch creating a climate where workers are demanding higher wages or threatening to leave, but the diverse needs of the multigenerational workforce mean that it’s more important than ever for companies to invest in their employer brands.

“As the war for talent continues, all organizations need to look at their full employee value proposition and offer benefits that appeal to every generation of workers. Otherwise, they will find their employees looking to move to companies which offer the benefits that suit their needs,” says Yu. The Randstad Award research also surveyed respondents about the most attractive employers in Hong Kong, with Cathay Pacific taking the top spot.

“This is a great testament to Cathay Pacific’s commitment to investing in its employer brand, which was also recognized for its strong management, good worklife balance, and pleasant working atmosphere,” says Yu.

6 HONG KONG BUSINESS | MAY 2015

Luxury shoppers found other destinations

Why is HK losing its luxury shoppers?

Y

ou may not feel the aloha as much as in Hawaii, but Hainan, dubbed as the ‘Chinese Hawaii,’ has what it takes to offer a unique luxury retail experience – enough to pose another threat to the already ailing Hong Kong luxury market. Hainan is a domestic alternative with price points exactly in line with those of Hong Kong. It has two operators offering goods at Hong Kong prices: China Duty Free in Haitang Bay which belongs to China International Travel (CITS) and DFS (part of LVMH) at the Haikou airport.

According to Erwan Rambourg, HSBC’s global co-head of consumer & retail research, there were 47.2m inbound trips to Hong Kong in 2014, translating to an average of 129,000 a day, but not all are necessarily luxury mall shoppers. “In Haitang Bay’s duty-free mall alone, there are 20,000 qualified visitors every day.

That’s more than 15% of Hong Kong visitation and, again, mostly qualified shoppers, and not including Haikou airport traffic,” adds Rambourg.

Further hurting Hong Kong’s luxury market is the heightened competition from neighbouring countries that offer almost the same shopping experience, but have wider and more exciting options in terms of tour-

There were 47.2m inbound trips to Hong Kong in 2014, translating to an average of 129,000 a day, but not all are necessarily luxury mall shoppers.

ist activities. Rambourg even notes that the traditional core shopping neighbourhood of Hong Kong, Tsim Sha Tsui, known as “TST”, is being replaced by a new TST: Tokyo, Seoul, Taipei. “Chinese shoppers go to Japan for its cultural depth and sophistication, to Korea for up-and-coming trends and pop culture fascination, and to Taiwan to rediscover Chinese cultural roots,” he adds.

According to Knight Frank, in January 2015, total retail sales value plunged 14.6% compared with the previous year. It is the first doubledigit decline in the first month of a year since 2002. This plunge in retail sales could have been negatively viewed by the market – but Rambourg says it is important to put things into context and realise that sales that are not occurring in Hong Kong will be occurring with Chinese visitors elsewhere, like in Europe.

Luxury retail outside Hong Kong Livian Har, head of retail services at Knight Frank, notes that with the depreciating Euro and strengthening USD, many luxury shoppers in Hong Kong are now refocusing their shopping activities in Europe. Due to currency differences, there is a price difference of as high as 25% - 40% in Hong Kong when comparing with other countries.

Meanwhile, Har reckons Chinese visitors have become increasingly cautious and their consumption continued to shift towards mid-priced products, dragging down luxury sales in Hong Kong. Unfortunately, Hong Kong has gradually come to be seen as a “commoditised” destination, and wealthy Chinese now favour edgier yet more practical destinations.

Luxury revenue breakdown in different markets (our 2014 projection)

Source: HSBC estimates

FIRST Residential properties transaction trend

Source: Land Registry

Developers suffer weaker cash flows

Slower property sales loom

W

hen the Hong Kong Monetary Authority announced plans to “cool” the “overheating” local property market, analysts lamented the fact that, despite promised benefits, real estate firms may suffer under the latest regime. “We believe the new measures will weaken demand for residential properties and have credit negative effect on property developers,” says Franco Leung, senior analyst at Moody’s Investors Service.

He believes local developers Sun Hung Kai Properties and Nan Fung International Holdings are likely

to suffer slower property sales and weaker cash flows “given their significant exposure to the residential property market.” This comes as the last prudential measures enforced in February 2013 was followed by a 30 to 60% drop in residential property deals, Leung adds. Nevertheless, the stricter rules will expose banks to less credit risk than before, according to other analysts.

“The tightening of LTV and DSR requirements applies to new mortgage contracts only, and not the existing mortgage portfolio. This will result in slower mortgage growth, but also reduce the credit risk of

The expected repercussion of the new mortgage rules on property developers will not be enough to cause long-term problems.

the banks’ mortgage portfolio,” says Sharnie Wong, analyst at Barclays.

At present, she says, the average mortgage risk weight of banks such as HSBC, Standard Chartered, and BOCHK stands at about 8%.

Moving forward, if mortgages are kept from being re-priced upwards due to aggressive competition, banks will increasingly shift their focus to other types of loans with more attractive returns on risk, weighted assets,” Wong adds.

At the end of the day, however, the expected repercussion of the new mortgage rules on property developers will not be enough to cause long-term problems. “The new rules will dampen the market sentiment, but we believe the potential hit is manageable by major developers. It is evidenced that developers were able to provide top-up financing to help homebuyers to enter the market,” says Simon Lo, executive director at Colliers.

The Chartist: Hong Kong’s structural headwinds affecting productivity The negative real interest rate in Hong Kong has prevailed since early 2010, and has become one of the key distortions of the productivity dynamic. According to a report by Morgan Stanley, the productivity dynamic in Hong Kong has been very weak following the credit crisis period. The incremental capital output ratio has risen from a trough of 3.3 in 2010 to an estimated 10.1 in 2015.

Hong Kong has experienced a period of rapid credit growth, thanks to the drawdown of excess saving to fund domestic demand growth. Morgan Stanley notes that the external orientation of Hong Kong suggests that a significant driver of the productivity dynamic on a cyclical basis will be the performance of its external sector.

Productivity trends have been weakening...

Source: CEIC, Conference Board, Morgan Stanley Research, E=Morgan Stanley Research Estimates

...but remains relatively high in context of high income economies

Source: Conference Board, Morgan Stanley Research

HONG KONG BUSINESS | MAY 2015 7

FIRST

Billionaire battle between Hong Kong and SG

Survey

WOMEN IN CHARGE

M

uch has been said about the rivalry between Hong Kong and Singapore, but if the ranking of the most important cities for the ultra-wealthy is anything to go by, Hong Kong would easily come out as the better city. In terms of the cities that are consistently favoured by the ultra-rich, or those with a net worth of US$30m or more, Asian cities now make up four of the top 10 slots in Knight Frank’s Global Cities Survey.

The most intriguing battle remains between the region’s top two cities, as Hong Kong retakes third spot from Singapore this year. Strengthened by its connections with mainland China and the sheer weight of Chinese capital on its doorstep, Hong Kong boasts a larger billionaire population (53) than its Southeast Asian rival.

“The wealthy population in Hong Kong is expected to grow by more than 40% from 2014 to 2024, while that in China could jump over 80% during the period. Between 20142024, Hong Kong is expected to see 1,251 new UHNWI residents, to rank the second for cities with the greatest growth in the number of UHNWIs,” says David Ji, director and head of research & consultancy, Greater China

Which city lays more golden eggs?

at Knight Frank.

Most notably on a regional level, Knight Frank reveals that Asia overtook North America as the region with the second-largest increase in ultra-high net worth individuals in 2014. The ultra-wealthy in Asia now also hold more in total wealth with net assets of $5.9tn – 7% more than those in North America with $5.5tn. Some 1,419 people moved past the $30m+ mark in Asia in 2014, after an increase of fewer than 1,000 in 2013. By 2024, Knight Frank predicts Asia will overtake North America in UHNWI population by 11%.

The wealthy population in Hong Kong is expected to grow by more than 40% from 2014 to 2024.

health watch

World-class yoga classes made more accessible to all in HK Following the Hong Kong launch of Yoogaia, the world’s first live, interactive online studio, the Scandinavian company recently announced the line-up of Hong Kong-based teachers who will unveil the breadth of styles and class offerings, and bring the culture of well-being to all.

According to Miko Bantigue, Yoogaia country manager in Hong Kong, they have a solid teaching team with 13 qualified experienced teachers.

“Thanks to the growth in popularity of yoga in Hong Kong in the early 2000s, and has continued to grow even further in recent years with the launch of boutique yoga studios, Hong Kong has cultivated a well-developed pool of talent to choose from. Our teachers are worldclass in their passion, professionalism, and personality,” he said. With Yoogaia, users only need a computer with an Internet connection to attend classes.

8 HONG KONG BUSINESS | MAY 2015

There’s been another step towards equality for women in Hong Kong, with female board representation reaching double digits for the first time. The latest findings of Community Business’ annual Women on Boards Report shows that the representation of women on the boards of Hong Kong’s leading companies on the Hang Seng index has reached 11.1% – double digits for the first time, up from 9.6% last year.

However, Community Business points out that while this progress represents the biggest increase in both the number of female directors and the number of director positions for women since the report was first launched in 2009, the positive changes are driven by a handful of companies and nearly three-quarters of companies have seen no improvement.

A concerted and multipronged effort by different sectors in Hong Kong in recent years has not brought about a faster pace of change, even with much global momentum behind the issue.

Consequently, Hong Kong, with its flat trajectory, is significantly lagging behind its global counterparts.

Community Business is a notfor-profit organization focusing on corporate responsibility, diversity, and inclusion in Asia, and this is its fifth Women on Boards report.

“These disappointingly slow moving numbers clearly shows that there continue to be cultural and structural barriers facing women, denying them full participation in Hong Kong’s economic growth, and excluding them from key decision-making positions,” says Fern Ngai, CEO of Community Business.

FIRST

Hong Kong’s shaky demographics further threatens productivity

W

ith Hong Kong’s working age population predicted to post almost no growth over 2015 and 2016 before beginning to decline from 2017 onwards, the role of productivity is now becoming more crucial than ever. As Morgan Stanley analyst Derrick Kam puts it, “an improvement in the quality of labour can help to mitigate the impact of a decline in the quantity of labour.”

Kam notes that productivity growth plays a key role in determining the sustainable growth rate of any economy in the long run.

The role of productivity arguably increases in the face of a weakening demographics trend, given that it will be the only factor left to support overall economic growth.

He reveals that the proportion of the population with an undergraduate degree has been rising over the years, from 5% in 1991 to 13% in 2001 to 21% in 2013. Over 2011-15, Kam expects 820,000 graduates to enter the workforce. “In addition to improving the quality of the additions to the workforce, continuous training of the existing workforce is important to ensure that its skillset remains relevant. As the workforce ages, the rising number of years spent away from full-time education will likely mean a gradual erosion of the knowledge stock. In this context, ensuring continuous training

of the workforce will help to mitigate this impact,” adds Kam. Unfortunately, Kam notes that the productivity dynamic in Hong Kong, much like that in the rest of the AXJ region, has been very weak after the credit crisis period. The external orientation of Hong Kong suggests that a significant driver of the productivity dynamic on a cyclical basis will be the performance of its external sector. Kam says export growth has also been under pressure for the past three years due to weak domestic demand growth in developed markets and subsequently a growth slowdown in China in the last two years.

“We do expect a cyclical improvement in exports growth, as global growth improves over the next two years, but we think structurally export growth is likely to remain weak as the headwinds of deleveraging in advanced economies keep domestic demand growth in these economies constrained,” he says.

Ryan Lam, senior economist at Hang Seng Bank concurs and notes that Hong Kong, an externally oriented economy that should theoretically be one of the prime Asian beneficiaries of the US recovery, saw its trade volume of goods and services expand by less than 1% in 2014. “And last year’s weakness in trade flows was far from being an isolated in-

HK must improve the quality of labour

cident. The city experienced a significant fall in trade growth in the aftermath of the 2008 global financial crisis. Annual trade growth in the period from 2011 to 2014 has averaged just 3.5%, compared with 9.2% in the precrisis period from 2002 to 2008,” adds Lam. “Structurally, the high per capita income levels suggest that there is lesser scope for catch-up rates of productivity growth, while the high services share in the economy suggest that it will be more difficult to sustain productivity growth,” says Kam.

OFFICE WATCH

A room for video games at GoAnimate’s new office GoAnimate, DIY video-creation platform, moved to a new office in Hong Kong located at FWD Financial Centre, 308 Des Voeux Road Central, Sheung Wan. It has a total area of more than 3,580 sq.ft. and can accommodate more than 40 employees.

The office features leisure and entertainment amenities, such as a 2.7-meter standard ping-pong table, a lounge, a meeting room for video games, and an inviting open pantry stocked with free snacks, fruits, and drinks for coffee and tea breaks. With these lifestyle enhancements, this LA-based company aims to stimulate energy and teamwork among the team and to foster creative production. It also provides a cozy setting to facilitate out-of-the-box thinking, collaboration, and innovation.

GoAnimate is currently looking for 10 more passionate engineers and designers.

10 HONG KONG BUSINESS | MAY 2015

Reception

Alvin Hung, founder & CEO

Pantry

Meeting room for video games

FIRST NUMBERS

E-COMMERCE IN HONG KONG

Over the next two years, do you expect to use each of these methods more often, less often, or would there be no change APAC CONSUMER SURVEY 2014 – HONG K when buying non-food items?

E-COMMERCE HAS LIMITED IMPACT ON BRICK AND Over the next two years, do you expect to use each of these methods more often, less often, or would there be no change when buying non-food items?

What ma attractive 1

31% 17%

2

Hong Kong’s treasure chest now growing

W

ith Singapore remaining stuck behind Hong Kong in the world’s wealth management rankings for the third straight year, analysts have begun to ask: is Singapore now a less attractive haven for investors, compared with Hong Kong? Daniel Kobler, partner and head of banking strategy consulting at Deloitte, says Singapore has been described as a “stagnating centre,” based on market volume from 2008 to 2014. “Despite a strong increase in client assets of 24%, Singapore fell by one position and is now ranked sixth, with $0.5 trillion assets booked,” says Kobler.

Hong Kong, on the other hand, has been tagged a “growth leader”, achieving its highest growth since 2008 and elbowing Singapore out. “Fifth-placed is Hong Kong, which achieved growth of 146% ($0.4 trillion) in cross-border client assets during the period, more than any other centre,” Kobler notes.

Different propositions But Alvin Lee, managing director, regional wealth management at Maybank, notes that apart from the generic investment products, Singapore and Hong Kong offer slightly different propositions to HNWIs. “Hong Kong’s proximity to China and its deeper capital markets will always appeal to investors who are looking 12 HONG KONG BUSINESS | MAY 2015

56%

70%

Hong Kong’s cross-border client assets grew 146%

13%

13% Brick/Mortar

Smartphone/ Tablet 3

16% 47%

for China exposures, while Singapore is in the heart of ASEAN and is continuously attracting offshore investors to not only park their funds, but also to consider setting up base. The key Shopping demand will expand both online and offline.

Whether it be using one format or another. driver for Hong Kong’s stellar growth is due to mainland Chinese banking in Hong Kong,” adds Lee. Thus, it Shopping demand will expand would be too early to count Singapore both online and oFFline out of the wealth management game Whether it be using one simply because of Hong Kong’s robust format or another. performance. Kobler notes that except for Hong Kong, the only other APAC CONSUMER SURVEY 2014 – HONG KONG international wealth management E-COMMERCE HAS LIMITED IMPACT ON BRICK AND MORTAR RETAILING What makes a shopping centre / centre attracting net new assets was high street shop attractive ? shop Over the next twoayears, do youof expect to use each of these methods What makes a shopping centre / high street Singapore, with growth $40bn. more often, less often, or would there be no change when buying attractive?

Further, Singapore’s financial non-food items? services sector continues to perform 1 31% Affordability well,17% an indication that the country still deserves its position as a leading 56% 70% management centre in the wealth 2 Cleanliness region. “I do not think that Singa13% 13% pore is a stagnating centre in wealth Brick/Mortar management. The financial services Smartphone/ Tablet 3 Accessibility 16% sector is a very key component of Sin47% gapore’s GDP and our policies have 53% always been very forward looking to Fifth-placed is 4 Safety 45% continuously promote Singapore as a Hong Kong, 31% 8% regional financial hub, if not a global which achieved Desktop/laptop Catalogue/ Mail order one,”Do says Lee. growth of 5 Diversity of Retailers more often No change “Market shares of financial centres 146% ($0.4 Do less often in wealth management will always trillion) in crossShopping demand will expand both online and offline.

Property Management is the key. fluctuate init the short but the border client Whether be using oneterm, format or another. overall soundness and conduciveness assets during of Singapore will make this centre a the period, Source: CBRE Research very important and relevant one in more than any the long run,” adds Lee. other centre.

53%

45%

4

31%

8%

Desktop/laptop

Do more often No change Do less often

Catalogue/ Mail order

5

Prope

Source: CBRE Research, August 2014

CBRE GLOBAL RESEARCH AND CONSULTING This report was prepared by CBRE Hong Kong Research Team, which forms part of CBRE Global Research and Consulting—a network of preeminent researchers and consultants who collaborate to provide real estate m consulting solutions to real estate.

© CBRE Ltd. 2014 Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, w responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduc

$

Source: CBRE Research, August 2014

CBRE GLOBAL RESEARCH AND CONSULTING This report was prepared by CBRE Hong Kong Research Team, which forms part of CBRE Global Research and Consulting—a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate. © CBRE Ltd. 2014 Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

FIRST of this Edwardian Baroque-style piece of architecture started in 1910 and finished in 1912.

6 Ocean Park Ocean Park bills itself as a premier educational theme park covering more than 9,800,000 sq ft. Ocean Park opened in January 1977 with HK$150 million.

Its construction was funded by the Hong Kong Jockey Club, with the Hong Kong Government providing the land. Through 1982 and 1984, Hong Kong Jockey Club funded the second phase of development, costing HK$240 million.

Photo credit: Kevin Li

Here are Hong Kong’s 10 most ‘liked’ pieces of architecture

T

he Hong Kong Architecture Centre (HKAC), a non-profit architecture promotion organization, was established in 2006 to promote interaction between architecture and the general public through Archi Education, Archi Focus, Archi Talk, Archi Tour, Archi Walk and Friends of Architecture. In line with their 10th anniversary celebrations, they launched “My 10 Most ‘Liked’ Hong Kong Architecture of the Century” campaign last year.

The campaign aims to enrich the general public’s appreciation of the built environment. The public voting took place from 1 January to 6 February 2015.

Members of the public were invited to vote on 100 shortlisted pieces. More than 15,000 people participated in the campaign, casting 150,000 votes. Here are the winners in alphabetical order: 1 Chi Lin Nunnery Chi Lin Nunnery is a large Buddhist temple complex located in Diamond Hill, Kowloon. Founded in 1934 and renovated in the 1990s, this architectural piece covers more than 360,000 sq ft. It features a nunnery, temple halls, Chinese gardens, visitor’s hostels, and a vegetarian restaurant.

Hong Kong International Airport Tbe HKIA bills itself as the world’s busiest cargo gateway and one of the world’s busiest passenger airports. HKIA 2

14 HONG KONG BUSINESS | MAY 2015

connects their passengers to around 180 destinations, including 45 on the Mainland. The two-terminal and tworunway facility airport accommodates over 1,000 daily flights by more than 100 airlines.

This HK$50 billion investment has been dubbed one of the largest engineering and architectural projects in the world.

3 Kowloon Walled City Inspired by the Jiangnan garden style of the early Qing Dynasty, the Kowloon Walled City Park is based on natural landscapes and mainly composed of stone mountains, pools and bridges. This $76 million piece of architecture is managed by the Leisure and Cultural Services Department and covers 31,000 sqm.

4 Lui Seng Chun Located in the heart of Kowloon, Lui Seng Chun was built and owned by Mr Lui Leung. The building was completed in 1931 and renovated in 2008 by the Hong Kong Baptist University, with financial assistance from the Government. The building was then transformed into the Hong Kong Baptist University School of Chinese Medicine – Lui Seng Chun.

5 The University of Hong Kong, Main Building Designed by Alfred Bryer of Leigh & Orange, this is the oldest structure on the HKU Main Campus. The construction

7 Tai O Stilt Houses Dubbed the Fishing Village and/or Venice of Hong Kong, Tai O features stilt houses built right over the waterways on Lantau Island. Unlike Venice’s romantic vibe, the beauty of this architecture can be found in unusual interconnected houses forming a community that lives above the waves. Currently, the village is occupied by squatters’ huts and ramshackle stilt houses, following a large fire in 2000.

8 Former Kowloon-Canton Railway Terminus & Clock Tower The 44-metre Tsim Sha Tsui Clock Tower is the only remaining part of the old Kowloon station. The Clock Tower was built as part of the Kowloon-Canton Railway terminus, and was declared a monument in 1990. Today, the building of the Kowloon Station is located at Hung Hom Station on the new Hung Hom Bay. 9 The Peak Tram Known today as one of top tourist destinations in Hong Kong, The Peak Tram is arguably the ‘most enduring emblem’ of the city’s unique past. The Peak Tram is an inclined railway operated

by Hongkong and Shanghai Hotels Group (HSH). It rises from 28 to 296 metres above sea level along a 1.4 kilometre track.

10 Tsim Sha Tsui Star Ferry Pier, The Five Flagpoles & Central Star Ferry Pier The Tsim Sha Tsui Star Ferry Pier is considered one of the most important transport centres between Hong Kong Island and Kowloon, while the ferry ride is known as one of the world’s best valuefor-money sightseeing trips. The Five Flag Poles, between the pier and Star House, used to be a popular meeting place as it was easy to identify.

startups

See how Variably revolutionizes online price negotiation

V

ariably started out with an idea: “How cool would it be to transact in the ‘real world’ with the same efficiency as in the financial markets?” Founders David Rosa and George Cotsikis, who have known each other for more than 18 years, pursued this ‘crazy’ idea to build the business with their own savings. They used their initial funding to conduct market research, customer development, design and code early prototypes, and to file a patent on their core IP. After accumulating many war stories along the way, the result was Variably, a platform that connects decision makers to facilitate

transactions.

Variably’s core IP is a patented algorithm that enables buyers and sellers to negotiate the best price automatically. The platform has created solutions for both ‘pure online’ as well as traditional ‘bricksand-mortar’ businesses. It also features two world-class authorities in the fields of Artificial Intelligence and Data Analytics.

According to David, their mission is simple: to bring efficiency to the business world outside financial markets. “Slow turnover is a major pain point for most businesses. This is typically due to poor customer experience and suboptimal pricing.

Variably solves this pain point.”

In August 2014, Variably raised USD925,000 in a priced equity seed round, with Angel investors and family offices in Hong Kong and Europe backing them up as major investors.

They have also been selected as part of the Swire Group’s prestigious Blueprint accelerator program. David says that the Variably team is very focused on finding product-market-fit within this very diverse and exciting market, to grow internationally.

USpace boosts mobile experience for work spaces

Russian Ilya Belikin, along with his core team members, founded Ungert Design to create a proper mobile experience for work spaces. Boasting a strong background in software development, an unusual story behind the name, and an international team with a hub in Hong Kong, Ungert Design’s flagship product is USpace.

USpace is an interactive plan, designed for people who work in the office. It is a visual representation of an office, designed to provide a better experience for workers. Through 16 HONG KONG BUSINESS | MAY 2015

USpace, you can tap on avatars to see members’ profiles, or find someone’s current location. Or tap on a meeting room to check the schedule and book a slot for your meeting. Ilya calls USpace a better “interface for a space.”

Ilya quit his top management position to make his dreams of building a company to create useful software for global market possible.

When asked what’s the craziest thing he has done for his company, that will be “#TeaTableProject” where he made cups of tea for people all over the world including VCs and managers.

The company currently has USD400,000 from internal funding and Angel investors. IIya adds that they have found some major clients in the US, and he’ll be meeting with them to ensure that their app will be adopted in co-working spaces globally.

Meanwhile, the team is currently working on another related app.

Digital marketing for ‘kezhans’

Funding your dream startup is not as easy as it seems. In fact, according to Perkins Ho and Ethan Wang, founders of Tavernlabs, Perkins even put all his money into starting the business. An electrical engineer by training, Perkins then sought help from his good friend Leonardo Wong, an experienced programmer, to help build the system. Eventually, Tavernlabs started off with only one programmer and had its beta launch to its first clients in less than 9 months. In less than a year, this company, which was inspired by the founders’ love of travelling, now has USD200,000 total funding at hand with the owner’s funds and Angel Investors such as Dominic Chan of Dark Horse Investment.

Tavernlabs has built a SaaS digital marketing system for boutique hotels (‘kezhans’) in China to enable their self-marketing and direct-booking capabilities. The company’s flagship product is called Yunnke, and allows boutique hotels to cultivate their own clients on the cloud.

Perkins explains that, due to a lack of resources, about 98% of kezhans don’t have an online presence.

These boutique hotels rely heavily on word-ofmouth and OTAs to sell rooms. Without brand differentiation in OTAs, they cannot compete with large hotels.

With Yunnke, these boutique hotels can now build a professional hotel website in 30 minutes and take commission-free direct bookings using the platform’s booking engine. Through Yunnke, they can also build hotel-specific features such as room features, a map showing nearby restaurants and points of interest, promotions modules and multilingual support. They are also able to control their own pricing, take reservations online, and be more proactive with promotions during the non-peak season.

According to Perkins, Tavernlabs aims to be the first company in China and Taiwan to run DIY commission-free direct sales via official hotel homepages. He explains that the Tavernlabs system will allow hotel clients to compete not just via traditional websites, but also in Weixin and Facebook.

After winning the Cocoon competitions for startups in January, Tavernlabs is focusing on perfecting their system and preparing to put more effort into sales and marketing in 2015, with a goal of reaching 500 clients.

FINANCIAL INSIGHT: mergers & acquisitions

Family-held conglomerates step up their M&A activity

Hong Kong M&A riding high on corporate restructuring M&A levels in the territory could skyrocket this year as more conglomerates consider multi-billion dollar restructuring deals.

I

f anything is tempting Hong Kong conglomerates in 2015, it is the urge to follow in the footsteps of Li Ka-shing and his bold reorganization of his massive diversified conglomerate into two new listed companies. The record-breaking deal is likely to cause a domino effect in the territory, analysts say, with corporate restructuring poised to become a defining M&A theme this year.

“In Hong Kong, we expect more restructuring among family-held conglomerates similar to the Hutchison-Cheung Kong deal,” says Samson Lo, head of M&A, Asia at UBS Investment Bank.

Helping to convince other conglomerates is the sound rationale behind the reorganization; the Hong Kong tycoon expects the two new listed companies will create shareholder value as well 18 HONG KONG BUSINESS | MAY 2015

In Hong Kong, we expect more restructuring among family-held conglomerates similar to the HutchisonCheung Kong deal.

as provide investors the option to choose between investing in property or non-property assets, says Elaine Tan, senior analyst, Deals Intelligence at Thomson Reuters.

The deal will see Cheung Kong (Holdings) Ltd acquire the remaining interest in Hutchison Whampoa Ltd, to form CK Hutchison Holdings Ltd, in a stock swap transaction valued at US$47.7 billion, including net debt.

Tan notes that the deal surpassed the biggest-ever M&A transaction involving Asia Pacific – CITIC Pacific’s US$42.2 billion acquisition of CITIC Group’s main asset in 2014 – and pushed the region’s M&A activity to the best annual start to any year since records began with US$211 billion.

“It’s a hectic start this year for

deal making in Hong Kong, with Li Ka-shing’s main companies leading the deal flurry,” says Tan. “They also stepped up the pace of M&A activities overseas, focusing on European and other foreign markets. This included Hutchison Whampoa Ltd’s US$15.4 billion pending acquisition of O2 plc from Telefónica SA,” she adds.

This has brought overall M&A activity in Hong Kong to US$83.9 billion as of early March. Tan points out that this is more than twice the level of the previous year, making it the highest first quarter level on record, in terms of deal value. The Telecommunications industry has seen the lion’s share of activity so far, accounting for 72.5% of Hong Kong’s deal making activity with US$60.8 billion worth of deals, according to Tan. Stronger Asian appetite The rest of the year promises to sustain the blistering M&A momentum in Hong Kong in the face of a stronger Asian appetite for deals. “Hong Kong and Singapore are regional financial hubs, and as

FINANCIAL INSIGHT: mergers & acquisitions a result, a lot of the M&A activity there is driven by companies operating in other countries in the region that have based themselves there; when you look at the deals announced in 2015 to date that’s again clear, particularly for Chinarelated deals in Hong Kong,” says David Cogman, partner at McKinsey & Company.

“As far as the deal industry is concerned – the professional advisors that work in M&A – the fortunes of Hong Kong and Singapore rise and fall with the region overall,” he adds.

Cogman expects Chinese acquirers to lead the M&A charge this year, both through outbound deals and in the domestic market with state-owned enterprise restructuring and an increasingly healthy private company deal market.

Major companies in other countries may also step up their activity in intra-regional M&A, due to their healthy cash positions and expansion aspirations.

Asia warms up to M&A No doubt about it – M&A appetite has bounced back strongly in 2015. “The Asia Pacific region excluding Japan is expecting the biggest increase in appetite,” says Vishal Sharma, Asia Pacific head of M&A at KPMG. There are also signs that large corporates, including those in Asia Pacific ex Japan and Southeast Asian regions, will have more capacity to act on their appetite and fund prospective deals.

Sharma notes that the region’s forward price/earnings (P/E) ratios – an indicator of corporate appetite – rose 12% over the past year, higher than the global increase of 7%, according to the latest KPMG Global M&A Predictor, a forward-looking tool that helps to forecast worldwide trends in M&A deals.

Asia Pacific ex-Japan’s capacity to transact is predicted to rise by 15%, showing that corporates in this region will have the funds to fulfill this stronger appetite.

Southeast Asia’s forward P/E

ratio echoed the global trend, increasing 10% over the past year while capacity is expected to improve by 14%.

And although a few countries like Singapore could show lacklustre M&A appetite – the country’s forward P/E ratio dropped 3%, the only country in Southeast Asia to see waning appetite – the region overall is feeling ravenous with Malaysia’s forward P/E ratio rising 5%, Indonesia by 19%, Thailand by 22%, and the Philippines by 23%. “The drop in Singapore’s forward P/E ratio is a reflection in some ways of the global concerns around rising interest rates and weak growth expectations from the large economies of China and Japan,” says Sharma.

KPMG data suggest large companies are paying down debt and stockpiling cash, putting them in a prime position to fuel their M&A deal-making sprees.

“The data indicates a return of confidence in the M&A markets.

We are seeing an upswing after almost three years of decline,” says Sharma. “This confidence will drive M&A transactions activity, with both deal volumes and deal values moving in a positive direction during the second half of 2014.”

“The early indications for 2015 seem positive,” agrees Cogman.

“Though we are not yet at the end of the first quarter, there has been a reasonable pipeline to date, and first quarter is always a bit slow due to the Lunar New Year.”

“We expect 2015 overall to be on par with or better than 2014 for the region, though of course it is early days yet,” adds Cogman.

Asia looks outside the region for growth The debate now is whether Asian corporates will look outside the region for M&A deals. Thomson Reuters data show the value of announced M&A deals involving Asia Pacific companies, excluding Japan, hit a record high with US$802.2 billion in 2014, surpassing the best annual period in 2010. But an expected increase in

Vishal Sharma

Elaine Tan

David Cogman

more lucrative targets in Western regions could lure away attention from Singapore and other ASEAN companies.

“We expect an increase in outbound activity from Asia Pacific – driven, in part, by a plethora of high-quality assets and real estate in the US and Europe coming on to the market and, in part, by Asian investors seeking growth opportunities,” says Lo. Cogman says that there has been an uptick in outbound investment from Asia into the Americas, mostly driven by Chinese companies.

“Chinese companies have grown considerably in confidence and financial capacity over the past few years. There are a few countries that are perhaps punching beneath their weight in the region,” says Cogman.

“There are plenty of cash-rich Japanese companies, for instance, who are looking for growth opportunities, but are perhaps more cautious on acquisitions. Indian deal volumes are consistently much smaller, and they see more inbound acquisitions, while in China outbound deals dominate the cross-border activity,” he adds.

But looking at the broader region, Cogman points out that the deal activity in Asia tends to be mostly intra-country and intra-regional, with 77% of deals by value being domestic wherein the acquirer and target are from the same country. Meanwhile, cross-border deals within Asia Pacific were 13% of the total, or roughly the same as it has been in past years.

Any Hong Kong involvement announced M&A First quarter volume comparison

Source: Thomson Reuters

HONG KONG BUSINESS | MAY 2015 19

economic INSIGHT: road to recovery

Patching Hong Kong’s economic holes

One belt, one road to growth Analysts believe Hong Kong could ride on the China-borne initiative’s success, and external-led recovery will still be the key this year.

I

f you were expecting Hong Kong’s economy to rebound soon, you’d be disappointed. Exports are improving at a snail’s pace and domestic consumption is not faring any better.

Experts predict that without decisive moves from Hong Kong’s government, the economy’s painstaking growth rate will continue being in the low single digits through the first half of 2015.

Hong Kong’s economic outing last 2014 had analysts disappointed.

Though a bit better than the forecasted 2.2%, the whole fiscal year dropped to only a 2.3% growth compared to 2.9% in 2013. “Although Q4 growth beat our expectation marginally, the economy was clearly slowing down.

While many observers regard the subdued external performance as the main drag and domestic demand as the resilient growth pole, we disagree,” expressed Audrey Shi, an economist at Deutsche Bank Shi cites that exports out-contributed domestic consumption in the 2014

20 HONG KONG BUSINESS | MAY 2015

The Hong Kong government’s concern reflects that of experts and its financial moves this 2015 are geared towards bringing the economy back on track.

GDP, redeeming itself to -0.4ppts in 2014 up from -1.4ppts accumulated through the five years after the Global Financial Crisis. However, comparing this to the pre-crisis years of 2002 to 2008, wherein external trade grew an average of 9.2% annually, reveals a disappointingly low yearly increase of 3.5% from 2011 to 2014.

“Going into 2015, we continue to expect an external-led recovery but it remains unclear to us whether the ‘transfer process’ from the external

environment to domestic recovery would be immediate and significant,” asserts Shi. Ryan Lam, a senior economist at Hang Seng Bank, agrees with predictions that the export figure should have been better than what it currently is. “Hong Kong, an externally oriented economy that should theoretically be one of the prime Asian beneficiaries of the US recovery, saw its trade volume of goods and services expand by less than 1% in 2014,” he notes.

However, Lam contends that cyclical factors affecting Hong Kong’s major trading partners have but a negligible influence on trade quantity.

He posits that structural elements such as production plant locations, manufacturing costs, and company control over production stages, are the main factors to consider in explaining why Hong Kong’s economy has been bumbling as of late.

Similarly, internal demand—including both consumption and investments—also took a hit, dwindling from 4.1ppts during 2009 to 2013 to only 2.8ppts last year. Additionally, private consumption was quite sluggish, falling from 4.6% to 2.7% year over year. Lam agrees that lawmakers have found cultivating domestic consumption to be more than problematic, and that their faith on the key economies of US and China is not enough to offset the GDP deficit.

Patching the economic holes The Hong Kong government’s concern reflects that of experts and its financial moves this 2015 are geared towards bringing the economy back on track. Financial Secretary John Tsang Chun-wah has predicted a 1 to 3% GDP growth this 2015, down from

Hong Kong private investment growth vs China GDP growth

Source: DBS Group Research

economic INSIGHT: road to recovery 2.3% last year, and he has maneuvered the national budget to meet the high end of the forecast. Hong Kong will be working with a budget surplus of HKD 63.8 billion, a monumental increase from FY13/14’s HKD 12 billion, to plug the financial holes the city will be facing this year.

Tsang expressed that there will be an allotted 11% increase in financial spending for FY15/FY16, a huge improvement over FY14/FY15 which saw a 5.7% decrease in expenditures.

The increase was mainly allotted towards healthcare (up 22.7%, 7.6% greater YOY); social welfare (16%, 10.7% greater YOY); and education (7%, 10% better YOY), the funding of which are expected to uplift consumer spending power.

Further boosting domestic purchasing capacity are relief measures in policies, including cutting personal salary and profits tax up to HKD 20,000 (twice as last year); property interest up to HKD 2,500 for Q1 and Q2 (HKD 1,000 more than last year); free public housing rent for one month (the same); additional two months stipend for beneficiaries of the Comprehensive Social Security Assistance (one month more); and additional basic and child subsidies up to HKD 100,000 per child. In addition, businesses impacted by the Occupy HK movement will also be given a leeway from licensing fees to reestablish lost investor and tourist confidence. The total projected amount for these is HKD 34 billion, higher than HKD 20 billion last 2014.

The real estate market will be benefiting from administrative proposals made by the government and the Hong Kong Monetary Authority. Now, residents purchasing homes valued lower than HKD 7 million can enjoy

a better 60% loan-value ratio, a fixed amount lower than the previously variable 60% to 70% cap. Moreover, the debt-service ratio will now affect not only mortgage loans from banks, but will also influence other lenders as well to quell foreclosures.

Those looking to sell their houses can enjoy (at least for a couple of months) a bit of wiggle room during negotiations as the cost of transaction will stay where it is. The administration is hopeful that this plateau will encourage owners to let go of their properties, and in turn, increase real estate volume. Prices, though, will likely continue to grow should policies become stricter.

Finally, Hong Kong should follow Singapore’s example in the face of an impending economic crisis. As the two bear significant similarities, including being major exporters of goods and services; the value of local currencies being dependent on exchange rate policies and expectations; both going through an extended bout with rapid credit expansion; and periods of highly unstable real estate turnouts; the problems one will face would have already been solved by the other. “Singapore responded to these dynamics by easing monetary policy, therefore accentuating the shift in currency expectations,” recalls Silvia Liu, an economist at UBS Hong Kong. For Hong Kong inflation not to burst out of control, policies should be tailored as to not be over dependent on a single foreign currency, in this case, the USD. More liberal policies will also cushion the impact of a lackluster domestic performance and subdued trade growth rates, bolstering infrastructure investment results.

Following these, Liu expects the

There will be an allotted 11% increase in financial spending for FY15/FY16.

GDP to remain at a humble but steady 2.3% year over year. “Tightening monetary conditions, with the US expected to start hiking interest rates later this year, will be a headwind for Hong Kong for many years to come. This, plus a slowing Chinese economy, suggests the risks are to the downsides.”

One belt, one road to rule them all A China-borne initiative, the “One Belt One Road” will see the Chinese government investing upwards of USD 40-billion Silk Road funding to help develop economic infrastructures in countries covered by the project. 21 nations have already committed their support for the accompanying Asian Infrastructure Investment Bank.

While the undertaking’s details are still being deliberated upon, Hong Kong should actively participate in proceedings to gain the first mover advantage. Chris Leung, DBS Hong Kong’s senior economist, reasons that “Hong Kong has a natural advantage, given its geographical proximity to China and established trade and financial ties. In addition, as unparalleled port infrastructure and efficient logistics systems are already in place, Hong Kong can meaningfully contribute to the Maritime Silk Road initiative in a short period of time.” The project is shaping up to be a sustainable GDP buffer over the long run and will ease the government out of the burden of creating a solid structural foundation, more jobs, and a thriving Hong Kong economy. “The significance of One Belt One Road should not be underestimated. If Hong Kong proactively supports the initiative and rides on its success, it could provide a palpable boost to Hong Kong’s GDP growth in the long run,” concluded Leung.

Hong Kong’s trade volume (% YoY)

Source: Census & Statistics Department of HKSAR, Hang Seng Bank

HONG KONG BUSINESS | MAY 2015 21

ANALYSIS: express cargo

FedEx is focusing on SMEs

Express cargo firms clash in the e-commerce arena Competition heats up among HK express cargo firms as Asia’s e-commerce boom creates billions of dollars in new business.

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hen an Asian shopper buys online and the shipment gets delayed or cannot be tracked, you can bet that an express cargo firm is scrambling to set things right. For express cargo firms, especially those based in Hong Kong, one of the world’s busiest air transport hubs, impeccable service has become an imperative if they want to bag contracts from e-retailers flooding into the region.

E-retailers and online shoppers have become the equivalent of royalty in the HK express cargo industry. Cargo firms are not only creating customised shipping options for e-commerce, but are also raising their delivery speed and service quality. Cargo firms are doing this to corner the Asian e-commerce market, widely seen as one of the biggest catalysts for

22 HONG KONG BUSINESS | MAY 2015

HK in particular will see a surge in e-commerce transactions, reaching HK27.1 billion in 2015, compared to HKD14.6 billion in 2011.

cargo transport growth. “The rapid growth of e-commerce is one of the reasons attributed to the growth of air cargo throughput,” says a spokesman for the HK Transport and Housing Bureau.

In terms of air cargo throughput, the Hong Kong International Airport has been the world’s business international airport since 1996 and total air cargo throughput increased by 6% to 4.38 million tonnes in 2014. “E-commerce is a major driving force in retail sales and economic growth, both locally and globally, and is also the fuel for growth at FedEx,” admits Anthony Leung, managing director at FedEx Express, Hong Kong and Macau.

Leung says the Asia Pacific region has a thriving e-commerce market that includes China, now the world’s biggest single e-commerce market, and the next

few years should see even more growth. He says Asia Pacific is expected to surpass North America this year as the leader in e-commerce sales, growing to 33.4% of the total compared with 31.7% for North America and the 24.6% for Western Europe.

Asia Pacific is the frontrunner in a world that is fully embracing e-commerce. Leung cites Forrester Consulting data which reveals online buying in 11 global markets alone was projected to exceed US$1 trillion in sales in 2014 and that number is expected to nearly double in the four years through 2018.

“Asia Pacific is now taking center stage in the global e-commerce market, driven by a range of factors including increased internet access and the burgeoning middle class,” says William Ng, managing director at UPS Hong Kong and Macau. HK in particular will see a surge in e-commerce transactions, reaching HKD27.1 billion in 2015, compared to HKD14.6 billion in 2011 and HKD 15.7 billion in 2012, according to a PayPal forecast. “This opportunity for e-commerce expansion in Asia Pacific is immense, but retailers will need to have the ideal supply chain management strategies in place in order to successfully gain and retain a share of this consumer base,” says Ng. SME focus With lucrative new business on the line, HK express cargo firms are adopting two main strategies to conquer the e-commerce arena: Focusing on SMEs and providing customised solutions.

Leung says FedEx has invested in infrastructure, expanding its airport facility in 2012 to enable more efficient cargo handling capabilities, and increasing its floor space by 37% to 4,695 square meters along with adding new equipment and staff.

He adds that FedEx is also paying attention to small and medium enterprises (SMEs), which are emerging as high-growth sec-

ANALYSIS: express cargo tors for cargo transport demand.

“E-commerce makes it easier than ever for millions of small businesses all around the world to trade internationally,” says Leung.

He notes how SMEs account for 98% of all businesses and employ 47% of the working population in HK, providing up to 1.3 million jobs in the market. “Digital technologies give rise to the emergence of micro-multinationals by providing even the smallest companies, start-ups and young entrepreneurs with access to global customers.”

DHL shares this focus on e-commerce and SMEs. DHL created the Break Bulk Express service, which allows companies to simplify the customs clearance process and improve delivery efficiency, says Ecila Chan, vice president, commercial at DHL Express Hong Kong. The service consolidates multiple shipments at origin then sends from the origin customs zone to the destination zone, where they are then deconsolidated and delivered

by DHL to different addresses at the destination. For SMEs, it offers flexible solutions that include insurance and real-time shipment tracking options that aims to give peace of mind to SMEs with relatively limited resources.

Customised solutions Similarly, UPS is focusing on offering differentiated products that are tailored for specific industries like retail, luxury and high technology.

“Retail forms the largest proportion of HK exports. HK outbound high fashion and luxury items – jewellery, watches and clothing – present significant airfreight and express delivery opportunities,” says Ng. “By 2025, it is forecasted that Chinese consumers will account for 50% of sales of luxury goods with their average spend much higher than that of other nationalities,” he adds.

To power its differentiated products and segment-specific solutions, UPS gathers industry intelligence through its UPS Pulse of the Online Shopper survey. A key finding of its latest survey is that creating personalised e-com-

Ecila Chan

William Ng

Anthony Leung

merce experiences and providing alternate delivery locations are helping retailers boost customer satisfaction among hard-to-please Asian online shoppers. The survey found that satisfaction with online shopping is significantly lower in Asia, at 46%, compared with 83% in the US and 80% in Europe.

Asian shoppers were also found to be the least patient with 27% expecting same-day delivery and 48% expecting next-day shipping, the highest internationally.

Even among demanding Asian online shoppers, HK shoppers stand out as one of the most difficult to satisfy. A regional high of 38% of shoppers expect same-day delivery for domestic purchases.

Through these insights, UPS recognises and offers customised solutions for e-tailers so they can meet the high standards of Asian and HK online shoppers.

Outstanding customer experience HK express cargo firms cannot afford to slack off because online shoppers and e-retailers will no longer tolerate a substandard customer experience.“Customers’ expectations are increasing in terms of shipping experience, so there is no room for complacency,” says Leung.

He cites a recent FedEx-commissioned research study which revealed that shipping-related factors are highly influential for HK online shoppers when buying from overseas. Their top concerns were: a simple returns process (68%); the ability to return goods

In response to a strong demand for logistics land in Hong Kong, the government has also disposed 3 longterm logistics sites with a total 6.9 hectares in Tsing Yi.

free of charge (68%); delivery time guarantees (68%); the ability to track their packages (66%); and the availability of free or reduced-cost shipping for purchases above a certain minimum value (66%).

Positive industry outlook Despite the challenges posed by e-commerce and Asian online shoppers, major players and the HK government have an optimistic outlook on the territory’s express cargo industry. One uplifting factor is that the HK government has thrown their support behind the industry through infrastructure improvements.

“We are embarking on a number of major transport infrastructure projects to enhance mobility within the city, as well as global and Mainland connectivity,” says a spokesman for the Transport and Housing Bureau (THB).

The HK government is planning a third runway for the airport and building a mega-bridge linking HK with neihbouring Macao and the Mainland city of Zhuhai in the western Pearl River Delta.

In response to a strong demand for logistics land in Hong Kong, the government has also disposed 3 long-term logistics sites with a total 6.9 hectares in Tsing Yi from 2010 to 2013 for the construction of modern logistics facilities.

Moreover, it reserved 10 hectares of land in Tuen Mun West for modern logistics development.

THB plans to release part of the logistics site to the market before end of this year.

DHL consolidates multiple shipments at origin

HONG KONG BUSINESS | MAY 2015 23

singapore’s hottest startups 2015

Hendra Gunawan’s Pandawa Dadu (The Dice Game from the Mahabharata Epic)

The changing taste of Asian art collectors bodes well for the Western art market Art is increasingly seen as a sound investment by collectors, and holding artworks gives pleasure to many, but significant risks are lurking in this volatile market.

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ast November, Vincent Van Gogh’s 1890 still life, Vase with Daisies and Poppies, sold for a staggering $61.76 million at Sotheby’s New York – the highest auction price for a painting by the Dutch master in more than 15 years. The buyer was Chinese movie mogul Wang Zhongjun, chairman of Huayi Brothers Media Corp, a well-known collector who has turned his attention of late to Impressionist masters and already counts in his collection pieces by Pierre-Auguste Renoir and Camille Pissarro. He has not been the only Chinese billionaire flexing his muscles in the western art market.

In 2013, tycoon Wang Jianlin’s Wanda Group bought the 1950 Pablo Picasso painting Claude and Paloma for $28 million, more than double the pre-sale upper estimate of $12 million.

“In the last five years, we’ve seen a dramatic change in what collectors from Asia are looking to buy,” says Suzanne Gyorgy, global head of Art Advisory & Finance, Citi Private Bank. “Five years ago there was not much interest in western art, and that has changed. We go to auctions, bidding on behalf of our clients there and watching the room, and it’s undeniable that specialists representing Asian clients are very active in those sales of western art.”

“We also have clients from China going to New York,

24 HONG KONG BUSINESS | MAY 2015

The combined value of the collections of the top 10 art collectors from China and Hong Kong is worth about $2.57 billion, often a fraction of their net asset value.

where we organize for them tours of galleries, auction previews and museums. They are getting exposed to the best, and their interest is really genuine and really growing. I would say the knowledge and education of the Asian clientele [in western art] has grown in leaps and bounds,” Gyorgy adds.

The rise of rich art collectors in Asia Asia currently has an estimated 492 billionaires, with 184 living on the Chinese mainland, another 53 in Hong Kong, and 24 living in Singapore, according to the Knight Frank Wealth Report 2015, and art as an investment of passion remains firmly on their radar. A separate report by Wealth-X, released in March during Art Basel in Hong Kong, estimated that the combined value of the collections of the top 10 art collectors from China and Hong Kong is worth about $2.57 billion, often a fraction of their net asset value.

For example topping their collector’s list was Wanda founder Wang Jianlin, with assets worth an estimated $27.5 4 billion and an art collection worth an estimated $1.2 billion, while Shanghai Zendai Investment Group founder Dai Zhikang’s assets are estimated at $1.3 billion while his art collection is worth $80 million.

Magnus Resch, the founder of Larry’s List, an art mar-

singapore’s hottest startups 2015 ASIAN ART REPORT ket knowledge company, estimates that 18% of the global collector scene is now based in Asia, with more than one third of it in China. “Beijing is the largest collector city in Asia with a share of 14% of Asian collectors. Seoul comes second (12%) and Singapore third (7%),” he says, noting that “45% of the collections were founded between 2001 and 2010, and 5% in the three years since 2010.”

According to the TEFAF Art Market Report 2015, released in March, the global art market raked in over €51 billion ($53.9 billion) last year – a 7% year-on-year increase that finally took the annual sales figure above the 2007 pre-recession high of €48 billion – with three major art markets dominating activity: the US (39%), China (22%) and the UK (22%).

The author of the report, Clare McAndrew, noted the art market last year reached its highest ever level of sales with continuing strength in Modern and Post War and Contemporary art, but it continued to be a “highly polarized market, with a relatively small number of artists, buyers and sellers accounting for a large share of value,” though she also noted that,“a promising trend counteracting this to some extent is the growth in online sales, which has encouraged a greater volume of sales in lower-priced segments.”

International rivals have picked up some market share from Chinese mainland auction houses when

China’s art fund and art investment trust market slowed rapidly from an estimated $529 million in 2012 to an estimated $169 million raised in 2013.

Auction scene of the sale’s top lot – Plum Blossoms by Wu Guanzhong

Kevin Ching, CEO of Sotheby’s Asia and Mr. Wang Zhongjun at the presentation ceremony of Van Gogh’s Still Life, Vase with Daisies and Poppies

they entered the market. According to UK based art market research company ArtTactic, over the last two years, Poly Auction and China Guardian’s market share fell from 53.7% in 2012 to 47.8% of the market in 2014.

Yet Sotheby’s and Christie’s are still struggling to get a foothold in the Chinese mainland market, having failed to create any significant inroads into this market, it noted in a recent report.

Sotheby’s sale in autumn 2014 was 46% lower than its spring 2014 sale and 68% lower than autumn 2013, while Christie’s autumn sale in Beijing was 14% lower than autumn 2013.

ArtTactic founder Anders Petterson says, “Although we’re seeing more Chinese collectors buying western art, I don’t see this as the reason for the market slowdown [in China].” Instead, Petterson believes “slower economic growth, government anti-corruption measures and tighter regulations around the art investment trust market in China are the main reasons behind a dampening of the market.”

This is confirmed by data from the Art & Finance Report 2014, prepared by Deloitte Luxembourg and ArtTactic, which showed that China’s art fund and art investment trust market slowed rapidly from an estimated $529 million in 2012 to an estimated $169 million raised in 2013 (latest available figure), following stricter government regulations on the Chinese shadow-banking market.

The report pointed out that 76% of art collectors around the world are buying art for collecting purposes, but with an investment view (up from 53% in 2012), implying that the investment aspect of art buying is something that collectors are “increasingly concerned about.”

Drivers of the strong interest in art For Mohit Mehrotra, Deloitte’s Global Wealth Management Group leader, a couple of important developments are driving the strong current interest in art. “The first generation of wealth was really about creation and accumulation, the second generation is starting to react like their peers in the west, appreciating the finer things in life,” he says.

But Mehrotra also notes that arts and collectibles as part of one’s asset would allow a High Net Worth Individual to diversify his/her risks from being overly concentrated in capital market products. Art, he says, also gives investors a “different way of managing their portfolio out of keeping it all in liquid financial assets.”

Petterson notes that, while investment is a “strong motivation among Asian art buyers”, it is by no means a trend exclusive to the region, “but one that has evolved globally over the last 10 years.”

Gyorgy also points out, “For better or for worse, in the last five years, there has been a general ‘financialization’ of the art market.” The private bank offers clients advice on how to build an art collection that will stand the test of time, and she says art advisory has been a growing business for the bank around the world. But she’s also quick to add that, “we’re really not advising clients to HONG KONG BUSINESS | MAY 2015 25

singapore’s hottest startups 2015 ASIAN ART REPORT buy art as an investment. We’re all museum-trained and when we’re talking to clients we’re really advising them about how to build an important collection, so it’s the art for art.”

Petterson notes that an investment in art should be “a long-term endeavour, otherwise you are susceptible to being caught up in the fads and short-term cycles of the markets. Unless you can afford to take at least a 10-year view on the market, you should probably stay away from art as an investment. Art for pleasure and enjoyment is a different thing.”

Patricia Amberg, head of the UBS Art Competence Centre, points out that the art market remains heterogeneous and about which very little data are available.

“Only the hammer prices achieved at auction are public.

This excludes the larger part of the art trade: galleries, dealers, private treaty sales, online platforms and all the rest. Auction prices therefore only represent about a third of the art market at best, making it one of the most non-transparent markets.”

She adds, “We always recommend that clients collect art for the love for art itself.”

The Mei Moses World All Art Index, which is widely considered a key index, showed a compound annual return of 7% between 2003 and 2013, slightly below the S&P 500’s total return of 7.4%. But post-war and contemporary art, as well as traditional Chinese works of art, delivered compound annual returns of 10.5% and 14.9% respectively.

Over the last 40 years (1973-2013), the compound annual return (CAR) for the World All Art Index was 6.9%, below the S&P’s 10.9%. The S&P and post-war and contemporary art have very similar results, with a CAR of 10.9% and 10.8% respectively.

Outlook for the art market in 2015 According to the 2015 outlook report by ArtTactic, 65% of experts surveyed believe contemporary art market sales will level out this year, though 35% feel the market

Liu Dan’s Splendour of Heaven and Earth Est. HK$10 – 15 million / US$1.29 – 1.94 million

26 HONG KONG BUSINESS | MAY 2015

65% of experts surveyed believe contemporary art market sales will level out this year, though 35% feel the market has further upside potential.

has further upside potential. So far, no one expects an art market correction within the first half of 2015, which might come as a relief.

“Although weaker economic growth might lead to slower art sales in the mid- to lower-price segments, the ultra-wealthy are expected to continue their trophy hunting at the top end of the market,” Petterson says. “This is supported by the fact that 73% of experts are positive towards the $1 million+ segment. However, the higher end of the middle-market could rekindle, as buyers are picking lower-hanging fruits in the hope that these artists will be promoted to the millionaire league. Expect another year with new auction records,” he says.

By Sonia Kolesnikov-Jessop

Georgette Chen’s Self-Portrait Est. HK$500,000 – 700,000 / US$64,500 – 90,500

HONG KONG’s 50 largest hotels

Hong Kong hotels diversify market segments

Competition among Hong Kong hotels gets tougher What should they do to meet higher guest expectations this year?

J

ust when you thought that Hong Kong’s best hotels would be plateauing in their customer service endeavors this 2015, out comes Peter Chiu, general manager of Regal Riverside Hotel at Regal Hotels International, with a bold guarantee: “Competition among hotels will continue to be tough in 2015. To cope with higher guest expectations, the major focus for our hotel will be continuing to improve guest services and diversifying market segments.”

That promise is well placed with the country’s premiere hospitality establishments recording satisfactory room revenues and continuous patronage of MICE groups last year. John Girard, area general manager for Hong Kong, attributes the success to improvements in facilities and services, as well as brand visibility projects.

28 HONG KONG BUSINESS | MAY 2015

L’hotel Nina et Convention Centre has once again topped Hong Kong Business Review’s ranking of largest hotels in the city based on total number of rooms.

The Mira Hong Kong likewise enjoyed a fruitful fifth anniversary, with its USD 65-million renovation backed up by new culinary, entertainment, and technical offerings. Its general manager, Gerhard Aicher, comments, “We have made a few strategic changes in our business mix as well as enhanced the guest experience with a more personalized approach and these helped us advance our market position.”

The efforts of the industry’s most powerful players did not go unrecognized. Awards and accolades ran aplenty, with the Regal Group garnering an EarthCheck Silver Certificate, ISO50001: 2011 Standard for Energy Management Systems, Indoor Air Quality Certificate (Good Class), and CarbonLess 15% Certificate for their energy efficiency achievements; and the Expedia Outstanding Performance

Award, Agoda Gold Circle Award, and Rakuten Travel Silver Award 2014 testament to the group’s services.

These honors were despite fierce competition between hotels in the area, slowdown in tourist arrivals due to aviation accidents, the devaluation of the Japanese Yen and Euro, and bad press from the Occupy HK movement.

“The last quarter with the Occupy Central protests did show an impact on the business in general, with declining overnight figures especially from the leisure segment. However, the overall year-end results exceeded our expectations,” notes Aicher. Riding this momentum, the Regal Group will continue to enhance and upgrade their facilities this year. Specifically, they will be expanding operations to mainland China as the first hotel connected to Xi’an Xianyang International Airport.

Meanwhile, Mira’s management remains silent about the details of their 2015 ventures.

Who made it to HKB’s list?

L’hotel Nina et Convention Centre has once again topped Hong Kong Business Review’s ranking of largest hotels in the city based on total number of rooms. From the 25 largest hotels, HKB once again collaborated with CBRE Hotels and came up with a list of the city’s 50 largest hotels.

Hong Kong’s 25 largest hotels in 2014 which included Regal Airport Hotel, Regal Riverside Hotel, Harbour Plaza Resort City, and Panda Hotel in the top 5, maintained their rankings in 2015 with no changes in their respective number of rooms except the top 1 decreasing from 1,608 last year to 1,599 this year.

New entrants from ranks 26 to 50 include Holiday Inn Golden Mile Hong Kong, City Garden Hotel Hong Kong, JW Marriott Hotel Hong Kong, Regal Kowloon Hotel and Disney’s Hollywood Hotel.

HONG KONG’s 50 largest hotels Hotel 1

L'hotel Nina et Convention Centre

2014 rankings

number 2015 2014

General Manager/Head of Hotel Operations

1

1599

1608

George Kuk John Girard

Hong Kong 2

Regal Airport Hotel

2

1171

1171

3

Regal Riverside Hotel

3

1138

1138

Peter Chiu

4

Harbour Plaza Resort City

4

1102

1102

Dickson Lee

5

Panda Hotel

5

1026

1026

Judy Tsang

6

The Excelsior Hong Kong

6

884

884

Michael Ziemer

7

Renaissance Hong Kong

7

857

857

Hans Loontiens

Harbour View Hotel 8

The Park Lane Hong Kong a Pullman Hotel

11

833

809

Luc Bollen

9

Harbour Grand Hong Kong

8

828

828

Benedict Chow

10

Rambler Oasis Hotel

9

822

822

Anthony Lui

11

Harbour Plaza Metropolis

10

819

819

Andres Teofilo Castillejos

12

Mexan Harbour Hotel

12

800

800

Patrick Ng

12

Rambler Garden Hotel

12

800

800

Anthony Lui Charles Woo

14

Sheraton Hong Kong Hotel and Towers

14

782

782

15

The Kowloon Hotel

15

736

737

Victor Chan

16

Harbour Plaza 8 Degrees

16

702

702

Christina Cheng

17

Royal Plaza Hotel

18

699

693

Peter Wong

18

Pentahotel Hong Kong Kowloon

17

695

695

Andy So

19

Royal View Hotel

19

688

688

Stephen Au

19

Kowloon Shangri-La Hong Kong

19

688

688

Ulf Bremer

21

The Royal Pacific Hotel and Towers

21

673

673

Kevin Chuc

22

Harbour Plaza North Point

22

669

669

Virginia Tam

23

Marco Polo Hong Kong Hotel

23

667

665

James Ong

24

Langham Place Mongkok Hong Kong

23

661

665

Shaun Campbell

25

Hong Kong Skycity Marriott Hotel

25

658

658

Michael Muller

26

Holiday Inn Golden Mile Hong Kong

-

621

-

Anne Busfield

27

City Garden Hotel Hong Kong

-

613

-

Annie Jea

28

JW Marriott Hotel Hong Kong

-

602

-

Mark Conklin

29

Regal Kowloon Hotel

-

600

-

John A. Girard

29

Disney's Hollywood Hotel

-

600

-

Cecilia Ho

31

InterContinental Grand Stanford

-

570

-

Alexander O. Wassermann

32

Island Shangri-La Hong Kong

-

565

-

Franz Donhauser

33

Hyatt Regency Hong Kong Sha Tin

-

559

-

Wilson Lee

34

Harbour Grand Kowloon

-

554

-

Yngvar Stray

35

ibis Hong Kong Central and Sheung Wan

-

550

-

Simone Hansen

36

Dorsett Tsuen Wan Hong Kong

-

547

-

Eric Cheng Steven Lau

Hong Kong

(Kwai Chung) 37

The Kimberley Hotel

-

546

-

38

Grand Hyatt Hong Kong

-

539

-

Philip Yu

39

B P International

-

529

-

Bernard Chan

40

Courtyard Hong Kong Sha Tin

-

524

-

Robert Chiang

41

Conrad Hong Kong

-

512

-

Thomas Hoeborn

42

Novotel Century Hong Kong

-

510

-

Darren Cann

43

InterContinental Hong Kong

-

503

-

Jean-Jacques Reibel

44

Headland Hotel

-

501

-

Dean Winter

44

Mandarin Oriental Hong Kong

-

501

-

Jonas Schuermann Chi Ping Tommy Chan

46

Newton Place

-

500

-

47

The Langham Hong Kong

-

495

-

Sherona Shng

48

Regal Oriental Hotel

-

494

-

Christoph Szymanski

49

The Mira Hong Kong

-

492

-

Gerhard Aicher

50

Metropark Hotel Kowloon Hong Kong

-

487

-

Banny Ng

34,511

20,979

716

884

TOTAL AVERAGE

The list is based on the information provided by CBRE HONG KONG BUSINESS | MAY 2015 29

legal briefing

Fighting fraud in retail payment systems

The scope of current regulation is now extended to device-based and non-device based payments.

H

ong Kong stored value facilities (SVFs) and retail payment systems (RPSs) should brace themselves for the forthcoming legal and regulatory sanctions brought by the proposed regulatory regime covering the two industries. With the objective to remedy any systemic risks caused by lack of oversight, the Hong Kong Monetary Authority’s (HKMA) amendments to the Clearing and Settlement Systems Ordinance have experts both pleased and concerned about the impact on established industry practices.

What financial systems will be encompassed by the proposed law?

Most of the service providers of these segments are not banks and operate without the jurisdiction of a governing body. “There is an obvious concern that large amounts of money are being held by unregulated businesses on behalf of the general public,” says Richard Mazzochi, partner at King & Wood Mallesons, Hong Kong.

The proposed amendments seek to safeguard Hong Kong’s economy against risks such as fraud, illegal use, identity theft, and violations of data privacy incubated by retail payment systems. It extends the scope of current regulatory bodies to device-based and non-device based mode of payments, and moves towards the creation of a regime covering retail pay-

“Ambiguity arising from self-regulation is eliminated, giving way to an equalopportunity market which would greatly benefit customers.” ment systems such as credit cards.

The bill also broadly defines SVFs as any medium – other than traditionally accepted cash – that can store money for use as payment in exchange of goods and services under an undertaking of its issuer.

Likewise, it clearly excludes specific items with value such as bonus point schemes, air mileage schemes, loyalty schemes, store- and location-specific reward programs, single use prepaid cards, and coupons from “single online store platforms”. The HKMA argues that such monetary considerations do not technically work as “electronic money”, and only serve to boost customer loyalty. All in all, these do not pose as much economic risk as SVFs. Why is there a need for complete overhaul? What do the proposed changes try to address?

According to Simon Deane, partner at Deacons, 30 HONG KONG BUSINESS | MAY 2015

Alice Molan

Chris Wong

Richard Mazzochi

Simon Deane

Urszula McCormack

“The changes are in response to ‘the rapid development of retail payment products and services in the past few years’, such as the rise in use of new SVFs, and reflect the need to respond to these changes adequately, as well as the need to provide for a stronger regulatory regime covering these new developments.”

Electronic modes of payment and SVFs have been gaining popularity, and are now more accessible than ever, thanks to the deep penetration of smartphones into different market segments. Through licensing and policing these digital money movers, their financial stability is ensured, and the public is secure from any problems arising therein.

“The new regulations are intended to offer stronger protections to the economy and the consumer in what is becoming a larger, and in some cases integral, part of the economy,” adds Chris Wong, trainee solicitor at Deacons. Further, ambiguity arising from self-regulation is eliminated, giving way to an equal-opportunity market which would greatly benefit customers.

If implemented, how would the changes affect the payment card scheme operators?

Should the bill become law, businesses will need to scrutinize whether or not they fall within the regulation’s scope in order to obtain an operational license.

The HKMA requires that applicants are fit, proper, able to fulfill capital as well as other financial needs, and are compliant with AML/CTF obligations – among other requirements. “This may require the applicant to undertake changes to their current financial arrangements and implement compliance arrangements outside the scope of what has been previously undertaken,” says Alice Molan, senior associate at King & Wood Mallesons, Hong Kong.

Urszula McCormack, partner at King & Wood Mallesons, Hong Kong, meanwhile, raises a number of issues to be considered when applying the proposed law amendment. “Many of the structures we are seeing involve several regulatory issues and ‘touch points’. For example, when does stored value amount to a ‘deposit’ and require an entirely separate licence?

Which jurisdiction’s laws apply to an online infrastructure? What are the data privacy issues? How will the AML/CTF controls be implemented? How is IT risk managed? What are the capital rules and what protections are necessary for customer funds?”

Affected stakeholders should keep a watchful eye on bill negotiations in order to retain the flexible and highly convenient nature of SVFs and RPSs, while at the same time providing a legal foundation that not only recognizes their contribution to Hong Kong’s economy, but also sets the precedence for regulatory regimes in other countries.

CMO Briefing

How to maximize your image marketing plans Hong Kong marketing heads reveal how they use Instagram and Pinterest to their advantage.

W

hen Sai Sudha, co-founder of startup discovery platform Hidden Truffles, launched her company’s second flagship event the Hidden Truffles Bazaar, her company ran a campaign centered upon online image marketing. “The idea was to pique the interest of viewers through collages of the previous event as well as the products/services that will be available in the upcoming Bazaar” she noted. The campaign was highly successful, generating 1,100+ footfalls for the event, which is quite impressive given that the company was in its first year at the time.

According to Google’s industry director for retail Julie Krueger, the customer has gone “Omni-Channel”, meaning the avenues for customer engagement have gone far past traditional methods, with online channels being cited as a key driver of foot traffic to offline locations. In their recent study, they found that 18% of all clicks lead to an in-store visit within thirty days. Image-based social media platforms such as Instagram and Pinterest are already powerful tools for large companies looking to spread their global reach, but have also become an invaluable avenue for smaller firms with smaller marketing budgets looking to do the same.

What is the key to successful image marketing?

The strength of social media marketing is in the amount of interaction and engagement that occurs between the brand that posts the content and the users that consume it. According to Vivian Chau, general manager of J Plus Hotel by YOO, marketers looking to utilize social media should make content “sharable” to leverage on the ability of users to repost and spread the content. Chau says that sharable

32 HONG KONG BUSINESS | MAY 2015

Marketers looking to utilize social media should make content “sharable.”

content is important “so the brand and its messages can be distributed out widely and to your targeted crowd.” Additionally, effective images are evocative, and compel viewers to take notice and view & share them. Chau says that “In an information age where data can quickly become overwhelming, people have to pick and choose read something only if it can attract their eyeballs. Shareable photos tend to evoke an emotion- beautiful, stylish, funny, exciting, touching, special etc.”

These images just have to be tangentially related to the brand with a short text tag, but what is more important is that the overall feel and emotion that customers get from a brand’s social media effort are consistent with that which the brand wants to convey. Sai Sudha also believes that the content must be compelling and must also allow customers to easily identify the brand or product associated with the image. “Image content should be interesting, useful and/or funny – ideally all of these” says Sudha.

What’s the best way to develop a strategy?

Kim Plaggenburg, head of marketing at Hong Kong-based restaurant group The Press Room, says “It’s important to understand the demographics of the various social media platforms and curate content accordingly” in order to maximize the impact of your social media initiatives. Further, it’s important to utilize the interactive nature of social media is afforded by the demographic of its user base, one that is constantly connected and active in online discussion. She notes that the Press Room actually hosts Instagram competitions which they say helps deepen the engagement existing fans and attract new ones.

According to Hidden Truffles’ Sudha, “Marketers should first understand who their customer is and what kind of platforms they are likely to interact with like Facebook, Instagram or Pinterest.” Each form of social media has its own idiosyncrasies and should be used accordingly, like Pinterest and Instagram for more image-based content and Facebook for those that incorporate a large amount of text into the posts. Additionally, certain types of customers are more inclined to look for certain forms of content on specific social media platforms, such as quick shots of food and beverages on Instagram, but promotions with the full details on Facebook instead. She notes that the ultimate end goal to any social media initiative is to build brand awareness, and it is important for them to identify what kind of awareness they are working towards, whether it is for a product, for a service, or for the company overall.

Lastly, Sudha also reminds us that it is important to revisit past campaigns and initiatives. Figuring out what worked and what did not will provide marketers with valuable insight into better understanding their customer base and formulating more effective campaigns in the future.

EMINENT INSURER: AGEAS

LIFE INSURANCE

34 HONG KONG BUSINESS | MAY 2015

A

geas Insurance Company (Asia) Limited is one of Hong Kong’s largest life insurance companies and a wholly-owned subsidiary of Ageas, an international insurance group with a heritage spanning 190 years. Headquartered in Belgium, Ageas is among Europe’s top 20 insurance companies, employing more than 13,000 people in the consolidated entities and over 30,000 in the non-consolidated partnerships throughout Europe and Asia.

EMINENT INSURER: AGEAS

Ageas Hong Kong: Your trusted partner CEO Stuart Fraser reveals how flair for innovation separates them from competitors.

The company’s prolific style of innovation came to the fore again in early February this year when three new investment-linked assurance schemes (“ILAS”) were unveiled – Cheers Plus, Aviator Plus and Legend. Cheers Plus is a regular-premium ILAS with high life protection, while the other two are single-premium ILAS. Dr Fraser said, “At Ageas, we believe it is crucially important to design products to suit the needs of customers at different stages of their lifetimes.”

Ageas Hong Kong’s CEO Dr Stuart Fraser regards its dedication to excellent service and responsiveness to market needs as key factors in its success

A

geas Insurance Company (Asia) Limited provides excellent service by building efficient and interactive relationships with customers and the public via creative marketing.

What separates Ageas Hong Kong from competitors is a flair for innovation, which is channelled into meeting the diverse needs of customers, as their trusted lifetime insurance partner.

“The company describes itself as Your Partner in Insurance because we aim to enhance the customer experience every step of the way through life – as a partner of the utmost trustworthiness,” Dr Stuart Fraser, the CEO of the company said.

Meeting the evolving needs of customers The company develops products by taking a keen interest in what concerns the customers, acting on what they need and building in a flexibility that suits the natural – and often unforeseen – dynamics of everyday life. A customer concerned with maintaining his or her good health, for example, is well served by the All-in-One Critical Illness Protector, which covers 49 major illnesses and 26 less severe critical illnesses. The insurance plan provides up to five claims of “Major Illness Benefits” and a free professional medical second opinion.

Our “Dynasty” RMB Diamond Plan endowment insurance plan is catered for customers who focus on earning. This plan requires a customer to pay premium for only two years and guarantees an average annual return of 3.5% at the end of the fifth policy year.

In addition, the Fortune 100 Insurance Series offers a guaranteed cash endowment every three years starting from the third policy anniversary to satisfy a customer’s financial needs at different stages of life. This is particularly helpful to parents who are concerned about funding their children’s future education.

Apart from ensuring a guaranteed cash flow stream to cover such contingencies, Fortune 100 Insurance Series paves the way to a comfortable and carefree retirement. More flexibility is provided by the availability of 5 different payment terms that can be as short as two years.

“The company describes itself as Your Partner in Insurance because we aim to enhance the customer experience every step of the way through life – as a partner of the utmost trustworthiness.”

Combining the technological with the traditional Ageas constantly explores new ways to interact with customers. With this in mind, the company became the first insurer to use QR codes, as well as Augmented Reality (AR) technology to convert static images into interactive videos for advertising. In addition, the company also made use of the Zapper 3D app and Near Field Communication (NFC) technology in its advertising campaign.

Our track record for harnessing interactive mobile technologies for brand-building purposes has given rise to award-winning financial planning apps, as well as industry recognition for imaginative use of social media and creating a highly-accessible website.

One of the beauties of the Ageas approach in marketing is combining the technological with the traditional, a prime example of which is in partnering with celebrities to promote the company and highlight the importance of financial planning. The company’s advertising campaign featured Hong Kong celebrities such as Dayo Wong and Dodo Cheng. In fact, standup comedian Dayo Wong has been the spokesperson for Ageas for a number of years, which involved teaming up with Dodo Cheng to “broadcast” financial planning tips.

Dr Fraser said “The campaign involving Dayo Wong and Dodo Cheng was hugely successful, both in terms of marketing and financial results. It projected an image of Ageas Hong Kong as an enterprising player in the insurance HONG KONG BUSINESS | MAY 2015 35

EMINENT INSURER: AGEAS

Ageas professional consultants help customers realise their aspirations via comprehensive protection and financial planning services

Giant neon signs reflect a prominent Ageas presence in Hong Kong

industry that delivers financial knowledge and high-quality service to customers.”

Creative marketing wins recognition The company also takes on title sponsorship of major events such as golf tournaments, concerts and talk shows. One of our highest profile sponsorships for the last six years has been the prestigious Hong Kong PGA Championship. This provides an excellent opportunity to get closer to the city’s affluent community.

No stranger to the showbiz spotlight, Ageas Hong Kong touched many hearts and minds by sponsoring the “Touch Mi Sammi Cheng World Tour 2014”, which blossomed into a glittering partnership with Cantopop diva Sammi Cheng.

“We were delighted to be associated with these performances as title sponsor.

I’m sure they will be warmly remembered 36 HONG KONG BUSINESS | MAY 2015

in an Ageas context for many years to come,” Dr Fraser added.

“We often act as title sponsor for mega events because it deepens our penetration of the high-net-worth market, while promoting the sheer lifetime importance of protection and financial planning.”

Industry recognition of the company’s forward-thinking marketing approach came when Ageas was singled out for “Outstanding New Media Marketing Strategies” and “Outstanding Integrated Marketing Strategies” accolades at the inaugural Hong Kong Insurance Awards 2014, staged by the Hong Kong Federation of Insurers.

Logo”, which has been conferred on Ageas Hong Kong for 13 consecutive years.

Administered by the Hong Kong Council of Social Service, this recognition scheme applauds companies that demonstrate a commitment to the community, environment and employees. In fact, the company has been recognised as one of the “Best Companies to Work for in Asia 2015” from HR Asia, the region’s most authoritative publication for senior HR professionals.

Making a practical contribution to helping underprivileged members of the community has seen our employees working with Habitat for Humanity to build homes for the poor in mainland China, and playing an active role in a campus beautification initiative in Hong Kong. A prime example of Ageas enthusiasm to support those less fortunate arose when 88 staff members responded to an Ice Bucket Challenge from the CEO in 2014 to raise funds to help Amyotrophic Lateral Sclerosis (ALS) sufferers.

Dr Fraser said “Our belief that commercial success is directly linked to sound corporate citizenship has become a core element of our marketing strategies to develop long-term relationships with customers, many of whom we believe share our concern for needy sections of society.”

Strong sense of corporate citizenship Ageas Hong Kong operates with a keen sense of corporate social responsibility, especially in terms of employees and the community in which the company does business.

The company believes commercial success is linked directly to sound corporate citizenship, a philosophy rewarded by the “Caring Company

“Our belief that commercial success is directly linked to sound corporate citizenship has become a core element of our marketing strategies to develop long-term relationships with customers.”

Ageas Hong Kong scooped two prestigious awards at the inaugural Hong Kong Insurance Awards staged by the Hong Kong Federation of Insurers

ANALYSIS: economic evolution & demographics

How has the Hong Kong economy evolved?

Hong Kong 2020: Sprinting ahead, sustaining growth, or sharing the stage?

Morgan Stanley lays out the broad contours and likely scenarios for the economy over the next five years.

T

he Hong Kong Special Administrative Region, with its 7.3 million inhabitants and 1,104 sq km of land area, generated GDP of HK$2,246bn (US$290bn) in 2014. This makes it one of the highest per capita income economies in the world. Hong Kong today is a highly competitive economy, regularly ranked in the top three economies across a number of global competitiveness ratings, and serves as the Asia ex Japan region’s trade, financial and services hub.

Over the past 40 years, Hong Kong has been able to maintain relatively high rates of growth and has successfully reinvented itself into a global financial centre.

However, the very successes that Hong Kong has experienced in the past have also prompted considerable debate about its future growth path and whether Hong Kong will be able to remain the regional business and financial hub.

Indeed, one of the key debates about the Hong Kong economy is about its competitiveness and whether Hong Kong can successfully fend off the competition from other cities in the region, not just from traditional rivals such as Singapore but also from cities in China such as Shanghai.

To address this longstanding debate, we will first review the economic evolution of Hong Kong over the past 38 HONG KONG BUSINESS | MAY 2015

In the 1980s, economic growth in the Asian Tigers began to decelerate and Hong Kong was no exception.

30 years and highlight areas that have aided Hong Kong’s development.

Evolution of long-term growth trends in Hong Kong Hong Kong’s economic growth story took off in the 1970s, together with that of the other Asian Tigers of Korea, Singapore and Taiwan. An abundance of labour, low per capita incomes (indicating the potential for catch-up growth), and the pursuit of an export-led growth model (leveraging external demand to fill the gap in domestic demand) allowed these economies to achieve high growth rates in the 1970s.

In the 1980s, economic growth in the Asian Tigers began to decelerate and Hong Kong was no exception. The integration of China into the regional and global economy and the narrowing scope for catch-up growth meant that the Hong Kong economy had to evolve to sustain its economic growth momentum. Over the past three decades, trend GDP growth rates in Hong Kong have been decelerating. This decelerating trend was interrupted in the mid-2000s when a global economic boom and sustained acceleration in China’s growth rates helped to lift Hong Kong’s GDP growth. However, the onset of the global financial crisis and subsequently weaker growth in China meant that trend growth rates resumed their

ANALYSIS: economic evolution & demographics deceleration path. Indeed, the GDP growth outcomes in Hong Kong have been highly volatile, a reflection of its status as a small open economy.

Amid this general downward trajectory in growth, the Hong Kong economy has also evolved during the past three decades into a more services-led economy. As of 2013, the services sector accounted for 93% of Hong Kong’s GDP, one of the highest levels in the world.

1980s – The decline of the manufacturing industry After averaging 9.0% in both the 1960s and 1970s, GDP growth in Hong Kong began to decelerate slightly in the 1980s, but still maintained a high average of 7.4% during the decade. The 1980s also marked the beginning of the decline of Hong Kong’s manufacturing industry. In 1980, manufacturing industry accounted for 20% of Hong Kong’s economy but this share began to decline throughout the decade, eventually falling to 16.3% of GDP by the end of the decade.

Similarly, the share of domestic exports in overall exports dropped from 69% in 1980 to 39% by 1989. The rise of China and its integration into the global economy, coupled with rising land and labour costs locally in Hong Kong, prompted the shift of the manufacturing industry into China.

The waning importance of the manufacturing sector was offset by the continued rise in the services sector, whose share of GDP rose from 68.9% in 1980 to 74.6% in 1989. The gains in the services sector were particularly strong in the (1) export/import, wholesale/retail trade and the (2) transport storage and communication secLong-term growth trends in Hong Kong, Korea, Singapore and Taiwan

Source: CEIC, Morgan Stanley Research

Bank credit for use outside of Hong Kong led the leverage cycle in the 1990s

Source: CEIC, Morgan Stanley Research

From 2000 onwards, the services sector continued to power ahead, rising from 87.3% of GDP in 2000 to 93% in 2013.

tors, whose share of GDP rose by 3.7% and 2.4% points respectively.

1990s – An emerging financial hub The 1990s saw an accelerated pace of the hollowing out of the manufacturing sector, and its share of GDP fell by a further 11.6% points to just 4.7% by 1999. In contrast, the services sector share of GDP rose from 76.1% in 1990 to 86.9% in 1999. The shift in the services sector was led by the financial services sector, which gained more prominence. At the start of the decade, financial services accounted for 7.1% of GDP, but its share began to grow steadily, reaching 11.8% by 1999.

Hong Kong began to grow as a regional financial hub, as reflected by a rise in bank credit to GDP from 233% in January 1990 to a peak of 356% in June 1995 before declining to 219% by the end of 1999. During this period, the buildup of credit was concentrated in “for use outside Hong Kong”, in which it rose from 93% of GDP in 1990 to a peak of 217% in June 1995 before decelerating to 68% by the end of the decade.

2000s – A full-fledged services hub From 2000 onwards, the services sector continued to power ahead, rising from 87.3% of GDP in 2000 to 93% in 2013. Within the services sector, the gains were led once again by the (1) export/import, wholesale/retail trade and (2) financial services sectors, which gained in share by 5.1% and 4.1% points respectively.

Also, reflecting Hong Kong’s growing importance as a full-fledged services hub, its service trade balance began to rise in the 2000s, from 9.2% of GDP in 2000 to 27.2% as of 2Q14, after remaining range-bound at around 6.9% of GDP since the 1980s.

Factors enabling Hong Kong’s success Despite the sectoral shifts over the past three decades, we believe that a number of factors have underpinned Hong Kong’s success: 1) Maintenance of a free and open economy: Hong Kong maintains one of the lowest corporate and personal tax regimes in the world. Goods can move in and out of Hong Kong freely, without the imposition of any import tariffs or goods and services tax. This low tax regime is conducive to the flow of goods and services and has been frequently cited as one of the key reasons that attract businesses and labour, which in turn encourages business activity. In this context, as of 2013, a total of 3,835 companies had located their regional headquarters in Hong Kong.

Because the size of the domestic population and economy is small, Hong Kong has been able to leverage demand from the rest of the world, allowing Hong Kong to overcome the constraints of the size of the domestic market. Indeed, the total trade in goods and services has constantly exceeded gross domestic output by a factor of 2.5, and in recent years this factor has been rising closer to 4.

2) Maintenance of competitiveness: Hong Kong has been consistently ranked highly across most global HONG KONG BUSINESS | MAY 2015 39

ANALYSIS: economic evolution & demographics competitiveness indices. A strong pro-business environment, excellent infrastructure and fairly flexible factor markets have all been cited by various surveys as key reasons. These factors, over and above tax considerations, have also played a key role in attracting businesses and individuals to set up shop in Hong Kong. Moreover, the active pursuit of high value-added economic activities and the resulting improvements to productivity in the economy have also helped.

3) Policy certainty: Finally, macroeconomic policies (both fiscal and monetary) have been conducted in a manner that is fairly transparent and fairly predictable, which in turn reduces the uncertainty of doing business in Hong Kong. Fiscal policy in Hong Kong over the years has been typically prudently managed, as the government tends to run fiscal surpluses, except during years of major economic downturns.

Monetary policy, in the form of a fixed exchange rate, has helped to anchor expectations in the form of exchange rate stability, although it has given rise to some side effects of inflation and asset price volatility in recent years. Exchange rate stability has served as an advantage over other Asian cities where exchange rates fluctuate against the dollar. In a world of the dollar standard, financial transactions denominated in a currency with a peg against the dollar largely eliminated extra exchange rate risks.

Adjustment looming?

Over the past three years, a confluence of domestic and external factors has been weighing on Hong Kong’s GDP growth. Looking ahead, external headwinds include: a global economic environment that features lower global growth but a longer economic expansion; headwinds from deleveraging in almost all the major economies; slower growth in China, Hong Kong’s largest trade partner; and rising (from extremely low levels) capital costs.

Domestically, weakening demographics in the form of rising age dependency and a looming decline in the working age population, lower saving ratios and the consequent impact on capital inputs, very little room for technological catch-up growth, and competitiveness headwinds in the form of rising costs in both land and labour, are all challenges facing the corporate sector in Hong Kong. In this context, Hong Kong seems to be hitting some of the limits of a fast pace of growth.

Demographics at a turning point From a supply side perspective, economic growth is driven by the availability of labour and capital inputs and also how efficiently these inputs can be utilised (total factor productivity). It is in this context that any discussion surrounding future growth potential has to involve a discussion of labour / talent availability.

There is no doubt that Hong Kong will face a demographic challenge. Fertility rates, despite some improvement in recent years, remain well below the replacement ratio of 2.1 per woman. According to projections from the Census and Statistics Department, the median age in Hong Kong is expected to rise from 42.5 in 2013 to 40 HONG KONG BUSINESS | MAY 2015

Working age population to decline from 2017

Fertility rates, despite some improvement in recent years, remain well below the replacement ratio of 2.1 per woman.

43.4 in 2016 and 45.1 in 2012. At that point, Hong Kong’s median age will be higher than that of Singapore (40.1), the UK (40.9) and the US (38.2) but lower than that of Japan (48.3) and Germany (47.6).

The next few years are likely to be the most crucial in Hong Kong’s demographic transition. According to projections from the Census and Statistics Department, Hong Kong’s working age population is expected to post almost no growth over 2015 and 2016 before beginning to decline from 2017 onwards, after growing by an average of 0.9% YoY over the past decade. The age dependency ratio (the ratio of the nonworking age population to the working age population) is expected to rise at a relatively fast pace, from 35% currently to 42% by 2020.

Worryingly, this projection of weak demographic trends is taking place even with a relatively optimistic assumption about net migration trends, suggesting that the underlying population dynamics will deteriorate at a far more rapid pace.

Factors to offset the impact of weaker demographics A reversal in demographics trends tends to be difficult to engineer. For instance, policy makers in countries such as Singapore, Korea and Nordic countries have tried, with varying degrees of success, to reverse the trend of declining total fertility rates. In any case, even if these trends were to reverse, it would take a significant time (about 20 years or more) before the reversal in demographic trends could have a meaningful impact on the labour force and hence the economy.

Although we do believe that there are merits in trying to reverse the weakening demographic trends, we think this should be supplemented by policies that aim to mitigate the economic impact of demographic changes; this can be achieved via policies that encourage a lengthier participation in the workforce and enhance the quality of labour. However, we do caution that these measures are effective only to the extent of cushioning the impact of the demographic trend and will not reverse it. By Derrick Kam, Hong Kong economist, Morgan Stanley

MOTORING REPORT

Mercedes-AMG C 63

The Mercedes-AMG C 63 is powerful, quick and rewarding for those who are used to the finer things in life. By Gary Tsang

Y

ou wish to reward a young executive who has helped you put together a team which has been consistently winning projects, but you don’t like the idea of simply paying out a flat monetary bonus. Being a connoisseur of fine cars, you think about getting him a company car, an exceptional set of wheels to match your executive’s personality: fearless, bold and at the same time sophisticated.

To the untrained eye, the Mercedes-AMG C 63 is unpretentious so you may wonder if it is the best car to choose on this occasion. However, it is a formidable version of the Mercedes-Benz C-Class, itself an excellent vehicle in its own right. The Mercedes-AMG C 63 4-door super saloon comes equipped with a 4.0-liter twin-turbocharged V8 engine that is capable of producing 476 horsepower.

To start with, the new 4.0-liter V8 bi-turbo engine is compact and light, offering optimum responsiveness and low exhaust emissions. The petrol piezo direct injection system used exclusively by Mercedes precisely “spray-guides” the combustion process of the engine, helping it fulfill the Euro 6 emissions standards.

Before long your man will see that the fuel cost of the Mercedes-AMG C 63 is not much higher than most so-called executive saloons that have seen their prime. The new biturbo engine is very clean and efficient, with a quoted 8.2 liters of unleaded fuel for each 100 kilometers of driving.

It is roughly 32 percent more fuel efficient than its direct 42 HONG KONG BUSINESS | MAY 2015

predecessor, the 6.3-liter V8 engine.

You understand that as a source of thundering sound the new engine might never compare to the engine fitted to the previous C 63 AMG. Nevertheless, the specialists at the dedicated Affalterbach engine division, which is responsible for all AMG power units, have pushed the boundaries so much that the new engine retains those characteristic AMG V8 roars every time a driver floors the throttle, despite the engine using forced induction technology.

The Mercedes-AMG C 63 is a potent set of wheels coupled with the lightning quick AMG Speedshift MCT 7-speed sport transmission. And the Mercedes-AMG C 63 can hit 100km/h from a stop in a mere 4.0 seconds, before reaching an electronically controlled top speed of 250km/h.

Mercedes-AMG isolates the vibration from the engine and transmission unit with dynamic engine mounts. Besides, the AMG Ride Control sports suspension, meanwhile,

“The mercedes-AMG C 63 4-door super saloon comes equipped with a 4.0-liter twin-turbocharged V8 engine that is capable of producing 476 horsepower.”

MOTORING REPORT allows a driver to choose between maximum sporting performance and long-distance comfort in three different stages.

As expected of a vehicle bearing the pointed star, the Mercedes-AMG boasts an interior that’s crafted with first-class materials. The seats, for example, are finished in Nappa leather to enhance the luxury experience.

On the center console is the AMG Dynamic Select, complete with touchpad and control knob for most of the auxiliary controls of the vehicle. There are four different drive programmes, including Individual, Controlled Efficiency, Sport and Sport +, to influence the characteristics of the Mercedes-AMG C 63, while the Mercedes-AMG C 63 S gets the additional Race programme.

Next to it are the buttons for the 3-stage Ride Control sports suspension, which combines cutting-edge technology with lightweight materials and optimized geometry; the 3-stage ESP vehicle stability programme with the functions ESP On or Off, as well as Sport Handling Mode for various dynamic settings, and the Performance exhaust system with flap control, allowing the engine sound to change from being generally quiet to simply evocative of a race car.

There is plenty the new Mercedes-AMG C 63 has to offer. It is definitely the best choice in its class.

HONG KONG BUSINESS | MAY 2015 43

ECONOMICs

Ian Perkin

Budget 2015-16: Mature debate on the age question

M

any years ago, a then newly-appointed colonial era financial secretary (FS) told me why he was so pleased to have taken the FS position ahead of any other role in the administration. Sitting in the pleasant surrounds of the FS’s official residence in Shouson Hill, he said the job was attractive because it was hard to make any big mistakes that might provoke a political (and perhaps personal career) backlash.

In a frank admission, he explained that between oversight from London on the fiscal side and the constraints from the “dollar peg” (the US dollar linked rate, or currency board system) on the monetary policy side, it was hard for any financial secretary to “mess things up”. Not much has changed since then.

Of course, Beijing has replaced London as the source of oversight (and, in any case, the Basic Law mandates both fiscal prudence and the currency system) and the so-called “dollar peg” remains in place as a brake on independent monetary (and interest rate) policy.

Given these circumstances, it is hardly surprising that the government’s annual budget usually becomes an exercise in ‘tinkering with the numbers’ within the limits allowed by other, much broader, policy settings.

The 2015-16 Budget, outlined to the Legco by the current financial secretary, John C Tsang, on 25 February, followed this pattern.

As Mr Tsang seemingly lamented in his RTHK “Letter to Hong Kong” broadcast on 8 March, “… and similar to previous occasions, the focus of attention fell once again on the one-off relief measures which took up only a small percentage of the entire package”.

The fundamental truth, though, is that in the past two years or so, Mr Tsang has embarked on a project that will determine the future of Hong Kong and its social and budgetary priorities – the ageing of the population.

In this, Mr Tsang is not addressing a problem that is unique to Hong Kong, but one that is the focus of attention in much of the ‘developed’ (and some of the ‘developing’ world), including Japan, Europe, the US, Canada, Australia, and so on.

Essentially, all these economies are facing the same problem in the budgetary sense: an ageing population means a shrinking share of the population in the most productive (and tax-paying) working age group (15-to-65 years) and an increase in the aged and dependent group (over 65s). See accompanying table.

What Mr Tsang has done in his past three budgets is to put the challenges front and centre in the budget context (revenue constraint and greater demands on spending). In this way, he has moved the budget from merely being an annual short term ‘tinkering’ with spending and revenue, to one that addresses a major long-term challenge in both societal and budgetary terms.

At the same time he established the Working Group on LongTerm Fiscal Planning. The Working Group issued its Phase Two Report on 2 March, just a week after the 2015-16 budget.

The emphasis on ageing apart, this group proposed options for 44 HONG KONG BUSINESS | MAY 2015

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

Hong Kong’s Ageing Population (% shares) 0-14 years (% share)

15-65 years (%)

Over 65 years (%)

Total Population (m)

1975

31.4

63.3

5.3

4.46

1980

25.5

68.0

6.4

5.06

1985

23.4

69.1

7.4

5.46

1990

21.5

70.0

8.5

5.70

1995

19.4

70.8

9.8

6.16

2000

16.9

72.1

10.9

6.67

2005

14.5

73.4

12.1

6.94

2008

13.5

74.3

12.1

7.06

2013

12.2

74.6

13.2

7.39

2018

11.8

72.3

15.9

7.69

2023

11.6

69.0

19.4

7.97

2028

11.2

65.2

23.6

8.20

2033

10.7

62.6

26.8

8.38

Year

Source: Census and Statistics Dept

a savings scheme (the Future Fund) for Hong Kong, and offered advice on how the government might enhance the management of its own assets. To address the demographic changes – now and into the medium term future – Mr Tsang has promoted new funding priorities in his 2015-16 budget, and plans to address the likely demands of a gradually ageing population.

This catering to short term needs in the annual budget, while planning for a future of greater spending demands and less revenue potential, is to be applauded in an office (Financial Secretary) more typically focussed on the annual fiscal cycle.

The 1-2-3 dilemma A less satisfactory aspect of the budget and related documents was the government’s lazy forecast that the local economy might “grow by 1% to 3% in 2015”. If a Hong Kong economist walked into a bar and was asked by a friend how the economy would perform in 2015 and he replied 1-to-3% growth it would be an acceptable guesstimate.

But when that same economist got back to his office and was asked the same question by his boss, a more definitive answer would be expected. So it should be with the government, which has more access to economic information than any other body in Hong Kong.

The forecast is merely lazy.

In the budget documents there was not even an indication of whether growth might be at the lower- or higher-end of the 1-to3% range. The situation is made more confusing by the fact the government says it expects GDP growth to be 3.5% annually from 2016 through to 2019. It cannot be a matter of face-saving. If 2015 growth ultimately comes in at a number outside the 1-to-3% range the government will look just as silly as if it had forecast, say, 2.3% growth. And that, as we all know, was the pace of growth last year.

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OPINION

tim hamlett

What housing crisis? Look harder tim hamlett Former Editor of Sunday Standard and Associate Professor of Journalism

T

he nice thing about the print edition of the Post is that when it’s really infuriating you can fling it on the ground and jump up and down on it. You can’t do that with an iPad. Consider a recent piece on the housing crisis, which contended that no crisis existed. This will be news to people living in crowded and sordid places. Was it perhaps written by someone who does not himself live in a crowded and sordid place? Meet author Ian Brownlee, managing director of a firm of “planning consultants”. Not written from a squatter hut, then.

Brownlee says the official figure of 105,600 households “inadequately housed” is too large. It is interesting to see how this trick is performed.

He accepts as beyond dispute that all residents in public housing are “adequately housed”. This is an ambiguous concept. Does “adequately” mean sheltered from rain or wind, with access to a toilet somewhere? Or does it mean the sort of place which we would choose? Look at it this way: if you take the footbridge from the Lucky Plaza podium in Shatin you will get a good look at Lek Yuen Estate, and see a few units which have been left empty because they are unacceptably close to the flow of passing pedestrians. So you can see the amount of space which local housing chiefs think is “adequate” as a family home. It is about the size of my carport. Public housing dwellers in North Lancashire allocate as much space to their whippets. Hong Kong public housing exhibits ferocious parsimony, reflected in tiny flats, lifts which stop only on selected floors, no gardens, no dogs… Hong Kong people never entertain at home (the flat is already full) and many schoolchildren do their homework in public places (the flat is effectively one room).

So whether a public housing dweller is “adequately” housed depends on how many people are living in the same flat. As well as the well-publicized cases of “rich tenants” there are also less wellpublicized cases of desperate overcrowding. You cannot just say that anyone in public housing has no unmet housing needs.

Now we turn to private housing. Brownlee starts going through the official list of the “inadequately housed”. There are those living in “temporary structures, huts or illegal rooftops”. Wait, he says. These are made of wood and tin sheet. But these are acceptable building materials in Canada and New Zealand. Therefore these people are not necessarily inadequately housed. An interesting logical structure here: an igloo in Hong Kong is perhaps a poor long-term housing investment but packed snow is an acceptable building material in Canada, so stop complaining.

Then we come to people living in converted industrial buildings. Again in other cities “loft-style” accommodation is common and accepted so we should accept it here.

Brownlee notes that such conversions would be feasible in Hong Kong “if fire safety requirements could be met”, but the reason why these dwellings are automatically classified as “inadequate” is because the fire safety requirements are not met. People are

46 HONG KONG BUSINESS | MAY 2015

living in death traps. Then we come to people living in shared accommodation. The line will now be becoming familiar: in other countries shared accommodation is accepted for “people at a certain stage of their lives” so we should not classify such people as inadequately housed. But we are not comparing like with like here. Shared accommodation is acceptable for people like students, who want something cheap and temporary which is not a home; as a permanent arrangement for a family it is questionable. If it is affordable the space is going to be tight. People who are desperate will take ill-chosen flatmates. It’s a recipe for misery.

Brownlee now turns to subdivided flats. He concedes that there are “situations in which the physical conditions in these units are not acceptable”. But there are also, mirabile dictu, “good standard subdivided flats that accommodate people who prefer this form of affordable housing to other options”. I think this is hogwash.

The vast majority of subdivided flats are dangerous, squalid and overcrowded. People who prefer them to “other options” are people whose other options are local flyovers.

Mr Brownlee triumphantly concludes that even the government’s figures show that 95% of the population is “adequately housed”. The government should not panic and should build properly planned new towns, he says sensibly. But the proper planning could be done urgently. And should be.

What does ‘adequately housed’ mean?

OPINION

Hemlock

What if no LKY? Time to find out

W

hen I went to Discovery Bay recently, I found the famously expatriate settlement in a state of shock and outrage.

The previous evening, excited residents reported, a group of kids had run into the community’s drinking/commercial/transport hub and raised the alarm about a security guard having beaten a young child. Details were hazy. The kid was 7 or 12; the guard worked for the shopping centre not the main security force; the kid had a reddened face or bruised ribs; the guard had run away with kids and/or parents in pursuit. What was certain was that passers-by had taken photos, the cops had arrested the alleged assailant and – most of all – this was a grievous outrage.

No-one I heard mentioned the death penalty as such. But the mood was that if furious protective parents had caught the guard they would have lynched him, and he would have deserved it.

Common sense and the law tell us that a security guard (or anyone) should only whack someone else in self-defence. Observation, hearsay and plaintive appeals for good behaviour in public notices from property management also suggest that at least a few kids in Disco Bay may be bratty and spoilt. I wouldn’t want to pass judgement.

However, I would venture to guess that the kid in question and all or most of his buddies were white/Western, English-speaking and well-off, while the security guard was Chinese or South Asian and relatively poor. And that the residents’ rage reflects deeper sensitivities and fears within what is essentially a middle-class, racially/culturally exclusive gated community. Under siege by the mysterious teeming Oriental hordes just a short ferry-ride away across the water.

Which brings us rather neatly to the death of Lee Kuan Yew. The father-figure of modern Singapore built his sterile but prosperous citystate on paternalism and authoritarianism rooted in a fear of the inferior peoples surrounding the place. Only his leadership and genius kept the tranquil and air-conditioned island safe from the surrounding steaming jungles full of resentful, impoverished Malay Muslims, pirates and cannibals.

Lee’s drawn-out passing allowed obituary writers to polish and update the epics that have no doubt been on file for years. Philip Bowring’s is probably second-to-none. Among his good

48 HONG KONG BUSINESS | MAY 2015

points: Singapore’s prosperity came naturally via geography and history rather than through Lee’s guidance (Hong Kong did equally well without state control), and the vindictive and spiteful treatment of critics was unjustified in terms of enabling stability or development (as Hong Kong also proved).

Which is more accurate or fashionable or edgy or provocative? To go with the ‘Lee Kuan Yew as towering genius’ school of thought, or to recall the man as vicious and even shallow – or whatever word we use for late-20th century eugenicists?

Either way, the real question is for his surviving leaders and citizens in Singapore: what now?

Many years ago, I remember a Hong Kong colleague’s sadness and anger at the fact that what was then a British colony was the freest Chinese community in the world, with ex-colony Singapore coming next, Taiwan’s police state coming third and the communist Mainland last. Since then, Taiwan has gone democratic and leapt into first place, and Hong Kong is being brought closer under Beijing’s paranoid one-party control. If the Chinese government continues to suppress Hong Kong’s media and judiciary, Singapore will get the number-two spot by default. As it is, Singapore is already making timid moves to ease up.

Rather than ponder, like a book I have, or one Twitter account, what things would be like without Lee Kuan Yew, Singaporeans should ask what is now possible without him. Just as Hong Kong would if the CCP breathed its last.

by hemlock www.biglychee.com Email: hemlock@hellokitty.com

What’s next for Singapore?