Hong Kong Business (August to September 2015)

Display to 30 September 2015 HK$40

hong kong’s franchising paradise

find outwhy Hong Kong entrepreneurs are uniquely positioned to tap into a wellspring of franchising opportunities

HK tweaks insurance

regulatory regime

Choosy Chinese shop elsewhere

Off-CBD areas lure office tenants

HK economy

still battered

Plus:

Why it’s high time for an even freer RMB MICA(P) 244/07/2011 KDM No: PPS1645/3/2008

+ranking

MBA Programmes

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

We are releasing the second edition of our much-talked about ranking of Hong Kong’s largest MBA programmes. The University of Wales, Newport MBA offered by the International Academy of Management has once again topped this year’s ranking.

It is then followed by University of Wales, UK MBA offered by The Hong Kong Management Association.

Publisher & EDITOR-IN-CHIEF Tim Charlton associate publisher Louis Shek production EDITOR Roxanne Primo Uy

ADVERTISING CONTACTS Louis Shek +852 6099 9768 louis@hongkongbusiness.hk Rochelle Romero rochelle@charltonmediamail.com

ADMINISTRATION ADVERTISING EDITORIAL

Lovelyn Labrador lovelyn@charltonmediamail.com advertising@charltonmediamail.com editorial@charltonmediamail.com

We also looked into the franchising and licensing industry in Hong Kong and found out that it is about time for entrepreneurs and organisations to ride on this booming and potentially lucrative expansion strategy.

Around 100 franchise brands are currently operating in Hong Kong and around 40 franchisors are planning to enter the market, a “constant level” of franchising business since the number of franchise operators peaked at 124 in 1999.

In this issue, you will also find an exclusive coverage of our inaugural International Business Awards, Listed Companies Awards, and Business Ranking Awards. Take a look at our photo gallery to re-experience the event.

Enjoy!

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

Can we help?

Tim Charlton

Hong Kong Business is available at the airport lounges or onboard the following airlines:

Editorial Enquiries If you have a story idea or just a press release please Email: editorial@hongkongbusiness.hk and our news editor will read it.

Media Partnerships Please Email: editorial@hongkongbusiness.hk and put “partnership” on the subject line and it will forward to the right person.

Subscriptions Email: subscriptions@charltonmedia.com Hong Kong Business is published by Charlton Media Group.

All editorial is copyright and may not be reproduced without consent. Contributions are invited but copies of all work should be kept as Hong Kong Business can accept no responsibility for loss.

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 | SEPTEMBER 2015 1

CONTENTS

coverage 2015 iba, lca and business 32 event ranking awards

CoVER STORY

HK entrepreneurs urged 18 to ride the franchising tide

ANALYSIS 38 regional Why it’s high time for an even freer RMB

FIRST 06 HK named as world’s ‘super-connector’

07 Choosy Chinese shop elsewhere 08 Hong Kong tightens real estate lending

44 Ian Perkin: Why Pudong Road

14 Financial Insight 16 Economic Insight 24 Legal Briefing 26 CMO Briefing

10 Off-CBD areas lure office tenants with transport access and lower rents

OPINION

REGULAR

South now matters

46 Tim Hamlett: Express to where?

White elephant or black hole

48 Hemlock: Shock as weakness

RANKING

revealed among policymakers in several places

20 MBA schools evolve to

12 TeamNote helps companies

teaching entrepeneurship

increase workforce productivity

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 | SEPTEMBER 2015 262 Des Voeux Road Central, Hong Kong

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

MARKETS & INVESTING

Prime street shop values dipped 2.5% in 2Q15 In Hong Kong, stock market volatility has introduced a note of uncertainty into the investment environment. According to Savills, however, it is still too early to identify any far reaching implications.

Capital values made some minor headway across most sectors in the second quarter, with the exception of prime street shops which recorded a 2.5% decline.

RETAIL

Sa Sa’s 1H15 earnings feared to tumble by over 24% Sa Sa has reported weak operational data for 1Q FY16 (April-June).

According to Barclays, while weak sales were only slightly behind its expectations, the bigger negative surprise came from gross margins being down 1.3ppt y/y.

RESIDENTIAL PROPERTY

Tenant profile in residential leasing market starts to shift Savills is seeing fewer ‘traditional’ western expatriates and more Asians. This includes Indians as well as Mainland and Hong Kong returnees.

Below HK$100,000 per month, budgets of HK$50,000 to HK$80,000 per month remain popular while the bigger HK$300,000 to HK$500,000 per month band is still very quiet, notes Savills in one of their reports.

RESIDENTIAL PROPERTY

Luxury residential leasing market records solid growth in 2Q15 According to Savills, central Midlevels is proving to be the most active market among all the core districts.Savills second quarter luxury residential indices have revealed that rental growth across all districts and sectors was in positive territory.

ECONOMY

How will Greece’s crisis affect Hong Kong?

Greece’s direct economic and financial links to the world at large are highly limited. It has been noted that the core question is — how much contagion will result from the recent turmoil in Greece?

According to a research note from Hang Seng Bank, specifically, what impact is the Greek turmoil to have on the Hong Kong economic outlook, and how significant could it become?

MARKETS & INVESTING

APAC H1 equity offerings increase 26.5% from same period in 2014 According to SNL Financial, in the first half, common equity offerings from SNL-covered Asia-Pacific banks generated US$16.05 billion, an increase of nearly 26.5% from 2014’s first-half total common equity raised of US$12.70 billion.

FIRST Flexi-work is key

With one-fifth of the HK population expected to be above 65 by 2023, a depletion in the workforce is looming. Over eight out of ten HK workers see that having flexibility in their work increases the chance of older, more experienced workers staying in the workforce, which would potentially counter the expected drain in the labour force.

Inflexible working hours and long commute times are some of the problems which discourage older workers who often have to juggle their responsibilities at work and caring for their family members at home, according to Regus. “Flexible working gives professionals greater choice over when and where they work, thereby enabling them to continue to contribute to the economy without sacrificing their worklife balance.” The Hong Kong SAR government has already raised the retirement age from 60 to 65 for newly hired civil servants to cope with the imminent mass retirement of workers.

Tax incentives The research also found out that 86% of global respondents believe tax incentives should be implemented for companies who endorse flexible work for their employees while 81% believe employees should be more aware about opportunities to work flexibly.

“Flexible working therefore is an ideal solution for those who want to remain in the workforce past traditional retirement age, by maintaining control of their schedule and reducing lengthy commutes to and from work,” says Michael Ormiston, the country manager of Regus Hong Kong.

“Flexible working can help older workers delay retirement without giving up too much of their hardearned freedom,” Ormiston adds.

6 HONG KONG BUSINESS | SEPTEMBER 2015

A most attractive investment destination

HK named as world’s ‘super-connector’

H

ong Kong has long been viewed as an investor paradise, but a new index asserts that the territory is, in fact, the best place for investment because of its unbeatably low operating risk. BMI Research declared Hong Kong the most attractive investment destination worldwide,rattling off a list of positives that made it hard to dispute the distinction. The territory has a large pool of skilled labour, a highly developed logistics network, an open economy with few fiscal, financial or trade barriers, and a low crime rate.

“As one of the world’s major hubs for international trade, investment, and finance, Hong Kong offers among the most favourable operating environments of any state globally,” says BMI Research.“The Special Administrative Region of China is a very low-risk location for businesses with no single, significant deterrent for foreign investors.”

Hong Kong received an 81.6 out of 100 in the overall BMI Operational Risk Index, the highest score out of 201 countries worldwide.

Factoring in risk criteria in logistics, labour market, trade and investment, and security, the BMI Operational Risk Index found Hong Kong to consistently rank as one of the safest investment destinations in

Simon Galpin

Asia and globally.

In particular, Hong Kong shines in reducing trade and investment risk with low fiscal and trade barriers and minimal red tape. Hong Kong ranks second in the world behind regional rival, Singapore.

“Investors in all sectors will be encouraged by reduced costs due to a transparent legal system, limited corruption and independent judiciary,” says BMI Research.

Hong Kong’s role as the “superconnector” between the mainland China and the rest of the world has also attracted many overseas companies to set up or expand in the city, according to Dr. Simon Galpin, director-general of investment promotion at InvestHK. Galpin further notes that in 2014, Hong Kong registered foreign direct investment (FDI)inflows of US$103 billion, a 39% increase from the previous year. This put Hong Kong second only to mainland China (US$129 billion) and ahead of the US, UK and Singapore in terms of global FDI inflows.

“It is very encouraging to see Hong Kong rank second in global foreign direct investment flows The numbers highlight Hong Kong’s role as a ‘super-connector’ and a conduit for direct investment,” says Galpin.

“Foreign investors use Hong Kong as a base to then invest in the rest of China and the region. Mainland companies increasingly use Hong Kong as a platform to make global investments and acquisitions.”

Hong Kong’s low tax regime, which caps profit tax at 16.5%, and strong rule of law further convince foreign companies to set up in Hong Kong, says Galpin.

Prime conduit for FDI

Source: World Investment Report 2015, UNCTAD

FIRST Retail sales in the first 6 months in 2015

Source: Census and Statistics Department, Barclays Research

HK has less attractive price differentials

Choosy Chinese shop elsewhere

I

f you think you are seeing fewer tourists from mainland China going on a luxury shopping spree in Hong Kong, you are probably right. Almost half of visitors from mainland China used to depart to Hong Kong, but there has been a significant divergence in visitor trends recently, with Chinese visitors to Japan, Korea, and Taiwan up 94%, 61% and 47%, respectively.

Analysts point out that one culprit to the diminishing visitor arrivals and disappointing luxury retail sales in Hong Kong could be the less attractive price differentials.

The strength of the U.S. dollar, to

which the Hong Kong dollar is pegged, erodes the city’s competitiveness, according to Helen Mak, senior director for retail services at Colliers Hong Kong. Nowadays, affluent mainland Chinese customers increasingly travel to other countries to shop rather than coming to Hong Kong for occasional shopping trips.

Barclays analyst Phoebe Tse notes that Hong Kong’s pricing edge over China for handbags is already just 14%. If we compare prices in Hong Kong with those in Europe, however, we still see a much larger 35% average discount if visitors

Double digit differentials will still remain in Hong Kong vs. Europe, making shopping luxury in Europe still much more attractive.

buy handbags in Europe vs. Hong Kong, assuming they claim VAT back. “While we have seen some high profile cutting of prices in Hong Kong (such as Chanel with their average 20% cut in prices, Patek Philippe with their 7% cut); this has not been seen for all brands and across products. We expect this price re-setting trend to continue but believe double digit differentials will still remain in Hong Kong vs.

Europe, making shopping luxury in Europe still much more attractive.”

Mak reckons that the headwinds hampering Hong Kong’s retail sales stem from structural changes in mainland-consumer behaviour.

“The mainland visitors that do come to Hong Kong are less willing to engage in conspicuous consumption. The growth in mainland visitors is not as vibrant as it once was because Chinese tourists are taking advantage of the depreciating currencies of other destinations.”

The Chartist: Housing starts, completions steadily roll downhill annually While overall housing supply continued to increase, new housing starts and completions have remained low. According to Barclays analyst Paul Louie, though there is a sequential pickup on 2,000 new starts and 900-unit completions in 1Q15, overall 1H housing starts and completions are still down year over year.

“We continue to believe that the steady rise in primary housing supply from the low of 56,000 in 2Q 2011 to 83,000 now shows that the housing supply-demand imbalance is gradually being addressed. Although it is hard to pinpoint when the current supply-demand mindset may shift, from a quantitative standpoint, the 83,000 primary supply in 2Q is 14% higher than the 73,000 units from 2Q 2014,” says Louie.

Hong Kong housing starts (in number of units)

Hong Kong private housing completions (in number of units)

Source: Transport and Housing Bureau, Barclays Research

Source: Transport and Housing Bureau, Barclays Research

HONG KONG BUSINESS | SEPTEMBER 2015 7

FIRST

Hong Kong tightens real estate lending

Survey

SALARY VS. BONUS

T

he combination of robust demand and all time low rates have caused lending to the property market to grow at a rapid clip recently, as banks seek to deploy capital to this higher-yielding asset class.

The easy access to capital naturally has supported demand in the property market, but could also lead to overheating in the near future. In response to this, Hong Kong’s regulators have implemented cooling measures to curb property market growth.

For example, the Hong Kong Monetary Authority implemented another round of what they call “demand-side management” measures early this year in the form of a lower Loan-To-Value cap and lower Debt-Servicing Ratio cap for mortgage borrowers acquiring second residential properties.

Non-bank lending gains popularity

for other alternative forms of credit.

Non-bank lending means such as privately placed credit instruments and mortgage-backed securities have gained popularity especially given the higher yields offered by these investment vehicles.

Alternative opportunities Appetite from asset managers has CBRE notes that high-quality issuers been growing due to falling yields in that have good access to the capital other forms of credit like bonds, with markets can still tap into the highreal-estate backed securities offergrade corporate market and their ing yields above 9% versus the 5-6% existing bank lines for corporate loans. Despite that, there is still a large offered by bonds of similar tenor.

Insurers have also shown appetite for demand for financing from issuers high-quality issues backed by recurapart from these “blue chip” names, ring income properties that are large. which has created an opportunity

Non-bank lending means such as privately placed credit instruments have gained popularity.

hotel watch

Eaton, Hong Kong partners with ‘handy’ smartphones Eaton, Hong Kong, which features 465 rooms has collaborated with “handy”, a smartphone rental service to launch a free-to-use smartphone service available to all its hotel residents. The handy smartphone offers an unlimited 3G data, wifi sharing and free local and international calls to Australia, China, Singapore, the United Kingdom and the United States on an entirely complimentarily basis.

The smartphone also features helpful travel applications including currency converter, Google maps, MTR maps and city guides featuring shopping, sightseeing and eating hotspots. Shane Pateman, general manager of the Eaton, Hong Kong, says the addition of this free-to-use smartphone as a multi-functional travel companion is just another way in which they want to help their residents maximise their time in Hong Kong while allowing them to stay connected with home at the same time.

8 HONG KONG BUSINESS | SEPTEMBER 2015

Eaton Hong Kong’s facade

Handy smartphone rental service

A majority of Hong Kong professionals are believing that hard work pays, as 75 percent would take a salary cut for the chance to earn more through performance-based bonuses.

The workers in Hong Kong displayed the most confidence in their work compared to their Asian neighbors, according to a recent poll by Hays.

Assured that they could earn more money through performance bonuses, 20% of Hong Kong professionals said they were willing to sacrifice up to one-fifth of their base salary, while 11% said they were ready to risk more than that. 25% of those polled in Hong Kong would rather not risk their salaries for an unsure bonus.

Retaining talent Meanwhile, Christine Wright, managing director of Hays in Asia, believes performancebased bonuses could be used to attract and retain skilled and hardworking employees. “However there is no one-size-fits-all approach to compensation packages and employers should work with a candidate and their recruiter to tailor an offer that has the best chance of retaining them longterm,” says Wright.

Wright also suggests that offering rewards to exemplary performances from workers would be a win-win solution for both the employer and the employee. “A performancerelated bonus rewards employees for good work and can be very motivating for employees as they have a vested interest in achieving a top result,” Wright adds. She adds that ample communication between the employer and employee is required.

FIRST

Off-CBD areas lure office tenants with transport access and lower rents

T

he current supply-demand situation in Hong Kong’s property market points toward a continued rise in rental rates and continuously tight vacant office stock as demand remains elevated, especially in the CBD. With property yields at record lows of about 2.77%, developers are also looking to find areas with lower accommodation and plot value to improve this, given the record high property prices in central areas. This new focus on more affordable locations with vacancies has non-central areas such as Kowloon East and Wong Chuk Huang receiving more attention as areas for office developments.

Recent data from Jones Lang LaSalle show that there is a need for this move towards newer, non-core locations to fill new office space demand given that vacancy stood at a very low 6.4% in 2014. Deutsche Bank property analyst Tony Tsang forecasts that vacancy in prime areas such as central are expected to see vacancy rates as low as 1.95% in 2016 with no new supply coming online due to the lack of available property for development.

New hubs emerging Colliers highlights Kowloon East as the centre for HK’s new central business district nicknamed “CBD2”. Kwun Tong, Kowloon

Bay and Kai Tak are also part of this new development, which should help to service some of the demand. These areas also have good access to public transportation such as the MTR through the Kowloon Bay Station, which makes them more accessible to employees.

Colliers adds that between 2015 and 2017, a total of 2.87M sqm of new office space and 2.56M sqm of revitalized old office space will be coming online in the market. Simon Lo, executive director for research and advisory at Colliers, notes that he sees continued demand from certain industries for many of these new off-central areas. Kowloon East, for example, is likely to be the primary choice for professional-service providers due to the lower rent and fit-out costs. He also notes that it could be an option as well for middle-office operational staff and the frontoffices of non-finance companies.

Infrastructure remains key Colliers’ executive director for office services Wendy Lau says that improving transportation infrastructure will be crucial for the viability of these new areas as alternatives to Central. According to her, this infrastructure development will facilitate the redevelopment and revitalisation of the large number of industrial buildings in the area for office

The rise of the CBD2

use. Areas with better transportation access will be more attractive to tenants and to developers as well, due to the higher rental rates they can fetch.

The train system’s planned new openings - South Island Line (East) in 2016, the Shatin to Central Link in 2020 and the Kai Tak Monorail, the Central-Wan Chai Bypass and Island Eastern Corridor Link projects will all be beneficial to these new developments given the improvements they bring to the local transportation network.

office WATCH

DBS unveils an exclusive startups co-working space Dedicated to house innovative FinTech startups selected to join the DBS Accelerator programme, powered by Nest, the team launched a more than 5000 sq ft co-working space named “The Vault.”

Located in the basement of the Overseas Trust Bank Building at 160 Gloucester Road in Wan Chai, “The Vault” will provide startups access to ongoing mentorship and speaker and networking events.

Operating 24/7, the new space centerpiece features the doors of the old bank vault, a heritage feature retained from when it was part of the Overseas Trust Bank (merged into DBS Bank (Hong Kong) Limited in Year 2003. According to a spokesperson from DBS, they felt that it was important that the space reflected the transition from old to new, which is very much symbolic of what is happening in the banking industry right now.

10 HONG KONG BUSINESS | SEPTEMBER 2015

The breakout space at the Vault with a HK scene mural hand-painted by T. Wong

An interpretation of a unicorn the pinnacle of success for a startup

A quiet corner where founders can meet for one-on-one

Private meeting area

startups

TeamNote helps companies increase workforce productivity

F

ounded in 2015 and spun off from AppTask, TeamNote’s mission has been clear since the very beginning and it is to help corporations unleash the productivity of their mobile workforce and maximise the working efficiency that mobile technology brings about.

The platform provides both iOS and Android apps, as well as the web-based administration portal with the primary features of instant text/voice/video messaging, group chat, individual chat mode, as well as group announcements organised by the top management. It also offers GPS location tracking, news polling,

photo reporting, sales reporting and back-end reporting. TeamNote has various customised features, such as form filling, HR tasks, job dispatch and duty rosters.

Founded by Roy Law, who has more than 16 years of experience in IT infrastructure and network security behind him, started TeamNote to ease corporate concern and aims at developing it as a design tool to protect industrial and commercial enterprises through digital communication. “Digital communication has replaced the email service and has become the primary communications platform.

However, today’s popular instant messaging tools do not provide enough privacy and security. It is risky to transfer corporate internal information because a third party can hack and gain sensitive company messages or files easily,” says Roy. With TeamNote, corporations manage complexity more effectively through the all-round management of tasks, training, documents, team communication and so on. Currently, the company has received seed funding from YCombinator, JDB holding and Big Bloom Investment.

A new platform to buy and sell your pre-loved items

Launched in January 2015 in Hong Kong, Swapit is a mobile app allowing users to buy and sell second hand items.

Founded by Patrick Kosiol, Jonas Hartmann, Teddy Ho, Boris Boege and William Wong, Swapit is turning the market for trading pre-loved items upside down, by focusing on the best experience for buyers.

Patrick, one of the founders who recently became a dad, told Hong Kong Business that people don’t know where to find the items that they want 12 HONG KONG BUSINESS | SEPTEMBER 2015

to buy. Communication between buyer and seller is often difficult because usually they are not known to each other, and they find it difficult to link to each other due to rudimentary search options and lack of filters.

“All in all, it’s not easy to buy nor sell items. That’s exactly what we built Swapit for: to buy or sell pre-loved items quickly. It comes with instant messaging that makes it quick and easy to sell,” he added.

Swapit boasts of its uniqueness in reaching out to potential buyers in a location-specific, contextually relevant and immediate manner. It has HK$1 million in funding and is currently raising around HK$2 million to capture the entire market for trading second-hand items in Hong Kong. Patrick also shared that since the platform launched in January, the number of new users has been growing by 22.7% per month.

Email inbox turned into a chat box

When Talkbox, the first voice messenger app, was copied by many big technology companies, Heatherm Huang, who was one of the foundering team members, left the company and started his own. Introducing MailTime, an Open Messenger built with email technology. It’s email as quick and easy as texting, and messaging without forcing your contacts to all download the same app.

According to Heatherm, the way people interact with emails today has changed dramatically, but the email experience has not. Users scroll through pages of copies, signatures, and metadata to find what they need. It’s all more reminiscent of the desktop paradigm than the modern mobile world. The MailTime Team wanted to build something different and open, so MailTime is a messaging service built on top of the open technology of email, that connects people and services.

“MailTime disrupts the traditional email. We believe mobile email is about communication, not “organisation”. Therefore the best email app resembles a mobile messenger, not a tool for typing essays and moving emails around. We reformat your cluttered email threads into clean bubble chats, get rid of all those signatures, repeated data and formats,” he says. Heatherm stresses that people want what they are making because many of them download it on the spot once they are presented with the product.

Just last year, with MailTime, he and his team became the first Chinese startup ever to enter into the TechCrunch Disrupt Startup Battlefield competition. Currently, MailTime has USD 3M of Angel Investments behind them.

Planning the move for now and the future The company plans to include a Referral mechanism by adding an additional account wherein users must invite one friend to Mailtime or pay 99 cents; a Viral loop whereby Mailtime signatures are set by default to advertise Mailtime, providing ads in every email sent. In addition, Network effects, @Mention feature and future ‘Seen’ features are available only between Mailtime users, so the more people who use us the better it gets.

Finally, Service platforms, wherein users can use integrated services with their email contacts such as payment via MailTime which is also a good channel to acquire new users.

FINANCIAL INSIGHT: ipos

No longer second fiddle

Hong Kong’s unstoppable feat in IPO listings

A robust pipeline of IPOs has emboldened Hong Kong to again challenge for the title of world’s top listing venue.

H

ong Kong is no longer content playing second fiddle to the United States or mainland China when it comes to wooing IPO issuers, as the Territory witnessed an impressive number of megasized deals to push its total equity listings to a new record high. Even better, analysts expect Hong Kong’s blistering rally to continue for the rest of the year as China’s financial giants look to launch more billion-dollar IPOs. Already, Hong Kong is off to a fantastic start in the first half of 2015 with total IPO in the Hong Kong Stock Exchange (SEHK) totaling US$17.3 billion, a 45% increase from the same period last year.

IPOs in SEHK surged on the back of China’s stock market rally, which, in turn, stimulated interest

14 HONG KONG BUSINESS | SEPTEMBER 2015

Ashok Lalwani

Elaine Tan

Psyche Tai

in Hong Kong’s local bourse, says Elaine Tan, analyst, deals intelligence – Asia Pacific and Japan at Thomson Reuters.

SEHK grew so much in the first half of 2015 that it managed to overtake the Shanghai Stock Exchange (US$16.3 billion) and New York Stock Exchange (US$13.3 billion) in terms of IPO proceeds raised. “Driven by a flurry of Chinese IPOs, the Hong Kong Stock Exchange (SEHK) regained its crown as the top listing venue for IPOs globally,” says Tan. “Hong Kong has long been favored by Chinese companies as a listing venue and the launch of the Shanghai-Hong Kong Stock Connect programme last year boosted its appeal to investors,” she adds.

To illustrate the dominance of

Chinese IPOs in SEHK, more than 90% of the total IPO or US$15.7 billion of funds raised in Hong Kong’s stock exchanges in the first half of 2015 came from Chinese IPOs. Tan notes that Chinese brokerage firms led the majority of issuance in terms of proceeds worth US$9.7 billion through IPO in SEHK. Huatai Securities Co. led the charge with US$5.0 billion raised after pricing its first time listing in Hong Kong at the top end of an indicative range and exercising over-allotment.

Along with IPOs, follow-on offerings flourished as well in SEHK to reach US$36.6 billion in the first half of 2015. Combined, IPOs and follow-on offerings led to total equity listings in Hong Kong rising to a record-setting US$53.9 billion, a 145% gain from the same period last year, and the highest first half period since records began, says Tan. Listing frenzy continues There seems to be no stopping Hong Kong’s hot streak in the near-term with more listings lined up in the latter half of 2015.

FINANCIAL INSIGHT: ipos “In 2015, the focus of the year in Hong Kong is the financial institutions sector, and megasized IPOs,” says Psyche Tai, partner at Norton Rose Fulbright.

“We’re also seeing a lot of public M&A, primarily from mainland companies, both state-owned and private enterprises, wanting to buy into a listed platform and inject or develop their business into or through the listed entity.

For these businesses, Hong Kong remains an attractive place for fundraising, and investor interest remains high.”

Finance sector to dominate The latter half of the year will continue to be dictated by the finance sector with headlinegrabbing listings expected from China Reinsurance Group, China Merchants Bank, and China International Capital Corp (CICC).

Among these upcoming listings, one of the most anticipated is the first-time listing of China Merchant Securities, which Tan estimates could raise as much as US$5 billion in the fourth quarter of 2015. There should also be high investor interest in CICC’s plan to raise US$1 billion in Hong Kong in the fourth quarter of this year.

“As China curbs IPOs amid market volatility as part of its initiative to stabilize the A-share market, Hong Kong could potentially benefit from the suspension in mainland offerings and continue to witness a surge in IPO listings,” explains Tan of the billion-dollar IPOs in the coming months.

Tan also points to China Huarong Asset Management, Everbright Securities and China Reinsurance (Group) Corp as companies that could help set off a “listing frenzy” in the second half of 2015 as the trio seeks to raise at least US$7.5 billion combined.

If these megasized IPOs pull through, Hong Kong could very well sustain its first-half rally and have a shot at surpassing the United States as the top listing venue in 2015.

“The Hong Kong IPO pipeline is looking strong, with a number of Chinese financial services providers and pharmaceutical companies planning to go public.

I think Hong Kong will make a strong run this year for the world’s IPO crown,” says Ashok Lalwani, head of Asia Pacific capital markets group at Baker & McKenzie.

Sustaining momentum While the short-term prospects of the Hong Kong IPO market is undeniably bright, sustaining the momentum in the long term could prove to be easier said than done as rival bourses attempt to lure investors away from the Territory.

“China’s ongoing financial reform such as the easing of its IPO rules under the new registration scheme and development of the new third board, and the maturing of stock markets in the other parts of Asia – all of these factors can have an impact on the attractiveness of the Hong Kong IPO market in the long run,” says Lalwani.

Equity-listings in Asia Pacific exchanges - first half volume comparison

Source: Thomson Reuters

singapore view

Singapore’s IPO market falters What started last year as a small step backward for initial public offerings (IPO) in Singapore has worsened to a full-on retreat. Singapore’s IPO activity has slowed to a crawl in the first half of 2015 to a point where even bourses of less developed Southeast Asian neighbors are attracting more interest.

Adding insult to injury, stock markets in Hong Kong and China are booming while Singapore faces an alarming IPO slowdown. “Volatile market conditions and weak market sentiment towards new offerings led to an IPO drought in Singapore and hampered the growth of the city state’s stock markets while Asian rivals flourished,” says Elaine Tan, analyst, deals intelligence – Asia Pacific & Japan at Thomson Reuters.

Tan notes that in the first half of 2015, only three IPOs were listed in Singapore. Total IPO proceeds raised only US$228.3 million, down 79% compared with the same period last year.

It should be noted that all three IPO listings were in the Catalist, the junior board of the SGX, led by Malaysia-based GCCP Resources which issued its IPO to raise US$207.7 million in proceeds, making it the biggest IPO listing in Singapore this year.

Disappointing numbers Fear and disappointment have gripped many issuers and have forced them to pull their IPO plans. One example is Manulife US Real Estate Management which sought to raise US$426 million – which would have been more than double that of GCCP’s and by far the biggest IPO listing in Singapore.

Unfortunately, investor demand did not meet company expectations which led the IPO to fall through. While the Catalist has seen a trickle of IPOs, the SGX Mainboard has witnessed no IPO listings so far in 2015 compared with US$1.0 billion investment raised from five companies during the first half of 2014.

Tan adds that follow-on offerings in Singapore totalled US$811.1 million in the first half of 2015, a 22% decline from the comparative period last year, and the lowest first half period since 2005 when it totalled US$512.2 million.

Combining the lacklustre IPO and follow-on offerings, total Singapore-listed equity offerings fell by 51% to S$1.0 billion during the first half of 2015.

“Singapore’s IPO market has been experiencing a bit of a dry spell this year, a spillover from 2014 when deal sizes started shrinking,” says Ashok Lalwani, head of Asia Pacific Capital Markets Group at Baker & McKenzie.

“Companies are grappling with uncertain market conditions such as the Greek debt crisis and the drop in commodity prices, and local firms are adopting a wait-and-see attitude with regard to listings,” adds Lalwani.

Overseas companies have turned their sights to more attractive, high-flying exchanges in the region, which has also contributed to Singapore’s drought in initial public offerings.

HONG KONG BUSINESS | SEPTEMBER 2015 15

economic INSIGHT: weak domestic demand tion have been showing declines year-on-year. “The downward cycle in tourism and the retail sector remained due to the ongoing anti-corruption campaign in mainland China” according to OCBC analyst Selena Ling.

Luxury retail sales, which was previously a growth driver for the country’s retail segment, has been a drag recently given waning demand especially from China. Ling attributes the weakness to the tourism sector.

Tighter visa restrictions for Chinese residents and stricter requirements for travel in connection with the anti-corruption campaign in China are not likely to abate any time soon.

In their view, the HK retail sector will continue to be constrained by the lack of tourism.

Financial sector is a bright spot

HK economy still battered

Headwinds from weak global growth and lack of domestic demand may keep growth from accelerating.

T

he Hong Kong economy has recently been growing between 2-2.4%, much lower than its historical average. The country’s exports have been hit by lower demand from abroad, caused by the weaker global growth especially in its main trading partner, China. According to John Zhu, an economist at HSBC, “the slowdown in China continues to weigh on Hong Kong. The latest PMI indicates a continued deterioration in business activity.”

Domestic demand remains the source of growth but has been soft recently.

Both import and export data have been weak since the start of the year

Source: Census and Statistics Department, HSBC

16 HONG KONG BUSINESS | SEPTEMBER 2015

He notes that exports dropped 4.6% year-on-year in May. The large stock market rout has also hit the country’s financial sector, with government and private sector measures to stabilise it buckling amidst global selling pressure. Other large trading partners have provided no relief as domestic economies continue to disappoint. HK’s second largest export destination, Japan, still has not seen the benefit from Abenomics with Inflation remaining too low and GDP looking to continue its flattish trend. Korea, HK’s third largest export recipient, has been hit by the MERS virus and El Nino which has also impacted the rest of Asia.

The country’s domestic consumption and consumer confidence had been dipping steadily since the outbreak of MERS, and the country’s central bank has cut rates to counteract the impact to the economy.

Domestic demand remains the source of growth but has been soft recently. Retail and tourism, the two main sources of domestic consump-

A silver lining Hong Kong’s financial sector is expected to be a bright spot amidst weaker performance in other sectors. The Shanghai-Hong Kong stock connect has opened up access to the Chinese stock market, which opens up a new business line for HK brokers. The Chinese government has also made a number of financially accommodative moves for cross-border capital flows.

Last year, the 20,000RMB conversion limit was removed as part of China’s initiatives to liberalise their capital account. The country also recently launched its mutual fund recognition programme which allows HK and China-domiciled funds to sell shares in both countries. According to Ling, these two in conjunction with the Shanghai-HK stock connect are likely to boost demand for the RMB, which will be beneficial for financial services firms in the country.

However, Ling notes that mainlandrelated lending could be a headwind for HK banks. “We expect mainlandrelated lending to grow slower than overall loan growth in HK.” She adds that this expected deceleration will be caused by the narrowing differential between mainland and HK interest rates, along with HK banks taking a more conservative stance towards lending to a weakening mainland economy.

Despite that, Hong Kong saw both an absolute increase in mainlandrelated lending at the start of the year.

Analysis: franchising and licensing

Daniel Yeung’s Fighting Arts Center

HK entrepreneurs urged to ride the franchising tide

Hong Kong entrepreneurs and organisations are uniquely positioned to tap into a wellspring of franchising opportunities.

W

hen Daniel Yeung founded the Fighting Arts Center, a Muay Thai boxing and workout gym, in 2011 he chose the path of franchising as a way to expand his business quickly and build on the early popularity of his brand. He developed a franchise system with the help of consultants and set up one-stop-shop support that would help franchisees set up their own gyms without having to worry about training club managers and personal trainers, which Yeung would handle as a franchisor.

The strategy worked in attracting a lot of interest from investors, and Fighting Arts has been able to set up nine clubs in Hong Kong, seven of which are franchised, with plans to expand to 21 clubs by 2017 as Yeung takes his franchising concept overseas.

18 HONG KONG BUSINESS | SEPTEMBER 2015

Around 100 franchise brands are currently operating in Hong Kong and around 40 franchisors are planning to enter the market.

Yeung’s is one of the growing number of success stories that can be attributed to franchising, according to the Hong Kong Trade Development Council (HKTDC), but analysts argue that the territory still has a large untapped potential that can be nurtured with strong government support and matching concepts with ravenous investor demand.

Turning up the franchising fever Hong Kong has much room to grow when it comes to franchising.

While the rest of the world seems enamoured by franchising, with franchise businesses projected to grow faster than the rest of the US economy, the Hong Kong scene only has been humming along at a constant level. “The world in general seems to have recognised that franchising can be a win-win

solution for both the originator of the brand – the franchisor - and the franchise owner by replicating the success that a well-established franchisor can demonstrate,” says Frankie Fan, managing director at Franchise Development Services. Fan notes that around 100 franchise brands are currently operating in Hong Kong and around 40 franchisors are planning to enter the market, a “constant level” of franchising business since the number of franchise operators peaked at 124 in 1999. In comparison, mainland China has become the leading market for franchising industry at both national and international levels with over 5,000 franchise systems and over 1 million franchise-owned outlets.

Fan says that given these statistics, it is about time for Hong Kong entrepreneurs and organisations to ride on this booming and potentially lucrative expansion strategy. “It is the only way in which many Hong Kong companies can start to earn from the knowledge that they have in relation to documenting and replicating their business systems,” says Fan. “There is already an evergrowing demand from countries around the world to replicate the standards that their brand provides and then to ensure that every element of running the business maintains that same standard.”

Potential franchisors’ challenge Lack of knowledge and a feeling of being overwhelmed are main deterrents, especially since most Hong Kong companies are eyeing the scary leap to international expansion.“Hong Kong companies will face the challenge of not knowing how to develop their franchise business strategically,” says Fan. To overcome this challenge, Yeung’s approach of leaning on consultants is a sound one. “Even though the existing franchisors has established their franchise

Analysis: franchising and licensing owner network successfully in Hong Kong, they will find difficulty or put a lot of their time and effort to expand their business in international markets,” says Fan. “The international associations therefore recommend that franchise companies work with franchise consultants and other professional service providers in order to save their associated cost and reduce the failure rate.”

A recent International Franchise Association survey revealed that more than 80% believe international growth was crucial to their company’s future success.

Also, roughly 50% of companies are allocating resources to engage with experienced international franchise consultants to facilitate their research, planning and cultural differences, says Fan. First-time franchisors in Hong Kong are also warned not to be too overzealous when it comes to imposing control over their franchisees. Some franchisors might think it prudent to add restrictions such as fixing minimum resale prices and imposing a post-agreement noncompete limitation that is excessive in duration and scope, but these are often unjustifiable, according to Hannah Ha, partner at Mayer Brown JSM. Ha recommends that franchisors should only provide necessary and proportionate restrictions that aim to protect brand unity, know-how and licensed intellectual property rights. This is usually enough to keep franchisees in line without choking them to the point of repulsion.

Giving China a helping hand For Hong Kong entrepreneurs looking for opportunity, the franchising sphere opens the door for assisting Chinese brands that want to penetrate overseas markets. “Hong Kong companies and entrepreneurs have long been recognised as the ‘superconnector’ or middleman between overseas companies and Chinese companies,” says Fan. Traditionally, Hong Kong

Frankie Fan

HK gives China a helping hand

Hong Kong companies can work as agents to help mainland companies expand overseas using the franchising model, by utilising Hong Kong’s experience to strengthen the operation standard, branding and service quality.

companies and entrepreneurs are chosen by international franchise brands to become master franchise owners that will lead to establishing a franchise network in China. But increasingly, Chinese companies are the ones looking to expand overseas and Hong Kong can equally serve as the giant’s guide to global franchising. “The international status of Chinese companies and their brands might also be enhanced in the coming years given the optimisation of business laws and encouragement of creative industry. Hong Kong entrepreneurs should also keen an eye on the trend to act as the ‘franchise developer’ to help the Chinese brands penetrate into the overseas markets by franchising,” says Fan. “Franchising is still an immature concept in China,” according to the HKTDC Research report on Franchising through Hong Kong: Accessing the Asian Market, published in November 2014. The report continues “Hong Kong companies can work as agents to help mainland companies expand overseas using the franchising model, by utilising Hong Kong’s experience to strengthen the operation standard, branding and service quality.”

Government support In view of the tremendous potential for Hong Kong entrepreneurs and organisations to venture into franchising – whether as brand franchisors,

master franchisees or agents for Chinese brands – the government has been rolling out a number of supportive measures. Seeing the success of Singapore in providing government assistance for local companies to expand their businesses at national level and also helping Singaporean companies flourish in international franchising, the Hong Kong government has also started to promote the benefits and growing potential of the franchising model.

HKTDC has been looking to catch up and know the exact needs of the Hong Kong franchising sector through a range of research studies. The council has also organised a franchise-themed exhibition zone within the World SME Expo to help promote the franchise strategy among Hong Kong entrepreneurs, and help them find franchise opportunities.

Subsidies are also being given out to franchise brands exhibiting at the approved overseas franchise exhibitions. This year, the first ever Hong Kong International Franchising Show will feature a wide range of local and foreign franchise opportunities, consulting and supporting services, where franchisors and prospective franchisees meet to explore winwin business collaborations. The show is expected to feature 100 local and overseas franchising brands, as well as a wealth of forums, seminars and networking functions to help expanding the franchise business and connection.

HONG KONG BUSINESS | SEPTEMBER 2015 19

HONG KONG’S 20 LARGEST MBA PROGRAMMEs

Institutions today don’t just train students to chase after jobs.

Chan, director of Marketing & Student Recruiting at The Chinese University of Hong Kong Business School.

In order to develop leaders who can innovate, the programme must also be innovative. “Specialization is not a new thing. However, I think certain fields resonate better with this generation than prior generations,” says Sean Ferguson, program director at HKUST, noting that constant adjustments must be made in order to remain relevant. For instance, corporate social responsibility has become a central component in business curricula following the financial crisis in 2008.

Despite the progress brought about by the many changes in the Hong Kong MBA programmes, one directive remains constant: their MBA programmes are created to develop leaders who are well-rounded in terms of leadership and management ability. The difference lies in the goal of Hong Kong business schools to equip graduates with the necessary skills to achieve success in today’s competitive business world.

f you have ever considered taking up further studies in business, chances are high that at some point you’ve been daunted by the sheer number of business schools and universities all over the world – thanks to globalization, educational options have never been so numerous. However, only a select number of institutions can provide the kind of training that can enable their students to successfully manoeuvre through the continually shifting business landscape. For those who are poised to take on a leadership role in a company, a definite competitive edge would be a Master’s Degree in Business earned from one of Hong Kong’s reputable business schools.

“Quality and relevance to the real world are always the best selling points [of Hong Kong

Who made it to HKB’s list?

Hong Kong Business’ annual list of HK’s largest MBA programmes based on total number of current students enrolled in the course is now on its second year. Data compiled from MBA providers show the basic information that potential students should know including the programme’s minimum cost, duration and number of intakes per year.

The University of Wales, Newport MBA offered by the International Academy of Management has the most number of students yet again with 800 enrollees. It is then followed by University of Wales, UK MBA offered by The Hong Kong Management Association with 350 current students. The list provided in the next page is arranged alphabetically.

Creating well-rounded leaders in Hong Kong

MBA schools evolve to teaching entrepeneurship

I

20 HONG KONG BUSINESS | SEPTEMBER 2015

More schools are introducing and paying more attention to entrepreneurship in recent years after the financial tsunami rather than just training students to chase after a job in investment banks.

business schools],” says Dr Mak Wai-ming, Mac, MBA programme director at The Hong Kong Polytechnic University, citing regular curriculum developments and international partnerships and accreditation as a major part of their effort to stay a few steps ahead of the global crowd.

Cultivating an international pool of students and teachers at the school creates opportunities for crosscultural interaction, an essential skill for developing leaders.

A departure from the usual offering of management and training courses, entrepreneurship is an emerging trend in Hong Kong business schools. “More schools are introducing and paying more attention to entrepreneurship in recent years after the financial tsunami rather than just training students to chase after a job in investment banks,” says Lawrence

City University of Hong Kong College of Business

The Hong Kong Management Association

International Academy of Management

Hopkins Training & Education Group

Management

University of Iowa's Henry B. Tippie School of

Hopkins Training & Education Group

Kaplan Higher Education

Lifelong College

The Hong Kong Polytechnic University

(The University of Manchester)

Manchester Business School

The Hong Kong Management Association

The Hong Kong Management Association

Hong Kong UST Business School

The University of Hong Kong

Henley Business School

Hong Kong Business School

The Chinese University of

Hong Kong Business School

The Chinese University of

Hong Kong Business School

350

800

300

45

500

112

80

189

355

300

90

457

300

30

315

98

116

89

160

400

800

300

52

500

112

46

183

352

300

310

300

30

322

97

114

108

180

100

2014

2015

100

students

Total no. of

students

Total no. of

William Chow

Qin

Charles Huang

350

800

300

45

500

112

80

Iluminado C. Valencia

355

300

90

230

240

30

167

98

116

39

160

100

Part time

189

227

60

147

50

Full time

Total number of students

Dr Mac Mak

Richard Petty

Ferguson

Sean O

Sachin Tipnis

Neil Logan

Ferguson

Michael

Jeff Yeung

Andrew Chan

Kevin Chiang

Richard Johnson

Julia Herries

Head of HK office

Survey period is from March to June 2015. *Data provided by companies. **Ivey Business School’s EMBA programme’s is being revamped for intake 2015 and details are expected to be announced later this year. ***Previous data.

University of Wales, UK MBA

Newport MBA

University of Wales,

MBA***

University of Northern Iowa

Hong Kong MBA

University of Iowa Tippie

Australia (UniSa) MBA***

The University of South

The University of Hull Executive MBA

Tarlac State University, MBA

PolyU MBA

Manchester Global MBA

of Management

Macquarie Graduate School

Glyndŵr University, UK MBA

HKUST MBA

HKU MBA

Executive MBA

Henley Flexible

CUHK MBA

CUHK EMBA (Chinese)

CUHK EMBA

The University of Chicago Booth School of Business

Chicago Booth EMBA

CityU MBA The Chinese University of

UNSW Business School

Australian Graduate School of Management

AGSM MBA, The University

of New South Wales

MBA Provider

Mba Programme

545,000

492,000

499,500

290,400

Full time

104,000

108,000

147,600

249,600

145,500

160,000

53,000

220,500

386,000

301,120

105,500

385,020

342,000

295,000

333,660

690,000

513,600

249,600

1,200,000

318,240

Part time

Minimum cost (in HK$)

months

12 to 16

14 months

months

12 or 16

1 year

Full time

2 Years

18 months

months

20-24

months

15 to 18

18 months

2 years

12 months

(Max: 4 years)

2 years

2.5 years

2.5 years

1.5 years

24 months

2-4 years

2 years

24 months

2 years

24 months

2 years

21 months

(Max: 7 years)

3 years

Part time

Duration

2

3

2

12

4

2

3

1

2

2

2

1

1

1

1

1

1

1

1

4

No. of Intakes per year

HONG KONG’S 20 LARGEST MBA PROGRAMMEs

HONG KONG BUSINESS | SEPTEMBER 2015 21

regional Analysis: asian trade

Weak investment picture in Asia

Drivers of trade stagnation

In addition to a slowing China, region-wide investment weakness, rising trade restrictions, and changing pattern of production are to blame.

I

t has been a difficult year for Asian exporters. Year-to-date exports growth has ranged from 1%yoy to -16%yoy. While commodity exporting economies like Indonesia and Malaysia have seen acute weakness (along with India which also is a large exporter of refined fuel), even economies focusing on manufactured goods exports (Japan, South Korea, the Philippines, Taiwan, and Thailand) are in negative territory. Considering that the US recovery is sustained enough

Domestic demand remains the source of growth but has been soft recently.

Across-the-board weakness in exports so far this year

Source: CEIC, Deutsche Bank. Year-to-date exports data for Jan-Jun in all countries except for Jan-May in Malaysia and the Philippines

22 HONG KONG BUSINESS | SEPTEMBER 2015

to warrant discussions of monetary policy normalization, domestic demand in EU has begun picking up, and China, despite all its difficulties, is still growing at around 7%, the trade weakness has been a source of surprise for many.

The malaise in trade has been in the making for several years. In the aftermath of the 2008/09 global financial crisis, there was a V-shaped recovery in global trade, but the momentum fizzled out rapidly thereafter.

Since 2011, global trade volume has amounted to an annualized growth rate of 3.2%, and so far this year the growth has been just 1.8%yoy. This is downright anemic compared to the past; in the 1990s, global trade volume grew on average by 7.2% annually, while during 2000-07 the growth rate was 6.8%.

Not only has global trade growth slowed relative to the past, it is also weaker in relation to GDP growth. We estimate that the relationship between global growth and trade was far stron-

ger in the 1990s, when trade volumes grew at twice the rate of global growth; compare this to recent years, when trade growth has in fact lagged real GDP growth. We are therefore seeing a secular slowdown, overturning longstanding relationships between activity and trade.

Trade malaise is hugely problematic for the export oriented economies of Asia, casting substantial downside risk to their outlook. In the past, forecasting growth in this part of the world has been a question of getting the outlook of US/EU right. But if the traditional relationship between trade and growth is breaking down, with a more muted positive spillover, what used to be great news in the past may be merely good news now.

Looking at Asian EM economies, export volume has been faltering lately.

Despite some recovery in recent years, on a seasonally adjusted basis, export volume from March-May has fallen back to early 2013 levels. In addition to weak volumes, exporters are also seeing weak pricing across the board.

Estimates of unit price show that price decline go beyond energy products.

Indeed, non-energy commodities have been on a down-trend longer than energy commodities. Manufactured goods prices have been stagnant for long, and also begun slipping lately.

Weak investment demand means weak trade There has been considerable discussion about the supply side developments that have driven trade values down, but we think that demand side developments are equally important.

China’s investment demand has slowed dramatically in recent years, reflecting structural (recalibration from exports to domestic demand) and cyclical (property market slowdown and build-up of debt) factors.

No other economy has even remotely comparable investment demand, so China’s slowdown has meant a global slowdown in investment.

Beyond China, the investment picture for the rest of Asia is also bleak. With the exception of India and Thailand, all economies are expected to have weaker investment growth this year than in 2013. By Taimur Baig, chief economist, Deutsche Bank

legal briefing

HK tweaks insurance regulatory regime A new law imposes stricter standards but smaller insurers risk getting steamrolled.

W

hen the Hong Kong Legislative Council passed the Insurance Companies (Amendment) Bill 2014 in July, consumers were the clear winners, gaining additional protections in the form of more stringent standards on how insurers conduct their business. But does this mean all insurers are automatically the losers? Not necessarily so, according to analysts, as only smaller insurers and intermediaries will likely feel the pinch as compliance costs rise under the new regime, which includes a more powerful independent Insurance Authority (IIA) and a statutory licensing regime for insurance intermediaries.

What does the new law mean for the local insurance industry?

The new law, which will be implemented in three stages over the next couple of years at the earliest, creates a new IIA which replaces the Office of the Commissioner of Insurance.

The IIA will have enhanced powers to regulate the insurance industry, including powers to carry out investigations and inspections, and impose disciplinary sanctions on authorised insurers and intermedi-

“With a more powerful statutory regulator overseeing insurance intermediaries, they are likely to be held to higher standards of performance and conduct.” aries, says Emma de Ronde, foreign legal consultant at Norton Rose Fulbright.

She adds that the new law also introduces a statutory licensing regime for insurance intermediaries to replace the existing self-regulatory regime. Other notable changes to the regime include the strengthening of corporate governance standards applied to insurers.

“A key thrust of the legislation is consumer protection and insurers and insurance agents should note the obligation on insurance agents to act in the best interests of consumers when carrying out their regulated activities,” says Martin Lister, partner at Simmons & Simmons.

“With a more powerful statutory regulator overseeing insurance intermediaries, the latter are likely to be subject to closer supervision and held to higher standards of performance and conduct than they currently adhere to, particularly with regard to understanding the consumer’s circumstances and needs and identifying the most suitable products to meet those needs,” adds Lister.

24 HONG KONG BUSINESS | SEPTEMBER 2015

Emma de Ronde

Martin C. v.M. Lister

Simon McConnell

How is the industry’s competitiveness improved?

The new law brings the HK insurance regulatory regime up to international standards, specifically with the establishment of an independent IIA that is disconnected from government control with a quasijudicial Insurance Appeals Tribunal.

“This is designed to enhance industry transparency, boost consumer confidence and encourage greater corporate governance, paving the way for a regulated and dynamic environment for businesses,” says Simon McConnell, partner at Clyde & Co. “The motivation is therefore to improve the industry’s competitiveness in the region.”

“The policy objectives underpinning the new law were to modernise the insurance industry, provide better protection for policyholders, and align Hong Kong with international standards applied by comparable jurisdictions and the International Association of Insurance Supervisors,” says de Ronde. “From that perspective, the changes are welcome and should enhance Hong Kong’s standing as a well-regulated international insurance market to international players.”

What are the possible difficulties insurers and insurance brokers might face with the new law?

With the introduction of a new regulatory and enforcement regime, the IIA has now been given extensive investigation and disciplinary powers that mirror the scope of existing SFC investigatory, regulatory and disciplinary provisions, says McConnell. Insurers and insurance brokers may experience increased regulatory scrutiny, and may bear the brunt of a more robust enforcement when they fall short of the more stringent standards.

Lister says the size of the penalties that may be imposed by the IIA for breach of the rules may be large, and when imposed on smaller intermediaries, the impact may be significant. Enhanced obligations and the threat of large penalties will also require intermediaries to focus more on compliance, which is likely to lead to an increase in compliance costs.

“It is also likely in due course that their remuneration arrangements will be reviewed, both regarding commission amounts and also the transparency of the payments of commission by insurers,” adds Lister.

For de Ronde, intermediaries, particularly those at the smaller end of the scale, will have the hardest time complying with the new regime.

“Hong Kong has a vast and disparate insurance industry, ranging from huge international insurance companies to very small intermediary outfits comprising one or two individuals. For the latter, and a large number of those in between, the task of digesting and complying with the legislation will be a significant challenge,” says de Ronde.

co-published Corporate profile

MGSM lives by a legacy of consistency

Be it in Hong Kong or Australia, the Macquarie University Graduate School of Management produces leaders committed to professional excellence. and more. All courses are taught face-toface by world class faculty, many of whom have extensive experience in business at a senior level in addition to possessing stellar academic credentials, flying in from Australia.

While MGSM’s Executive Director International is based in Hong Kong, the rest of the faculty fly in to teach, ensuring consistency and a standard of quality in delivery and supervision that few others achieve. “The students can expect the same flexible, integrated, and progressive programs at all MGSM campuses,” says Petty.

Prof. Richard Petty, Executive Director International Macquarie University Graduate School of Management

I

ndustry longevity is rarely unaccompanied by a track record of excellence, consistency, and reliability, and the Macquarie University Graduate School of Management is no exception.Established in Hong Kong with The Hong Kong Management Association in 1994, MGSM has, over the span of over two decades, produced classes full of high-performing individuals – leaders in their chosen fields. Many have started successful businesses and many others work in leadership roles globally.

Practical learning experiences The school is committed to providing an education grounded in the industry, with a focus on practical and applied learning experiences. “The MGSM MBA is designed to mirror today’s working environment,” says Prof. Richard Petty, Executive Director International and Professor in Management (Accounting and Finance) at MGSM. Most classes require group work and individual assignments that will test and develop practical skills needed in the business world. A carefully selected suite of core units ensures that students develop a thorough knowledge of key business practices.

Students are also offered electives to let them delve deeper into their chosen fields of study.

“Either way, both our core units and electives are designed to teach students how to become great leaders.”

Partnerships with other organizations The school also partners with multinational organizations, collaborating on research projects. A relatively new elective is the Living Case Study unit, for high-achieving MBA students, wherein they are given the chance to work on a living case study of significant strategic importance to an organization’s future.

“MGSM students can expect to be challenged by real-world experience while studying, whether this be solving real issues of strategic importance for multinationals, such as Siemens, BT Global Services and Pfizer, or attending a lecture at Google’s head offices.”

The student body also reflects the industry in its diversity, with students from over 35 different countries, from backgrounds and fields including finance, human resources, law, accounting, banking, property, logistics, manufacturing, marketing, IT, medicine, government, education, entrepreneurs,

“All courses are taught face-to-face by world class faculty flying in from Australia who has extensive experience in business at a senior level.”

Global expertise and flexibility Since the faculty fly back and forth from Hong Kong to Australia, they are able to deliver a global classroom experience, rather than a Western or Asian one, enriching one campus with the broader regional perspectives gained from the other.

Flexibility is key at MGSM, with courses being taught part-time on weekends over a two to two and a half year period. Roughly 1-in-4 weekends is spent in class. “The graduate certificate is a starting point,” says Petty. “Students can exit after that point but few do so. MGSM is finding that an increasing number of students are opting to do the full MBA because it opens more doors for them professionally.”

The MBA program’s multi-tiered structure allows students the flexibility to move along at a pace of study that is suited to them.

Students can choose to pause their study as their lifestyle or career dictates. Even the location of study is flexible, as students can choose to study part of the course in Sydney and vice-versa.

No wonder MGSM is the #1 Australian MBA Program taught in Hong Kong, also ranking consistently in the top tier of business schools globally, placed at fifth in the AsiaPacific and first in Sydney/New South Wales in recent Economist rankings.

A perfect mix of East and West, MGSM’s is a winning combination.

MBA, Graduate Diploma Programmes Commencement Date: January 2016 Enquiries: 2774 8585 (Ms Carol Wong) / 2774 8534 (Ms Mani Ng) Website: www.hkma.org.hk/mgsm HONG KONG BUSINESS | SEPTEMBER 2015 25

CMO Briefing

The tricks in social media brand marketing Find out how important brand engagement and good social media content is in promoting your brand.

W

hen Formula 1 partnered with Tata Communications to improve their clientele’s online engagement, they saw an opportunity for them to reach race enthusiasts in a unique way – by providing them with continuous updates along with commentary from the races on their website and social media, they made it possible for their audience to have the full experience virtually, and in real-time.

“This experience is delivered natively across desktop and laptop computers, tablets and mobile phones, meaning that, whether a user is at the race, at home, or in a cafe, they have race data at their fingertips easily,” says Julie Woods-Moss, chief marketing officer of Tata Communications. “No matter where you are or the device you are on, there’s content for you on a platform that makes it simple and easy to access.”

How vital is optimising brand engagement?

The team behind Formula 1 knew that ensuring full engagement with their audience meant that it was vital to provide them with information they could easily access anytime, anywhere, on any device. Optimising brand engagement across different devices and platforms is a challenge that’s keeping brands constantly on their toes, particularly with more and more users turning to mobile devices rather than desktops as a primary source of information.

“The screen space of a mobile is pretty small, and captivating someone’s attention quickly is becoming increasingly more difficult… the amount of time [your brand] is in front of people is reducing,” says Jason Black, managing director of Empire Media.

Capturing attention on social media is crucial,

26 HONG KONG BUSINESS | SEPTEMBER 2015

82% of mobile Twitter users watch video within the platform and natively hosted video is 2.8 times more likely to be retweeted.

particularly for businesses in the food and beverage industry, according to Black. Many hungry diners wouldn’t hesitate to close the browser tab of a restaurant’s website if it took more than a few seconds to access. “Decisions on where to dine are often made “on the move”, so access to mobile-configured information, be that a restaurant’s website that has been optimised for mobile use, or one of the many “review platforms” out there, is vital,” he says.

However, providing relevant content isn’t enough to optimise a brand’s presence for mobile users.

Timely and regular updates must be packaged appropriately, depending on the platform. Familiarity with social media platforms is inextricably linked to the brand’s knowledge of their target audience.

Good content can go to waste if consumers don’t notice it.

“Optimising your social presence for these channels is a matter of understanding how the audiences use the platform on their mobile devices and the type of content they prefer, then adapting to that.

For instance, 82% of mobile Twitter users watch video within the platform and natively hosted video is 2.8 times more likely to be retweeted so we’re using lots of short, fun, natively hosted videos to engage our audience on Twitter. In contrast, for LinkedIn we’re far more likely to see engagement with longer written content,” says Woods-Smith.

How do you cater to a niche audience?

Conversely, it would be pointless to publish content that isn’t relevant to the brand’s audience, a consideration that is particularly important for brands with niche markets, such as luxury brands. Social media and mobile marketing must adjust not only to the interests of their audience but also to their needs, especially in terms of customer service and communication.

“Due to the nature of our services and the highend profile of our members, we therefore have a very “niche” audience, who are always looking for the most unique experiences and exclusive information that is not available to others,” says Vincent Lai, Greater China managing director of Quintessentially Lifestyle, a business which has adapted not only by utilizing social media but also by creating a mobile app for their high-end clientele. “[The app] allows users the most up-to-date lifestyle information and recommendations from experts through a comprehensive global lifestyle directory. Quintessentially Lifestyle members can also place requests through the mobile app and communicate with their dedicated Lifestyle Manager around the clock wherever they are, with internet access,” he says.

“The biggest challenges facing brands in mobile today will be not only to keep up with the more educated consumer who has a wealth of information already at their fingertips via the click of a button, but also to really access, know, and understand customers,” says Lai.

interior design 連續八年榮獲 Hong Kong Business 頒發

傑出室內設計獎2006–2014 Outstanding Interior Design Award 2006–2014

design for the elite

Interior Design

Architecture

普特朗建築及室內設計 工程管理 查詢熱線: (852) 2239 6888 G/F, 75A Wong Nai Chung Road, Happy Valley, Hong Kong

www.zchron.com

References: Commercial projects Carlsberg Escada Leica Residential projects House, Belleview Drive, Repulse Bay Apartment, The Mayfair Apartment, The Leighton Hill

12,000 S.F. 7,000 S.F. 5,000 S.F.

6,000 S.F. 6,000 S.F. 2,200 S.F.

regional Analysis: asia economics

Consumption, not investment

Asia’s need to shift focus on consumption While there is a need to lift demand, the starting point of huge excess capacities indicates that much of the stimulus needs to be aimed at boosting consumption.

D

eflationary pressures are intensifying and spreading out: Weak growth in economic activity and a persistent deflationary trend in producer prices have led to a sharp slowdown in corporate profit growth. With bloated balance sheets and weaker profit growth, corporates are transmitting this stress to households in the form of slower wage growth, hence intensifying and spreading out the deflationary pressures. Indeed, the GDP deflator for the region was 0.0% in 1Q15. By our estimate, it will remain near zero in 2Q15, with six out of 10 countries likely to report a negative print for GDP deflator (up from four in 1Q15). This in turn is persistently taking the region’s ratio of debt to GDP higher.

A typical reaction to this trend is that these economies need stimulus: We agree that there is a need to lift demand – but we believe that the starting point of huge excess capacities indicates that a large part 28 HONG KONG BUSINESS | SEPTEMBER 2015

of the stimulus needs to be aimed at boosting consumption rather than investment.

What boosting consumption would not do...and what it would: To be sure, lifting consumption would not necessarily help address the slowing trend in potential growth. But, it would help the region better address the deflationary pressures, begin to heal the balance sheets of the corporate sector, and take the region to a more sustainable macro environment with better quality of growth.

A rise in investment to GDP (creation of new capacities) in the face of a sharp collapse in demand for exports is at the heart of Asia’s excess capacity problem: To elaborate, one of the key factors behind the current problem of excess capacity in Asia (and deflationary pressures) is the aggressive stimulus that lifted the ratio of investment to GDP since 2008. As exports collapsed in 2008, the region (ex-India, Indonesia, and the Philippines), with a high level of

“The starting point of huge excess capacities indicates that a large part of the stimulus needs to be aimed at boosting consumption rather than investment.”

current account surplus and high level of investment to GDP, chose to lift investment to GDP to another new high. As investment to GDP shot up, the current account balances (saving minus investment) declined, giving one an impression that these economies have rebalanced. In reality, we believe this development has only aggravated the imbalances.

Exports have recovered from the low point, but the rate of export growth has been unusually weak over the last few years: Considering the region’s still-low levels of per capita income and capital stock, policy makers in the region have always worked on lifting domestic demand in the face of weaker exports with stimulus that lifts investment in a counter-cyclical manner. The underlying belief is that investment will create a virtuous cycle of capacity creation, employment generation, and sustained income growth as exports growth accelerates back to the old norm. The key challenge in

regional Analysis: asia economics “Addressing the deflationary pressures by increasing the pace of investment growth would only lead to a bigger deflationary problem later.”

How can consumption growth be lifted?

the current cycle, however, has been that exports growth has not recovered back to the precredit-crisis trend.

Of more importance, though the boost in investment to GDP has worked towards addressing job creation needs in the past, the significant slowing in the growth of the region’s workforce over the last few years suggests that the need for job creation has decreased considerably: Indeed, from 2016 onwards, the working agepopulation in five out of 10 countries in the region will decline.

This trend of excess investment and weaker capital productivity in the region is very clearly reflected in a weaker incremental capital output ratio: This has risen to 6.7 in 2015 from an average of 3.9 in 2004-07 and the lows of 3.4 in 2007. This implies that the region now needs a 6.7% ratio of investment to GDP to get 1ppt of growth in its GDP. This compares with an average of 34% investment to GDP addition during

2000-2008, coupled with average real GDP growth of 8.7%.

Putting across the same point in a different way – if Asia were to follow its own past capital efficiency trend, for GDP growth of 6.2% expected in 2015, the overall investment to GDP ratio should be at 24% instead of the 41% where it stands today.

In this context, we believe that addressing the deflationary pressures by increasing the pace of investment growth would only lead to a bigger deflationary problem later. Indeed, we believe that there is a need for an accelerated provisioning of nonperforming loans in the banking system. This would lead to a slowdown in overall investment growth – but would help to clean up the banking system, purge the excesses of the investment cycle, and allow central banks to cut real interest rates aggressively with a goal of improving the mix of investment, returns on investment and incremental capital

Weak capital productivity trends over the past seven years

Source: CEIC, Morgan Stan ley Research , E = Morgan Stan ley Research estimates. *We h ave exclu ded ICOR data du rin g th e crisis years in th e ch art

output ratio.

To be sure, a slowdown in investment would risk aggravating the deflation problem in the interim period. However, we believe the region ex-India, Indonesia and Philippines needs to manage aggregate demand with a lift in consumption rather than investment.

How can consumption growth be lifted? We point to an increase in fiscal transfers: One attendant question we often get in this context is how consumption growth can be lifted when the corporate sector is cutting back on wage growth in face of a slowdown in revenue and profit growth.

The decline in energy prices has helped to boost household saving to some extent. However, a more reliable measure to support household consumption would be an increase in fiscal transfers from the government, even if it is for a defined period of 1-2 years. Most countries in the region have a relatively low fiscal deficit and moderate to low public debt burden.

We do acknowledge the obstacles in implementing such fiscal transfers.

This means that policy makers in the region would have to revisit their prior principle of observing prudence in public spending in preparation for an aging population, and also overcome their preference for boosting investment. However, if policy makers do not adopt a comprehensive policy response to deflation by way of cutting real rates and boosting consumption, we think it would lead to a sub-optimal outcome of deflationary pressures persisting for longer with continued weak trends in corporate profit growth. By Chetan Ahya, Morgan Stanley Research

Saving-investment gap vs. current account balance (% of GDP)

Source: CEIC, Morgan Stanley Research

HONG KONG BUSINESS | SEPTEMBER 2015 29

co-published Corporate profile

Is your board of directors digital-savvy?

It’s almost a cliché – the CEO whose son or daughter does everything for them technology-wise, or the chairman of the board whose assistant types his emails.

Y

ears ago that was acceptable. Those days are gone, and no-one can afford to be ignorant when it comes to technology. Gartner’s worldwide head of research Peter Sondergaard said last year that businesses now have at most a two year window to get a digital lead in their industries. In his view, digital leadership is at par with all other assumed skills in a fully rounded business leader, and unfortunately, quite a few people and organisations have neglected developing the skills required.

No industry sector is exempt. We are seeing some organisations take a very proactive approach to building digital capability. However, it is most often still at the business unit level, not board level.

The banking sector has been much more proactive in its use of technology and expecting digital awareness in senior executives and board members, yet even in that sector, the challenge from digital business models are so great that it might not be enough. Banks’ revenue streams could be still be hit, for example, by something as simple as crowdfunding.

What if high income earners all get together and organised loans under much better conditions than the banks can offer them?

According to Gartner research, most supervisory boards/boards of directors, executive committees and governance

committees do not have enough knowledge or experience regarding digital initiatives, opportunities and threats. Gartner’s 2014 CIO survey showed that digitally savvy business leadership is one of the best correlations of business success.

Looking at your average board of directors, there is always someone with a legal background and at least one or two with a finance background, but many still do not have a director with appropriate technology skills on their board. Too many board directors and senior executives still absolve responsibility for technology to the technology department in their organisation.

We still hear business people complain that they don’t understand ‘technical speak’ or jargon, and while that is a fair criticism, the effort needs to be made by both sides.

There is an onus on IT people to translate how technology will help, but equally, board members need to satisfy themselves that the technology choices made by their organisation are the right ones.

So how can boards become tech savvy?

First, they must recognize that technology is no longer an “IT problem or opportunity”, it is a business problem or opportunity.

This means it is the responsibility of every board director to develop their knowledge and help their organization develop

“Gartner’s 2014 CIO survey showed that digitally savvy business leadership is one of the best correlations of business success.”

Gartner HK Major Accounts Team – (l-r) Phoebe Lam, Greg Chu, Venus Chan, Cecilia Cheung, Eddy Wong, Alice Wong, Evan Tate, Sharon Chan, Lester Owencroft 30 HONG KONG BUSINESS | SEPTEMBER 2015

competitive advantage. The success of every corporate strategy depends on it. Within that corporate strategy, there should be an explicit strategy for digital transformation.

The approach needs to be top down and bottom up – developing skills not just within the organisation but in its leadership as well.

For years, CIOs and other IT executives have been doing MBAs to broaden their business knowledge and help them communicate and collaborate better with other business leaders. Is it now time for other functional leaders to seek technologyrelated qualifications – perhaps an IT Masters or digital marketing program? We have seen, for example, CFOs and directors of government agencies become Gartner clients because they know technology is essential to delivering services and delivering on their organisation’s strategy.

How can boards address the skills gap?

In boards that recognize they have a gap in skills, there are ways to address it. Adding digital savvy non-executive advisors to the board is one way. Having a nonexecutive director (or outside director) of a company or public-sector agency that is not a member of the executive management is a long-established practice.

They can bring valuable knowledge, experience and independence to the enterprise. Non-executive directors typically look at strategic direction, operational performance, risk and people issues – but why not technology or digital business issues? Gartner predicts that by 2020, 40 percent of the top global companies will have nonexecutive members of the board of directors who were primarily selected for their digital knowledge.

Gartner’s 2015 CEO survey found that most CEOs have improved the digital capability of the board and C-suite, or will do so by 2016. What is your plan to develop the board’s skills so the organization becomes digital savvy in a very short window? Or will you hire in those skills?

Lester Owencroft is an Area Vice President of Gartner & Country Manager for Hong Kong, winner of the corporate advisory category of the Hong Kong International Business Awards 2015.

26 – 29 October 2015 Gold Coast, Australia gartner.com/au/symposium

THE WORLD’S MOST IMPORTANT GATHERING OF CIOs AND SENIOR IT EXECUTIVES Rise to the Challenge A digital wave is sweeping through every industry and there is no safe haven to ride out the disruption. This defining moment gives every CIO and senior IT executive a chance to rise up and transform the mission-critical priorities into bold business outcomes.

Gartner Symposium/ITxpo 2015, 26 – 29 October, on the Gold Coast, Australia, will show you how to harness this wave of technology change, from personal development to process reinvention, Gartner is here to help you Rise to the Challenge.

Guest Speakers Steve Wozniak Co-founder of Apple, Inc. and Chief Scientist, Fusion-IO

Sir Ray Avery Scientist, Author, Entrepreneur and Philanthropist

Nigel Marsh Author, Co-founder of Earth Hour, Former CEO of Leo Burnett and George Patterson

Alisa Camplin Australia’s First Female Winter Olympic Gold Medallist

Dr. Stefan Hajkowicz Principal Scientist, Megatrends, CSIRO

Vinh Giang 2013 South Australian Entrepreneur of the Year, Magician and Communication Coach

© 2015 Gartner, Inc. and/or its affiliates. All rights reserved. Gartner is a registered trademark of Gartner, Inc. or its affiliates.

ITxpo is a trademark of Gartner, Inc. or its affiliates. For more information, email info@gartner.com or visit gartner.com.

Gartner Symposium/ITxpo 2015 at a Glance: • Four days • 1,500 attendees with 500 CIOs • More than 200 analyst-led sessions • Exclusive CIO Experience • Tracks aligned to your missioncritical priorities • More than 50 Gartner analysts on-site • 70 solution providers

Event Coverage: Iba & lca 2015

Hong Kong Business honours Hong Kong’s largest, most innovative firms

U

ncompromising excellence is the name of the game in Hong Kong’s extremely competitive corporate landscape. Hong Kong Business Magazine honored the city’s biggest and most innovative firms at an awards ceremony held in July at Island Shangri-La Hong Kong.

HKB hosted three distinct events for the first time: The Listed Companies Awards, International Business Awards, and Business Ranking Awards. The awards night was attended by over 100 top executives from the winning firms.

“Tonight we celebrate some of Hong Kong’s largest and most influential firms. Among our roster of winners are innovative listed companies and trailblazing international businesses, as well as the largest firms in specific industries,” said Tim Charlton, editor-in-chief of Hong Kong Business.

HKB salutes all the winners, as follows: LISTED COMPANIES AWARDS​2015 Pharmaceuticals Uni-Bio Science Group Limited Manufacturing Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited Real Estate Soundwill Holdings Limited Financial Services China Huirong Financial Holdings Limited Diversified Services Colour Life Services Group Co., Limited INTERNATIONAL BUSINESS AWARDS 2015 Advertising MAR VIVO STUDIO Transportation Thales Transport & Security (H.K.) LTD Banking United Overseas Bank Limited Corporate Advisory Gartner Hong Kong Ltd

32 HONG KONG BUSINESS | SEPTEMBER 2015

Energy Spencer Ogden International Limited Food and Beverage Organic Clover Limited Legal Clyde & Co Consulting ABN Impact BUSINESS RANKING AWARDS 2015 Largest Accounting Firms • RSM Nelson Wheeler, Rank 6 • Crowe Horwath, Rank 8 • SHINEWING (HK) CPA Limited, Rank 9 • Mazars, Rank 10 • Grant Thornton, Rank 12 • Ting Ho Kwan & Chan, Rank 19 Largest Hotels • Renaissance Hong Kong Harbour View Hotel, Rank 7 • The Park Lane Hong Kong a Pullman Hotel, Rank 8 • Harbour Grand Hong Kong, Rank 9 • Harbour Plaza 8 Degrees, Rank 16 • Pentahotel Hong Kong Kowloon, Rank 18 Largest Insurance Firms • Manulife, Rank 4 • Hang Seng Insurance, Rank 8 Largest Law Firms • King & Wood Mallesons, Rank 6 • Li & Partners, Rank 13 Largest MBA Programmes • City University of Hong Kong College of Business • HKMA • The Chinese University of Hong Kong (CHUK MBA) • The University of Chicago Booth School of Business • Hong Kong UST Business School • Henley Business School • UNSW

Louanta Yeung of City University of Hong Kong College of Business

Charbon Lo of Crowe Horwath

William Chan of Grant Thornton

Wilson Tang of Hang Seng Insurance

Emma Chan of Harbour Grand Hong Kong

Cindy Lam of Harbour Plaza 8 Degrees

Dennis Chan of Henley Business School

Victoria Lo and Doris Ng of HKMA

Raymond Wong of King & Wood Mallesons

Ivan Chan of Manulife

Pauline Cheng of Hong Kong UST Business School

Oliver Or of Mazars HONG KONG BUSINESS | SEPTEMBER 2015 33

Angela Chan of Pentahotel Hong Kong Kowloon

Cecilia Wong of Renaissance Hong Kong Harbour View Hotel

Eugene Liu of RSM Nelson Wheeler

Roy Lo of SHINEWING (HK) CPA Limited

Becky Tsang of The Chinese University of Hong Kong (CHUK MBA)

Vicky Wong of The Park Lane Hong Kong a Pullman Hotel

Bill Kooser of The University of Chicago Booth School of Business

Albert Chan of Ting Ho Kwan & Chan

Man Sing Yeung of Li & Partners

Julia Herries of UNSW Business School

Gregory Chu of Gartner Hong Kong Ltd

Jean-Luc Bonefacino of MAR VIVO STUDIO

34 HONG KONG BUSINESS | SEPTEMBER 2015

Charles De Lassus of Thales Transport & Security

Kingsley Leung of Uni-Bio Science Group Limited

Eric Tham of UOB

David Chao and Eric Tham of UOB

Uni-Bio Science Group Limited Team

Gartner Hong Kong Ltd Team

Uni-Bio Science Group Limited Team

Thales Transport & Security Team HONG KONG BUSINESS | SEPTEMBER 2015 35

Kathy Shum and Cecilia Wong of Renaissance Hong Kong Harbour View Hotel

Eugene Liu of RSM Nelson Wheeler

Doris Ng and Victoria Lo of HKMA

UOB Team 36 HONG KONG BUSINESS | SEPTEMBER 2015

Becky Tsang of The Chinese University of Hong Kong

Louis Shek with Fujitsu Team

Jean-Luc Bonefacino of Mar Vivo and Wilson Choi of iBis North Point

regional analysis: rise of the redback

The RMB will become a freely floating currency

Why it’s high time for an even freer RMB The RMB has taken huge strides since it left the USD peg 10 years ago. China should not fear losing monetary policy independence, nor control over its exchange rate.

T

he last decade has been an eventful one for the Chinese renminbi (RMB). In hindsight, the announcement by the People’s Bank of China (PBoC) ten years ago on 21 July 2005 was likely a watershed event for the global FX market. That day, the central bank ceased the de facto peg of the RMB at 8.28 per USD, which had been in place since 1997, and revalued the RMB at 8.11 against the USD, a 2.1% one-off appreciation. More importantly, the PBoC reformed the RMB exchange rate regime: the exchange rate would be determined by market demand and supply, and managed in relation to an undisclosed basket of currencies.

Over the past ten years, the RMB has gained 30% against the USD, the most among major currencies, after the CHF. However, does the exchange rate regime today conform to the vision the PBoC had painted for investors in 2005? In our view, the PBoC has gone above and beyond some expectations but has also undelivered on others. Certainly, the offshore CNH market is much more developed today than most could have imagined in 2005; however, most would probably also agree that the onshore USD-CNY exchange rate is not yet fully marketdetermined. We believe that will be the story for the next decade.

RMB: The next phase The goal is for the RMB to be a freely floating currency.

38 HONG KONG BUSINESS | SEPTEMBER 2015

Over the past ten years, the RMB has gained 30% against the USD, the most among major currencies, after the CHF.

We believe the “fear of floating” seen in many EM economies should not apply to China. For a start, currency mismatch is not particularly acute. Importantly, China has the potential to circumvent “original sin” – it could eventually borrow abroad largely in its own currency. This means the economy will be able to manage a more flexible exchange rate.

Furthermore, even with greater capital mobility, China could still retain some degree of influence over its exchange rate, just as policymakers in Japan and the US do, via the international spill-over impact of their QE policies, for example. The “impossible trinity” need not always strictly apply to large and globally important economies.

We believe there are two key developments to watch for in this transition. First, there could be important changes to the onshore USD-CNY trading band via the reference rate, and/or the width of the band. The daily fixing should cease tracking the USD, be more transparent, market-determined, and less influenced by the PBoC. Such reforms will take time. In the interim period, a wider trading band can diminish the significance of the fix and provide more room for the spot exchange rate to move.

Second, we expect onshore USD-CNY to eventually converge with the offshore USD-CNH into a single floating exchange rate, as cross-border capital flow channels are widened and the offshore market deepens. The offshore USD-CNH exchange rate is not bound by the trading

REGIONAL analysis: rise of the redback band and is already very much market-determined. We have recently observed that it occasionally leads developments in the onshore exchange rate.

A potential concern then is: will a growing offshore market challenge domestic monetary policy independency? In our view, this risk is low now and should remain manageable, given the sheer size of China’s onshore money supply. If China continues to push for financial and exchange rate reforms, we believe the RMB has the potential to become among the top five most traded currencies by 2020. It was ranked ninth in the last BIS Triennial survey in 2013.

If China continues to push for financial and exchange rate reforms, the RMB has the potential to become among the top five most traded currencies by 2020.

Nothing to fear…

The “impossible trinity” suggests that a country can only choose two out of the following three goals: 1) Monetary policy independence; 2) Control over the exchange rate; 3) Free capital mobility.

China is trying to evolve into a more consumption-driven economy, it needs to reallocate savings and investments more efficiently domestically and abroad, and it requires a more sophisticated financial system. Against this backdrop, a more flexible exchange rate is a logical solution, as opposed to sacrificing monetary policy independence or closing the capital account.

What are the risks and trade-offs of a freely floating currency regime? For emerging markets, the “fear of floating” (Calvo and Reinhart, 2000) is largely related to the problems of “original sin” and currency mismatch (Eichengreen et. al, 2002). EM economies typically have a deficit in domestic savings and, therefore, have to rely on foreign funding. At the same time, they usually suffer from low policy credibility due to inflation volatility. The inability for most EMs to borrow abroad in one’s domestic currency leads to the accumulation of foreign currency liabilities, which, if excessive, can cause negative balance sheet effects in the event of local currency volatility (depreciation).

However, we believe this currency mismatch problem is not a serious one for China currently and will become even less so from hereon. There are several reasons, including: 1. China’s current stock of foreign currency debt, scaled

by GDP and/or FX reserves, is not particularly high compared to other EMs. China’s private sector may be the world’s third largest net international borrower but that mostly reflects its large USD2.75trn stock of FDI liabilities China’s external debt, relative to the size of its economy and FX reserves, is not large compared to many other EMs

Source: BIS, CEIC, World Bank, HSBC

China’s private sector external liabilities are concentrated in FDI

Note: Equity liabilities refer to the equity components of FDI and foreigners’ portfolio investment holdings in China.

Source: BIS, CEIC, HSBC

(i.e., in the form of equity). China’s stock of foreign currency debt is much lower, around USD900bn, or 9% of GDP (of which about 35% is in the form of trade credit).

In the event of currency volatility, FDI (equity) liabilities are less of a risk to companies’ balance sheets and the overall economy, compared to foreign currency debt. The value of the latter automatically fluctuates with the exchange rate, while the risk of liquidation or partial repatriation in FDI liabilities is less explicitly related to currency movements but more driven by macro-economic considerations.

2. We are already seeing signs of foreign currency debt deleveraging that could continue into the medium term.

For Chinese companies, the reason for foreign currency borrowing in the past probably had less to do with insufficient domestic savings but was more driven by strong RMB appreciation expectations and high interest rate differentials between China and the G3 economies. Since those two latter conditions are changing – as the RMB shows more two-way volatility and China’s monetary policy is now in an easing cycle – balance of payments data suggests that gradual deleveraging has been occurring more recently 3. China has the potential to circumvent “original sin” completely. Indeed, China has already started borrowing abroad in its own currency, in CNH, via trade credits, bank deposits, loans and bonds. This trend will only grow as capital controls are further liberalised and the RMB becomes more internationalised and held as a reserve currency. In fact, the RMB could even become an international funding currency in the future, for example, through infrastructure development loans from AIIB and in China’s “One Belt, One Road” plan.

4. We should also consider the asset side of the private sector’s external balance sheet. Foreign currency assets and income streams are growing with the policy push for outbound investments and the opening up of more overseas portfolio investment channels (for example, the upcoming QDII2). In the meantime, China has the buffer of its FX reserves to hedge the private sector’s external debts.

A decline in currency mismatch will increase the economy’s capability of managing a more flexible currency regime. This is because sharp currency depreciation, which tends to occur during periods of economic difficulties, would not naturally cause an inflation of external debt and lead to forced deleveraging, thereby exacerbating the growth down-cycle further. Instead, with foreigners owning China’s local currency liabilities, they are “bailed in” to share any domestic economic challenges via FX losses.

China will not be cornered In any case, having a floating currency regime does not mean China will not retain at least some degree of influence over its exchange rate. In fact, empirical observations suggest that the “impossible triangle” does not appear to strictly apply to large and globally important economies.

A large economy’s interest rates will be determined domestically and its monetary policy has the potential to influence global capital movements, thereby affecting the exchange rate, particularly if its local currency assets are HONG KONG BUSINESS | SEPTEMBER 2015 39

regional analysis: rise of the redback also widely traded globally. The US, Eurozone and Japan are good examples. Their respective central bank’s QE policies have impacted their exchange rates. This observation was also made by the PBoC’s research department in an April 2012 report on China’s FX policy. The PBoC’s researchers further point out that macro-prudential tools can complement conventional monetary policy and circumvent the “Tinbergen rule” (that the number of policy target requires at least an equal number of instruments).

As such, policymakers can try and exert some influence on the exchange rate, even in an inflation-targeting monetary policy framework. …but fear itself Even though China has fewer reasons to fear a floating currency regime than many other EMs, the truth is, it has been operating as if such concerns strongly exist from time to time. China’s currency regime is most recently classified by the IMF as a “crawl-like arrangement” with a “de facto exchange rate anchor” to the USD. This means the exchange rate has remained within a narrow margin of 2% relative to a statistically identified trend, but there is an annualised rate of change of at least 1%. That is in contrast with the de jure arrangement: China officially describes its exchange rate regime as a “managed float” with reference to a “basket of currencies” (including the USD, the EUR, the JPY, the KRW, the SGD, the MYR, the RUB, the AUD, the THB and the CAD, i.e., currencies of China’s top 15 trading partners).

Statistical evidence often confirms the IMF’s de facto classification. For example, our estimates suggest that movements in the broad USD could explain more than 85% of the changes in the USD-CNY reference rate most of the time since 2006. Moreover, the explanatory power of the USD appears to have some kind of positive correlation with changes in market volatility, both globally and domestically. In other words, the policy preference for USD-CNY stability rises when there is uncertainty on other fronts.

Lack of rainfall signals widespread crop damage

There is no reason for China to shy away from currency flexibility – after all, it has relatively low and falling levels of currency mismatch.

Conclusion In our view, the next phase for the RMB exchange rate is to move towards a free float. There is no reason for China to shy away from currency flexibility – after all, it has relatively low and falling levels of currency mismatch and has the potential to overcome “original sin”. There are several China needs to enhance the economy’s financial openness…

Source: CEIC, HSBC

40 HONG KONG BUSINESS | SEPTEMBER 2015

…to propel the RMB into a top five traded currency by 2020

Source: World Bank, CEIC, HSBC

paths to a free float, and China will likely embark on all of them at the same time, advancing only gradually in each type of reform. First, China is likely to reform the onshore USD-CNY trading band, by making the fixing mechanism more transparent and market transactions based, as well as widen the trading band, to reduce the influence of the fix so as to increase the flexibility in the spot exchange rate.

Second, China should continue to liberalise its capital account, grow the size of the offshore CNH market, and make the onshore and offshore market access more porous and accessible to a wider number of market participants.

That way, both exchange rates will essentially converge into one.

Concerns about the PBoC having to cede complete control over either its monetary policy or exchange rate in the near future are over-blown, in our view. The US retains monetary policy independence, despite the deep and liquid euro-dollar market. That should also be the case for China, even if the offshore RMB market grows exponentially, as we expect.

We also believe that China, as a large and globally important economy, will be able to retain a certain degree of influence over its exchange rate via spill-overs of its domestic monetary policy to abroad. However, of course, on a day-to-day basis the eventual dominant influence for the RMB exchange rates will be China’s interest rate differentials with major economies.

China clearly has the economic and financial clout to make the RMB a major global trading and reserve currency. The key now is to open up the domestic markets to the rest of the world and increase the financial openness from extremely low levels.

If China’s financial reforms continue, the RMB’s internationalisation and convertibility accelerates, and the exchange rate regime becomes more flexible, the RMB could very well be among the top five daily traded currencies by 2020 and perhaps among the top three over the next decade. By Qu Hongbin, Co-Head of Asian Economic Research, Chief China Economist, HSBC

event coverage: International CSR Summit 2015 allow companies to reap profits from underserved market segments but also gives lowincome communities access to products that would ordinarily be out of their reach.

CSV, as opposed to traditional CSR, also allows firms to cut down on costs and make their business models more sustainable. In particular, Tracy highlighted Singapore-listed agribusiness player Olam’s sustainability drive, which resulted not only in substantial cost savings and a more efficient supply chain but also in employment creation for African women. “Looking at this from an investment point of view, creating shared value is not an add-on but it’s really part of the core business strategy,.”

Over 200 delegates attended the event

Asian corporates face tough balancing act as issues mount Find out why corporate social responsibility is now one of the keys in ensuring business profitability.

T

here was a time when Asian companies viewed corporate social responsibility (CSR) as little more than a cheap marketing stunt.

CSR initiatives were a necessary homage for the sake of good PR, but did not really play a role in the sustainable development of companies. But that period is now in the past, according to speakers at Enterprise Asia’s inaugural International CSR Summit held in Macau SAR, China in June.

The summit, which gathered over 200 representatives from 14 key Asian economies, showed that far from being a publicity trick, CSR is now key in the tough balancing act that Asian corporations face when it comes to ensuring sustainability and profitability.

CSR has gone beyond the arena

42 HONG KONG BUSINESS | SEPTEMBER 2015

CSR has gone beyond the arena of corporate giving and has now entered the realm of creating shared value (CSV) between businesses and the communities that they impact.

of corporate giving and has now entered the realm of creating shared value (CSV) between businesses and the communities that they impact, said Alexandra Tracy, president of Hoi Ping Ventures and chairman of the Association for Sustainable & Responsible Investment in Asia.

Instead of relying on occasional dole-outs, CSV occurs when corporations engage communities and individuals to create mutually beneficial economic value.

“The success of every business is impacted by other companies and the surrounding infrastructure around them. And so supporting or improving that local community could also have an impact on profit and productivity,” she said.

For instance, creating quality but affordable products for lowerincome consumers does not only

Capital markets take notice Even capital markets are now paying attention to shared value initiatives. Dr Niven Huang, general manager of KPMG Sustainability Consulting, highlighted that bulk of a company’s value now comes from intangible assets such as sustainability practices.

Listed companies in Europe will soon be required to disclose their environmental, social, and corporate governance (ESG) information in their annual reports, while Asian countries such as Taiwan have also started mandating large firms to disclose their CSR initiatives.“Last year, Singapore Stock Exchange also announced that maybe by the year 2017, all of the listed companies in Singapore will be compelled to release their ESG performance and information.

Why would capital markets be so interested in CSR? There must be something going on about this,” he said. Tracy, who sits on the Listing Committee of the Hong Kong Stock Exchange, shared that the bourse is mulling the issue of requiring listed firms to disclose their corporate governance issues. By Marianne Angeli Estioco

thalesgroup.com

Ground Transportation solutions Wherever safety and security matter, we deliver PASSENGER SATISFACTION Offering real time information and ensuring security TRANSPORT SAFETY Automate critical decisions to eliminate human errors

REVENUE PROTECTION Innovative solutions to collect revenues

OPERATIONAL EFFICIENCY Ensure optimised network management with minimal investment

NETWORK CAPACITY Improve flow with automated signalling for optimal train frequency

SEAMLESS JOURNEYS Unique fare systems for all transport modes

Millions of critical decisions are made every day in transportation.

The ability to run networks smoothly and efficiently is crucial to economic growth and quality of life. Thales is at the heart of this.

We design, develop and deliver equipment, systems and services, providing end-to-end solutions. Our integrated smart technologies give decision makers the information and control they need to make more effective responses in critical environments. Every moment of every day, wherever safety and security are critical, Thales delivers.

ECONOMICs

Ian Perkin

Why Pudong Road South now matters

T

he recent gyrations on the Shanghai and Shenzhen stock markets have ensured that a whole lot more attention will be paid to the mainland securities markets in the future than has been common in the past – and with good reason. Pudong South Road is not (yet) Wall St but it is now abundantly clear that what happens in the Shanghai financial district matters.

It is now front and centre in terms of both domestic (economic and political) implications and as a (relatively) new indicator of how the rest of the world perceives China’s economic and financial market health. The rise and rise of the main Shanghai Composite Index to a record 5,178.19 points on June 13 and its subsequent 1400 point slump a couple of weeks later to around 3800 points certainly attracted attention in Beijing and around the globe.

It might have attracted more had it not been competing with the Greek bailout saga for the global economic headlines, Measured by share market capitalisation the Chinese stock markets are relatively small in overall economic terms, but as the Mainland moves to a more market-orientated economy they take on an importance greater than their size.

The domestic reaction to the recent boom and bust cycle in the Shanghai market was immediate, with authorities moving to halt the decline by various measures like restricted trading, bans on shortselling and the creating of funds to buy more shares.

The dramatic market rise had rightly been seen as a validation of the broader economic reforms pursued by Beijing. Not surprisingly, there were fears the subsequent fall would be seen as negating that.

There are good reasons for this and they will only grow as the Chinese stock markets take a more prominent place in the overall economy of China and comes to be viewed as more of a “leading indicator” of where that economy might be headed.

What does history tell us?

Recent history shows that, more often than not, a lengthy economic boom ends with a period of excess in the stock market – a sustained and perhaps “irrationally exuberant” (thank you Mr Greenspan) rally in stock prices followed by a crash.

Think the “roaring twenties” and Wall St’s “great crash of 1929” which brought to an end the post-WWI boom and ushered in the Great Depression which effectively lasted until the world was again consumed by war.

Think the dark days of October 1987 (and the excessively optimistic books like “The Dow at 30,000” that just preceded them) when another Wall St crash ended a 30-year “sweet spot” for the American economy. (By the way, the Dow has never made 30,000,) Think the Japanese post-WWII boom (and books like “Japan as No 1”), which ended in spectacular style in 1990 with the crash of the Tokyo market (and an equally spectacular crash in the Tokyo property market). The effects are still being felt.

Think, too, of the 1997 Asian Financial crisis which rudely 44 HONG KONG BUSINESS | SEPTEMBER 2015

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com Global growth outlook Region/Country

2013

2014

2015

2016

World

3.4

3.4

3.3

3.8

Advanced economies

1.4

1.8

2.1

2.4

USA

2.2

2.4

2.5

3.0

Euro area

-0.4

0.8

1.5

1.7

Japan

1.6

-0.1

0.8

1.2

UK

1.7

2.9

2.4

2.2

Emerging economies

5.0

4.6

4.2

4.7

Asia

7.0

6.8

6.6

6.4

China

7.7

7.4

6.8

6.3

India

6.9

7.3

7.5

7.5

ASEAN 5

5.1

4.6

4.7

5.1

Source: IMF

interrupted the long period of growth and transformation in the “tiger economies” of east and south-east Asia; the dot-com boom and bust of 2001; and, of course, the 2008-09 banking crisis.

It was only to be expected then that the massive surge in the Shanghai and Shenzhen share markets through to the final days in June this year and then the sudden crash in late June and early July led to some nervous moments.

Fortunately, things settled down soon after with the markets stabilising in the second week of July as the central government sought to reassure investors generally and retail investors and margin traders more specifically.

The calmer market was also helped by the reassuring economic growth figures for the whole economy issued by the government on July 15, just a couple of days after the markets had settled.

There were certainly equal measures of surprise and relief when China’s second quarter growth in Gross Domestic Product (GDP) came in at a 7% annual rate, down from the 7.4% rate last year in but in line with expectations and the first quarter.

The surprise came from the Chinese economic sceptics who had worried that the second quarter outcome might come in significantly below both the consensus forecast of 6.9% and the official full year target from Beijing of 7%.

The relief was from the more optimistic China monitors who had been concerned that a lower growth figure might not only compound worries about the direction of the country’s economy but also exacerbate the carnage on the share market.

Also of assistance was the International Monetary Fund’s (IMF’s) Global Economic Update, which basically conformed global growth for 2015 at 3.3% and took a benign view of the mainland economic outlook (see Table).

STUDIO PARIS ． HONG KONG ． SHANGHAI． LOS ANGELES

MOVING PEOPLE

告

广 FILMS ADVERTISEMENTS

影

电

contact@ marvivo.fr

OPINION

tim hamlett

Express to where? White elephant or black hole

tim hamlett Former Editor of Sunday Standard and Associate Professor of Journalism

M

uch anguish in railway watching circles is over the fact that the new express rail station does not yet feature any arrangement for passengers to go through mainland customs and immigration before they get on the train. Clearly this lack will be inconvenient and the officials concerned have another two years to get their heads round the problem. Gary Cheung warned that the new railway might be a “white elephant” if the checkpoint problem was not solved. It is becoming increasingly clear that the rail link will not be a “white elephant” but a “black hole”, inexorably sucking in money from all directions.

Careless reporters, including Mr Cheung, often report that the original budgeted cost of the project was $65 billion. This is not the case. The original budget was $85 billion. Realising that this held out dim prospects of the line ever covering its costs, officials then massaged the figure down to $65 million.

This was done by shunting parts of the expenses into other sidings in the government budget, on the specious grounds that they “would have to be done anyway.” Interestingly, the price of the cultural district (which shares part of its site with the railway terminus) skyrocketed while the publicised price of the railway remained the same.

Price predictions Meanwhile I predicted that if the sums were done honestly, the taxpayers would see no change from $100 billion. The average budget overrun on big rail projects (not the maximum, the average) is fifty per cent. Projects involving long tunnels are particularly prone to financial overrun because although you can drill test holes, you cannot really know what is there until the tunnel is built - and your contractor will charge extra for any nasty surprises. The express rail link, owing to an extravagant early inspiration, consists of one long tunnel.

It now appears that the $100 billion guess will need to be revised upwards. The official price is now $71.5 billion but Michael Tien, who is experienced in these matters, is now predicting a figure of $90 billion, and the corporation has not yet made the widely-expected announcement that the line will not open by “the end of 2017.” Many people do not expect it to open before 2018.

Delays are a cause of extra expense, as officials remind us every time one of their projects fails to get through the Finance Committee the first time.

So let us suppose for a moment that the MTR Corp ends up paying roughly $100 billion for construction and that the cost of borrowing has returned to the historic average of about 4 per cent.

The corporation will have to find $4 billion a year just to pay the interest on its debts. This compares with its profit of $7 billion from all other railway activities in Hong Kong last year.

How much can you charge people for taking them 27 kms?

Mr Cheung quotes Frederick Ma, chairman 46 HONG KONG BUSINESS | SEPTEMBER 2015

of the committee which looked at the project, as saying that without a joint checkpoint at West Kowloon, the trip will only be marginally faster than the existing through train. On the through train, passengers complete their Hong Kong formalities in Hung Hom, and the China stuff in Guangzhou. Even at a joint checkpoint you will queue for the Hong Kong formalities and then you will queue for the mainland formalities. They will not be quicker; you will just get all your frustrations in one place.

Mr Ma apparently supposes that in the absence of a joint checkpoint the train will have to stop in Shenzhen for the purpose.

But by all accounts it will stop in Shenzhen anyway. There will also be a stop in Dongguan, then the “high speed” train will drop you in the outskirts of Guangzhou, instead of the middle. Some people might consider the existing through train better value even if there is no extra charge for the new-fangled express at all.

I conclude that the new link is never going to make money. This is not uncommon with new rail services which often only make a profit after the original builder has gone bankrupt and sold assets at a huge loss. But this is not an option for the HKSAR Government. It has placed the MTR in a tricky dilemma. If it charges too much for the new express then nobody will ride them. But due to the costs of construction, if the trains are priced a level which fills them with customers they will lose money anyway.

How much is it, really?

OPINION

Hemlock

Shock as weakness revealed among policymakers in several places

T

he Greek ‘No’ referendum vote has an element of the Hong Kong Legislative Council’s resounding defeat of the political reform bill about it – telling an unelected, arrogant, dictatorial, soulless, distant supraregime to drop dead. Since the country is going to default anyway, and the people will be penniless whichever currency it uses, we can only assume that the vote was primarily a gesture of defiance.

Another parallel is that in both cases the self-serving, grandiose autocracy (the Chinese Communist Party and the European Union) will probably carry on as if nothing had happened.

The CCP was founded to liberate downtrodden workers from poverty, while the EU aimed to replace a perpetually warring continent with a peaceful free-trade zone. Both succeeded, and can go away now – but of course they are just getting started in their missions to be big, overwhelming, almighty and generally presumptuous towards the gods.

Even if the Brussels bureaucratic machine is oblivious to it, Greece shows the rest of us that the EU and its neo-imperial single-currency project is broken. Perhaps similarly,China’s own debt problems are revealing the limits of CCP omnipotence. Specifically, the Great Patriotic Unburstable Stock Market Bubble Miracle looks like being Xi Jinping’s first visible and unmistakable screw-up.

Different scales The scales of the two failures seem to be quite different, so far. The Euro was rooted in deranged megalomania. Euro-visionary elites salivated at the idea that their odd assortment of small-tomedium nation-states could be merged into a new, social-democratic version of the USA, so they could strut around on the world stage like American leaders, except sophisticated and pacifist.

Since the populations of France, Germany, Italy, the Netherlands, etc irritatingly insisted on remaining sovereign, the utopians had to try constructing the new country backwards, starting with a flag (the easy bit) and then forcing them all to adopt the same currency and thus monetary policy.

They are now locked in and uncompetitive with a voraciously mercantilist Germany, too

48 HONG KONG BUSINESS | SEPTEMBER 2015

ashamed to admit that it was a crazy idea.

China’s debt problem looks relatively minor in historical terms. Insecure and fearful of popular unrest, the CCP ordered a mega-stimulus in 2008-09 and beyond. Billions directed into infrastructure investment ended up going into land and property speculation and bubbles. That felt good for a while and then became dangerous.

But efforts to curb the bubbles threatened an economic slowdown, so the (still insecure and fearful) government talked up the stock market late last year apparently to divert everyone’s attention and spread joy and happiness throughout the land.

The index more or less doubled in six months, and by the time millions of housewives and cabdrivers were piling into margin-trading accounts last month or so, the smart money started to come out – and no prizes for guessing what happens next.

Except the Chinese government is using every desperate measure to prop the market up, from freezing new issues to forcing brokerages and government funds to buy, buy, buy. Every time they succeed in reversing the declines in share prices and the index spikes 5%, rueful, not-sosmart money makes a dash for the exit.

Unless it buys up the whole market, the Chinese government cannot halt this fall in stock prices from absurd ramped-up levels. But the concept of not being able to control is alien to the Communist mind.

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

The scales of the failures seem to be different

WE’VE GOT SLEEP COVERED. JUST RISE AND SHINE. 夜夜酣睡 旅程將更精彩

OZO is all about the simple things done well, ensuring you start the day feeling inspired, recharged and ready to roll.

最簡單的事，遨舍亦堅持做到最好， 讓您精力充沛迎接全新一天。

www.ozohotels.com

22 Hennessy Road, Wanchai, Hong Kong 香港灣仔軒尼詩道 22 號 T + 852 2292 3000

An ONYX brand